OPERATIONS MANAGEMENT Chapter 1 5

 There are number of reasons to
study POM
1. It lies at the heart of business activities:
Finance, operations, and Marketing
2. It is the segment of our society that
creates the useful products
3. In order to develop our career in OM area
4. It offers opportunity to improve
profitability (by reducing cost) and
enhance services to society

 What is POM?
 It is the managements of direct resources
 What are these resources?
 They are identified as 5 P’s
 People
 Plant
 Parts
 Processes
 Planning & control systems

 Related to 5 M’s of Management
 Men
 Money
 Machine
 Material
 Method

 In general, POM is the management of
processes or systems that create useful
goods/services
 The ultimate objective of POM is to
produce a specified product, on schedule
at minimum cost

 POM is a set of component whose functions
are to convert a set of
 input/resources into some desired
 output through
 transformation process.

 In most organizations,
operations/production is an internal
function that is buffered from external
environment by other organization
functions.
 See diagram below

 Customer Needs & Orders – Marketing
 What to produce?
 Sales forecast
 Customer quality requirements (product specification)
 Development of new products and processes
 Provision of customer feedback
 Technology – Engineering
 Development of product-service design
 Perform method analysis
 Provision of work measurement information
 Perform plant layout and materials handling
 Plant maintenance

 Services and Material Supply – Procurement &
Inbound Logistics
 Determination of items to be purchased
 Determination of delivery Schedule
 Discovery of new materials, products, and new
processes
 Conducting inventory control
 Labor market – Personnel (HRM)
 Understanding of the industrial relationship
 Understand the relationship b/n time standards and
incentive packages
 Development of job summary: job description and job
specification

 Financial Institution – Finance Adm.
 Provision of budgeting information
 Analysis of investment projects
 Provision of finance for capacity, quality, …
improvement
 Accounting
 Compile production cost data
 Perform audit
 Prepare financial statement
 Distribution/outbound Logistics
 Identify the location of customer
 Perform order fulfillment
 Shipping the order

 Examination of decisions in POM helps us to understand
how operations managers manages the production
system
 These decisions are broadly classified as:
I. Strategic Decisions
 Decisions are related to products, process and facilities
 Concerned with operations strategies & long-range plan
a. Products & production process
b. Production technology
c. Allocating resources to strategic alternatives
d. Long-range capacity planning & facility location
e. Facility layout

II. Operating decision
 Decisions about planning production to meet demand.
 Decision areas are:
a. Production planning systems involves APP, MPS
b. Independent demand inventory systems: how much
finished goods inventory to carry for each product
c. Material Requirement Planning (MRP) and Capacity
Requirement Planning (CRP)
d. Shop floor planning and control: short range decisions
“what to produce & where to produce”
e. Planning & scheduling service plan operations
f. Just in Time (JIT) manufacturing
g. Material Management (MM) and purchasing

III. Control decision
 It is related to day-to-day activities of workers,
quality of products, production and OH costs
and maintenance of machines
 Decision areas are:
a. Productivity of employees
b. Total Quality Management (TQM): planning
the system for quality of product
c. Quality control: application of quality
control tools
d. Planning & control project
e. Maintenance management & reliability

 Corporate mission: is a set of long-range goals
unique to each organization which included
statements about:
 The kind of business the company wants to be in
 Who its customers are
 Its basic beliefs, about business
 Its goals of survival, growth & profitability
 Business strategy: a long-range plan which
provides a roadmap how to achieve corporate
mission
 It includes a plan for each functional areas
 It is developed after assessing the global business
condition

 Global Business Conditions: which is related to
Opportunities and Threats: Conducting Market &
competition analysis, Economic, Political - Legal,
Technological and Social developments, . .
 Distinctive competencies: which include Strength
and Weaknesses: Level of technology, motivation
& competitiveness of the workforce, managerial
capabilities …. )
 Competitive dimensions: are things that customer
want from product/services. They can be used as
tools to capture the market share

Major competitive dimensions
1. Cost: “make the product cheap”
2. Product quality & reliability: “make the
product good”
 Quality involves both product quality & process
quality
 The goal of process quality is to produce error free
product
 The goal is to focus on requirements of the
customer i.e. avoid both over and under design of
product
3. Delivery speed: “make the product fast”
Company’s ability to deliver more quickly than
competitors

