Operations Management is the business function that plans, organizes, coordinates, and controls the resources needed to produce a company’s goods and services. Operations management is a management function. It involves managing people, equipment, technology, information, and many other resources. Operations management is the central core function of every company. This is true whether the company is large or small, provides a physical good or a service, is for profit or not for profit. Every company has an operations management function. Actually, all the other organizational functions are there primarily to support the operations function. Without operations, there would be no goods or services to sell. Consider a retailer such as Gap that sells casual apparel. The marketing function provides promotions for the merchandise, and the finance function provides the needed capital. It is the operations function, however, that plans and coordinates all the resources needed to design, produce, and deliver the merchandise to the various retail locations. Without operations, there would be no goods or services to sell to customers.
The role of operations management
The role of operations management is to transform a company’s inputs into the finished goods or services. Inputs include human resources (such as workers and managers), facilities and processes (such as buildings and equipment), as well as materials, technology, and information. Outputs are the goods and services a company produces. At a factory the transformation is the physical change of raw materials into products, such as transforming leather and rubber into sneakers, denim into jeans, or plastic into toys. At an airline it is the efficient movement of passengers and their luggage from one location to another. At a hospital it is organizing resources such as doctors, medical procedures, and medications to transform sick people into healthy ones.
Operations management is responsible for orchestrating all the resources needed to produce the final product. This includes designing the product; deciding what resources are needed; arranging schedules, equipment, and facilities; managing inventory; controlling quality; designing the jobs to make the product; and designing work methods. Basically, operations management is responsible for all aspects of the process of transforming inputs into outputs. Customer feedback and performance information are used to continually adjust the inputs, the transformation process, and characteristics of the outputs. The transformation process should be dynamic in order to adapt to changes in the environment. Proper management of the operations function has led to success for many companies.
For example, in 1994 Dell Inc. was a second-tier computer maker that managed its operations similar to others in the industry. Then Dell implemented a new business model that completely changed the role of its operations function. Dell developed new and innovative ways of managing the operations function that have become one of today’s best practices. These changes enabled Dell to provide rapid product delivery of customized products to customers at a lower cost, and thus become an industry leader. Just as proper management of operations can lead to company success, improper management of operations can lead to failure.
Operations management is the systematic direction and control of the processes that transform inputs into finished goods and services. The operations function comprises a significant percentage of the employees and physical assets in most organizations. Operations managers are concerned with each step in providing a service or product. They determine what equipment, labor, tools, facilities, materials, energy, and information should go into an operating system and how these inputs can best be obtained and used to satisfy the requirements of the market place. Managers are also responsible for critical activities such as quality management and control, capacity planning, materials management, purchasing, and scheduling.
The importance of operations management has increased dramatically in recent years. Significant foreign competition, shorter product and service life-cycles, better-educated and quality-conscious consumers, and the capabilities of new technology have placed increasing pressures on the operations function to improve productivity while providing a broader array of high-quality products and services. With the globalization of markets, firms are recognizing that the operations function can be used to strengthen their position in the market place. Managers in operations management play a strategic and tactical role in satisfying customer needs and making their firms strong international competitors.
Chapter 1: Productivity and Operations Management
Production is a process or procedure developed to transform a set of input elements into a specified set of output elements in the form of finished products or services, whereas productivity is an efficiency concept that gauges the ratio of outputs relative to inputs in a productive process.
Productivity is one of the major concerns of managers as high productivity is essential to survive in a competitive environment. Productivity is of two types – total productivity and partial productivity. The problems in measuring productivity, especially that of the knowledge workers were also discussed.
Operations management is the application of concepts, procedures and technologies by managers to improve the process of transformation of resource inputs into outputs. The effectiveness and efficiency of an organization depends on how effectively and efficiently operations are managed. The tools of operations research are of special interest to managers of production and operations, as they help the managers increase efficiency and profitability of the organization.
