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Operations Management

Operations Management

Operations Management
Chapter-I : Introduction
Operations management is about the way organizations produce goods and services. Operations Management is the term that is used for the Activities, decision and responsibilities of operations Manager. Operations function: arrangement of resources which are devoted to the production and the delivery of products and Service Operations manager: staff of the organizations who have particular responsibility to managing some or all the resources which comprise the operations function

Core functions

Accounting And financed


Operations Management

Input transformed Table:1 T resources

Inputs to the transformation process 1. Transformed resources: the resources that are treated , transformed, or converted Transformed resources A. Material B. Information C. Customers 2. Transforming resources ; the resources that act upon the transformed resources A. B.

Materials information customers Operation

Facilities: the buildings, equipment, plant and process technology Staff: Those who operate, maintain, plan and manage the operation 3

Operations Management
Table-2 : Dominant transformed materials for various operations Predominantly Material processor All manufacturing operations Mining and extraction Retail operations Warehouse Postal services Container shipping line Predominantly Information processor Accountants Bank headquarters Market research company Financial analysts News service Predominantly Customer processor Hairdressers Hotels Hospitals Mass transport Theatres Dentists

Operations Management

The ou
Low repetition Each staff member Performs more job Less systemization High unit cost


Operations Management

What is operations Management: Operation management is the term used for activities, decisions, and responsibilities of operation manager who manage the production and delivery of products and services It is one of the core function of any business What is the similarities between all operations
All operations can be modeled as a process which transform input to out put All have input transformed and transforming resources Transform input to out put by acting on some aspect of their physical , informational, possession, location

etc state All operations produce some mixture of tangible goods and less tangible services All operations can be divided in to micro and macro operations

How are the operations different from other

All operations differ in terms of volume of their out put All operations differ in terms of variety of their out put All operations differ in terms of variation in demand of their out put All operations differ in terms of visibility of their out put

EXAMPLES Electricity generator factory Gourmet restaurant Pioneering surgery Taxi service Bespoke tailor University tutorials

Operations Management
Chapter- II Types of transformation processes
Project Jobbing Batch Line (mass) Continuous

Project Processes One-off, complex, large scale, high work content products Specially made, every one customized Defined start and finish: time, quality and cost objectives Many different skills have to be coordinated Fixed position layout, resources brought to product

Jobbing Processes Very small quantities: one-offs, or only a few required Specially made. High variety, low repetition. Strangers Skill requirements are usually very broad Skilled jobber, or team of jobbers complete whole product Fixed position or process layout (routing decided by jobbers)

Batch Processes Higher volumes and lower variety than for jobbing Standard products, repeating demand. But can make specials Specialized, narrower skills Set-ups (changeovers) at each stage of production Process or cellular layout, predetermined planned routing

Mass (Line) Processes Higher volumes than Batch Standard, repeat products (runners) Low and/or narrow skills

Operations Management
No set-ups, or almost instantaneous ones Cell or product layout: a fixed sequence of operations

Continuous Process Extremely high volumes and low variety: often single product Standard, repeat products (runners) Highly captial-intensive and automated Few changeovers required Difficult and expensive to start and stop the process Product layout: usually flow along conveyors or pipes

Manufacturing process types

High High Variety Low
Project Jobbing

Service process types

Professional service



Service shop



Contin-uous Low Volume High

Mass service




product-process matrixManagement Operations has consequences for cost and flexibility

Manufacturing operations process types

Volume Variety

Service operations process types


Less process flexibility than is needed so high cost


More process flexibility than is needed so high cost

Professional service

Service Shop



Non e
Natural line of fit of process to volume/variety characteristics

Mass service

Continuous Production A paper manufacturer produces a continuous sheet paper from wood pulp slurry, which is mixed, pressed, dried, and wound onto reels.

Mass Production Here in a clean room a worker performs quality checks on a computer assembly line.

Batch Production At Martin Guitars bindings on the guitar frame are installed by hand and are wrapped with a cloth webbing until glue is dried.

Project Construction of the aircraft carrier USS Nimitz was a huge project that took almost 10 years to complete.

Operations Management

Service Factory Electricity is a commodity available continuously to customers.

Mass Service A retail store provides a standard array of products from which customers may choose.

Service Shop Although a lecture may be prepared in advance, its delivery is affected by students in each class.

Professional Service A doctor provides personal service to each patient based on extensive training in medicine.


Operations Management Chapter-3 Lay out and Flow

The layout of an operation is concerned with the physical location of its transforming resources. Layout is deciding where to put all the facilities , machines, equipments and staffs in the operation Arrangement of areas within a facility to: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Minimize material-handling costs Utilize space efficiently Utilize labor efficiently Eliminate bottlenecks Facilitate communication and interaction Reduce manufacturing cycle time Reduce customer service time Eliminate wasted or redundant movement Increase capacity Facilitate entry, exit, and placement of material, products, and people Incorporate safety and security measures Promote product and service quality Encourage proper maintenance activities Provide a visual control of activities Provide flexibility to adapt to changing conditions

Basic layouts Process layouts Group similar activities together according to process or function they perform Product layouts Arrange activities in line according to sequence of operations for a particular product or service Fixed-position layouts are used for projects in which product cannot be moved. Equipment, workers, materials, other resources brought to the site. Highly skilled labor


Operations Management
Process Layout in Services



Womens dresses

Cosmetics and jewelry

Childrens department

Womens sportswear

Entry and display area

Mens department

Manufacturing Process Layout Lathe Department Milling Department Drilling Department




Grinding Department





Painting Department

Receiving and Shipping



Operations Management
A Product Layout



Comparison of Product and Process Layouts Product Description Description Sequential arrangement of activities Continuous, mass production, mainly assembly Standardized, made to stock Stable High Special purpose Limited skills Low in process, High finished good Small Line balancing Efficiency Process Functional grouping of activities Intermittent, job shop, batch production, mainly fabrication Varied, made to order Fluctuating Low General purpose Varied skills High in process, Low finished good Large Machine location Flexibility

Type of process Type of process

Product Product Demand Demand Volume Volume Equipment Equipment Workers Workers Inventory Inventory Storage space Storage space Layout decision Layout decision Advantage Advantage