4. Delivery reliability: “deliver it when promised”
 Company’s ability to supply products on/before
promised due date
5. Coping with changes in demand: “change its
volume”
 Company’s ability to respond to increased and/or
decreased demand
 It is an ability to effectively deal with dynamic market
demand
6. Flexibility & New Product Development (NPD)
speed: “change it”
 Company’s ability to offer a wide variety
 Provide customers more choice
 It implies the time required to develop new products,
and to convert its processes to offer the new product

7. Other product specific criteria: “support
it”
 There are technical support, product mix
option, customization, location of fabrication
site, color, size, weight …. which are primarily
service in nature

 Operations strategy: is a long-range plan
which provides a roadmap for the production
function to achieve the business strategy
 It incorporate decisions such as:
 What new products must be developed & when
 When they must be introduced into production
 What facilities are needed & when
 What new production technologies & processes
must be develop and when

 Types of Productivity Measures
a. Single Factor/Partial Productivity:
implies ratio of output to single
resource/input
b. Multifactor Productivity: implies ratio of
output to group of inputs but not all of the
inputs
c. Total Factor Productivity: implies ratio
of all outputs to all inputs

 Factors Affecting Productivity
1. Labor:
 Productivity improvement can be achieved
through
 healthier,
 better educated & nourished labor force
 It accounts one- sixth (17%) of annual 1%
increase in productivity

2. Capital: provides tools/technology to be
used by the workforce
 It accounts one-sixth(17%) of the annual 1%
3. Leadership/Management: is a factor of
production and an economic resource
 It is responsible for ensuring that labor and
capital are effectively used to increase
productivity
 It accounts two third (66 %) of the annual 1%

i. Develop productivity measure for all
operations
ii. Look at the system as a whole and decide
which operations to concentrate on i.e.
identifying bottleneck operation
iii. Develop methods of achieving productivity
improvements through involving workers,
method analysis, getting lesson from other
company which improved its productivity.

iv. Establishing reasonable goals for
improvements
v. Make it clear that management support
and encourage productivity improvements
through adequate rewards
vi. Measure improvements & publicize them

 Given the following data:
 Annual production: 40,000 units
 Selling price: Birr 65.50 at competitive market
 Production hours per day: 8 standard hrs a day
 Work weeks: 5 days work week
 Ave. no. of work weeks per annum: 47 weeks
 Ave. active no. of workers in the production floor: 12 workers
 Number of assembly lines: Two assembly lines
 Ave. wage rate: Birr 10 per man-hour
 Ave. cost per machine hours: Birr 5.50 per machine-hour
 Raw material cost per unit: 20% of selling price/unit
 Ave. cost of component parts per annum: Birr 56,500.00
 Ave. energy consumption per machine per hr.: Birr 3.50
 Other ave. utility costs per annum: Birr 34,500.00
 Average MOH costs per annum: Birr 32,500.00
 Required: Compute annual total productivity

There are 5 ways to make the ratio bigger
 Make the output larger for the same input
 Make the input smaller for the same output
 Increasing the output while decreasing the
input
 Increasing the output greater than the input
increase
 Decreasing the output lesser than the input
decrease

 They are often similar in terms of “What is
done?” but differ in terms of “how it is
done”
 Similar decisions include: size, location,
scheduling, and allocation of resources…
 Their difference lies as manufacturing is
“product oriented” where as service is
“act oriented”

 Design is the process of structuring of
component parts/activities of a product so that
as a unit it can provide specified value.
 It is a major factor in customer satisfaction,
product-service quality, and production costs
 Objectives of Product-Service Design
 To bring new or revised products or services to the
market as quickly as possible
 To design products and/or services that have
customer appeal
 To increase the level of customer satisfaction
 To increase quality
 To reduce costs

 It adds competitive advantage by creating
an image as a leader on top of profitability
and increasing market share
 It also applied for not-to-profit
organization
 Successful product design must consider
market environment and the
process/technology which must allow using
firm’s resources and available levels of
technology

 The Design Process
 The design process begins with the motivation for
design (to achieve goals, government regulation,
new technology, competition, customer needs, …)
 In order for the design process to occur, there
must be ideas for new or improved designs. These
can come from a variety of sources (employees,
customers, R & D, competitors) through Reverse
Engineering (RE) which requires carefully dismantle
and inspect the product, benchmarking, ..)
 In designing process manufacturability is a key
concern for manufactured goods: Ease of
fabrication and/or assembly is important for cost,
productivity, and quality

