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Q 1. Do most of the principles, tools and techniques of Operations Management apply to

both manufacturing and service sectors? Justify with examples.

Answer:

Manufacturing & Service are the major economic activities in any country. In India,
manufacturing and services together constitute nearly 75% of the GDP. In recent years,
growth in GDP has been primarily due to the growth in these sectors of the economy.
Therefore, managing manufacturing and service operations are important economic
activities. Utilising appropriate methods for planning and control of Operations in
manufacturing and service organizations can result in significant productivity
improvements and cost savings. It can also positively influence the overall health of the
economy. ÄOperations Management is a discipline that focuses on this aspect Operations
Management is an exciting and vital field, especially in the new millennium that we have
entered. Operations have become increasingly competitive on a global basis. Therefore, it
becomes necessary for students of MBA courses to understand the field of Äoperations ±
an essential function in every business.

The importance of Operations Management ± both for organizations and for society ±
should be fairly obvious: the consumption of goods & services is an integral part of our
society. Operations management is responsible for creating those goods and services.
Organizations exist primarily to provide services or create goods. Hence, Operations is
the core function of an organization. Furthermore, the operations function
is responsible for a major portion of the assets in most organizations.
Operations Management, as a field, deals with the production of Goods & Services. The
abundant variety and types of Goods & Services that we see everyday are produced
under the supervision of operations managers. A modern industrialized society cannot
exist without effective management of Äoperations.

Operations managers have important positions in every company. The Plant Manager,
Production Manager, Inventory Control Manager, Quality Manager and Line Supervisors
± are all operations managers. This group of managers, (plus a few more factory
managers), is collectivelyresponsible for producing the supply of products in a
manufacturingbusiness. We need to include in this group, those managers at the
corporate level (e.g. Vice President) who are overall in charge or are
holding staff functions related to operations.

Wealth is created in the global economy through excellent operations management, when
the value of outputs in goods & services exceeds the cost of the inputs used. Wealth can
only be created by manufacturing and service operations that add more value than the
costs of the inputs they use. The wealth created is reflected in the standard of living of the
people, and is a function of constantly increasing productivity.
Raising productivity of operations, - the ratio of output to input, - is therefore, the primary
basis for creating wealth. Thus, in the global economy, a company or a country cannot
prosper in the long run unless it has higher productivity than its domestic and foreign
competitors.

The primary task of Operations Manager, therefore, is one of the wealth creators.
Operations should lead the way in enhancing our ability to create wealth, improve
productivity, and raise the standard of living for all people. This is the challenge for the
coming years.

In the early days of manufacturing, goods were produced using craft production: highly
skilled workers using simple, flexible tools produced goods according to customer
specifications.

Craft production was slow & costly. And when parts failed, the replacements also had to
be custom made, which was again slow & costly. Also, production costs did not decrease
as volume increased; i.e. there were no ÄEconomies of Scale , which might have
provided incentives for companies to expand. Instead, many companies emerged, each
with its own set of standards.

A major change occurred that gave the industrial revolution a boost: the development of
Ästandard gauging systems . This greatly reduced the need for custom-made goods.
Factories began to spring up and grow rapidly, providing jobs for countless people.
Despite the major changes that were taking place, management theory and practice had
not progressed much from early days. What was needed was an enlightened and more
systematic approach to management.

The scientific-management era brought widespread changes to the management of

factories. The movement was spearheaded by the efficiency engineer
and inventor Frederick W. Taylor, who is often referred to as ³the father of scientific
management´.

Taylor¶s methods emphasized maximizing output. They were not always popular with
workers as the latter felt they were exploited. Eventual, the public outcry reached the halls
of congress, and hearings were held on the matter. In 1911, Taylor s classic book,.

The Principles of Scientific Management, was published; and the publicity from the
hearings actually helped scientific management principles to achieve wide acceptance in
the industry.