Chapter-4 Project Management


Operations Management
Introduction: The program Evaluation and Review Technique (PERT) and Critical Path Method (CPM) are two of the best known and most widely used techniques of management science. They are typically used in situations where managers have responsibilities for planning, scheduling and controlling large projects that are composed of many activities performed by a variety of people in various work areas. PETT and CPM have been effective procedures for complex project management problems. Although PERT and CPM utilize the same terminology and have the same objectives, they were developed independently. The program Evaluation and Review Technique (PERT) was developed in 1958 for the planning and control of the efforts involved in the development of the Fleet Ballistic Missile submarine. PERT is typically used for projects that involve research and development work in which the planning effort and the manufacturing of component parts is new and is usually being attempted for the first time. In using PERT, the time estimates that are made cannot be predicted with certainty and probabilistic concepts are employed. The Critical Path Method (CPM) originated in 1957, when consultants from the Remington Rand UNIVAC division of Sperry Rand Corporation were asked by the DuPont Corporation of Wilmington, Delware, to help devise a scheduling technique to be used in the construction, maintenance and shutdown of chemical process plants. CPM is typically used for construction projects plants. CPM is typically used for construction projects in which a single , or deterministic , time estimate is made for each job or activity. The framework of PERT/ CPM network analysis A project is viewed as a group of jobs or operation that are performed in a certain sequence to reach an objective . Each one of the jobs or operations that is part of a project is time and resource consuming , incurs a cost and is referred to as an activity. Each activity has a beginning point and an ending point that are points in time. The points in time are known as events. A path for this project is a sequence of relate activities which is resource and time consuming. A mathematical model satisfying the previous definition can be visualized as a network in which nodes , corresponding to events are joined by branches , corresponding to activities. This network becomes a convenient method for depicting the sequential nature of the project. Example: Project: Build a wooden deck List of activities with predecessor information Activity Design the deck Purchase materials Construct deck Predecessor ----design deck Purchase materials


Operations Management

Design Deck 1 2

Purchase material 3

Construction deck 4

The first step in the PERT/CPM project scheduling process is to specify all of the jobs or activities that constitute the project. The development of a complete and accurate set of activities is the key step in the project scheduling process, since the entire scheduling process is based on the list of activities. There are several important rules connected with the handling of events and activities in a network that should be followed in order to maintain the correct structure for the network. The following rules are most important 1. Each defined activity is shown by a unique branch 2. Branches show only the relationship between different activities; the length of the branches have no significance 3. Branches direction indicates the general progression in time. The branch head represents the point in time at which an activity completion event takes place. In a similar the branch tail represent the point in time at which an activity start event occurs 4. When a number of activities terminate at one event, this indicates that no activity starting from that event may start before all activities have been completed


2 C 3

5. Events are identified by numbers. An effort should be made to have each event identified by a number higher that the immediately preceding event. 6. Activities are identified by the numbers of their starting events and ending events, and are specified by capital letters


Operations Management
7. Two or more activities are not allowed to share the same beginning and ending events. In a situation like this in which two or more activities can be done concurrently , a dummy activity is used to ensure that the proper activity relationship are depicted by the network. Dummy activities have no duration or costs. A (1, 2 ) A (1, 2 ) 1 B (1, 2 ) 2 1 B (1, 3 ) 3
Dummy activity



8. There should be one starting point and one finishing point for the entire network 9. No looping is allowed
Starting event

Start and finish Same event

1 2

End event

Incorrect network

Correct network


Operations Management

Class Problems: 1. Activity A B C D 2. Activity A B C D 3. Activity A B C D 4. Activity A B C D 5. Activity A B C D E Predecessor ---A A B, C Predecessor ------A, B A, B Predecessor ------A A, B Predecessor ---A A C B, D Predecessor ------A, B B


Activity A B C

Predecessor ------A


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D E F G H 7. Activity A B C D E F G 8. Activity A B C D E F G H I J Predecessor ------B A A, C B E, F Predecessor ---A A B B B, C D, E F F G, H, I B C, D C E, F G


Activity A B C D E F G

Predecessor ---A A B, C D E E Predecessor




Operations Management
A B C D E F G H 11. Activity A B C D E F G H I J K Predecessor ------------A B, C, D E, F F G G H ------A B, C B D E F, G


Activity A B C D E F G

Predecessor ---A B B D C, D F, E


Activity A B C D E

Predecessor ---------A, B B


Operations Management
F G H D, C E, C F, G


Activity A B C D E F G H

Predecessor ---------A B C D E, F, G


Activity A B C D E

Predecessor ------A B C, D


Activity A B C D E F G H

Predecessor ---A B C C C F D, E, G


Activity A B

Predecessor -------


Operations Management
C D E F G H I J K A, B A, B A, B C, E C, D G F, G E, H I, J


Activity A B C D E F

Predecessor ------A B C, D D


Activity A B C D E F G H I J

Predecessor ---------A B C, E D F G, H G


Activity A B C D E

Predecessor ---------A, B B, C


Operations Management
F A, C


Activity A B C D E F

Predecessor ---------A, B B, C A, B, C


Activity A B C D E

Predecessor ------A B A, D


Activity A B C D E F G H I J

Predecessor ---------A B A C, D E G, H I, F


Operations Management
24. Activity A B C D E F G H I J K Predecessor ---------A A B B C C D, F, H E, G, I


Activity A B C D E F G H I J K L M N

Predecessor ---------A A B C C D F, G F, G H I, E, J K, L


Activity A B C D E

Predecessor ---------A A


Operations Management
F G H I J K L B C E, F, C E, F, C D G, I H, K


Activity A B C D E F G H I J K L M N O

Predecessor ------A A B B C C, D, E C, D, E G, H, I, F G, H, I, F J I, F I, F K, M, N


