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An Instructional
Material

Prepared by: Michelle G. Acuavera, DBA

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Table of Contents

Module 1 Introduction to Operations Management 1

1.1 Basic Functions of the Business Organization 1
1.2 Manufacturing vs. Service 8
1.3 Scope of Operations Management 9
1.4 Role of the Operations Manager 10
1.5 Types of Models 12
1.6 The Historical Evolution of Operations Management 14
1.7 Activity No. 1 17
1.8 Activity No. 2 18
1.9 Group Exercises 19
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INTENDED LEARNING OUTCOMES:

1. Define the term operations management;
2. Identify the three major functional areas of organizations and describe how
they interrelate;
3. Identify similarities and differences between production and service
operations;
4. Describe the operations function and the nature of the operations manager’s
job;
5. Summarize the two major aspects of process management;
6. Explain the key aspects of operations management decision-making;
7. Briefly describe the historical evolution of operations management;
8. Characterize current trends in business that impact operations management.

INTRODUCTION:
Operations is what businesses do. Operations are processes that either provide
services or create goods. Operations take businesses such as restaurants, retail stores,
supermarkets, factories, hospitals, and colleges and universities. In fact, they take
place in every business organization. Moreover, operations are the core of what
business organization does.

This chapter also provides a description of the historical evolution of

operations management and a discussion of the trends and issues that impact
operations management.

Operations refer to the part of an organization that is responsible for

producing goods and/or services. Goods are physical items inclusive of raw materials,
parts, subassemblies such as the engine system used in a car, and final products such
as computers and machineries. Services are activities that provide a combination of
time, location form, and psychological value. There are examples of these goods and
services all around you.
Operations management is managing the systems or processes that create
goods and services. It can also be defined as the administration of business
operations within an enterprise to achieve the best quality products and services.
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Table 1.
Basic Functions of the Business Organization

Marketing – responsible for assessing consumer needs and wants,

and selling and promoting the organization’s goods or services.
Operations – responsible for producing the goods or providing the
BUSINESS services offered by the organization.
ORGANIZATION Finance – responsible for securing financial resources at favorable
prices and allocating those resources throughout the organization,
as well as budgeting, analyzing investment proposals, and providing
funds for operations.

Manufacturing vs. Service?

Manufacturing and Service Organizations differ chiefly because manufacturing is
goods-oriented and service is act-oriented.

1. Degree of customer contact. By its nature, service often involves a much higher
degree of customer contact than manufacturing. The point of consumption occurs
when a service provider interacts with customers and this results in a “moment of
truth” where the service is being performed and the customers judge its performance.

2. Uniformity of input. Manufacturing operations often can carefully control the

amount of variability of inputs and thus achieve low variability in outputs.
Consequently, job requirements for manufacturing are generally more uniform than
those for services.

3. Labor content of jobs. Many services involve a higher labor content than
manufacturing operations.

4. Uniformity of output. Because high mechanization generates products with low

variability, manufacturing tends to be smooth and efficient; service activities
sometimes appear to be slow and awkward, and output is more variable. Automated
services are an exception to this.

5. Measurement of productivity. Measurement of productivity is more

straightforward in manufacturing due to the high degree of uniformity of most
manufactured items.

6. Production and delivery. In many instances customers receive the service as it is

performed (e.g., haircut, dental care).
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7. Quality assurance. Quality assurance is more challenging in services when

production and consumption occur at the same time. Moreover, the higher variability
of input is actively managed.

8. Amount of inventory. Due to the nature of manufacturing, manufacturing systems

usually have more inventory on hand (e.g. raw materials, partially completed items,
finished goods inventories) than service firms.

9. Evaluation of work. Because goods are tangible and there is often a time interval
between production and delivery, evaluation of output is less demanding that it is for
services.

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

SUPPLY CHAIN

Figure 1.0 Supply Chain

Source: Recurrency

A supply chain is the sequence of organizations – their facilities, functions, and

activities – that are involved in producing and delivering a product or service. The sequence
begins with basic suppliers of raw materials and extends to the final customer, as seen in
Figure 1.0
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SCOPE OF OPERATIONS MANAGEMENT

The scope of operations management ranges across the organization. Operations

Management people are involved in product and service design, process selection,
selection and management of technology, design of work systems, location planning,
facilities planning, and quality improvement of the organization’s products or services.

The operations function includes many interrelated activities, such as forecasting,

capacity planning, scheduling, managing inventories, assuring quality, motivating employees,
deciding where to locate facilities and more.

