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Production and Operations
Management
Transformation Process Model
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• Management of Any Activity / Process that create goods
and provide services:
− Forecasting,
− Scheduling,
− Quality Management
• The business function responsible for Planning,
Coordinating, and Controlling the Resources Needed to
Produce Products and Services For a Company
Operations Management

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Why to study P & OM?
At a Typical Manufacturing Company
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Profit 5%
OM Cost 21%
Marketing
Cost 26%
Manufacturing
Cost 48%

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Manufacturers vs Service Organizations
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Services:
• Intangible product
• Product cannot be inventoried
• High customer contact
• Short response time
• Labour intensive
Manufacturers:
• Tangible product
• Product is inventoried
• Low customer contact
• Longer response time
• Capital intensive

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Organization of Businesses
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Operations / Production
1. Goods oriented (manufacturing and assembly)
2. Service oriented (health care, transportation, retailing)
3. Value-added (the essence of the operations functions)
Finance-Accounting
1. Budgets (plan financial requirements)
2. Economic analysis of investment proposals
3. Provision of funds (the necessary funding for operations)
Marketing
1. Selling / Promoting
2. Assessing customer wants and needs
3. Communicating those needs to operations

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Operations
Finance
Marketing
The Need for Working Closely

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Operations Interfaces
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Types of Operations
Operation Examples
Goods producing Farming, mining, construction
Storage/transportation Warehousing, trucking, mail,
taxis, buses, hotels, location
Exchange Trade, retailing, wholesaling,
renting, leasing, loans
Entertainment Radio, movies, TV, concerts,
recording
Communication Newspapers, journals,
magazines, radio, TV, telephones,
satellite

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• The goal of the production/operations department is to
transform the inputs (using labor, machines and materials) into
desired qualities of goods and services at the minimum cost.
• Alteration of materials and components adds value and changes
them into goods / services that customers want to own.
• The raw materials and components before transformation could
not be used—and therefore had no utility—for the customer.
• The raw materials for glass, steel, food, and paper have no
utility without technological transformations.
• New processes are constantly get invented for improving the
transformations and the products obtained from them.
Transformation Process
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Generalized Input - Output Transformation Model
o It is a standard form that could be applied to any system where
conversions are taking place. Inputs are fed into the
transformation box representing the process.
o The ‘‘process’’ often includes many sub-processes.
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Transformation Process - Services
Service conversions have customer utility even if no transfer of
goods takes place.
The conversion may be a change of location or related to the
customer’s state of well-being. Transformations are being
accomplished when:
• People are served in Restaurants.
• When they give blood to the Red Cross.
• They have their teeth cleaned by the dentist.
• They visit Disney World to be entertained.
• Depositing a check in bank results in the electronic transfer of
funds (ETF), clearly an input–output transformation
• People are being moved from one place to another by an airline.
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Classification of Operations Management:
You can think of operations management at three levels:
Strategic, Tactical, and Operational Planning & Control.
i. Strategic (Broad, Long Term) : Product Planning, Capacity,
Locations – Holds good for several years
ii. Tactical (Constraints and Controls, Intermediate) : Raw
Material and Manpower Planning, Finished Goods Inventory
– Weeks and Months
iii. Operational ( Routine Decisions) : Daily Production Plan,
Shift Management, Deliveries – Days and Weeks
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Responsibilities of an Operations Manager
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1. Planning the Process
One of the main roles an operations manager is responsible for
is, of course, planning.
Without a plan, there will be no product, and with a bad plan,
things will go wrong, or your product will not turn out the way it
was intended.
Operations managers need to make clear, detailed plans about
each stage of production to make sure that the whole process
goes as smoothly as possible.

