OPERATIONS MANAGEMENT

1. Definition of Operations Management

Production is the creation of goods and services. Operations management (OM) is

the set of activities that creates goods and services by transforming inputs into outputs.
Activities creating goods and services take place in all organizations. In manufacturing
firms, the production activities that create goods are usually quite obvious. In them, we
can see the creation of a tangible product such as TV or vehicle.
In organizations that do not create physical products, the production function maybe
less obvious. It maybe hidden from public and even from the customer. An example is the
transformation that takes place at a bank, hospital, airline office, or school.
Often when services are performed, no tangible goods are produced. Instead, the
product may take such forms as the transfer of funds, from a savings account to a
checking account, the transplant of a liver, the filling of an empty seat on an airline, or the
education of a student. Regardless of whether the end product is a good or service, the
production activities that go on in the organization are often referred to as operations or
operations management.

2. Reasons for Studying OM

The OM is a crucial part of the organizational operations. The following are the
reasons of studying OM:
a. OM is the one of the three major functions of any organizations, and it is integrally
related to all other business functions.
b. We want to know how goods and services are produced.
c. We want to understand the operations managers do.
d. We study OM because it is a costly part of an organization. Study of OM provides
opportunity for an organization to improve its profitability and enhance its service
to society.
The comprehensive understanding of OM is necessary as the management has to deal
with various concerns or issues that requires critical decisions. There are 10 critical
decision areas as follows:
a. Service and product design
b. Quality management
c. Process and capacity design
d. Location
e. Lay-out design
f. Supply chain management
g. Inventory, material requirements planning and Just-In-Time (JIT)
h. Intermediate, short-term, and project scheduling
i. Maintenance

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A. Operations and Productivity

1. Organizing to Produce Goods and Services

The organizations are bound to perform three functions to be able to create goods
and services and for survival:

a. Marketing – This generates the demand, or at least takes the order for a product
or service.
b. Production/operations – This is the creation of products.
c. Finance/accounting – This tracks how well the organization is doing, pays the bills
and collects the money.

Schools, churches and businesses perform these functions.

2. New Trends in Operations Management

OM is an exciting discipline as the operations manager is confronted with an ever-

changing world. These dynamics are the result of a variety of forces, from globalization
of world trade to the transfer of ideas, products, and money at electronic speeds. The
direction now being taken by OM is presented in the figure below:

Past Causes Future

Local or national focus Low-cost, reliable worldwide Global focus
communication and transportation
networks.
Batch (large) shipments Cost of capital puts pressure on Just-in-time shipment
reducing investment in inventory.
Low-bid purchasing Quality emphasis requires that Supply-chain partners,
suppliers be engaged in product enterprise resource
improvement. planning, e-commerce
Lengthy product Shorter life cycles, internet rapid Rapid product
development international communication, development alliance
computer-aided design, and
international collaboration.
Standardized products Affluence and worldwide markets; Mass customization
increasingly flexible production
processes
Job specialization Changing cultural milieu; Empowered
increasingly a knowledge and employees, teams, and
information society. lean production.

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3. Operations in the Service Sector

The economic activities that typically produce an intangible product (such as

education, entertainment, lodging, government, financial and health services) are termed
as services. Let us examine some of the differences between good and services:
a. Services are usually intangible.
b. Services are often produced and consumed simultaneously.
c. Services are often unique.
d. Services have high customer interaction.
e. Services have inconsistent product definition.
f. Services are often knowledge-based.
g. Services are frequently dispersed.

Below are some additional differences between goods and services:

Attributes of Goods Attributes of Services

(Tangible product) (Intangible product)
Product can be resold. Reselling a service is unusual.
Product can be inventoried. Many services cannot be inventoried.
Some aspects of quality are measurable. Many aspects of quality are difficult to
measure.
Selling is distinct from production. Selling is often a part of the service.
Product is transportable. Provider, not product, is often
transportable.
Site of facility is important for cost. Site of facility is important for customer
contact.
Often easy to automate. Service is often difficult to automate.
Revenue is generated primarily from Revenue is generated primarily from the
tangible product. intangible services.

