Operations Management

September 2022 Examination

Q1. What are various decision criteria for deciding a location for a business setup? Explain
these decision criteria with reference to a location decision for setting up a textile
manufacturing plant.

Answer:

Despite the increasing pace of technology and digital enterprise, there will almost always be a
requirement for a bricks and mortar presence, whether that’s to house your staff, store stock in a
secure warehouse, or provide a physical brand presence for your customers.

There are many things for business owners to consider when choosing a business location, whether
setting up an office or a shop for the first time, or looking to expand into new areas. Entrepreneur Jake
Fox reveals the key factors a business needs to consider when selecting a new location.

1. Accessibility

Does your business rely on frequent deliveries? If so, it’s important to consider local transport links,
particularly main roads and motorways. Property rental and purchase prices are often steeper in higher
density, more commercialised areas, so there are certainly cost benefits to seeking a more out of town
location, providing your daily business operations won’t be hampered by poor transport links.
Equally, if you rely on high customer footfall, then ensuring your location is accessible by car, bus and
even train will all be important considerations. Don’t forget your employees too, as a good location is
often a critical factor in recruiting the right people into your business, particularly if they have been
offered several jobs and need to evaluate the pros and cons of each.

2. Security

Believe it or not, your location can increase your odds of being affected by crime, which in turn can
influence your insurance premiums, as well as the additional security measures you need to take to
keep your premises safe. It’s fair to say that in business, we all make decisions based on information,
intuition and probability mixed in with a little luck. But knowing the chances of crime in the areas you
are considering is an important part of the decision making process. Looking at UK government crime
statistics can help businesses make an informed decision about where to set up a new shop, office or
warehouse. Knowing the risks of potential criminal activity can help you better prepare and take
adequate precautions.
3. Competition

Your proximity to other competing businesses could be crucial to your success. Could they provide a
benefit to your business or cause a hindrance? Establishing which competitors are in your area and
their offering could help guarantee you choose the right location for your business. If there is too
much competition then it may be a warning sign to expand your horizons to a new location. There are
exceptions to this such as car dealerships who want to be near each other as customers compare and
choose the best car deal, hence their close proximity. Likewise, if you have an element of your
offering that is unique or offers some kind of new innovation, then choosing an area that already has a
ripe market could be the ideal way to pick up customers very quickly and establish a presence in a
new area in a relatively short time frame.

4. Business Rates

Cash is king! Cash flow is critical as it determines the viable ability for a business to survive and pay
its bills. Therefore, it is important to research the average business rates including rent, utility bills
and taxes in the area to ensure you can afford the premises. Simple hidden costs such as deposits and
whether you need to pay to park need to be snuffed out before committing to a location. Estimating
the living cost of the location will prevent a commitment outside your means.

5. Skill base in the area

Find out the skill base in the area – can it fulfil your needs? Take into account employment rates as
well. If you rely on skilled workers it is best to go to where there is a healthy bank of talent.
Employees are often a business’s biggest asset thus choosing a location that’s lacking in required
talent may be the start of your business’s downfall. Some recruitment agencies will happily send you
CVs on spec to gauge the market, only charging if you subsequently decide to interview and hire
someone. Alternatively, posting a free job via an online job site will quickly show you the calibre of
employees in a particular area.

6. Potential for growth

Will the premises be able to accommodate business growth or a spike in demand? Moving premises is
a big upheaval and can be time consuming and costly. A decision needs to be made as to whether the
premise you are choosing is a short-term location or if you would like to stay there for the long haul.
Consequently, a location’s flexibility could be a very important factor regarding the premises’
suitability for your business needs.

Whilst a perfect business location is different for every business, covering these crucial areas will
certainly give you the best chance of beating the odds and keeping your business on track for future
success.
Q2. Define and explain the term ‘Operations Management’. Explain the role of an Operations
Managers in their interface with other functions in an organisation. Give relevant examples
from a Retail Store Operation.

Answer :

Operation Management :

Operations management is the administration of business practices to create the highest level of
efficiency possible within an organisation. It is concerned with converting materials and labour into
goods and services as efficiently as possible to maximise the profit of an organisation. Operations
management teams attempt to balance costs with revenue to achieve the highest net operating profit
possible.

Role of an Operations Managers & Functions

Finance - In any manufacturing organization, finance plays a crucial role in ensuring that financial
resources are properly allocated and utilized to their full extent. Finance in operations management
helps create a budget that will allow the organization to meet its production goals and can help
evaluate various investment opportunities to make the best decision. Proper utilization and allocation
of finances will allow for a product to be created for the lowest cost that will also satisfy overall
consumer needs.