Operations Management

1 2 3 6

1 0

5 4

3 3

5 3

Activity 1-2 2-3 2-4 2-5 3-6 3-5 4-7 5-6



Activity 6-8 6-9 7-9 9-10



Slack = LF-EF or LS-ES


Operations Management
Example 6.1

1 7 3 5


Time estimates a m 8 6 3 0 4 3 4 b 10 9 5 0 12 4 5

Mean time t* 8

Variance 2 ** 0.44


Time estimates a m 2 7 4 0 4 10 b 2 11 6 0 7 13

Mean time t*

Variance 2 **

1-2 1-3 1-4 2-5 2-6 3-5 4-5

6 3 1 0 2 2 3

4-8 5-7 5-8 8-7 6-9 7-9

2 3 2 0 1 1

*t = (a+4m +b) /6

**2 = [ (b-a) /6] 2


Operations Management


Operations Management

Chapter 5 : F r c s in oe a t g
Forecasting : A statement about the future. Two use of forecast: 1. Plan the system Long range plans about the types of examples Products and services to offer What facilities and equipment to offer Where to locate. e.t.c. 2. Planning the use of system: Short range- intermediate range planning examples Planning inventory Work force level Planning purchasing and production Budgeting Scheduling Forecasting are also used to predict: Profit, revenues, costs, productivity changes price, availability of energy and raw materials. There are six basic steps in the forecasting process: 1. Determine the purpose of the forecast 2. Establish the time horizon 3. Select a forecasting technique 4. Gather and analyze relevant data 5. Prepare the forecast 6. Monitor the forecast Forecasting problems can be classified according to three time span 1. Short range : Current operations and the immediate future 2. Intermediate : Operations in the next one to three years 3. Long range : Operations beyond three years


Operations Management

Type of forecast Short range

Time span

Use of forecast

Forecasting method

Less than 1 year

Production scheduling Purchasing

Trend forecast, Moving average, Exponential smoothing

Intermediate range Long range

1-3 year

Budgeting Sales planning Capital budgeting Plant location

Regression, Time series analysis

3 year or more

Delphi method, Market research

Approaches to forecasting A. Quantitative forecast 1. Time series analysis a) b) c) d) e) f) Nave method of forecast Moving average Weighted moving average Exponential smoothing Adjusted exponential smoothing Linear trend 2. Casual method a) b) Regression Econometrics B. Qualitative forecast

Quantitative forecasting methods Quantitative forecasting methods are applicable when the following 3 conditions are met 1. Reliable information about the past 2. The set of information can be expressed in quantitative terms 3. Assumed that pattern of demand exhibit by the past will continue in to the future Time Series: A time ordered sequence of observations taken at regular intervals over time. (e.ghourly, daily, weekly, monthly, annually) Assumption: Future values of the series can be estimated from the past values.


Operations Management

Time series and projection method Forecasting technique Moving average Accuracy of forecast Short term: Poor to good Intermediate term: Poor Long term: Very poor Short term: Fair to good Intermediate term: Poor to good Long term: Very poor Short term: Very good to excellent Intermediate term: Poor to good Long term: Very poor

Exponential smoothing Box-Jenkins

Casual method Forecasting technique Regression model Accuracy of forecast Short term: Good to Very good Intermediate term: Good to Very good Long term: Good Short term: Good to Very good Intermediate term: Very Good to Excellent Long term: Good to excellent Short term: not used in short term Intermediate term: Good to very good Long term: Good to excellent

Econometric model

Input-output model

Qualitative forecast method Forecasting technique Delphi method Accuracy of forecast Short term: Fair to very good Intermediate term: Fair to very good Long term: Fair to very good Short term: Excellent Intermediate term: Good Long term: Fair to good Short term: Poor to fair Intermediate term: Poor to fair Long term: Poor

Market research

Panel consensus


Operations Management

Nave forecast Perhaps the simplest form of a univariate forecast model is the nave model. This model uses the current time periods value for the next time period

Yt+1 = Yt

The nave forecast is useful when the observation remain relatively constant over time. If Yt is always increasing then the forecast value of the nave model is always below the actual value. If the actual (Yt ) value is always decreasing the forecast value will always be above the actual value. The forecast will be an overestimate and each of the forecast will be negative ( forecast error = actual value forecast value)

The simple Moving average forecast The simple moving average model uses a simple average of the n most resent values of the time series variable

Yt+1 = (Yt + Yt-1 + Yt-2 + Yt-3+ Yt-4 + .Yt- (k-1)) / n

The term moving average refers to an average that is updated each time period by deleting one observation at the beginning of the period and replacing it with another at the end of the period. It is also an univariate forecast model because all future values of the variable are determined by the past values. The moving average is only appropriate when there is considerable randomness in data series. Moving average is good for stable demand with no pronounced behavioral pattern ( Russell, page 365).

Exponential smoothing 1. = Large value Disadvantages: Emphasis on the recent value but the recent value change is due to the irregular variation 2. = Small value Disadvantages: Not reflect any change, very similar to the past forecast = Large value when response to recent change is desired = Small value lot of irregular movement throughout the entire series But if the series is stable and definite change in the pattern of the data a large value of is appropriate


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Measuring forecasting error
Forecast error is defined to be the numerical difference between the forecasted value and the actual value Forecasted error = forecasted value actual value Obviously the forecaster would like the forecasting errors to be as small as possible, and would chose a forecasting method to accomplish this objective. Measuring Forecasting error Absolute measure ( Page 379-381)

MAD( Mean Absolute Deviation) /Or MAE (Mean Absolute Error) MSE (Mean Square Error) RMSE (Root Mean Square Error) Cumulative error Average error

Relative measure ( Page 380) MAPD (Mean Absolute Percent Deviation)

Note: ( Mad and MSE)

Comparisons of these forecast summary measures for alternative forecasting methods using different transformations of the data are not permissible. For example: 1. If a researcher were comparing two forecasts, one generated from a model using the actual data and another from a model in which the data have been transformed to logarithms, then a simple comparisons of the forecast summary statistics would not be correct. 2. Comparison of forecast summary statistics for variable expressed in different frequencies (e.g., monthly versus quarterly ) is generally not appropriate. How ever the forecast measure MAPE a unit free and could be used to make such comparisons.

