What are the Basic Concepts of Operations Management?


By: Site Engineer, Staff

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Operation management is the process of transforming certain inputs (resources) into products and services. It consists of various activities for creating products and services to satisfy our wants. Every meal you have eaten every treatment you have ever received at a clinic or hospital and every book you have ever read are the outputs of a transformation process, that is, conversion of certain inputs, such as materials, people, energy, information into products and services that can satisfy human needs.

The transformation process may involve a chemical change of inputs, fabrication or change of shape or form, assembly of parts or materials, the transformation of information as in computer processes or transportation of products and materials.

Operations management is important to an entrepreneur because it accounts for a high percentage of all the expenditure of the business. It is where most of the costs of the business are incurred. Whether the business will succeed or not depends largely on how and at what cost most of the activities of operations management are carried out.

Operations management addresses problems of location and site selection, capacity planning, product design, process design, layout, quality, materials management, maintenance, and safety. These are the issues that must be carefully addressed in creating products and services to satisfy customers and to ensure the profitability and growth of the enterprise.

1. Location and Site Selection

Location and site selection decisions must be carefully made since they have long-term effects on oil the cost of operations. A good location and site are important for the success of any small business. Most small businesses do not have enough resources to engage in extensive marketing to attract customers outside their immediate locality. Furthermore, changing a location and site after the facilities have been installed can be very expensive. Apart from the cost of acquiring a new site, existing facilities would have to be dismantled, moved and re-installed in the new site. Not only would some equipment be damaged, but some customers who are used to the existing location might also be lost in the process.

2. Capacity Planning

Capacity planning is an important area where decisions have to be carefully considered because excess capacity ties down scarce resources, increases overhead costs and reduces profitability. It is the highest output that a business enterprise can produce with the facilities (buildings, plant, equipment and manpower input) available to it.

Generally, these production facilities cannot be expanded in the short-run. In the case of small businesses, in particular, the expansion of facilities is difficult because of the limited resources available to them. Similarly, inadequate capacity results in crowded facilities, poor product and service quality, inability to meet the demand of customers and loss of sales. Capacity should, therefore, be planned such that within the first three years or so, the business enterprise can satisfy the demand of its customers with the existing facilities.

To determine the appropriate capacity for a business enterprise for the medium or long-term, the sales forecast for the period’ is done. Based on the forecast, the physical facilities and manpower needed to support the sales are determined.

Incapacity planning, these questions needed to be asked and answered in different areas:

  1. Manpower: How many laborers are needed for each operation in the production process given the maximum output per person per unit of time?
  2. Support Functions: How many people are needed in various support functions such as administration finance sales, maintenance, security, etc.
  3. Physical Space: Given the expected sales over the defined period, how much space is needed to accommodate plant, equipment, storage of raw materials and spare parts, administrative offices, etc usually provision is made for more space than is currently needed so that future expansion can be accommodated.
  4. Plant and Equipment: What are the different operations needed to produce the product or provide the service? What is the equipment needed for each operation? What is the possible output of the equipment per time unit? Answering these questions enables the entrepreneur to determine the size and number of equipment to purchase for each operation.

Decisions in these areas determine the capacity of the business enterprise to meet its expected sales.

3. Designing Your Product

Design is the conceptual process that generates the noticeable features of a product or service that are meant to satisfy some functional, quality and aesthetic requirements of individuals groups or organizations. The design has to do with translating the expectations of customers into the physical attributes of a product or service.

The design begins with studying and understanding the expectations of the target customers, their characteristics and behavior. Based on this understanding, product or service features that are expected to satisfy the needs of customers are developed, tested and modified if necessary.

There are different approaches to designing products or services:

  1. Creating a completely new product. This involves the following processes:
    • The needs or problems of individuals or organizations are identified.
    • The entrepreneur asks, how can these needs be met or how can this problem be solved?” What are the product or service attributes that can satisfy the customer?
    • Having generated the product or service attributes/features, a prototype is made, tested and if necessary modified to suit the identified needs,
  2. Using the services of consults to design the product/service.
  3. Copying an existing product. This is a popular approach used by most small businesses such as bakeries, hair styling, and dressmaking enterprises. The product or service features are copied as they are in the original product offered by another business enterprise. In some cases, the product designs are made available for sale in the form of patterns in magazines and catalogs. However, copying an existing product is feasible only where there are no patent rights over the product or service.
  4. Modifying an existing procure by using different materials, using a different style of packaging or adopting a different name for the product or service. In modifying an existing product or service, the entrepreneur looks for ways to make the product work better faster more convenient to use and cheaper.
  5. Adopting the design specifications of customers/clients.

