Module – 1

Introduction, Functions within business organizations, the operation management function,

Classification of production systems, Productivity, factors affecting productivity.
Decision Making: The decision process, characteristics of operations decisions, use of models,
decision making environments, graphical linear programming, analysis and trade-offs.

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
that part of an organization, which is concerned with the transformation of a range of inputs into
the required (products/services) 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 called as operations
management.

Operations Management is the management of systems or processes that create goods and/or
provide services.

Operations Management is the process of effectively planning and regulating the activities of
that part of an enterprise which is responsible for actual transformation of materials into finished
products.

Operations Management deals with decision making related to production processes so that the
resulting goods or services are produced according to specifications, in the amounts and by the
schedule demanded and at a minimum cost.

Goods and services

- Every book you read

- Vehicle you drive

- Any medical treatment you receive

- Vehicle repair and maintenance

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HISTORICAL EVOLUTION OF OPERATION MANAGEMENT
Year Contribution Contributor
(i) Handicraft Era
(ii) Industrial Revolution Era
1764 Invention of Steam Engine James Watt
1776 Specialization of labour in manufacturing Adam Smith
1799 Interchangeable parts, cost accounting Eli Whitney and others
1832 Division of labour by skill; assignment of jobs by
skill; basics of time study Charles Babbage
(iii) Scientific Management Era
1900 Scientific management time study and work study
developed; dividing planning and doing of work 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: H.F. Dodge & H.G.
inspection sampling plans Roming
1940 Operations research applications in World War II P.M. Blacker and others.
1946 Digital computer John Mauchlly and J.P.
Eckert
G.B. Dantzig, Williams
1947 Linear programming
& others
1950 Mathematical programming, on-linear and stochastic
A. Charnes, W.W. Cooper
processes & others
(iv) Operation Research & Computer Era

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 1951 Commercial digital computer: large-scale Sperry Univac
computations available.
1960 Organizational behaviour: continued study of people
at work L. Cummings, L. Porter
1970 Integrating operations into overall strategy and
policy, Computer applications to manufacturing, W. Skinner J. Orlicky and
Scheduling and control, Material requirement G. Wright
planning (MRP)
1980 Quality and productivity applications from Japan: W.E. Deming and
robotics, CAD-CAM,JIT,TQM,KANBAN J. Juran.
2000 Total integrated system, Integration of several USA,Europe,Japan
engineering and total customer satisfaction, E-
commerce-mail,Internet,Global village concepts

Business organizations have three basic functional areas –

Finance, marketing, and operations.

All business organizations have these three basic functions.

Finance is responsible for securing financial resources, allocating those resources throughout the
organizations and providing funds for operations.

Marketing is responsible for assessing consumer wants and needs, and selling and promoting
the organization’s goods or services.

Operations are responsible for producing the goods or providing the services offered by the
organization.

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FUNCTIONS OF BUSINESS ORGANIZATIONS

Operations are a transformation process. It transfers or converts various inputs, for example, into
outputs – Goods or services. To ensure that the desired outputs are obtained, feedbacks are sent
at various points in the transforming process. These feedbacks are evaluated to determine
whether a control is needed.

EXAMPLE OF OPERATIONS MANAGEMENT PROCESS

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This is another example – hospital. This is an example of delivery of services. The output of this
process is more psychological – healthy patients

This is another example – hospital. This is an example of delivery of services. The output of this
process is more psychological – healthy patients

To add value

Increase product value at each stage

Value added is the net increase between output product value and input material value

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Provide an efficient transformation

Efficiency – perform activities well at lowest possible cost

FUNCTIONS OF MANAGEMENT
The functions of management are planning, organizing, staffing, Directing, and controlling.

1. Planning: This step involves mapping out exactly how to achieve a particular goal. Say, for
example, that the organization’s goal is to improve company sales. The manager first needs to
decide which steps are necessary to accomplish that goal. These steps may include increasing
advertising, inventory, and sales staff. These necessary steps are developed into a plan. When the
plan is in place, the manager can follow it to accomplish the goal of improving company sales.

2. Organizing: After a plan is in place, a manager needs to organize her team and materials
according to her plan. Assigning work and granting authority are two important elements of
organizing.

