Don Honorio Ventura State University

MODULE 1:

Introduction to Production and Operations Management

INTRODUCTION

Production/Operations Management is the process, which combines and transforms

various resources used in the production/operations subsystem of the organization into value
added product/services in a controlled manner as per the policies of the organization. Therefore,
it is the part of an organization, which is concerned with the transformation of a range of inputs
into the required (product/service) having the requisite quality level.

The set of interrelated management activities, which are involved in manufacturing

certain products, is called as production management. If the same concept is extended to
services management, then the corresponding set of management activities is as called as
operations management.

OBJECTIVES
At the end of this module, students are expected to;
1. Understand the nature of production and operations management
2. Differentiate the concept of production and operations.
3. Compare and contrast production of goods and production of services.
4. Acquire basic information on the evolution and recent trends of operations management.

1. THE NATURE OF PRODUCTION AND OPERATIONS

The nature of production or operations can be better understood by viewing the
manufacturing function as:
a) Production/operations as a system,
b) Production/operations as an organisational function,
c) Production/operations as a conversion or transformation process and
d) Production/operations as a means of creating utility.
These four distinct views are discussed in the following section.

1.1. Production/Operations as a System (further discussion of this topic on Module

2)
This view is also known as "systems concept of production". A system is defined as the
collection of interrelated entities. The systems approach views any organisation or entity as an
arrangement of interrelated parts that interact in ways that can be specified and to some extent
predicted. Production is viewed as a system which converts a set of inputs into a set of desired
outputs. A production system has the following elements or parts:
 Inputs,

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 Conversion process or transformation process,

 Outputs
 Transportation subsystem,
 Communication subsystem and
 Control or decision-making subsystem.

1.2. Production/Operations as an Organisational Function

To create goods and services, all organisations, whether manufacturing goods or
providing services, perform three basic functions. They are:
 Marketing: which generates the demand or takes customers’ orders for a product
or service.
 Production/Operations: which creates the product (goods or services).
 Finance/Accounting: which keeps track of how well the organisation is
performing, and takes care of cash inflow and cash outflow.
Production/operations managers need to build and maintain strong relationships both intra-
organizational and inter-organizational. Inter-organisational relationship exists between
production/ operations department and suppliers, whereas intra-organisational relationship
calls for cross-functional coordination.
Cross functional coordination is essential for effective production/operations
management. For example, marketing function determines the need for new products and
services and the demand for existing ones and operations managers must bring together human
and capital resources to meet these demands effectively.
Figure 1.1: Organization charts for a manufacturing and a service organisation

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1.3. Production/
Operations as a Conversion/Transformation Process

The conversion or transformation sub-system is the core of a production system because

it consists of processes or activities wherein workers, materials, machines and equipment are
used to convert inputs into outputs, i.e.,
The conversion process may include manufacturing processes such as cutting, drilling,
machining, welding, painting, etc., and other processes such as packing, selling, etc.
Any conversion process consists of several small activities referred to as "operations"
which are some steps in the overall process of producing a product or service that leads to the
final output.
Figure 1.2 Simple Production System

Conversion Process
INPUTS OUTPUTS
(A simple production system)

1.4. Production/Operations as a Means of Creating Utility

Production is defined as the process of adding to the value of outputs or the process of
creating utility in outputs. "Utility" is the power of satisfying human needs. During the process
of converting the raw materials into finished goods, various types of utilities are created while
adding value to the outputs. These types of utilities are:
a) Form utility: which is created by changing the size, shape, form, weight, color, smell of
inputs in order to make the outputs more useful to the customers. For example, iron ore is
changed to steel, wood is changed to furniture, etc.
b) Place utility: which is created by changing the places of inputs or transporting the inputs
from the source of their availability to the place of their use to be converted into outputs.

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For example, the iron ore and coal are transported from the mines to the steel plant to be
used in the conversion process.
c) Time utility: which is created by storage or preservation of raw materials or finished
goods which are in abundance sometime, so that the same can be used at a later time
when they become scarce due to higher demand exceeding the quantity available.
d) Possession utility: which is created by transferring the possession or ownership of an
item from one person to another person. For example, when a firm purchase materials
from suppliers, the possession utility of the materials will increase when they are
delivered to the buying firm.
e) Service utility: which is the utility created by rendering some service to the customer.
For example, a doctor or a lawyer or an engineer creates service utility to a
client/customer by rendering service directly to the client/customer.
f) Knowledge utility: which is created by imparting knowledge to a person. For example, a
sales presentation or an advertisement about some product communicates some
information about the product to the customer, thereby imparting knowledge.

