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Production and Operation Management

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Production and operations management (POM) is the

management of an organization’s production system.

Operation: produces product/service

Conversion Process: process of changing inputs into outputs.

Inputs: Land, Labor, Capital, Management

Output: Product/ Services

The primary concern of an operations manager is the activities

of the conversion process.

Introduction

General Functions of POM

Conversion Process

Random Fluctuations

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Input: Land, Labor, Capital, Management

Conversion Process

Output: Product/ Service

Random fluctuation: unplanned or uncontrollable

environmental influences

Feedback: information needed for corrective action

Technology: scientific plant, equipment or skill set

Throughput: Items going trough conversion process

Production Process

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Tangible/ Intangible nature

Consumption of output

Nature of work

Degree of customer contact

Customer participation

Manufacturing Vs. Service

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The industrial revolution developed in England in the 1700s.

Adam Smith’s The Wealth of Nations in 1776 taught the

economic benefits of the specialization of labor.

Thus the late-1700s factories had not only machine power but

also ways of planning and controlling the tasks of workers.

Benefit of skilled labor and efficiency achieved.

Scientific management emphasize to remove wasteful efforts

from production to achieve greater efficiency

Concept of Human needs came into production environment

Concept of service operation has been introduced separate

from goods.

The Industrial Revolution

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Subsystem : collection of objects related by regular interaction

and interdependence.

Organizational systems

Classical Management:

1. Scientific Management(economic efficiency and motivation)

Emphasize on efficiency

Separation of planning and doing

Labor efficiency (standards set when labor is costly)

2. Process Management(functions of management)

Planning: establishing future course of action

Organizing: establish structure of task and authority

Controlling: compare actual performance with standard one.

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Behavioral Management:

Emphasize on human relation and behavioral science

Human relation:

People have complex nature(change in the work

environment affects productivity)

Have multiple needs

Supervisor-subordinate relation affect the productivity in

the firm

Behavioral Science:

How human behavior is affected by leadership, motivation,

communication, interpersonal relation , attitude

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Emphasize on decision Making, system and Mathematical

Modeling

Decision Making should be in the center of Management

Mathematical representation of Management Problems

Subsystems to be managed as total management concept

Modeling as Management

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Primary Goals-Market opportunities

Secondary goals –Efficiency and conversion process

Fig.1.6-Operation as a strategic element in accomplishing

organizational goals

Industry- Market and competition

Organizational strategy-Quality, Cost, Dependability, Flexibility

Operation Policy-product design flexibility, delivery capabilities,

location of facilities, processing technologies, control systems

Managing conversion operation-Quality, Efficiency and schedule

Strategic Roles Of Operation

Dimensions Competencies Price Low cost

Quality High perfomance design, high quality

Time Rapid delivery

Flexibility Variety, volume

Service Superior customer service

Location convenience

• Operation Alternatives and Tradeoffs(Choice among objectives)

• Trends in Operation Management(Shift in Economic Activity)

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Product/service characteristics

Process characteristics

Product/service quality

Efficiency

Less labor cost

Cost control of material

Cost control of facility utilization

Customer service

Produce quantities to meet the demand

Meeting the required delivery date for goods and services

Adaptability of future survival

Operation Objectives

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A process of thinking through organization’s current mission

and environment and then formulating plan for future decisions

Operational strategies should be consistent with overall

organizational strategies

Strategic Planning forced choice model

Environment-Broad Economic Assumption, Regulatory threats,

technological forces, Marketing opportunities/threat,

Competitive strategy

Organization’s Position-Mission, Objectives, Swot analysis,

financial analysis, future programs, contingency plans

Strategic Planning

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Operation strategy framework

Infrastructure

Vertical Integratio

nFacilitiesCapacityProcess

Facility Mission

Operational Strategies

Environment and Industry

Corporate strategy

Corporate Resources

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Productivity=output/Input Example: Levels of productivity: Entire Nation Business level Sub unit Level Work group level Individual level Quality and Productivity(Depends on firm/business) Higher quality=better productivity Higher quality=lower productivity Quality-Productivity Strategy Competitive advantage(benefits to customers, employees

and business)

Productivity and Quality

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Entrepreneurs – new product ideas

Products have limited life

Competition

To create point of difference

New product ideas from different sources

Product Life cycle(Product demand and Market acceptance

in overall industry)

Operation management has to keep in mind the production

in terms of demand

New Product Design

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Product Life cycle

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Operation Issues

Product variety

Great Increasing standardization

Emergence of dominant design

No change

Product volume

Low Increasing High High/decreasing

Industry structure

Small Competitors

Cloners Few large companies

Survivors

Form of competition

Product characteristics

Product quality and availability

Price and dependability

price

Technologies are not identical

Growth and decline phase of product can’t be predicted

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New products New uses for existing product (IKEA came up with folding sofa

which can be used as bed) New processes to reduce capital cost (Adaption of new technology,

Like computers in Govt. Office)

New ideas will be evaluated on the basis ofEconomic feasibility , Market potential, Functional testing,

Competition

Steps involved in research,Screening ,Economic analysis, Development, Testing, Commercial

use

Components of innovationBasic research, Applied research , Development, Implementation

Research and development

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Need identification (Consumer need that didn’t fulfilled by existing

product)

Advance product planning (Deciding Logistics and design criteria ,

suppliers, technology, Market analysis)

Advance design (Technical Feasibility)

Detailed engineering design (Material, Size, Shape, skilled people)

Production process design and development (Planning for operation

schedule, MIS system)

Production evaluation and improvement (checking technical

breakthrough of man, machine and process)

Product use and support (Promotion, Education about use of product,

repair and installation service)

New Product development process

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Design of service and service processes

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Service development steps are same as product

Services which don’t require physical component do not

require engineering step. (For E.g. Counseling)

Preferences of clients and customers are important

Labor intense process

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Capacity: A Facility’s maximum productive capability, usually

expressed as volume of output per period of time.

