CHAPTER-ONE

INTRODUCTION TO
PRODUCTION AND OPERATION
MANAGEMENT

S. M. Khaled Hossain, PhD (Candidate), MBA

Academician & Researcher (Accounting)
Army Institute of Business Administration (Army IBA)
(Affiliated Institute of Bangladesh University of Professionals)
Key Functions of Business
 Line Functions

Production/
Supply Chain Marketing
Operation
Management and Sales
Management

 Staff Functions:
Finance, Accounting, Human Resource Management
Product vs. Service
What is Production?
Production implies the creation of goods and services to satisfy human
needs. It involves conversion of inputs (resources) into outputs (products). It
is a process by which, raw materials and other inputs are converted into
finished products.

Any process which involves the conversion of raw materials and bought-out
components into finished products for sale is known as production. Such
conversion of inputs adds to the value or utility of the products produced by
the conversion or transformation process.

The utility or added value is the difference between the value of outputs and
the value of inputs.
What is Operation?

The term “operations” refers to a function or system that transforms inputs

into outputs of greater value. Operations are often defined as a
transformation or conversion process wherein inputs such as materials,
machines, labour and capital are transformed into outputs (goods and
services).
What is Management?

Management means problem solving.

The art of managing something is called management.

The basic functions of management includes, planning, organizing, staffing,

leading and controlling.
What is Production and Operation
Management?
Production / Operations Management is defined as the process which
transforms the inputs/resources of an organization into final goods (or services)
through a set of defined, controlled and repeatable policies.

Production/Operation management is the process that combines and transforms

various resources used in the production/operation subsystem of the
organization into value-added products/services in a controlled manner as per
the organization’s policies.

Production/Operation management is the process of planning, organizing,

staffing, leading and controlling of production/ operation functions of a
business.


Production and operation Management
System
Block Diagram of a Production/
Operation Management System
Communicati
on in POM
Types of Production System
 Job method
 Batch method
 Flow method
 Project manufacturing
Job Method
With Job production, the complete task is handled by a single worker or
group of workers. Jobs can be small-scale/low technology as well as
complex/high technology.
Low technology jobs: here the organization of production is extremely
simply, with the required skills and equipment easily obtainable. This method
enables customer's specific requirements to be included, often as the job
progresses. Examples include: hairdressers; tailoring
High technology jobs: high technology jobs involve much greater
complexity - and therefore present greater management challenge. The
important ingredient in high-technology job production is project
management, or project control. Examples of high technology / complex jobs:
film production; large construction projects
Batch Method
Batch methods require that the work for any task is divided into parts or
operations. Each operation is completed through the whole batch before the
next operation is performed. By using the batch method, it is possible to
achieve specialization of labour. Capital expenditure can also be kept lower
although careful planning is required to ensure that production equipment is
not idle. The main aims of the batch method are, therefore, to:
 Concentrate skills (specialization)
 Achieve high equipment utilization
Flow Method
Flow methods are similar to batch methods - except that the problem of
rest/idle production/batch queuing is eliminated. Flow has been defined as a
"method of production organization where the task is worked on continuously
or where the processing of material is continuous and progressive,"

The aims of flow methods are:

 Improved work & material flow
 Reduced need for labour skills
 Added value / completed work faster
Flow Method
In order that flow methods can work well, several requirements must be met:
 There must be substantially constant demand
 The product and/or production tasks must be standardized
 Materials used in production must be to specification and delivered on
time
 Each operation in the production flow must be carefully defined - and
recorded in detail
 The output from each stage of the flow must conform to quality standards
Project Manufacturing
It is an operation designed to produce large, expensive, specialized products
such as custom homes, defense weapons such as aircraft carriers and
submarines, and aerospace products such as passenger planes, and the space
shuttle. Project manufacturing is highly flexible, because each project is
usually significantly different from the one before it, even if the project‗s size
and expense and high degree of customization, project manufacturing can
take an extremely long time to complete.
Productivity

Productivity is a relationship between the output (product/service) and input

(resources consumed in providing them) of a business system. The ratio of
aggregate output to the aggregate input is called productivity.