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2. Maintaining A Professional Workforce
An operations manager isn’t just in charge of the production
process; they’re also in charge of people.
Managing employees has many different aspects – Making sure
that efficiency is being maintained and employees are doing
what they can to keep the process going smoothly.
Concern towards satisfaction and wellbeing of the subordinates:
Low motivation, bad moods, lack of comfort, and bad conditions
can all contribute to workers feeling uncomfortable and unhappy
in their work, decreasing the efficiency and quality of
production.
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3. Location, Facilities, and Equipment Decisions
An operations manager is also responsible for deciding what sort
of facilities are required, and what equipment and machinery
will be needed in the process.
Should take into account where your raw materials are coming
from as well as where you plan on shipping your final products
to. This will minimize transport and shipping costs as much as
possible.
Needs to consider what sort of facilities need to be put in place
for the staff, keeping in mind the health and safety regulations
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Typical Responsibilities
• Ensure all operations are carried on in an appropriate, cost-
effective way
• Improve operational management systems, processes and
best practices
• Purchase materials, plan inventory and oversee warehouse
efficiency
• Help the organization’s processes remain legally compliant
• Formulate strategic and operational objectives
• Examine financial data and use them to improve profitability
• Manage budgets and forecasts
• Perform quality controls and monitor production KPIs
• Recruit, train and supervise staff
• Find ways to increase quality of customer service
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New Product Development
• New product development is the process of converting an
idea into a workable product.
• The New Product Development (NPD) process is about
grabbing the market opportunity that revolves around
customer needs, checking the idea’s feasibility, and delivering
the Product.
• The New Product Development approach revolves around
working on an entirely new idea, where the uncertainty
around its development and subsequent adoption is high.
• The stages of the NPD process include — idea generation,
idea screening, concept development and testing, building a
market strategy, product development, and market
commercialization.
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Stage 1: Idea Generation
• The goal should be to generate many worthy ideas that can
form the foundation for the New Product Development
strategy. The major focus for stage 1 should be to arrange
brainstorming sessions where solving customer problems is
given precedence.
• This phase is not about generating fool-proof ideas that are
ready for implementation. Instead, raw and unproven ideas
that can be shortlisted later should be discussed.
 Emphasize on Customer Problems
 Qualify Each of the Listed Problems
 Coming Up With Possible Solutions
 Narrowing Down Problems + Solutions
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Stage 2: Idea Screening
• This New Product Development stage revolves around
choosing the one idea that has the highest potential for
success. Put all the ideas available on the table for internal
review. That is, turn to people with industry knowledge and
experience in the field for idea screening.
• For a new product development idea, having a proof of
concept (POC) should hold precedence as it helps check the
feasibility of the idea. There is no point in zeroing in on an
idea that is not technically feasible to build.
• SWOT ( Strengths, Weaknesses, Opportunities, and Threats)
analysis can be another good practice to consider when
shortlisting New Product Development ideas.
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Stage 3: Concept Development & Testing
Meaningful insight can be gained by focusing on four critical
aspects:
• Identification of the focus group, i.e., people who would
benefit from the new product under development.
• Assessment of other alternatives that can be presented to the
focus group.
• Development of a detailed plan for the New Product
Development that includes all stages from feature
development, marketing, pricing, and distribution.
• Positioning of the product’s unique features into the
customers’ minds to enhance findability and discoverability.
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Stage 4: Market Strategy/Business Analysis
Marketing strategy is all about drafting a way to reach out to the
targeted audience. Perhaps the best and most straightforward
method is to follow McCarthy’s 4Ps of marketing for a New
Product Development project.
Product, Price, Promotion and Placement
1. Cost-Based Pricing Model
Here, the initial production cost is added to the mark up
percentage to come up with the new product’s final price.
2. Market-Focused Pricing
This pricing is inferred after a thorough analysis of the pricing
model of similar products in the target market.
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Stage 5: Product Development
This is where you get to decide how your product will look and
experience it in your own hands!
Not only will the actual product be able to be reviewed, but also
the packaging, as that is an important aspect of your product.
1. Prototype
This helps in visualizing how the product will look and whether it
complies with the idea and the basic manufacturing feasibility
2. Minimum Viable Product (MVP)
Once the design, development, and testing are done, the MVP is
launched in the market with minimal features. The future
iterations depend on the initial response.
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Stage 6: Market Testing
• This step in New Product Development aims to reduce the
uncertainty revolving around the success of the product.
• In other words, this step revolves around checking the
viability of the new product or its marketing campaign.
• The users should be allowed to use the product, and then
their feedback should be recorded.
• Their feedback can form the foundation for further
improvements.
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Stage 7: Market Entry/Commercialization
• Commercialization is an umbrella term that entails varied
strategies to ensure the success of the new product.
Commercialization includes:
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• Helps check the technical feasibility of the idea
• Ensures faster time to market
• Effectively addresses the customer needs
• Multiplies the chances of success
• Reduces Efforts and Expenses
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Benefits of the New Product Development Process