 Some products do not seem to go through
such a life cycle but most exhibit it.
 Wide variations exist in the amount of time
a particular product takes to pass through
a given phase of its life cycle.
 Often it is a matter of the basic need for
the item and the rate of technological
change.
 Examples: a matter of few hours
(newspaper), months (seasonal fashions),
years (video recorders) and decades
(Beetle Volkswagen)

 Product Design and Development
Philosophies
1.Market-Pull Philosophy
 The market-pull logo is: “One should make
what can be sold” i.e., one should produce the
market requirement or customer demand
irrespective of internal technology or
processes.
 It is required to undertake customers’ survey
and market research which deals with the
formulation of a firm’s marketing strategies
with regard to the four P’s

2. Technology-Push Philosophy
 The technology-push strategy logo is “one
should sell what can be made” i.e., the
existing technology and/or process determines
what kind of a product to be produced
 The view is suffer from Marketing Myopia
 The philosophy is dominated by: Vigorous use
of technology and operation simplicity
 Efficiency and effectiveness through aggressive
R& D
 Producing superior products

3. Inter-functional Philosophy
 The inter-functional approach logo is: “Product
design and development is neither market-pull
nor technology-push.
 Rather it is inter-functional and interactive
processes of customers, marketing, finance,
personnel, engineering, procurement,
suppliers and other related functional areas.”
 The problem in applying this strategy is the
existence of an inter-functional conflict among
different functional areas and parties. The
remedy is forming a committee or taskforce
whose members are drawn from these parities.

 The traditional product development process
include
i. Idea generation from both internal and external
sources
ii. Product conception and selection
iii. Conducting feasibility study from three
dimensions: market, technical and financial
iv. Generating initial/preliminary product design in
order to avoid costly and impossible product design
v. Develop prototype model
vi. Conduct product testing and pilot market test in
order to generate feedback from prospect
customers
vii. Final product design; and start production at full-
scale and commercialize to the target market

 It is a business strategy which replaces the
traditional product development process
 It involves product development tasks that
are done in parallel and there is an early
consideration for every aspect of a
product's development process
 Design for Manufacturability (DFM)
 Design for procurement
 Design for environment
 Design for disassembly

 Answering whether it is possible to
produce using current technology and/or
process?
 Elements of DFM are:
 Specification: is a detailed description of raw material,
part, or product including physical dimensions stated in
terms of tolerances (a minimum and maximum product
dimension). It allows both ease of assembly and
effective functioning of the finished products
 Standardization: refers to the design activity
that reduces variety among a group of
products or parts. It usually results in higher
volume for each product or part model, which then
leads to lower production costs, higher product
quality, greater ease of automation, and lower
inventory investment

 Simplification of product design: is the
elimination of the complex features so that the
intended function is performed but with
reduced costs, higher quality, or more
customer satisfaction. Customer satisfaction
may be increased by making a product easier
to recognize, buy, install, maintain, or use

 answering questions regarding: What is the
supply base for the required component
parts?
 What is the capacity of that supply base?
 At what cost can parts be made and at
what levels of conformance quality?

 it broadens the concept of design from the
extraction of raw materials to their
disposal This strategy is based on the
concept of sustainable development
 A philosophy of satisfying current
generation needs and wants without
compromising the ability of the next
generation

 Companies are responsible for the items
they make, from start to finish/
 The approach helps to prevent
environmental liabilities in the future
 Concerned with recycling, energy
consumption, emission, . . .

 Japanese engineer Genichi Taguchi’s approach
is based on the robust design
 His premise is that it is often easier to design a
product that is insensitive to environmental
factors, either in manufacturing or in use, than
it is to control the environmental factors
 It is a design when products are designed to
perform over a much broader range of
conditions
 The more robust a product (or service) is, the
less likely that it will fail due to a change in
the environment in which it is used or in which
it performed (in the case of a service)

 Products and processes are designed and
introduced after series of experiments for
various factors to make them insensitive to
use conditions and other environmental
factors
 It is based on Energy Transformation Model
which is a unique approach to achieving
Quality Assurance and Robustness during
the design phase utilizes identification of
the ideal functions of a product or process