Strategy - Strategic management is the planning, monitoring, analysis, and assessment of tall aspects
of an organization on a continuing basis. Attention to these elements ensures that a strategy is
developed and then implemented in the manufacturing facility. The benefits of strategic management
will help manufacturing organizations make better decisions regarding production planning and
scheduling, keep customers happy and allow the facility to meet its overall goals. Many business
strategies include supply chain configuration, sales, capacity to hold money, and optimal utilization of
human resources.
Operation - This function of operations management is concerned with planning, organizing,
directing, and overall control of all activities within the organization. This is the primary function of
operations management and will effectively aid in converting raw materials and human efforts into a
durable good and service that consumers will be able to utilize. Operations within production must be
scheduled in a way that minimizes the amount of setup required and maximizes the utilization of
resource capacity. If this is achieved, the production facility will be able to increase its production
output.
Product Design - With new technology becoming available, the selling of a product becomes much
more simple. One of the main duties of operations management is to ensure that a product is designed
properly and caters to market trends and satisfies the needs of consumers. In addition, introducing
new product designs can be challenging due to the existing product mix and available resources.
Those are important factors to consider when looking to introduce new items.

Forecasting - Demand forecasting is the process of predicting what the demand for certain products
will be in the future. It identifies what both current and future customers will want to buy and tells
manufacturing facilities what they should actually produce. Ideally, manufacturing companies want to
be able to accurately predict customer demands so that they can produce the right amount of products.
Producing too few items leads to stock shortages and can negatively impact customer relationships.
On the other hand, having too much inventory is costly and can lead to having excess stock if the
items become obsolete. Finding the right balance is one of the functions of operations management.
Quality Control - In addition to the product design function, operations managers should strive to
produce the best quality product possible. Modern-day consumers are concerned about quality instead
of quantity, which is why it is so crucial to develop a durable and top-notch quality product. This is
especially important when evaluating the existing processes as improving production processes should
not be at the expense of quality. Operations managers should ensure that quality control processes are
defined and implemented to catch any defective items.

Examples
These examples give a basic understanding of the functions of operations management.

Example 1
Sam is an operations manager of a mobile phone manufacturing company called “ABC ltd.” The
company wants to sell a batch of new phones. Therefore, the responsibilities Sam needs to fulfill are:

Ensure the products are designed to meet the criteria of customer expectations through analysis of past
data.
Predict the future requirements through analysis and ensure that the production amount meets the
demand in the market.
Secure the supply chain system. It involves arranging raw materials and delivering the same,
maintaining existing inventory, ensuring a successful smooth production process, confirming the
production numbers, distributing them in the market, and guaranteeing their sales.
Ensuring there is no loss incurred from the organization’s side by evaluating the cost and best
alternatives available. This reduces the overall cost and overhead costs
, efficient processes, and timely delivery of goods and services.

Examples from a Retail Store Operation

● Work to build and maintain Client/Retailer partnerships while managing ongoing

client goals and KPI objectives.
● Lead a team of 100 distributor customers in the wholesale building products market
covering a three state territory.
● Manage photo lab operations in multi-unit retail locations throughout multiple
geographies.
● Manage sales, profit and operational expenses for designate sales territory.
● Manage day-to-day store operations including inventory management, sales
generation, and payroll.
● Manage scheduling and payroll for team; conduct performance evaluations,
promotions and terminations when necessary.
● Monitor KPI's and adjust the focus of improvement efforts as necessary to meet target
goals.
● Monitor all orders, shipments, service, inventory, and points of sale (POS) to
maximize open-to-buy.
● Process information/merchandise through German POS register system.
● Advance to increasingly responsible positions, culminating in management role with
full oversight of store operations.
● Collaborate with staff and develop a communication channel with customers to fulfill
their needs and specifications.
● Manage the day-to-day oversight of funding requirements for vendors, retailers and
wholesalers using company sponsor software.
● Create management and operational procedures for capital projects, budgeting, lease
administration, reconciliations, and contract management.
● Sustain constant communication with store manager to guarantee compliance of
operations procedures as well as performance and execution of quarterly audits.
● Create account-specific marketing materials, premiums, corrugate displays and
signage by designing message communication and directing internal teams on
execution.
Q3.Many business organizations have operations in which inventory management is a
daily and constant process. Managing a production setup (say an automobile
manufacturing or service shop) is one such business, wherein the procurement and
managing various inventory is a very strategic process. Explain the following concepts
(with atleast one example) in the Operations of the business, and conclude how relevant
is it in the business?

a. Economic Ordered Quantity (EOQ)

b. Define Quality and list and discuss in brief the various dimensions of quality in
operations

Answer:

(a) What Is Economic Order Quantity (EOQ)?

