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Management Science – 2ABI-301

Prelim Period Lecture Note#3

Introduction to Operations ManagementBusiness organizations typically have three basic functional areas, as depicted in Figure 1.1:

finance, marketing, and operations. It doesn’t matter if the business is a retail store, a hospital, amanufacturing firm, a car wash, or some other type of business; it is true for all business organizations.Finance is responsible for securing financial resources at favorable prices and allocating thoseresources throughout the organization, as well as budgeting, analyzing investment proposals, andproviding funds for operations.

Marketing is responsible for assessing consumer wants and needs, and selling and promotingthe organization’s goods or services. And operations is primarily responsible for producing the goodsor providing the services offered by the organization. To put this into perspective, if a businessorganization were a car, operations would be its engine. And just as the engine is the core of what a cardoes, in a business organization, operations is the core of what the organization does. Operationsmanagement is responsible for managing that core. Hence, operations management is the managementof systems or processes that create goods and/or provide services. The creation of goods or servicesinvolves transforming or converting inputs into outputs. Various inputs such as capital, labor, andinformation are used to create goods or services using one or more transformation processes (e.g., storing,transporting, cutting). To ensure that the desired outputs are obtained, measurements are taken at variouspoints in the transformation process (feedback) and then compared with previously established standards todeterminewhether corrective action is needed (control). Figure 1.2 depicts the conversion process.

The essence of the operations function is to add value during the transformation process: Value-added isthe term used to describe the difference between the cost of inputs and the value or price of outputs.

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Organizational functionsin practice, there is significant interfacing and collaboration among the various functional

areas, involving exchange of information and cooperative decision making. For example, although thethree primary functions in business organizations perform different activities, many of their decisionsimpact the other areas of the organization. Consequently, these functions have numerous interactions, asdepicted by the overlapping circles shown in Figure 1.5. Finance and operations management personnelcooperate by exchanging information and expertise in such activities as the following:1. Budgeting. Budgets must be periodically prepared to plan financial requirements. Budgets mustsometimes be adjusted, and performance relative to a budget must be evaluated.2. Economic analysis of investment proposals. Evaluation of alternative investments in plant andequipment requires inputs from both operations and finance people.3. Provision of funds. The necessary funding of operations and the amount and timing of funding can beimportant and even critical when funds are tight. Careful planning canhelp avoid cash-flow problems.

Thus, marketing, operations, and finance must interface on product and process design, forecasting,setting realistic schedules, quality and quantity decisions, and keeping each other informed on theother’s strengths and weaknesses.

Other Functions in operations

1) Accounting – Provides information to management on costs of labor, materials, and overhead, andmay provide reports on items such as scrap, downtime, and inventories.

2) Management information systems (MIS) is concerned with providing management with theinformation it needs to effectively manage.

3) The personnel or human resources department is concerned with recruitment and training ofpersonnel, labor relations, contract negotiations, wage and salary administration, assisting inmanpower projections, and ensuring the health and safety of employees.

4) Public relations has responsibility for building and maintaining a positive public image of theorganization. Good public relations provides many potential benefits.

5) The legal department must be consulted on contracts with employees, customers, suppliers, andtransporters, as well as on liability and environmental issues.

6) Purchasing – procurement of raw materials

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Production systemsStage 1System design – decisions on system capacity, location of facilities, arrangement of department,acquisition of equipment usually involves decision that is for long-term use.

Stage 2System Operation- decision on management of personnel, inventory planning and control,scheduling, project management, quality control

Production of Goods versus Delivery of ServicesProduction of goods results in a tangible output, such as an automobile, eye glasses, a golf ball, arefrigerator anything that we can see or touch. It may take place in a factory, but can occur elsewhere. Forexample, farming produces non-manufactured goods.

Delivery of service, on the other hand, generally implies an act. A physician’s examination, TV and autorepair, lawn care, and projecting a film in a theater are examples of services. The majority of service jobsfall into these categories:

Government (federal, state, local). Wholesale/retail (clothing, food, appliances, stationery, toys, etc.). Financial services (banking, stock brokerages, insurance, etc.). Health care (doctors, dentists, hospitals, etc.). Personal services (laundry, dry cleaning, hair/beauty, gardening, etc.). Business services (data processing, e-business, delivery, employment agencies, etc.). Education (schools, colleges, etc.).

The differences between manufacturing and service1. Degree of customer contact (service involves a much higher degree of customer contact).2. Uniformity of input (Service operations are subject to greater variability of inputs)3. Labor content of jobs (Often services involving a higher labor content)4. Uniformity of output (in manufacturing there is less variability in final product)5. Measurement of productivity (productivity is more straightforward in manufacturing)6. Production and delivery (often customers receive the service as it is performed)7. Quality assurance (is more challenging in services when production and consumption

occur at the same time)8. Amount of inventory

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Classification of Production system1) Mass production

Producing large volume of standardized products/goods, produced by low skilled or semi skilledworkers, using highly specialized and expensive equipment.