 Modules represent groupings of component
parts into subassemblies, usually to the
point where the individual parts lose their
separate identity
 Modular design is another form of
standardization
 It aims at sub-dividing a system into smaller
group of parts (module) that can be
independently created
 Modular design allows accommodating
customers demand by arranging modules in
different configurations

 It combined the advantages of
standardization with customization
 Advantages are:
 Failure on equipment parts are often easier to
diagnose and remedy
 Ease of repair and replacement
 Manufacture and assembly of modules generally
involves simplifications
 Purchasing and inventory control become more
routine
 Fabrication and assembly operations become
more standardized
 Training costs often are less

 Disadvantages of modular design
 Decrease in customer choice/variety: the
number of possible configurations of modules
is much less than the number of possible
configurations based on individual components
 Inability to disassemble a module: in order to
replace a faulty part, the entire module must
be scrapped-usually a more costly procedure.

 QFD is a structured approach for integrating
the “voice of the customer (VOC)” into the
product development process
 QFD uses planning matrices each called “The
House of Quality”.
 Collecting Customer Information through: What
does customer really want ?
 What are customer’s expectations ?
 Are customer’s expectations used to drive
design process ?
 What can design team do to achieve customer
satisfaction?

 Building the House involve the following
components
 List Customer Requirements (What’s)
 List Technical Descriptors (How’s)
 Develop Relationship (What’s & How’s)
 Develop Interrelationship (How’s)
 Perform Competitive Assessments
 Prioritize Customer Requirements
 Prioritize Technical Descriptors

 It is an approach that uses computer software
and hardware applications to generate
digitized models representing:
 A product’s structural characteristics
 Physical dimensions
 CAD originally developed in the field of
Mechanical Engineering as a way of replacing
the inefficient method of mechanical drafting
 When CAD is used, a design engineer starts by
developing a rough sketch or just an idea
 The designer then uses a graphic display as a
drafting board to construct the geometry of a
design

 VA is the study of the relationship of design,
function and cost of a product, materials, or
services with the aim of reducing its cost through:
Modification of design or materials specification,
 Manufacturing by more efficient process
 Change in source of supply (internal or external)
 Possible elimination of certain feature of a product
 Value Engineering (VE) focuses on pre-production
design improvement, whereas VA, a related
technique, takes place during the production
process, when it is clear that a new product is a
success
 VA involves both cost analysis and design analysis

 GT is a process by which components be
identified by a coding system that specifies the
type of processing (such as drilling) and the
parameters of the processing (such as size)
 This facilitates standardization of materials,
components, and processes as well as the
identification of families of parts
 GT is an engineering and manufacturing
strategy based on the development and
exploitation of commonalities among Parts,
Equipment, or Processes
 As families of parts are identified, activities
and machines can be grouped to minimize
setups, routings, and material handling

 A crucial element of product design is its
impact on quality
 Whether products of superior quality are
received by customers is ultimately
determined in large part to the extent that
products are designed for quality
 Quality obviously determined by the
customer’s perception of the degree of
excellence of the characteristics and/or
features of products or services

 The design of services shall consider
different elements than the design of
goods
 Service design often focuses more on
intangible factors (e.g., peace of mind,
environmental setting, mood, quality of
facilities, etc) than does product design
 In services design due to simultaneously,
training, process design, and customer
relations are particularly important as there is
less chance in finding and correcting errors
before the customer discovers it

 As services cannot be inventoried it limits
flexibility, and makes capacity design very
important
 Services are highly visible to consumers, and
must be designed with that in mind
 Some services have low barriers to entry and
exit resulting additional burden on service
design to continually be aware of what
competitors are offering
 Location is often important in service design,
with convenience as a major factor

 The term process refers to the facilities,
skills, and knowledge used to produce
firm's products or services
 Difference between product and process
design is: What to do? – for product design
 How to do? - for process design
 Process flow design implies the specific
processes that raw materials, parts,
subassemblies, or people flow as they
move through the plant

3. Process charts
 It is a detailed analysis of only one of the
operations required to produce a specific
product
 It can be used to compare alternative methods
of performing individual operations or groups
of operations
 It is a tool to be used in Business Process
Reengineering (BPR) analysis

