Operation Management – Introduction | CMA Inter Syllabus

Table of contents

Scope

Operations Management (OM) encompasses all organizational activities that acquire the raw form of materials (input), process or convert into a consumable products and services as required to meet the needs of the end customers. OM deals with both tangible product and intangible services.

Example 1 (Product Centric)

Suppose, you require a smartphone. OM deals with procuring all raw materials such as chip, motherboard, battery, lens, speakers etc.; assemble and mount all components; test the performance of finished good; quality check; maintenance; storage and distribution for making the smartphone available to you.

Example 2 (Service Centric)

Suppose, you take a subscription of Netflix to watch a movie. OM covers all activities that includes dealing with movie-makers to get transmission right, make the movie available in the database, arranging for live streaming or recorded version transmission over spectrum and so on.

To better understand OM, let us have a simple diagram

 Examples of input include, raw materials, machines, electricity, manpower, facilities, storage space etc.

In some cases, product and service are required both. For example, if you visit a retail shop. You not only require the availability of the products you want but also you expect courtesy of the salesperson, ambience, convenience of buying etc which are services. In fact, goods (tangible) and services (intangible) follow a trade off relationship over a continuum ranging from pure product (for example, study material) to pure service (for example, teaching).

Objectives of Operations Management

 Objectives of operations management can be categorised into (i) Customer service and (ii) Resource utilisation.

 (i) Customer service

The first objective is the customer service which means the service for the satisfaction of customer wants. Customer service is therefore a key objective of operations management.

The Operations Management must provide something to a specification which can satisfy the customer in terms of cost and timing. Thus, primary objective  can be satisfied by providing the ‘right thing at the right price at the right time’.

These three aspects of customer service - specification, cost and timing - are described in a little more detail for the four functions in Table 1. They are the principal sources of customer satisfaction and must, therefore, be the principal dimension of the customer service objective for operation managers.

 Table 1: Aspects of Customer Service

Generally an organization will aim reliably and consistently to achieve certain standards, or levels, on these dimensions, and operations managers will be influential in attempting to achieve these standards.

Hence, this objective will influence the operations manager’s decisions to achieve the required customer service.

(ii) Resource Utilization

Another major objective is to utilize resources for the satisfaction of customer wants effectively, i.e., customer service must be provided with the achievement of effective operations through efficient use of resources. Inefficient use of resources or inadequate customer service leads to commercial failure of an operating system.

Operations management is concerned essentially with the utilization of resources, i.e., obtaining maximum effect from resources or minimizing their loss, under utilization or waste. The extent of the utilization of the resources’ potential might be expressed in terms of the proportion of available time used or occupied, space utilization, levels of activity, etc. Each measure indicates the extent to which the potential or capacity of such resources is utilized. This is referred as the objective of resource utilization.

Operations management is also concerned with the achievement of both satisfactory customer service and resource utilization. An improvement in one will often give rise to deterioration in the other. Often both cannot be maximized, and hence a satisfactory performance must be achieved on both objectives. All the activities of operations management must be tackled with these two objectives in mind, and many of the problems will be faced by operations managers because of this conflict. Hence, operations managers must attempt to balance these basic objectives.

Below Table 2 summarizes the twin objectives of operations management. The type of balance established both between and within these basic objectives will be influenced by market considerations, competitions, the strengths and weaknesses of the organization, etc. Hence, the operations managers should make a contribution when these objectives are set.

Table 2 : The twin objectives of operations management

 Scope of Operation Management

Operations Management concerns 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 Production and Operations Management functions:

1. Location of facilities.
2. Plant layouts and Material Handling.
3. Product Design.
4. Process Design.
5. Production Planning and Control.
6. Quality Control.
7. Materials Management.
8. Maintenance Management.

The xyz Ltd requires to take few important decisions. The first question comes into picture is: “What to produce?”