A design is feasible if it is cost-effective and easy to implement given available physical, managerial and financial resources. The design options should be evaluated based on feasibility, acceptability, and risk. Acceptability has to do with whether the product will meet the expectations of the target market, and also whether the product design is socially and legally acceptable. Risk is concerned with whether the product design is a good or poor business proposition.

4. Process Design

This is the choice of the preferred sequence of operations needed to produce a product or service efficiently. An entrepreneur can select any of the following processes depending on the one that suits his circumstances better:

Project Process: A project is a unique or one-of-a-kind operation with a clear beginning and ending point. An important element of a project process facilities are assembled at the product site at the beginning and removed again on completion. Examples of the project process are found in the construction of buildings bridges, factories, and borehole drilling. In the project process, the machines are such that they can be moved from one site to another.

  • Line Process: This is used in the production of large volumes of standardized items. The machines are set to a required gauge and materials are processed in a sequence of operations. The machines and facilities (which also includes people) are arranged in the order in which they are required to carry out the operations required. A typical example of the line process is an assembly line. As the product moves from one stage to the other, components are bolted, welded or in some other way, added to it.
  • Continuous Process: This process runs non-stop except there is a need for adjustment or maintenance. It is used in chemical industries. It is not normally used in small businesses because the investment required for plants and facilities is very high.
  • Jobbing Process: This is similar to the project process in the sense that the product or service is also unique and made to customers’ specifications. But unlike the project process, the resources used in the job process are not moved to the customers’ site. They are stationed on the premises of the business enterprise and products/services are processed through them. On completion, they are dispatched to the customers. For instance, a small printing press may receive different orders from customers. Each customer’s order is different and the volume is low – one or two. The same facilities are used to produce and deliver the products to their respective customers. Hence the machines must be general-purpose machines flexible enough to be used for different jobs.
  • Batch Process: In the job process, the order is unique and is not likely-to-be repeated in the same form frequently. However, when the order is frequently repeated in the same form, a higher quantity (batch) can then be produced at a time to meet the orders. For example in the production of school uniforms, a large number of the same size can be made at a time. Consequently, the machines can be set to produce a given batch and reset again when another batch is to be produced.

5. Selecting Layout

The layout decision is important because it has serious implications for the overall cost of production. A layout is the general form of the arrangement of facilities in the operation. It is the logical arrangement of all the physical facilities of business such that operations are efficient. A wrong layout results in poor scheduling, customer queues, risk of fire and accidents, employee dissatisfaction and rising costs. To correct a wrong layout decision can be very difficult and very expensive because facilities already in position will have to be repositioned. It must, therefore, be got right the first time.

There are certain factors to consider in developing a layout:

  • Health and safety of people using the facilities
  • Planning laws and regulations of the State and Local Councils. The layout must conform with the laws and regulations especially as they affect the structure of buildings, factory entrances and exits, ventilation lighting and sanitary facilities.
  • The functional requirements of the type of business. For instance, the layout must consider the process design already decided upon.
  • Provision of adequate space for:
    1. Storage of raw materials, spare parts, and finished products.
    2. Pathways for the movement of people and transportation of materials and equipment between workstations.
  • Machines.
  1. Places where employees and customers can carry out various operations.
  2. Services such as fire-fighting facilities medical facilities, maintenance, etc.

The basic layout type is developed after the process design has been selected.

Specific Layouts

  1. Store layout such as that of a supermarket or retailer must not only ensure that customers can see the goods but can also get to them. It must consider the flow of customers, goods, and staff.
  2. Restaurant layout should arrange tables and chairs for fours and twos with the twos preferably along the wall as most occupants will prefer privacy. Also, space must be provided so that customers and waiters can move.
  3. The layout of the work floor or workstations where machines are not cramped tight but spaced out to allow movement of operators. The equipment is arranged to follow stages of production so that materials and men do not have to cross each other. Equipment must be firmly positioned and fixed to prevent accidents while necessary warnings and policies are indicated in bright colors.
  4. Office layout should be such that desks, chairs tables safes, files, and equipment are arranged to ensure efficiency and safety.

