Addis Ababa University
College of Business and Economics
Department of Management
Course Title: Operations Management
Course Code:
Credit hours: Pre-requisite: Operations Research
Status of the course: Core
2. Course Description
Operations Management involves those aspects of the firm that provide the goods or services
in its value proposition to the targeted market. As such, operations will be decisive in
determining the long-term viability of the firm’s business model. This fact has become even
clearer in recent years as competition has increased with more globalization and improved
information technology
3. Course Objective
Operations are becoming increasingly competitive on a global basis. Therefore, students of
management have an urgent need to understand operations, an essential function in every
business. The purpose of this course is to provide students of management with a sound
understanding of the concepts, techniques, and applications of production and operations
management.
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4. COURSE OUTLINE
CHAPTER I: OPERATIONS FUNCTION
1.1. Introduction
1.2. Definition of Production
1.3. Definition of Production and Operations Management
1.4. Objectives of Operations Management
1.5. Scope of Production and Operations Management
1.6. Operations Management as a study decision making
1.7. Operations as a function
1.8. Operations as a production system
1.9. Reasons for the study of Operations Management
1.10. New Operations Themes
1.11. Efficiency and Effectiveness
CHAPTER II: OPERATIONS STRATEGY FOR COMPETETIVE ADVANTAGE
2.1 Identifying Missions and Strategies
2.2 Strategy Formulation
2.3 Achieving Competitive Advantage through Operations
2.4 Focused Operations
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CHAPTER III: PRODUCT AND SERVICE DESIGN
3.1. Reasons for Product or Service Development
3.2. Strategies for New Product Introduction
3.3. The Designing Process
3.4. New Product Development Process
3.5. Value Analysis
3.6. Product Design
3.7. Service Operations Design
CHAPTER IV: PROCESS SELECTION AND CAPCITY PLANNING
4.1. Process Selection
4.2. Capacity Planning
4.3. Developing Capacity Alternatives
CHAPTER V: FACILITY LOCATION
5.1. The Need for Location Decisions
5.2. The Nature of Location Decisions
5.3. Factors That Affect Location Decisions
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CHAPTER VI: FACILITY LAYOUT
6.1. Layout Types
6.2. Service Layouts
6.3. Line Balancing
CHAPTER VII: QUALITY MANAGEMENT AND CONTROL
7.1. Meaning of Quality
7.2. Determinants of Quality
7.3. The Costs of Quality
7.4. Quality Circles and Quality Improvement Teams
7.5. International Quality Documentation Standards
7.6. Total Quality Management
7.7. Quality Control and Improvement
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CHAPTER VIII: AGGREGATE PLANNING
8.1. Decision Options
8.2. Basic Strategies
8.3. Aggregate Planning Costs
CHAPTER IX SCHEDULING OPERATIONS
9.1. Introduction
9.2. Scheduling
9.3. Loading
9.4. Job Sequencing
9.5. Priority Rules and Techniques
9.6. Personnel Scheduling in Service
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REFERENCES:
1. S.N. chary, Theory and problems in Production and Operations Management,
Tata McGraw Hill Publishing co. Ltd, New Delhi, 1995
2. Richard B. Chase, Nicholas J. Aquilano, and F.Robert Jacobs, Production and
Operations Management, Irwin McGraw-Hill 8th ed., 1998
3. William J.Sterenson, Production/Operations Management, Irwin McGraw-Hill,
6th ed., 1999
4. Jay Hezer and Barry Render, Principles of Operations Management, Prentice- Hall
Inc., 3rd ed., 1999
5. Monks, Joseph G. Operations Management: Theory and Problem, 3rd edn. ,
McGraw-Hill, 1987
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Chapter one:
Introduction
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What is Production/Operations
Management?
• Operations is the set of activities that
creates value in the form of goods and
services by transforming inputs into
outputs
• Operations management is defined as
the
design,
operation
(implementations), and improvement of
the production system that creates the
firm’s primary products (goods and/or
services).