The function of an operating system is a reflection of the purpose it serves for its
customer, i.e. the utility of its output to the customer. Four principal functions can be
identified:

Manufacture, in which, the principal common characteristic is that something is physically

created, i.e. the output consists of goods which differ physically ± in form or content ±
from those materials which form the inputs to the system.
Manufacture, therefore, requires some physical transformation, or a change in Äform
utility of resources.
Service, in which the principal characteristic is the treatment or accommodation of
something or someone. There is primarily a change in state utility of a resource. Unlike in
supply systems, the state or condition of physical outputs will differ from inputs by virtue
of have been treated in some way.

The service sector encompasses a wide spectrum of activities in every country. The
growth of the service sector in India in the last five years has been very significant.
Between the years 1998 to 2004: the GDP growth of services of Trade,
Hotels, Transport & Communication have consistently risen year after year at rates
ranging between 6.8% and 11.8%; the corresponding growth of GDP in Community,
Social & Personal Services have ranged between 3.9% and 12.2%; Financial Services
have recorded GDP growth ranging between 3.5% and 10.6%; The GDP growth of overall
services have ranged between 5.5% and 10.1%.

Although services are often classified separately from manufacturing in a macroeconomic

sense, from the perspective of operations management, the separation is artificial. From
the operations management perspective, the notion of a pure product
and pure service is just two ends of a spectrum. In reality, a vast majority of operations
share a continuum of services and products. Therefore, most of the principles and tools
and techniques of operations management apply to both these sectors.

Service operations are different from manufacturing operations in terms of:

È tangible and intangible output

È customer consumption
È use of labor and equipment
È customer contact
È customer participation in conversion process
È measuring activities and resources

Manufacturing is characterized by tangible output, outputs that consumer consumes over

time, jobs that use less labor and more equipment, little consumer contact, no consumer
participation in conversion process (in production), and sophisticated methods for
measuring activities and resource consumption as products are made.

Service on the other hand is characterized by intangible outputs, outputs that customer
consumes immediately, jobs that uses more labor less equipment, direct customer
contact, frequent customer participation in conversion process and elementary methods
for measuring conversion activities and resource consumption.

È Productivity is more easily measured in manufacturing operations than services.

È Quality standards are more difficult to establish and product quality is more difficult
to evaluate in service operations.
 È Manufacturing operations can increase and decrease finished goods inventory
levels in response to change in customer demand patterns.
È In services, the most expensive resource is people, while in manufacturing the
most expensive resource is machinery.

Manufacturing is one where in production process service orientations is done where in

service sector is to completely to serve with service and no production involved in this
process.
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  India's economic advancement no longer rests on telephone call centers and
computer programmers.

Among villages with thatch-roofed huts and dirt roads on the outskirts of this city in central
India, John Deere and LG Electronics have recently built factories turning out tractors and
color television sets for sale in India and for export to the United States.

In Hazira, in northwestern India, where some residents still rely on camels to carry
traders' goods, the Essar Group is making steel to be used for ventilation shafts in
Philadelphia, high-rise structural beams in Chicago and car engine mountings in Detroit.

For decades, India followed a route to economic development strikingly different from that
of countries like Japan, South Korea or China. While its Asian rivals placed their bets on
manufacturing and exports, India focused on its domestic economy and grew more slowly
with an emphasis on services.

India's annual growth in manufacturing output, at 9 percent and accelerating, is close to

catching growth in services, at 10 percent. Exports of manufactured goods to the United
States are now rising faster in percentage terms than China's, although from a much
smaller base. More than two-thirds of foreign investment in the last year has gone into
manufacturing in India, not services.

A prime reason India is now developing into the world's next big industrial power is that a
number of global manufacturers are already looking ahead to a serious demographic
squeeze facing China. Because of China's ''one child'' policy, family sizes have been
shrinking there since the 1980's, so fewer young people will be available soon for factory
labor.

India is not expected to pass China in total population until 2030. But India will have more
young workers aged 20 to 24 by 2013; the International Labor Organization predicts that
by 2020, India will have 116 million workers in this age bracket to China's 94 million.
General Motors and Motorola are preparing to build plants in western and southern India.
Posco of South Korea and Mittal Steel of the Netherlands have each announced plans to
erect giant steel mills in eastern India, where Reliance of India will soon construct one of
the world's largest coal-fired power plants.