We can use an airline company to illustrate a service organization’s operations

system. The system consists of airplanes, airport facilities, and maintenance facilities,
sometimes spread out over a wide territory. Most of the activities performed by management
and employees fall into the realm of operations management.

The operations function includes many interrelated activities such as:

➢ Forecasting such things as weather and landing conditions, seat demand for
flights, and the growth in air travel.

➢ Capacity planning, essential for the airline to maintain cash flow and make a
reasonable profit. (too few or too many planes, or even the right number of
planes but in the wrong places, will hurt profits

➢ Scheduling of planes for flights and for routine maintenance, scheduling of

pilots and flight attendants; and scheduling of ground crews, counter staff,
and baggage handlers.

➢ Managing inventories, of such items as foods and beverages, first-aid

equipment, in-flight magazines, pillows and blankets, and life preservers.

➢ Assuring quality, essential in flying and maintenance operations, where the

emphasis is on safety, and important in dealing with customers at ticket
counters, check-in, telephone and electronic reservations, and curb service,
where the emphasis is on efficiency and courtesy.

➢ Motivating and training employees, in all phases of operations

➢ Locating facilities, according to managers’ decisions on which cities to

provide service for, where to locate maintenance facilities, and where to locate
major and minor hubs.
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ROLE OF THE OPERATIONS MANAGER

A primary function of an operations manager is to guide the system by decision

making. Certain decisions affect the design of the system, and others affect the operation of
the system.

System design involves decisions that relate to system capacity, the geographic
location of facilities, arrangement of departments and placement of equipment within the
physical structures, product and service planning, and acquisition of equipment. These
decisions usually, but not always, require long-term commitments. Moreover, they are
typically strategic decisions.

System operation involves management of personnel, inventory planning and

control, scheduling, project management, and quality assurance. These are generally tactical
and operational decisions.

Feedback on these decisions involves measurement and control. In many instances,

the operations manager is more involved in day-to-day operating decisions than with
decisions relating to system design.

There are also a number of other areas that are part of the operations function. They
include purchasing, industrial engineering, distribution, and maintenance.

Purchasing has responsibility for procurement of materials, supplies, and

equipment. Close contact with operations is necessary to ensure correct quantities and
timing of purchases. The purchasing department is often called on to evaluate vendors for
quality, reliability, service, price and ability to adjust to changing demand. Purchasing is also
involved in receiving and inspecting the purchased goods.

Industrial engineering is often concerned with scheduling, performance standards,

work methods, quality control, and material handling.

Distribution involves the shipping of goods to warehouses, retail outlets, or final

customers.

Maintenance is responsible for general upkeep and repair of equipment, buildings

and grounds, heating and air-conditioning; removing toxic wastes; parking; and perhaps
security.

Decision Making

Most operations decisions involve many alternatives that can have quite different
impacts on costs or profits

Typical operations decisions include:

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What: What resources are needed, and in what amounts?

When: When will each resource be needed? When should the work be
scheduled? When should materials and other supplies be ordered?
Where: Where will the work be done?
How: How will the product or service be designed? How will the work be done?
How will resources be allocated?
Who: Who will do the work?

OPERATIONS MANAGEMENT AND DECISION MAKING

The chief role of an operations manager is that of planner and decision maker. In this
capacity, the operations manager exerts considerable influence over the degree to
which the goals and objectives of the organization are realized. Most decisions involve
many possible alternatives that can have quite different impacts on costs or profits.
Consequently, it is important to make informed decisions.

Throughout this book, you will encounter the broad range of decisions that
operations managers must make, and you will be introduced to the tools necessary to
handle those decisions. This section describes general approaches to decision making,
including the use of models, quantitative methods, analysis of trade-offs, establishing
priorities, ethics, and the system approach. Models are often a key tool used by all
decision makers.

Model - an abstraction of reality; a simplified representation of something. For

example, a child’s toy car is a model of a real automobile. It has many of the same visual
features (shape, relative proportions, wheels) that make it suitable for the child’s
learning and playing. But the toy doesn’t have a real engine, it cannot transport people,
and it does not weigh 2,000 pounds.

Common features of models:

✓ They are simplifications of real-life phenomena

✓ They omit unimportant details of the real-life systems they mimic so that
attention can be focused on the most important aspects of the real-life
system.