3. Staffing: After a manager discerns his area’s needs, he may decide to beef up his staffing by
recruiting, selecting, training, and developing employees. A manager in a large organization
often works with the company’s human resources department to accomplish this goal.

4. Directing: A manager needs to do more than just plan, organize, and staff her team to achieve
a goal. She must also lead. Leading involves motivating, communicating, guiding, and
encouraging. It requires the manager to coach, assist, and problem solve with employees.

5. Controlling: After the other elements are in place, a manager’s job is not finished. He needs
to continuously check results against goals and take any corrective actions necessary to make
sure that his area’s plans remain on track. All managers at all levels of every organization
perform these functions, but the amount of time a manager spends on each one depends on both
the level of management and the specific organization.

SCOPE OF OPERATIONS MANAGEMENT

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Operations Management includes:

 Forecasting

 Capacity planning

 Scheduling

 Managing inventories

 Assuring quality

 Motivating employees

 Deciding where to locate facilities

Forecasting - It is used to determine how to allocate the budgets and resources for an upcoming
period of time. Forecast the quantities of product/service requirement.

Capacity Planning - It is the process of determining the production capacity needed by an

organization to meet changing demands for its products. It is the maximum amount of work that
an organization is capable of completing in a given period.

Scheduling - The purpose of scheduling is to minimize the production time and costs. It aims to
maximize the efficiency of the operation and reduce costs, by telling a production facility when
to make, with which staff, and on which equipment.

Managing inventories - Successful inventory management involves creating a purchase plan

that will ensure that items are available when they are needed (but that neither too much nor too
little is purchased) and keeping track of existing inventory and its use.

Assuring Quality - Quality management is concerned with controlling activities with the aim of
ensuring that products and services are fit for their purpose and meet the specifications.

Motivating Employees – Effectiveness of job design, rewards, employee participation, training.

Deciding where to locate facilities - Facility location is the process of identifying the best
geographic location for a service or production facility.

Factors affecting facility location

 Proximity to source of supply: Reduce transportation costs.

 Proximity to customers: High population areas, near to distribution facility.

 Proximity to labor: Local wage rates, attitude toward unions, availability of skilled
workers.

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CONCEPT OF PRODUCTION
Production function is that part of an organization, which is concerned with the transformation of
a range of inputs into the required outputs (products) having the requisite quality level.

Production is defined as “the step-by-step conversion of one form of material into another form
through chemical or mechanical process to create or enhance the utility of the product to the

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user.” Thus production is a value addition process. At each stage of processing, there will be
value addition.

Edwood Buffa defines production as ‘a process by which goods and services are created’. Some
examples of production are: manufacturing custom-made products like, boilers with a specific
capacity, constructing flats, some structural fabrication works for selected customers, etc., and
manufacturing standardized products like, car, bus, motor cycle, radio, television, etc.

The production system of an organization is that part, which produces products of an

organization. It is that activity whereby resources, flowing within a defined system, are
combined and transformed in a controlled manner to add value in accordance with the policies
communicated by management. A simplified production system is shown above.

The production system has the following characteristics:

1. Production is an organized activity, so every production system has an objective.

2. The system transforms the various inputs to useful outputs.

3. It does not operate in isolation from the other organization system.

4. There exists a feedback about the activities, which is essential to control and improve
system performance.

Production of Goods (Manufacturing) and Delivery of Services

• Production of goods results in a tangible output, like automobile, eyeglasses, a cricket

ball, a refrigerator anything that we can see or touch.

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 • Delivery of service generally implies an act. A physician’s examination, TV and auto
repair, and the projection of a film in a theater are examples of services.

Although goods and services go hand in hand, there are some basic difference between these
two, manufacturing and services are often different in what is done but somewhat similar
how is done.

MANUFACTURING AND SERVICES COMPARISON

1. Degree of customer contact

2. Uniformity of input

3. Labour content of jobs

4. Uniformity of output

5. Measurement of productivity

6. Production and delivery

7. Quality assurance

8. Amount of inventory

9. Evaluation of work

10. Ability to patent design

• Degree of customer contact - Many services involve a higher degree of customer

contact than manufacturing.

• Labour content of jobs - Services often have a higher degree of labor content than
manufacturing jobs do.

