Operation management

Introductory note on Operation Management

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INTRODUCTORY NOTE ON OPERATIONS MANAGEMENT
Operations is one key to any organization’s success. Along with marketing, operations, often
called production, is where an organization adds value and makes money. In order to develop
an effective operating point of view and decision-making skills related to operations, this note
explores four fundamental aspects of all organizations:
1. The purpose and components of operations;
2. The key tasks that operations managers must manage for their respective organizations to
do well;
3. The types of operations systems and their management requirements; and
4. Some tools to help you diagnose and solve operations problems.

THE PURPOSE AND BASIC COMPONENTS OF OPERATIONS
One common way to describe operations is the input-transformation-output model shown in
Exhibit 1. According to this model, the organization “purchases” inputs from suppliers,
changes them in some way through a transformation process, and then “sells” the outputs to
customers.
We normally associate operations with mines, factories, and food processing plants, we also
see it in everyday settings such as restaurants, hotels, airlines, universities, hospitals, banks,
and stores. Exhibit 2 gives some examples.

Exhibit 3 lists six conclusions drawn from Exhibits 1 and 2. First, some enterprises transform
materials, others transform customers, and others transform information.
Second, operations is everywhere. Accounting departments need a process to transform
transactions into financial records. Marketing departments need a process to capture
information from customers. Personnel departments need processes to hire, train, evaluate,
promote, motivate, discipline, and lay off staff.
Third, inputs and outputs are a matter of perspective. To deal with the potential ambiguity,
the analyst must carefully define the operations system by deciding where its boundaries are,
keeping in mind that although such boundaries are necessary, they are almost always
artificial.
Fourth, operations adds value. For example Paper mills link forestry companies to
newspapers because they can transform wood into paper. Real estate brokers are able to bring
buyers and sellers together because they know the local market.
Fifth, breaking an operation down into its many steps can help in understanding and analysis.
The examples in Exhibit 2 tend to be rather large at the factory or company level. Thus, iron
oxide concentrate, limestone, and coal are put in and steel is taken out; thousands of parts are
assembled and an automobile is driven away. For kitchen design decisions, a detailed
sequence would be useful, but to decide how much to charge customers for the labour content
in such a breakfast, a much broader scope would be appropriate.
Sixth, operations needs information. The model in Exhibit 1 shows the flow of materials and
services. Although this flow is central to any operating process, no process operates
completely independently. We must make the decision from where we should start from.

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OPERATING SYSTEM COMPONENTS
The transformation process usually involves equipment, people with a range of skills,
inventories of goods to help smooth out the operation, and energy to make it all happen.

Equipment
Equipment is the machinery needed to make production happen. The kind of equipment
needed depend as per the business. Four important features of equipment are capability,
capacity, flexibility, and reliability.

Capability refers to what a piece of equipment can do. In quality terms, capability refers to a
machine’s ability to perform reproducibly.

Capacity is different from capability. This word has two distinct notions: how much a piece
of equipment can hold and the amount of material, number of customers, or quantity of
information that can be processed or produced in a given period of time. Exhibit 4 gives some
examples. We normally discuss capacity in terms of theoretical capacity — what the
equipment manufacturer designed and built the unit to do but when done it practically the
operating capacity is what happens in actual use. The extent to which theoretical capacity is
achieved is one measure of the equipment’s efficiency. There are exceptions for operating
capacity being usually less than theoretical capacity.

Flexibility refers to an operating system’s ability to cope with changing circumstances with
little penalty in cost, time, effort, or performance. Flexibility refers to many things, such as
product range, rates of output, and speed of change. Labour contracts that spell out detailed
job classifications often reduce flexibility by restricting the right to do certain types of work.

Reliability refers to the likelihood that a piece of equipment will perform as designed. High
or increasing downtime and maintenance costs might indicate a decrease in reliability.