Despite of the definitions above, however, in reality, almost all services are a mixture of
a service and tangible product; similarly the sale of most goods requires a service.

4. The Productivity Challenge

The creation of goods and services 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). Improving productivity means improving efficiency. This can
be achieved by (a) reducing inputs while maintaining output; or, (b) Increase output while
inputs remain constant.
In the production of goods and services, high production may imply only that more
people are working and that employment levels are high, but it does not imply high
productivity. Measurement of productivity is an excellent way to evaluate a country’s
ability to provide an improving standard of living for its people. Only through increases in
productivity can the standard of living improve. Moreover, only through increases in

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productivity can labor, capital, and management receive additional payments. If returns
to labor, capital, or management are increased without increased productivity, prices rise.
On the other hand, downward pressure is placed on prices when productivity increases,
because more is being produced with the same resources.

The Productivity Variables

The increases in productivity are dependent upon three productivity variables:

labor, capital, and management.
a. Labor – Improvement in the contribution of labor to productivity is the result of
the healthier, better-nourished labor force. Some areas may also be attributed
to a shorter workweek. Historically, about 10% of the annual improvement in
productivity is attributed to improvement in the quality of labor. The key
variables for improved labor productivity are:
• Basic education appropriate for an effective labor force.
• Diet of the labor force.
• Social overhead that makes labor available, such as transportation and
sanitation.
Maintaining and enhancing the skills of labor in the midst of the rapidly
expanding technology and knowledge is another challenge to the
management. Better utilization of labor with a stronger commitment is a
challenge too.
b. Capital – Capital investment provides tools. It is affected by the inflation and
taxes making capital investment increasingly expensive. When the capital
invested per employee drops, it is expected to have a drop in productivity.
c. Management – It is a factor of production and an economic resource. It is
responsible for ensuring that labor and capital are effectively used to increase
productivity. Management accounts for over half of the annual increase in
productivity. It includes improvements made through the application of
technology and the utilization of knowledge.

B. Operations Strategy for Competitive Advantage

A major focus to the operations is effectiveness which relates to the core business
processes needed to run the business. An effective operations management effort must
have a mission so it knows where it is going and a strategy so it knows how to get there.

Mission

Mission is the purpose or rationale for an organization’s existence. Mission

statements provide boundaries and focus for organizations and the concept around which
the firm can rally. Developing a good mission is a requirement to developing strategy.
Once the organization’s mission has been decided, each functional area within the firm
determines its supporting mission. The functional areas are the major divisions such as
the marketing, finance/accounting, and production/operations.

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 Strategy

Upon establishment of mission, the strategy and its implementation can begin.
Strategy is an organization’s action plan to achieve the mission. Each functional area has
the strategy for achieving its mission and for helping the organization reach the overall
mission. These strategies exploit opportunities and strengths, neutralize threats, and
avoid weaknesses.

Achieving Competitive Advantage Through Operations

Competitive advantage implies the creation of a system that has a unique

advantage over competitors. The idea is to create value in an efficient and sustainable
way. Strategies to achieve competitive advantage:

1. Competing on differentiation
➢ Differentiation is concerned by providing uniqueness. A firm’s opportunities for
creating uniqueness are not located within a particular function or activity, but
can arise in virtually everything that the firm does. Differentiation should be
thought of as going beyond both physical characteristics and service attributes
to encompass everything about the product or service that influences the value
that the customers derive from it.
2. Competing on cost
➢ Low-cost leadership entails achieving maximum value as defined by the
customer. It requires examining each of the 10 OM decisions in a relentless
effort to drive down costs while meeting customer expectations of value. A low-
cost strategy does not imply low value or low quality.
3. Competing on response
➢ Response is often thought of as a flexible response, but it also refers to reliable
and quick response. Indeed, we define response as including the entire range
of values related to timely product development and delivery, as well as reliable
scheduling and flexible performance.
➢ Flexible response is the ability to match changes in a marketplace in which
design innovations and volumes fluctuate substantially.
➢ Other responses are reliability of scheduling and quickness.
In practice, the three concepts – differentiation, cost, and response – are often
implemented via the six specific strategies:
a. Flexibility in design and volume;
b. Low price
c. Delivery
d. Quality
e. After sales service; and,
f. Broad product line