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Organizing to Produce Goods and
Services
 Essential functions:
 Marketing – generates demand
 Production/operations – creates the product
 Finance/accounting – tracks how well the organization
is doing, pays bills, collects the money
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Organizational Charts
Commercial Bank
Operations
Finance
Marketing
Teller
Scheduling
Check Clearing
Collection
Transaction
processing
Facilities
design/layout
Vault operations
Maintenance
Security
Investments
Security
Real estate
Loans
Commercial
Industrial
Financial
Personal
Mortgage
Accounting
Auditing
Trust Department
Organizational Charts
Airline
Operations
Ground support
equipment
Maintenance
Ground Operations
Facility
maintenance
Catering
Flight Operations
Crew scheduling
Flying
Communications
Dispatching
Management science
Finance/
accounting
Accounting
Payables
Receivables
General Ledger
Finance
Cash control
International
exchange
Marketing
Traffic
administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising
Organizational Charts
Manufacturing
Operations
Facilities
Construction; maintenance
Production and inventory control
Scheduling; materials control
Quality assurance and control
Supply-chain management
Manufacturing
Tooling; fabrication; assembly
Design
Product development and design
Detailed product specifications
Industrial engineering
Efficient use of machines, space,
and personnel
Process analysis
Development and installation of
production tools and equipment
Finance/
accounting
Disbursements/
credits
Receivables
Payables
General ledger
Funds Management
Money market
International
exchange
Capital requirements
Stock issue
Bond issue
and recall
Marketing
Sales
promotion
Advertising
Sales
Market
research
Operations as technical core: In relation with
other functions and suppliers
•
•
•
•
•
Operations
Marketing
Finance and accounting
Human resources
Outside suppliers
1-13
Importance of Operations
 Improvements in operations can simultaneously lower
costs and improve customer satisfaction.
 Improving operations often dependent on advances in
technology.
 Can
obtain
competitive
advantage
by
improving
operations.
 Improvement
in
productivity
has
benefits
to
all
stackholders
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Transformation process
• A series of activities along a value chain
extending from supplier to customer.
• The part of the system that adds value to the
inputs
• Activities that do not add value are
unnecessary and should be eliminated
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The Production System/ systems view
of operations
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Service transformation
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OM Involves Managing
Transformations
Input
Transformation
Process
Output
(Value Adding)
Transformation is
enabled by The 5 Ps of OM:





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People
Plants
Parts
Processes
Planning and Control
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Major ways of Transformation






Physical  Manufacturing
Locational  Transportation
Exchange  Retailing
Storage  Warehousing
Physiological  Health care
Informational  Telecommunications
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Dominant transformed resource inputs of
various operations
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Set of input that
transformed input:
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up
on
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Operations performance
Perspectives:
1. The triple bottom line:
• organization’s performance: the ‘triple bottom
line’ 2 (TBL, or 3BL), also known as ‘people, planet
and profit’.
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Cont…
Link the above with UN Sustainable
Development goals/SDGs/
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Cont….
2.
Stakeholders perspective
operations performance
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2.
2. Stakeholders perspective on operations performance:
Stakeholder groups with legitimate interest with
operations
activities
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3. CSR-corporate social responsibility
• about how business takes account of its
economic, social and environmental impacts in the
way it operates – maximizing the benefits and
minimizing the downsides . . .
• the voluntary actions that business can take, over
and above compliance with minimum legal
requirements, to address both its own competitive
interests and the interests of wider society
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The five operations performance objectives
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Cont…
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Cont…
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Cont…
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Cont…..
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Cont…..
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Service VS Good?
 “If you drop it on your foot, it won’t hurt you.”
(Good or service?)
 “Services never include goods and goods
never include services.” (True or false?)
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Operations Decision Making
Marketplace
Corporate Strategy
Finance Strategy
Operations Strategy
Marketing Strategy
Operations Management
People
Plants
Parts
Materials &
Customers
Processes
Products &
Services
Planning and Control
Input
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Production System
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Output
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Within OM function: Critical Decisions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Managing quality
Design of goods and services
Process strategies
Location strategies
Layout strategies
Human resources
Supply-chain management
Inventory management
Scheduling
Maintenance
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The Critical Decisions
 Quality Management
 Who is responsible
for quality?