An owner of a small business has been using two models to forecast annuals sales during the past four years and now is interested in determining which of the two forecast models is better. The data for annual revenues (in millions of dollars) and the forecasts generated by each models are given in table below

Table-1: Comparison of MAE (MAD) and MSE for two models Model-I Actual ( Yt ) Forecasted Error (Yt - Yt) I Error I Error 2


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15 20 19 23 MAE or MAD = 5/4 = 1.25 Model-II Actual ( Yt ) 15 20 19 23 Forecasted ( Yt ) 14 18 21 24 ( Yt ) 15.5 20.0 18.5 27 -0.5 0.0 +0.5 -4.0 MSE = 16.5/ 4 = 4.125 Error (Yt - Yt) 1.0 +2.0 -2.0 -1.0 I Error I 1.0 2.0 2.0 1.0 Error 2 1.0 4.0 4.0 1.0 0.5 0.0 0.5 4.0 0.25 0.00 0.25 16.00

1. The number of subassemblies used in a particular production process each week in the last 12 weeks is as follows


Operations Management
Week Subassemblies used in production

6 7 8 9 10

450 480 520 580 600

The plant manager had originally forecast that 375 subassemblies would be used in week 7. using the information just presented and exponential smoothing with = 0.50 develop forecast for week 810 . If the manager decide to forecast with 3 week moving average for the same period (9-10 week), then suggest which method is better . Assume any reasonable assumption if required . 2. ABC company has recently introduced 21 inch flat screen TV in their product line. Company is forecasting with three period weighted moving average , forecast with weights of 0.5, 0.30 and 0.20 for the most recent demand values, in that order . If the company wants to change the present forecasting techniques with naive. What is your opinion about companys decision .The past six month selling data are as follows . Month February March April May June July August Actual demand 520 490 550 580 600 420 510

3. Lee Ia Cocca Chairman and CEO of Chrysler Corporation found that high cost structure made small profits though sale was rising. He ordered company executives to undertake a concerned study of Chryslers cost structure as it related to reported sales .If cost is a function of sales volume then forecast Month 1 2 3 4 5 6 Costs(000) 15.8 12.3 14.5 15.7 12.7 13.5 Sales(000) 23 18 21 23 18 19


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A. Forecast for Cost when sales is 21,000 B. What is the regression constant, what does it mean ( answer with respect to this question) 4. The following data are forecast errors for three different models Calculate MAE, MSE for each models , explain which model is best by what criteria

Year 2005




Model-I -2 -1 0 1 2 2 3 5 1 2 3 4

Error Model-II 3 -2 -1 2 1 -2 -1 1 4 6 6 10

Model-III 15 12 7 3 0 -1 -3 -6 2 -3 -2 2

5. The Victory plus Mutual fund of growth stocks has had the following average monthly price for the last 10 month.

Month January February March April May June July August September

Fund price 60 63 65 70 67 74 79 80 85 35

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Compute the exponentially smoothed forecast for the exponential smoothing constant = 0.40 and then adjust the forecast with = 0.3. 6. The chairperson of the department of management at East West University wants to forecast the number of students who will enroll in production and operations management next semester in order to determine how many sections to schedule. The chair has accumulated the following enrollment data for the past eight semester: Semester 1 2 3 4 5 6 7 8 Student enrolled in POM 400 450 350 420 500 575 490 650

a. Compute a 3 semester moving average forecast for semester 4 through 8. b. Compute the exponentially smoothed forecast for semester 4-8( = 0.2) for the enrollment data. Use Nave method of forecast to initialize the model. c. Compare the two forecasts and indicate the most accurate. 7. The manager of Gilleys Ice Cream parlor needs an accurate forecast of the demand for Ice cream. The store orders Ice Cream from a distributor a week ahead, and if too little is ordered the store loses business. If it orders too much, it must be thrown away. The manager believes that a major determinant of ice cream sales is temperature; that is, the hotter is the more ice cream people buy . Using an almanac, the manager has determined the average day time temperature for 10 weeks selected at random and then from store records, has determined the ice cream consumption the same week. The data are summarized follows Week 1 2 3 4 5 Temperature (Degree) 73 65 81 90 75 Gallons sold 110 95 135 160 97


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6 7 8 9 10 77 82 93 86 79 105 120 175 140 121

a. Develop a linear regression model for this data . b. Forecast the ice cream consumption if the average weekly temperature is expected to be 85 degree. c. Compute the coefficient of determination for the data and explain its meaning

8. The manager of the Carpet city outlet needs to be able to forecast accurately the demand for Soft Shag carpet (its biggest seller). If the manager does not order enough carpet from the carpet mill, customers will buy their carpets from one of the Carpet citys many competitors. The manager has collected the following demand for the past 5 months Month 1 2 3 4 5 6 7 8 Demand for Soft Shag Carpet (1000 Yd) 8 12 7 9 15 11 10 12

a. Compute a 3 month moving average forecast for month 4 to 9 b. Compute a weighted moving average forecast for month 4 to 9. Assign weights of 0.55, 0.33 and 0.12 to the month in sequence, starting with the most recent month.

9. A computer software firm has experienced the following demand for its Personal Finance software package Month January February Unit 56 61


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March April May 55 70 66

a. Develop an exponential smoothing forecast (February- May) using =0.4 and b. Develop an adjusted exponential smoothing forecast using =0.4 and = 0.20. 10. RAP computers assembles minicomputers from generic parts it purchases at discount and sells the units via phone orders it receives from customers responding to their ads in trade journals. The business has developed an exponential smoothing forecast model to forecast future computer demand. Actual demand for their computers for the past five months is as follows Month March April May June July August September October November Demand 120 110 150 130 160 165 140 155 ----Forecast ----120 116.0 129.6 129.7 141.8 151.1 146.7 150.0

Find out a. MAD b. MAPD c. Comments about the accuracy of the forecast 11.The EWU university athletic department wants to develop its budget for the coming year using forecast for football attendance . Football attendance accounts for the largest portion of its revenues, and the athletic director believes attendance =f ( number of wins). The business manager has accumulated total annual attendance figurers for the past 8 years . Forecast the number attendance for 7 wins .


