What is Operations Management

Oper­a­tions man­age­ment (OM) is the plan­ning, organ­is­ing and con­trol­ling of the activ­i­ties that turn inputs such as peo­ple, mate­ri­als, machines, money and infor­ma­tion into the goods and ser­vices cus­tomers want. Put sim­ply, it is the part of man­age­ment that answers the prac­ti­cal ques­tions of any organ­i­sa­tion: what to pro­duce, how to pro­duce it, how much, when, and at what qual­ity and cost.

The topic mat­ters because oper­a­tions is where most of an organ­i­sa­tion's peo­ple, assets and money are used. A com­pany with a good prod­uct can still fail if deliv­er­ies are late, qual­ity is uneven or costs run out of con­trol. Good oper­a­tions man­age­ment turns a busi­ness idea into a reli­able, effi­cient sys­tem, and it applies equally to a car plant, a hos­pi­tal, a bank branch, a school or a restau­rant.

Mean­ing and def­i­n­i­tion

Most text­books define oper­a­tions man­age­ment along these lines: oper­a­tions man­age­ment is the design, oper­a­tion and improve­ment of the sys­tems that cre­ate and deliver an organ­i­sa­tion's prod­ucts and ser­vices. A shorter exam def­i­n­i­tion is that oper­a­tions man­age­ment is the process of plan­ning, organ­is­ing and con­trol­ling the activ­i­ties that trans­form inputs into goods and ser­vices effi­ciently and effec­tively.

Three words in these def­i­n­i­tions deserve atten­tion:

• Design cov­ers long-term choices such as what prod­uct to offer, which process to use, where to locate and how much capac­ity to build.
• Oper­a­tion cov­ers day-to-day run­ning: sched­ul­ing, inven­tory, qual­ity checks and main­te­nance.
• Improve­ment cov­ers con­tin­u­ous effort to raise pro­duc­tiv­ity, cut waste and serve cus­tomers bet­ter.

The older term pro­duc­tion man­age­ment was used when the focus was only on fac­to­ries. "Oper­a­tions man­age­ment" is the wider mod­ern term because it includes ser­vices as well as man­u­fac­tur­ing.

Oper­a­tions man­age­ment typ­i­cally deals with ques­tions such as:

• What should be pro­duced?
• How should it be pro­duced?
• How much should be pro­duced?
• When should it be pro­duced?
• How can qual­ity and cost be con­trolled?

The input - trans­for­ma­tion - out­put model

The sim­plest way to pic­ture oper­a­tions is as a trans­for­ma­tion process. Inputs enter, some­thing is done to them, and out­puts leave. Infor­ma­tion about the out­puts is then fed back so that man­agers can cor­rect the process.

Inputs

Inputs are the resources an oper­a­tion uses. They are usu­ally grouped as:

• Trans­formed resources: mate­ri­als, infor­ma­tion and cus­tomers that are changed by the process (flour becomes bread; a patient becomes health­ier).
• Trans­form­ing resources: peo­ple, machines, build­ings and money that do the chang­ing but are not them­selves the out­put.

Trans­for­ma­tion process

The trans­for­ma­tion can be phys­i­cal (mak­ing fur­ni­ture), loca­tional (a courier mov­ing a par­cel), stor­age (a ware­house), infor­ma­tional (an accoun­tant prepar­ing a tax return) or phys­i­o­log­i­cal (a hos­pi­tal treat­ing a patient). In a bak­ery, mix­ing, bak­ing, pack­ing and inspec­tion make up the process.

Out­puts

Out­puts are goods, ser­vices or, most often, a mix of both. The bak­ery pro­duces cakes and bread (goods) and may also offer home deliv­ery and advice on cus­tom orders (ser­vices).

Feed­back and con­trol

Actual out­put is mea­sured against stan­dards for qual­ity, cost and time. If loaves come out under-weight, or orders are late, man­agers adjust inputs or the process. This loop is what turns a one-off activ­ity into a man­aged sys­tem.

