OPERATONS DECISIONS - A FRAMEWORK

Since operations management is concerned with decision making for the

transformation system and the operations function, a framework which
categorises and defines decisions in operations is needed. What is proposed
here is a conceptual framework of decision responsibility for operations which
classifies decisions according to function or purpose.
In the proposed framework, operations has responsibility for five major
decision areas: quality, process, capacity, inventory, and work force.

1 Quality. The operations function is typically responsible for the quality of

goods and services produced. Quality is an important operations responsibility
which requires total organisational support. Quality decisions must ensure that
quality is built into the product in all stages of operations: standards must be
set, people trained, and the product or service inspected, preferably by those
who produce it, for quality to result.

2, Process. Decisions in this category determine the physical process or

facility used to produce the product or service. The decisions include the type
of equipment and technology, process flows, layout of the facility, and all other
aspects of the physical plant or service facility. Many of these process
decisions are long-range in nature and cannot be easily reversed, particularly
when heavy capital investment is needed. It is, therefore, important that the
physical process be designed in relation to the long-term strategic posture of
the business.

3 Capacity. Capacity decisions are aimed at providing the right amount of

capacity at the right place at the right time. Long-range capacity is determined
by the size of the physical facilities which are built. In the short run, capacity
can sometimes be augmented by subcontracting, extra shifts, or rental of
space. Capacity planning, however, determines not only the size of facilities
but also the proper number of people in operations. Staffing levels are set to
meet the needs of market demand and the desire to maintain a stable work
force. In the short run, available capacity must be allocated to specific tasks
and jobs in operations by scheduling people, equipment, and facilities.

4. Inventory. Inventory decisions in operations determine what to order, how

much to order, and when to order. Inventory control systems are used to
manage materials from purchasing through raw materials, work in process,
and finished goods inventories. Inventory managers decide how much to
spend on inventory, where to locate the materials, and a host of related
decisions. They manage the flow of materials within the firm.

5. Work force. Managing people is the most important decision area in

operations because nothing is done without the people who make the product
or service. Work-force decisions include selection, hiring, firing, training,
supervision, and compensation. These decisions are made by the line
managers in operations, often with the assistance of the personnel or human
resources office. Managing the work force in a productive and humane way is
a key task for operations today.

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Careful attention to the five decision areas is the key to management of
successful operations. Indeed, the well-managed operations function can be
defined in terms of the decision framework. If each of the five decision areas
is functioning properly and well integrated with the other areas, the operations
function can be considered well managed.

DECSON FRAMEWORK. - EXAMPLE

To illustrate the use of the decision framework, a company will be described in

terms of the five decision categories. The example is a simplified description
of Pizza U.S.A., Inc., a company which produces and markets pizza pies on a
national basis. It consists of 85 company-owned and franchised outlets (each
called a store) in the United States. The operations management function in
this company exists at two levels: the corporate level and the level of the
individual store.
The major operations decisions made by Pizza U.S.A. can be described as
follows:

Quality. The corporate staff has set certain standards for quality which all
stores must follow. These standards include procedures to maintain service
quality and to ensure the quality of the pizzas served. While service quality is
difficult to measure, the quality of the pizzas can be more easily specified by
using criteria such as temperature at serving time, the amount of raw
materials used in relation to standards, and so on. In Pizza U.S.A., each store
manager must carefully monitor quality to make sure that it meets company
standards. Each employee is responsible for quality in their job in order to
ensure that quality is produced at the source.

Process. Since uniformity across different stores is desired, most of the

process decisions are made by the corporate staff. They have developed a
standard facility which is simply sized to fit a particular location. The standard
facility incorporates a limited menu with high-volume equipment. As pizzas are
made, customers can watch the process through a glass window; this
provides entertainment for both children and adults as they wait for their order
to be filled. Because this is a service facility, special care is taken to make the
layout attractive and convenient for the customers. The location of facilities is
based on a mathematical model which is used to project revenues and costs
for particular sites. Each potential site must have an adequate projected
return on investment before construction can begin.