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Wins Attendance (1000s)

4 6 6 8 6 7 5 7

36.3 40.1 41.2 53 44 45.6 39 47.5

12.The Manufacturer of a new type women's lipstick "Fire and Ice" is trying to determine how television advertising expenditures affect lipstick sales. lipstick sales , advertising expenditure data indicate the following

Lipstick Sales($000) 100 110 130 180 220

Advertising Expenditure($000) 20 30 35 40 50

A. What level of lipstick sales would expect for an advertising expenditure of $ 200,000


Operations Management

C a te : 6In e to M n g m n hp r v n ry a a e e t
T eE m n o In e to yM n g m n h le e ts f v n r aae et Inventory is a stock of items kept by an organization to meet internal or external customer demand. Purpose of inventory management is to deter A. How many units to order B. When to order Most people think of inventory as a final product waiting to be sold to a retail customer-a new car or a can of tomatos. This is certainly one of its most important uses. However, especially in a manufacturing firms carries different kind of inventories, including the followings Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment Goods-in transit to warehouse or customers (pipeline inventory)

Services firms do not carry these kinds of inventories, although they do carry inventories of supplies and equipment. Functions of Inventory Inventories serve a number of functions. Among the most important are the following: A. To meet anticipated demand B. To smooth production requirements C. To decouple components of the production-distribution system D. To protect against stock out E. To take advantage of order cycle F. To hedge against price increase or to take advantage of quantity discounts G. To permit operations Objective of the Inventory Control 1. Level of Customer service: ( To have the right goods, in sufficient quantities, in the right place at the right time) 2. Cost of ordering and carrying inventories Measure to test the effectiveness of inventory management A. Inventory turnover: Ratio of average cost of goods sold to average inventory investment B. Days of inventory on hand: A number that indicates the expected number of days of sales that can be supplied from the existing inventory


Operations Management

D mn e ad In general, the demand for items in inventory is either dependent or independent Dependent demand Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item

Item Discrete demand

Time Independent demand Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory


Continuous demand

Time In e to C n o S s m v n ry o tr l y te s An inventory system controls the levels of inventory by determining how much to order (the level of replenishment) and when to order. There are two types of inventory systems: Continuous (fixed order quantity) system and a periodic (or fixed time period) system A. Continuous system (fixed-order-quantity) A constant amount is ordered when inventory declines to predetermined level (reorder point) a new order is placed. Advantage: Control (advantageous for critical items such as replacement parts or raw materials and supplies.) Management can determine an optimal order quantity



Co - cost of placing order Cc - annual per-unit carrying cost Costly

Operations Management Q - order quantity

D - annual demand

Annual Order cost = Co D /Q Computerized checkout system with a laser scanner Example of Continuous system: used by many super markets and retail store. Annual Carrying cost = CcQ/2 B. Periodic system (fixed-time-period) Order placed for variable amount after fixed passage of time Total cost = Order Cost + Carrying Cost Advantage: Co D /Q + CcQ/2 Less direct control (This typically results in larger inventory levels for a periodic inventory system than in a continuous system to guard against unexpected stock outs early in the fixed period..) Management can determine an optimal order quantity

Disadvantage A new order quantity be determined each time a periodic order is made Example of Periodic system: College or University book store. T eA -CC s ific tio S s m h -B la s a n y te The A-B-C approach can be used to classify inventory items according to some measure of importance. Very often that measure is annual dollar volume, which is the product of unit cost for an item and its annual demand or usage. Generally there will be a small percentage of items (10% to 15%) with relatively high annual volumes( 60-70 percent of the dollar) usage. These should be classified as A items, and given disproportionately high attention by management. At the other end of the scale will be a large percentage of items (around 50% to 60%) that have relatively low annual volume. These should be classified as C items and given disproportionately low attention by management. The middle group in terms of annual volume (25% to 40%) should be classified as B items and given moderate attention by management. Other factors taken in to account in making exception for certain items ( changing classification from C to A item). Factors may include the risk of obsolescence, risk of stock out, the distant of supplier, and so on) In e to C s v n ry o ts A. Carrying cost Cost of holding an item in inventory Costs include Interest, Insurance, Taxes, depreciation, obsolescence, deterioration, spoilage, Pilferage, breakage and warehousing cost like heat, light, rent security The significance of the various components of item involved. holding cost depends on the type of


Operations Management
Fresh seafood, meats and poultry baked goods are subject to rapid deterioration and spoilage Dairy products, medicines, batteries and film have limited shelf lives percentage of Holding costs are stated in either of two ways : as a dollar amount per unit. Or as a unit price.

Carrying Costs are linearly related to order size

Annual Cost

(Q/2) Cc

Order quantity (Q) B. Ordering cost cost of ordering and receiving inventory These include preparing invoice, shipping costs, inspecting goods upon arrival for quality and quantity, and moving the goods to temporary storage. Ordering costs are generally expressed as a fixed dollar amount per order regardless of order size. When a firm produces its own inventory instead of ordering it from a supplier, the cost of machine set up, (preparing equipment for the job by adjusting machine, Changing cutting tools) are analogous to order cost. Ordering Costs are inversely and non- linearly related to order size

( D/Q) C0 Annual Cost

Order Quantity (Q) C. Shortage cost


Operations Management
temporary or permanent loss of sales when demand cannot be met

E o o ic Od r Q a t (E Q M d ls c n m r e u n ity O ) o e Optimal order quantity that will minimize total inventory costs Basic EOQ model Demand is known with certainty and is constant over time No shortages are allowed Lead time for the receipt of orders is constant Order quantity is received all at once Assumptions of Basic EOQ Model

Order quantity Q Demand rate

Reorder point, R

Inventory Level

Order placed

Lead time Order receipt

Lead time



Operations Management

Fig: the EOQ cost model

Annual cost ($)

Total Cost

Slope = 0
Minimum total cost Carrying Cost

Ordering Cost

Optimal order Qopt

Order Quantity, Q

The pedal bicycle shop operates 365 days a year. The shop pays $ 300 for purchase a particular bicycle from the manufacturer. The shop sells an average of 25 bikes per week( 52 week =1 year). The order cost is $100 and Carrying cot is 25% of the dollar value of the inventory per unit per year. Lead time is 5 days Find A. B. C. D. E. F. G. Economic Order Quantity Total no of Order Average Inventory Total Inventory Cost Inventory Cycle Reorder Quantity (Reorder Point) Draw the profile of the Inventory

Solution : Here Order Cost Carrying Cost Annual Demand C0 = $100 CC = 0.25* 300 = 75 D = 25 * 52 = 1300