• Uniformity of inputs - Service operations are often subject to a higher degree of

variability of inputs. Each client, patient, customer, repair job presents a somewhat
unique situation. Conversely, manufacturing operations often don’t have a great deal of
variability as inputs are controlled.

• Measurement of productivity. Measurement of productivity can be more difficult for

service jobs due largely to the high variations of inputs. (Productivity is the ratio of
output to inputs.)

• Quality assurance. Quality assurance is usually more challenging for services due to the
higher variation in input, and because delivery and consumption occur at the same time.
Unlike manufacturing, which typically occurs away from the customer and allows

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 mistakes that are identified to be corrected, services have less opportunity to avoid
exposing the customer to mistakes.

• Inventory. Many services tend to involve less use of inventory than manufacturing
operations, so the costs of having inventory on hand are lower than they are for
manufacturing. However, unlike manufactured goods, services cannot be stored. Instead,
they must be provided “on demand.”

• Wages. Manufacturing jobs are often well paid, and have less wage variation than service
jobs, which can range from highly paid professional services to minimum-wage workers.

• Ability to patent. Product designs are often easier to patent than service designs, and
some services cannot be patented, making them easier for competitors to copy.

DIFFERENCES BETWEEN PRODUCTION OF GOODS AND PROVISION OF

SERVICES

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INTERMITTENT PRODUCTION SYSTEM

• Intermittent means something that starts and stops at irregular intervals of time.

• Goods are produced based on customer's orders, hence no need for stocking.

• Goods are produced on a small scale.

• The flow of production is intermittent.

• The design of products goes on changing.

• This system is very flexible.

Types of Intermittent Production System

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1. Project production flows

• In project production flows, company accepts a single, complex order or contract. The
order must be completed within a given period of time and at an estimated cost.
• Examples of project production flows mainly include construction of airports, dams,
roads, buildings, shipbuilding, etc.

Nice (nandi infrastructure corridor enterprises) road comprises of kalyani group of

companies, VHB & SAB international ltd.

2. Jobbing production flows

• In jobbing production flows, one or few units of a product as per specifications given by
the customer is produced. The product is produced within a given period and at a fixed
cost.

• Examples of such jobbing production flows include, services given by repair shops,
tailoring shops, manufacturer of special machine tools, etc

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 Advantages
Following are the advantages of job shop production:
1. Because of general purpose machines and facilities variety of products can be
produced.
2. Operators will become more skilled and competent, as each job gives them learning
opportunities.
3. Full potential of operators can be utilized.
4. Opportunity exists for creative methods and innovative ideas.
Limitations
Following are the limitations of job shop production:
1. Higher cost due to frequent set up changes.
2. Higher level of inventory at all levels and hence higher inventory cost.
3. Production planning is complicated.
4. Larger space requirements.

3. Batch production flows

• Here, the production of items takes place in lots or batches as per demand forecasts. A
product is divided into different jobs. All jobs of one batch of production must be
completed before starting the next batch of production.

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 • Examples of batch production flows include manufacturing of drugs and
pharmaceuticals, medium and heavy machineries, etc.

Advantages
Following are the advantages of batch production:
1. Better utilization of plant and machinery.
2. Promotes functional specialization.
3. Cost per unit is lower as compared to job order production.
4. Lower investment in plant and machinery.
5. Flexibility to accommodate and process number of products.
6. Job satisfaction exists for operators.
Limitations
Following are the limitations of batch production:
1. Material handling is complex because of irregular and longer flows.
2. Production planning and control is complex.
3. Work in process inventory is higher compared to continuous production.
4. Higher set up costs due to frequent changes in set up.

CONTINUOUS PRODUCTION SYSTEM

• Continuous means something that operates constantly without any irregularities or

frequent halts.

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 • In the continuous production system, goods are produced constantly as per demand
forecast. Goods are produced on a large scale for stocking and selling. Here, the inputs
and outputs are standardized along with the production process and sequence.

Advantages
Following are the advantages of continuous production:
1. Standardization of product and process sequence.
2. Higher rate of production with reduced cycle time.
3. Higher capacity utilization due to line balancing.
4. Manpower is not required for material handling as it is completely automatic.
5. Person with limited skills can be used on the production line.
6. Unit cost is lower due to high volume of production.
Limitations
Following are the limitations of continuous production:
1. Flexibility to accommodate and process number of products does not exist.
2. Very high investment for setting flow lines.
3. Product differentiation is limited.

