Chapter 1

INTRODUCTION
1.1 Productive System.
1.2 The Production and Operations Function
1.3 The Production and Manufacturing Organization
1.4 Production Planning and Control
1.5 Lead Time and Manufacturing Strategies
1.6 Management Problems
1.7 The frame work of the Production Planning and Control System
1.8 Primary Topics in Production and Operations Management

Chapter Objectives

By the end of the chapter students should be in position to:

1. Define operations management (OM) in terms of its contribution to an

organization and the activities it involves.
2. Describe how operations management contributes to the overall betterment of
society.
3. Present operations management as a function that addresses issues in both
manufacturing and services.
4. Show how operations management is gaining more recognition both internally
and externally to an organization.
5. Demonstrate how the operations management function interacts with the other
functional areas within an organization.
6. Present a brief history of operations management as a field and its evolution to
its current role in an organization.

1.1 Productive System

Production or operations: The part of a business organization that is responsible for

producing goods or services of higher value.

Production and Operations management: The management of systems or processes

that create goods and or provide services. Thus production or operations management
designs and operates productive systems -systems for getting work done. The food you
eat, the movies you watch, the stores in which you shop, and the book you read are
provided to you by the people in operations.

Production and Operations managers are found in manufacturing and service

providing companies like factories, banks, hospitals, and government. They design
systems, ensure quality, produce products, and deliver services. They work with
customers and suppliers, the latest technology, and global partners. They solve problems,
reengineer processes, innovate, and integrate. Production and Operations is more than
planning and controlling - it's doing. Whether it's superior quality, speed-to-market,
customization, or low cost, excellence in production and operations is critical to a
firm's success.

Production management is more used in the manufacturing industry and operations

management in the service industry.

Production and Operations is often defined as a transformation process.

Figure 1.1 Operations as a Transformation Process

Feedback: measurements taken at various points in the transformation process

Control: The comparison of feedback against previously established standards

to determine if corrective action is needed.

As shown in figure 1.1 inputs (such as material, machines, labor, management, and
capital) are transformed into outputs (goods and services). Measurements and feedback
from customers are used to adjust factors in the transformation process, which may in
turn alter inputs. In operations management, we try to ensure that the transformation
process is performed efficiently and that the output is of greater value than the sum of the
inputs. Thus, the role of operations is to create value. The transformation process itself
can be viewed as a series of activities along a value chain extending from supplier to
customer. Any activities that do not add value are superfluous and should be eliminated.

The input-transformation-output process is characteristic of a wide variety of operating

systems. In an automobile factory, sheet steel is formed into different shapes, painted and
finished, and then assembled with thousands of component parts to produce a working
automobile. In an aluminum factory, various grades of bauxite are mixed, heated, and
cast into ingots of different sizes. In a hospital, patients are helped to become healthier
individuals through special care, meals, medication, lab work, and surgical procedures.
Obviously, "production and operations" can take many different forms. The
transformation process can be

physical, as in manufacturing operations;

 locational, as in transportation or warehouse operations;
exchange, as in retail operations;
physiological, as in health care;
psychological, as in entertainment; or
informational, as in communications.

Supply Chain: a sequence of activities and organizations involved in producing and

delivering a good or service. The supply chain can be referred to as demand chain or
value chain.

1.2 The Production and Operations Function

Activities in production and operations management include organizing work, selecting

processes, arranging layouts, locating facilities, designing jobs, measuring performance,
controlling quality, scheduling work, managing inventory, motivating employees and
planning production. Production and Operations managers deal with people, technology,
and deadlines. These managers need good technical, conceptual, and behavioral skills.
Their activities are closely intertwined with other functional areas of a firm.

As shown in figure 1.2, the three primary functions of a firm are marketing, finance, and
operations. Marketing establishes the demand for goods or services, finance provides the
capital, and production or operations actually makes the goods or provides the service.
Of the three functions, production or operations typically employs the greatest number of
people and requires the largest investment in assets. For these reasons, management of
the production or operations function has often been viewed as an opportunity to improve
a firm's efficiency and reduce costs. But production or operations can also be an avenue
to increase sales, gain market share, and eliminate the competition.

Production or Operations can also be viewed as the technical core of an organization as

depicted in figure 1.3.
In this scenario, the organization exists to produce goods and services for its customers.
Therefore, production or operations is the central function or "hub" of the organization in
contact with every other functional area. For example, operations interacts with
marketing to receive estimates of customer demand and customer feedback on problems;
with finance for capital investments, budgets, and stockholder requirements; with
personnel to train, hire, and fire workers; and with purchasing to order needed materials
for production.

