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.

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

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 services offered by the 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.

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Manufacturing vs. Service?

Manufacturing and Service Organizations differ chiefly because

manufacturing is goods-oriented and service is act-oriented.

Manufacturing vs. Service

1. Degree of customer contact. Often, by its nature, service 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 its
performance is judged by the customers.

2. Uniformity of input. Manufacturing operations often have the ability to

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).

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.

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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 the 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.

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.

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 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:

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 he 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

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 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:

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

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 ✓ 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.

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.

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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.

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 OM?

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

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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 18 th 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 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

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 ✓ 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
➢ 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 to
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. Employees turnover is often higher, especially in the low-skill jobs.
6. Inputs 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. 2

Case
HAZEL

Hazel had worked for the same Fortune 500 company for almost 15years.
Although the company had gone through some tough times, things wer 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 know 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 to require forecasts?

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?

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MULTIPLE CHOICE. Encircle the letter your answer.

1. What is the primary function of operations in a business organization?

a. Marketing products
b. Producing goods or providing services
c. Securing financial resources
d. Analyzing investment proposals

2. Which of the following is not a major functional area of an organization?

a. Operations
b. Marketing
c. Finance
d. Engineering

3. Which of the following is a characteristic of service operations compared to

manufacturing?
a. Lower degree of customer contact
b. Higher degree of customer contact
c. More uniformity of output
d. Easier measurement of productivity

4. Which type of model is the most abstract?

a. Physical
b. Schematic
c. Mathematical
d. Visual

5. Which of the following is not typically a responsibility of an operations

manager?
a. Inventory planning and control
b. Scheduling
c. Product and Service Planning
d. Advertising campaigns

6. Suppose a company wants to patent a new way of delivering legal advice

online. What challenge might it face compared to patenting a new physical
product?
a. Service designs are often harder or impossible to patent
b. Patents are not needed for services
c. Patenting a service is always easier
d. Physical products cannot be patented

7. Why is quality assurance often more difficult in service operations than in

manufacturing?
a. Services can be inspected after delivery
b. Service production and consumption occur simultaneously, making defects
harder to detect and correct.
c. Services are always automated
d. Manufacturing never has quality problems

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 8. When a manager uses a model to analyze “what if” scenarios, what is the
primary benefit?
a. Models always guarantee best decision
b. Models allow exploration of different alternatives without costly real-world
experiments
c. Models are always more complex than reality
d. Manufacturing never has quality problems

9. What is the main difference between goods and services?

a. Goods are intangible, services are tangible
b. Goods are tangible, services are intangible
c. Goods cannot be stored, services can
d. Services are always patented

10. Imaging you are tasked with improving productivity in a service-based

business. Which challenge might you face that is less common in
manufacturing?
a. Measuring productivity is straightforward
b. Output is always uniform
c. Service delivery often varies due to high customer contact and labor
content
d. All services can be stored for later use

Reference:

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

by Stevenson, Sum, 2013

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