 How do we define quality?
 Goods and Services Design
 What product or service should
we offer?
 How should we design these products and
services?
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The Critical Decisions - continued
 Process and Capacity Design
 What processes will these products
require and in
what order?
 What equipment and technology is necessary for
these processes?
 Location
 Where should we put the facility
 On what criteria should we base this location
decision?
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The Critical Decisions - continued
 Layout Design
 How should we arrange the facility?
 How large a facility is required?
 Human Resources and Job Design
 How do we provide a reasonable work
environment?
 How much can we expect our employees to
produce?
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The Critical Decisions - continued
 Supply Chain Management and JIT “Just-in-
time” Inventory, Material Requirements
Planning
 Should we make or buy this item?
 Who are our good suppliers
and how many should
we have?
 How much inventory of each item should we
have?
 When do we re-order?
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The Critical Decisions - continued
 Immediate, Short Term, and Project
Scheduling
 Is subcontracting
production a good idea?
 Are we better off keeping people on the payroll
during slowdowns?
 Maintenance
 Who is responsible
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An illustration of operations
decision making
The following table illustrates ´the
different operation decisions using
the case of a cookies producing
company
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Evolution of Operations and Supply
Chain Management
• Craft production
– process of handcrafting products or services for
individual customers
• Division of labor
– dividing a job into a series of small tasks each
performed by a different worker
• Interchangeable parts
– standardization of parts initially as replacement
parts; enabled mass production
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Evolution of Operations and Supply
Chain Management
• Scientific management
– systematic analysis of work methods
• Mass production
– high-volume production of a standardized product
for a mass market
• Lean production
– adaptation of mass production that prizes quality
and flexibility
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Historical Events in Operations
Management
Era
Industrial
Revolution
Events/Concepts
Steam engine
Division of labor
Interchangeable parts
Principles of scientific
management
Time and motion studies
Scientific
Management Activity scheduling chart
Moving assembly line
Dates
1769
1776
1790
Originator
James Watt
Adam Smith
Eli Whitney
1911
Frederick W. Taylor
1911
Frank and Lillian
Gilbreth
Henry Gantt
1912
1913
Henry Ford
Taylor:
 Matching employees to right job, Providing the proper training, Providing
proper work methods & tools, and Establishing legitimate incentives for work to
be
accomplished
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Historical Events in Operations
Management (cont.)
Era
Events/Concepts Dates Originator
Human
Relations
Motivation theories
Operations
Research
Hawthorne studies
Linear programming
Digital computer
Simulation, waiting
line theory, decision
theory, PERT/CPM
MRP, EDI, EFT, CIM
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1930
1940s
1950s
1960s
1947
1951
Elton Mayo
Abraham Maslow
Frederick Herzberg
Douglas McGregor
George Dantzig
Remington Rand
1950s
Operations research
groups
1960s,
1970s
Joseph Orlicky, IBM
and others
Historical Events in Operations
Management (cont.)
Era
Events/Concepts Dates Originator
JIT (just-in-time)
TQM (total quality
management)
Strategy and
Quality
Revolution operations
Business process
reengineering
Six Sigma
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1970s
1980s
1980s
1990s
1990s
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Taiichi Ohno (Toyota)
W. Edwards Deming,
Joseph Juran
Wickham Skinner,
Robert Hayes
Michael Hammer,
James Champy
GE, Motorola
Historical Events in Operations
Management (cont.)
Era
Internet
Revolution
Events/Concepts
Dates Originator
E-commerce
2000s
Internet, WWW, ERP,
1990s
supply chain management
Globalization WTO, European Union,
1990s
and other trade
2000s
agreements, global supply
chains, outsourcing, BPO,
Services Science
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ARPANET, Tim
Berners-Lee SAP,
i2 Technologies,
ORACLE
Amazon, Yahoo,
eBay, Google, and
others
Numerous countries
and companies
Productivity
Productivity:
Measure of process improvement
Represents output relative to input
Measures of Productivity
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Example
Sofia, the Production Manager at Afar Mills, can
currently expect his operation to produce 1000 square
yards of fabric for each ton of raw cotton. Each ton of
raw cotton requires 5 labor hours to process. He
believes that he can buy a better quality raw cotton,
which will enable him to produce 1200 square yards per
ton of raw cotton with the same labor hours.