Why oper­a­tions man­age­ment is impor­tant

Oper­a­tions man­age­ment helps an organ­i­sa­tion to:

• reduce cost by cut­ting waste, idle time and excess stock;
• improve qual­ity so that prod­ucts and ser­vices meet spec­i­fi­ca­tions every time;
• save time and deliver faster;
• use resources prop­erly, includ­ing labour, machines, space and cap­i­tal;
• sat­isfy cus­tomers through reli­able, flex­i­ble ser­vice;
• increase profit and build a com­pet­i­tive advan­tage that rivals find hard to copy.

Because oper­a­tions usu­ally accounts for the largest share of an organ­i­sa­tion's costs and staff, even a small per­cent­age improve­ment in pro­duc­tiv­ity can have a large effect on profit.

Objec­tives of oper­a­tions man­age­ment

The over­all aim is often sum­marised as pro­vid­ing the right prod­uct or ser­vice, in the right quan­tity, at the right time, with the right qual­ity, at the right cost. Slack and col­leagues express this as five per­for­mance objec­tives:

These objec­tives often con­flict. Very high flex­i­bil­ity, for instance, can raise cost. Part of an oper­a­tions man­ager's job is to decide which objec­tives mat­ter most to the tar­get cus­tomers and to trade the oth­ers off sen­si­bly.

Main func­tions (deci­sion areas) of oper­a­tions man­age­ment

The work of oper­a­tions man­agers can be grouped into ten deci­sion areas. The first few are mainly strate­gic and long term; the later ones are mainly tac­ti­cal and short term.

1. Prod­uct and ser­vice design

Decid­ing what prod­uct or ser­vice to offer and what its fea­tures will be. Exam­ple: a col­lege designs a new MBA spe­cial­i­sa­tion, decid­ing its courses, dura­tion and intake.

2. Process design

Decid­ing how the work will be done, includ­ing the choice of tech­nol­ogy and the type of pro­duc­tion sys­tem. Exam­ple: a hos­pi­tal decides the sequence of steps for admit­ting a patient.

3. Capac­ity plan­ning

Decid­ing how much out­put the oper­a­tion should be able to pro­duce in a period. Exam­ple: a fac­tory checks how many units it can make in one day and whether to add a shift.

4. Loca­tion and lay­out

Loca­tion is where the facil­ity oper­ates; lay­out is how machines, depart­ments and peo­ple are arranged inside it. Exam­ple: a super­mar­ket places billing coun­ters near the exit so that cus­tomers flow in one direc­tion.

5. Fore­cast­ing

Esti­mat­ing future demand so that the other deci­sions rest on a sound basis. Exam­ple: a cloth­ing store esti­mates sales for the fes­ti­val sea­son.

6. Inven­tory man­age­ment

Man­ag­ing raw mate­ri­als, work-in-progress and fin­ished goods so that there is enough stock with­out tying up too much money. Exam­ple: a restau­rant keeps enough veg­eta­bles in stock with­out let­ting them spoil.

7. Sched­ul­ing

Fix­ing the tim­ing of jobs, work­ers and machines. Exam­ple: a tuition cen­tre sched­ules batches at dif­fer­ent times so that rooms and teach­ers are not dou­ble-booked.

8. Qual­ity man­age­ment

Mak­ing sure the prod­uct or ser­vice meets stan­dards, through inspec­tion, sta­tis­ti­cal qual­ity con­trol and con­tin­u­ous improve­ment. Exam­ple: a school mon­i­tors teach­ing qual­ity and gives timely feed­back.

9. Main­te­nance

Keep­ing equip­ment and sys­tems in work­ing con­di­tion through pre­ven­tive and break­down main­te­nance. Exam­ple: a fac­tory ser­vices its machines on a fixed sched­ule.

10. Sup­ply chain man­age­ment

Man­ag­ing the flow of mate­ri­als, infor­ma­tion and money from sup­pli­ers to final cus­tomers. Exam­ple: a book­store obtains books from pub­lish­ers and deliv­ers them to buy­ers.

Types of pro­duc­tion sys­tems

How an oper­a­tion is organ­ised depends mainly on its vol­ume and vari­ety. The four clas­sic types, which are fre­quently asked in exams, are:

Each type is cov­ered in detail in the related arti­cle on pro­duc­tion sys­tems.

Goods ver­sus ser­vices

Oper­a­tions man­age­ment applies to both goods and ser­vices, but they dif­fer in impor­tant ways.