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Ten Strategic OM Decisions

Differentiation, low cost, and response can be achieved when managers make
effective decisions in 10 areas of OM. These are collectively known as operations
decisions. The 10 decisions of OM that support missions and implement strategies follow:

1. Good and service design.

➢ Designing goods and services defines much of the transformation
process. Costs, quality, and human resource decisions interact strongly
with design decisions. Designs usually determine the lower limits of cost
and the upper limits of quality.
2. Quality
➢ The customer’s quality expectations must be determined and policies
and procedures established to identify and achieve that quality.
3. Process and capacity design.
➢ Process options are available for products and services. Process
decisions commit management to specific technology, quality, human
resource use, and maintenance. These expenses and capital
commitments will determine much of the firm’s basic cost structure.
4. Location selection
➢ Facility-location decisions for both manufacturing and service
organizations may determine the firm’s ultimate success. Errors made
at this juncture may overwhelm other efficiencies.
5. Lay-out design
➢ Capacity needs, personnel levels, purchasing decisions, and inventory
requirements influence layout. Additionally, processes and materials
must be sensibly located in relation to each other.
6. Human resources and job design.
➢ People are an integral and expensive part of the total system design.
Therefore, the quality of work life provided, the talent and skills required,
and their costs must be determined.
7. Supply chain management
➢ These decisions determine what is to be made and what is to be
purchased. Consideration is also given to quality, delivery, and
innovation, all at a satisfactory price. An atmosphere of mutual respect
between buyer and supplier is necessary for effective purchasing.
8. Inventory
➢ Inventory decisions can be optimized only when customer satisfaction,
suppliers, production schedules, and human resource planning are
considered.
9. Scheduling
➢ Feasible and efficient schedules of production must be developed; the
demands on human resources and facilities must be determined and
controlled.

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 10. Maintenance
➢ Decisions must be made regarding desired levels of reliability and
stability, and systems must be established to maintain that reliability and
stability.

Strategy Development and Implementation

Once firms understand the issues involved in developing an effective strategy, they
evaluate their internal strengths and weaknesses as well as the opportunities and threats
of the environment. That is known as SWOT analysis (for Strength, Weakness,
Opportunities, and Threats). Beginning with SWOT analyses, firms position themselves,
through their strategy, to have a competitive advantage. The firm may have excellent
design skills or great talent at identifying outstanding locations. However, the firm may
recognize limitations of its manufacturing process or in finding good suppliers. The idea
is to maximize opportunities and minimize threats in the environment while maximizing
the advantages of the organization’s strengths and minimizing the weaknesses. Any
preconceived ideas about mission are then re-evaluated to ensure they are consistent
with the SWOT analysis. Subsequently, a strategy of achieving a mission is developed.
The strategy is continually evaluated against the value provided customers and
competitive realities.

Identify Critical Success Factors

Because no firm does everything exceptionally well, a successful strategy

implementation requires identifying those tasks that are critical to success. Critical
Success Factors (CSF) are those relatively few activities that make a difference between
having and not having a competitive advantage. Successful organizations identify and
use CSF to develop a unique and distinct competence that allows them to achieve a
competitive advantage.

Build and Staff the Organization

There is a three-step process involved. Once a strategy and critical success factors have
been identified, the second step is to group the necessary activities into an organizational
structure. The third step is to staff it with personnel who will get the job done. The
manager works with subordinate managers to build plans, budgets, and programs that
will successfully implement strategies that achieve missions.

Integrate OM with Other Activities

The organization of the operations function and its relationship to other parts of the
organization vary with the OM mission. Moreover, the operations function is most likely to
be successful when the operations strategy is integrated with other functional areas of
the firm, such as marketing, finance, MIS, and human resources. In this way, all of the

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areas support eh company’s objectives. When the organization of the OM function results
in effective scheduling, a competitive advantage can exist.

