Production and Operation Management

Introduction

Production and operations management (POM) is the

management of an organizations 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.

General Functions of POM

Random Fluctuations

Conversion Process

Production Process

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

Manufacturing Vs. Service

Tangible/ Intangible nature

Consumption of output

Nature of work

Degree of customer contact

Customer participation

The Industrial Revolution

The industrial revolution developed in England in the 1700s.

Adam Smiths 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.
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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

Modeling as Management

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

Strategic Roles Of Operation

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

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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)

Operation Objectives

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

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Strategic Planning

A process of thinking through organizations 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

Organizations Position-Mission, Objectives, Swot analysis,

financial analysis, future programs, contingency plans

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Operation strategy framework

Environment
and Industry

Corporate
strategy

Corporate
Resources

Operational
Strategies

Facility
Mission

Process

Capacity

Facilities

Vertical
Integratio
n

Infrastructu
re
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Productivity and Quality

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

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New Product Design

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

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Product Life cycle

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18

Operation

Issues

Product
variety

Great

Increasing
standardizati
on

Emergence of No change
dominant
design

Product
volume

Low

Increasing

High

High/decreasi
ng

Industry
structure

Small
Competitors

Cloners

Few large
companies

Survivors

Form of
competition

Product
Product
characteristic quality and
s
availability

Price and
price
dependability

Technologies are not identical

Growth and decline phase of product cant be predicted
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Research and development

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 of

Economic feasibility , Market potential, Functional testing,
Competition

Steps involved in research,

Screening ,Economic analysis, Development, Testing, Commercial
use

Components of innovation
Basic research, Applied research , Development, Implementation

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New Product development process

Need identification (Consumer need that didnt 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)

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Design of service and service

processes

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Service development steps are same as product

Services which dont 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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Operation Capacity

Capacity: A Facilitys 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

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Capacity Planning
Decisions

Assessing Existing capacity

Forecasting capacity needs

Identifying alternative ways to modify capacity

Evaluating feasibility of alternatives

Selecting an alternative suited to achieve strategic mission

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Measuring capacity

For manufacturing unit=No. of outputs

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

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Estimating future capacity

needs

Short term Requirements (Current Demand)

Long term Requirements (using forecasting of demand and

technology)

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Facility Location Planning

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 .

Problems due to improper facility location

planning
Sell off the facility
to other companies
(Divestment)

Relocate
facility to a
new location

Facility set up
without proper
location
planning

Close down the

operations
completely and
liquidate the
assets

Operation Strategy for multiple facilities

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 processes

Example: The Aditya Birla group has a separate factory at Jagdishpur
for manufacturing plastic sack, which are supplied to the IndoGulf Fertilizers factory, also at Jagdishpur. These sack are used to
package the urea manufactured by them.

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.

Need For Facility Location Planning

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

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.

The Effect of location on Costs and

Revenues
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.

Reasons for Location Change

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.

Break Even Analysis for facility location

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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Different breakeven volumes for four location options for

different FC and VC values

TC

Cost/
Revenue
(Rs)

Cost/
Revenue
(Rs)

VC (High)

FC (Low)
VBE
Volume of Production (units)

VBE
Volume of Production (units)

Location 1

Location 2
TR

TC

Cost/
Revenue
(Rs)

VC (Low)

Cost/
Revenue
(Rs)

FC (High)

VBE
Volume of Production (units)

Location 3

VBE
Volume of Production (units)

Location 4
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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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Consumer Consideration

For service organization (Location convenience)

Ex: Theaters, Banks, Restaurants etc.

Factors that affect facility location:

Tax advantages
Demand
Resource availability
Weather conditions
Power availability

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Behavioral impact in facility Location

Cultural differences

Ex: Japanese people are lifetime employees

Job satisfaction (value system)

Less Labor turnover

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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 10very 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

Facility utilization

Total patient per month

Employee preferences

SOLUTION
Sl. No.

Location
factor

Factor
rating (1)

Location 1

Location 2

Ratin
g

Total

Rating

Total

Facility
utilization

24

15

Total patient
per month

20

15

Employee
preferences

25

15

Total

69

Total

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