 It is an approach to improve existing internal
business processes radically i.e., Revolution
 It is the fundamental reconsideration and the
radical redesign of organizational processes in
order to achieve drastic improvement of current
performance in terms of:
 Cost: reducing cost by > 50%
 Services: reducing complaints by 80%
 Speed: reducing time by > 50%
 The key enabler is Information Technology
 The model is developed in 1990’s by Michael
Hammer and James Champy

 The concept was published in “Reengineering
the Corporation” in Harvard Business Review
journal in 1990s
 The underlying theme is rather than organizing
a firm into functional specialties (like
Production, Accounting, Marketing, etc.) and
to look at the tasks that each function
performs, look at complete processes and their
outcome
 The founder of the idea believed that the
design of workflow is based on assumptions
about Technology, People, and Organizational
goals that were no longer valid

They suggested seven principles to streamline the
work process:
i. Organize around outcomes: results, not tasks,
inputs, or even outputs
ii. Identify all the processes in an organization and
prioritize them in order of redesign urgency
iii. Integrate information processing work into the
real work that produces the information
iv.Treat geographically dispersed resources as
though they were centralized
v.Link parallel activities in the workflow instead of
just integrating their results
vi.Put the decision point where the work is
performed, and build control into the process
vii.Capture information once and at the source

 A Six Step Approach to BPR - Davenport Approach
i. Develop the business vision and process objectives
ii. Identify the business processes to be redesigned
and map the existing process (AS-IS)
iii. Understand and measure the existing processes:
helps to provide a baseline for future improvements
iv. Identify IT levers: awareness of IT capabilities can
and should influence BPR
v. Design and build/map a prototype of the new
process (TO-BE)
vi. Adapt the organizational structure, and the
governance model, towards the newly designed
primary process

 Benchmarking: refers to systematically
learn from others who considered to be the
best in the sector/industry
 Design from a Clean Sheet: helps to come
up with ideas that lead to a dramatically
improved process to achieve the process's
desired outcomes and meet stretch
objectives

 Process Selection Decisions
 Process selection decisions determine the type
of production process to be used and the
appropriate span of the process: make-to-
order, make-to-stock, continuous, repetitive,
process (job-shop) or project
 It affects the costs, quality, delivery, and
flexibility of operations as it binds the firm
with equipment, facilities, and a particular
type of labor force
 It also involves the selection of the appropriate
process technology

 Technology: refers to applications of scientific
discoveries to the development and improvement of
goods and services and/or the processes that produce or
provide them
 Three kinds of technology
 Product and service technology: is the discovery and
development of new products and services
 Process technology: includes methods, procedures,
and equipment used to produce goods and provide
services.
 Information Technology (IT): is the science and use of
computers and other electronic equipment to store,
process, and send information

 Process Selections decisions answers:
 Variety: How much variety in products or services
will the system need to handle?
 Flexibility: What degree of equipment flexibility
will be needed?
 Volume: What is the expected volume of output?
 Types of Production Process
 Conversion: such as iron ore into steel
 Fabrication: forming raw material (steel to spare
parts)
 Assembly: fastening parts together to create
product e.g., car, bicycle, ….
 Testing: such as for quality of products

 It is appropriate to make-to-order, custom
products in accordance with design
supplied by the customer
 Needs general-purpose production
equipment (e.g., Lathe, Cutting machine,
Turn, Welding machine, etc.)
 May require an inventory of some of the
raw materials
 There is largest percentage WIP inventory
 Examples: woodworking shops, metal
fabrication shops, . . .

2. Batch Manufacturing
 It is found between Job shop and Repetitive
Manufacturing
 Batch refers to a single production run
 Batch size refers to the quantity produced in a single
production run that could be less than 100 units or up to
a few 1000 units
 The company makes a batch of one product, then switch
over (set up) the equipment and make a batch of another
item
 Production equipment is more flexible than repetitive
manufacturing and it is generally less flexible than job
shops
 Products having same or similar processes may be
grouped into a product family
 Examples: small hand tools (e.g., drill, screw driver), and
hand mixers

3. Repetitive Manufacturing
 These are mass production facilities that
produce high volumes of identical products
 They are usually make-to-stock producers
 Equipment are automated and special-purpose
 WIP is low because the items move quickly
 Product(s) follow the same path
 Examples: television, radio, and telephone
producers

4. Continuous Flow (Flow Shop)
 Products flow continuously through a linear
process
 Usually the products are not discrete
 Examples: chemical, oil, petroleum, sugar
refineries, bottling, cement

 It is the process of determining a
geographical site for a company’s
operations
 It is among the strategic operations
decisions areas
 It answer for the question
 “Where should we locate the plant and/or
facility?”

