BM 2
OPERATIONS MANAGEMENT AND TQM
CHAPTER 1: AN OVERVIEW OF OPERATIONS
MANAGEMENT
Operations Management
The management of processes or systems that create
goods and/or provide services.
It encompasses forecasting, capacity planning,
scheduling, managing inventories, assuring quality,
motivating employees, deciding where to locate the
facilities and more.
Business Organization
Organizations are formed to pursue goals that are
achieved more effectively by the concerted efforts of a
group of people than by individuals working alone.
THREE BASIC FUNCTIONS OF BUSINESS ORGANIZATION
1. PRODUCTION / OPERATION
Production and Operation System - Inputs are used to
obtain finished goods using one or more transformation
processes (e.g. storing, transporting, and cutting).
2. FINANCE
Comprises of activities related to securing resources at
favorable prices and allocating those resources
throughout the organization.
Finance and operations management personnel
cooperate by exchanging information and expertise in
activities such as:
1. Budget – must be periodically prepared to plan
financial requirements.
2. Economic analysis of investment proposals –
evaluation of alternative investment in plant and
equipment requires input from both operations and
finance people.
3. Provision of funds – necessary funding of operations
and the amount and timing of funding
3. MARKETING
- Focus on selling and/or promoting the goods and
services of an organization.
- Responsible for assessing customer wants and needs.
Other functions:
1. Accounting – supplies information to management
on cost of labor, materials, and overhead and may
provide reposts on items such as scrap, downtime and
inventories.
2. Management Information System (MIS) – providing
management with the information it needs to
effectively manage
3. Purchasing – responsible for procurement of
materials, supplies, and equipment.
4. Personnel or Human Resources _ concerned with
recruitment and training of personnel, labor relations,
wages and salaries and ensuring health and safety of
employees.
5. Public Relations – responsible for building and
maintaining a positive image of the organization.
6. Distribution – involves shipping of goods to
warehouse, retail outlets or final consumer.
7. Maintenance – responsible for general upkeep and
repair of equipment, building and grounds, heating and
air-conditioning, removing toxic waste.
DIFFERENTIATING FEATURES OF OPERATIONS SYSTEM:
I. DEGREE OF STANDARDIZATION
Standardized Output - means that there is a high
degree of uniformity in goods or services.
Customized Output - means that the product or
service is designed for specific case or individual.
II. TYPES OF OPERATIONS
The degree of standardized products and the volume of
output of a producer or service influence the way firm
organizes production.
The four Vs of operations:
1. Volume – how many products or services are made
by the operation?
2. Variety – how many different types of products or
services are made by the operation?
 BM 2
OPERATIONS MANAGEMENT AND TQM

3. Variation – how much does the level of demand
change over time?
4. Visibility – how much of the operation’s internal
working are ‘exposed’ to its customers?
III. PRODUCTION OF GOODS VERSUS SERVICE
OPERATIONIII. PRODUCTION OF GOODS VERSUS
SERVICE OPERATION
Production of goods - results in a tangible product.
III. ANALYSIS OF TRADE-OFFS
Manager sometimes deal with decision by listing the
advantages and disadvantages – pros and cons – of a
course of action to better understand the decision
they must make.
IV. SYSTEMS APPROACH
System – a set of interrelated parts that must work
together.

Service operation - generally implies an act. In a business organization, the organization can be
thought of as a system composes of subsystem. The
Differences Between Goods and Services:
system approach emphasizes interrelationships
1. Customer contact among subsystems, but its main theme is that the
2. Uniformity of input whole is greater than the sum of its individual parts.
3. Labor content of job
4. Uniformity of output
5. Measurement of productivity
6. Simultaneous production/consumption and delivery
7. Quality assurance

GENERAL APPROACHES TO DECISION MAKING:

I. MODEL - an abstraction of reality; a simplified version

of something.

Physical Models -Look like their real-life

counterparts.

Schematic Models - More abstract than their

physical counterparts (less resemblance to physical
reality)

There are often relatively simple to construct and

change.

Mathematical Models- The most abstract: they do

not look at all like their real-life counterparts.

These are usually the easiest to manipulate and they

are important forms of inputs for computers and
calculators.

II. QUANTITATIVE APPROACHES

Quantitative approaches to problem solving embody

an attempt to obtain mathematically optimum
solutions to managerial problems.
 BM 2
OPERATIONS MANAGEMENT AND TQM

CHAPTER 2: PRODUCTIVITY
A measure of the effective use of resources, usually
expressed as the ratio of output to input.