This question is linked with the basic existence of the company It talks about the product that xyz Ltd. is manufacturing. Here, the organization needs to understand that what is the need of the customers in terms of product attributes/Features & quality. In other words, it talks about the competitive positioning of the company, its products acceptability at the market place this decision is based on the input received from market intelligence team and often is a part of the product design process later on we will study an important concept related to product design, such as QFD. In this regard, one important point to be noted that, many a times the organizations need to forecast about product life cycle & related requirement of the technology. Forecasting we will discuss separately.

One the company is aware that what it needs to produce, the second question comes: “How much to produce?”

This question is an ongoing questions, as the organization is engaged in estimating the quantity (“How much”) on a daily, weekly, monthly, quarterly & yearly basis. Again this information is obtained from marketing team. Based on the information received, the planning team (as a part of supply chain’s planning section) provides a forecast of demand. Hence, here deal with an important aspect of operational planning known as Demand Forecasting.

The next question is: “Where to produce?”. 

This question leads to facility location selection problem after this, a series of questions need to be answered that lead to a member of decision areas such as “

Q: “How to produce?” (Process selection & Layout)

Q: “When to produce?” (Aggregate Planning inventory Master Production decision schedule)

Q: “Do we have materials to produce?” (MRP, Inventory Management) It also deals with Sourcing

Q: “Are we producing right things?” (Quality Management)

Q: “Are our machines able to provide desired results?” (Maintenance Management)

Q: “How to reach the products to the customers?”(Distribution or Delivery planning)

It includes transportation decision, warehousing, materials handling ets. Logistics issues In case the organization is practicing sustainability then another important decision area is reverse Logistics i.e., taking returns

Therefore, in summary the major decision areas are:

1. Product selection
2. Facility Location Selection
3. Demand Forecasting
4. Process selection & Layout decision
5. Capacity planning
6. Aggregate Planning, Master production schedule
7. Materials Requirement Planning (MRP)/Manufacturing Resource Planning (MRP I)/ Distribution Resource Planning (DRP) / Enterpnse Resource Planning (ERP)
8. Inventory Management
9. Supplier Selection/Sourcing
10. Process Management
11. Quality Management
12. Maintenance
13. Warehousing /Transportation
14. Reverse Logistics

In Addition, an operations manager is also responsible for working capital management, skill-management etc.

Characteristics of Modern Operations Functions

The production management of today presents certain characteristics which make it look totally different from what it was during the past. Specifically, today’s production system is characterised by at least four features.

1. Manufacturing as Competitive Advantage : In the past production was considered to be like any other function in the organisation. When demand was high and production capacities were inadequate, the concern was to somehow muster all inputs and use them to produce goods which would be grabbed by market. But today’s scenario is contrasting. Plants have excess capacities, competition is mounting and firms look and gain competitive advantage to survive and succeed. Interestingly, production system offers vast scope to gain competitive edge and firms intend to exploit the potential. Total Quality Management (TQM), Time-Based Competition, Business Process Re-engineering (BPRE), Just-in-Time (JIT), Focused Factory, Flexible Manufacturing Systems (FMS), Computer Integrated Manufacturing (CIM), and The Virtual Corporation are but only some techniques which the companies are employing to gain competitive advantage.
2. Services Orientation : As was stated earlier, service sector is gaining greater relevance these days. The production system, therefore, needs to be organised keeping in mind the peculiar requirements of the service component. The entire manufacturing needs to be geared to serve (i) intangible and perishable nature of the services, (ii) constant interaction with clients or customers, (iii) small volumes of production to serve local markets, and (iv) need to locate facilities to serve local markets. There is increased presence of professionals on the production, instead of technicians and engineers.
3. Disappearance of Smokestacks :Protective labour legislation, environmental movement and gradual emergence of knowledge based organisations have brought total transformation in the production system. Today’s factories are aesthetically designed and built, environment friendly - in fact, they are homes away from homes. Going to factory everyday is no more excruciating experience, it is like holidaying at a scenic spot. A visit to ABB, L & T or Smith Kline and Beecham should convince the reader about the transformation that has taken place in the wealth creation system.
4. Small has Become Beautiful : It was E.F. Schumacher who, in his famous book Small is Beautiful, opposed giant organisations and increased specialisation. He advocated, instead, intermediate technology based on smaller working units, community ownership, and regional workplaces utilising local labour and resources. For him, small was beautiful. Businessmen, all over the world, did not believe in Schumacher’s philosophy. Inspired by economies of scale, industrialists went In for huge organisations and mass production systems.