They are finding India's labor force well suited to their goals. When LG set out in 2005 to
fill 458 assembly line jobs at its factory here at a starting wage of $90 a month, it required
that each applicant have at least 15 years of education -- usually high school plus
technical college.

Seeking a young work force, the company decided that no more than 1 percent of the
workers could have had any prior work experience. Despite the limitation, 55,000 young
people met its criteria for interviews.

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Sprawling across more than a square mile next to a gray tidal estuary, the scale of the
Essar Group's complex in Hazira is already impressive. Essar has its own port to bring in
iron ore and its own large gas-fired power plant for electricity. At the steel mill, giant
buckets pour 150 tons of molten metal at a time to form slabs 2 yards wide and up to 10
yards long.

But the complex is just starting to grow. Essar is quintupling steel production and pushing
forward a sevenfold increase in power generation, most of it for sale to a national grid
desperately short of electricity.

Growth on that scale, especially in industries like steel and power but also in areas like
car parts and household appliances, is what India has long lacked. Industrial production
accounts for only a fifth of India's economic output, compared with two-fifths of China's.
But this ratio is starting to rise in India as manufacturing, led by exports, grows faster than
agriculture and even some service industries.

But a result was hundreds of thousands of businesses too small to be competitive; India
lags behind even the impoverished Bangladesh next door in exports of garments, a big
creator of jobs for China. The Indian government has responded by narrowing the list of
protected industries to 326 categories of goods from 20,000 and has lowered tariffs.

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The Essar steel mill, for example, has been replacing old, labor-intensive equipment with
more modern gear. ''We were having it all done manually, but because the customers
demand very high quality, we have to do it automatically,'' yelled Rajesh Pandita, an
Essar manager, over the roar of a house-size machine that was stretching a minivan-size
coil of steel back and forth through large rollers until it was little thicker than plastic
kitchen wrap.

The Whirlpool factory in Pune uses machines, not people, to fold the steel exteriors of
refrigerators. It has some of the highest productivity per worker of any Whirlpool factory in
the world, with just 208 line workers producing up to 33,000 refrigerators a month.

Labor laws, however, discourage flexibility. They still ban companies from allowing
manufacturing workers to put in more than 54 hours of overtime in a three-month period
even if the workers want to earn extra money. Firing workers is extremely difficult.

''Companies think twice, 10 times before they hire new people,'' said Sunil Kant Munjal,
the chairman of the Hero Group, one of the world's largest manufacturers of inexpensive
motorcycles.

Hero in Gurgaon, on the southern outskirts of New Delhi, and its archrival, the Lifan
Group in Chongqing, a city in western China, produce comparable motorcycles but the
similarity ends there. Hero markets heavily to its domestic market, protected from foreign
competition by high import tariffs, while Lifan emphasizes exports. Resources: Are natural
resources fundamental to the development of these economies? How were East Asian
countries able to develop considering their relative lack of natural resources? If natural
resources include human capital, e.g. educated workers, do you consider East Asian
economies resource rich?

Education: To nurture human capital, the government needs to educate the people.
Almost all scholars agree on this issue. However, some East Asian governments put
special emphasis on certain types of vocational education and special undergraduate and
graduate schools focused on technology and engineering. Do you think these education
programs helped their economic development? Also, there is a remarkable difference
between East Asia and Latin America in terms of the quality of K-12 education. What are
the key differences? How does the rate of literacy in a country effect its economic
development? Why is K-12 education so important relative to higher education? Is basic
education related to income distribution? Is it related to the quality of products produced
by a given economy?

Development Strategy: What kind of role do you think government should play in
economic development? Do you agree with neoliberal economists who would limit the
role of government in order to promote the growth of a market economy? Or do you agree
with the development state argument that emphasizes the role of government in
selecting, nurturing, and encouraging particular industries? Are you convinced that some
governments have displayed an ability to predict which industries will grow? Or do you
think it was mere coincidence that East Asian governments seem to have chosen the
³right´ industries? Another relevant issue here is export. Do you think East Asia¶s
economic success is related to its focus on export? Was it a strategic choice for East
Asian governments or did they have to focus on exports given their relatively small
domestic markets? What kind of benefits have exports had? Does the focus on exports
help improve the quality of products in foreign markets? How about the relationship
between government intervention and export? Do export results provide a dependable
gauge by which governments can judge economic performance?

