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Unit 1

Introduction to Operations Management (Ch. 1)


Any organization producing a tangible good or a service can be thought of in terms of two main functions production and marketing. While all organizations have production function, formal marketing function may not exist. For example, in Canadian context, most of the hospitals do not have a marketing function. All other functions, such as accounting, finance, and human resource support the above two functions.

Operations Management (OM)

Authors define OM as the set of activities that creates value in the form of goods and services by transforming inputs into outputs. They detail ten critical decision areas -- see Table 1.2, p. 7 -- that underlie an operations manager’s job. The textbook is organized according to this schema. A very broad definition of OM in an organization considers it as the management of a transformation process that converts inputs into outputs. The textbook gives several examples of this process. Another convenient schema for understanding the major decisions in OM is the Life Cycle approach.

Table 1.1:

Stages of Production System and Key Issues under Life Cycle Approach

Stage of the Production System


Key Issues

Birth of the system

What are the Mission and goals of the

organization? What products will be offered?

What is the OSM strategy and its fit?

Product Design and Process Selection

What is the form of the manufactured

product? How will it be produced?

What capacity will we have?

How to design quality in the product?

Design of the system

How to determine the demand?

Where would the production facilities be

located? What is the best physical layout of work

centers in the production facility? How will the jobs be designed, measured,

and compensated? How do we train the workers and know


that the training has taken place?

Operation and Control of the system

How to manage day to day activities of

quality assurance, production planning,

scheduling, and inventories? How to manage suppliers, including

outsourcing, and logistics? How to maintain and enhancement of the production facilities?

Rejuvenation/Death of the system

How to make major changes in the system including business re-engineering, or closure of the system?

The Figure2.5, p. 42, helps in explaining the ideas of life cycle approach.

that the training has taken place? Operation and Control of the system  How to manage

Because, of the paucity of time, we cannot consider all the decisions during each life cycle

stage, therefore, we’ll concentrate on a few stages. The Course Schedule tells you of our

intended focus, pl. consult it.

Operations management traces its origin from factory management, but now its applications are more in services. As China becomes the factory of the nations, for job creation, services assume greater importance. You should read the differences between physical goods

and services, p. 10, and be very conversant with it. Throughout the course, you’ll find an

emphasis on application of various principles in services.

As more and more globalization occurs, the greatest impact is being felt in operations. The table on p. 13, tells us about the new challenges in operations management.

Managers are entrusted with the management of economic resources and therefore, it is important to measure their performance through productivity measures. Two broad measures, Single-factor productivity measure and the Multifactor productivity measures are provided on p. 18, and you should enhance your understanding of these by solving Related Problems.

Review and Discussion Questions with answers

  • 7. Name the 10 decision areas of operations management.

The 10 decisions of operations management are product design, quality, process, location, layout, human resources, supply-chain management, inventory, scheduling (aggregate and short term), and maintenance.

  • 8. Name four areas that are significant to improving labour productivity.

Four areas that are important to improving labor productivity are: (1) basic education (basic reading and math skills), (2) diet of the labor force, (3) social overhead that makes labor available (water, sanitation, transportation, etc.), and (4) maintaining and expanding the skills necessary for changing technology and knowledge, as well as for teamwork and motivation.

  • 9. The U.S., and indeed much of the world, has been described as a “knowledge society”. How

does this affect productivity measurement and the comparison of productivity between the U.S. and other countries.

Productivity is harder to measure when the task becomes more intellectual. A knowledge society implies that work is more intellectual and therefore harder to measure. Because the U.S. (and many other countries) are increasingly “knowledge” societies, productivity is harder to measure. Using labor hours as a measure of productivity for a postindustrial society vs. an industrial or agriculture society is very different. For example, decades spent developing a marvelous new drug or winning a very difficult legal

case on intellectual property rights may be significant for post- industrial societies, but not show much in the way of productivity improvement measured in labor hours.

  • 10. What are the measurement problems that occur when one attempts to measure productivity?

Productivity is difficult to measure because precise units of measure may be lacking, quality may not be consistent, and exogenous variables may change.

  • 11. Mass customization and rapid product development were identified as current trends in modern

manufacturing operations. What is the relationship, if any, between these two trends? Can you cite any examples? In services, Smart phones service, and in computers, Dell model, are a good example of the above.

Mass customization is the flexibility to produce in order to meet specific customer demands, without sacrificing the low cost of a product oriented process. Rapid product development is a source of competitive advantage. Both rely on agility within the organization.

  • 12. What are the five reasons productivity is difficult to improve in the service sector?

Labor productivity in the service sector is hard to improve because (1) many services are labor intensive and (2) they are individually (personally) processed (the customer is paying for that servicethe hair cut), (3) it may be an intellectual task performed by professionals, (4) it is often difficult to mechanize and automate, and (5) often difficult to evaluate for quality.

  • 13. Describe some of the action taken by Taco Bell to increase the productivity that have resulted in

Taco Bell’s ability to serve “twice the volume with half the labour.”

Taco Bell designed meals that were easy to prepare; with actual cooking and food preparation done elsewhere; automation to save preparation time; reduced floor space; manager training to increase span of control.


  • 1.2 (a) Labor productivity is 160 valves/80 hours = 2 valves per hour.

    • (b) New labor productivity = 180 valves / 80 hours = 2.25 valves per hour

    • (c) Percentage change in productivity = .25 valves / 2 valves = 12.5%


0.15 =





, where


number of laborers employed at the plant


L =

(160)(12)(0.15) 57,600

= 200

laborers employed



Last Year

This Year


Percent Change





1, 000 = 3.33


1, 000 = 20


1, 000

10, 000

= 0.1





= 0.33

1, 000


= 3.64 0.31

1, 000


= 22.22

1, 000

11, 000

= 0.09





= 0.35




0.31 = 9.3%


2.22 = 11.1%




= –10.0%



= 6.1%


Productivity =

Output Input

(a) Labor productivity =




(520 × 13)


= .0096 rugs per labor $

  • (b) productivity Multifactor


(520 × $13) + (100 × $5) + (20 × $50)


  • 65 = .00787 rugs per $



  • (a) Labor productivity = 1,000 tires/400 hours = 2.5 tires/hour.

  • (b) Multifactor productivity is 1,000 tires/(400 × $12.50 + 20,000 × $1 + $5,000 + $10,000) = 1,000 tires/$40,000 = 0.025 tires/dollar.

  • (c) Multifactor productivity changes from 1,000/40,000 to 1,000/39,000, or from 0.025 to 0.02564; the ratio is 1.0256, so the change is a 2.56 percent increase.

  • 1.11 Multifactor productivity is: 375 autos/[($20 × 10,000) + ($1,000 × 500) + ($3 × 100,000)] = 375/(200,000 + 500,000 + 300,000) = 375/1,000,000 = .000375 autos per dollar of inputs


  • (a) Before: 500/20 = 25 boxes per hour; After, 650/24 = 27.08 boxes per hour

  • (b) =27.08/25 = 1.083 or an increase of 8.3% in productivity

  • (c) New labour productivity = 700/24 = 29.167 boxes per hour