1.0 INTRODUCTION
This first note introduces you to the field of operations
management. Generally, it describes the nature and scope of operations
management, and how it relates to the other parts of the organization.
2.0 OBJECTIVES
At the end of this note you should be able to:
(i) Define the term production/operations management (POM)
(ii) Identify the three major functional areas of organizations
and describe how they interrelate
(iii) Compare and contrast service and manufacturing operations
(iv) Briefly describe the historical evolution of POM
3.0 MAIN CONTENT
3.1 Introduction to Production and Operations Management
Operations management deals with the production of goods and
services that people buy and use every day. It is the function that enables organizations
to achieve their goals through efficient acquisition and utilization of resources.
Manufacturers of steel, food, vehicles, computer (i.e. physical goods) need
operations management. So do health care providers, banks, schools, retailers etc.
Every organization, whether public or private, manufacturing or service, has an
operations function.
To some people, the term production conjures up images of
factories, machines and assembly hires. Interestingly enough, the field of
production management in the past focused almost exclusively on manufacturing
management, with a heavy emphasis on the methods and techniques used in
operating a factory.
In recent years, however, the scope of production management has
broadened considerably. Production concept and technologies are applied to a
wide range of activities and situations; that is, in services such as health
care, food service, recreation, banking, hotel management, retail sales, education,
transportation and government.
This broadened scope has given the field the name production/operations
management or more simply operations management – a term that more closely
reflects the diverse nature of activities to which its concepts and techniques
are applied. Formally stated, therefore, production and operations management
(POM) is the management of an organization’s production system, which converts
inputs into the organization’s products and services. (or the direction and
control of the processes that transform inputs into finished goods and
services). This function is essential to systems producing goods and services
in both profit and nonprofit organizations.
3.1.1 Function within Business Organizations
A typical business organization has three basic functions:
finance, marketing and production/operations. (see Figure 1.1)
Figure 1.1: The three basic functions of business organizations
Figure 1.2: The 3 major functions of business organization overlap
These three functions, and other supporting functions, perform
different but related activities necessary for the operation of the organization.
The interdependency of the major functions is depicted by overlapping circles in
figure 1.2. These functions must interact to achieve the goals and objectives of
the organization, and each makes an important contribution. Very often, the
success of our organization depends not only on how well each area performs but
also on how well the areas interface with each other. For instance in
manufacturing, it is essential that production and marketing work together.
Otherwise, marketing may promote goods that production cannot profitably produce,
or production may turn out items that have no demand. Similarly, unless finance
and production people work closely, funds for expansion or new equipment may
not be available when needed in addition to the three primary functions, many organizations
have a number of supporting functions, such as personnel, accounting, engineering,
purchasing, public relations, distribution etc. the existence of these
functions and the emphasis placed on each depend on the type of business a firm
is engaged in. We will take a closer look at these functions:
3.1.2 Operations
The operational function consists of all activities directly
related to producing goods or providing services.
The operations function is the core of most business organizations;
it is responsible for the creation of an organization’s goods or services.
Inputs are used to obtain finished goods or services using one or more
transformation process (e.g. storing, transporting, cutting, and cleaning). To
ensure that the desired outputs are obtained, measurements are taken at various
points in the transformation process (Feedback) and then compared with
previously established standards to determine whether corrective action is
needed(control). Fig 1.3 shows the conversion process.
Figure 1.3: The conversion process of the operations function
Table 1.2: Provides
some examples of inputs, transformation processes, and outputs
The essence of the operations
function is to add value during the transformation process: The term “value
added” is used to describe the difference between the cost of inputs and the
value or price of outputs. In non-profit organizations, the value of outputs
(e.g. highway construction, police and five protection services is their value
to society; the greater the value added, the greater the effectiveness of these
operations. In the case of profit making organizations, the value of outputs is
measured by the prices that customers are willing to pay for these goods or
services.
The essence of the operations
function is to add value during the transformation process: The term “value
added” is used to describe the difference between the cost of inputs and the
value or price of outputs. In non-profit organizations, the value of outputs
(e.g. highway construction, police and five protection services is their value
to society; the greater the value added, the greater the effectiveness of these
operations. In the case of profit making organizations, the value of outputs is
measured by the prices that customers are willing to pay for these goods or
services.