Operations research and linear programming are two mathematical approaches used for optimizing operations. The applications of operations research techniques to complex problems of an organization take into account the total system that influences the decision-making process. The data is presented in a quantified form to the extent possible, and this helps managers to arrive at the best means of achieving the goals.
The operations research procedure comprises six steps – formulating the problem, constructing a mathematical model, deriving a solution from the model, testing the model, providing controls for the model and the solution, and putting the solution into effect. Linear programming is a technique for selecting an optimum combination of factors from a series of inter-related alternatives, each subjected to certain limitations, in order to achieve a desired goal. Maintaining inventory helps organizations deal with uncertainties in market supply and prevent stockouts during periods of peak demand. Different types of inventory control used in organizations are EOQ, JIT and Kanban. Distribution logistics is a logistics system that helps in optimizing inventory procurement as well as product distribution.
Though operations research offers many advantages, it has its own limitations. The high magnitude of computation and the inability to accommodate qualitative factors prevent OR from being applied in many management decisions. Other techniques that help to improve productivity are time-event networks, value engineering, work simplification, quality circles and total quality management.
Productivity in economics refers to metrics and measures of output from production processes, per unit of input. Labor productivity, for example, is typically measured as a ratio of output per labor-hour, an input. Productivity may be conceived of as a metrics of the technical or engineering efficiency of production. As such quantitative metrics of input, and sometimes output, are emphasized. Productivity is distinct from metrics of allocative efficiency, which take into account both the value of what is produced and the cost of inputs used, and also distinct from metrics of profitability, which address the difference between the revenues obtained from output and the expense associated with consumption of inputs. Economic growth and productivity
Activity can be identified with production and consumption. Production is a process of combining various immaterial and material inputs of production so as to produce tools for consumption. The methods of combining the inputs of production in the process of making output are called technology. Technology can be depicted mathematically by the production function which describes the function between input and output. The production function depicts production performance and productivity is the metrics for it. Measures may be applied with, for example, different technology to improve productivity and to raise production output. With the help of the production function, it is possible to describe simply the mechanism of economic growth. Economic growth is a production increase achieved by an economic entity or nation. It is usually expressed as an annual growth percentage depicting (real) growth of the company output (per entity) or the national product (per nation). Economic growth is created by two factors so that it is appropriate to talk about the components of growth. These components are an increase in production input and an increase in productivity. Both years can be described by a graph of production functions, each function being named after the respective number of the year, i.e., one and two.
Two components are distinguishable in the output increase: the growth caused by an increase in production input and the growth caused by an increase in productivity. Characteristic of the growth effected by an input increase is that the relation between output and input remains unchanged. The output growth corresponding to a shift of the production function is generated by the increase in productivity. Accordingly, an increase in productivity is characterised by a shift of the production function and a consequent change to the output/input relation. The formula of total productivity is normally written as follows: • Total productivity = Output quantity / Input quantity According to this formula, changes in input and output have to be measured inclusive of both quantitative and qualitative changes. In practice, quantitative and qualitative changes take place when relative quantities and relative prices of different input and output factors alter. In order to accentuate qualitative changes in output and input, the formula of total productivity shall be written as follows: • Total productivity = Output quality and quantity / Input quality and quantity
B. Main processes of a company
A company can be divided into sub-processes in different ways; yet, the following five are identified as main processes, each with a logic, objectives, theory and key figures of its own. It is important to examine each of them individually, yet, as a part of the whole, in order to be able to measure and understand them. The main processes of a company are as follows: • real process
• income distribution process
• production process
• monetary process
• market value process
Productivity is created in the real process, productivity gains are distributed in the income distribution process and these two processes constitute the production process. The production process and its sub-processes, the real process and income distribution process occur simultaneously, and only the production process is identifiable and measurable by the traditional accounting practices. The real process and income distribution process can be identified and measured by extra calculation, and this is why they need to be analysed separately in order to understand the logic of production performance. Real process generates the production output from input, and it can be described by means of the production function. It refers to a series of events in production in which production inputs of different quality and quantity are combined into products of different quality and quantity. Products can be physical goods, immaterial services and most often combinations of both. The characteristics created into the product by the manufacturer imply surplus value to the consumer, and on the basis of the price this value is shared by the consumer and the producer in the marketplace.