Major Layout Types

  1. Cell layout is one where the products or services being developed are selected and moved to the cell or part of the operation where all the required human and material resources are located. It can be flexible and motivates performance but costly and associated with low plant utilization. Hotel business and nightclub business are good examples.
  2. Product layout is where all the transforming resources, such as human materials, are located entirely for the convenience of the product or service. Examples include an assembly plane and a self-service restaurant. It has the advantage of low cost and specialization, but it can generate boredom.
  3. The mixed layout or hybrid layout which combines some or all the other types are common in large businesses such as a general or teaching hospital.
  4. Fixed position or product layout where services and equipment are moved to the location of the product or project because the product or the project is too large or too delicate to be moved. Examples are construction operations where materials and equipment needed are moved to the site because the product is too big. It is convenient for the customer but it involves substantial scheduling costs during the movement of required materials. Businesses that require this layout include roofing construction, pest control, plant cleaning business, and waste disposal services.
  5. Process layout is the grouping of human and material resources (that constitute the process) according to functions. It is built around the needs and convenience of the human and material resources. An example is a layout in a laundry service where washing activities are grouped, ironing services together, packaging and collection together. It can be easily supervised but can result in low facility utilization.

Planning and Scheduling Operations

To ensure high productivity, it is important to carefully plan operations.

  1. Machines and people are maximally utilized – resources are not unduly left idle at any work-station.
  2. The quantity and quality of products required by customers are produced and delivered on schedule at minimum cost.
  3. The flow of work is maintained without major hitches.

When the volume of operations is low, these can be achieved through direct monitoring and supervision. But as the volume of production increases, therefore, careful operations planning becomes critical if efficiency is to be achieved.

Production planning involves finding answers to the following questions:

  1. What is the best sequence of production operations that will achieve maximum utilization of machines and people and without unnecessary bottlenecks?
  2. What is the rare production of each machine that will enable the entire production system to achieve its output targets?
  3. What quantity of raw materials should be stored so that production can continue without stoppages due to a shortage of raw materials and at the same time not incurring unnecessary costs from the excessive stock of raw materials?
  4. What quantity of raw materials should be stored so that production can continue without stoppages due to a shortage of raw materials and at the same time not incurring unnecessary costs from the excessive stock of raw materials?

6. Quality Management

One of the major problems most African entrepreneurs face is the difficulty of penetrating the market with their products and services. Consumers resist purchasing the products/services of these entrepreneurs because they perceive the products/services to be of poor quality.

As the continent embraces globalization – the free flow of goods and services across national borders – the products/services of African entrepreneurs must be able to compete with the products/services of other countries especially in the area of quality. That is, firms that provide consumers with superior products/services at a satisfactory price are more likely to attract and retain consumer loyalty.

Quality is the degree of goodness or worth of something. In operations management, quality is defined as “the totality of features and characteristics of a product/service that bears on its ability to satisfy stated or implied needs.” It is good to notice here that quality is seen as the ability of a product/service to meet the expectations of consumers and to satisfy their needs.

Quality of a Product in Consumers Perspective

  • Quality of associated services such as the opportunity to return defective products warranty repair services.
  • The physical characteristics of a product such as size, color, flavor, package, durability, reliability, etc.

Customers may use certain indicators to judge the quality of a product. For instance, they may use the reputation of the manufacturers to judge quality. Therefore, if a product is manufactured by a firm that is not known or which, in the mind of the consumer, has a low capacity or poor reputation for producing quality products, the consumer is likely to believe that the product is of poor quality. Some other indicators used by consumers are price and the image of the outlet through which the product is distributed.

The processes involved in the determination, and control of quality in a business enterprise are:

  • The raw material specifications, process specifications, and product\performance specifications are used by the entrepreneur as standards against which actual quality attained are compared and corrective actions are taken where necessary.
  • Determination of the quality expectations of consumers in the target market. First, the entrepreneur finds out from consumers what they mean by quality and what factors they use to judge it. Is it size, taste, dependability, long life, credit facilities, repairs, etc?
  • From the quality expectations of consumers ascertained by the entrepreneur, standard quality specifications for the product are established. Standard quality specifications are established for the various stages of operations. In a manufacturing operation, for example, quality specifications are established for all incoming raw material. Only materials that meet the standard specifications are used in the production process. Standard quality specifications are also established for a variety of processes that make up the production/operations process. Lastly, product performance standards are established. That is after the product has been produced, does it meet performance standards? Does it function adequately, or is the product defective? In establishing quality specifications, careful attention is paid to the cost of production since cost often increases with quality.