Operations Management
A. EOQ = 2 * Co * D/ Cc

58.8 = 1300 / 58.8 = 22.10 = 58.8/ 2 = 29.4

B. Total No of Order = D/ EOQ C. Average Inventory = EOQ / 2 D.

Total Inventory Cost Minimum = Order Cost + Carrying Cost Co( D/EOQ) + CC (EOQ/2 ) = 4415.88


Inventory Cycle (C) = EOQ/D year

= 58.8 / 1300 = 0.045 year = 16.50 days


Reorder Quantity = D* L = 1300 * 5 / 365 = 17.80

Q a tityD c u ts un is o n Quantity discounts occurs when suppliers choose to provide incentives for the purchase of large quantities of a good. Quantity discounts are often reflected by lower unit costs on items purchased in larger lots. If the purchase price per unit be denoted by C, then C*D represents the total purchase price of the item purchased in a given time period. Total inventory cost is then Total inventory cost = Order Cost+ Carrying cost+ total purchase price Co D/Q + Cc Q/2 + CD As CD is independent of Q, so relationship between holding cost, carrying cost and total cost is same as total cost of inventory (EOQ cost model)


Operations Management
Fig: the EOQ cost model

Annual cost ($) Slope = 0

Total Cost

Minimum total cost

Carrying Cost

Ordering Cost

Optimal order Qopt

Order Quantity, Q

EOQ = 2* Order Cost * Total demand/ carrying cost Quantity Discounts problem 1. Carrying cost is fixed 2. Carrying cost is function of price 1. Carrying cost is fixed Problem: Comptek computers wants to reduce alarge stock of PCs it is discounting. It has offered the university bookstores at tech a quantity discount pricing schedule as follows Quantity 1.49 50-89 90+ Price $1400 $ 1,100 $900

Annual carrying cost is $190 and Order cost is $2500 and annual demand is 200 units. The book store wants to determine if it should take advantage of the discount or order the basic EOQ model? Solution: Step 1: Find the EOQ EOQ = 2* Co*D/Cc


Operations Management
Here Order Cost = $ 2500, Carrying Cost = $ 190 , D =200 EOQ = 72.5 Step: 2: Identify the discount price for EOQ If order quantity is 72.5 then the discount price is 1,100 per pc Then find the total cost Step:3 : Find total cost TCQ=EOQ = Co D/Q + Cc Q/2 + CD = $ 233784

Step: 4 : if the EOQ is not from the large discount, then find out the total cost for large discount For this problem large discount for Q =90 so find out total cost considering Q =90

TCQ=90 = 194105 Answer TCQ=90 ordered 2. Carrying cost is function of price Problem: XYZ carpet ltd wants to reduce a large stock of carpet s it is discounting. It has offered a quantity discount pricing schedule as follows Quantity 0 7449 7500- 9999 10,000 and over Price $10.00 $8.00 $ 7.50 < TCQ=EOQ so maximum discount price should be taken and 90 units should be

Annual carrying cost is 10% of the unit price and Order cost is $1000 and annual demand is 30,000 units. The carpet store wants to determine if it should take advantage of the discount or order the basic EOQ model? Solution Step: 1: Find out the EOQ for all the different carrying cost Quantity 0 7449 7500- 9999 10,000 and over EOQ Price = $10 = 7746 Price $10.00 $8.00 $ 7.50 Carrying cost 10% of 10 = 1 10% of 8 = 0.8 10% of 7.5 = 0.75

EOQ Price = $8 = 8660


Operations Management
EOQ Price = $7.50 = 8944 Step-2 : Identify the correct EOQ EOQ Price = $10 = 7746 is not the correct one, because if the quantity is 7746(7746 > 7500) then price $10 is not applicable EOQ Price = $8 = 8660 is correct one because for quantity 8600 price is $8 EOQ Price = $7.50 = 8944 is not correct one, because if the quantity is 8944(8944<10000) then price $7.50 is not applicable

Step: 3 : Find the TC with the correct EOQ (in this case it is 8660) TC Q= 8660 = 246928 Step: 4 : if the EOQ is not from the large discount, then find out the total cost for large discount For this problem large discount for Q =10,000 so find out total cost considering Q =10,000

TCQ=10000 = 231750 Answer TCQ=10000 < TCQ= 8660 so maximum discount price should be taken and 10,000 units should be ordered


Operations Management
Inventory Problems
A. Discount Problems 1. Discounts information for the carpet division is summarized in the following table Discount class 1 2 3 Order size 0-7499 7500-9999 10,000 and over Unit Cost $ 10.00 $ 8.00 $ 7.50

If the yearly demand is 30,000 unit, Order costs is $ 1000 and holding cost per unit per year is 10% of the unit cost. Compute A. Economic order quantity B. Total inventory cost 2. Manufacturing firm has been offered a particular component part it uses according to the following discount pricing schedule provided by the supplier Order size 1-199 200-599 600-over Price $65 $59 $56 (10 Marks)

The manufacturing company uses 700 of the components annually. The annual carrying cost is $14 per unit, and the ordering cost is $275. Determine the amount the firm should order.

3. The book store at Havard University purchases sweatshirts emblazoned with the school name and logo from a vendor. The vendor sells the sweatshirts to the store for $38 a piece. The cost to the bookstore for placing an order is $120 and the annual carrying cost is 25 percent of the cost of a sweatshirt. The bookstore manager estimates that 1700 sweatshirts will be sold during the year. The vendor has offered the book store the following volume and price schedule. Determine the amount the bookstore should order. Order size 1-299 300-499 500-799 800+ Price $38 $37 $36 435