As a field of study, production or operations brings together many disciplines and provide
an integrated view of business organizations.

Products Versus Services

The output of a productive system was labeled as a bundle of products and services.

Products (Goods) are physical items that include raw materials, parts,
 subassemblies, and final products. For example: Automobile, Computer, Oven,
Shampoo, etc.

Services are activities that provide some combination of time, location, form or
psychological value. For example: Air travel, Education, Haircut, Legal counsel,
etc.

This shows that there is no clear line between product systems and service systems.
However, the following table shows the characteristics of productive systems that
produce products versus productive system that provides services.

Products Services
Tangible Intangible, perishable, consumed in the
process of their production
Can be produced to inventory for off the Availability achieved by keeping the
shelf availability productive system open for services
Minimal contact with ultimate consumer High contact with clients or customers
Complex and interrelated processing Simple processing
Demand on system variable on weekly, Demand commonly variable on hourly,
monthly and seasonal bases daily, and weekly
Markets are regional, national, and Markets served are usually local
international
Large units that take advantage of Relatively small units to serve local
economies of scale markets
Location of system is in relation to Location dependent on location of local
regional, national, and international customers, clients and users
markets

Differences between Product vs Service productive systems continued

Characteristic Manufacturing Service

Output Tangible Intangible
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Opportunity to correct quality problems High Low

Some manufacturing systems are predominately the producers of goods and provide very
little service. Some service organizations provide almost no physical product as a part of
the service. However most productive systems provide a bundle of products and services,
and production or operations management recognizes both aspects of the outputs of the
system. Currently the differences are beginning to fade as the output from many
productive systems is a mixture of products and services.
1.3 The Production or Manufacturing Organization

Figure 1-4 shows an organization chart for a typical manufacturing organization, and a
brief description of each of the organization’s functions. It breaks out the different
functional areas that companies need in order to operate. Quite often this typical
organization has more to do with administration than it does with building the product
and getting it out the door. In each of these areas, though, each group needs to be working
toward the company goal, and the company goal is simple - to make whatever you make
at a profit.

Figure 1-4
A Typical Manufacturing Organization

Marketing and sales are responsible for discovering and developing the market demands
that the company wishes to satisfy. The company’s response to the marketplace is
determined by the marketing function. Not only must companies assess demand, they
must also be able to specify what the customer wants and estimate the volume that can be
sold. These decisions will have a major influence on manufacturing.

Engineering is responsible for research, development, and design of products. Product

engineers must take the ideas for new products, do all necessary product research and
development, and produce the final specifications so that manufacturing can make the
product.

Human resources is responsible for proper staffing and employee training, development
and retention.

Information systems looks after the computer systems that provide the data needed to
make decisions.

Finance is responsible for the fiscal well-being of the company. Finance is concerned
with profitability and cash flow. Cash flow management is important because a company
that lacks the cash to pay its bills will go out of business.

Manufacturing is responsible for making the product and usually performs the following
functions:

 Manufacturing or Process Engineering: designs the manufacturing process that

makes the product. Activities include process design, equipment selection, plant
layout, and methods engineering.
 Materials management manages the flow of materials into the manufacturing
process, through the manufacturing process, and out to the customer.
 Production (manufacturing) actually makes the product.
 Industrial (or plant) Engineering looks after the machinery, equipment,
buildings, and grounds. Additional responsibilities include installing machinery
and equipment; maintenance; and the light, heat, and power used in the building.

Quality ensures that the manufacturing processes are producing a product according to
specification.

The individual departments of the company must work together as a team for the
company to remain effective and efficient.

1.4 Production Planning and Control

The course is devoted to providing a managerial perspective to production planning and

control systems. The course deals with all of the activities from acquisition of raw
materials to delivery of completed products.

Production planning and control systems are also designed to support key management
interfaces and activities in various functions of the firm.
The success of production planning and control depends on correct timing of demand and
supply. It also requires specifying the appropriate levels of resources (capacity) to meet
the company’s output objectives.

Successful production planning and control management needs to be viewed in an

evolutionary context so as to improve on the following:
- Better responsiveness to customer requests
- Reduced times for new product introduction
- Improved quality levels and
- Better strategic focus.

Thus production planning and control plays a key role of maintaining a competitive edge
of the company against competitors.

Pay offs of Production Planning and Control

Technology is increasingly shrinking the world and this has got a lot of effects for
example: increased availability of raw materials and products from all over the world,
global competition is intensified.

The result is a set of key challenges (described next) that good production planning and
control system help to meet.

