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Summary Strategic Operations Management, ISBN: 9781136362309 Economics and Business
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4. OPERATIONS AND PROJECT MANAGEMENT (AS LEVEL)4.1 The nature of operations
-It is also referred to as production management. Production is the transformation of inputs into outputs. Thus
production takes place when a business takes inputs, carries out a production process and produces output. In
other words, it is the conversion of resources such as raw materials or components into goods or services.
Operations management decisions involve making effective use of resources (inputs), land, labour and capital to
provide outputs in the form of goods and services.
-Production can be done at primary, secondary or tertiary levels. The inputs of production differ from one
organisation to another. The outputs of one organisation can be the inputs of another firm.
-operations management seeks to ensure that goods/ services are made with the required quantity, required
standard and at the right time and in the most efficient manner. Thus it is concerned with acquiring the necessary
inputs, allocating and utilising them in such a way as to maximise output
– Operations management and planning is concerned with:
○ which resources are needed to complete the production/service process.
○ how the work/process will be organised and scheduled.
○ who will perform the work.
Objectives of an operations management department
To design, create, produce goods and services for an organisation and its customers effectively.
To direct and control the transformation process so that it is efficient and effective and adds value.
To procure appropriate inputs in a cost effective way.
To effectively manage an appropriate inventory level.
To focus on quality, speed of response, flexibility, type cost of the production process.
Achieve an effective labour/capital production mix.
To incorporate latest technological approaches into the production process.
THE DIAGRAM BELOW SUMMARIES PRODUTION
,Transformation process
An activity (process) or group of activities that takes inputs and converts them into outputs.
INPUTS
i. Raw materials- the basic materials that can be used to make or create something e.g wheat is a raw
material in bread production
ii. Land- refers to the site on which production takes. It also refers to all the free gifts of nature e.g minerals,
climate
iii. Labour- refers to the physical and mental effort put into the production process. Production process is said
to be labour intensive if labour cost constitutes a larger fraction of a firm’s total costs. There are three
types of labour:- unskilled labour, semi-skilled labour and skilled labour
iv. Capital:- refers to the tools, machinery, computers and other equipment that businesses uses to produce
goods and services. All man-made items used in the production of other goods i.e machines, buildings,
computers, vehicles, roads e.tc Production process is said to be capital intensive if the cost on capital
constitute a larger proportion of the firm’s total cost
NB- Intellectual Capital - is defined as the amount by which the market value of a company exceeds its
tangible assets (physical and financial) – the collective knowledge and skills of a company.
Intellectual capital is the intangible bank of expertise, skills and competencies within a
business that can give the production process a distinctive competitive edge.
INTELLECTUAL CAPITAL- total market value of business asset- total net book value of assets
VALUE-ADDITION and OPERATIONS DECISIONS
Refers to the differences between the cost of purchasing raw materials and the price at which finished goods are
sold. In other words it is an increase in value a business adds from one stage of production to another. When inputs
are transformed into outputs, they will end up with a higher value than their starting point. As each stage of
production process takes place, value is added to the starting inputs because these have to be transformed, adding
value. The role of operations decisions is to achieve a desired value added, in terms of productive efficiency in
reducing unit costs (minimising inputs in relation to outputs) and in terms of financial value (sales revenue and profit).
The operations decisions should lead to efficiency and effectiveness so that customers’ needs are met by the value
added through the productive process
Value added and Marketing
Value addition can be looked at from the point of view of customers. Marketing is the process of meeting customers’
needs, and the process of adding value is making sure that that production process is effective in doing this. Adding
value in marketing is giving something to customer that is of high value to them but is low cost to producer. Added
value marketing gives customers what they really want by making the product have improved performance or better
looks, giving advice on using it, making it more easily available to the customer, providing discounts as well as
quality assurance.
PRODUCTIVITY
-It is a measure of efficiency of production. It shows the relationship between output of a system and factor
inputs. It is also defined as the ratio of outputs to inputs during production. There are two types of
productivity:-
i. Labour Productivity- refers to the number of units produced per worker
Labour Productivity= total units produced/ total workers involved
,ii) Capital Productivity- units of output produced per unit of capital resources employed.
Capital productivity= total output produced/ capital employed
ILLUSTRATION
FIRM ITEMS UNITS PER CAPITAL NO OF TOTAL
MONTH EMPLOYED EMPLOYEES WAGES
A Chairs produced 1000 $500 100 $300
B Shirts produced 500 $200 25 $250
C cakes 300 $200 20 $200
Calculate
(i) Firm A’s - Capital productivity
- Labour productivity
(ii) Which firm is more efficient in terms of the utilisation of labour.
METHODS TO IMPROVE PRODUCTIVITY
a) Improve the training of staff to raise skills level:- employees with relevant skills are more
productive
b) Improve worker motivation- use financial and non-financial motivators to encourage employees
to work extra harder.
c) Purchase more technologically advanced equipment- the firm can introduce new machinery
and latest production systems i.e robot-controlled production systems.
d) More efficient management- good leadership improves the overall efficiency of the business
Differences between efficiency and effectiveness in business operations
EFFICIENCY
-it is defined as doing the right thing. It involves the production of output at the highest ratio of output to
input. Efficiency is measured by the productivity of the factors of production. E.g total output / units of
inputs
EFFECTIVENESS
-is defined as doing the thing right. It involves meeting business objectives by using inputs appropriately to
meet customer needs. Efficiency is one part of effectiveness. For any business the relationship between
efficiency and effectiveness depends on the market segment it is aiming at e.g volume, exclusive designer
range etc
, Differences between Labour intensive and Capital intensive method of production
Labour intensive Capital intensive
Costs of labour are a higher proportion of Costs of capital are a higher proportion of
total costs than costs of capital total costs than costs of labour
E.g hand worked farm E.g an oil refinery
Benefits Benefits
Can produce one-off unique products Mass production requires large scale
Well suited to deliver personal services output using repeated task. Machine can
Lower productions costs especially when deliver this much more quickly than labour
labour is cheaper in that area Enables the business to enjoy economies
Low start-up costs of scale
Relatively easy to vary labour force (recruit/ Increased labour productivity
retrench) Skills level may be lower so costs are less
and it is easier to recruit employees.
Limitations Limitations
Cannot produce large-scale output quickly Difficult to produce a range of varied one-
Limited economies of scale off products
Employees can disrupt production easily Difficult to deliver personal services
due to industrial action or absence High start-up costs. Cost of capital may be
Legal constrains may make it difficult to too high for a business to buy machinery
vary labour force Machine break down can be a big
Training costs may be very high challenge to the business
Employees using machines can be bored
Factors that could influence a decision to change to more capital intensive
production methods.
– Relative prices of the two inputs may change – labour costs significantly increase.
– Cost of capital machinery may reduce.
– Technological development may allow production process (or parts of it) to be mechanised.
– Competitors may force a business into capital intensive approach.
– Business may become large enough/profitable enough to purchase capital machinery.
Benefits of operations management
Operations management is concerned with orchestrating all resources to produce a final product or
service and as such it is constantly seeking to make the transformation process of inputs into outputs
more efficient.
○ reducing costs.
○ reducing wastage.
○ increasing productivity.
○ taking out activities that do not add value.
○ improving design.
○ improving quality.
○ designing more efficient work methods.
○ better product development.
○ more efficient inventory management.
4.2 Operations planning
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