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OPERATIONS

MANAGEMENT

“THE HEART OF ALL


MANAGEMENT DISCIPLINES
WHICH BRING COMPETITIVE
ADVANTAGE AND MARKET
FOCUS FOR ALL BUSINESS
ORGANIZATION.”
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 Production is the creation of goods and services.
The field of production management in the past
focused almost exclusively on manufacturing
management, with a heavy emphasis on the
methods and techniques used in operating a
factory.
 In recent years, the scope of production
management has broadened considerably.
Production concepts and techniques are applied to
a wide range of activities and situations outside
manufacturing; that is, in services such as health
care, food service, recreation, banking, hotel
management, retail sales, education,
transportation, and government.
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 This broadened scope has given the field the
name production/operations management, or
more simply, operations management, a term
that more closely reflects the diverse nature of
activities to which its concepts and techniques are
applied.

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1.2Historical Development of Operation
Management
 For over two centuries operations and production
management has been recognized as an important
factor in a country’s economic growth
 The traditional view of manufacturing
management began in eighteenth century when
Adam Smith recognized the economic benefits of
specialization of labor. He recommended
breaking of jobs down into subtasks and
recognizes workers to specialized tasks in which
they would become highly skilled and efficient.

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 In the early twentieth century, F.W. Taylor
implemented Smith’s theories and developed
scientific management.
 From then till 1930, many techniques were
developed prevailing the traditional view.
 Brief information about the contributions to
manufacturing management is shown in the Table
1.1.

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Date Contribution Contributor Date

1776 Specialization of labour in manufacturing Adam Smith 1776

1799 Interchangeable parts, cost accounting Eli Whitney and others 1799

1832 Division of labour by skill; assignment of jobs by Charles Babbage 1832


skill; basics of time study

1900 Scientific management time study and work study Frederick W. Taylor 1900
developed; dividing planning and doing of work

1900 Motion of study of jobs Frank B. Gilbreth 1900

1901 Scheduling techniques for employees, machines Henry L. Gantt 1901


jobs in manufacturing

1915 Economic lot sizes for inventory control F.W. Harris 1915
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1927 Human relations; the Hawthorne studies Elton Mayo
1931 Statistical inference applied to product quality: quality W.A. Shewart
control charts

1935 Statistical sampling applied to quality control: inspection sampling H.F. Dodge &H.G. Roming
plans
1940 Operations research applications in World War II P.M. Blacker and 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 L. Cummings, L. Porter


at work
1970 Integrating operations into overall strategy and policy, Computer W. Skinner J. Orlicky and G.
applications to manufacturing, Scheduling and control, Material Wright
requirement planning (MRP)
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1980 Quality and productivity applications from Japan: robotics, CAD- W.E. Deming and J. Juran
Production management becomes the acceptable
term from 1930s to 1950s.
As F.W. Taylor’s works become more widely
known, managers developed techniques that
focused on economic efficiency in manufacturing.
Workers were studied in great detail to eliminate
wasteful efforts and achieve greater efficiency.
At the same time, psychologists, socialists and other
social scientists began to study people and human
behavior in the working environment.

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 In addition, economists, mathematicians, and
computer socialists contributed newer, more
sophisticated analytical approaches. With the 1970s
emerge two distinct changes in our views.
 The most obvious of these, reflected in the new name
operations management was a shift in the service
and manufacturing sectors of the economy.
 As service sector became more prominent, the change
from ‘production’ to ‘operations’ emphasized the
broadening of our field to service organizations.
 The second, more suitable change was the beginning
of an emphasis on synthesis, rather than just analysis,
in management practices.

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What is Operations
Management?

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What is Operations Management?

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 In organizations that do not create physical
products, the production function may be less
obvious.
 An example is the transformation that takes place
at a bank, hospital, airline, or college.
 Regardless of whether the end product is good or
service the production activities that go on in the
organization are often referred to as operations or
operations management.

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Operations management is the study of decision-
making in the operations function.
Three points in this definition deserve emphasis:
 Decisions- Decision-making is an important
element of operations management. There are
four major decision responsibilities in operations
management.
– Process
– Quality
– Capacity
– Inventory
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 Function- Operations is a major function in any
organization, along with marketing and finance.
 The operations function is responsible for
supplying or producing products and services for
the business.
 In a manufacturing company, the operations
function is typically called the manufacturing or
production department.
 In service organizations, the operations function
is called the operations department.
 In general the term “operations” refers to the
function that produces goods or services.
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 Every business is managed through three major
functions: finance, marketing, and operations
management.
 Figure 1.1 illustrates this by showing that the vice
presidents of each of these functions reports
directly to the president or CEO of the company.
 Other business functions—such as purchasing,
human resources, and engineering—support these
three major functions. Finance is the function
responsible for managing cash flow, current
assets, and capital investments.
 Marketing is responsible for sales, generating
customer demand, and understanding customer
wants and needs.
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 An operation is responsible for supplying the
product or service of the organization. Operations
managers make decisions regarding the
operations function and its connection with other
functions.