2. DIFFERENCE BETWEEN OPERATIONS MANAGEMENT AND OPERATIONS

MANAGEMENT

2.1. Production Management refers to the application of management principles

to the production function in a productive system such as a factory or a manufacturing
plant. (e.g., steel plant, cement plant, etc.). It involves application of planning, organising,
directing and controlling the production processes employed for the conversion of inputs
into outputs in a productive system.

2.1.1. Objectives of Production Management

The objective of production management is to produce goods services of right quality and
quantity at the right time and at the right manufacturing cost.
 Right Quality – the quality of product is established based upon the customers’
needs. The right quality is not necessarily best quality. It is determined by the cost
of the product and the technical characteristics as suited to the specific
requirements.
 Right Quantity – the manufacturing organization should produce the products in
right number. If they produced in excess of demand the capital will block up in
the form of inventory and if the quantity is produced in short demand, leads to
shortage of products.
 Right Time – timeliness of delivery is one of the important parameters to judge
the effectiveness of production department. So, the production department has to
make the optimal utilization of input resources to achieve its objective.
 Right Manufacturing Cost – manufacturing costs are established before the
product is actually manufactured. Hence, all attempts should be made to produce
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the products are pre-established cost, so as to reduce the variation between actual
and the standard (pre-established) cost.

2.2. Operations Management refers to a set of activities that creates value in the
form of goods and/ or services by transforming inputs into outputs. Operations
management designs and operates productive systems or operating systems such as
banks, hospitals, hotels, government agencies and manufacturing plants. Operations
management includes activities such as organising work, selecting processes, arranging
layouts, locating facilities, designing jobs, measuring performance, controlling quality,
scheduling work, managing inventory and planning production.

2.2.1. Objectives of Production Management

 The Customer Service Objective. To provide agreed/adequate levels of
customer service (and hence customer satisfaction) by providing goods or services
with the right specification, at the right cost at the right time.
 The Resource Utilization Objective. To achieve adequate levels of resource
utilization (or productivity) e.g., to achieve agreed levels of utilization of
materials, machines and labour.

From the above definition of production management and operations management, it

becomes clear that there is hardly any difference between the two terms. But the two apparent
differences between production management and operations management are:
a. The term “production management” is mainly used for a productive system where
tangible goods are produced; whereas the term “operations management” is more
frequently used where various inputs are transformed into intangible services.
b. Operations management is the more recent term used to activities involved in the
process of transforming inputs into outputs (goods and/or services) in a productive
system, whereas the term “production management” (or manufacturing management)
was used earlier to refer to activities related to the process of transforming inputs
into outputs (mainly tangible goods).

3. DIFFERENCE BETWEEN GOODS AND SERVICES

Although goods and services often go hand in hand, there are some very basic differences
between the two, differences that impact the management of the goods portion versus
management of the service portion. There are also many similarities between the two.

a) Services are usually intangible whereas goods are tangible (i.e., can be touched and seen)
b) Services are often produced and consumed simultaneously, services cannot be stored
whereas goods can be produced and inventoried before consumption or use.

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c) Services are often unique, for example insurance policies, medical treatment procedures,
haircut styles, etc.
d) Services have high customer interaction; services are often difficult to standardize and
automate because customer interaction demands uniqueness. The service product may have
to be customized in most of the service offerings.
e) Services are often knowledge based, for example educational, health-care, legal and
consultancy services and, therefore, difficult to standardize and automate.
f) Services are frequently dispersed because services may have to delivered to the
client/customer at his/her place or office, a retail outlet or even at the residence of the
customer/client.
g) Goods can be inventoried and can be resold whereas reselling of services is unusual and
services cannot be inventoried.
h) Some aspects of quality of goods are measurable whereas many aspects of quantity of
services are difficult to measure.
i) Selling and production are distinct in case of goods whereas in case of services selling is
often a part of the service.
j) Goods can be transported whereas service cannot be transported but the service provider
can be transported.
k) Location of facility to manufacture goods, affects costs whereas location of service facility
affects customer contact.
l) Manufacturing of goods can be easily automated whereas service is often difficult to
automate.

4. RESPONSIBILTIES OF OPERATIONS MANAGER

The following are the major responsibilities of production/operations managers:

a. Meeting requirements of quality demanded by customers.
b. Establishing realistic delivery or completion dates.
c. Producing the required volume of products to meet the demand.
d. Selection and application of most economic methods or processes.
e. Controlling the cost of inputs and conversion process and thereby keeping the cost of
outputs within the desired limits.

