Introduction to Operations Management
The field of what has been known as Production management has expanded in scope to cover management of non manufacturing or service activities such as banking, hotel management, transportation and education. Because of this broad scope, the field has taken a new name, Production and Operations management.
What is Production?
Production is the process by which goods and services are created. We find productive processes in all kind of organised activities such as factories, offices, supermarkets and hospitals.
It is the process of where Inputs of materials, labour and resources are used to obtain goods or services using one or more conversion/transformation processes, thereby adding value.
What is added value?
Added value is the difference between the cost of acquiring the raw materials and finished goods.
Value added = Sales Revenue - cost of Raw materials
For example, if I am selling wooden chair.
Cost of wood for one chair=$100
Selling Price of one chair=$250
Added Value= Selling price-Cost of raw material i.e. ($250-$100) =$150
Value added is NOT the same as Profit.
To calculate profit we subtract the cost of raw material + labour cost + other expenses from Sales revenue whereas in Valued added we only subtract the raw material cost only.