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 System- The transformation systems produce goods
and services. Using the systems view, we consider
operations managers as managers of the conversion
process in the firm.
 Operations management is defined as the design,
operation, and improvement of the production system
that creates the firm’s primary products (goods and/or
services).
 It is a set of activities that creates goods and services
through the transformation of inputs into outputs. 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 called
as operations management
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Components of transformation model
 1. Inputs
 Some inputs are used up in the process of creation
of goods and services, while others play a part in
the creation process but are not used up. To
distinguish between these inputs resources,
usually classified as
 Transformed resources for example material,
information
 Transforming resource example staffs, land,
building, machines, and equipments

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 2. Out puts
 Output is goods and services resulting from the
transformation process. In these OM is
responsible for minimizing wastes, protecting the
health and safety of the employees and ethical
behavior in relation to social impact of
transformation process.

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3. Transformation process
 Is any activity or group of activities that takes one or more
inputs and transform and add values to them and provides
out puts for customers and clients. Transformation process
includes
 Change in physical characteristics of materials
 Change in location of materials, information, and
customers
 Example Airline service, information exchange and etc.
 Change in ownership of materials or information
 Storage and accommodation of materials or customers
 Change in the process or form of information
 Change in physiological or psychological state of
customers
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Feed back
 Information used to control the operation process by
adjusting the inputs and transformation process that are
used to achieve desired out comes. It can come from both
internal and external sources
 Internal sources : like testing, evaluation, and
continuously improving production process
 External source: it includes those who supply raw
materials , customers, government and other
 Boundary of the system

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The role of OM
 The business function that plan, organizes, coordinates and
controls the resource needed to produce a company’s goods and
service.
 OM involves managing people, equipment, technology,
information and many other resources.
 To transform a company’s input into output (finished products)
 In general, OM is responsible for orchestrating all the resource
needed to produce the final product and service. This includes
 Designing the product or service
 Deciding what resources are needed
 Arranging schedules, equipment, and other facilities
 Managing inventory
 Controlling quality
 Designing jobs to make sub products
 Designing work methods
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Manufacturing
Operations and
Service Operations
 An operation is defined in terms of the mission it
serves for the organization, technology it
employs and the human and managerial
processes it involves.
 Operations in an organization can be categorized
into manufacturing operations and service
operations.
 Manufacturing operations is a conversion
process that includes manufacturing yields a
tangible output: a product,
 whereas, a conversion process that includes
service yields an intangible output: a deed, a
performance, an effort.
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Distinction between Manufacturing
Operations and Service Operations
 Following characteristics can be considered for
distinguishing manufacturing operations with
service operations:
1. Tangible/Intangible nature of output
2. Consumption of output
3. Nature of work (job)
4. Degree of customer contact
5. Customer participation in conversion
6. Measurement of performance.

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 Manufacturing is characterized by tangible
outputs (products), outputs that customers
consume overtime, jobs that use less labour and
more equipment, little customer contact, no
customer participation in the conversion process
(in production), and sophisticated methods for
measuring production activities and resource
consumption as product are made.

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 Service is characterized by intangible outputs,
outputs that customers consumes immediately,
jobs that use more labour and less equipment,
direct consumer contact, frequent customer
participation in the conversion process, and
elementary methods for measuring conversion
activities and resource consumption.
 Some services are equipment based namely rail-
road services, telephone services and some are
people based namely tax consultant services, hair
styling

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 1.4 Operations Decisions
 An operation has responsibility for five major
decision areas: process, capacity, inventory, work
force, and quality.
 Process: Decisions in this category determine the
physical process or facility used to produce the
product or service. The decisions include the type
of equipment and technology, process flows,
layout, and all other aspects of the physical plant
or service facility. It is important that the physical
process be designed on relation to the long
strategic posture of the business.

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 Inventory: Inventory decisions in operations
determine what to order, how much to order, and
when to order. Inventory control systems are used
to manage materials from purchasing through raw
materials, work in process, and finished goods
inventories. They manage the flow of materials
within the firm.
 Work force: Work force decisions include
selection, hiring, firing, training, supervision, and
compensation. Managing the work force in a
productive and humane way is a key task for
operations today.

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 Quality: Quality is an important operations
responsibility which requires total organizational
support. Quality decisions must ensure that
quality is built into the product in all stages of
operations, standard must be set, equipment
designed, people trained, and product or service
inspected for quality to result.

