Lecture note no. 1 introduction to operations management


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Lecture note no. 1 introduction to operations management

  1. 1. AMA International University College of administrative and Financial Science Prelim Lecture Note # 1 Subject:-Management Science – 2 ABI-301Introduction to operations Management Prepared by: Abdulaziz Al-Sa’adi http://Amaiu.pbwiki.com aziz.alsaadi@gmail.com Contact Number 36704704
  2. 2. Introduction to Operations Management Operations management is the management of that part of an organization that is responsible forproducing goods and/or services. There are examples of these goods and services all around you. Everybook you read, every video you watch, every e-mail you send, every telephone conversation you have, andevery medical treatment you receive involves the operations function of one or more organizations. So doeseverything you wear, eat, travel in, sit on, and access the Internet with. Business 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 those resourcesthroughout the organization, as well as budgeting, analyzing investment proposals, and providing funds foroperations. Marketing is responsible for assessing consumer wants and needs, and selling and promoting theorganization’s goods or services. And operations is primarily responsible for producing the goods orproviding the services offered by the organization. To put this into perspective, if a business organizationwere a car, operations would be its engine. And just as the engine is the core of what a car does, in abusiness organization, operations is the core of what the organization does. Operations management isresponsible for managing that core. Hence, operations management is the management of systems orprocesses that create goods and/or provide services. The creation of goods or services involvestransforming or converting inputs into outputs. Various inputs such as capital, labor, and information areused 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 various points in thetransformation process (feedback) and then compared with previously established standards to determinewhether 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.Organizational functions2|Page
  3. 3. Working together successfully means that everyone understand not only their own role, they alsounderstand the roles of others. This is precisely why all business students, regardless of their particularmajor, are required to take a common core of courses that will enable them to learn about all aspects ofbusiness. Because operations management is central to the functioning of all business organizations, it isincluded in the core of courses business students are required to take. And even though individual courseshave a narrow focus (e.g., accounting, marketing), in practice, there is significant interfacing andcollaboration among the various functional areas, involving exchange of information and cooperativedecision making. For example, although the three primary functions in business organizations performdifferent activities, many of their decisions impact the other areas of the organization. Consequently, thesefunctions have numerous interactions, as depicted by the overlapping circles shown in Figure 1.5. Financeand operations management personnel cooperate by exchanging information and expertise in such activitiesas 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 and equipmentrequires 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.Marketing’s focus is on selling and/or promoting the goods or services of an organization. Marketing isalso responsible for assessing customer wants and needs, and for those to operations people (short term)and to design people (long term). That is, operations needs information about demand over the short tointermediate term so that it can plan accordingly (e.g., purchase materials or schedule work), while designpeople need information that relates to improving current products and services and designing new ones.Marketing, design, and production must work closely together to successfully implement design changesand to develop and produce new products.Marketing can provide valuable insight on what competitors are doing. Marketing also can supplyinformation on consumer preferences so that design will know the kinds of products and features needed;operations can supply information about capacities and judge the manufacturability of designs. Operationswill also have advance warning if new equipment or skills will be needed for new products or services.Finance people should be included in these exchanges in order to provide information on what funds mightbe available (short term) and to learn what funds might be needed for new products or services(intermediate to long term).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 operations3|Page
  4. 4. 1) Accounting – Provides information to management on costs of labor, materials, and overhead, and may provide reports on items such as scrap, downtime, and inventories. 2) Management information systems (MIS) is concerned with providing management with the information it needs to effectively manage. 3) The personnel or human resources department is concerned with recruitment and training of personnel, labor relations, contract negotiations, wage and salary administration, assisting in manpower projections, and ensuring the health and safety of employees. 4) Public relations has responsibility for building and maintaining a positive public image of the organization. Good public relations provides many potential benefits. 5) The legal department must be consulted on contracts with employees, customers, suppliers, and transporters, as well as on liability and environmental issues. 6) Purchasing – procurement of raw materials Legal Department Management Purchasing Information System MIS Operations Public Accounting Relations PersonnelProduction systemsStage 1System design – decisions on system capacity, location of facilities, arrangement of department,acquisition of equipment usually involves decision that are for long-term use.Stage 2System Operation- decision on management of personnel, inventory planning and control, scheduling,project management, quality controlProduction of Goods versus Delivery of Services4|Page
  5. 5. Although goods and services often go hand in hand, there are some very basic differences between the two,differences that impact the management of the goods portion versus management of the service portion.This section explores those differences. Production of goods results in a tangible output, such as anautomobile, eye glasses, a golf ball, a refrigerator anything that we can see or touch. It may take place in afactory, but can occur elsewhere. For example, 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.).Manufacturing and service organizations differ chiefly because manufacturing is goods orientedand service is act-oriented. The differences involve the following:1. 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 (Due to the nature of manufacturing, manufacturing systems usually have moreinventory on hand (e.g., raw materials, partially completed items, finished goods inventories) than servicefirms. Nonetheless, all business organizations carry at least some items in inventory that are necessary forthe operation of their businesses (e.g., office supplies, spare parts for equipment). And some serviceorganizations have substantial amounts of inventory (e.g., firms that supply replacement parts forautomobiles, construction equipment, or farm equipment).Classification of Production system5|Page
