COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION

INTRODUCTION TO OPERATING MANAGEMENT

LESSON 1

Production and Operations managers carry on their work in a social and economic
environment. Society puts restrictions on them as they strive to produce products and
services. Their jobs require managing the organization’s resources, people, money,
physical property, and the production of products and services.

 PRODUCTION – the process of converting or transforming resources materials,

machines, employees, time-into goods or services.

 OPERATIONS – broadly describe the set of all activities associated with the
production of goods and services. Operations involves not only production but also
transportation, whereby the location of something or someone is changed; supply,
whereby the ownership or possession of goods is changed’ and service, the
principal characteristics of which is the treatment or accommodation of those
activities of something or someone.
 Production is the intentional act of creating useful according to quantity demanded,
quality specifications and delivery schedule. It is the process of converting or
transforming resources into products. Operations are set of all activities associated
with the production of a product.

System – provides an efficient and effective framework of activities necessary to attain

an objective.

The elements of production system consist of a physical network of men, materials,

machines and processes, and an information network so planned and built as to interact
harmoniously.
 2 sub-system within the production system

1. Physical system – which acts in the transformation of inputs to product outputs.

2. Information system – which coordinates and controls the action of the physical
system.

The production system is characterized by:

1. A material transformation process

2. A degree of repetitiveness
3. An information system superimposed on the physical system
4. A material process flow

PRODUCTION/OPERATION MANAGEMENT (P/OM) or OPERATIONS

MANAGEMENT - Managing the resources needed to produce goods and services.

Operations management is the management of processes that transform inputs into

goods and services that add value for the customer.

Definition of Production Management

“It is also called operations management, planning, and control of industrial processes to
ensure that they move smoothly at the required level.

Production “Management deals with decision–making related to the production process.

So that the resulting goods and services are produced in accordance with the quantitative
specifications and demand schedule with minimum cost”.

The main activities of production management can be listed as:

(i) procurement of input resources namely material, and land, labor,

equipment, and capital.
 (ii) Product design and development to determine the production process
for transforming the input factors into the output of goods and services.
(iii) Supervision and control of the transformation process for the efficient
production of goods and services.

Characteristics of Production Management

1. Production Management is the process of effective planning

 It helps in regulating the operations of that section of an enterprise which is

responsible for the actual transformation of materials into finished products.

2. Related to the production process.

 goods and services are produced in accordance with the quantitative

specifications and demand schedule with minimum cost.

3. Production Management is a set of general principles for production

 Production management has a set of certain principles like economies,

facility design, job design, schedule design, quality control, inventory
control, work-study and cost, and budgetary control.

Functions of Production Management

1. In modern times production management has to perform a variety of functions.

2. Design and development of the production process.
3. Production planning and control.
4. Implementation of the plan and related activities to produce the desired output.
5. Administration and coordination of the activities of various components and
departments responsible for producing the necessary goods and services.
6. Get real-time insight into the production.
7. Improve performance with flexible routing.
8. Monitor production costs with ease.
The Goal of Operations Management

The goal of operations management is to maximize efficiency while producing goods and
services that effectively fulfil customer needs.

Frederick Taylor “the father of scientific management” said that management is knowingly
exactly what you want men to do and then seeing to it that they do it in the best and
cheapest way.

Management is often described as consisting of:

1. Planning and establishing goals or objectives.

2. Organizing input resources and staffing.
3. Directing or motivating people to perform to attain those goals.
4. Controlling the performance or comparing actual progress with planned
performance.

The production managers’ aim is to create the end product in the market in the right
quantity, of the right quality, at the right time, economically.

- To achieve this objective, he must involve himself in product planning, process

planning, production planning and control and quality control. To meet the
economic objective, the manager is concerned with such things as methods
improvement and work measurement, physical facilities management, materials
management, and personnel management.

 Product Planning
 Process Planning
 Physical Facilities Management
 Production Planning and Control
 Quality Control
 Methods Improvement
 Work Measurement
  Materials Management
 Personnel Management
The functions related to personnel management are:
1. Manpower planning
2. Manpower procurement
3. Manpower development
4. Wage administration
5. Personal relations
6. Maintaining personnel safety, health and benefits
 Interrelationship

The concept of Production Management and its functions

Concept of Production management refers to the application of management and

principles to the production function in a factory. In simple words production
management involves planning, organizing, directing and controlling in the
production process.

Why Study about Production/Operation Management?