First step to start a process

Capacity depends on demand and demand depends on

Location (E.g. Banks)

Opening a new branch of bank (for existing customers)

This affect the cost structure of organization

Modeling techniques used

Operation Capacity

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Assessing Existing capacity

Forecasting capacity needs

Identifying alternative ways to modify capacity

Evaluating feasibility of alternatives

Selecting an alternative suited to achieve strategic mission

Capacity Planning Decisions

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For manufacturing unit=No. of outputs

For Service organization=No. of inputs (No. of employees)

Measuring capacity

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Short term Requirements (Current Demand)

Long term Requirements (using forecasting of demand and

technology)

Estimating future capacity needs

The facility location decision is very important for big business

houses as well as new entrepreneurs.

Wrong location of the facility may lead to a failure of the

complete project.

A factory or a plant is the manufacturing facility of a company.

The offices of a service sector company such as a courier company, a bank, or an insurance company are its facilities.

Facility Location Planning

Problems due to improper facility location planning

Relocate facility to a

new location

Close down the

operations completely

and liquidate the assets

Sell off the facility to other

companies (Divestment)

Facility set up without

proper location planning

Separate facilities for different product/services

Example: White goods manufacturing companies such as LG, Videocon, BPL, etc gave separate plants for color TVs, washing machines, microwave ovens, refrigerators etc.

Separate facilities to serve different geographical areas

Pepsi and Coca-Cola offer an example of this strategy. Reduces the overall transportation cost .

Separate facilities for different processesExample: The Aditya Birla group has a separate factory at Jagdishpur for

manufacturing plastic sack, which are supplied to the Indo-Gulf Fertilizers factory, also at Jagdishpur. These sack are used to package the urea manufactured by them.

Operation Strategy for multiple facilities

In service sector, banks and insurance companies have

their central/head offices, where the main activity is

designing various financial instruments/policies.

These offices design new instruments, which are marketed

by the various regional offices of the company.

Revenues and costs are both affected by facility location.

A technique called break-even analysis helps relate costs

and revenues to facility location.

Break-even represent the relationships among volume of

output, costs and revenues.

As the volume of output from facility increases, costs and

revenues also increase.

Cost can generally be divided into two categories;

Fixed and variable

Need For Facility Location Planning

Break-even analysis identifies the level of output that must be reached in order to recover through revenues all the costs of operation.

The break-even point depend on the selling price of the product and the operating cost structure.

Revenue In some industry revenues depend on having the facility

near potential customers.

Location is not so important for stored services, those not

directly consumed.

Automotive repair shops

The firm that offer directly consumed services, location can

be critical.

The Effect of location on Costs and Revenues

Fixed Cost

Acquiring new or additional facilities involves costs for

new construction, purchase and renovation of other

existing plants, or rental.

The magnitude of these costs may well depend on the

site that is selected.

The Effect of location on Costs and Revenues

Variable Costs

The new facility must be staffed and operated, and these

costs, too, depend on location.

For labor intensive conversion processes, the availability of

labor and local expectations for wages are major concerns.

The location offering the highest revenue potential may

also incur highest costs.

The Effect of location on Costs and Revenues

The cost or availability of labor, raw materials and

supporting resources may change.

Merger of companies

New product may be introduced, changing the availability

of resources and markets.

Political and economical conditions may change.

Reasons for Location Change

- Organization always prefer to have low break

even volume so investments can be completely

covered.

- The location with lower break even would be

selected.

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Break Even Analysis for facility location

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Location 1

Cost/Revenue (Rs)

Cost/Revenue (Rs)

Cost/Revenue (Rs)

Cost/Revenue (Rs)

VC (High)

VC (Low)

FC (Low)

FC (High)

VBE VBE

VBE VBE

Volume of Production (units)

Volume of Production (units)

Volume of Production (units)

Volume of Production (units)

TR

TC

TC

Different breakeven volumes for four location options for different FC and VC values

Location 2

Location 3 Location 4

Simple median Model:

This model helps to identify a location such that the transportation cost between the new facility & existing facility of organization is minimum.

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For service organization (Location convenience)

Ex: Theaters, Banks, Restaurants etc.

Consumer Consideration

Factors that affect facility location:

• Tax advantages

• Demand

• Resource availability

• Weather conditions

• Power availability

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Cultural differences

Ex: Japanese people are lifetime employees

Job satisfaction (value system)

Less Labor turnover

Behavioral impact in facility Location

1. Factor rating method

The process of selecting a new facility location involves a series of following steps:

1. Identify the important location factors.

2. Rate each factor according to its relative importance, i.e.,

higher the ratings is indicative of prominent factor.(1- very

low to 5-very high)

3. Assign each location according to the merits of the

location for each factor.(1-very low to 10- very high)

4. Calculate the rating for each location by multiplying factor

assigned to each location with basic factors considered.

5. Find the sum of product calculated for each factor and

select best location having highest total score.

ILLUSTRATION 1: Let us assume that a new medical facility, Health-care, is to be located in Delhi. The location factors, factor rating and scores for two potential sites are shown in the following table. Which is the best location based on factor rating method?

Sl. No.

Location factor Factor rating

Rating

Location 1

Location 2

1 Facility utilization 3 8 5

2 Total patient per month 5 4 3

3 Employee preferences 5 5 3

Sl. No. Location factor

Factor rating (1)

Location 1 Location 2

Rating

Total Rating Total

1 Facility utilization

3 8 24 5 15

2 Total patient per month

5 4 20 3 15

3 Employee preferences

5 5 25 3 15

Total 69 Total 45

SOLUTION