People
Capability, capacity, flexibility, and reliability also apply to people, who bring muscles,
brains, and interpersonal skills to operations. Although most operations require some labour
to operate machines, move materials, or perform operating tasks, physical labour is
increasingly being reduced as tasks become automated or otherwise changed.

In many services, operations workers interact directly with customers. In such a role, their
interpersonal skills are an important determinant of the quality of service provided. The
people component brings the psychological concepts and theories of managing people face to
face with the realities of assigning workers to tasks, assessing performance, and achieving
reliability.

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Energy
Energy is a component of almost any operation and a major operations factor. Traditionally,
our economy developed around energy sources, as many watercourses were exploited to run
mills and factories

Inventory
Inventory is an input, a component, and a product of most operating systems. Inventory can
be defined as anything that is purchased or acquired for transformation or resale, or that
assists in the transformation of materials into saleable goods. Although we talk about
inventories of people, plants, equipment, capacity, or light bulbs but in this case the
discussion to inventories of items along the material flow is based on in Exhibit 1 i.e. there
are three basic kinds of inventory: raw materials, work in process, and finished goods.

Inventories both cost and save money and organizations have inventory because it is cheaper
to have it than not. Inventory management involves managing the economic balance. The
major benefits can be summed up as helping to smooth the flow of materials and reduce the
costs in going from the supplier through the production process and on to the customer. Some
of the costs are described in Exhibit 5.
Exhibit 6 shows the functions of inventory. Just as an inventory item can be raw materials,
work in process, or finished goods simultaneously, it can also serve more than one function at
any given time.

Despite the usefulness of inventory, having too much creates its own problems. Inventory not
only costs money to keep, but having it can confuse workers and managers. The goal in
managing inventory is to have the right amount, of the right material, in the right place, at the
right time, every time. In general, the amount should be the minimum possible to ensure
smooth operations.

OPERATIONS TASKS
Operations tasks are what an organization must do to produce products and/or services to
satisfy customers and realize its overall objectives. The main function of operations is to
transform inputs into the desired outputs, using the necessary resources. The goal is to
provide the right product or service, in the right quantity, at the right price, in the right place,
at the right time, every time, with an acceptable level of side effects.

The different departments are all interdependent: operations needs them and they need
operations (and each other). But each of the various departments has its own agenda,
priorities, and ways of doing things. The operations manager must deal with the inherent
conflicts to which these distinctions will give rise in the internal environment.

In conjunction with finance and accounting, operations must manage financial resources. The
two departments maintain many of the records necessary to perform and measure operations
and are also responsible for sending invoices and collecting and making payments.

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Although operations has a role in satisfying customers, marketing is the liaison between
production and the firm’s external customers. Marketing should help to translate customer
needs and wishes into product specifications, forecasts of sales volumes, delivery schedules,
and the like. Exhibit 8 outlines five important customer needs that have significant
implications for operations.

Function
Function depends on design. A computer’s failure to run Windows software might be the
result of its design as the latest version requires more powerful chips. In a changing world
unless product or service function changes, the product might well become obsolete.

Quality
Quality is such that the product will perform its functions reliably. Manufacturing affects
quality. Even the function is better still the quality is necessary otherwise will result in a poor
quality finished product.

Quantity
Quantity is an easily understood need. Organizations must provide enough goods or services
to satisfy their customers’ needs which means that they need to produce the quantity at least
that match the demand of the customers. For operations, quantity demands require attention
to customer needs and the timing of those needs.

Price
Price also appears to be a fairly simple idea. Potential customers who perceive the price to be
too high will either not buy or switch to an alternative. However, it is clear that price,
particularly that of a single purchase, is not the sole purchase criterion. Although price and
value are marketing concerns, they have a major effect on operations. Few organizations can
manage to produce low cost products or services with a full range of features and high
quality.