Recent Trends in Production and Operations Management

Modern Operations Management is characterized by the following :

1. Technological development
2. Shorter product life cycle
3. Changing needs and preferences of the customers
4. Disruptions (market and product) and pressure for innovation
5. Globalization
6. Requirement for supreme service at an affordable price
7. Pressure for optimization of operational cost

Production Management vs Operations Management

There are two points of distinction between production management and operations management. First, the term production management is more used for a system where tangible goods are produced. Whereas, operations management is more frequently used where various inputs are transformed into intangible services. Viewed from this perspective, operations management will cover such service organisations as banks, airlines, utilities, pollution control agencies, super bazaars, educational institutions, libraries, consultancy firms and police departments, in addition, of course, to manufacturing enterprises. The second distinction relates to the evolution of the subject.

Operations management is the term that is used nowadays. Production management precedes operations management in the historical growth of the subject.

Recent trends in production and operations management relate to global competition and the impact it has on manufacturing firms. Some of the recent trends are :

1. Global Market Place : Globalisation of business has compelled many manufacturing firms to have operations in many countries where they have certain economic advantage. This has resulted in a steep increase in the level of competition among manufacturing firms throughout the world.
2. Production/Operations Strategy : More and more firms are recognising the importance of production/ operations strategy for the overall success of their business and the necessity for relating it to their overall business strategy.
3. Total Quality Management (TQM) : TQM approach has been adopted by many firms to achieve customer satisfaction by a never-ending quest for improving the quality of goods and services.
4. Flexibility : The ability to adapt quickly to changes in volume of demand, in the product mix demanded, and in product design or in delivery schedules, has become a major competitive strategy and a competitive advantage to the firms. This is sometimes called as agile manufacturing.
5. Time Reduction : Reduction of manufacturing cycle time and speed to market for a new product provide competitive edge to a firm over other firms. When companies can provide products at the same price and quality, quicker delivery (short lead times) provide one firm competitive edge over the other.
6. Technology : Advances in technology have led to a vast array of new products, new processes and new materials and components. Automation, computerisation, information and communication technologies have revolutionised the way companies operate. Technological changes in products and processes can have great impact on competitiveness and quality, if the advanced technology is carefully integrated into the existing system.
7. Worker Involvement : The recent trend is to assign responsibility for decision making and problem solving to the lower levels in the organisation. This is known as employee involvement and empowerment. Examples of worker involvement are quality circles and use of work teams or quality improvement teams.
8. Re-engineering : This involves drastic measures or break-through improvements to improve the performance of a firm. It involves the concept of clean-slate approach or starting from scratch in redesigning the business processes.
9. Environmental Issues : Today’s production managers are concerned more and more with pollution control and waste disposal which are key issues in protection of environment and social responsibility. There is increasing emphasis on reducing waste, recycling waste, using less-toxic chemicals and using biodegradable materials for packaging.
10. Corporate Downsizing (or Right Sizing) : Downsizing or right sizing has been forced on firms to shed their obesity. This has become necessary due to competition, lowering productivity, need for improved profit and for higher dividend payment to shareholders.
11. Supply-Chain Management : Management of supply-chain, from suppliers to final customers reduces the cost of transportation, warehousing and distribution throughout the supply chain.
12. Lean Production : Production systems have become lean production systems which use minimal amounts of resources to produce a high volume of high quality goods with some variety. These systems use flexible manufacturing systems and multi-skilled workforce to have advantages of both mass production and job production (or craft production).