Required: What will be the impact on productivity
(measured in square yards per labor-hour) if he
purchases the higher quality raw cotton?
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Answer
1000 sq yds
Current labor productivity =
 200 sq yds per hour
1 ton*5 hours
1200 sq yds
Newlaborproductivity =
 240 sq yds per hour
1 ton*5 hours
Productivity improves 20% = ( 240 - 200 ) / 200 = .2
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Exercise two
Ms. Triad is currently working a total of 12 hours per
day to produce 240 toys. She thinks that by changing
the paint used for the facial features and fingernails that
she can increase her rate to 360 toys per day. Total
material cost for each toy is approximately $3.50; she
has to invest $20 in the necessary supplies
(expendables) per day; energy costs are assumed to be
only $4.00 per day; and she thinks she should be
making $10 per hour for her time. Viewing this from a
total (multifactor) productivity perspective, what is her
productivity at present and with the new paint?
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Answer for exercise tow
Currently
Using the new paint
Labor
12 hrs * $10 = $120
12 hrs * $10 = $ 120
Material
240 * $3.50 = $840
360 * $3.50 = $1260
Supplies
= $ 20
= $ 20
Energy
=$ 4
=$
Total Inputs
= $984
= $1404
Productivity
240/984 = 0.24
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360/1404 = .26
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oProductivity is a relative measure.
oTypically measure percent changes in
productivity from month to month,
quarter to quarter, year to year, or
over a number of years.
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Productivity Measurement
Problems
 Quality
may change while the quantity
of inputs and outputs remains
constant.
 External elements may cause an
increase or decrease in productivity.
 Precise units of measure may be
lacking
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Productivity Variables
 Labor - contributes about 1/6 of the
annual increase
 Capital - contributes about 1/6 of the
annual increase
 Management - contributes about 2/3
of the annual increase
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Key Variables for Improved
Labor Productivity
 Basic education appropriate for the
labor force
 Diet of the labor force
 Social overhead that makes labor
available
 Maintaining and enhancing skills in the
midst of rapidly changing technology
and knowledge
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Service Productivity
Improving service productivity is more difficult than goods.
Because:
 Typically labor intensive
 Frequently individually processed
 Often an intellectual task performed by professionals
 Often difficult to mechanize
 Often difficult to evaluate for quality
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New Challenges in OM






From
Local or national focus
Batch shipments
Low bid purchasing
Lengthy product
development
Standard products
Job specialization
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To
¨ Global focus
¨ Just-in-time
¨ Supply chain partnering
¨ Rapid product
development
¨ Mass customization
¨ Empowered employees
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Efficiency and effectiveness
Efficiency :- Doing things at lowest possible cost.
It is producing goods and services with lowest
possible resources
Effectiveness: Doing the right to create the most
value to the company.
Note: Maximizing efficiency and effectiveness at
the same time create conflict between the two
objectives.
Value: the ratio of Quality and price.
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Ethics and Social Responsibility
Challenges facing
operations managers:
 Developing safe quality products
 Maintaining a clean environment
 Providing a safe workplace
 Honoring community commitments
Chapter 2 Operations Strategy
Mission/Strategy
Operations Priorities
 Strategy Development
Developing an operations strategy means looking into
new ways to add value for the customers in the goods
and services that the firm produces.
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Mission/Strategy
Mission - where you are going
It describe the purpose or rational for the firm
existence.
Vision Statement: used to express organization’s
values and aspirations.
Strategy - how you are going to get there
It explain the firms action plan to achieve its mission.
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Mission
 Organization’s purpose for being
 Provides boundaries & focus
Expressed in mission statement
Mission statement provide boundaries and
focus for organization and the concepts
around which the firm can rally.
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Sample Missions
Sample Company Mission
To manufacture and service an innovative, growing, and
profitable worldwide microwave communications business
that exceeds our customers’ expectations.