1. Customer Expectations
Global competition carries with it an ever-increasing set of demands by the customers.
For example:
- Better quality, more features in products or services.
- Better delivery performance.
- Reduced costs.

2. Manufacturing Improvement Plans

This aims at integrating manufacturing activities both internally within manufacturing
and a cross functional boundaries. The effort is directed to achieving computer integrated
manufacturing. The five units to be integrated are:

I. Material Planning and Control; that includes the following:

a. Master Production Scheduling (MPS).
b. Inventory Management.
c. Material Requirement Planning (MRP).
d. Purchasing.
e. Shop floor control (Operations or Production Scheduling).

II. Engineering Activities; that include the following:

a. Manufacturing Engineering.
b. Computer Design.
 c. Computer Aided Manufacturing.
d. Design Engineering.

III. Quality Assurance; that include the following:

a. Process Controls.
b. Maintenance

IV. Sales or Marketing; that include the following:

a. Sales or Market planning.
b. Order entry.
c. Sales Forecast.
d. Physical Distribution.
e. Sales Planning.
f. Market Research and Marketing Information Systems

V. Financial control; that includes the following:

a. Budgeting.
b. Cost Accounting.
c. Financial Reporting

3. Actual Company Performance Improvements:

Production Planning and Control System performance is often viewed in terms of specific
measures such as:
a. Reduction of excess inventories, capacity, labor costs.
b. Elimination of overtime costs.
c. Reduction of long manufacturing lead times.
d. Elimination of poor delivery promise performance.
e. Elimination of fewer new products with longer development cycles.
f. Elimination of lack of responsiveness to changes in the business environment.

Therefore, the primary pay off from Production Planning and Control system is obtaining
high valued outputs by reducing organizational slack which can be measured in terms of
improved output per man hour, reduced over time, reduced inventory investment, reduced
obsolescence, improved inventory turn over, lower purchasing costs, reduced distribution
costs, improved customer service levels, and internal generation of capital investment
funds.

1.5 Lead Time and Manufacturing Strategies

There are two key lead times: delivery lead time is the time from receipt of a customer
order to the delivery of the product. Cumulative lead time is the time required from
initial parts ordering to completion of the product. It does not include time to ship to the
customer.
Lead time is defined as the span of time required to perform a process. Two lead times
are important in being able to meet customer expectations: delivery lead time and
cumulative lead time.

Delivery lead time is the time from the receipt of the order to the delivery of the product.
Cumulative lead time is the longest planned length of time to accomplish the activity in
question. Naturally, the customer would like the delivery lead time to be as short as
possible, but the delivery lead time is affected by the time it takes manufacturing to
provide the goods.

Manufacturing Company Types

Make-to-stock means that the supplier manufactures the goods and sells from inventory.
Here the products are made ready before receipt of customer orders. Customer orders are
filled from existing stock and production orders are used to replenish sold off stock.
Products must be manufactured a head of need and in quantities based on forecasted
demand. Management concern is the accuracy of the forecast in terms of quantity and
timing. Forecasts below / above demand have serious consequences on the firm

Make-to-order means that the manufacturer does not start to manufacture the product
until a customer order is received. Sometimes this strategy requires design engineering
and is then called engineer-to-order. In this case, the cumulative lead time is increased by
the time needed to design the product. Forecasts may be used to plan for predictable raw
materials with long lead times and the capacity that will be needed. Detailed materials
planning and production are performed after receiving an order. Management concern is
the due date or delivery date; and volume of the common components to keep in stock.

Assemble-to-order means that the product is made from standard components that the
manufacturer can inventory and assemble according to a customer order. The
subassemblies or components are planned and possibly stocked in anticipation of
customer order. Assemble to order is useful where a large number of end products can be
assembled from common components. Management concern is the accuracy of the
forecast in terms of quantity and timing of the common components; as forecasts below
or above demand have serious consequences to the firm.

Delivery Lead Time Depends on the Type of Manufacturing

On the other hand manufacturing companies could be distinguished as: project, job shop,
repetitive production, and continuous processing

1.6 The Conflicts in a Manufacturing Company

Let’s look at some inherent conflicts among marketing, production, and finance in
meeting these objectives. Referring now to Figure 1-5, marketing has as its primary
objective, the highest customer service. It does not care about either production efficiency
or inventory investment. Production wants the highest production efficiency, because
that’s what they’re measured on - it has no interest in the other two issues. Finance wants
the lowest possible inventories because that will free up cash for other purposes. It has
some interest in production efficiency because that reduces costs. It has no direct interest
in customer service.