1. P/OM deals with the supply side of organizations.

a. Marketing Managers
b. Financial Managers
c. Accountants and controllers
d. Personnel Managers
e. Computer and Information System Specialist
f. Engineers
2. Asset concentration is controlled by P/OM
3. Career opportunities in P/OM and purchasing are excellent for creative individuals.
4. Understanding of P/OM and strategic business decision making is necessary since
the product and the service strategies have a large impact on the design of the
production process.
- There are six basic strategies which have to be addressed to for the
manufacturing company to determine it is in the right track
a. Positioning of the production system
b. Capacity and location factors
 Product demand forecasts over a period of time
 Cost of money (lower cost enable designs for long
period) vs. penalties for expansion, penalties for
shutdowns, prices

Types of Expansion:

- Grassroot – building a new plant

- Debottlenecking – identifying bottlenecks and relieving these bottlenecks.

Location Factors:

- Transportation costs
- Labor availability, cost trainability
- City ordinances, taxes
- Power supply and costs
- Weather conditions
- Peace and order
- Government incentives
- Real estate value
- Political stability
- Infrastructures – roads, bridges, communication systems
- Social environment
- Economic
- Technical requirement – ex. Refineries need to be built in deep water to
allow VLCCs

c. Product and process technology.

 d. Workplace force and job design

e. Strategic implications of operating decisions to reduce Costs and

Control Quality.

5S’s

1. Seiri sort proper arrangement

2. Seiton systematize orderliness
3. Seiso sweep cleanliness
4. Seiketsu sanitize clean-up
5. Shitsuke self-discipline

KISS – Keep It Simple Stupid

Don’t use P1,000 approach to a P10 program

Distinguish between the forests and woods.

f….Strategies regarding supplies reduction/minimization of inventory

costs.

5…P/OM and Social Responsibility

6..P/OM and our “Productivity Crisis”

Productivity is a measure of the effectiveness with which an organization uses its

resources in transforming inputs to outputs; in other words, the ratio of the output of a
production system to the input.

Major factors affecting productivity:

1. Government policy
a. Integrated planning and infrastructure
 b. Price stability
c. Tax base
d. Licensing
e. Small scale industries promotion
f. Import substitution
2. Resource endowment
a. Natural resources
b. Human resources
c. Financial resources
3. Cultural/social values and institutions
a. Attitudes of people
b. social values

OPERATIONS IN THE SERVICE SECTOR

Manufactures produce a tangible product, whereas service products are often intangible.
We will define services as including repair and maintenance, government, food and
lodging, transportation, insurance, trade, financial, real estate, education, legal, medical,
entertainment, and other professional occupations.

DIFFERENCES BETWEEN GOODS AND SERVICES

1. Services are usually intangible as opposed to a tangible good.

2. Services are often produced and consumed simultaneously, there is no stored
inventory.
3. Services are often unique.
4. Services have high customer interaction
5. Services inconsistent product definition.
6. Services are frequently dispersed.

Attributes of Goods (tangible product)

 1. Product can be resold.
2. Product can be inventoried.
3. Some aspects of quality are measurable.
4. Selling is distinct from production.
5. Product is transportable.
6. Site of facility is important for cost.
7. Often easy to automate.
8. Revenue is generated primarily from the tangible product.

Attributes of Services (intangible product)

1. Reselling a services is unusual.

2. Many services cannot be inventoried.
3. Any aspects of quality are difficult to measure.
4. Selling is often a part of the service.
5. Provider, not product, is often transportable.
6. Site of facility is important for customer contact.
7. Service is often difficult to automate.
8. Revenue is generated primarily from the intangible services.

What Are Goods and Services?

Basically, a product is a tangible offering to a customer, whereas a service is an intangible

offering. The former is usually a one-time exchange for value. In contrast, a service
usually involves a longer period of time.

The value of a product is inherent in the tangible offering itself, for example, in the can of
paint or pair of pants. In contrast, the value of a service often comes from the eventual
benefit that the customer perceives from the time while using the service.

In addition, the customer often judges the value of a service based on the quality of the
relationship between the provider and the customer while using the service.
Operations Management Specific Roles

 Chief Operating Officer

"The chief operating officer (COO), also called the chief operations officer, is one of the
highest-ranking executive positions in an organization, comprising part of the "C-Suite".
The COO is responsible for the daily operation of the company and routinely reports to
the highest-ranking executive, usually the chief executive officer (CEO)... The COO is
usually the second in command at the firm, especially if the highest-ranking executive is
the Chairman and CEO.

 Operations Manager

 "Operations management is the administration of business practices to create the

highest level of efficiency possible within an organization.
 Operations management is concerned with converting materials and labor into
goods and services as efficiently as possible.
 Corporate operations management professionals try to balance costs with revenue
to maximize net operating profit."