 Location problem is very important
decision for the following basic reasons:
 Location decision is somewhat irreversible due
to its expensiveness or immobility
 It affects the costs of operations, including
labor, raw materials, taxes, construction, land,
utilities, power, and many other factors.
 It affects the costs of shipping raw materials
and finished products.
 It affects expansion potential in the future
 It affects the marketing effectiveness of the
firm

 The Operation Managers of a business firm,
when confronted with problems leading to
a decision on plant location, have several
alternatives:
 Continuing operating on the present location
and subcontract for the additional demand
when demand is instable
 Expand the present plant on the present site
provided that there is available site.
 Keeping the present plant and at the same
time build new plant/plants elsewhere.
 Sell the present plant and relocate the entire
operation.

 If the decision is to build new plants
elsewhere, then a complex analysis is
necessary related to:
 Which market will be served?
 Where are the sources of raw materials used?
 What type of labor supply is necessary?
 What methods of transportation are necessary?
 How much land will be needed for the plant
and for future expansion?
 What types of power will be needed/required
in the production process?
 What particular type of climatic conditions
required? Dry, temperate, damp, …… climates

Steps in Location Decisions
 The general procedure for making
location decisions usually consists of the
following steps:
i. Decide on the criteria that will be used to
evaluate location alternatives.
ii. Identify the factors that are important, such
as location of markets or raw materials.
iii. Develop location alternatives:
 Identify the general region for a location
 Identify a small number of community alternatives
 Identify a particular site alternatives
iv. Evaluate the alternatives and make a
selection

a. Regional Considerations/Factors
1. Proximity to markets: relates to the
location where customers are found
It is appropriate if:
 The products to be produced is perishable,
Fragility, its volume bulk,
 Fragility, and perishability increase when it
is processed further, needs high
transportation space (i.e., large percentage
of transportation cost form the total cost),
 The product is a service
 The company deals with custom-made
products

 Organizations that need to be close to
markets include:
Government agencies
 Police and fire departments
 Post Office
Retail Sales and Service
 Fast food restaurants, supermarkets, gas stations
 Drug stores, shopping malls
 Bakeries
Services
 Doctors, lawyers, accountants, barbers
 Banks, auto repair, motels

2. Proximity to Raw Materials: refers to the
location of raw materials, supplies, semi-
finished goods, parts, equipment, tools etc.
 If the weight or bulk of the product largely
decreases by further processing
 If the perishability decreases by further processing
such as through pasteurizing
 The product needs a number of raw materials
locate it at a place that reduces the cost of
transporting major materials
3. Availability of Adequate Transportation
Facilities
 Operation Managers must study the characteristics
of the raw materials and finished products to
determine transportation need such as cut
flower, fossil oil, . . .

4. Labor supply: one of the important inputs in
production systems is labor
 Factors that should be considered include
availability, level of skill and education, their
productivity, cost of labor, degree unionization, and
costs of living as related to labor cost
5. Climate
 Favorable climate is important in order to acquire
and maintain productive work force
 Certain industries like agricultural business require
specific climatic conditions
6. Government and political stability
7. Exchange rate fluctuation
8. Export, import regulations, duties, and tariffs
of a country

b. Community Considerations/Factors
 Managerial preference: relates to the personal
preference of owners and managers
 Community facilities: is concerned with the
availability of schools, churches, medical facilities,
residential housing, recreational opportunities, police
and fire protection, high ways, etc.
 Community attitudes: in order to assure the long-term
existence in a community, it is mandatory to win the
interest, enthusiasm, and cooperation of a society
 Community government and taxation: gov’t policies,
its stability, competency, honesty and cooperative
government officials are credits
 Availability and cost of sites: relates to the
consideration of the availability and cost of a specific
sites for the facility

c. Site Considerations/Factors
 Size of the site: it must be large enough to
satisfy some requirements such as customers
parking requirement, future expansion plan,. .
 Drainage and soil condition: if there is poor
drainage there will be accumulation of water
and also if the load bearing capacity of the soil
is low, it is hardly possible to establish sound
building foundations
 Water supply: even though the amount may
differ for different organizations, all
companies require getting access to safe and
pure water