Figure 1-5
Conflicts in Traditional Systems

. Marketing Production Finance

Highest Highest Lowest

Objective customer Production inventory
service efficiency investment

Implications

Customer
. .
Service
Production
. .
Efficiency
Inventories
. .
(investment)

Production planning and control through “Materials Management” wants to manage each
of these elements so that we have the lowest and highest synergy with one another to
achieve the best overall advantage for the company.

The managerial problems presented are related to the various stages of production or
operations process.

Purchasing: This relates to the purchase of needed raw materials and component parts.
The key managerial problems include:
a. Vendor selection.
b. Approaches to coordinate vendor activities with production needs.
c. How to monitor and control vendor performance.
Techniques and systems to solve problems include: Vendor scheduling procedures.
Data base elements include: Purchase orders.
Raw Materials Inventories: Managerial problems include:
a. Desired inventory level.
b. Proper procedures for physical control.
c. Appropriate record keeping system.
Technique and systems to solve problems include: Cycle Counting methods.
Data base elements include: Inventory records

Fabrication: Relates to conversion of raw materials into fabricated component parts

Managerial problems include:
a. Approach to scheduling each fabrication step for each component part.
b. Determining the overall level of fabrication activities.
c. Utilizing work center capacities effectively.
Techniques and systems to solve problems include: Shop - floor control systems
Data base elements include: Part routings.

Component Part Inventories: This is directly linked to fabrication stage or upon vendors
for vendor requirements.
Managerial problems include:
a. How to plan and release replenishment orders.
b. How large a batch to produce (lot size) for replenishment.
c. How to maintain physical control of inventories.
Techniques and systems to solve problems include: Material Requirement Planning
(MRP) systems
Data base elements include: Bills of materials.

Assembly: Relates to assembly of component parts into finished goods

Managerial problems include:
a. Setting up the overall output rate for the manufacturing facility.
b. Determining the build schedule for individual and items or options.
c. Forming up the final assembly schedule.
d. Monitoring actual performance
Techniques and systems to solve problems include: Master Production Scheduling (MPS)
systems
Data Base elements include: Open customer orders

Finished Goods Inventories: Any difference between desired and actual finished goods
inventory levels is a potential source of demand for replenishment orders on assembly.
Managerial problems include:
a. How to forecast end item demand.
b. Ways of accomplishing the customer contact functions of order entry and
order promising.
c. Setting of safety stock.
d. How to establish desired finished goods inventory levels.
Techniques and systems to solve problems: Exponential smoothing forecasting
procedures.
Data base elements include: Sales order history
Transportation: Relates to moving finished goods inventories to physical distribution
system.
Managerial problems include:
a. Frequency of distribution center inventory replenishment.
b. Approach to be taken in preparing actual truck and freight schedules.
c. Integration of product distribution with finished goods inventory level
determination.
Techniques and systems to solve problems: Vehicle loading procedures.
Data base elements include: Shipping costs

Distribution Centers: May not exist in a particular firm and if they do exist might not be
used for all products.
Managerial problems include:
a. Whether to have distribution centers.
b. Desired distribution center inventory levels.
c. Approach to use for inventory replenishments.
Technique and systems to solve problems include: Independent demand-based inventory
procedures
Data base elements: Planned shipments.

Transportation: Relates to moving goods from distribution centers to field warehouses.

Managerial problems include:
a. Choice of transportation mode.
b. Scheduling of replenishment shipments.
c. Whether to ship directly to customers.
d. Whether to utilize shipment between warehouses.
Technique and systems to solve problems include: Inventory or Transportation trade off
techniques.
Data Base elements include: Transportation costs

Field Warehouses:
Managerial problems include:
a. Whether to utilize this form of physical distribution.
b. Which items to hold and not to hold in these facilities?
c. Approach to use to replenish.
d. Desired inventory levels.
Techniques and systems to solve problems include: Distribution Requirement Planning
(DRP) system
Data base elements include: Customer order patterns.

The stages in the production or logistics process are related and likewise the managerial
issues are related. Answers to questions at any stage need to be examined in terms of
their influence on preceding and succeeding stages.

Since the importance and complexity of and emphasis on the different stages vary from
company to company and industry to industry, the Production Planning and Control
systems can be expected to vary. Application of techniques has been most sharply
focused on those stages that are key to the success of the firm.

System transparency is critical as the stages are interrelated and production planning and
control is therefore devoted to the design of technique and systems to routinely control
the material flow process depicted in the production and operations process.

A well-formulated Production Planning and Control system will be driven with data that
is appropriate, consistent and accurate. The data elements must be the same in all
applications.

