2 Operations Management in Manufacturing and Services
Sudhanshu Joshi
Learning Objectives:
The module provides an introduction to operations management in Manufacturing and services
Learning Outcomes:
Throughout this module, learner shall understand broad range of Strategies and decisions that operations managers must make in domain of services and manufacturing setups.
Introduction
Operations are that part of a business organization that is responsible for producing goods and/or services. Goods are physical items that include raw materials, parts, sub-assemblies such as motherboards that go into computers, and final products such as cell phones and automobiles. Services are activities that provide some combination of time, location, form, or psychological value. Examples of goods and services are found all around you. Every book you read, every video you watch, every e-mail or text message you send, every telephone Conversation you have, and every medical treatment you receive involves the operations function of one or more organizations. So does everything you wear, eat, travel in, sit on, and access the Internet with. The operations function in business can also be viewed from a more far-reaching perspective: The collective success or failure of companies’ operations functions has an impact on the ability of a nation to compete with other nations, and on the nation’s economy.
Figure 2-1 depicts a simplified process of transformation in a manufacturing setup
Figure 2-1: Block diagram to represent Product Supply Chain
Operation Management – System approach
A system is a group of interrelated items in which no item studied in isolation and each item will act in the same way as it would in the system. A system has many subsystems and it is a part of a larger system. The system’s boundary defines what is inside the system and what is outside. The outside environment of a system affects the behavior of a system at high level. A system’s inputs are the physical objects of information that enter it from the environment and its outputs are the same which leave it for the environment. Operations system activities can be classified as input, transformation process and output. Operations management transforms inputs into outputs that provide added value to customers. It does not matter whether the organization is for Profit Company, a non-profit organization or a government agency; all organizations must strive to maximize the quality of their transformation processes to meet customer needs. Figure 2-2 explains system approach of operation management.
Figure 2-2: System approach – Operation Management
Characteristic of efficient Operational Management:
Following are some priorities which operational management needs to consider.
Acquire capabilities to tolerate product proliferation: Every organization needs to understand customer needs and incorporate them into new product initiatives. In order to satisfy the expectations of customers, organizations needs to change their process accordingly.
Relate operation system to customer/market: Before choosing a particular operation system an organization needs to consider the demand of their valuable customers. In other words, choices related to manufacturing and services cannot be made on the basis of internal conveniences but instead customer be central to the demand. If customer has difficulty in using the product then it should be rectified.
Develop system and procedures that promote learning: Continuous improvement is very important for the organization. These improvements do not take place in isolation but because of continuous learning by the employees in an organization.
Operational Strategy – Need and Scope
The process by which key business operations decisions are made is known as operational strategy. These key business decisions are consistent with the overall strategic objectives of the firm. A firm’s operational strategy is affected by several factors. So, before making any operational decisions the firms need to consider such factors. The factors which needs to be consider are as under:
(i) The competitive dynamics will change due to several factors. On account of this the expectations of the customer also change. The firms need to analyze competitive dynamics before making any operational strategy.
(ii) Organizations need a structural approach to scan the market and made operational strategy as per the requirements. Moreover they also need a mechanism to chalk out a plan for responding to these changes in the most effective way.
(iii) With the changes in the market place the competitive priorities for an organization must also change. Organization need to tune their operations to match with the competitive priorities.
It is important for organizations to develop the capability to devise optimum strategies for operational management and revisit the strategy formulation exercise whenever there is a requirement of change.
Operation Strategy implementation Process Strategy formulation process involves following steps:
Step 1: Understand the Competitive Market Dynamics
Step 2: Identify Order-qualifying and Order-winning attributes
Step 3: Identify Strategic Options for Sustaining Competitive Advantage Step 4: Arrive at the Operations Strategy
Operations of Goods and Services
We can classify organizations into two broad categories namely manufacturing and service. Manufacturing organizations produce physical, tangible items which can be stored as inventory before delivery to the customer. Service organizations produce intangible items that cannot be produced ahead of time. One of the key developments in operations is the increasing importance of service operations as service industry accounts for an increasing proportion of the output of industrialized economies.