Common statistical models include descriptive statistics such as the mean, median,
mode, range, and standard deviation, as well as random sampling, the normal
distribution, and regression equation.

Models are sometimes classified as physical, schematic, or mathematical:

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Types of Models:

1. Physical Models look like their real-life counterparts. Examples include miniature
cars, trucks, airplanes, toy animals and trains, and scale-model buildings. The
advantage of these models is their visual correspondence with reality.

2. Schematic Models are more abstract than their physical counterparts; that is they
have less resemblance to the physical reality. Examples include graphs and charts,
blueprints, pictures and drawings. The advantage of schematic model is that they
are often relatively simple to construct and change. Moreover, they have some
degree of visual correspondence.

3. Mathematical Models are the most abstract: They do not look at all like their real-
life counterparts. Examples include numbers, formulas and symbols. These models
are usually the easiest to manipulate, and they are important forms of inputs for
computers and calculators.
Benefits of Models
✓ Models are generally easier to use and less expensive than dealing with the real
system
✓ Require users to organize and sometimes quantify information and, in the
process often indicate areas where additional information is needed.

✓ Increase understanding of the problem

✓ Enable managers to analyze “What if?” questions
✓ Serve as a consistent tool for evaluation and provide a standardized format for
analyzing a problem
✓ Enable users to bring the power of mathematics to bear on a problem.

This impressive list of benefits notwithstanding, models have certain limitations of

which you should be aware. The following are three of the more important limitations.

✓ Quantitative information may be emphasized at the expense of qualitative

information.
✓ Models may be incorrectly applied and the result misinterpreted. The
widespread used of computerized models adds to this risk because highly
sophisticated models may be placed in the hands of users who are not
sufficiently knowledgeable to appreciate. The subtleties of a particular model;
thus they are unable to fully comprehend the circumstances under which the
model can be successfully employed.
✓ The use of models does not guarantee good decision.
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Quantitative Approaches

Quantitative approaches to problem solving often embody an attempt to obtain

mathematically optimal solutions to managerial problems.

Linear Programming and related mathematical techniques are widely used for optimum
allocation of scarce resources.

Queuing Techniques are useful for analyzing situations in which waiting lines form.

Inventory Models are widely used to control inventories.

Project Models such as PERT (program evaluation and review technique) and CPM (critical
path method) are useful for planning, coordinating, and controlling large-scale projects.

Forecasting Techniques are widely used in planning and scheduling.

Statistical models are currently used in many areas of decision making.

Quantitative approaches to decision making in operations management have been

accepted because of calculators and high-speed computers capable of handling the required
calculations. Computers have had a major impact on operations management. Moreover, the
growing availability of software packages for quantitative techniques has greatly increased
management’s use of the computer.

Because of the emphasis on quantitative approaches in operations management

decision making, it is important to note that managers typically use a combination of
qualitative and quantitative approaches, and many important decisions are based on
qualitative approaches.

Performance Metrics

All managers use metrics to manage and control operations. There are many metrics
in use, including those related to profits, costs, quality, productivity, assets, inventories,
schedules, and forecast accuracy.

Analysis Trade-Offs

Operations personnel frequently encounter decisions that can be described as trade-

off decisions. For example, in deciding on the amount of inventory to stock, the decision
maker must take into account the trade-off between the increased level of customer service
that the additional inventory would yield and the increased costs required to stock that
inventory. In selecting equipment, a decision maker must evaluate the merits of extra
features relative to the cost of those extra features.
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A System Approach

A system can be defined as a set of interrelated parts that must work together. The
systems approach emphasizes interrelationships among subsystems, but its main them is
that the whole is greater than the sum of its individual parts.

WHY STUDY OPERATIONS MANAGEMENT?

1. Every aspect of business affects or is affected by operations;

2. Many service jobs are closely related to operations;

➢ Financial services
➢ Marketing services
➢ Accounting services
➢ Information services

3. There is a significant amount of interaction and collaboration amongst the functional

areas; involving exchange of information and cooperative decision making. Finance and
operations management personnel cooperate by exchanging information and expertise in
such activities as the following:

✓ Budgeting. Budgets must be periodically prepared to plan financial requirements.

Budgets must sometimes be adjusted, and performance relative to a budget must
be evaluated.
✓ Economic analysis of investment proposals. Evaluation of alternative investments
in plant and equipment requires inputs from both operations and finance people.
✓ Provision of funds. The necessary funding of operations and the amount and timing
of funding can be important and even critical when funds are tight. Careful
planning can help avoid cash-flow problems.