1.7 The frame work for the production planning and control system

The below figure is a simplified schematic of a modern Production Planning and Control
system and the figure is divided into three parts.
The front end: This is the set of activities and systems for overall direction setting. The
phase establishes the company objectives for production planning and control. Demand
planning encompasses forecasting customer or end product demand, order entry, order
promising accommodating interplant and inter-company demand and spare parts
requirements. Production planning is the activity, which provides the production input to
the company game plan and determines the manufacturing role in the agreed upon
strategic plan. The master production schedule is the disaggregated version of the
production plan. That is the master production schedule (MPS) is the statement to
manufacturing that shows which end items or product options they will build in future.
The MPS must sum up to the production plan.

The Engine: This is the set of systems for accomplishing the detailed material and
capacity planning. The MPS feeds directly into MRP. MRP determines the period-by-
period time phased plans for all component parts and raw materials required to produce
all the components in the MPS. The information can be utilized in the detailed capacity
planning systems to compute labor or machine center capacity.

The Back End: Depicts the execution system. Shop floor control systems establish
priority for all shop orders at each work center so that the orders can be properly
scheduled. Purchasing systems provide detailed planning information for vendor
scheduling (includes existing orders and planned orders).

Note: Computer firms have produced software packages that integrate all the activities
depicted in the above framework.

1.8 Primary Topics in Production / Operations Management

There are many issues, concepts, and techniques associated with the field of production
and operations management. This text is designed as an introductory survey course that
covers many different topics. They are presented in the order in which production and
operational decisions are made within a firm.

Deploying Strategy

Strategy is only as good as the results it produces. Good results require that the
corporation vision and strategic plan be converted into a series of consistent, achievable
action plans to be deployed throughout the organization. Operations strategy must be
consistent with corporate strategy and may provide the distinctive competence on which a
firm competes.

Assuring Quality

Quality drives operational decisions. The level of quality a company seeks to achieve is a
strategic decision that eventually determines how a product is made or a service is
delivered. Designing products and services, designing and planning the production
process, locating and developing the production facility, designing jobs and work
activities, and planning and scheduling the flow of products throughout the system are all
areas of operations management that are increasingly dominated by quality.

Designing Products and Services

The traditional starting point in the production process is designing the product or
service. Decisions related to design include converting customer requirements to product
or service characteristics, determining the desired level of quality, selecting materials,
and evaluating the resulting production costs.

Planning the Production Process

Once the product or service has been designed, the physical process that will produce the
product or deliver the service must be constructed. Plans are developed for acquiring
materials, determining the types of job skills, equipment, and technology required, and
managing the process. This phase is referred to as process planning, analysis, and
reengineering.
Laying Out the Facility

The production process that has been designed must be physically housed in a facility and
laid out in an effective manner so that the product can be produced or service delivered as
efficiently as possible. Decision making focuses on how to arrange different parts of the
production or delivery process in the facility in order to ensure a smooth flow and
minimal cycle time. The title of this area of production and operations management is
facility layout.

Designing Jobs and Work

A primary component of the production process is the work performed by people, alone,
together, or with machines and equipment. Human resources management is the area
concerned with making sure that jobs meet the requirements of the production and
operations process in the most efficient and effective manner possible.

Managing the Supply Chain

Once the production process and facility have been designed, decisions must be made
regarding where to locate the facility in relation to customers and suppliers and how to
manage the supply chain. A supply chain encompasses all the facilities, functions, and
activities involved in producing and delivering a product or service, from the suppliers
(and their suppliers) to the customer (and their customers).

Forecasting Demand for Products and Services

Once the physical facility and production process are in place to produce a product or
deliver a service, a host of planning decisions is required to determine how much to
produce and when to produce it. These decisions are based on customer demand.
Forecasting involves using a number of different methods and quantitative techniques to
provide accurate estimates of demand, which are subsequently used to make production
decisions.

Production Planning and Scheduling

Once management has determined how much product or service is needed to meet the
demand, production schedules that involve a myriad of decisions are developed. These
decisions include how much material or how many parts to order, when material or parts
should be ordered, how many workers to hire, and how these workers should be
scheduled on jobs and machines. Decisions must also be made to ensure the amount of
inventory available at each stage of the production process is sufficient to avoid
unnecessary delays, and the amount of final inventory is sufficient to meet customer
demand. For service operations, the number of servers required to serve customers in a
timely manner must be established. Production planning represents a major area of
decision making in operations management and includes the topics of capacity and
aggregate production planning, inventory management, material requirements planning,
scheduling, just-in-time systems, service improvement, and project planning.