3 Operations Management as an Inter-functional Imperative

Sudhanshu Joshi

Learning Objectives:

The module provides an introduction to operations management and its role in decision making.

Learning Outcomes:

On successful completion of this module, students should be able to:

Explain the scope of decision making in operation management.
Strategic aspect of decision making in Operation Management.
Various techniques and tools (models, quantitative methods, analysis of trade-offs) use by Operation Managers to take operation decisions.

Throughout this module, learner shall understand broad range of decisions that operations managers must make. Also, it covers introduced to the tools necessary to handle those decisions.

1. Introduction

Operations Management (OM) aims to manage processes engaged in production, distribution of products/ or services. Therefore, it includes set of activities (including product creation, development, production, distribution and reverse logistics). The creation of goods or services involves transforming or converting inputs into outputs. Various inputs such as capital, labor, and information are used to create goods or services using one or more transformation processes (e.g., storing, transporting, and repairing). To ensure that the desired outputs are obtained, an organization takes measurements at various points in the transformation process (feedback) and then compares them with previously established standards to determine whether corrective action is needed (control). Figure 1.1 depicts the conversion system.

Operations management inclusive all operations within the organization (viz. Managing purchases, Material Management (MM) and inventory control, Production Planning and Production Management (PP/PM) Quality Control (QC) and Quality Assurance (QA), storage, Sales and Distribution (S&D) and logistics Management and evaluations). The prime focus during the operation management is on efficiency and effectiveness of processes. Therefore, OM includes substantial measurement and analysis of internal processes. Ultimately, the nature of how operations management is carried out in an organization depends very much on the nature of products or services in the organization, For example, in the domain of retail, manufacturing, wholesale, etc. successful operation management involves several decisions in accordance to time and space. We can broadly classify them as Design/ Strategic decisions and operations decisions.

The strategic decisions are the design and policy decisions. The operational decisions relate to day-to-day activities: managing the flow of material and product and other aspects of the Operation Management in accordance with strategic decisions.

2. Importance of Operations Management

Operations and sales are the two line functions in a business organization. All other functions—accounting, finance, marketing, IT, and so on—support the two line functions. Among the service jobs that are closely related to operations are financial services (e.g., stock market analyst, broker, investment banker, and loan officer), marketing services (e.g., market analyst, marketing researcher, advertising manager, and product manager), accounting services (e.g., corporate accountant, public accountant, and budget analyst), and information services (e.g., corporate intelligence, library services, management information systems design services).

Figure 1.2: Overlapping between Business functions

Working together successfully means that all members of the organization understand not only their own role, but they also understand the roles of others. In practice, there is significant interfacing and collaboration among the various functional areas, involving exchange of information and cooperative decision making. For example, although the three primary functions in business organizations perform different activities, many of their decisions impact the other areas of the organization. Consequently, these functions have numerous interactions, as depicted by the overlapping circles shown in Figure 1.2.

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.

Operation management refers to the management of various operational processes doing by a business organization. Operations Management is about how organizations produce or deliver the goods and services that provide the reason for their existence. Various operations doing by an organization may include marketing, finance, personnel etc. The operational function of an organization can be described as that part of the organization devoted to the production or delivery of goods and services. All organizations undertake operational activities because every organization produces goods and/or services.

Operation management is the process, which combines and transforms various resources used in the production/operations subsystem of the organization into value added product/services in a controlled manner as per the policies of the organization. Therefore, operation management is that part of an organization, which is concerned with the transformation of a range of inputs into the required (products/services) having the requisite quality level.

Operation can be seen as one of many functions e.g. marketing, finance, personnel etc. within the organization. The operation function is that part of the organization which is devoted to the production and delivery of goods and services. This means all organizations undertake operations activities because every organization produces goods and/or services. Operation Management means administration of all business practices in a way to achieve organizations goal more efficiently and effectively. It is the process of management of business operations optimally in order to maximize the business profit and minimize the cost.

Operations management refers to the management of the production system that transforms inputs into finished goods and services. Operations management seeks to increase the quality and efficiency of the firm.

3. Key components of Operations Management Various Concepts of Operations Management:

A. Quality: Quality simply means the fulfilment of the customers’ expectations. For example, reliable goods and services can fulfil the customers’ expectations.

B. Efficiency: Efficiency simply means produce the required amount of output with a given level of input.

C. Responsiveness to Customers: It means actions taken to respond to customer needs. Firm can react quickly and correctly to customer needs as they arise.