Types:

Partial measures
- output/(single input)

Multi-factor measures
- output/(multiple inputs)

Total measure
- output/(total inputs)

PRODUCTIVITY = Outputs/ Inputs

MEASURES OF PRODUCTIVITY

Labor Productivity ( Output/Time x Workers)

Multifactor Productivity (Output/Labor +Materials +
Overhead)

PRODUCTIVITY GROWTH RATE (PGR)

 BM 2
OPERATIONS MANAGEMENT AND TQM
CHAPTER 3: DECISION MAKING
Decision Theory
Represents a general approach to decision making that
is suitable for a wide range of operations management
decision.
THE DECISION PROCESS
1. Identify the possible future conditions (chance event
or state of nature)
2. Develop a list of possible alternatives.
3. Determine or estimate the payoff associated with
each alternative for every possible future conditions.
4. If possible, estimate the likelihood of each possible
future condition.
5. Evaluate alternatives according to some decision
criterion (maximize expected profit) and select the best
alternative.
PAY OFF TABLE
Table showing the expected payoff for each alternative
in every possible state of nature.
DECISION ENVIRONMENT
1. Certainty – means that relevant parameters
such as cost, capacity and demand have known
value.
2. Risk – means that certain parameters have
probabilistic outcomes.
3. Uncertainty – means that it is impossible to
assess the likelihood of various possible future
events.
Decision Making Under CERTAINTY
When it is known for certain which of the possible
future conditions will actually happen, the decision is
relatively straightforward.
Four possible decision criteria:
1. Maximin – choose the alternative with the
best of the worst possible payoffs.
SF = $ 10; MF = $7; LF = $ -4
Best worst = $ 10 to build SF
2. Maximax – choose the alternative with
the best possible payoff.
SF = $ 10; MF = $12; LF = $ 16
Best overall payoff = $16, to build LF.
3. Laplace – choose the alternative with the
best average payoff of any of the alternatives.
SF= (10+10+10)/3= $ 10
MF= (7+12+12)/3= $ 10.33
LF= (-4+2+16)/3= $ 4.67
Best average payoff is to build a MF.
4. Minimax Regret – choose the alternative that has the
least of the worst regrets.
a. prepare a table of opportunity losses or regret.
(subtract every payoff in each column from the best
payoff in that column)
b. identify the worst regret for each
alternative.
SF= 6; MF= 4; LF= 14
Lowest regret is 4 which is for MF.
 BM 2
OPERATIONS MANAGEMENT AND TQM

Decision Making Under RISK DECISION TREE

A schematic representation of the available alternatives
The probability of occurrence of each state of nature is
and their possible consequences. The term gets its
known, these probabilities must add to 1.00
name from the treelike appearance. Although tree
Expected Monetary Value (EMV) criterion - the best diagrams can be used in place of a payoff table, they are
expected value among the alternatives. particularly useful for analyzing situations that involve
Probabilities: low=.30; medium=.50; high=.20 sequential decisions.
EMV(SF)= $10(.30) + $10(.50) + $10(.20) = $10
A decision tree is composed of a number of nodes that
EMV(MF)= $7(.30) + $12(.50) + $12(.20) = $10.5
have branches emanating from them. Square nodes
EMV(LF)= $-4(.30) + 2(.50) + $16(.20) = $ 3
denote decision points, and circular nodes denote
The highest expected value is $10.5, to build a medium
chance events.
facility.

EXPECTED VALUE OF PERFECT INFORMATION (EVPI

solution 1)

The difference between the expected payoff with

perfect information and the expected payoff under risk.

EVPI = Expected payoff under certainty – Expected

payoff under risk

Expected payoff under certainty:

$10(.30) + $12(.50) + $16(.20) = $ 12.2

Expected payoff under risk is computed in EMV as $

10.5.
EVPI (sol.1) = $12.2 - $10.5 = $ 1.7

EXPECTED VALUE OF PERFECT INFORMATION (EVPI

solution 2)

Use the table of regret, compute for the expected

regret for each alternative using the given probabilities.

SF= 0(.30) + 2(.50) + 6(.20) = 2.2

MF=3(.30) + 0(.50) + 4(.20) = 1.7
LF=14(.30) + 10(.50) + 0(.20) = 9.2
The lowest expected regret is 1.7

EMV
Builds Small = $40 (.40) + $55 (.60) = $ 49
Build Medium = $50 (.40) + $ 70 (.60) = $ 62
EVPI (sol. 1)
= certainty – risk
$ 50 (.40) + $ 70 (.60) = $ 62
$ 62 - $ 62 = $ 0
EVPI (sol.2)
BS = $10 (.40) + $15 (.60) = $13
BM = $ 0 (.40) + $ 0 (.60) = $ 0
 BM 2
OPERATIONS MANAGEMENT AND TQM

CHAPTER 4: PRODUCT AND SERVICE DESIGN It allows:

(with computation of reliability) -easier diagnosis and remedy of failures
-easier repair and replacement
Major Factors in Design Strategy -simplification of manufacturing and assembly
1. Cost
2. Quality 3. Reliability - the ability of a product, part, system to
3. Time-to-market perform its intended function under a prescribed set of
4. Customer satisfaction condition.
5. Competitive advantage *failure – situation in which a product, part, or system
does not perform as intended.
Idea Generation *normal operating conditions – set of conditions under
Sources of Ideas for New or Redesigned Products and which an item’s reliability is specified.
Services 4. Robust Design - design results in products or services
1. Internal Sources that can function over a broad range of condition.
Research & Development (R&D) Designing for Manufacturing
- Organized efforts to increase scientific knowledge or
product innovation. 1. Concurrent Engineering - bringing together of
engineering design and manufacturing personnel early
2. External Sources in the design phase.
-customers
-suppliers 2. Computer-Aided Design (CAD) – designing products
-competitors using computer graphics.
*reverse engineering - dismantling and inspecting a -increases productivity of designers, 3 to 10 times
competitor’s product to discover product -creates a database for manufacturing information on
improvements. product specifications
-provides possibility of engineering and cost analysis on
Design Considerations proposed designs
1. Product / Service Life Cycle 3. Recycling - recovering materials for future use.
-Incubation, growth, maturity, saturation, and decline. Reasons for recycling:
2. Standardization Cost savings
-Extent to which there is an absence of variety in a Environment concerns
product, service or process. Environment regulations
-Standardized products are immediately available to 4. Remanufacturing - refurbishing used products by
customers replacing worn-out or defective components.
*Mass Customization - a strategy of producing
standardized goods or services but incorporating some
degree of customization.

Tactics in Mass Customization:

a. Delayed differentiation - is a postponement tactic,

producing but not quite completing a product or service
until customer preferences or specifications are known.

b. Modular design - a form of standardization in which

component parts are subdivided into modules that are
easily replaced or interchanged.
 BM 2
OPERATIONS MANAGEMENT AND TQM

RELIABILITY

Independent events - events whose occurrence or Rule # 3

nonoccurrence do not influence each other.
Redundancy - the use of backup components to
increase reliability
Rule # 1
If two or more events are independent and success is
defined as the probability that all these events occur,
then the probability of success is equal to the product of
the probabilities of the events.
If three events are involved and success is defined as
the probability that at least one of them occurs, the
probability of success is equal to the probability of the
first one (any of the events), plus the product of 1.00
minus that probability and the probability of the second
event (any of the remaining events), plus the product of
1.00minus each of the first two probabilities and the
probability of the third event, and so on. This rule can
be expanded to cover more than three events.

Rule # 2

If two events are independent and success is defined as

the probability that at least one of the events will occur,
the probability of success is equal to the probability of
either one plus 1.00 minus the probability multiplied by
the other probability.

Rule #1 .92x.89 = 0.8188

Rule #2 .92+(1-.92)x.80 = 0.984
Rule #3 1-((1-.90)x(1-.85)x(1-.70))= 0.9955
Rule #3 1-((1-.93)x(1-.80)x(1-.79))= 0.99706

Total Reliability = 0.7996673

 BM 2
OPERATIONS MANAGEMENT AND TQM

CHAPTER 5: FORECASTING • Sales-force opinions

Forecast • Consumer surveys

It is a statement about the future value of a variable of
interest.
Features Common to All Forecasts
1. Techniques assume some underlying causal system
that what existed in the past will persist into the future
2. Forecasts are not perfect
3. Forecasts for groups of items are more accurate than
those for individual items
4. Forecast accuracy decreases as the forecasting
horizon increases
• Delphi method - An interative process in which
managers and staff complete a series of
questionnaires, each developed from the
previous one, to achieve a consensus forecast.
II. Time-series Forecasts
Forecasts that project patterns identified in recent time-
series observations.
I. Naïve Forecast - The forecast for a time period is
equal to the previous time period’s value

Elements of a Good Forecast Forecast for any period = previous period’s actual value

should be timely Ft = At-1

should be accurate F: forecast A: Actual t: time period
should be reliable
should be expressed in meaningful units
should be in writing
technique should be simple to understand and use
should be cost effective

APPROACHES TO FORECASTING Averaging - They can handle step changes or gradual

Qualitative Forecasting changes in the level of a series.
Techniques
• Qualitative techniques permit the inclusion of
soft information such as: 1. Moving average - Averages a number of recent
Human factors actual values, updated as new values become
Personal opinions available.
Hunches
These factors are difficult, or impossible, to quantify

Quantitative Forecasting

• Quantitative techniques involve either the

projection of historical data or the development
of associative methods that attempt to use
causal variables to make a forecast
• These techniques rely on hard data

FORECASTING TECHNIQUES
I. Judgmental Forecasts F6= (43 + 40 + 41)/3 = 41.33
Forecasts that use subjective inputs such as opinions If actual demand in period 6 turns out to be 38, what is
from consumer surveys, sales staff, managers, the moving average forecast for period 7?
executives, and experts.
F7= (40 + 41 + 38)/3 = 39.67
• Executive opinions
 BM 2
OPERATIONS MANAGEMENT AND TQM

2. Weighted moving average- More recent values in a III. Associative Model

series are given more weight in computing a forecast Forecasting technique that uses explanatory variables to
predict future demand.

a. Compute a weighted average forecast using a weight

of .40 for the most recent period, .30 for the next most
recent, .20 for the next, and .10 for the next.

b. If the actual demand for period 6 is 38, forecast

demand for period 7 using the same weights as in part
a.

F6 = .10(40) + .20(43) + .30(40) + .40(41) = 41.0

F7 = .10(43) + .20(40) + .30(41) + .40(38) = 39.8

3. Exponential smoothing - Based on previous forecast

plus a percentage of the forecast error.