Service
Service has many dimensions. Service might include advice on how to operate or maintain a
product, financing arrangements, checkups, availability of parts, provision of qualified
labour, or assurance that the manufacturer or service firm will survive the lifetime of the
product or service.
Competing on service requires that operations have a very flexible delivery system; often
excess capacity; equipment, people, and suppliers that are fully competent, reliable, and at
least somewhat interchangeable; and intelligent scheduling.

Achieving the Desired Outcomes
Customer needs vary from one individual to another and depend very much on the situation.
The operations manager’s job includes determining what today’s need is and having the
flexibility to provide it. The ranking of those needs will dictate what the operations manager
should emphasize. As a manager we have to know where to focus our attention. Because we
can’t do everything well, we need to know what is most important so we can at least achieve
that.

Organizations translate the need for other services much as they do the price need. Because
many service aspects have implications for function, quality, quantity, and price, they can be

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considered as part of these objectives. However, it is not good enough simply to meet only
some of these targets, even perfectly. Because the process must be repeatable and
improvable, managers must manage operations to ensure that it is in harmony with overall
company policies and objectives for continuity of the enterprise. They must also plan both for
the short and the long term.

Effectiveness and Efficiency
The role of the operations manager is to accomplish the necessary tasks as effectively and as
efficiently as possible. Exhibit 9 describes and gives some examples of these two concepts.
Effectiveness is related to quality. An operation is effective if it makes the product as
designed, on time.

Efficiency is related to productivity. An operation is efficient if it functions with a minimum
of cost, effort, and waste. The ideal, of course, is to be both effective and efficient. Although
this goal is not always possible, every organization should strive for it.

TYPES OF OPERATING PROCESSES AND MANAGERIAL IMPLICATIONS
The following sections describe three types of production process along a continuous
spectrum as shown in Exhibit 10. Despite classification problems, however, focusing on these
three types is useful because they:
1. Stress the need to select a process according to the production tasks to be performed; and
2. Represent very different kinds of production processes, each with its own critical
characteristics that
must be carefully managed.

Continuous-Flow and Line-Flow Processes
In a continuous-flow process, inputs are transformed into outputs continuously. As Exhibit 10
shows, they are closely akin to line-flow processes. The differences between the two are
largely matters of degree; one distinction is that line-flow processes tend to produce discrete
units (that is, they can be counted one by one, such as cars or bottles), whereas continuous-
flow processes produce products counted in units of measure (litres of benzene, tonnes of
steel). Exhibit 11 shows some important traits of such processes.

Job Shop and Batch Processes
In job shop and batch processes work moves intermittently in batches. Job shop and batching
operations typically build up significant work-in-process inventories. Although job shop and
batching operations are similar, they are not identical. A key difference is their response to
customer specifications. A job shop typically performs custom work in response to customer
orders. A batching operation more likely makes a standard product line in response to
inventory levels.

Project Processes
Some products are unique or very complex. In these situations, a somewhat different
approach to production, a project process, is most efficient and effective. Economies of scale
and specialization do not apply. Often, the organization is “product-dedicated,” with the job
often being stationary and having resources brought to it. Projects resemble job shops in that
both handle special custom orders. Projects are unique because of their size, complexity, and
the presence of a number of steps that must be completed in a clearly defined order.

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Choosing a Process
Although there are exceptions, observers have noted a strong correlation between the
characteristics of the product and the process used to make it. The product characteristics are
typical of the product life cycle, which describes changes in product volume and other traits
over time. In short, customers can have any two of speed, quality or low cost, but not all
three.

Exhibit 13 shows the relationship between product and process characteristics. According to
this model, successful organizations are found in or near the diagonal band; those found
significantly above or below it are uncompetitive. Think about how you would make a line of
family cars versus a high-performance race car, or how you would set up a cafeteria as
opposed to an haute cuisine restaurant.

Other Management Decisions
Obviously, operations managers need to do more than simply choose a suitable process type
and change it as the product traits change. Exhibit 14 gives examples of the sorts of decisions
managers must make during design and start-up as well as on a day-to-day basis.