In prac­tice most out­puts are a bun­dle. A restau­rant meal com­bines food (a good) with cook­ing, serv­ing and ambi­ence (ser­vices). That is why oper­a­tions man­age­ment is not only for fac­to­ries: it also applies to hos­pi­tals, banks, schools, col­leges, hotels and trans­port ser­vices.

Pro­duc­tiv­ity, effi­ciency and effec­tive­ness

Pro­duc­tiv­ity

Pro­duc­tiv­ity is the ratio of out­put to input. If out­put rises while input stays the same, pro­duc­tiv­ity improves.

$$\displaystyle \text{Productivity} = \frac{\text{Output}}{\text{Input}}$$

When only one input is used in the denom­i­na­tor (labour-hours, machine-hours) it is called sin­gle-fac­tor or par­tial pro­duc­tiv­ity. When sev­eral inputs are com­bined in money terms it is called mul­ti­fac­tor pro­duc­tiv­ity.

Effi­ciency

Effi­ciency means doing the work with min­i­mum waste of time, effort and mate­r­ial, often mea­sured as actual out­put com­pared with stan­dard or expected out­put.

Effec­tive­ness

Effec­tive­ness means doing the right work and achiev­ing the intended goals. An oper­a­tion can be effi­cient at mak­ing a prod­uct nobody wants, which is not effec­tive. Good oper­a­tions man­age­ment aims for both.

Worked exam­ple: mea­sur­ing pro­duc­tiv­ity

Sup­pose a small bak­ery employs 12 bak­ers, each work­ing 40 hours a week. In Week 1 it bakes 2,400 loaves. In Week 2, after rear­rang­ing the work area so that bak­ers walk less, it bakes 2,640 loaves with the same staff and hours.

Step 1: find the labour input.

$$12 \times 40 = 480 \text{ labour-hours per week}$$

Step 2: find labour pro­duc­tiv­ity in each week.

$$\displaystyle \text{Week 1} = \frac{2{,}400}{480} = 5.0 \text{ loaves per labour-hour}$$

$$\displaystyle \text{Week 2} = \frac{2{,}640}{480} = 5.5 \text{ loaves per labour-hour}$$

Step 3: find the per­cent­age change.

$$\displaystyle \frac{5.5 - 5.0}{5.0} \times 100 = 10\%$$

Step 4: a mul­ti­fac­tor mea­sure for Week 2. Sup­pose Week 2 inputs cost ₹72,000 for labour (480 hours at ₹150 an hour), ₹48,000 for mate­ri­als and ₹12,000 for energy, a total of ₹1,32,000.

$$\displaystyle \text{Multifactor productivity} = \frac{2{,}640 \text{ loaves}}{\text{₹1,32,000}} = 0.02 \text{ loaves per rupee}$$

That is 2 loaves for every ₹100 of input. Com­par­ing this fig­ure over time shows whether the bak­ery is using all its resources bet­ter, not just labour.

Oper­a­tions man­age­ment in a ser­vice: a restau­rant

Oper­a­tions man­age­ment in a restau­rant includes:

• fore­cast­ing cus­tomer demand for each day and meal;
• buy­ing ingre­di­ents in the right quan­tity;
• sched­ul­ing chefs and wait­ers for busy and quiet hours;
• main­tain­ing food qual­ity and hygiene;
• reduc­ing cus­tomer wait­ing time;
• con­trol­ling cost and food waste.

Every one of the ten deci­sion areas appears here in some form, which shows how broad the sub­ject is.

Brief his­tory

Mod­ern oper­a­tions man­age­ment grew out of sev­eral devel­op­ments. Adam Smith described the gains from divi­sion of labour. Fred­er­ick W. Tay­lor's sci­en­tific man­age­ment (1911) stud­ied work meth­ods and set stan­dard times. Frank Gilbreth devel­oped motion study. Henry Ford's mov­ing assem­bly line made mass pro­duc­tion prac­ti­cal. Wal­ter She­whart intro­duced sta­tis­ti­cal qual­ity con­trol, later extended by W. Edwards Dem­ing. From the 1950s onwards, Toy­ota's pro­duc­tion sys­tem gave rise to lean and just-in-time think­ing. Today the field also cov­ers sup­ply chains, sus­tain­abil­ity and dig­i­tal tech­nolo­gies.