Table 2-1 : Illustrations on the Transformation Process in service and manufacturing industry
| Inputs | Processing | Output | |
| Food processor | Raw Vegetables | Cleaning | Canned Vegetables |
| Metal Sheets | Making Cans | ||
| Water | Cutting | ||
| Energy | Cooking | ||
| Labor | Packing | ||
| Building | Labeling | ||
| Equipment | |||
| Hospital | Doctors, nurses | Examination | Treated Patients |
| Hospital | Surgery | ||
| Medical Supplies | Monitoring | ||
| Equipment | Medication | ||
| Laboratories | Therapy |
Goods and services often go hand in hand; there are some very basic differences between the two, differences that impact the management of the goods portion versus management of the service portion. There are also many similarities between the two. Production of goods results in a tangible output, such as an automobile, eyeglasses, a golf ball, a refrigerator— anything that we can see or touch. It may take place in a factory, but it can occur elsewhere. For example, farming and restaurants produce non-manufactured goods. Delivery of service, on the other hand, generally implies an act. A physician’s examination, TV and auto repair, lawn care, and the projection of a film in a theater are examples of services.
In recent times, there is a direct emergence of service activities from manufacturing. Also, services become a separate industry itself. Table 2-2 explains variety of service activities fall into such categories.
Table 2-2: Types of Services
| Professional services (e.g., financial, health care, legal). |
| Mass services (e.g., utilities, Internet, communications). |
| Service shops (e.g., tailoring, appliance repair, car wash, auto repair/maintenance). |
| Personal care (e.g., beauty salon, spa, barbershop). |
| Government (e.g., Medicare, mail, social services, police, fire). |
| Education (e.g., schools, universities). |
| Food service (e.g., catering). |
| Services within organizations (e.g., payroll, accounting, maintenance, IT, HR, janitorial). Retailing and wholesaling |
| Shipping and delivery (e.g., truck, railroad, boat, air). |
| Residential services (e.g., lawn care, painting, general repair, remodeling, interior design). |
| Transportation (e.g., mass transit, taxi, airlines, ambulance). |
| Travel and hospitality (e.g., travel bureaus, hotels, resorts). |
| Miscellaneous services (e.g., copy service, temporary help). |
YouTube animation I: Operation Management in service and Manufacturing setup
Following YouTube link explains the similarities and difference between operation management in service and manufacturing industry
The video illustrate the importance of operation management in both industries (Services vs. manufacturing sector).(Source: teachingbubble.com)
Similarities between manufacturing and service operations
Manufacturing and service are often different in terms of what is done but quite similar in terms of how it is done. Consider these points of comparison:
Degree of customer contact. Many services involve a high degree of customer contact, although services such as Internet providers, utilities, and mail service do not. When there is a high degree of contact, the interaction between server and customer becomes a “moment of truth” that will be judged by the customer every time the service occurs.
Labor content of jobs. Services often have a higher degree of labor content than manufacturing jobs do, although automated services are an exception.
Uniformity of inputs. Service operations are often subject to a higher degree of variability of inputs. Each client, patient, customer, repair job, and so on presents a somewhat unique situation that requires assessment and flexibility. Conversely, manufacturing operations often have a greater ability to control the variability of inputs, which leads to more-uniform job requirements.
Measurement of productivity. Measurement of productivity can be more difficult for service jobs due largely to the high variations of inputs. Thus, one doctor might have a higher level of routine cases to deal with, while another might have more-difficult cases.
Unless a careful analysis is conducted, it may appear that the doctor with the difficult cases has a much lower productivity than the one with the routine cases.
Quality assurance. Quality assurance is usually more challenging for services due to the higher variation in input, and because delivery and consumption occur at the same time. Unlike manufacturing, which typically occurs away from the customer and allows mistakes that are identified to be corrected, services have less opportunity to avoid exposing the customer to mistakes.
Inventory. Many services tend to involve less use of inventory than manufacturing operations, so the costs of having inventory on hand are lower than they are for manufacturing. However, unlike manufactured goods, services cannot be stored. Instead, they must be provided “on demand.”
Wages. Manufacturing jobs are often well paid, and have less wage variation than service jobs, which can range from highly paid professional services to minimum-wage workers. Ability to patent. Product designs are often easier to patent than service designs, and some services cannot be patented, making them easier for competitors to copy.