They oversee product development and delivery, inventory and supply chain
management, operations staffing and job design, and production. They oversee an
organization's key operations and, thus, they usually have a wide and strategic view of
the organization. The specific duties of the role depend on the nature of the product and
service that the company produces and provides, for example, in agriculture, industry or
construction.

Operations Systems
What is a System?

Simply put, a system is an organized collection of parts that are highly integrated to
accomplish an overall goal. The system has various inputs, which go through certain
processes to produce certain outputs, which together, accomplish the overall desired goal
for the system.

For example, an automobile is a system. Its inputs are gasoline, a driver, a steering
mechanism, tires, as well as various tubes, pipes and electrical cords. The system's
processes are when they work together to burn the gasoline, resulting in the systems
outputs of the tires moving and the car steering as the driver prefers. The overall system's
desired goal is a very useful automobile.

What is an Operations System?

The primary activities in operations management is a system -- they are all integrated
and aligned with each other. The operations manager's job is to ensure they are all
effectively and efficiently working together in order to produce the desired goal of useful
goods and services for customers.

An operations system includes, for example:

1. Inputs -- such as expertise, best practices, funding, equipment, facilities and

technologies, as well as the customer's feedback and the overall organization's
strategic priorities
2. Processes -- such as planning (capacity, product and service design, production,
facilities, jobs, inventory, quality control, etc.) and managing productivity to
produce high-quality products and services
3. Outputs -- high-quality products and services
4. Outcomes -- very satisfied customers

Feedback from customers should be continually collected and considered as an input to

the processes of the planning the development and production of goods and services. In
that way, the operations system is really a recurring loop of outcomes which, in turn,
influence the inputs to the next round of the system.

PRODUCTION SYSTEM

- Manufacturing system that includes all functions required to design,

produce, distribute, and service a manufactured product
-
ELEMENTS
1. Input
2. Transformation
3. Output

CHARACTERISTICS

 System Discrimination – It is primarily concerned about input and output only.

 Interrelationship – it exists on a close relationship with other systems of the
organization.
 Level Formulation – it consists of various levels of corporate hierarchy like
headquarters, administrative departments etc.
 Specialization of Functions – since there are large number of levels, each level
performs a specialized function.
 Renovation – in order to cope up with changes, the production system needs to be
renovated from time to time

PRODUCTION SYSTEM CONTROLS

- CONTROL IS ESSENCIAL FOR PRODUCTION MANAGEMENT. The
input-output relationship must be controlled whatever is the size of
production system.
Align Operations Systems with Strategic Planning

Notice that one of the inputs to the operations system is the strategic priorities of the
organization. It is critical that the operations system be closely integrated and aligned with
the purpose (the mission) and priorities (strategic goals) of the organization. Otherwise,
the system will not be operating as effectively as it should be. For the system to be
operating as efficiently as it should be, there should be closely integrated and aligned
parts within the system.

Phase 1: Planning Operations Systems

Product/Service Planning

The planning of products and services (the outputs from the system) includes market
research to:

 Clarify the needs and wants of potential groups (market niches) of customers, as
well as how those needs and wants might be met with certain products and
services.
 Clarify how the new products and services should best be provided to those target
markets.
 Identify competitors, as well as potential collaborators.
 Suggest the best terms in pricing for the products and services.
 Suggest how best to advertise and promote to those groups of customers.

The results of that research produce a specification of the product or service. Various
feasibility studies and perhaps a prototype might be done, as well, to refine the description
of the product or service.

The specification could be further enhanced by adding information about costs to develop
and produce the product or service, including employees, facilities and management. This
information is often included in a business plan. (This information is also sometimes
referred to as the business strategy.)

Capacity Planning

Capacity planning includes specifying how many of the outcomes (products or how much
service) will be produced and how often. That includes predicting, or forecasting, the
demand for those outcomes. The previous market research will be very useful here. There
are a variety of other tools that could be useful, as well.

A useful planning technique to ensure consideration of many possible influences is

scenario planning, including to consider various external driving forces that could have a
strong influence.

It also might be useful to hire an expert with knowledge about developing the particular
product or service.

The results of the planning should produce estimates of the needed inputs to produce the
product or service, including types of expertise needed, amounts of certain kinds of
materials, what technologies to use, etc.

Facilities and Layout Planning

This is one of the most critical activities in operations management, not just because they
underlie and facilitate the activities to very effectively and efficiently produce products and
services, but also because facilities and their maintenance are one of the most expensive,
as well. Fortunately, there is a variety of helpful articles about how to do this acclivity in
operations management.