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Schmcnner (1986) proposed the Service Process Matrix (SPM),
based on three characteristics of service delivery systems.
1. Labour intensity,
2. Customer contact
3. Service customization.
o Labour intensity is defined as the ratio of the labour cost
incurred to the value of the plant and equipment.
o A service with a high level of interaction is one in which the
customer can actively intervene in the service process.
o A service with high customization will work to satisfy an
individual's particular preferences.
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Process Types in Services

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The Services are classified in 4 types:
Service Factory
• Services with both low customer contact / customization and
a low degree of labour intensity are classified as Service
Factories.
• Similar to line type processes in manufacturing, the facilities
and equipment account for a large fraction of costs.
• Much of the transportation industry (airlines, trucking
companies), hotels and fast-food establishments can be
classified as Service Factories.
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Service Shop.
• Services with low labour intensity but high customer contact /
customization are classified as Service Shops.
• Similar to a Job-Shop type of operation in manufacturing
industry.
• Service Shops can provide various types of customized
services for their customers. Hospitals, auto and other repair
services arc excellent examples of Service Shops.
Mass Service
• Mass Services have low customer contact/customization in
combination with high labour intensity.
• Retail companies, wholesaling and schools are examples of
Mass Service.
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Professional Service
• These services have both high customer contact /
customization and a high degree of labour intensity.
• Services provided by doctors, lawyers, accountant and
architect all have a very high labour costs due to the
education associated with these professions.
• These services lend to be highly customized according to the
particular situation/need of each customer.
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POM Models
 Models are a way for P/OM to represent and study the real
production environment.
 The P/OM input-output model can be written in simple math
form,
 P/OM models also take the form of algorithms.
 Algorithms are logical step-by-step procedures for solving
problems.
 Companies often create models which show how to lower
costs, improve quality, speed up delivery, enhance
productivity, and improve competitive capabilities
( )
y f x


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Expanded Input-Output P/OM Model
o Figure below illustrates an expanded version of the input–
output transformation model.
o There are many boxes now within the transformation grid.
o Each box represents operations that generate the product line,
which can be goods or services.
o Productive P/OM systems have well-designed transformations.
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Costs & Revenues Associated with Input - Output
(I/O) Models
Cost management is a key function associated with all aspects of
P/OM. A major portion of the cost of goods or services originates
with operations. Figure below is meant to illustrate how costs
are related to input-output models. Controlling costs is of prime
concern to all managers.