  6. 6. 1) Mass production Producing large volume of standardized products/goods, produced by low skilled or semi skilled workers, using highly specialized and expensive equipment. 2) Lean Production Lean production - uses 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 customized goodsPrelim Period Lecture Note#3Productivity6|Page
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  8. 8. Productivity Measures are useful to the following: 1. To track performance over time 2. 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 to reduce variability can have a significant benefit for both production and quality. 2) Capital: From manual packing to automated packing but requires capital investment for auto packing comparing to manual. 3) Quality: Example will it be 100% inspection which is time consuming or just random sampling? 4) Technology: the fact is that many productivity gains in the past have come from technological 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 are substandard or don’t come on time? 7) Equipment: What will be the output if the machines are too old and experience downtime?8|Page
  9. 9. 8) Working Condition/Environment: Will one produce more if the work area is too hot?SAMPLE PROBLEMS FOR PRODUCTIVITYExample # 1 A company that processes fruits and vegetables is able to produce 400 cases of canned peachesin one half hour with four workers. What is the labor productivity?Example # 2A wrapping paper company produced 2,000 rolls of paper one day. Standard price is $ 1/roll.Labor cost was $ 160, material cost was $ 50, and overhead was $ 320. Determine the multifactorproductivity.Example # 3 a) Find the productivity if four workers installed 720 square yards of carpeting in eight hours. b) Compute for the productivity of a machine which produced 68 usable pieces in two hours.Example # 4Determine the multifactor productivity for the combined input of the labor and the machine timeusing the following: Input: Labor: $ 1,000 Materials: $ 520 Overheads: $ 2,000Keep in mind the Production is 1760 unitProblem No#1Collins Little Company has a stuff of 4, each working 8 hours per day (for a payroll cost of $640 / day) and overhead expenses of $ 400 / day. Collins processes and closes on 8 titles eachday. The company recently purchased a computerized title search system that will allow theprocessing of 14 titles per day. Although the staff, their works hours, and pay will be same, theoverheads expenses are now $ 800 per day.Problem No#2At Modem Lumber, Inc., Art Binley, a president and a producer of an apple crates sold togrowers, has been able, with his current equipment, to produces 400 crates per 100 logs. Hecurrently purchases 100 logs per day, and each logs required 3 labor hours to process. He believes9|Page
  10. 10. that he can hire a professional buyer who can buy a better quality log at the same cost. If this isthe case, he increases his production to 260 crates per 100 logs. His labor hours will increase by 8hours per day. What will be the impact on productivity (measured in crates per labor –hour) if thebuyers is hired?Problem No#3Calculate the productivity for the following operations: a) Three employees processed 600 insurance policies last week. They 8 hours per day, 5 days per week. b) A team of workers made 400 units of product, which is valued by its standard cost of $10 each (before markups for other expenses and profit). That accounting department reported that for this job the actual cost were $ 400 per labor, $1000 for materials and 4300 for overhead:Problem No#4Student tuition at Boering University is $ 100 per semester credit hours. The states supplementschool revenue by matching student tuition, dollars per dollars. Average class size for typicalthree credit course is 50 students. Labor costs are $4000 per class, material costs are $20 perstudent, and overhead cost are $25,000 per class.Find: a) What is the multifactor productivity ratio? b) If instructors work an average, what is the labor productivity ratio?Prelim Period Lecture Note#3 Capacity PlanningIntroductionCapacity 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 have a real impact on the ability of the organization to meet future demands for products and services; capacity essentially limits the rate of output possible. 2) Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be matched, which will tend to minimize operating costs. 3) Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of a productive unit, the greater its cost.10 | P a g e
  11. 11. 4) Capacity decisions often involve long-term commitment of resources and the fact that, once they are implemented, it may be difficult or impossible to modify those decisions without incurring major costs. 5) 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.ExampleDeterminants 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 services 3. Processes 4. Human considerations 5. Operations 6. External forcesDeveloping 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:11 | P a g e
  12. 12. 1) Design flexibility into systems. The long-term nature of many capacity decisions and the risks inherent in long-term forecasts suggest potential benefits from designing flexible systems. (For example provision for future expansion). 2) Differentiate between new and mature products or services. Mature products or services tend to be more predictable in terms of capacity requirements, and they may have limited life span. 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 capacity without enough car park). 4) Prepare to deal with capacity “chunks.” Capacity increases are often acquired in fairly large chunks rather than smooth increments. 5) Attempt to smooth out capacity requirements. Unevenness in capacity requirements also can create certain problems. 6) Identify the optimal operating level. Production units typically have an ideal or optimal level of operation in terms of unit cost of output. Production units have an optimal rate of output for minimum cost Minimum cost and optimal operating rate are functions of size of a production unitCOST–VOLUME ANALYSISCost–volume analysis focuses on relationships between cost, revenue, and volume of output. Thepurpose of cost–volume analysis is to estimate the income of an organization under different operatingconditions. It is particularly useful as a tool for comparing capacity alternatives. One of the famousmathematical modeling using to identify capacity is break-even point (BEP) the volume of output atwhich total cost and total revenue are equal.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 symbols12 | P a g e
  13. 13. 1. The efficiency of a productive unit is 60%. The unit produces an average of 20 forklift trucks per day. Determine the effective capacity of the unit. 2. The utilization of a machine is 50%. The machine has a design capacity of 70 units per hour and an effective capacity of 60 units per hour. Find the efficiency of the machine.13 | P a g e