THE HISTORICAL EVOLUTION OF OPERATIONS MANAGEMENT

1. The Industrial Revolution it began in 1770s in England and spread to the rest of Europe
and to the United States during the 19th century. Prior to that time, goods were produced in
small shops by craftsmen and their apprentices. Under that system, it was common for one
person to be responsible for making a product, such as horse-drawn wagon or a piece of
furniture, from start to finish. Only simple tools were available; the machines that we use
today had not been invented

The number of innovations in the 18th century changed the face of production forever by
substituting machine power for human power. Perhaps the most significant of these was
the steam engine, because it provided a source of power to operate machines in factories.
The spinning jenny and the power loom revolutionized the textile industry. Ample supplies
of coal and iron ore provided materials for generating power and making machinery. The
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new machines, made of iron, were much stronger and more durable than the simple
wooden machines they replaced.

In the earliest days of manufacturing, goods were produced using craft production: highly
skilled workers using simple, flexible tools produced goods according to customer
specifications.

A major changed occurred that gave the Industrial Revolution a boost: the development of
standard gauging systems. This greatly reduced the need for custom-made goods. Factories
began to spring up and grow rapidly, providing jobs for countless people who were
attracted in large numbers from rural areas.

2. Scientific Management it brought a widespread changes to the management of

factories. The movement was spearheaded by the efficiency engineer and inventor
Frederick Winslow Taylor, who is often referred to as the father of scientific management.
Taylor believed in a “science of management” based on observation, measurement, analysis
and improvement of work methods, and economic incentives. He studied work methods in
great detail to identify the best method for doing each job. Taylor also believed that
management should be responsible for planning, carefully selecting and training workers,
finding the best way to perform each job, achieving cooperation between management and
workers, and separating management activities from work activities.

Scientific Management – pioneers who also contributed heavily to this movement

Frank Gilbreth – was an industrial engineer who is often referred to as the father of motion
study. He developed principles of motion economy that could be applied to incredibly small
portions of a task.

Henry Gantt - recognized the value of non-monetary rewards to motivate workers, and
developed a widely used system for scheduling called Gantt charts.

Harrington Emerson - applied Taylor’s ideas to organization structure and encouraged the
use of experts to improve organizational efficiency. He testified in a congressional hearing
that railroads could save a million dollars by applying principles of scientific management.

Henry Ford - employed scientific management techniques to his factories

✓ He introduced mass production to the automotive industry

✓ He introduced moving assembly line
3. Human Relations Movement emphasized the importance of human element in job
design. Lilian Gilbreth worked with her husband focusing on the human factory in work.
Many of her studies dealt with worker fatigue. In following decades, there was much
emphasis on motivation.
➢ Elton Mayo – Hawthorne studies on worker motivation, 1930
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➢ Abraham Maslow – motivation theory, 1940s; hierarchy of needs, 1954

➢ Frederick Hertzberg – Two Factor Theory, 1959
➢ Douglas McGregor – Theory X and Theory Y, 1960s
➢ William Ouchi – Theory Z, 1981

4. Decision Models & Management Science the factory movement was accompanied by
the development of several quantitative techniques.

a. F.W. Harris – mathematical model for inventory management, 1915

b. Dodge, Romig, and Shewart – statistical procedures for sampling and quality control,
1930s
c. Tippett – statistical sampling theory, 1935
Operations Research (OR) Groups – OR applications in warfare
d. George Dantzig – linear programming, 1947

Influence of Japanese Manufacturers

A number of Japanese manufacturers developed or refined management practices that
increased productivity of their operations and the quality of their products. Their
approaches emphasized quality and continual improvement, workers teams and
empowerment, and achieving customer satisfaction.

TRENDS IN BUSINESS

Major Trends
✓ The internet, e-commerce, and e-business
✓ Management of Technology
✓ Globalization
✓ Management of Supply Chains
✓ Outsourcing
✓ Agility
✓ Ethical Behavior
TRENDS IN BUSINESS

Electronic Business involves the use of the Internet to transact business. It changed
the way business organizations interact with their customers and their suppliers.

Technology refers to the application of scientific discoveries to the development and

improvement of goods and services. It can involve knowledge, materials, methods, and
equipment. OM is primarily concerned with three kinds of technology:

a. Product and Service Technology – refers to the discovery and development of

new products and services.
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b. Process Technology – refers to methods, procedures, and equipment used to

produce goods and provide services. They include not only processes within an
organization but also supply chain processes.

c. Information Technology – refers to the science and use of computers and other
electronic equipment to store, process, and send information. Information
technology is heavily ingrained in today’s business operations.