This is the mechanism through which surplus value originates to the consumer and the producer likewise. Surplus value to the producer is a result of the real process, and measured proportionally it means productivity. Income distribution process of the production refers to a series of events in which the unit prices of constant-quality products and inputs alter causing a change in income distribution among those participating in the exchange. The magnitude of the change in income distribution is directly proportionate to the change in prices of the output and inputs and to their quantities. Productivity gains are distributed, for example, to customers as lower product sales prices or to staff as higher income pay. Davis has deliberated (Davis 1955) the phenomenon of productivity, measurement of productivity, distribution of productivity gains, and how to measure such gains. He refers to an article (1947, Journal of Accountancy, Feb. p. 94) suggesting that the measurement of productivity shall be developed so that it ”will indicate increases or decreases in the productivity of the company and also the distribution of the ’fruits of production’ among all parties at interest”.
According to Davis, the price system is a mechanism through which productivity gains are distributed, and besides the business enterprise, receiving parties may consist of its customers, staff and the suppliers of production inputs. In this article, the concept of”distribution of the fruits of production” by Davis is simply referred to as production income distribution or shorter still as distribution. The production process consists of the real process and the income distribution process. A result and a criterion of success of the production process is profitability. The profitability of production is the share of the real process result the producer has been able to keep to himself in the income distribution process. Factors describing the production process are the components of profitability, i.e., returns and costs. They differ from the factors of the real process in that the components of profitability are given at nominal prices whereas in the real process the factors are at periodically fixed prices. Monetary process refers to events related to financing the business. Market value process refers to a series of events in which investors determine the market value of the company in the investment markets.
Surplus value as a measure of production profitability
The scale of success run by a going concern is manifold, and there are no criteria that might be universally applicable to success. Nevertheless, there is one criterion by which we can generalize the rate of success in production. This criterion is the ability to produce surplus value. As a criterion of profitability, surplus value refers to the difference between returns and costs, taking into consideration the costs of equity in addition to the costs included in the profit and loss statement as usual. Surplus value indicates that the output has more value than the sacrifice made for it, in other words, the output value is higher than the value (production costs) of the used inputs. If the surplus value is positive, the owner’s profit expectation has been surpassed. The table presents a surplus value calculation. This basic example is a simplified profitability calculation used for illustration and modeling. Even as reduced, it comprises all phenomena of a real measuring situation and most importantly the change in the output-input mix between two periods. Hence, the basic example works as an illustrative “scale model” of production without any features of a real measuring situation being lost. In practice, there may be hundreds of products and inputs but the logic of measuring does not differ from that presented in the basic example. Both the absolute and relative surplus value have been calculated in the example. Absolute value is the difference of the output and input values and the relative value is their relation, respectively. The surplus value calculation in the example is at a nominal price, calculated at the market price of each period.
The next step is to describe a productivity model by help of which it is possible to calculate the results of the real process, income distribution process and production process. The starting point is a profitability calculation using surplus value as a criterion of profitability. The surplus value calculation is the only valid measure for understanding the connection between profitability and productivity or understanding the connection between real process and production process. A valid measurement of total productivity necessitates considering all production inputs, and the surplus value calculation is the only calculation to conform to the requirement. The process of calculating is best understood by applying the clause of Ceteris paribus, i.e. “all other things being the same,” stating that at a time only the impact of one changing factor be introduced to the phenomenon being examined. Therefore, the calculation can be presented as a process advancing step by step. First, the impacts of the income distribution process are calculated, and then, the impacts of the real process on the profitability of the production.