 Utilities: costs of acquiring and using utilities
like electricity, natural gas, water, etc.
 Transportation facilities: relates to getting
access to high ways, rail roads, pipelines,
water, and air transport
 Land and development costs: costs related to
excavation, grading, filling, construction of
roads, siding etc.
 Waste disposal and environmental
considerations: as part of discharging some
societal responsibilities it has to play its part
by preventing and reducing pollution and
environmental degradations and deteriorations

 Where do we get such Information for Plant
Location Analysis in Ethiopia?
 Investment office (both federal and regional),
Municipalities
 Government sponsored organizations, Sub cities
 Addis Ababa Chamber of Commerce (AACC) Ethiopia
Chamber of Commerce (ECC)
 Commercial banks (both governmental and private)
 Ethiopian/Addis Ababa Investment Authority
 Ethiopia Revenue & Customs Authority (ERCA)
 Ethiopian/Addis Ababa Road Authority
 Ethiopian Electric Power Corporation
 Ethiopian Water and Sewerages Authority
 Ethiopian TeleCom, . . .

 This section contains descriptions of major
quantitative techniques that are used to
help Operations Managers in evaluating
location alternatives:
 Locational break-even analysis,
 Center of gravity
 Transportation method of linear programming

 Locational Break-even Analysis
 Method of cost-volume analysis used for
industrial locations
 It requires identifying both fixed and variable
costs and graphing them for each location to
determine which one provides the lowest cost
 It can be done mathematically or graphically
 The graphic approach has the advantage of
providing the range of volume over which each
location is preferable

 The three steps to locational break-even
analysis are:
i. Determine the fixed and variable cost for each
location.
ii. Plot the costs for each location with costs on
the vertical axis of the graph and annual
volume on the horizontal axis
iii. Select the location that has the lowest total
cost for the expected production volume

 The method assumes the following
conditions:
a.Fixed costs are constant for the range of
probable output
b.Variable costs are linear for the range of
probable output
c.The required level of output can be closely
estimated
d.Only one product is involved

Finds location of Distribution Center (DC)
that minimizes distribution costs
It considers Existing location of markets
Volume of goods shipped to those markets
Shipping cost (or distance)
 Steps in calculating Center of Gravity
i. Place existing locations on a coordinate grid
 Grid origin and scale is arbitrary
 Maintain relative distances
ii. Calculate X and Y coordinates for ‘center of
gravity’
 Assumes cost is directly proportional to distance and
volume shipped

 Capacity: is the rate of output that can be
achieved from a process or a facility can hold,
receive, store, or produce in a period of time
 Design capacity: is the rate at which a firm
would like to produce under ideal condition
 Maximum capacity: is used to describe the
maximum output rate that could be achieved
when productive resources are used to their
maximum
It may result in inefficient use of resources:
increasing energy costs, the need for OT,
higher maintenance costs, etc.

 The capacity of the production system
defines the firm’s competitive boundaries
i.e., It sets the firm’s response rate to the
market
 Its cost structure
 Its work-force composition
 Its level of technology
 Its management and staff supports requirements
 Its inventory strategy
 The objective of a capacity planning is to
specify which level of capacity will meet
market demands in a cost-efficient way
 Capacity decisions must merge consumer
demands with the human, material, and
financial resources of the organization

Two Broad Factors that affect Capacity
1.External Factors:
 Government regulations (working hours, safety,
pollution)
 Union agreements
 Suppliers' capabilities
2.Internal Factors:
 Product-service design
 Personnel and jobs (training, motivation learning
curve, job content, methods)
 Plant layout and process flow
 Equipment capabilities and maintenance
 Materials management
 Quality control system
 Management capabilities

 Important Capacity Concepts:
a. Best operating level: the best operating level
of capacity for which the average unit cost is at
a minimum
b. Economies of scale: implies that when plant
gets larger and volume increases, the average
cost per unit of output drops because each
succeeding unit absorbs part of the fixed costs.
Economies (as well as diseconomies) of scale are
found not just between cost curves, but also within
each one
As the output approaches a facility’s best operating
level, economies of scale are realized. Beyond the
level, diseconomies set in.
Thus, managers often set polices regarding the
maximum-size for any one facility.