Activity No. 1

Reading

The Challenges of Managing Services

Services can pose a variety of managerial challenges for managers – challenges that in
manufacturing are either much less or nonexistent. And because services represent an
increasing share of the economy, this places added importance on understanding and
dealing with the challenges of managing services. Here are some of the main factors.

1. Jobs in service environments are often less structured than in manufacturing

environments.
2. Customer contact is usually much higher in services.
3. In many services, worker skill levels are low compared to those of manufacturing
workers.
4. Services are adding many new workers in low-skill, entry-level positions.
5. Employee turnover is often higher, especially in the low-skill jobs.
6. Input variability tends to be higher in many service environments than in
manufacturing.

7. Service performance can be adversely affected by workers' emotions, distractions,

customers' attitudes, and other factors, many of which are beyond managers' control.

Because of these factors, quality and costs are more difficult to control, productivity
tends to be lower, the risk of customer dissatisfaction is greater, and employee
motivation is more difficult.

QUESTIONS:

1. What managerial challenges do services present that manufacturing does not?

2. Why does service management present more challenges than manufacturing?

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Activity No.

Case
HAZEL

Hazel had worked for the same Fortune 500 company for almost 15 years. Although
the company had gone through some tough times, things were starting to turn around.
Customer orders were up, and quality and productivity had improved dramatically from
what they had been only a few years earlier due to a company-wide quality improvement
program. So it came as a real shock to Hazel and about 400 co-workers when they were
suddenly terminated following the new CEO’s decision to downsize the company.

After recovering from the initial shock, Hazel tried to find employment elsewhere.
Despite her efforts, after eight months of searching she was no closer to finding a job than
the day she started. Her funds were being depleted and she was getting more discouraged.
There was one bright spot though, she was able to bring in a little money by mowing lawns
for her neighbors. She got involved quite by chance when she heard one neighbor remark
that now that his children were on their own, nobody was around to cut the grass. Almost
jokingly, Hazel asked him how much he be willing to pay. Soon Hazel was moving the lawns
of five neighbors. Other neighbors wanted her to work on their lawns, but she didn’t feel that
she could spare any more time from here job search.

However, as the rejection letters began to pile up, Hazel knew she had to make a
decision. On a sunny Tuesday morning, she decided, like many others in a similar situation,
to go into business for herself – taking care of neighborhood lawns. She was relieved to give
up the stress of job hunting, and she was excited about the prospect of being her own boss.
But she was also fearful of being completely on her own. Nevertheless, Hazel was determined
to make a go for it.

At first, business was a little slow but once people realized Hazel was available, many
asked to take care of their lawns. Some people were simply glad to turn the work over to her;
others switched from professional lawn care services. By the end of her first year in business.
Hazel knew she could earn a living this way. She also performed other services such as
fertilizing lawns, weeding gardens, and trimming shrubbery. Business became so good that
Hazel hired two part-time workers to assist her and even then, she believed she could expand
further if she wanted to.

QUESTIONS:

1. In what ways are Hazel’s customers most likely to judge the quality of her lawn care
services?
2. Hazel is the operations manager of her business. Among her responsibilities are
forecasting, inventory management, scheduling, quality assurance, and maintenance.

a. What kinds of things would likely require forecasts?

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b. What inventory items does Hazel probably have? Name one inventory decisions
she has to make periodically.
c. What scheduling must she do? What things might occur to disrupt schedules and
cause Hazel to reschedule?
d. How important is quality assurance to Hazel’s business? Explain.
e. What kinds of maintenance must be performed?

1. Group / Experiential Learning Exercise

(Virtual) Imagine that you visited a fast food restaurant and you observed many things, and
answer these questions:

✓ In what ways is quality, or lack of quality visible?

✓ What items must be stocked in addition to the food?

✓ How important do you think employee scheduling is? Explain.

✓ How might capacity decisions affect the success or failure of the? restaurant

A – Jollibee B – Mc Donalds E - Shakeys

C- Chowking D – Mang Inasal F – Max’s

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2. Illustrate the Basic Functions of a business organization. Cite each main function. 10
points.

References:

Chapter 1 from Operations Management, Second Edition, Asia Global Edition by

Stevenson, Sum, 2013