One problem with the quality control processes described above is that they focus on ensuring that the existing standards are met. They also tend to accept that the production of defective products/services within tolerable limits is normal and acceptable. Total Quality Management (TQM) rejects these notions of quality control. TQM is about “constantly improving every process and product by progressive methods”.

Total Quality Management Perspective

  • Continuous quality improvement to attain the ultimate goal of zero-defect or error-free products/services. The objective is no longer to meet existing standards that may accommodate defects or errors but to continuously improve on existing quality levels and practices. The existing quality levels and practices may be those already attained by the business firm or those attained by competing businesses.
  • Employee training and participation. Employees must receive continuous training to improve their skills. Through this, higher quality levels of production can be attained. Employees are theories that interact with which customers and know how they feel. In the process of production, they observe opportunities for cutting costs, eliminating waste, and improving products/services design. Entrepreneurs must find ways to exp1oit this knowledge base by allowing employees to suggest improvements and implement them if considered appropriate.
  • Quality is a major goal of the business enterprise and should constitute the primary focus of business operations.
  • The satisfaction of customer needs is the driving force of a firm’s quality management efforts. Therefore, the managers of the business enterprise must ascertain these needs by gathering information from various sources including employees who are in contact with customers, observation, customer complaints, systematic research, etc.
  • Commitment to superior quality and excellence in operations at all levels of the business enterprise. Providing customers with superior quality products/services s becomes a doctrine for the entrepreneur, all managers, and employees. Everyone security personnel, drivers, cashiers, operators, supervisors, etc operate as quality officers.

Managing Materials

There are different types of materials. These raw materials and components are those that are transformed in the process of production. Retail stocks are those that are bought for resale. Finished products are the output of the production process while a factory and office supplies include fuel, grease, stationery, etc. in most small businesses, purchasing of materials is handled informally by the owner-manager.

But in some businesses, purchasing and managing inventory may constitute a major cost element. Takes for instance, in poultry businesses the stock of birds, feed, and drugs constitute up to 80% of costs. In retail businesses, stock of goods may engage up to 90% of the available capital.

Careful purchasing and managing of inventory have a significant effect on costs and profits. Attention to the purchasing and inventory management function also reduces risks associated with materials – deterioration of stock, theft by employees and customers, destruction in the event of accidents and minimization of scarce working capital tied down in inventory.

As can readily be observed, all items of materials used in production operations are not all equally important. Some are of high value in terms of the amount involved in purchasing and storing them. Some, although inexpensive, maybe so critical to production operations that their non-availability can stop production operations for long periods. Others are low-cost and non-critical to production operations. This suggests that the owner-manager can analyze materials used in production operations so that he/she can focus attention on monitoring and controlling those items that are of high value and critical to his/her operations.

There are Three Common Options on How Much to Purchase:

  1. Scheduled budget or planned buying to meet anticipated requirements. It involves estimating production or sales needs so that the appropriate quantity called the economic order quantity can always be requested. This will also include a buffer stock, which is a minimum safety stock below which the stock level is not allowed to decline.
  2. Hand-to-mouth buying that involves buying small amounts as needed. Advantages include easy determination material needs, minimization of loss from overstocking, the affordable amount spent on inventory, lower holding or storage costs, and reduced deterioration or obsolescence. Disadvantages include higher ordering costs and possible loss of sales due to unavailability materials.
  3. Speculative buying which involves buying more than an immediate requirement. There is the advantage of possible profits when inventory prices rise but it involves gambling with its attendant problems. A substantial amount of money is also tied down in inventory.

Establishing and building a good relationship with suppliers is an aspect of the management of materials that should engage the attention of owner-managers of small businesses. Since the order-size and value of materials purchased by a single small business are often small, the relationship between a small business and its supplier is usually supplier-dominated. This means that it is more in the interest of the small business to have a strong relationship with the supplier. Therefore, the small business should put itself in a position to initiate the establishment and maintenance of a good relationship with its suppliers to enjoy their support. Such support comes in the form of delivery of materials promptly and on schedule, credit facilities, preferential treatment in the event of shortages of raw materials, training of employees, etc.