4. Operations as a Key Functional Areas:

Operation management is one of the important functional areas of any kind of business. It influences other functional areas of business at high level. In other words, all functional areas of a business are interrelated. Following figure shows inter linkage between various functional areas of a business concern.

Figure 1: Inter-linkage between various functions

Organization typically begins their yearly plan with the marketing function making an estimate of the next year’s sales. This input forms the basis for production planning in the operations area of business. Procurement planning is done on the basis of the production plans and all these factors lead to a certain estimate of the fund requirements. This forms an important input for the finance function. The human resource management function influences the productivity capacity as the availability of labor depends upon it. The actual production of goods and services influences the marketing activities to be undertaken and the quantity and timing of available funds from sales. Such interactions are common in most organizations.

5. Historical evolution of Operation Management

For over two century’s operations and production management has been recognized as an important factor in a country’s economic growth. The traditional view of manufacturing management began in eighteenth century when Adam Smith recognized the economic benefits of specialization of labor. He recommended breaking down the task of a job into subtasks and the responsibility of workers for doing a specific task must be fixed according to his/her skill and qualification. In the early twentieth century, F.W. Taylor implemented Smith’s theories and developed scientific management. From then till 1930, many techniques were developed, prevailing the traditional view. Brief information about the contributions to manufacturing management is shown in following table 2.

Year	Contribution	Contributor
1776	Specialization of labor in manufacturing	Adam Smith
1799	Interchangeable parts, cost accounting	Eli Whitney and others
1832	Division of labor by skill; assignment of jobs by skill; Basics of time study	Charles Babbage
1900	Scientific Management: time study and work study	Frederick W. Taylor
1900	Motion of study of jobs	Frank B. Gilbreth
1901	Scheduling techniques for employees, machines jobs in manufacturing	Henry L. Gantt
1915	Economic lot sizes for inventory control	F.W. Harris
1927	Human relations; Hawthorne Studies	Elton Mayo
1931	Statistical inference applies to product quality: quality control charts	W.A. Shewart
1935	Statistical sampling applied to quality control: inspection sampling plans	H.F. Dodge & H.G. Roming
1940	Operations research applications in World War II	P.M. Blacker and others
1946	Digital computer	John Mauchlly and J.P. Eckert
1947	Linear programming	G.B. Dantzig, Williams & others
1950	Mathematical programming, on-linear and stochastic processes	A. Charnes, W.W. Cooper & others
1951	Commercial digital computer: large-scale computations available	Sperry Univac
1960	Organizational behavior: continued study of people at work	L.Cummings & L. Porter
1970	Integrating operations into overall strategy and policy; Computer applications to manufacturing; Scheduling and control: Material requirement planning	W. Skinner, J. Orlicky and G. Wright
1980	Quality and productivity applications from Japan: robotics, CAD-CAM	W.E. Deming and J. Juran

6. Operation functions and its Linkages

Following figure shows various operations functions and its linkages with other functions:

Figure 2: Linkage between various layers

Managing operations can be enclosed in a frame of general management function as shown in figure 3. Operation managers are concerned with planning, organizing, and controlling the activities which affect human behavior through models.

6.1. Planning:

Planning simply means to decide what is to be done, when and how. It involves those activities which establish a course of action and guide future decision making. It is the responsibility of the operation manager to define the objectives for the operations subsystem of the organization, and the policies and procedures for achieving the objectives. This stage includes clarifying the role and focus of operations in the organizations overall strategy. It also involves product planning and facility designing.

6.2. Organizing:

Organizing involves those activities that establish a structure of tasks and authority. In organizing top management assigned different tasks and authorities to their employees. Operation managers establish a structure of roles and the flow of information within the operations subsystem. They determine the activities required to achieve the goals and assign authority and responsibility for carrying them out.

6.3. Controlling:

Under this function the operation manager compare actual outputs with planned outputs. It involves those activities that assure the actual performance in accordance with planned performance. To ensure that the plans for the operations subsystems are accomplished, the operations manager must exercise control by measuring actual outputs and comparing them to planned operations. Some important functions consider under this function are controlling costs, and ensure the quality of production.

6.4. Behavior:

In this function operation managers concerned with how their efforts to plan, organize, and control affect human behavior. They also want to know how the behavior of subordinates can affect management’s planning, organizing, and controlling actions.

6.5. Models:

As operation managers plan, organize, and control the conversion process, they face many problems during this process. They must take decisions to find out solutions for such problems. They can simplify their difficulties using models like aggregate planning models for examining how best to use existing capacity in short-term, break even analysis to identify break even volumes, linear programming and computer simulation for capacity utilization, decision tree analysis for long-term capacity problem of facility expansion etc.