Difference between manufacturing and service operations
| Characteristics | Goods | Services |
| Output | Tangible | Intangible |
| Customer Contact | Low | High |
| Labor Content | Low | High |
| Uniformity of Input | High | Low |
| Measurement of Productivity | Easy | Difficult |
| Opportunity to correct problems before delivery | High | Low |
| Inventory | Much | Little |
| Wages | Narrow-range | Wide Range |
| Patentable | Usually | Not Usually |
Many service activities are essential in goods-producing companies. These include training, human resource management, customer service, equipment repair, procurement, and administrative services.
Figure 2-3 shows the continuum between good- service
Figure 2-3: Goods-Service Continuum
Capacity Planning and Strategic decision for Service and Manufacturing Operation Management
Capacity planning is a key strategic component in designing the system. It encompasses many basic decisions with long-term consequences for the organization. In this chapter, you will learn about the importance of capacity decisions, the measurement of capacity, how capacity requirements are determined, and the development and evaluation of capacity alternatives. Note that decisions made in the product or service design stage have major implications for capacity planning. Designs have processing requirements related to volume and degree of customization that affect capacity planning.
Hospitals that not too long ago had what could be described as “facility oversupply” are now experiencing what can be described as a “capacity crisis” in some areas. The way hospitals plan for capacity will be critical to their future success. And the same applies to all sorts of organizations, and at all levels of these organizations. Capacity refers to an upper limit or ceiling on the load that an operating unit can handle. The load might be in terms of the number of physical units produced (e.g., bicycles assembled per hour) or the number of services performed (e.g., computers upgraded per hour). The operating unit might be a plant, department, machine, store, or worker. Capacity needs include equipment, space, and employee skills.
The goal of strategic capacity planning is to achieve a match between the long-term supply capabilities of an organization and the predicted level of long-term demand. Organizations become involved in capacity planning for various reasons. Among the chief reasons are changes in demand, changes in technology, changes in the environment, and perceived threats or opportunities. A gap between current and desired capacity will result in capacity that is out of balance. Overcapacity causes operating costs that are too high, while under capacity causes strained resources and possible loss of customers.
The key questions in capacity planning are the following:
1. What kind of capacity is needed?
2. How much is needed to match demand?
3. When is it needed?
The question of what kind of capacity is needed depends on the products and services that management intends to produce or provide. Hence, in a very real sense, capacity planning is governed by those choices.
Forecasts are key inputs used to answer the questions of how much capacity is needed and when is it needed.
Related questions include:
1. How much will it cost, how will it be funded, and what is the expected return?
2. What are the potential benefits and risks? These involve the degree of uncertainty related to forecasts of the amount of demand and the rate of change in demand, as well as costs, profits, and the time to implement capacity changes. The degree of accuracy that can be attached to forecasts is an important consideration. The likelihood and impact of wrong decisions also need to be assessed.
3. Are there sustainability issues that need to be addressed?
4. Should capacity be changed all at once, or through several (or more) small changes?
5. Can the supply chain handle the necessary changes? Before an organization commits to ramping up its input, it is essential to confirm that its supply chain will be able to handle related requirements.
Table 2-3 provides some examples of commonly used measures of capacity. Up to this point, we have been using a general definition of capacity. Although it is functional, it can be refined into two useful definitions of capacity:
1. Design capacity: The maximum output rate or service capacity an operation, process, or facility is designed for.
2. Effective capacity: Design capacity minus allowances such as personal time, and maintenance.
Table 2-3: Various Measures of Capacity
| Business | Inputs | Outputs |
| Auto Manufacturing | Labor hours, machine hours | Number of cars per shift |
| Steel Mill | Furnace size | Tons of Steel per day |
| Oil Refinery | Number of acres, | Gallons of fuel per day |
| Farming | Number of cows | Bushels of grain per acre per year |
| Restaurant | Number of tables, seating capacity | Number of meals served per day |
| Theater | Number of seats | Number of tickets sold per performance |
| Retail sales | Square feet of floor space | Revenue generated per day |
These different measures of capacity are useful in defining two measures of system effectiveness: efficiency and utilization. Efficiency is the ratio of actual output to effective capacity. Capacity utilization is the ratio of actual output to design capacity.
Efficiency = (Actual Output/ Effective Capacity) X 100 %
Utilization = (Actual Output/ Design Capacity) X 100 %
(Both measures are expressed as percentages).