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P/OM Input- Output Profit Model
• The inputs are materials, labor, and other direct costs
associated with each unit of work made or services
delivered.
• The basic equations are:
• Profit (P) = Revenue (R) minus Total Costs (TC)
• P = R - TC
• TC = Fixed Costs plus Total Variable Costs
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I/O Profit Model with Sales Volume (V )
Period (t)
Output Variables Input Variables Transformation
Revenue: R Total Cost: TC Volume: V Units sold
at price/unit, p
R = pV TC = FC + vc (V) Net Profit: R - TC
p = price per unit vc = variable costs per
unit
Margin = p - vc
What volume V can be
sold in period t at price
p?
FC = fixed costs for time
period, t
Productivity is the
Output/Input = (R)/
(vc) V

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Centralized Manufacturing
A single factory reduces per unit production costs by allowing
the company to achieve economies of scale.
Research from the APQC shows that centralized organizations
have manufacturing costs that are about 3 percent lower than
decentralized companies.
Raw material inventory turn rates and production schedule
efficiency is higher with centralized manufacturing. Overall RM
costs are also generally lower.
Centralized manufacturing enables better forecasting, more
local jobs, consistent production and more effective use of
limited resources.

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However, there are certain disadvantages:
Centralized manufacturing tends to be inflexible because of the
cost of customization.
If a product has to change, the entire system must be retooled
and this is extremely costly and time consuming.
The cost of labour can also be disadvantage, especially if a
company maintains its central plant in a region or country where
wages rising.

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Decentralized Manufacturing
Companies with decentralized manufacturing enjoy many
benefits that often elude companies with centralized plants.
These advantages include flexibility, being closer to their
customers.
Better and timelier information, more motivated employees,
and the ability to take advantage of low labour costs in different
areas.
When a company is physically close to its customers, it can be
more flexible in meeting increasingly diverse demands, country
wise, even location wise.
Decisions can be more quick.

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Often a company decentralizes in response to increased
demand or expanding markets.
Decentralized manufacturing has disadvantages as well.
Multiple sites require a larger investment of capital to set up,
the per-unit costs are higher than mass-produced products
made in central plant, and maintaining organization-wide
consistency in products and processes is a challenge.
For companies that manufacture highly specialized products
and distribute them locally, decentralized manufacturing may
not be the best solution.

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Chase Strategy: Production Matches Demand
The chase strategy refers to the notion that you are chasing the
demand set by the market. Production is set to match demand
and doesn't carry any leftover products.
This is a lean production strategy, saving on costs until the
demand – the order – is placed. Inventory costs are low, and
the cost of goods for products sold is kept to a minimum and
for a shorter length of time.
The chase strategy is common in industries where perishables
are an issue or with a company that doesn't have a lot of extra
cash on hand and doesn't want the added risks of loss, theft or
unsold products. The production schedule is based on orders
and immediate demand.

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Level Production: Constant Production Over Time
As the title suggests, level production is a strategy that
produces the same number of units equally. This is common in
industries where demand is cyclical and production
capabilities are limited or capped.
For example, assume a manufacturing plant can only produce
10,000 calculators per month. The demand for calculators
changes based on consumer cycles that peak during the start
of the school year and tax season.
If the demand in peak seasons is 20,000 per month, the plant
could not meet the demand. By consistently producing 8,000
per month, the manufacturer keeps new inventory flowing
during nonpeak seasons but is still prepared for peak seasons.

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Make to Stock: Enough Product to Stock Shelves
A manufacturer can choose to make-to-stock producing enough to
stock the shelves of retailers. This is a common strategy for rolling
out a new product such as a cellphone or car.
Products are made and put in the inventory so consumers can see
what is available. This strategy is similar to level production, using
the efficiency of constant production that lowers costs and keeps
inventory at a minimum. Buyers can access products readily and
don't need to wait, keeping demand consistent.
The difference between make-to-stock and level production is the
schedule considers the cyclical demands of buyers and produces
according to those anticipated demands, reducing production if
the stock remains in inventory for extended periods.

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Assemble to Order: For Perishables
The assemble to order strategy is a common production strategy
for restaurants or any company that has perishables to consider.
A florist may have supplies to make 100 arrangements but won't
make an arrangement until the order is placed. This reduces
spoilage and allows for customization and freshness of
perishable products.
By assembling-to-order, the business can meet the customer's
demand and improve satisfaction while reducing the costs of
supplies and spoilage.