Culture: Can the superior performance of East Asian economies to those of Latin America
be solely attributed to the cultural differences? Do you think Confucianism and/or
Buddhism are better suited to economic development than Christianity and Catholicism,
which are predominant in Latin America? If so, why did it take East Asian economies
centuries to become economic powers in the world?

International Environment: Would rapid economic development have been possible in

East Asia without security and development assistance from the United States? Would
East Asian governments have been so serious about economic development without the
fear of Communism? Alternatively, in spite of the lack of damage caused by World War II,
why did Latin American economies fail to continue develop at high rates? Why did the
United States funnel its economic support to East Asia rather than Latin America?

Society and Government: What kind of social legacy affected economic development in
East Asia and Latin America? Do you think the colonial legacy in Latin America hindered
the long-term economic development in the region? In spite of devastating losses of life
and property, do you think World War II contributed to post-war economic development in
East Asia? How do you explain the relatively egalitarian income distribution in East Asia
even under dictatorial regimes? Almost all countries in East Asia and Latin America
achieved high-economic growth under authoritarian governments. Do you think it is
necessary to have an authoritarian government to achieve rapid economic growth? Why
or why not? If yes, why haven¶t all dictatorships produced economic expansion?
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 There are several assumptions that affect the applicability of break-even analysis. If
these assumptions are violated, the analysis may lead to erroneous conclusions.

A primary key to detecting the applicability of linearity is determining the relevant range of
output. If the forecast of demand suggests that 100 units will be demanded, but quantity
discounts on materials are applicable for purchases over 500 units from a single supplier,
then linearity is appropriate in the anticipated range of demand (100 units plus or minus
some fore-cast error). If, instead, quantity discounts begin at 50 units of materials, then
the average cost of materials may be used in the model. A more difficult issue is that of
volume sales, when such sales are frequently dependent on the ordering patterns of
numerous customers. In this case, historical records of the proportionate quantity-
discount sales may be useful in determining average revenues.

Linearity may not be appropriate due to quantity sales/purchases, as noted, or to the

step-function nature of fixed costs. For example, if demand surpasses the capacity of a
one-shift production line, then a second shift may be added. The second-shift supervisor's
salary is a fixed-cost addition, but only at a sufficient level of output. Modeling the added
complexity of nonlinear or step-function costs requires more sophistication, but may be
avoided if the manager is willing to accept average costs to use the simpler linear model.

One obviously important measure in the break-even model is that of fixed costs. In the
traditional cost-accounting world, fixed costs may be determined by full costing or by
variable costing. Full costing assigns a portion of fixed production overhead charges to
each unit of production, treating these as a variable cost. Variable costing, by contrast,
treats these fixed production overhead charges as period charges; a portion of these
costs may be included in the fixed costs allocated to the product. Thus, full costing
reduces the denominator in the break-even model, whereas the variable costing
alternative increases the denominator. While both of these methods increase the break-
even point, they may not lend themselves to the same conclusion.

Recognizing the appropriate time horizon may also affect the usefulness of break-even
analysis, as prices and costs tend to change over time. For a prospective outlook
incorporating generalized inflation, the linear model may perform adequately. Using the
earlier example, if all prices and costs double, then the break-even point  = 200 ÷ (20 í
12) = 200 ÷ 8 = 25 units, as determined with current costs. However, weakened market
demand for the product may occur, even as materials costs are rising. In this case, the
price may shift downward to $18 to bolster price-elastic demand, while materials costs
may rise to $14. In this case, the break-even quantity is 50 (200 ÷ [18 í 14]), rather than
25. Managers should project break-even quantities based on reasonably predictable
prices and costs.