Productivity = Output/Input

For the survival of any organization, this productivity ratio must be at least 1.
If it is more than 1, the organization is in a comfortable position. The ratio of
output produced to the input resources utilized in the production.
Importance of Measuring Productivity
Benefits derived from higher productivity are as follows:
 It helps to cut down cost per unit and thereby improve the profits.
 Gains from productivity can be transferred to the consumers in form of lower priced
Products or better quality products.
 These gains can also be shared with workers or employees by paying them at higher
rate.
 A more productive entrepreneur can have better chances to exploit expert
opportunities.
 It would generate more employment opportunity.
 Overall productivity reflects the efficiency of production system.
 More output is produced with same or less input.
 The same output is produced with lesser input.
 More output is produced with more input.
 The proportional increase in output being more than the proportional increase in input.
Measurement of Productivity

 Single-Factor Productivity Measurement.

 Multi-Factor Productivity Measurement.
 Total (Composite) Factor Productivity Measures.
 Total Productivity Model.
Single-Factor Productivity

Single-factor productivity is a measure of output against specific input.

Partial productivity is concerned with the efficiency of one class of input. Its
significance lies in its focus on the utilization of one resource.
Example: Labor productivity.

Single Factor Productivity= (Total output/ Individual input)

Single Factor Productivity

Advantages Disadvantages
 Does not reflect the overall
 Ease in obtaining relevant data and
performance of the business.
easy to comprehend.  Misinterpreted as technical change
 Acts as a good diagnostic measure or efficiency/ effectiveness of
to identify areas of improvement by labor.
evaluating inputs separately across  Management may identify wrong
the output. areas of improvement if the focus
 Ease in comparing with other areas of a business are not
businesses in the industry. examined accurately.
Multi-Factor Productivity

Multi-factor productivity is ratio of output to a group of inputs such as; labor,

energy and material. Multi-factor productivity is an index of output obtained
from more than one of the resources (inputs) used in production. It is the ratio
of net output to the sum of associated labor and other factor inputs.
The concept of multi-factor productivity was developed by Scott D. Sink.

Multi-Factor Productivity= (Total output/ Total input)

Multi-Factor Productivity

Advantages Disadvantages
 Difficulty in obtaining all the
 Considers intermediate inputs of a
inputs.
business.  Difficulty in communicating inter-
 Measures technical change in an industry linkages and aggregation.
industry.
Total (Composite)-Factor Productivity

The Total (Composite) Factor Productivity model developed by John W.

Kendrick in 1951, he has taken only labour and capital as only two input
factors. In an effort to improve productivity of labour, company may install
more machinery and then productivity of labour will go up bringing down the
capital productivity.

Total (Composite) Factor Productivity

= (Total output/ Input of Labor and Capital)
Total (Composite)-Factor Productivity

Advantages Disadvantages
 Not a good measure for
 Ease in obtaining data and
technological change.
understanding.
 Other inputs are ignored.
 Ease in understanding.  Net output does not reflect the
 Ease of aggregation across efficiency of production system in
industries. a proper way.
Total Productivity Model

Total Productivity Model was developed by David J. Sumanth in 1979

considered five items as inputs. These are human, material, capital, energy
and other expenses. This model can be applied in any manufacturing or
service organization.

Total Tangible Output = Value of finished units produced + Partial units

produced + Dividends from securities + Interests from bonds + other
incomes.

Total Tangible Inputs = Value of human inputs + Capital inputs +

Materials purchased + Energy inputs + other expenses (taxes, transport
& office expenses etc.).
Total Productivity Model

Advantages Disadvantages
 Data is difficult to compute.
 All quantifiable inputs are
 Does not consider intangible
considered.
factors of input and output.
 Sensitivity analysis can be done.
 Provides both firm-level and
operational unit-level productivity.
Why Productivity Growth is so
important?
 To the workforce through better wages and conditions;
 To shareholders and superannuation funds through increased profits and
dividend distributions;
 To customers through lower prices;
 To the environment through more stringent environmental protection; and
 To governments through increases in tax payments (which can be used to
fund social and environmental programs).
Drivers of Productivity Growth

 Investment is in physical capital — machinery, equipment and buildings.