Particularly when making major decisions, managers must bear in mind both the current
circumstances and anticipated future developments. Changing major decisions, such as plant
location and primary machinery layout, is always expensive and disruptive and can
sometimes threaten the firm’s future.

PROCESS AND TRADE-OFF ANALYSES: TWO BASIC ANALYTICAL TOOLS
Process Analysis
As much as possible, operations managers must ensure that the units of product proceed
through the process as scheduled. In continuous- or line-flow processes, production is usually
either on or off; when it is on, each unit moves along at essentially the same even or level
rate. In job shops or batch operations, this is usually not the case. Flow is intermittent, and the
rate of any one step can change frequently, leading to bottlenecks that keep changing. To
determine the location of bottlenecks and the degree of balance in the process, we must
perform the key operations tool of process analysis. Typically, it proceeds as shown in
Exhibit 15.

Exhibit 17 shows an example of process analysis, including a partial process-flow diagram
with the capacities for four of the steps and the required output.

Trade-off Analysis
Trade-offs arises when we must choose because we cannot have everything. Everyone makes
trade-offs every day. In some cases, the trade-off is black or white — medicine or business.
Trade-off analysis helps managers decide what the “best” compromise is. Like process
analysis, trade-off analysis involves a logical sequence of steps that will not guarantee
success but might prevent disaster. Exhibit 18 shows the steps.

Our hospital dishwashing example demonstrates the trade-off process. Our process analysis
of this operation revealed some idle labour time in two of the four steps (see Exhibit 17). We
might ask, Is there a better way to process the dirty dishes, that is, can we make the process
more efficient while maintaining our effectiveness in cleaning just over 6,300 dishes per day?
Apparently, demand peaks are not a problem here, and outputs determine inputs as dishes are
cycled through this process (6,300 clean dishes return as 6,300 dirty dishes — with

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occasional losses from breakage). For the purpose of illustration, we will consider only two
of the many possible alternatives:
1. Leave the current system alone (that is, do nothing).
2. Reduce scraping, rinsing, and stacking staff by one; reassign workloads so staff perform all
operations on a rotating basis; separate labour and machine operations by work-in-process
dish inventory.

Exhibit 19 summarizes estimates of the costs and benefits of these alternatives. The cost of
the first alternative is the quantitative savings of the second alternative — the yearly wages
plus benefits of one worker. However, laying off a worker and reassigning work does not
come cost-free.

RECENT DEVELOPMENTS IN OPERATIONS
Like all fields, operations is constantly developing. The recent past has seen revolutionary
changes in attitudes toward quality, inventory management, and timing, which affect all
departments in an organization.

Quality
The changes in quality originate in how it affects an organization’s competitiveness, how it is
defined, and how it is achieved. Many organizations have been able to produce high quality
goods and services, forcing participants in their industries to devote significant attention to
this area to maintain their market share.

Some see quality as an inherent characteristic that cannot really be defined but is recognized
when seen. Others see quality as a measurable characteristic inherent in a product — more, or
less, represents higher quality. Others view quality as conformance to specifications —
deviation from specifications means bad quality.

Current thinking on quality focuses on a philosophy rooted in Japan known as total quality
management (TQM), which builds on SPC in two ways. First, its real goal is to enhance
competitive performance in all areas: costs, productivity, market share, and profits, as well as
quality. Second, TQM is all-inclusive. Although TQM uses several simple SPC tools to
diagnose quality problems, TQM is not a set of techniques or even a state — it is a
philosophy, an attitude, a never-ending journey. Exhibit 20 shows its philosophical bases.

Exhibit 21 describes some of the significant implications of TQM. TQM requires dramatic
change in many organizations. Managers often see this change as threatening because:
 Their jobs change from gathering information, making decisions, and using incentives
and
punishments to manage the work force, to consulting and coaching, and
 Organizations widen their spans of control and reduce layers of management.