It may defy traditional thinking to determine which costs are variable and which are fixed.
Typically, variable costs have been defined primarily as "labor and materials." However,
labor may be effectively salaried by contract or by managerial policy that supports a full
workweek for employees. In this case, labor should be included in the fixed costs in the
model.
Complicating the analysis further is the concept that all costs are variable in the long run,
so that fixed costs and the time horizon are interdependent. Using a make-or-buy
analysis, managers may decide to change from in-house production of a product to
subcontracting its production; in this case, fixed costs are minimal and almost 100 percent
of the costs are variable. Alternatively, they may choose to purchase cutting-edge
technology, in which case much of the variable labor cost is eliminated; the bulk of the
costs then involve the (fixed) depreciation of the new equipment. Managers should project
break-even quantities based on the choice of capital-labor mix to be used in the relevant
time horizon.

Traditionally, fixed costs have been allocated to products based on estimates of

production for the fiscal year and on direct labor hours required for production.
Technological advances have significantly reduced the proportion of direct labor costs
and have increased the indirect costs through computerization and the requisite skilled,
salaried staff to support company-wide computer systems. Activity-based costing (ABC) is
an allocation system in which managers attempt to identify "cost drivers" which accurately
reflect the appropriate usage of fixed costs attributable to production of specific products
in a multi-product firm. This ABC system tends to allocate, for example, the CEO's salary
to a product based on his/her specific time and attention required by this product, rather
than on its proportion of direct labor hours to total direct labor hours.

Break-even analysis typically compares revenues to costs. However, other models

employ similar analysis.



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In the crossover chart, the analyst graphs total-cost lines from two or more options. These
choices may include alternative equipment choices or location choices. The only data
needed are fixed and variable costs of each option. In Figure 2, the total costs (variable
and fixed costs) for three options are graphed. Option A has the low-cost advantage when
output ranges between zero and ß units, whereas Option B is the least-cost alternative
between ß and ß units of output. Above ß units, Option C will cost less than either A or B.
This analysis forces the manager to focus on the relevant range of demand for the
product, while allowing for sensitivity analysis. If current demand is slightly less than ß
Option B would appear to be the best choice. However, if medium-term forecasts indicate
that demand will continue to grow, Option C might be the least-cost choice for equipment
expected to last several years. To determine the quantity at which Option B wrests the
advantage from Option A, the manager sets the total cost of A equal to the total cost of B
(
 +   ×  =
 +   ×  ) and solves for the sole quantity of output (  ) that will
make this equation true. Finding the break-even point between Options B and C follows
similar logic.

The Economic Order Quantity (EOQ) model attempts to determine the least-total-cost
quantity in the purchase of goods or materials. In this model, the total of ordering and
holding costs is minimized at the quantity where the total ordering cost and total holding
cost are equal, i.e., the break-even point between these two costs.



: *  "  : 3 
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 ':- is the application of statistical methods to the
monitoring and control of a process to ensure that it operates at its full potential to
produce conforming product. Under SQC, a process behaves predictably to produce as
much conforming product as possible with the least possible waste. While SQC has been
applied most frequently to controlling manufacturing lines, it applies equally well to any
process with a measurable output. Key tools in SQC are control charts, a focus on
continuous improvement and designed experiments.

Much of the power of SQC lies in the ability to examine a process and the sources of
variation in that process using tools that give weight to objective analysis over subjective
opinions and that allow the strength of each source to be determined numerically.
Variations in the process that may affect the quality of the end product or service can be
detected and corrected, thus reducing waste as well as the likelihood that problems will
be passed on to the customer. With its emphasis on early detection and prevention of
problems, SQC has a distinct advantage over other quality methods, such as inspection,
that apply resources to detecting and correcting problems after they have occurred.

In addition to reducing waste, SQC can lead to a reduction in the time required to produce
the product or service from end to end. This is partially due to a diminished likelihood that
the final product will have to be reworked, but it may also result from using SQC data to
identify bottlenecks, wait times, and other sources of delays within the process. Process
cycle time reductions coupled with improvements in yield have made SQC a valuable tool
from both a cost reduction and a customer satisfaction standpoint.

04
 
  " 5   " 7 3"

+2
È Process control
È Process capability
È Quality assurance
È Quality control
È ANOVA Gauge R&R
È Sampling (statistics)
È Stochastic control
È Electronic design automation
È Reliability engineering
È Six sigma
È Process Window Index