c. Capacity utilization rate: is calculated by
dividing capacity used (actual output) with
design capacity. It determines the extent to
which a firm uses its capacity.
 It is expressed in terms of Machine hours/day,
Barrels of oil/day, Patients/day, Amount of
output/month, etc.
d. Capacity cushions: it is an amount of capacity
in excess of expected demand.
Negative capacity cushion occurs when a
firm’s design capacity is less than the
capacity required to meet its demand.

e. Capacity flexibility: implies the capability
to deliver what the customer wants within
a Lead Time (LT) shorter than competitors
Such flexibility is achieved through:
1. Flexible plants: when a co. uses movable
equipment, knockdown walls, easily accessible
and re-routable utilities
The ultimate plant flexibility is zero-
changeover-time plant i.e., change in real
time – a plant with equipment that is easy to
install and easy to tear-down and move
2. Flexible processes: are characterized by
Flexible Manufacturing Systems (FMS) and
simple, easily set-up equipment

3. Flexible workers: occurs when co. workers have
multiple skills and the ability to switch easily from
one kind of task to another. They require broader
training than specialized workers and need
managers and staff support to facilitate quick
changes in their work assignments.
4. Using external capacity: when a co. uses the
capacity of other organizations such as
subcontracting and sharing capacity.

f. Capacity balance: in a perfectly balanced
plant, when the output of stage 1 provides
the exact input requirement for stage 2,
stage 2’s output provides the exact input
requirement for stage 3..
In practice, however, achieving such a
“perfect” design is usually both impossible
and undesirable:
1. The best operating levels for each stage
generally differ; and
2. The variability in product demand and the
process
It occurs only in an automated production
line which considers to be one big machine

 There are various ways of dealing with
such imbalance:
 Adding capacity to those stages that are the
bottlenecks through scheduling overtime,
leasing equipment, purchasing additional
capacity and subcontracting
 Using buffer inventories in front of the
bottleneck stage which is a central feature of
Synchronous production approach.
 Duplicating the facilities of one department on
which another is dependent.

g. Capacity focus: the concept was developed by
Wickham Skinner in 1974 which implies that a
production facility works best when it focuses
on a fairly limited set of production
objectives /manufacturing performance such
as:
 Cost
 Quality
 Flexibility
 New product introductions
 Reliability
 Short Lead Times (LT)
 Low investment

 The capacity focus concept can also be
operationalized through the mechanism of
Plants Within Plants – PWPs in Skinner's terms.
 A focused plant may have several PWPs, each
of which may have separate:
 Sub-organizations
 Equipment and process policies
 Workforce management policies
 Production control methods and so forth for
different products – even if they are made under
the same roof.

h. Capacity and complexity: one of the
main factors that must be considered
in capacity planning is how much
complexity is added to the Operation
Manager’s job as a result of how that
capacity is deployed.
 This is especially true in multi-site
services where the locations of
capacity are, by definition widely
dispersed and inherently difficult to
coordinate.

 Three Capacity Strategy Options
1.Capacity-lead strategy: capacity is
expanded in anticipation of demand growth
It is an aggressive strategy and is used to:
 Lure customers from competitors who are
capacity-constrained
 Gain a foothold in a rapidly expanding market
 Two options are available:
a. Incremental: less risky, but more costly
Often the initial facility should be built with
future expansion in mind
b. One-step Expansion: more risky, but finished in
one step, less hassle/costly

 Adjustments to Capacity
a. Increase capacity by: Adding extra
shifts
 Scheduling Overtime (OT) or
weekends
 Adding equipment and/or personnel
 Reduce load by:
Reducing lot sizes
Holding work in production control
Subcontracting work to outside
suppliers

b. Reduce capacity by:
Temporarily reassigning staff
Reducing the length of shifts
Eliminating shifts from three shifts to two
shifts and so on
Increase load by:
 Releasing orders early
 Increasing lot sizes
 Making items normally outsourced

 Measures of Capacity
1. Design capacity of a facility/machine
 It is a planned (engineered) rate of output
under normal or full-scale operating
conditions
 The uncertainty of future demand forces
capacity planner to build capacity just to
meet immediate demand that could lead
them to underutilize their resources
 Care must be taken not to make inadequate
capacity because it may result in inferior
service and dissatisfied or lost customers

OPERATIONS MANAGEMENT Chapter 1 5

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