Sample Operations Management Mission
To produce products consistent with the company’s mission
as the worldwide low-cost manufacturer.
Sample Missions
Sample OM Department Missions
Product design
To design and produce products and
services with outstanding quality and
inherent customer value.
Quality management
To attain the exceptional value that is
consistent with our company mission and
marketing objectives by close attention to
design, procurement, production, and field
service operations
Process design
To determine, design, and produce the
production process and equipment that will
be compatible with low-cost product, high
quality, and good quality of work life at
economical cost.
Sample Missions
Sample OM Department Missions
Location
To locate, design, and build efficient and
economical facilities that will yield high
value to the company, its employees, and the
community.
Layout design
To achieve, through skill, imagination, and
resourcefulness in layout and work methods,
production effectiveness and efficiency
while supporting a high quality of work life.
Human resources
To provide a good quality of work life, with
well-designed, safe, rewarding jobs, stable
employment, and equitable pay, in exchange
for outstanding individual contribution from
employees at all levels.
Sample Missions
Sample OM Department Missions
Supply-chain
management
To collaborate with suppliers to develop
innovative products from stable, effective,
and efficient sources of supply.
Inventory
To achieve low investment in inventory
consistent with high customer service levels
and high facility utilization.
Scheduling
To achieve high levels of throughput and
timely customer delivery through effective
scheduling.
Maintenance
To achieve high utilization of facilities and
equipment by effective preventive
maintenance and prompt repair of facilities
and equipment.
Factors Affecting Mission
Philosophy &
Values
Profitability
& Growth
Environment
Mission
Customers
Public Image
Benefit to
Society
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Strategy planning Process
Enviromental
Analysis
Company
Mission
Corporate
Strategy
SWOT
Analysis
FunctionalArea
Area
Functional
Strategies
Marketing
Strategy
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Operations
Strategy
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Finance
Strategy
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Strategic Planning
Mission
and Vision
Corporate
Strategy
Marketing
Strategy
Operations
Strategy
Financial
Strategy
1-10
Operations Strategy
Strategy Process
Example
Customer Needs
More Product
Corporate Strategy
Increase Org. Size
Operations Strategy
Increase Production Capacity
Decisions on Processes
and Infrastructure
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Competitiveness is how effectively an organization
meets the needs and requirements of customers
relative to other competitors. It needs to answer:
1. What do the customers want?
2. How can our business deliver the required value
to the customer?
The main objective of manufacturing strategy
development are:
i.
to translate required competitive dimensions into
specific performance requirements for operation
and
ii. to make sure that operation capabilities are
sufficient to accomplish them.
•
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Operations Priorities
(Competitive Dimensions)







Cost
 Make the Product or Deliver the Service Cheap
Quality
 Make a Great Product or Deliver a Great Service
Delivery Speed
 Make the Product or Deliver the Service Quickly
Delivery Reliability
 Deliver It When Promised
Coping with Changes in Demand
 Change Its Volume
Flexibility and New Product Introduction Speed
 Change Its
Other Product-Specific Criteria
 Support It
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Dealing with Trade-offs
For example, if we reduce costs by reducing product quality
inspections, we might reduce product quality.
For example, if we improve
customer service problem
solving by cross-training
personnel to deal with a
wider-range of problems,
they may become less
efficient at dealing with
commonly occurring
problems.
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Cost
Flexibility
Delivery
Quality
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Order Qualifiers and Winners
Order qualifiers are the basic criteria that
permit the firms products to be considered as
candidates for purchase by customers
Order winners are the criteria that
differentiates the products and services of
one firm from another
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Order Qualifiers and Winners - Continued
 A brand name car can be an “order qualifier”
 Repair services can be “order winners” Examples:
Warranty, Roadside Assistance, Leases, etc
Customers’ expectation is increasing with time
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Competitive Advantage Through:
Firms achieve missions in three conceptual ways:
1. Differentiation
2. Low cost
3. Response
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1. Competing on Differentiation
• To distinguish the offerings in any way that
the customers perceived as value adding.
• Uniqueness - can go beyond both the physical
characteristics and service attributes to
encompass
everything
that
impacts
customer’s perception of value.