The strategies that can be adopted by a small business to achieve a good relationship with its suppliers include:

  • Keep accurate records of all transactions with the supplier. This helps to reduce disputes between the small business and the supplier.
  • Honor all agreements to the letter, whether such agreements are formal or informal. This raises the credibility of the small business in the eyes supplier
  • Maintain high ethical values.
  • There is evidence in the literature that small businesses that are registered are more likely to establish a good and mutually beneficial relationship with the larger supplier of raw materials. Larger businesses tend to deal only on a cash-and-carry basis with businesses that are not incorporated.
  • Prompt payment of bills.

7. Maintenance

Irrespective of the type of machine and equipment finally purchased, the facilities will periodically need servicing and occasionally major repairs to keep them functioning at optimum levels.

Poor maintenance facilities result in poor quality products and dissatisfaction of customers who are unable to get a regular supply of the firm’s product. Lack of maintenance of machines and equipment results in frequent breakdowns reducing production capability. The cost of production also increases since employees are idle while the machines are being repaired. Faulty machines and equipment may cause accidents and injuries to employees.

Most of these problems are preventable by adopting a policy of preventive maintenance. This policy requires that at regular intervals, even though the machines and equipment are functioning well, they are serviced by qualified and experienced persons. Most vendors of machines and equipment also provide maintenance services. As much as possible, the owner-manager of a small business should use such services because they are more likely to have genuine spare parts to replace faulty parts.

However, machine operators’ must be trained to clean, lubricate and repair minor faults in the machines. Besides, they must be trained and encouraged to report such minor repairs and other observations they have of the functioning of the machines.

An associated policy that facilitates maintenance services is the practice of recording the history of all major or critical machines and equipment on a card. This card indicates the date of purchase, all maintenance activities carried out on the machine, parts replaced, etc. This card provides essential information about the machine that would enable the owner-manager to plan for the replacement of the machine at a future date.

Whatever the owner-manager does, machines tend to breakdown at one time or the other. This necessitates corrective maintenance. It is important to utilize the services of known and experienced firms to undertake major repairs of machines and equipment.

8. Health and Safety at Work

In every workplace, there are safety and health hazards. Employees and other people on the premises may sustain injuries, such as burns, cuts, bruises, electric shocks, death, etc as a result of faulty machines, broken furniture, exposure to chemicals, poisonous liquid, dangerous fumes, and other dangerous events. Sometimes employees may become ill due to the conditions in which they work. Their health may deteriorate because of the nature of work that they do or the materials they work with. For instance, continuous exposure to toxic substances dust, excessive noise, etc may result in ill-health in the long-run.

Therefore, employers must provide a safe and healthy work environment for their employees by ensuring:

  • Substances such as poisonous liquids, chemicals, explosives, boilers, gas substances, etc are effectively covered and precautions are taken when handling them.
  • That first-aid facility, fire extinguishers, protective clothing are provided for and used by employees.
  • That employees are fully instructed and trained to observe safety precautions and practices.
  • That the workplace is kept clean, refuse removed regularly, and salary conveniences provided;
  • That machine is properly maintained and safeguarded by fencing or by any other means to prevent accidents.

Employers are liable to pay compensation to employees and third parties in the event of injuries, damage to property or ill-health attributable to default or negligence of employers in maintaining safety and health standards at work.

Environmental Impact of Business

Recently, governments and the community have become more concerned with the impact of the operations of the business on the environment. Several businesses produce wastes that harm the environment if not properly and effectively disposed of. For example, the environment may be polluted by smoke from incinerators; offensive odor from poultry farms sited in residential neighborhoods, solid waste from barbing saloons, restaurants, and sawmills noise from carpentry workshops, etc.

In Nigeria, the Federal Environmental Protection Agency (FEPA), which is now part of the Federal Ministry of Environment, was established to formulate policies, prescribe standards, monitor and enforce the standards, guidelines, regulations, and schemes designed to protect the environment.

The following are the regulations made by the Federal Ministry of Environment:

  • Requires establishments to develop contingency plans for handling unusual and accidental discharges and strategies for waste reduction.
  • It makes it mandatory for establishments to install facilities capable of reducing or eliminating pollution arising from their production activities.
  • Specifies the maximum limits of effluent parameters allowed to be discharged into the air, streams, rivers, drains, and ground.
  • Impose restrictions on the release of toxic substances into the environment.
  • Stipulates the requirements which industries and facilities generating waste must meet.


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