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Productivity

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 The creation of goods and service 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, such as
labor and capital).
 Productivity is defined in terms of utilization of
resources, like material and labour. In simple
terms, productivity is the ratio of output to input.
For example, productivity of labour can be
measured as units produced per labour hour
worked. Productivity is closely inked with quality,
technology and profitability.
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 Hence, there is a strong stress on productivity
improvement in competitive business
environment.
Productivity can be improved by
 (a) controlling inputs,
 (b) improving process so that the same input
yields higher output, and
 (c) by improvement of technology.
Productivity can be measured at firm level, at
industry level, at national level and at
international level.
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Productivity Improvement Techniques
 (A) TECHNOLOGY BASED
 1. Computer Aided Design (CAD), Computer
Aided Manufacturing (CAM), and Computer
Integrated Manufacturing Systems (CIMS):
CAD refers to design of products, processes or
systems with the help of computers. The impact
of CAD on human productivity is significant for
the advantages of CAD are:
 Speed of evaluation of alternative designs,
 Minimization of risk of functioning, and
 Error reduction
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 CAM is very much useful to design and control
the manufacturing. It helps to achieve the
effectiveness in production system by line
balancing
 Production Planning and Control
 Capacity Requirements Planning (CRP),
Manufacturing Resources Planning (MRP II) and
Materials Requirement Planning (MRP)
 Automated Inspection.

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 Computer integrated manufacturing:
Computer integrated manufacturing is
characterized by automatic line balancing,
machine loading (scheduling and sequencing),
automatic inventory control and inspection.
 Robotics
 Laser technology
 Modern maintenance techniques
 Energy technology
 Flexible Manufacturing System (FMS)

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 (B) EMPLOYEE BASED
 Financial and non-financial incentives at individual and group level.
 Employee promotion.
 Job design, job enlargement, job enrichment and job rotation.
 Worker participation in decision-making
 Quality Circles (QC), Small Group Activities (SGA)
 Personal development.
 (C) MATERIAL BASED
 Material planning and control
 Purchasing, logistics
 Material storage and retrieval
 Source selection and procurement of quality material
 Waste elimination.

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 (D) PROCESS BASED
 Methods engineering and work simplification
 Job design evaluation, job safety
 Human factors engineering.
 (E) PRODUCT BASED
 Value analysis and value engineering
 Product diversification
 Standardization and simplification
 Reliability engineering
 Product mix and promotion.
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(F) TASK BASED
 Management style
 Communication in the organization
 Work culture
 Motivation
 Promotion group activity.

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`

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Productivity Measurement
 Productivity = Units Produced
Input used
For example, if units produced =1000 and labour
hours used is 250, then :
Productivity = Units produced =
Labor-hours used
1000 = 4 units/ per labor hour
250

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 The use of just one resource input to measure
productivity as shown above is known as single
factor productivity.
 However, a broader view of productivity is
multifactor productivity, which includes all inputs
(e.g., labor, material, energy, capital).
 Multifactor productivity is also known as total
factor productivity.
 Multifactor productivity is calculated by
combining the input units, as shown below:

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Productivity = Output
Labor + Material + Energy + Capital + Miscellaneous

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Example

 Biruk Textile Company has a staff of 4 each


working 8 hours per day (for a payroll cost of
$640 /day) and overhead expenses of $400 per
day. Company processes and closes on 8 titles
each day. The company recently purchased a
computerized title-search system that will allow
the processing of 14 titles per day.
 Although the staff, their work hours, and pay will
be the same, the overhead expenses are now $800
per day.

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 ILLUSTRATION 1: A company produces 160 kg of
plastic molded parts of acceptable quality by
consuming 200 kg of raw materials for a particular
period. For the next period, the output is doubled
(320 kg) by consuming 420 kg of raw material and
for a third period; the output is increased to 400 kg by
consuming 400 kg of raw material.
 SOLUTION: During the first year, production is 160
kg
 Productivity =Output/Input = 160/200
 = 0.8 or 80%
 For the second year, production is increased by 100%
 Productivity =Output/Input =320/420
 = 0.76 or 76% ↓
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 For the third period, production is increased by
150%
 Productivity = Output/Input = 400/400
 = 1.0, i.e., 100%
 From the above illustration it is clear that, for
second period, though production has doubled,
productivity has decreased from 80% to 76% for
period third, production is increased by 150% and
correspondingly productivity increased from 80%
to 100%.

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 ILLUSTRATION 2: The following information
regarding the output produced and inputs
consumed for a particular time period for a
particular company is given below:
 Output – birr 10,000
 Human input – birr 3,000
 Material input – birr 2,000
 Capital input – birr 3,000
 Energy input – birr 1,000
 Other misc. input –birr 500
 The values are in terms of base year birr value.
Compute various productivity indices.
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SOLUTION:
Partial productivity
1. Labour productivity = Output/Human input
=10,000/3,000 = 3.33
2. Capital productivity =Output/Capital input
=10,000/3,000 = 3.33
3. Material productivity =Output/Material input
=10,000/2,000 = 5.00
4. Energy productivity = Output/Energy input
=10,000/1,000 = 10.00
5. Other misc. expenses =Output/Other misc. input
= 10,000/500
= 20.00
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Loss Control

= Total output /(Human + Material + Capital +


Energy + Other misc. input)
10,000
3,000 + 2,000 + 3,000 +1,000 +500
10,000
9,500 = 1.053

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