Production managers are responsible for the amalgamation of five Ps namely Product,
Plant, Processes, Programs and People. The product is the most obvious interface between
production and marketing. It includes characteristics such as performance, aesthetics, quality,
reliability, selling price, delivery dates and/ or lead times. The plant includes buildings,
equipment and machinery required to produce the product. The processes include the
transformation or conversion processes which convert the inputs into outputs. The programs
consist of schedules or timetables which set times for delivery of products or services to
customers. These delivery schedules in turn decide the time schedules for various activities such

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as design, purchase, manufacture, assembly, packing and despatch etc. The people aspect of
production management includes the skills, knowledge, intelligence, etc., of labour and
managerial personnel which is crucial for the efficient and effective utilisation of resources for
the production of outputs.

5. HISTORY OF PRODUCTION & OPERATIONS MANAGEMENT

Operations management came to prominence in the 20th century, but its roots can be
traced back to the 18th and 19th centuries.

5.1. Pre-Industrial Revolution

One of the first people to address the issues of operations management was the Scottish
philosopher -- and father of modern economics -- Adam Smith. In 1776 Smith wrote "The
Wealth of Nations," in which he described the division of labor. According to Smith, if
workers divided their tasks, then they could produce their products more efficiently than if
the same number of workers each build products from start to finish. This concept would later
be used by Henry Ford with the introduction of the assembly line.

5.2. Post-Industrial Revolution

During the industrial revolution, machinery allowed factories to grow in capacity and
greatly increased their output. Despite this growth, there was considerable inefficiency in
production. Two individuals helped to overcome these inefficiencies in the early 20th century:
Frederick Winslow Taylor and Henry Ford. Taylor developed a scientific approach for
operations management, collecting data about production, analyzing this data and using
it to make improvements to operations. Henry Ford increased efficiency in production by
introducing assembly line production and improved the supply chain through just-in-
time delivery.

5.3. Post-World War II

Technological developments during the second world war created new possibilities for
managers looking to improve their operations. Specifically, the development of
computational technology allowed for a greater degree of data to be analyzed by firms .
The abilities of computers have continued to increase exponentially, allowing for a high
degree of data analysis and communication. Modern producers are now able to track their
inventory from raw materials, through production and delivery.

5.4. Modern Day

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Quality management systems are popular in today's operations management. Quality

management is a system for mapping, improving and monitoring operations processes. A
variety of quality management systems are in use among top firms, the most notable systems
being the ISO systems and Six Sigma. These systems aim to increase the efficiency of
business processes. Although operations management has typically dealt with the
manufacturing process, the growth of the service industry has created a field of service
operations management.

5.4.1 Key Issues for Todays’ Business Operations

There are a number of issues that are high priorities of many business organizations.
Although not every business is faced with these issues, many are. Chief among the issues are the
following:

a. Economic conditions. The lingering recession and slow recovery in various sectors of
the economy has made managers cautious about investment and rehiring workers who
had been laid off during the recession.
b. Innovating. Finding new or improved products or services are only two of the many
possibilities that can provide value to an organization. Innovations can be made in
processes, the use of the Internet, or the supply chain that reduce costs, increase
productivity, expand markets, or improve customer service.
c. Quality problems.
d. Risk management. Managing risks starts with identifying risks, assessing vulnerability
and potential damage (liability costs, reputation, demand), and taking steps to reduce or
share risks.
e. Competing in a global economy. Companies must carefully weigh their options, which
include outsourcing some or all of their operations to low-wage areas, reducing costs
internally, changing designs, and working to improve productivity.

5.4.2 Ethical Conduct

The need for ethical conduct in business is becoming increasingly obvious, given
numerous examples of questionable actions in recent history. In making decisions, managers
must consider how their decisions will affect shareholders, management, employees, customers,
the community at large, and the environment.

The Utilitarian Principle is that the good done by an action or inaction should outweigh
any harm it causes or might cause. An example is not allowing a person who has had too much to
drink to drive.

a. The Rights Principle is that actions should respect and protect the moral rights of others.
An example is not taking advantage of a vulnerable person.

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b. The Fairness Principle is that equals should be held to, or evaluated by, the same
standards. An example is equal pay for equal work.
c. The Common Good Principle is that actions should contribute to the common good of
the community. An example is an ordinance on noise abatement.
d. The Virtue Principle is that actions should be consistent with certain ideal virtues.
Examples include honesty, compassion, generosity, tolerance, fidelity, integrity, and self-
control.

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DISCUSSION QUESTIONS

1. What is the importance of studying production and operations management?

2. Discuss the difference between production management and operations management.
3. Compare and contrast goods & services.
4. Among all the role/responsibilities of an operations manager, what do you think will be
the most challenging? Explain your answer.

COMMENTS/SUGGESTIONS

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