• Example: superior product features, service
parts & broader product line.
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Differentiation with Quality
• Minimizing defect rates or conforming to design
specifications; please the customer.
• Make it according to customers’ need
• Customers are king and they are always right
• Ritz-Carlton - one customer at a time
– Service system is designed to “move heaven and earth” to
satisfy customer
– Every employee is empowered to satisfy a guest’s wish
– Teams at all levels set objectives and devise quality action
plans
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2. Cost- Leadership/Competing on Cost
• Make it cheap
• Maximum value as defined by customer
• Customer’s value is the difference b/n the perceived
benefits and costs.
• Does not imply low value or low quality
• It requires the firm to utilize its resource efficiently.
• It is best applied if the customers cannot distinguish
the products of one firm from those of another.
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Positioning the Firm: Cost
• Value Analysis
― design analysis to make the product cheaper
• Waste elimination
– relentlessly pursuing the removal of all waste
• Examination of cost structure
– looking at the entire cost structure for reduction
potential
• Lean production
– providing low costs through disciplined operations
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3. Competing on Response
It includes: Flexible, Quick and Reliable customer service
Flexible- to cope with change in demand
• Ability to adjust to changes in product mix, production volume, or
design
• National Bicycle Industrial Company
– offers 11,231,862 variations
– delivers within two weeks at costs only 10% above standard models
– mass customization: the mass production of customized parts
Quick: deliver more quickly than competitors
• Fast moves, fast adaptations, tight linkages
• Internet - conditioned customers to expect immediate responses
• Service organizations – always competent on speed
(McDonald’s, LensCrafters, and Federal Express)
• Manufacturers - time-based competition:
production and efficient supply chains
Reliable- deliver it when promised
04-Mar-24
OM, @AAU
build-to-order
22
OM’s Contribution to Strategy
10 Operations
Decisions
Product
Quality
Process
Location
Layout
Human
resource
Approach
DIFFERENTIATION
Innovative design …
Broad product line …
After-sales services
Experience …
COST LEADERSHIP
Low overhead …
Effective capacity
use …
Inventory
management …
Supply chain
Inventory
Scheduling
Maintenance
Competitive
Advantage
RESPONSE
Flexibility …
Reliability …
Quickness …
Differentiation
(better)
Response
(faster)
Cost
leadership
(cheaper)
Strategy Development Process
Analyze the Environment
Identify the strengths, weaknesses, opportunities, and threats. Understand
the environment, customers, industry, and competitors.
Determine the Corporate Mission
State the reason for the firm’s existence and identify the
value it wishes to create.
Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, aftersale service, broad product lines.
Strategy Deployment
It requires
• Action plan to achieve mission
• Shows how mission will be
achieved
• Shows how Corporate, Business
and Functional strategies are
interrelated.
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OM, @AAU
25
A Framework for Manufacturing Strategy
Customer Needs
New and Current
Products
Performance Priorities
and Requirements
Quality, Dependability,
Speed, Flexibility, and Price
Enterprise Capabilities
Operations & Supplier Capabilities
Technology
Systems
People
R&D
CIM
JIT
TQM
Distribution
Support Platforms
Financial Management
04-Mar-24
Human Resource Management
OM, @AAU
Information Management
26
Policy Deployment
• Policy deployment
– translates corporate, Business and Functional
strategies into measurable objectives
– Shows who will be responsible for implementing
action plans generated from the policy
deployment process
04-Mar-24
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OM, @AAU
Policy Deployment
04-Mar-24
1-28
Derivation of an Action Plan Using Policy Deployment
OM, @AAU
Strategy Evaluation
• Balanced scorecard
– measuring more than financial performance
•
•
•
•
finances
customers
processes
learning and growing
• Key performance indicators
– a set of measures that help managers evaluate
performance in critical areas
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OM, @AAU
Preconditions
to Implement a Strategy
One must understand:
Strengths & weaknesses of competitors and new
entrants into the market
– Current and prospective environmental, legal, and
economic issues
– The notion of product life cycle
– Resources available with the firm and within the
OM function
–
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OM, @AAU
30