Capacfty, Pizza U.S.A. faces a series of decisions related to the maximum

level of output. First, when the initial location and process decisions are made,
the corporate staff fixes the physical capacity of each facility. Individual store
managers then plan for annual, monthly, and daily fluctuations in service
capacity within the available physical facility. During peak periods, they
employ part-time help, and advertising is used in an attempt to raise demand
during slack periods. In the short run, individual personnel must be scheduled
in shifts to meet demand during store hours.

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Inventory. The individual store managers buy the ingredients required to
prepare the recipes provided by corporate staff. They select their own
suppliers and decide how much flour, tomato paste, sausage, etc., to order
and when to place orders. Store operators must carefully integrate purchasing
and inventory decisions to control the flow of materials in relation to capacity.
They do not want to run out of food during peak periods or waste food when
demand is low.

Work Force, Store managers are responsible for hiring, training, supervising,
and, if necessary, firing workers. They must decide on exact job
responsibilities and on the number of people needed to operate the store.
They also advertise job openings, screen applications, interview candidates,
and make the hiring decisions. They must measure the amount of work
required in relation to production and also evaluate the performance of each
individual. Management of the work force is one of the most important daily
responsibilities of the store manager.

The five decision categories provide a framework to describe the important

operations decisions made by Pizza U.S.A. It should be recognized, however,
that these five types of decisions cannot be made separately; they must be
carefully integrated with one another and with decisions made in other parts of
the business.

RG Schroeder, Operations Management, 4edition, 1993, McGraw Hill (pp16-20)

Henzer 10 Critical Decision Area for OM

10 Critical Decision areas of operation management

I. Goods and service design. According to Henzer (2004), design of goods and design
defines much of the transformation process. The factors of cost, quality and human
resources must be made during the stage. Operation management of product and
services is also different because due to different characteristic and tangible /
intangible feature.

II. Quality. Customer has a very high quality standard nowadays and operation
management decision in quality must be clear and strict for its members to understand
and comply. It must set a quality, standard and operating procedure to meet customers
high expectation.

III. Process and capacity design. Manufacturing of physical products may have higher
importance on process and capacity design than services operation. Operation
management (product) should decide what process it, what type of technology and to
what extent, human resources, quality and maintenance that determines its basic cost
structure. Services operation decision on this area is much simpler and it can
determine by customers who directly involved in the process. For example, customer

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will ask tailor to design specific fashion clothes. Capacity design issue is critical for
services because it will try to reduce waiting time and avoid lost of sales due to
insufficient capacity. For manufacturing capacity design is based on firms financial
capability, forecast for future and market demand.

IV. Location can be an area for operation management to decide and with
globalization of business, operation managers too must think global. For physical
goods, location selection can be determined by pools of qualified human resources,
technology, raw material, access to market and government policy. For services as it is
direct to customers, the location is determined by market accessibility or near to
customer as possible.

V. Layout design. Material flow, process selection technology used, capacity needs,
workers needs, inventory requirement, and capital will influence the decision for
layout design. For services such as hotels, beside capacity needs layout also will
enhance its attributes and features to the customers.

VI. Human Resources and Job Design Employees is the integral part in the total
system design. Operation management must set a policy to set labor standards to ease
transition of skills, improvement of knowledge, skills and abilities (KSA), build a
balance work and life quality in an effective cost target. For services one extra area
operation management should touch, which is customers relationship that they are
dealing directly.

VII. Supply Chain Management Decisions that have to take place of what to
produce, what material to buy, from where, how is the cost and how is the delivery
from supplier to the final end customers in on-time delivery and minimum cost
possible. It is more critical in production of goods than services.

VIII. Inventory Decisions on how and where the inventory level to keep long term
customers satisfaction, suppliers, material availability for not to disrupt the
production, human resources needed for this purpose and important the holding cost
from financial perspective. Goods production are more concern because manufacturer
may kept raw material, in progress work order and final goods while services is not
critical as it is directly produce and consume simultaneously.

IX. Scheduling Efficient way of allocation, control and management of materials,

capital goods and human resources to efficiently produce the final goods from the
input available. Schedules are more formal in goods production with short, medium
and long term planning to accommodate customers demand. For services the demand
is more direct and volatile and often concern on human resources and KSA
availability to meet current customers needs.

X. Maintenance Decision must be made regarding the desired level of reliability,

stability and systems must be established by management to maintain that reliability
and stability.

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