Firms use the money generated by value-added for Research and
Development(R&D), investment in new plants and equipment, and profits.
Consequently, the greater the value added the greater the amount of funds
available for these purposes. It is obvious that one sure way businesses can
attempt to become more productive is to examine critically whether the
operations performed by their workers add value. Those operations that do not
add value are considered wasteful.
By eliminating or improving such operations, firms can reduce the cost
of inputs or processing, thereby increasing the value added. Let us use an example
to buttress this point: suppose a firm discovers that it is producing an item
much earlier than the scheduled delivery dates to a customer. This firm evidently
requires the storage of the item without adding to the value of the item.
Reducing storage time would reduce the transformation cost and, hence, increase
the value – added.
3.1.3 Finance
The finance function is made up of activities related to securing
resources at favourable prices and allocating those resources throughout the organization.
Generally, the finance and operations management personnel cooperate by exchanging
information and expertise in such activities as budgeting, economic analysis of
investment proposals and provision of funds. For instance, budgets must
necessarily and periodically prepare for the planning of financial requirements.
These budgets must sometimes be adjusted, and performance relative to a budget
must be evaluated. In addition, evaluation of alternative investment in plant
and equipment requires inputs from both operations and finance people.
Furthermore, the necessary funding of operations and the amount and timing of
such funding can be important and even critical when funds are tight. Therefore,
careful planning can help avoid cash flow problems.
3.1.4 Marketing
Marketing is concerned with sensing, serving, and satisfying the
needs and wants of the present and potential customers of the organization. It
consists of selling and /or promoting the goods or services of the firm advertising
and pricing decisions are made by the marketing people. It has been said that marketing
is responsible for assessing customer needs and wants, and for communicating
such to operations people (short term) and to design people (long term).
Hence, operations department needs information about demand over
the short to intermediate term so that it can plan accordingly (e.g purchaser’s
raw materials or schedule work). In addition, the design department also needs
information that relates to improving current products and services and
designing new ones. In essence therefore, departments of marketing, design and
production must work closely to successfully implement design changes and to
develop and produce new products. Marketing usually supplies information on
consumer preferences so that the design department will know the kinds of
products and features needed .
Operations department often supplies information about capacities,
as well as assess operationally of designs. Operations department will also
have advance warming if new equipment or skills will be needed for new products
or services. It is necessary to include the finance people in these exchanges
so as to provide information on what funds might be available (short term), and
to learn what funds might be needed for new products or services (intermediate
to long term). The marketing department needs information on lead time from the
operations department, so that customers can be given realistic estimates of how
long it will take to fill their orders. From our treatment of sections 3.1.1,
3.1.2 and 3.1.3, it is clear that department of marketing, operations and
finance must interface on product and process design, forecasting, setting
realistic schedules, quality and quantity decisions and keeping each other
informed on the other’s strengths and weaknesses.
3.1.1 Other Functions
Apart from the three core functions, there are a host of other
supporting functions that interface with these core functional areas of
operations, finance, and marketing. These are illustrated in figure
1.4.Accounting has responsibility for preparing the financial statements, such as
income statement and balance sheet. In addition, it supplies to management costs
of labour, materials, and overhead, it may also provide reports on scrap, downtime
and inventories. Furthermore, it must keep track of receivables, payables, and
insurance costs, as well as prepare tax statements for the firm. It is the
responsibility of the purchasing department to procure materials, suppliers and
equipment. The department is usually asked to evaluate vendors for quality,
reliability, service, force, and ability to adjust to changing demand. In
addition, the department is responsible for receiving and inspecting the purchased
goods. The personnel department is concerned with recruitment and training of personnel,
labour relations, contract negotiations, wage and salary administration,
assisting in manpower projections. It is the responsibility of public relations
department to build and maintain a positioned public image for the organization.
Very often, this might involve sponsoring events in sports, donating to actual
events in sports, donating to actual events, and sponsoring community affairs. Industrial
engineering has the responsibility of scheduling, performance standards, work
methods, quality control and materials handling. Distribution is concerned with
the movement of goods to warehouses, retail outlets or to customers. 
Figure 1.4: Interface of operations with
supporting functions.
Last, but by no means the least, the maintenance department is
responsible for general upkeep and repair of equipment, building and grounds,
heating and air conditioners removing wastes; parking and, at times security.