With reference to Exhibit 13, above, through reduced set-up times, TQM has shifted the
attractive band of production from the rigid diagonal shown, toward the lower right-hand
corner. TQM proficiency is now recognized by a number of well-known awards.

Just-in-Time Manufacturing
TQM arose from a more fundamental Japanese movement, just-in-time (JIT) or zero
inventory (ZI) manufacturing, which is largely responsible for Japan’s striking post–World

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War II success. JIT has at least two distinct meanings. On a micro level, the term literally is
taken to mean that something arrives just as it is needed — no sooner and no later.

On a macro level JIT means eliminating waste — the TQM philosophy of continual
improvement. Non- TQM plants often believe that operations, once debugged, are running
optimally and that changing things will only cause problems. TQM recognizes that no matter
how well something is running, it is never perfect. Under this philosophy, everyone,
including managers, tries to find operations problems (waste) and eliminate them. JIT
operators have found ways to eliminate the reasons for having inventory.

Flexibility and Operations Control
In the past few years, customers have started to demand exactly what they want from
manufacturers. Typically, they want something different — perhaps colour, size, flavour, or
shape — and they want it ast without a price penalty. This phenomenon, termed “mass
customization,” is more common in some industries than others. In some markets — such as
those for commodities — customers place little value on the possible custom features. Other
markets might be restricted by law from customizing. Although mass customization can be
expected to increase production costs, there are significant advantages to producers that can
manage it, especially if they can charge a price premium.

Mass customization differs from providing variety in one important respect: it means
economically manufacturing in response to a customer’s order instead of trying to meet
customer needs through inventory. The requirements of mass customization are both a major
challenge and a significant opportunity for manufacturers. The task is simultaneously to
obtain both low cost and flexibility. With reference to Exhibit 13 the question becomes, How
can manufacturers combine the traditional scale of line- and continuous-flow processes with
the nimbleness of job shops?

Many mass customizers dedicate a team to design, produce, and deliver a customer’s order.
Flexibility requires that such teams be established quickly and work together from the start,
implying a cooperative organizational culture. Computers are also being used in operations
planning and control in a technique known as manufacturing resource planning (MRP). The
main notion behind MRP is that the needs for materials and other resources are
interconnected rather than independent.

MRP and TQM use quite different means toward the same ends. In production controlled by
kanban, problems quickly stop the flow — production is pulled through the system. Think
about a string attached to a toy; stop pulling, and the toy stops instantly. In production
controlled by MRP, production is pushed through the system. MRP production is thus
relatively insensitive to stoppages in flow unless the MRP program is recalculated. Try
stopping a rolling toy by pushing on the string. MRP’s aim is to control the current system
using computer programs and databases as tools. In contrast, TQM’s aim is to discover
problems in the existing system so that the system can be improved by eliminating the
problems. Referring to Exhibit 13, computerization in manufacturing can increase flexibility.
It can reduce set-up costs per run, making production of small lots of mature products viable
(the lower right-hand corner).

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SUMMARY
This note was designed to broaden our knowledge of operations situations by discussing five
aspects of operating systems:
1. The input-transformation-output notion and the basic transformation components of
equipment, labour, materials, and energy;
2. The key operations tasks of function, quality, quantity, price, and service;
3. The basic process types (continuous-flow, line-flow, batch, job shop, and project
processes) and their management requirements;
4. The two basic operations analysis tools of process and trade-off analysis; and
5. Recent developments in quality, inventory management, and timing.

This note also emphasized that operations is all around us, all the time. Each of us is involved
in operations daily in our professional and personal lives. Operations cannot meaningfully be
dealt with in isolation from the other functions in the organization, nor can these functions
ignore operations. Although operations problems vary in their difficulty and scope, we
believe that understanding the points discussed in this note will help you to make a
significant start in dealing with the complexities and accepting the challenges.