2) Lean productionUses minimal amount of resource to produce high volume of high quality goods with some

variety.

3) Craft Production -Using highly skilled workers using simple, flexible tools to produce small quantities of customizedgoods

Productivity

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Productivity Measures are useful to the following:

1. To track performance over time2. To determine what has changed and then devise means of improving productivity in the

subsequent periods.3. To judge the performance of an entire industry or the productivity of a country as a

whole.

Factors that Affect Productivity:

1) Methods: by Standardizing the process and procedures where ever possible toreduce variability can have a significant benefit for both production and quality.

2) Capital: From manual packing to automated packing but requires capital investment forauto packing comparing to manual.

3) Quality: Example will it be 100% inspection which is time consuming or justrandom sampling?

4) Technology: the fact is that many productivity gains in the past have come fromtechnological change such as automation, computers, calculators and so on…

5) Management: A supportive management will boost morale of employees

6) Raw Materials: Will production be able to perform will if raw materials aresubstandard or don’t come on time?

7) Equipment: What will be the output if the machines are too old and experiencedowntime?

8) Working Condition/Environment: Will one produce more if the work area is toohot?

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IntroductionCapacity issues are important for all organizations, and at all levels of an organization. Capacityrefers to an upper limit or ceiling on the load that an operating unit can handle. The operating unitmight be a plant, department, machine, store, or worker. The capacity of an operating unit is animportant piece of information for planning purposes: It enables managers to quantify productioncapability in terms of inputs or outputs, and thereby make other decisions or plans related to thosequantities. The basic questions in capacity planning are the following:

1. What kind of capacity is needed?2. How much is needed?3. When is it needed?

Importance of Capacity DecisionsFor a number of reasons, capacity decisions are among the most fundamental of all thedesign decisions that managers must make.

1) Capacity decisions impact on ability organization to meet future demands2) Capacity decisions affect operating costs3) Capacity is usually a major determinant of initial cost.4) Capacity decisions often involve long-term commitment5) Capacity decisions can affect competitiveness.6) Capacity affects the ease of management.

Defining and Measuring CapacityCapacity often refers to an upper limit on the rate of output. Even though this seems simple enough,there are subtle difficulties in actually measuring capacity in certain cases. These difficulties arisebecause of different interpretations of the term capacity and problems with identifying suitablemeasures for a specific situation. Up to this point, we have been using a working definition ofcapacity. Although it is functional, it can be refined into two useful definitions of capacity:

1) Design capacity: the maximum output that can possibly be attained.2) Effective capacity: the maximum possible output given a product mix, scheduling

difficulties, machine maintenance, quality factors, and so on.3) Actual Capacity: The actual production at specific time.

These different measures of capacity are useful in defining two measures of system effectiveness:efficiency and utilization. Efficiency is the ratio of actual output to effective capacity. Utilization is theratio of actual output to design capacity.

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Determinants of Effective CapacityMany decisions about system design have an impact on capacity. The same is true for many operatingdecisions. This section briefly describes some of these factors, which are then elaborated on elsewherein the book. The main factors relate to the following:

1. Facilities 2. Products or services3. Processes 4. Human considerations5. Operations 6. External forces

Developing Capacity AlternativesAside from the general considerations about the development of alternatives (i.e., conduct areasonable search for possible alternatives, consider doing nothing, take care not to overlook non-quantitative factors), there are other things that can be done to enhance capacity management:

1) Design flexibility into systems. The long-term nature of many capacity decisions and therisks inherent in long-term forecasts suggest potential benefits from designing flexiblesystems. (For example provision for future expansion).

2) Differentiate between new and mature products or services. Mature products or servicestend to be more predictable in terms of capacity requirements, and they may have limited lifespan.

3) Take a “big picture” approach to capacity changes. When developing capacity alternatives,it is important to consider how parts of the system interrelate. (for example increase capacitywithout enough car park).

4) Prepare to deal with capacity “chunks.” Capacity increases are often acquired in fairly largechunks rather than smooth increments.

5) Attempt to smooth out capacity requirements. Unevenness in capacity requirements also cancreate certain problems.

6) Identify the optimal operating level. Production units typically have an ideal or optimal levelof operation in terms of unit cost of output. Production units have an optimal rate of output forminimum cost Minimum cost and optimal operating rate are functions of size of a production unit

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COST–VOLUME (BEP) ASSUMPTIONSCost–volume analysis can be a valuable tool for comparing capacity alternatives if certainassumptions are satisfied:

1) One product is involved.2) Everything produced can be sold.3) The variable cost per unit is the same regardless of the volume.4) Fixed costs do not change with volume changes, or they are step changes.5) The revenue per unit is the same regardless of volume.6) Revenue per unit exceeds variable cost per unit.

Cost–volume symbols