The more capital workers have at their disposal, generally the better they
are able to do their jobs, producing more and better quality output.
 Innovation is the successful exploitation of new ideas. New ideas can take
the form of new technologies, new products or new corporate structures
and ways of working. Speeding up the diffusion of innovations can boost
productivity.
 Skills are defined as the quantity and quality of labour of different types
available in an economy. Skills complement physical capital, and are
needed to take advantage of investment in new technologies and
organisational structures.
Drivers of Productivity Growth

 Enterprise is defined as the seizing of new business opportunities by both

start-ups and existing firms. New enterprises compete with existing firms
by new ideas and technologies increasing competition. Entrepreneurs are
able to combine factors of production and new technologies forcing
existing firms to adapt or exit the market.
 Competition improves productivity by creating incentives to innovate and
ensures that resources are allocated to the most efficient firms. It also
forces existing firms to organise work more effectively through imitations
of organisational structures and technology.
Example of
Productivity
Measurement
Exercise-01
Long Beach Bank employs three loan officers, each working eight hours per
day. Each officer processes an average of five loans per day. The bank’s
payroll cost for the officers is $820 per day, and there is a daily overhead
expense of $500.

a. Compute the labor productivity.

b. Compute the multifactor productivity, using loans per dollar cost as the
measure.

The bank is considering the purchase of new computer software for the loan
operation. The software will enable each loan officer to process eight loans
per day, although the overhead expense will increase to $550.

c. Compute the new labor productivity.

d. Compute the new multifactor productivity.
e. Should the bank proceed with the purchase of the new software? Explain.
Exercise-02
A hamburger factory produces 50,000 burgers each week. The equipment
costs $5,000 and will remain productive for three years. The annual labor
cost is $8,000.

a) What is the productivity as measured in units of output per dollar of input

over a 3 year period?
b) Management has the option of $10,000 equipment, with an operating life
of five years. It would reduce labor costs to $4,000 per year. Should
management purchase this equipment (using productivity arguments alone)?
Exercise-03
XYZ Manufacturing uses two measures of productivity:
a) total sales/total inputs, b) total sales/total labor inputs. Given data for the
last three years (Table 1), calculate the productivity ratios. How would you
interpret the results.
Y1 Y2 Y3
Table 1: XYZ Productivity Data (in millions of dollars)
Sales 110 129 124
Materials 62 73 71
Labor 28 33 28
Overhead 8 12 10
Exercise-04
FastCo has generated productivity data for the first two quarters of the year
(Table 1). Using dollar measures of input and output, compare the total profit
and productivity achieved for the first two quarters. How does Q2
productivity compare with Q1 productivity? Use partial factor productivity
to identify what might be done to improve productivity and profitability
during Q3.
Q1 Q2
Unit selling price $20 $21
Total units sold 10,000 8,500
Labor hours 9,000 7,750
Labor cost/hr $10 $10
Material usage (lb) 5,000 4,500
Material cost/lb $15.00 $15.50
Other costs $20,000 $18,000
Exercise-05
Modern Lumber, Inc. (MLI) produces apple crates, which it sells to growers. With
the current equipment, MLI produces 240 crates per 100 logs. It currently purchases
100 logs per day, and each log requires three labor hours to process. MLI is
considering the hire of a professional buyer who can buy better quality logs at the
same cost. If this is the case, MLI can increase production to 260 crates per 100 logs,
and the labor hours required will increase by eight hours per day (for the buyer).

a. Compute the labor productivity for the current method (i.e., no buyer).
b. What will the labor productivity be if MLI hires the professional buyer?

Suppose that MLI spends $12 per hour for each worker who constructs the crates.
The buyer, however, is paid $24 per hour. The material cost is $10 per log (regardless
of who purchases them).

c. Compute the multifactor productivity for the current method, using crates per
dollar cost (labor + materials) as the measure.
d. How does the multifactor productivity change if the professional buyer is hired?