Economic order quantity (EOQ) is a calculation companies perform that represents their ideal
order size, allowing them to meet demand without overspending. Inventory managers
calculate EOQ to minimize holding costs and excess inventory.

It doesn’t matter if your business sells jelly beans, appliances, furniture or airplanes. Finding
the economic order quantity for every product you purchase is almost certain to impact the
bottom line. Every business that manages inventory can benefit from measuring and
following the EOQ.

Inventory management systems and ERP systems can automate economic order quantity
calculations, so your business makes the best, most informed decisions regarding orders and
inventory management.

Economic Order Quantity (EOQ) Explained

Economic order quantity is a useful metric for businesses that buy and hold inventory for
manufacturing, resale, internal use or any other purpose. Businesses that follow EOQ look at
all costs related to purchasing and delivery while also factoring in demand for the product,
purchase discounts and holding costs.

Experienced business owners and managers understand that purchasing and finding the ideal
inventory levels can be complex. When your vendors offer volume discounts and other
incentives to purchase more, EOQ can help you decide on the right place to draw the line.

EOQ relies on the economic order quantity formula (found below). That gives you a
data-driven result to help optimize business profitability.

Why Is Economic Order Quantity (EOQ) Important?

Economic order quantity is a key metric for your organization’s sustainability because
ordering too much can lead to high holding costs and take resources away from other
business activities, like marketing or R&D, that could further boost sales or reduce costs.

Inventory is a type of working capital. Working capital represents business assets needed for
regular operations. But too much working capital can eat into your profits, and it also
represents a big opportunity cost.

EOQ may not be extremely helpful when managing your office supply closet. It's most
important when looking at large, high volume or expensive purchases. As your orders and
inventory grow and scale, EOQ has a greater impact on profits.

Your Complete Guide to Inventory Forecasting

Effective inventory forecasting can mean the difference between profitability and piles of
unsold goods that eat up your available cash. The bottom-line impact of inventory forecasting
is clear: less money is tied up in inventory, stock is maintained at a realistic threshold and
ordering becomes much more precise.

Get Your Free Guide

What Does Economic Order Quantity (EOQ) Tell Businesses?

Economic order quantity tells businesses the ideal order size for every product they buy. The
EOQ formula assumes annual demand for a product is relatively flat. If you are in a growing
business, EOQ may not be the best way to calculate your order size, as those numbers could
change frequently.

Once you work through EOQ, you should know the optimal number of orders per year and
the ideal order size. You may adapt the EOQ model to factor in pricing discounts, backorders,
defective items and more.

With your EOQ results, you should have an optimal supply chain order schedule for the
entire year.
Benefits of Economic Order Quantity (EOQ)

The main benefit of using EOQ is improved profitability. Here’s a list of benefits that all add
up to savings and improvements for your business:

Improved Order Fulfillment: When you need a certain item or something for a customer
order, optimal EOQ ensures the product is on hand, allowing you to get the order out on time
and keep the customer happy. This should improve the customer experience and may lead to
increased sales.

Less Overordering: An accurate forecast of what you need and when will help you avoid
overordering and tying up too much cash in inventory.

Less Waste: More optimized order schedules should cut down on obsolete inventory,
particularly for businesses that hold perishable inventories that can result in dead stock.

Lower Storage Costs: When your ordering matches your demand, you should have less
products to store. This can lower real estate, utility, security, insurance and other related
costs.

Quantity Discounts: Planning and timing your orders well allows you to take advantage of the
best bulk order or quantity discounts offered by your vendors

(b) Dimensions of quality in operations

A quality product is a product that meets the expectations of the customers. The eight
dimensions of quality help producers to meet these expectations.It is a strategic management
tool that can be used as a framework to analyse characteristics of quality. The eight
dimensions are performance, features, reliability, conformance, durability, serviceability,
aesthetics, and perceived quality.
Performance
Performance has to do with the expected operating characteristics of a product or service. Does a
service or product do what it’s supposed to do? The primary operating characteristics involve
measurable elements, which makes it easier to objectively measure the performance.

Some of the performance requirements are related to subjective preferences, but when they are the
preference of almost every consumer they become as powerful as an objective requirement.

Features
What the dimension ‘performance’ doesn’t focus on are the features, the characteristics that decide
how appealing a product or service is to the consumer.