Job and Work Design

The Business Dictionary defines work design as:

  "An arrangement in the workplace that has the objective of overcoming employee
alienation and job dissatisfaction that comes about from mechanical and repetitive
tasks in the workplace. Work design is used by organizations to boost productivity
by offering employees non- monetary rewards such as satisfaction from a greater
sense of personal achievement. Also called job design."

From Wikipedia:

 "Job design (also referred to as work design or task design) is a core function of
human resource management and it is related to the specification of contents,
methods and relationship of jobs in order to satisfy technological and
organizational requirements as well as the social and personal requirements of the
job holder or the employee."

Work Flow Management

"Workflow management is creating and optimizing the paths for data in order to complete
items in a given process. Workflow management includes mapping out the workflow in
an ideal state, finding redundant tasks, automating the process, and identifying
bottlenecks or areas for improvement." kissflow

The map depicts the flow of activities through the system, including its input, processes,
outputs and outcomes. These are sometimes also referred to as operations management
process maps

Phase 2: Planning Operations, Inventory and Quality Control

Production and Scheduling

 Production Planning

This is the processes part in the operations system where the inputs are transformed into
the desired product or service. Considerations include, for example:
  Are there technologies currently or soon available that could expedite the
production?
 Are there best practices suggested by various experts about the product or
service?
 Can components of the product be purchased as-is or off-the-shelf?
 What components are needed, in total, to produce the product or service?
 What are the costs associated with developing and producing the product or
service?
 What are the estimated demands of customers for the next six months? 12
months? 18 months? These estimates drive the scheduling of the production
activities.

This activity also includes developing a detailed map of the activities required to obtain,
assemble, integrate and test the product or service before it is provided to customers.

 Scheduling

A critical activity in ensuring that the operations system is highly effective and efficient is
coordinating (scheduling) the timing of activities to organize, monitor and optimize the
equipment, people and production activities. Scheduling has a major impact on the
productivity of the system.

Supply Chain Management and Inventory Management

Supply Chain Management

"In business and finance, supply chain is a system of organizations, people, activities,
information, and resources involved in moving a product or service from supplier to
customer." Wikipedia

" Supply chain management (SCM) is the active management of supply chain activities
to maximize customer value and achieve a sustainable competitive advantage. It
represents a conscious effort by the supply chain firms to develop and run supply chains
in the most effective & efficient ways possible. Supply chain activities cover everything
from product development, sourcing, production, and logistics, as well as the information
systems needed to coordinate these activities."

Inventory Management

Inventory includes unprocessed materials, finished products, supplies and works-in-

progress. Inventory management is a part of supply chain management that oversees the
inventory items from manufacturers to storage to where they are sold. There must be a
very careful balance between the size of the inventory of items compared to the actual
rate of their sales. Too many items in inventory means their costs are not recovered in a
timely manner from their sales. It also might mean high costs of storage. Insufficient
numbers of items means the organization cannot meet the customer demand, resulting
in lost revenue.

Service Design

In the past, an organization was expected to provide a product or service to the customer,
and then that transaction was done -- the activity was done to the customer. The customer
was more or less at the mercy of the organization.

Today, that is changing dramatically. Customers have a much wider range of

organizations, products and services to choose from, and they can access them instantly.
Customers can also access numerous sources of useful opinions or reviews about the
product or service even before they buy them. Thus, it is more important than ever that
organizations remain very good at attracting, satisfying and retaining customers. That
requires a carefully designed and implemented customer services plan.

Service design "is the activity of planning and organizing people, infrastructure,
communication and material components of a service in order to improve its quality and
the interaction between the service provider and its customers. Service design may
function as a way to inform changes to an existing service or create a new service
entirely."
Quality Control

Quality management, including quality control, is crucial to effective operations

management, particularly continuous improvement. More recent advancements in
quality, such as benchmarking and Total Quality Management, have resulted in
advancements to operations management as well.

Quality Management

Quality control can be defined "part of quality management focused on fulfilling quality
requirements." While quality assurance relates to how a process is performed or how a
product is made, quality control is more the inspection aspect of quality management. An
alternate definition is "the operational techniques and activities used to fulfill requirements
for quality."

Phase 3: Managing Productivity

What is Productivity?

In the context of operations systems, productivity is defined as the ratio of the output to
the input of the system. The higher the ratio, the more productive the system. One of the
most common measures of productivity is output per hour. This is important especially in
manufacturing industries.

Methods to Measure and Improve Productivity

Where many guidelines are in regard to increasing employee productivity, Productivity: A

Practical Handbook distinguishes between three factors that drive productivity, not all of
them around employee productivity, including:

1. Job-related
2. Resource-related
3. Environment-related