Operations Management
B. Basic EOQ problems 4. L Jones department store experiences an annual demand of 9000 super soft pillows. The fixed cost associated with the placing an order is $200 and it costs $3 a years to hold a pillow in inventory. Compute the economic order quantity, the minimum total annual inventory cost, the optimal number of orders per year, and the optimal time between the orders. Provide a schematic representation of the inventory system. If the lead time is 15 days what is the reorder point? 5. Hayes electronics stocks and sells a particular brand of microcomputer. Its costs the firm $ 450 each time it places an order with the manufacturer for the microcomputers. The costs of carrying one microcomputer in inventory for a month is $15 .The store manager estimates that total annual demand for the computers will be 1200 units with a constant demand rate throughout the year. The store is open for everyday of the year except two Eid holidays. Find out the following A. Economic Order quantity B. Inventory cycles in days C. Economic order quantity (When Order and carrying cost is 10% less than the estimated) D. Total inventory cost (on the basis of C) 6. Hayes Electronics assumed with certainty that the ordering cost is $ 450 per order and the inventory carrying cost is $170 /unit/ year. The total estimates monthly demand is 100 unit. However the inventory model parameters are frequently only estimates that are subject to some degree of uncertainty. Consider two case of variation in the model parameters 1. Both the carrying cost and the order cost are 10% less than originally estimated 2. Ordering cost is 10% higher and carrying cost is 10% lower than the originally estimated Determine the optimal order quantity and total inventory cost for above two change situation and comment? 7. AV city stocks and sells a particular brand of laptop. It costs the firm $625 each time it places an order with the manufacturer for the laptops. The cost of carrying one laptop in inventory is $ 0.357 per unit per day. The store manager estimates that total monthly demand for the laptops will be 125 units. A. Determine the optimal order quantity and total inventory cost B. If the order quantity is 10% more and 10% less than the optimum order quantity. Then what is the total inventory cost for both cases C. Comments on the above finding (on diagram) 8. A company maintains a yearly inventory of 3 inventory items. The demand for item A is 3600, Item B is 24,000 and Item C is 600. If the order cost is $12 for all the three items and carrying cost for item A is $2.5, for B is $0.5 and for C is $2. The companys presently orders quarterly for each of the three items. Now the company is interested to adopt optimum order quantity (Basic EOQ model) for all the three items. How much savings in total inventory cost if the optimum quantity is practiced for all the three items?


Operations Management
9 . Find the amount (taka) of average inventory carried for a family against each of the following purchase for a period of one month. Make necessary assumptions, so all calculations. A. The family requires 4 kg of onion @ taka 26. They purchase the required onion two times a month at equal gap, Draw the EOQ profile B. The family consumes 10 kg of flour @ TK 18.00. They purchase the whole amount at the first day of the month, Draw the EOQ profile C. The family purchases two litre bottles of soft drink exclusively for their weekend lunch @ TK 45 per bottle. The purchase is made from the local grocery before the lunch, Draw the EOQ profile D. The family purchases 2 kg of meat every weekend. The monthly consumption for meat is TK 880.00 Draw the EOQ profile 10. Yellow pres inc., buys slick paper in 1500 pound rolls for text book printing. Annual demand is 2,500 rolls. The cost per roll is $800, and annual holding cost is 15 percent of the cost. Each order cost is $50. I. How many rolls should Yellow Press order at a time? II. What is the time (in days) between orders? III. If the manager of the Yellow press wants to use only one order per month to full fill the annual demand then what is the order quantity and what is your suggestions for this case and why? IV. What is the cost of average inventory for both cases (I and III)? 11. Electronic Village stocks and sells a particular brand of personal computer. It costs the store $450 each time it places an order with the manufacturer for the personal computers. The annual cost of carrying the PCs in inventory is $170. The store manager estimates annual demand for the PCs will be 1200 units. Determine the optimal order quantity, total inventory cost, total no of order, Inventory cycle in days and average inventory.

12. A large law firm uses an average 40 boxes of copier paper per day. The firm operates 260 days a year. Carrying costs for the paper are $2.5 a month per box, and it costs approximately $60 to order and receive a shipment of paper. The office manager is currently using an order size of 200 boxes. The partners of the firm expect the office to be managed in a cost efficient manner. Would you recommend that office manager use the optimal order size instead of 200 boxes? Justify your answer. Draw the profile of two cases (Optimum size and Present practice) 13. A Producer distributor uses 800 packing crates a month, which it purchases at a cost of $10 each. The manager has assigned an annual carrying cost of 35 percent of the purchase price per crate. Ordering costs are $28. Currently the manager orders once a month. How much could the firm save annually in ordering and carrying cost by using EOQ?


Operations Management
ABC classification 14. The dynaco company stocks different parts and material it uses in its manufacturing processes. Recently as demand for its finished goods increased, management has had difficulty managing parts inventory; they frequently run out of some crucial parts and seem to have an endless supply of others. In an effort to control inventory more effectively, they would like to classify their inventory of parts according to the ABC approach. Following is a list selected parts and annual usage and unit value for each. Classify the inventory items according to the ABC approach Item name G-101 H-102 I-201 J-202 K-301 L-302 M-201 N-202 O-401 P-402 Annual use 36 400 50 300 40 500 710 80 344 45 Unit cost 350 30 23 45 1000 8 4 26 28 450 Usage value (Annual use * Unit cost) 12600 12000 1150 13500 40000 4000 2840 2080 9632 20250

15. The following table contains figures on the annual usage and unit costs for a random sample of 12 items. Develop an A-B-C classification for these items Item Name 1 2 3 4 5 6 7 8 9 10 11 12 Annual usage 1000 5000 1900 1000 2500 2500 400 500 200 1000 3000 9000 Unit cost TK 4300 720 500 710 250 192 200 100 210 35 10 3


Operations Management
16. The maintenance department for a small manufacturing firm has responsibility for maintaining an inventory of spare parts for the machinery it receives. The parts inventory, unit cost and annual usage are as follows Part 1 2 3 4 5 6 7 8 9 10 Unit cost ($) 60 350 30 80 30 20 10 320 510 20 Annual Usage 90 40 130 60 100 180 170 50 60 120

A. Classify the items in to ABC classes 17. The following table contains figures on the monthly volume and unit costs for a random sample of 12 items from a list of 2000 inventory items at a health care facility Item name K34 K35 K36 M10 M20 Z45 F14 F95 F99 D45 D48 D52 Unit cost 10 25 36 16 20 80 20 1200 20 10 12 15 Usage 200 600 150 25 80 200 300 130 60 550 90 110

a. If manager decides to place item M-10 in to A category what are the possible explanation


Operations Management

MRP Problems


B (2)