Such features are the extras of a product or service and complement its basic functioning. This means
that the ones designing a product or service should be familiar with the end-users and should be
updated on developments in consumer preferences. Often it’s difficult to see a clear line between
primary performance attributes and additional features.

An example of features in service is offering free drinks on a plane. An example of features in

products is adding a drink cooler in the car.

Reliability
Reliability is usually closely related to performance. The focus of the dimension reliability is more on
how long a product will perform consistently according to the specifications of that product. This is
important to customers who need the product to work without any errors and contributes to a brand or
company’s image.

The dimension reliability shows the probability of the product having signs of error within a specific
time of period. For measuring reliability you should measure the time to the first failure, how much
time there is between failures, and the failure rate per a specific time of period.

These measures are usually applied to products that are expected to last for a longer time and not so
much for products that are meant to be used directly and for a shorter time period. Usually when the
costs for maintenance or downtime increase, reliability as a dimension of quality becomes more
important to consumers.

For example, for parents with children who depend on a car, the reliability of the car becomes an
important element. Also for most farmers, reliability is a key attribute.

This group of consumers is sensitive to downtime, especially during the shorter harvest seasons. For a
farmer, reliable equipment can be crucial in preventing spoiled crops. Also, the reliability of
computers is key for many consumers.

Conformance
This dimension is closely related to the dimensions performance and features. The dimension of
conformance is about to what extent the product or service conforms to the specifications. Does it
function and have all the features as specified? Every product and service has some sort of
specifications that comes with it.
For example, the materials used or the dimensions of a product can be specified and set as a target
specification for the product. Something that can also be defined in the specification is the tolerance,
which states how much a product is allowed to deviate from the target. Problematic with this approach
is that it makes it easier for producers to focus less on if the specifications have been met as long as
they’ve met the tolerance limits.

When it comes to service businesses, conformance is measured by focussing on the accuracy, the
number of processing errors, unexpected delays and other common mistakes.

Durability
Out of the eight dimensions of quality, the dimension durability is about how long a product will last
or perform and under what conditions it will perform. Estimating the length of a product’s life
becomes complicated when it’s possible to repair the product.

For such products, the durability will be counted until it is no longer economically beneficial to use it.
This is when the repairs and the costs of repairing increase.

Customers then must weigh the costs for future repairs against the costs of investing in a new one
together with its operating expenses. In other cases, durability is measured by the amount someone
can use a product before it stops working and repair is impossible.

This, for example, is the case when a light bulb burns up and must be replaced by a new one. In this
case, repairing it is impossible.

Serviceability
Serviceability is one of the eight dimensions of quality that reflects on if the product is relatively easy
to maintain and repair. This becomes important for consumers who are more focused on the total cost
of ownership as criteria for selecting a product.

Serviceability reflects on how easy it is for the consumer to obtain repair service, how responsive the
service personnel is, and how reliable the service is. It also focuses on the speed with which a product
can be repaired and also the competence and behaviour of the personnel.

Customer’s concerns are mainly about the product getting defects, but also how long it takes for the
product to be repaired. It is not only important if a product can be fixed, but also how satisfied the
customer is about the company’s complaint handling procedures.

This can affect how the customer evaluates the service quality and eventually the company’s
reputation. Each company has a different way of dealing with complaint handling and not every
company attaches the same level of importance to serviceability.

For example, there are companies that do their best to resolve the complaints they receive, while
others don’t offer any service when it comes to complaints. An example of improving a company’s
serviceability is by installing a cost-free phone number to reach the helplines.
Aesthetics
The aesthetics dimension is all about the way a product looks and contributes to the company’s
identity or a brand. Aesthetics is not only about how a product looks but also about how it feels,
tastes, smells or sounds.

This is clearly determined by individual preference and personal judgement, however, there is a way
to measure this dimension. There are some clear patterns found in the way consumers rank products
based on personal taste. Still, the aesthetics of a product is not as universal as the dimension
‘performance’.

Not all people prefer the same taste or smell, which makes it impossible to please every single
customer. For this reason, companies end up searching for a niche.

Perceived Quality
The perception of something is not always reality. Meaning that a product or service can have high
scores on each of the seven dimensions of quality, but still receive a bad rating from customers as a
result of negative perceptions from customers or the public.

Customers sometimes lack information about a service or product and for comparing brands will rely
on indirect reviews. This is usually the case when it comes to a product’s durability because in most
cases it can’t be observed directly.

Also, reputation plays a significant role when it comes to perceived quality. It’s easier for a customer
to trust the quality of a company’s new product when the established products received positive
reviews.