Types of Continuous Production System

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1. Mass production flows

• Here, company produces different types of products on a large-scale and stock them in
warehouses until they are demanded in the market.

• The goods are produced either with the help of a single operation or uses a series of
operations.

• E.g. of mass production is the production of toothpastes, soaps, pens, etc.

Advantages
Following are the advantages of mass production:
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilization due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.
Limitations
Following are the limitations of mass production:
1. Breakdown of one machine will stop an entire production line.
2. Line layout needs major change with the changes in the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.

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2. Process production flows

• Here, a single product is produced and stocked in warehouses until it is demanded in the
market. The flexibility of these plants is almost zero because only one product can be
produced.

• Examples of these plants include, steel, cement, paper, sugar, etc.

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PRODUCTIVITY
• One of the primary responsibilities of a manager is to achieve productive use of an
organization’s resources. The term used to describe this is productivity.

• Productivity is an index that measures output (goods and services) relative to the input
(labor, materials, energy, and other resources) used to produce it.

A productivity ratio can be computed for

– a single operation,

– a department,

– an organization,

– planning workforce requirements,

– scheduling equipment,

– financial analysis, and

– other important tasks.

– For nonprofit organizations, higher productivity means lower costs;

– For profit-based organizations, productivity is an important factor in determining

how competitive a company is.

– Productivity growth is the increase in productivity from one period to the next
relative to the productivity in the preceding.

– Period

• Productivity growth is a key factor in a country’s rate of inflation and the standard of
living of its people.

• Productivity increases add value to the economy while keeping inflation in check.

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Different types of productivity measures

Productivity measures can be

– Single input (partial productivity)

– More than one input (multifactor productivity)

– All inputs (total productivity).

• Labor productivity Units of output per labor hour

• Machine productivity Units of output per machine hour

• Capital productivity Units of output per rupee input

• Energy productivity Units of output per kilowatt-hour

1. Determine the productivity, if four workers installed 720 square yards of carpeting in
eight hours.

2. Determine the productivity, if a machine produced 70 pieces in two hours. However, two
pieces were unusable

3. Determine the multifactor productivity for the combined input of labor and machine time
using the following data:

Output: 7,040 units

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Input: Labor: Rs1, 000; Materials: Rs 520; Overhead: Rs 2,000

4. Compute the multifactor productivity. Assume 40-hour weeks and an hourly wage of Rs 100.

Overhead is 1.5 times weekly labour cost. Material cost is Rs. 5 per kg

Week Output Workers Material

kg)

1 30,000 6 450

2 33,600 7 470

3 32,200 7 460

4 35,400 8 480

Productivity measures are useful on a number of levels.

• To track performance of an organization over time.

• Allows managers to monitor performance and to decide where improvements are

needed.

• It serves as scorecards of the effective use of resources.

• To judge the performance of an entire industry or the productivity of a country as a

whole.

• Business leaders are concerned with productivity as it relates to competitiveness.

• It helps in deciding wage and price increases

FACTORS AFFECTING PRODUCTIVITY

1. Standardizing the processes

2. Skilled workers

3. Design of the workspace

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 4. Reward productivity increases

5. Layoffs

6. Update use of technology

• Standardizing the processes reduces variability which can have a significant benefit for
both productivity and quality.

• A shortage of skilled workers hampers the ability of companies to update computing

resources, generate and sustain growth, and take advantage of new opportunities.

• Design of the workspace can impact productivity. For example, having tools and other
work items within easy reach can positively impact productivity.

• Incentive plans that reward productivity increases can boost productivity.

• Layoffs often affect productivity.

• New workers tend to have lower productivity than seasoned workers.

• Use of the Internet can lower costs of a wide range of transactions, thereby increasing
productivity.

IMPROVING PRODUCTIVITY

1. Develop productivity measures for all operations.

2. Look at the system as a whole in deciding which operations are most critical. It is overall
productivity that is important.

3. Develop methods for achieving productivity improvements.

4. Establish reasonable goals for improvement.

5. Make it clear that management supports and encourages productivity improvement.

Consider incentives to reward workers for contributions.

6. Measure improvements and publicize them.

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