C (1)

D (3)

E (2)

F (1)

G (4)

H (1)

I (2)

E (4)

J (4)

K (2)

Referring to the product structure diagram for product A determine a. How many K, E, I are required for 10 unit of A b.Construct a single level bills of material for product A

2. P

K (1)



G(3) H(4)



Z (3)


Operations Management

3. Master Production Schedule 1 P Item Master File On hand Schedule Receipt LLC Lot Size Lead Time P 0 0 0 L4L 1 K 0 10 (Period 3) 30 (Period 6) 1 L4L 2 G 40 0 2 L4L 1 2 3 4 5 6 100 7 100

Find out the MRP calculations for P, K and G 4. Given the following diagram for a product, determine the quantity of each component required to assemble 30 unit of finished good ( Inventory record : F = 20 units, G = 5 unit, H = 4 unit, D = 76 unit currently on hand) E F( 2) G (1) H (1)

J (2)


L (2)

J (2)

A (4)

D (2)

5. Use the bill of materials and inventory records to determine the quantity of purchased items necessary to assemble 20 end items if the manufacturer uses lot-for-lot ordering. There are no end items currently on hand. Component A B C On-hand 5 75 10 Component D E F On-hand 15 3 20


Operations Management


C (2)


D (2)


F (2)


6. Product A consist of two units of subassembly B, three units of C and one unit of D. B is composed of four units of E and three units of F. C is made of two units of H and three units of D. H is made of five units of E and two units of G A. Construct a product structure tree using low level coding B. To produce 100 units of A determine the number of units of B, C, D, E, F, G 7. The Alpha beta company produces two products A and B. The product structure tree and master schedule, inventory information are given below. Determine when order should be released for A, B and D ( 2 + 3+ 5 = 10 marks) A B C D On hand 10 5 140 200 Schedule receipt 0 0 0 250, period 2 Lot size L4L L4L Multiple of 150 Multiple of 250 MPS 100, period 8 200, period 6

A LT = 3

B LT = 2

Level 0

C (3) LT = 4

D (2) LT = 2

D (3) LT= 2

Level 1


Operations Management
8. Eighty units of end item E are needed at the beginning of week 6. Three cases ( 30 units per case) of J have been ordered and one case is scheduled to arrive in week 3, one in week 4 and one in week 5: Note : J must be ordered by the case, and B must be produced in multiples of 120 units. There are 60 units of B and 20 units of J now on hand. Lead times are two weeks each for E and B and one week for J E

B (2)

J (3)

J (4)

F (2)

9.Complete the following MRP matrix for item X Item: X LT: 2 Lot Size: Min 50 LLC: 1 Gross requirements Scheduled receipt Projected on hand ( 40) Net requirements Planned order receipts Planned order release A. 1 20 2 30 50 3 75 12 4 88 14 Period

5 60 17

6 90

7 40

8 60

There are five manufacturing processes , in which manufacturing process you can apply MRP , answer with reasoning


Operations Management
10. The XYZ company is the producer of different saw. One of the popular brand is X . The MRP department has a problem- its computer died just as it spit out the following information. Planned order release for the item E = 640 unit in week 2. the firm has been able to reconstruct all the they except the MPS for end item X, the firm is fortune because E is used only in X. Being an expert of MRP how you can help the firm to determine the master schedule for X, Given the following record information. Item X B C D E Lead time (weeks) 1 1 1 2 2 On hand 0 60 200 0 0 Schedule receipt 20, week 2 20, week 6 40, week 3 Lot L4L 120 L4L L4L L4L Components B(1), C(2), D ------------E(4), B -------------------------

11. Complete the following MRP matrix Item = X LLC =1, LT=2 Lot size= Min=50 Gross requirements Scheduled receipt On hand (50) Net requirements Planned order receipts Planned order release 1 2 3 4 5 6 7 8 9 10


30 10

55 15

60 20


40 30

100 50




12. Consider the operation of emergency department and other specialized department of a hospital . Explain which department is belongs to which service process category and why X



D(3) E (4)


F (2)

Determine the quantities ( X = 10 unit)if the inventory status is as follows , B = 4 unit, C = 5 unit, D = 8 unit, E = 60 unit


Operations Management
13. A table is assembled using three components as shown in the accompanying product structure tree. The company that makes the table wants to ship 100 units at the beginning of day 4, 150 units at the beginning of day 5, and 200 units at the beginning of day 7. Receipts of 100 wood section are scheduled at the beginning of day 2. There are 120 legs on hand. An additional 10 percent of the order size on legs is added for safety stock. There are 60 braces on hand with no safety stock requirement for braces. Lead times are days for all items are shown in the following table. Prepare a MRP plan using lot for lot ordering .Find MRP calculation for Table, Woo section, and Legs) Table

Wood section (2) Quantity 1.200 201.550 551.999

Braces (3) Lead times 1 2 3

Legs (3)

14. End item P is composed of three subassemblies : K, L and W. K is assembled using 3 Gs and 4 Hs, L is made of 2 Ms and 2 Ns; and W is made of 3 Zs. On hand inventories are 20 Ls, 40 Gs and 200 Hs. Scheduled receipts are 10 Ks at the start of week 3, 30 Ks at the start of week 6 and 200 Ws at the start of week 3. One hundred Ps will be shipped at the start of week 6, and another 100 at the start of week 7. Lead times are two weeks for subassemblies and one week for components G,H, and M. Final assembly of P requires one week. Include an 10% scarp allowance in each planned order of G. the minimum order size for H is 200 units. Find MRP for P, K and G 15. Assume that you are the manager of a shop that assembles power tools . You have just received an order for 50 chain saws, which are to be shipped at the start of week 8. Pertinent information on the saw is Item Saw A B C D E F Lead time (weeks) 2 1 2 1 1 1 2 On hand 15 10 5 30 20 10 30 Schedule receipt 15 , week 7 17, week 4 10, week 8 10 , week 4 20, week 5 Lot Lot for Lot Lot size=50 Lot for Lot Lot size = multiple of 15 200 Components A (2), B(1), C(3) E(3), D(1) D(2), F(3) E(2), D(2)

B. Develop a product structure tree C. Develop the material requirements plan for component E