Depicting the development by time series
Development in the real process, income distribution process and production process can be illustrated by means of time series. (Kendrick 1984, Saari 2006) The principle of a time series is to describe, for example, the profitability of production annually by means of a relative surplus value and also to explain how profitability was produced as a consequence of productivity development and income distribution. A time series can be composed using the chain indexes as seen in the following. Now the intention is to draw up the time series for the ten periods in order to express the annual profitability of production by help of productivity and income distribution development. With the time series it is possible to prove that productivity of the real process is the distributable result of production, and profitability is the share remaining in the company after income distribution between the company and interested parties participating in the exchange. The graph shows how profitability depends on the development of productivity and income distribution.
Productivity figures are fictional but in practice they are perfectly feasible indicating an annual growth of 1.5 per cent on average. Growth potentials in productivity vary greatly by industry, and as a whole, they are directly proportionate to the technical development in the branch. Fast-developing industries attain stronger growth in productivity. This is a traditional way of thinking. Today we understand that human and social capitals together with competition have a significant impact on productivity growth. In any case, productivity grows in small steps. By the accurate measurement of productivity, it is possible to appreciate these small changes and create an organisation culture where continuous improvement is a common value.
Measuring and interpreting partial productivity
Measurement of partial productivity refers to the measurement solutions which do not meet the requirements of total productivity measurement, yet, being practicable as indicators of total productivity. In practice, measurement in production means measures of partial productivity. In that case, the objects of measurement are components of total productivity, and interpreted correctly, these components are indicative of productivity development. The term of partial productivity illustrates well the fact that total productivity is only measured partially – or approximately. In a way, measurements are defective but, by understanding the logic of total productivity, it is possible to interpret correctly the results of partial productivity and to benefit from them in practical situations.
Typical solutions of partial productivity are:
1. Single-factor productivity
2. Value-added productivity
3. Unit cost accounting
4. Efficiency ratios
5. Managerial control ratio system
Single-factor productivity refers to the measurement of productivity that is a ratio of output and one input factor. A most well-known measure of single-factor productivity is the measure of output per work input, describing work productivity. Sometimes it is practical to employ the value added as output. Productivity measured in this way is called Value-added productivity. Also, productivity can be examined in cost accounting using Unit costs. Then it is mostly a question of exploiting data from standard cost accounting for productivity measurements. Efficiency ratios, which tell something about the ratio between the values produced and the sacrifices made for it, are available in large numbers. Managerial control ratio systems are composed of single measures which are interpreted in parallel with other measures related to the subject. Ratios may be related to any success factor of the area of responsibility, such as profitability, quality, position on the market, etc. Ratios may be combined to form one whole using simple rules, hence, creating a key figure system.
The measures of partial productivity are physical measures, nominal price value measures and fixed price value measures. These measures differ from one another by the variables they measure and by the variables excluded from measurements. By excluding variables from measurement makes it possible to better focus the measurement on a given variable, yet, this means a more narrow approach. The table below was compiled to compare the basic types of measurement. The first column presents the measure types, the second the variables being measured, and the third column gives the variables excluded from measurement.
C. Aspects of productivity
Productivity studies analyze technical processes and engineering relationships such as how much of an output can be produced in a specified period of time. It is related to the concept of efficiency. While productivity is the amount of output produced relative to the amount of resources (time and money) that go into the production, efficiency is the value of output relative to the cost of inputs used. Productivity improves when the quantity of output increases relative to the quantity of input. Efficiency improves, when the cost of inputs used is reduced relative the value of output. A change in the price of inputs might lead a firm to change the mix of inputs used, in order to reduce the cost of inputs used, and improve efficiency, without actually increasing the quantity of output relative the quantity of inputs. A change in technology, however, might allow a firm to increase output with a given quantity of inputs; such an increase in productivity would be more technically efficient, but might not reflect any change in allocative efficiency.