3.2 Manufacturing and Service Operations
Manufacturing implies production of a tangible output (i.e.
something that can be seen or touched) such as a car, tyre, bread, knife, etc.
Service on the other hand, generally implies an act. Examples here include a
doctor’s examination, TV and auto repair, lawn care and lodging in a hotel. The
majority of service jobs fall into the following categories: Education
(schools, colleges, universities, etc.) Business services (data processing,
delivery, employment agencies, etc.)Personal services (laundry, dry cleaning,
hair/ beauty, gardening etc)Health care (doctors, dentists, hospital care, etc)
Financial services (banking, stock brokerages, insurance, etc)Wholesale /
retail (clothing, food, appliances, stationeries, toys, etc)Government
(federal, state, local)
3.2.1 Differences between Manufacturing and Services
The differences between manufacturing and service operations fall
into the eight categories show in figure 1.5. You should however note that
these distinctions actually represent the ends of a continuum. The first distinction
arises from the physical nature of the product: manufactured goods are physical,
durable products. Services on the other hand are intangible, perishable
product- they are usually ideas, concept, or information. The second area of
difference also relates to the physical nature of the product.
For instance, manufactured goods are outputs that can be produced,
stored, and transported in anticipation of future demand. This way, creating inventories
allows manager to cope with fluctuations in demand by smoothing output level. On
the other hand, services can’t be pre-produced. To this end, service operations
do not have the luxury of using finished goods inventories as a cushion against
erratic customer demand. Customer contract is the third distinction between
manufacturing and service operations. Most customers for manufactured products
have little or no contact with the production system.
The primary customer contract is normally left to distributors and
retailers. However, in the case of service firms, the customers themselves are
inputs, and thus, are active participant in the process. Another distinction is
response time to customer demand. For instance, manufacturers generally have
days or even weeks to meet customer demand. However, many services must be
offered within minutes of customer arrival. The purchaser of a generator may be
willing to wait for four weeks for delivery. By contrast, a grocery store
customer may grow inpatient after waiting five minutes in a checkout line.
Since customers for services usually arrive at times convenient to
them, service operations may have difficulty matching capacity with demand. In
addition, arrival patterns may vary daily or hourly, thus creating even more
short-term demand uncertainty. There are two distinctions with respect to
location and size of an operation. Manufacturing facilities usually serve
regional, national, or even international markets. Therefore, they generally
require larger facilities, more automation, and greater capital investments
than for service facilities. On the other hand, services can not be moved to
distant locations. Hence, service organization requiring direct customer
contact must locate relatively near the customer 
Figure 1.5: Continuum of characteristics of manufacturing and
service operations.
The final distinction between manufacturing and service operations
relates to the measurement of quality. Since manufacturing systems tend to have
tangible products and less customer contact, quality is relatively easy to
measure. However, the quality of service systems, which generally produce
intangibles, is often very difficult to measure. Coupled with this, the
subjective nature of individual preferences further makes the measurement of
services difficult.
3.2.2 Similarities between Manufacturing and Service Operations
In spite of the differences already discussed there are compelling
similarities between manufacturing and service operation: firstly both have
processes that must be designed and managed effectively. Secondly, some type of
technology be it manual or computerized, must be used in each process. Thirdly,
both of them are usually concerned about quality, productivity and the timely response
to customers. Fourthly they must make choices about capacity, location, and layout
of their facilities. Fifthly, both deal with suppliers of outside services and
materials, as well as scheduling problems. Sixthly, matching staffing levels
and capacities with forecasted demand is a universal problem.
4.0 CONCLUSION
Note one has thrown light on an understanding of the term
‘Production and Operations Management. You have been able to identify the three
major functional areas of an organization, as well as how these functions
interrelate. The note has also enabled you to compare and contrast services and
manufacturing operations. A special emphasis was placed on the historical evolution
of Production and Operations Management.
5.0 SUMMARY
This note has introduced Operations Management as a function that
enables organizations to achieve goals through efficient acquisition and
utilization of resources. The note points out that a typical business
organization has three basic functions, including: Finance; production/operations;
and marketing. It also point out that, apart from these three core functions,
there are other functions, including: distribution, maintenance purchasing,
accounting, personnel, public relations, and the like
Nice. also read on difference between Product and Production Concept.
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