Figure 3: General Model for Managing Operations

7. Objectives of Operation Management:

There are two main objectives of operation management namely, customer service and resource utilization.

7.1 Customer Service:

The first objective of operational management is the customer service to satisfy the customer wants. Under this objective the operational manager tends to identify the customer needs and will try to fulfill their needs in best possible way. The operation system must provide something special which can satisfy the customer in terms of cost and timing. This objective can be achieved by providing the right thing at a right price at the right time.

7.2 Resource Utilization:

Another major objective of operational management is to utilize the available resources optimally. As we all know resources are very scare, the operational manager needs to utilize the available resources more efficiently and effectively so that the firm will be able to satisfy the customer needs and wants in best possible way.

Under this objective the operational manager tends to achieve adequate levels of resource utilization or productivity e.g., to achieve agreed levels of utilization of materials, machines and labor.

8. Scope of Operation Management:

Production and operation management concern with the conversion of inputs into outputs, using physical resources, so as to provide the desired utilities to the customer while meeting the other organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself from other functions such as personnel, marketing, finance etc., by its primary concern for ‘conversion by using physical resources.’ Following are the activities which are listed under operation management functions:

(I) Location of facilities

(II) Plant layouts and material handling

(III) Product design

(IV) Process design

(V) Production and planning control

(VI) Quality control

(VII) Materials management

(VIII) Maintenance management

8.1. Location of Facilities:

Location of facilities for operations is a long-term decision which involves a long term commitment about the geographically static factors that affect a business organization. It is an important strategic level decision-making for an organization. It deals with the question ‘where our main operations should be based?’

The selection of location is a key decision because it involves investment of a large amount of money in building plant and machinery. An improper location of plant may lead to waste of all the investments made in plant and machinery equipments. Hence, location of plant should be based on the company’s expansion plan and policy, diversification plan for the products, changing sources of raw materials and many other factors. The main purpose of the location study is to find the optimal location that will results in the greatest advantage to the organization.

8.2. Plant Layout and Material Handling:

Physical arrangement of facilities known as plant layout. It is the configuration of department, work centers and equipments. The overall objective of the plant layout is to design a physical arrangement that meets the required output quality and quantity most economically.

According to James Moore, “Plant layout is a plan of an optimum arrangement of facilities including personnel, operating equipment, storage space, material handling equipments and all other supporting services along with the design of best structure to contain all these facilities”.

Material handling is the process of movement of materials from store room to machine and from one machine to another during the manufacturing process. It also involves moving, packing and storing of products in any form. It is a specialized activity for a modern manufacturing concern, which involves 50 to 75% of total cost of production. This cost can be reduced by proper operation and maintenance of material handling devices. Material handling devices increases the output, improves quality, speeds up the deliveries and decreases the cost of production.

8.2.1. Types of Layout:

Layouts can be classified into following categories:

(I) Process Layout

(II) Product Layout

(III) Combination Layout

(IV) Fixed Position Layout

8.2.1.1 Process Layout:

In process layout all machines performing similar type of operations are grouped at one location e.g., all lathes, milling machines etc. Process layout is very useful in job shop and batch production. Process layouts are found primarily in job shops or firms that produce customized, low-volume products that may require different processing requirements and sequences of operations.

8.2.1.2. Product Layout:

Product layout is also known as line layout. In product layout, (a)Reasonably stable demand for the product. (b)Continuous supply of materials.

8.2.1.3. Combination Layout:

Combination layout is a mixture of both process and product layouts. A combination layout is possible where an item is being made in different types and sizes. In combination layout machinery is arranged according to process layout but the process grouping is then arranged in a sequence to manufacture various types and sizes of products. It is to be noted that the sequence of operations remains same with the variety of products and sizes.

8.2.1.4. Fixed Position Layout :

Fixed position layout is also known as project type of layout. In this type of layout, the major components remain in a fixed location and tools, machinery, men and other materials are brought to this location. This type of layout is suitable when one or a few pieces of identical heavy products are to be manufactured and when the assembly consists of large number of heavy parts. The cost of transportation of these parts is very high. For example, when a ship is manufactured then its main component ship building yard is fixed at one location and other components i.e. material, labour, equipments etc brought here to complete the manufacturing process. Following figure shows fixed position layout.