C. Operations in Global Management

Global competition exists. Rapid growth in emerging world markets like China and
Eastern Europe means that even medium-size companies must extend their operations
globally. Making a product only in the US and then exporting it no longer guarantees
success or even survival. There are new standards of global competitiveness that include
quality, variety, customization, convenience, timeliness, and cost. This globalization of
production contributes efficiency and adds value to the products and services offered the
world, but it also complicates the operations manager’s job.

The Importance of Global Operations

1. Reduce Cost
➢ Many international operations seek to take advantage of the tangible
opportunities to reduce their costs. Foreign locations with lower wages
can help lower both direct and indirect costs. Less stringent government
regulations on a wide variety of operation practices reduce cost.
Opportunities to cut the cost of taxes and tariff also encourage foreign
operations.
2. Improve the Supply Chain
➢ The supply chain can often be improved by locating facilities in countries
where unique resources are available. These resources maybe
expertise, labor, or raw material.
3. Provide Better Goods and Services
➢ While the characteristics of goods and services can be objective and
measurable (e.g. number of on-time deliveries), they can also be
subjective and less measurable (e.g. sensitivity to culture). As we move
from tangible to intangible reasons for internationalizing operations, we
need an ever better understanding of difference in culture and of way
business is handled in different countries. Improved understanding as a
result of a local presence permits firms to customize products and
services to meet unique cultural needs in foreign market.
➢ Another reason for international operations includes nearness to foreign
customers, which improves response time to meet customers’ changing
product and service requirements.
4. Attract New Markets
➢ Since international operations require local interaction with foreign
customers, suppliers, and other competitive businesses, international
firms inevitably learn about unique opportunities for new products and
services. Knowledge of these markets may not only help to increase
sales but also may permit organizations to diversify their customer bases
and smooth the business cycle. Global operations also add production

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 flexibility so products and services can be switched between economies
that are booming and those that are not.
➢ Another reason to go into foreign markets is the opportunity to expand
life cycle of an existing product.
5. Learn to Improve Operations
➢ Firms serve themselves and their customers well when they remain
open to the free flow of ideas.
6. Attract and Retain Global Talent
➢ Global organizations can attract and retain better employees by offering
more employment opportunities. They need people in all functional
areas of expertise worldwide. The firm can recruit and retain employees
because they provide both greater growth opportunities and insulation
against unemployment during times of economic downturn. The firm has
the means to relocate unneeded personnel in country with economic
downturn to more prosperous one.

Achieving Global Operations

1. Global Product Design

➢ The products are designed for the user and therefore social and cultural
differences must be taken into consideration in any global design. While
packaging and marketing can help make foreign products seems domestic in
origin, very small differences in product orientation can spell disaster for
manufacturers.
2. Global Process Design and Technology
➢ The real cost of information processing and communication have fallen so fats
that it is now possible for a firm to manage effectively a highly integrated, globally
dispersed operation. Global communication networks, based on either ground
or satellite systems, are now available virtually everywhere. The technology has
reduced the time needed to develop new products and to increase the
integration of the globally dispersed operation.
3. Global Facility Location Analysis
➢ The first step in going international is to determine the country in which to locate
a new factory or service facility. One approach to this requires parent
organizations to identify what they believe are critical success factors.
4. Impact of Culture and Ethics
➢ One of the greatest challenges to global operations is reconciling differences in
social and cultural behavior. One country’s culture deems acceptable maybe
considered unacceptable in another country’s culture. Example are the cultural
variations in punctuality, and long lunch hour.
➢ Ethics varies too. Bribery likewise creates substantial ethical problems in the
global arena.
➢ International managers must understand other cultures and be able to work
successfully in various cultural environments.

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References

Heizer, J., & Render, B. (2001). Operations management. Prentice Hall. USA

Jacobs, F. R., & Chase, B. (2011). Operations and supply chain management. McGraw-
Hill/Irwin. USA

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