Increases in productivity
Companies can increase productivity in a variety of ways. The most obvious methods involve automation and computerization which minimize the tasks that must be performed by employees. Recently, less obvious techniques are being employed that involve ergonomic design and worker comfort. A comfortable employee, the theory maintains, can produce more than a counterpart who struggles through the day. In fact, some studies claim that measures such as raising workplace temperature can have a drastic effect on office productivity. Experiments done by the Japanese Shiseido corporation also suggested that productivity could be increased by means of perfuming or deodorizing the air conditioning system of workplaces. Increases in productivity also can influence society more broadly, by improving living standards, and creating income.
They are central to the process generating economic growth and capital accumulation. A new theory suggests that the increased contribution that productivity has on economic growth is largely due to the relatively high price of technology and its exportation via trade, as well as domestic use due to high demand, rather than attributing it to micro economic efficiency theories which tend to downsize economic growth and reduce labor productivity for the most part. Many economists see the economic expansion of the later 1990s in the United States as being allowed by the massive increase in worker productivity that occurred during that period. The growth in aggregate supply allowed increases in aggregate demand and decreases in unemployment at the same time that inflation remained stable. Others emphasize drastic changes in patterns of social behaviour resulting from new communication technologies and changed male-female relationships.
Labour productivity is generally speaking held to be the same as the “average product of labor” (average output per worker or per worker-hour, an output which could be measured in physical terms or in price terms). It is not the same as the marginal product of labor, which refers to the increase in output that results from a corresponding increase in labor input. The qualitative aspects of labor productivity such as creativity, innovation, teamwork, improved quality of work and the effects on other areas in a company are more difficult to measure.
Marx on productivity
In Karl Marx’s labor theory of value, the concept of capital productivity is rejected as an instance of reification, and replaced with the concepts of the organic composition of capital and the value product of labor. A sharp distinction is drawn by Marx for the productivity of labor in terms of physical outputs produced, and the value or price of those outputs. A small physical output might create a large value, while a large physical output might create only a small value – with obvious consequences for the way the labor producing it would be rewarded in the marketplace. Moreover if a large output value was created by people, this did not necessarily have anything to do with their physical productivity; it could be just due to the favorable valuation of that output when traded in markets. Therefore, merely focusing on an output value realised, to assess productivity, might lead to mistaken conclusions.
In general, Marx rejected the possibility of a concept of productivity that would be completely neutral and unbiased by the interests or norms of different social classes. At best, one could say that objectively, some practices in a society were generally regarded as more or less productive, or as improving productivity – irrespective of whether this was really true. In other words, productivity was always interpreted from some definite point of view. Typically, Marx suggested in his critique of political economy, only the benefits of raising productivity were focused on, rather than the human (or environmental) costs involved. Thus, Marx could even find some sympathy for the Luddites, and he introduced the critical concept of the rate of exploitation of human labour power to balance the obvious economic progress resulting from an increase in the productive forces of labor.
Despite the proliferation of computers, there have not been any observable increases in productivity as a result. One hypothesis to explain this is that computers are productive, yet their productive gains are realized only after a lag period, during which complementary capital investments must be developed to allow for the use of computers to their full potential. Another hypothesis states that computers are simply not very productivity enhancing because they require time, a scarce complementary human input. This theory holds that although computers perform a variety of tasks, these tasks are not done in any particularly new or efficient manner, but rather they are only done faster. It has also been argued that computer automation just facilitates ever more complex bureaucracies and regulation, and therefore produces a net reduction in real productivity. Another explanation is that knowledge work productivity and IT productivity are linked, and that without improving knowledge work productivity, IT productivity does not have a governing mechanism
Chapter 2: Operations Strategy for a Competitive Advantage
A. COMPETITIVE STRATEGIES
A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Following on from his work analysing the competitive forces in an industry, Michael Porter suggested four “generic” business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of businesses’ activities are narrow versus broad and the extent to which a business seeks to differentiate its products. The four strategies are summarized in the figure below:
The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.