It is not unusual for managers to focus exclusively on efficiency, but in many instances this emphasis can be misleading. This happens when effective capacity is low compared to design capacity. In those cases, high efficiency would seem to indicate effective use of resources when it does not.
Determinants of effective capacity
Many decisions about system design have an impact on capacity. The same is true for many operating decisions. The main factors relate to facilities, products or services, processes, human considerations, operational factors, the supply chain, and external forces.
Facilities. The design of facilities, including size and provision for expansion, is key. Locational factors, such as transportation costs, distance to market, labour supply, energy sources, and room for expansion, are also important. Likewise, layout of the work area often determines how smoothly work can be performed, and environmental factors such as heating, lighting, and ventilation also play a significant role in determining whether personnel can perform effectively or whether they must struggle to overcome poor design characteristics.
Product and Service Factors. Product or service design can have a tremendous influence on capacity. For example, when items are similar, the ability of the system to produce those items is generally much greater than when successive items differ. Thus, a restaurant that offers a limited menu can usually prepare and serve meals at a faster rate than a restaurant with an extensive menu. Generally speaking, the more uniform the output, the more opportunities there are for standardization of methods and materials, which leads to greater capacity. The particular mix of products or services rendered also must be considered since different items will have different rates of output.
Process Factors. The quantity capability of a process is an obvious determinant of capacity. A more subtle determinant is the influence of output quality. For instance, if quality of output does not meet standards, the rate of output will be slowed by the need for inspection and rework activities. Productivity also affects capacity. Process improvements that increase quality and productivity can result in increased capacity. Also, if multiple products or multiple services are processed in batches, the time to change over equipment settings must be taken into account.
Human Factors. The tasks that make up a job, the variety of activities involved, and the training, skill, and experience required to perform a job all have an impact on the potential and actual output. In addition, employee motivation has a very basic relationship to capacity, as do absenteeism and labor turnover.
Policy Factors. Management policy can affect capacity by allowing or not allowing capacity options such as overtime or second or third shifts.
Operational Factors. Scheduling problems may occur when an organization has differences in equipment capabilities among alternative pieces of equipment or differences in job requirements. Inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased materials and parts, and quality inspection and control procedures also can have an impact on effective capacity.
Inventory shortages of even one component of an assembled item (e.g., computers, refrigerators, automobiles) can cause a temporary halt to assembly operations until the components become available. This can have a major impact on effective capacity. Thus, insufficient capacity in one area can affect overall capacity.
Supply Chain Factors. Supply chain factors must be taken into account in capacity planning if substantial capacity changes are involved. Key questions include: What impact will the changes have on suppliers, warehousing, transportation, and distributors? If capacity will be increased, will these elements of the supply chain be able to handle the increase? Conversely, if capacity is to be decreased, what impact will the loss of business have on these elements of the supply chain?
External Factors. Product standards, especially minimum quality and performance standards, can restrict management’s options for increasing and using capacity. Thus, pollution standards on products and equipment often reduce effective capacity, as does paperwork required by government regulatory agencies by engaging employees in non- productive activities. A similar effect occurs when a union contract limits the number of hours and type of work an employee may do.
Summary
- The operations function is that part of every business organization that produces products and/or delivers services.
- Operations consist of processes that convert inputs into outputs. Failure to manage those processes.
- Effectively will have a negative impact on the organization.
- A key goal of business organizations is to achieve an economic matching of supply and demand. The operations function is responsible for roviding the supply or service capacity for expected demand.
- All processes exhibit variation that must be managed.
- Although there are some basic differences between services and products that must be taken into account from a managerial standpoint, there are also many similarities between the two.
- Environmental issues will increasingly impact operations decision making.
- Ethical behaviour is an integral part of good management practice.
All business organizations have, and are part of, a supply chain that must be managed
Suggested Readings:
- Davis, M. M., & Heineke, J. N. (2005). Operations management: Integrating manufacturing and services. McGraw-Hill Companies.
- Hayes, R. (2006). Operations, strategy, and technology: pursuing the competitive edge. Strategic Direction,22(9).
- Parker, D. (2012). Service operations management: the total experience. Edward Elgar Publishing.
- Sanders, N. R. (2013). The definitive guide to manufacturing and service operations. Pearson Education
- Slack, N., Chambers, S., & Johnston, R. (2009). Operations and process management: principles and practice for strategic impact. Pearson Education