Figure 5: Fixed Position Layout

8.3. Product Design:

Product design simply means conversion of ideas into reality. In order to survive in current globally competitive environment, business organizations needs to design, develop and introduce new products in the market. It is an important part of organizations survival and growth strategy. Developing the new products and launching them in the market is the biggest challenge faced by the organizations. The entire process of need identification to physical manufactures of product involves three functions namely, marketing, product development and manufacturing. Through marketing organizations tends to identify customer needs. Product development translates the needs of customers given by marketing into technical specifications and designing the various features into the product. Manufacturing has the responsibility of selecting the processes by which the product can be manufactured.

8.4. Process Design:

Process design means selection of optimum decision route for converting the raw material into finished goods. During process design the operational manager needs to consider on selection of process, choice of technology, process flow analysis and layout of the facilities.

8.5. Production Planning and Control:

Production planning and control can be defined as the process of planning the production in advance, setting the exact route of each item, fixing the starting and finishing dates for each item, to give production orders to shops and to follow up the progress of products according to orders.

Production planning and control works on a simple principle ‘First Plan Your Work and then Work on Your Plan’. The main functions of production planning and control includes planning, routing, scheduling, dispatching and follow-up.

8.5.1 Planning: Planning refers to deciding in advance what to do, how to do it, when to do it and who is to do it. Planning bridges the gap from where we are, to where we want to go. It makes it possible for things to occur which would not otherwise happen.

8.5.2. Routing: It simply means selection of path to convert raw materials into finished goods. Routing determines the path to be followed from department to department and machine to machine till raw material gets its final shape.

8.5.3. Scheduling: It determines the programme for the operations. Scheduling may be defined as the fixation of time and date for each operation as well as it determines the sequence of operations to be followed.

8.5.4. Dispatching: It is concerned with the starting the processes. It gives necessary authority so as to start a particular work, which has already been planned under “routing” and “scheduling”. Therefore, dispatching simply means release of orders and instruction from the starting of production for any item in acceptance with the route sheet and schedule charts.

8.5.5. Follow-up: It involves the report of daily work progress in a prescribed proforma and to investigate the causes of deviations from the planned performance.

Figure 4: Scope of Operation Management

8.6. Quality Control:

Quality control refers to a system that is used to maintain a desired level of quality in a product or service. It is a systematic control of various factors that affect the quality of the product. Various factors that affect the quality of a product include raw material, techniques and equipments to be used, skill level of workers etc.

Quality control is that industrial management technique which helps in production of a uniform product with acceptable quality. It is the entire collection of activities which ensures that the operation will produce the optimum quality products at minimum cost.

The main objective of quality control is prevention of defects at the source. Other objectives are as under:

To improve the companies income by making the production more acceptable to the customers i.e. by providing long life, greater usefulness, maintainability etc.
To reduce cost through reduction of losses due to defects.
To produce optimal quality at reduced price.
To make inspection prompt to ensure quality control.
To check the variation during manufacturing.

8.7. Material Management:

Material management refers to the management of various materials needed in the process of production. It means find out the optimum ways of acquisition of raw materials and other inputs required in the production process of a product so that the wastage of materials are minimized.

The main objectives of material management are as under:

To minimize material cost.
To purchase, receive, transport and store materials efficiently and to reduce the related cost.
To trace new sources of supply and to develop cordial relations with them in order to ensure continuous supply at reasonable rates.

8.8. Maintenance Management:

In current scenario, equipment and machinery are a very important part of the total productive effort. An organization can’t survive without suitable machinery and equipments. Therefore, their idleness or downtime becomes are very expensive. Hence, it is very important that the plant machinery should be properly maintained.

The main objectives of maintenance management are as under:

To achieve minimum breakdown and to keep the plant in good working condition at the lowest possible cost.
To keep the machines and other facilities in such a condition that permits them to be used at their optimal capacity without interruption.
To ensure the availability of the machines, buildings and services required by other sections of the factory for the performance of their functions at optimal return on investment.

Suggested Readings:

(a) Parker (2008): Service operations Management: The Total Experience. Edward Elagar Publishing

(b) Slack and Brandon-Jones (2012): Operations and Process Management: Principles and Practice for Strategic impact. Pearson

(d) Sanders (2014): The Definitive Guide to Manufacturing and Service Operations. Pearson FT Press.

(e) Davis and Heineke (2005): Operations Management, Integrating Manufacturing and Services. McGraw-Hill.

(f) Hayes and Pisano (2004): Operations, Strategy, and Technology: Pursuing the Competitive Edge. Wiley.

(g) Schemenner (1997): Plant and Service Tours in Operations Management. Prentice Hall.