Strategy – Differentiation
This strategy involves selecting one or more criteria used by buyers in a market – and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product – often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products. Strategy – Cost Leadership
With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimising costs. If the achieved selling price can at least equal (or near)the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering “standard” products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. Strategy – Differentiation Focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants – in other words that there is a valid basis for differentiation – and that existing competitor products are not meeting those needs and wants. Strategy – Cost Focus
Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic – perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called “me-too’s”.
B. Operations Strategy& Process
1. To understand the competitive priorities available to an organization and their relationships
2. To consider the impact of strategy on operations also of operations on strategy Organization Strategy
Corporate strategy focuses on the questions:
• Where are we going?
• How are we going to compete?
• How are we going to meet customer needs in order to accomplish our objectives?
Typical steps in setting an organization’s strategy:
1. Establishing Goals
2. Market and Competitive Analysis – See the Society of Competitive Intelligence Professionals site for information 3. Identification of Products, Markets and Competitive Priorities 4. Establishment of Policy Guidelines and Constraints
Mission – Why are we in the business?
Vision – What do we want our organization to look like 5 years from now? Strategic Goals- Specific intended targets that indicate how the organization will achieve its mission and vision Operations Strategy
Once the organization has a clear picture of where it is heading the operations strategy can be addressed. • Purpose – To support the organization strategy.
• Operations can be used as a Competitive Weapon
– by excelling in one or two key areas of operations a company may gain an edge over its competition. The relationship between Operations and Corporate Strategy
Definition = combination of physical, service and other characteristics to meet customer needs Product Differentiation
• · design a product to meet customers’ needs • · to create a competitive advantage Market Strategy
Grouping of customers based on important difference in their needs, preferences and/or ability to buy options,
How do we intend to compete in the market place?
What will we offer our customers that is
1. important to them
2. different from our competitors
3. Economically feasible
4. difficult to match / imitate
Competitive priorities: the elements in which operations must excel in order to support corporate strategy. A company cannot excel on all dimensions and must select the ones most important to its operations and organizational strategy. 1. Cost and/or price
• the production and distribution of a product or service with a minimum of expenses or • wasted resources
• low cost production and distribution
• low price product or service
2. Quality and dependability
• producing a product which meets (or exceeds) customer expectations for quality • providing
• consistent quality (“dependability”)
• product features
• high-performance design allows product to do things that other products cannot 4. Delivery
• the ability to meet requested and promised delivery schedules • short lead time or fast delivery (“speed”)
• on-time delivery (“reliability”)
• speed in developing and introducing new products or services 5. Flexibility
The ability to respond to rapid changes in customer demand and requirements for existing • products or services
• product flexibility – quickly introduce new products or ability to make rapid design changes to existing products • process flexibility (“volume flexibility”)
Ability to introduce and incorporate new ideas into products and processes. Top Ranked Competitive Priorities
|1990 Competitive Priorities |1996 Competitive Priorities | |Conformance quality |Conformance quality | |On-time delivery |Product reliability | |Product reliability |On-time delivery | |Performance quality |Low price | |Low Price |Fast delivery | |
|Performance quality | | |Speedy new product introduction |
Market Qualifying/Order Winning Priorities
Market qualifying – characteristics a product must have to be in the market – Which is market qualifying for a luxury car?
Order winning – characteristics make a product different and cause customers to buy – Which is market winning for a Porsche 911?
Business system focus
What are the key value adding activities
Which activities will be done.
• · Within the organization (internal)?
• · By others (external)?
• · Jointly?
Business system – the combination of all activities (physical vs. service; primary vs. support; internal, joint, external) that must be performed to product and market a product Developing an Operations Strategy
1. Segment the markets by product groups
2. Identify product requirements, demand patterns and profit margins for each group 3. Determine market qualifying and order winning attributes for each product group 4. Convert these attributes into specific performance characteristics – most focus will be on order winning