Operations Management

1
Introduction to Operations Management

Module 001 Intro to OM and the

different Business Organizations

This chapter is an overview of Operations Management, serving as a

preparation for this course.
At the end of this module, you will be able to:
1. To be able to define operations management and understand its
importance.
2. To differentiate the forms of business organization and identify
the advantages and disadvantages of each.

As you will find out later, OM is an important function of any

business organization since it centers its focus on the heart of any
business – its product and service.

What is Operations Management?

Operations Management (OM) is a discipline composed of activities
that relate to the creation of goods and services through the
transformation of inputs to outputs. As it is concerned with the
transformation of inputs to outputs, it implies relevance in a
manufacturing business such as Procter & Gamble, Unilever, and even
Toyota or Hyundai as they transform raw materials to finished goods.
However, such notion is not true. OM is a concept applicable not only
in a manufacturing business, which is a type of business that
transforms raw materials to finished goods, but also to merchandising
and services businesses. A merchandising business, just like
manufacturing, deals with tangible products. However, it does not
provide significant modifications on the product. An example of this
would be department stores and online resellers. On the other hand, a
service business concerns itself with providing services.

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Why study OM?
We study OM for four reasons:
First, it is a major function in the organization. It is integrally related
to the other business functions, which are to market (sell), finance
(account), and produce (operate), the third one concerned with OM
activities. Therefore, we study how people organize themselves for a
productive organization.
Second, knowing how goods and service are produced and rendered
are important for any organization. Needless to say, you will never
know if you have arrived in a destination if your do not know where
you are going. Understanding what the company sells highlights the
value of the organization to the society through its products and
services.
Third, understanding what operations managers do is important to
every member of the organization. Regardless of your job in an
organization, you can perform better if you understand what
operations managers do. In addition, understanding OM will help you
explore the numerous and lucrative career opportunities in the field.
Fourth, it is a cost center of an organization. By this, it means that
operations incur expenses and are not primarily the bread and butter
of an entity. A large percentage of the revenue of most firms is spent
in the OM function. Hence, OM provides a major opportunity for an
organization to improve its profitability and enhance its service to
society.

As highlighted above, OM is an important part of any organization.

However, one should understand the types and forms of business
organizations so as to fully understand how operations management
impact its function.

Type of Business Organizations

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Introduction to Operations Management

Service business
This is the type of business which offers services for a fee.
Examples include laundry shops, salons, spas, dress shops,
barber shops, appliance repair shops, vulcanizing shops,
computer or internet shops, and printing and photocopying
shops. Those in the practice of professions like CPAs, lawyers,
doctors, dentists, and others, are also included in this type of
business.

Merchandising business
This type of business is concerned with buying and selling of
goods for profit. Examples include supermarkets, department
stores, sari-sari stores, hardware, bakery, cell phone shops, and
jewelry shops.

Manufacturing business
This type of business produces goods from raw materials and
sold to wholesalers and retailers. Examples include car
manufacturers, soft drink manufacturers, soap and laundry
detergent manufacturers, and others.

Businesses are part of the private sector and are never considered part of the
public sector unless they are government owned and controlled corporations
(GOCCs).

Forms of Business Organizations

Sole or single proprietorship

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 This is a type of business which is owned by only one person.
Usually a sole proprietor (owner of the business), is also the
manager or boss of his own business.
Advantages:  The proprietor alone
enjoys the profits gained
 Formation is easy
by the business.
because fewer
documents are needed in Disadvantages:
opening this type of
business compared to a  The sole proprietor has to
partnership or shoulder all the risks and
corporation. losses.

 It is easy to operate since  The sole proprietor has no one

most of this type of to get advice from or opinion
business is small. regarding business operations.

 It is easy to manage since  The sole proprietor has

the owner makes the unlimited liability for any debt
decision himself. of the business which may
extend up to his personal
 Lesser tax to pay unlike properties.
other types of
businesses.  The sole proprietor has limited
ability to raise funds for his
business as it grows.

Partnership
By the contract of partnership, two or more people join
together to contribute money, property or industry for
purposes of dividing the profits (or loss) among themselves.

Advantages: less burden to each of

the partners.
 Formation is easier than
that of the corporation  More capital can be
because of minimal contributed by the
regulatory partners.
requirements.  It is exempted from
 Management is divided paying corporate
among partners, thus income taxes.
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Introduction to Operations Management

Disadvantages:  Unlimited liability of partners.

The partner’s liability extends
 Limited life. When a partner
up to their personal properties
withdraws due to
in case of insolvency.
incapacitation, bankruptcy,
death, or the addition of a new  Joint liability. Each of the
partner, the partnership is partners can bind the
dissolved. partnership to contracts which
make all partners jointly liable.

Corporation
It is composed of five to fifteen people. It is organized by operation of
the law and considered the most complex form of a business
organization.

Advantages: Disadvantages:
 There is a board of directors  It is costly to form and manage
who makes decisions for the a corporation.
corporation.  The government has greater
 It has the capacity to raise scrutiny, regulation, control
more capital. and supervision over the
corporation.
 It can exist for a period not
more than 50 years, subject to  It is more complex to manage a
renewal. corporation compared to
partnership and sole
 It has limited liability. This
proprietorship.
means creditors cannot go
after their personal property in  It has limited powers as stated
case of bankruptcy. in the Corporation Code.
 It is subject to higher income
tax.

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