How to study and write about it

A sen­si­ble study order is:

1. Mean­ing and def­i­n­i­tion
2. Objec­tives
3. Input - process - out­put model
4. Func­tions of oper­a­tions man­age­ment
5. Types of pro­duc­tion
6. Goods ver­sus ser­vices
7. Pro­duc­tiv­ity and effi­ciency

For a 5-mark answer to "Explain oper­a­tions man­age­ment", write the def­i­n­i­tion, the input - process - out­put con­cept, the objec­tives, the key func­tions and a short exam­ple. For a 2-mark answer, write: oper­a­tions man­age­ment is the process of plan­ning, organ­is­ing and con­trol­ling the activ­i­ties that trans­form inputs into goods and ser­vices effi­ciently.

Key terms

Oper­a­tions man­age­ment

The plan­ning, organ­is­ing and con­trol­ling of the processes that con­vert inputs into goods and ser­vices.

Trans­for­ma­tion process

The set of activ­i­ties that changes inputs into out­puts of higher value.

Trans­formed resources

Mate­ri­als, infor­ma­tion or cus­tomers that are changed by the oper­a­tion.

Trans­form­ing resources

Peo­ple, equip­ment and facil­i­ties that carry out the change.

Pro­duc­tiv­ity

The ratio of out­put to input over a period.

Effi­ciency

Achiev­ing out­put with the least waste of resources.

Effec­tive­ness

Achiev­ing the intended goals or doing the right things.

Per­for­mance objec­tives

Qual­ity, speed, depend­abil­ity, flex­i­bil­ity and cost.

Com­mon ques­tions

What is the dif­fer­ence between pro­duc­tion man­age­ment and oper­a­tions man­age­ment?

Pro­duc­tion man­age­ment tra­di­tion­ally referred only to man­u­fac­tur­ing goods in fac­to­ries. Oper­a­tions man­age­ment is broader: it cov­ers both man­u­fac­tur­ing and ser­vices such as bank­ing, health care and edu­ca­tion, and it includes sup­ply chain and improve­ment activ­i­ties.

Is oper­a­tions man­age­ment only for fac­to­ries?

No. Any organ­i­sa­tion that con­verts inputs into out­puts has oper­a­tions. Hos­pi­tals, banks, col­leges, hotels, air­lines and restau­rants all make capac­ity, sched­ul­ing, qual­ity and inven­tory deci­sions.

What are the five per­for­mance objec­tives?

Qual­ity, speed, depend­abil­ity, flex­i­bil­ity and cost. They describe what cus­tomers value in an oper­a­tion and what man­agers try to improve.

How is pro­duc­tiv­ity dif­fer­ent from effi­ciency?

Pro­duc­tiv­ity com­pares out­put with input, for exam­ple loaves per labour-hour. Effi­ciency com­pares actual per­for­mance with a stan­dard or expected level. A firm can improve pro­duc­tiv­ity by invest­ing in bet­ter machines even if work­ers' effi­ciency against stan­dard is unchanged.

Why is feed­back part of the trans­for­ma­tion model?

With­out feed­back, man­agers would not know whether out­puts meet stan­dards. Mea­sur­ing out­puts and cor­rect­ing inputs or processes is what allows con­trol and con­tin­u­ous improve­ment.

Ref­er­ences

1. Slack, N., Bran­don-Jones, A. and Burgess, N. Oper­a­tions Man­age­ment. Pear­son.
2. Heizer, J., Ren­der, B. and Mun­son, C. Oper­a­tions Man­age­ment: Sus­tain­abil­ity and Sup­ply Chain Man­age­ment. Pear­son.
3. Steven­son, W. J. Oper­a­tions Man­age­ment. McGraw-Hill Edu­ca­tion.
4. Chary, S. N. Pro­duc­tion and Oper­a­tions Man­age­ment. McGraw-Hill Edu­ca­tion (India).
5. Tay­lor, F. W. (1911) The Prin­ci­ples of Sci­en­tific Man­age­ment. Harper & Broth­ers.

Related read­ing

• Make or Buy Deci­sion in Oper­a­tions man­age­ment
• Types of Pro­duc­tion Sys­tems in Oper­a­tions Man­age­ment
• Fore­cast­ing In Oper­a­tions Man­age­ment