INTRODUCTION TO

OPERATIONAL
MANAGEMENT
 WHY STUDY OPERATION
MANAGEMENT?
1. We study how people organize themselves for
productive enterprises.
2. To know how goods and services are produced.
3. To understand what operations managers do.
4. We study because it is such a costly part of an
organization.
OPERATIONS – part of a business organization that is
responsible for producing goods and services

MANAGEMENT – process of planning, decision

making, organizing, leading, motivation and
controlling the human resources, financial,
physical and information resources of an
organization to reach its goals in an efficient
and effective manner.
 THREE BASIC FUNCTION OF ORGANIZATION
1. FINANCE – responsible for securing financial resources
- budgeting
- analyzing investment proposals
- providing funds for operation

2. MARKETING – responsible for assessing consumer wants and needs

- selling and promoting organizations goods and services

3. OPERATIONS – responsible for producing the goods and providing

services offered by organization.
 OPERATIONS MANAGEMENT

BUSINESS FUNCTION
PLANNING COORDINATING CONTROLLING
RESOURCES NEEDED
PRODUCTS AND SERVICES
 OPERATIONS MANAGEMENT

•A Management Function
•An Organization’s Core Function
•Exists in every organization whether
Service or Manufacturing, profit or
non-profit
 OPERATIONS MANAGEMENT
PROCESS
OPERATIONS

INPUTS TRANSFORMATION
OUTPUTS
PROCESS

RESOURCES GOODS AND

SERVICES
 TRANSFORMATION OF A CANNED
FOOD PROCESSOR

INPUTS PROCESS OUTPUTS

Raw Meat Cleaning Canned Meat
Metal Sheets Making Cans
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
 SUPPLY CHAIN

SUPPLY CHAIN - the sequence of organizations that

are involved in producing and delivering a product
or service.
 OM’S TRANSFORMATION ROLE

- TO ADD VALUE
- PROVIDE EFFICIENT
TRANSFORMATION
 TYPES OF TRANSFORMATION
PROCESS
• PHYSICAL – manufacturing of goods
• LOCATIONAL – transportation (e.g. Trucking, buses)
• EXCHANGE - retailing
• STORAGE - warehousing
• PHYSIOLOGICAL – health care
• INFORMATIONAL – telecommunications, media
• PSYCHOLOGICAL - entertainment
 OPERATIONS MANAGEMENT
DECISIONS

STRATEGIC TACTICAL
DECISIONS DECISIONS
Broad in Scope, Narrow in Scope,
Long Term, Short Term,
All encompassing Concerning a small
group of issues
 OPERATION OBJECTIVES

1. Cost
2. Speed
3. Dependability
4. Quality
5. Flexibility
6. Innovation
 EXAMINING THE OPTIONS FOR
INCREASING CONTRIBUTION
Fisher Technologies is a small firm that must double its dollar
contribution to fixed cost and profit in order to be profitable
enough to purchase the next generation of production
equipment. Management has determined that if the firms
fails to increase contribution, its bank will not make the loan
and the equipment cannot be purchased. If the firm cannot
purchase the equipment, the limitations of the old equipment
will force Fisher to go out of business and, in doing so, put its
employees out of work and discontinue producing goods
and services for its customers.
 TABLE 1.1 OPTIONS FOR INCREASING CONTRIBUTION

MARKETING FINANCE
OPTION OPTION OM OPTION

INCREASE REDUCE REDUCE

SALES FINANCE PRODUCTION
CURRENT REVENUE 50% COSTS 50% COST 20%
Sales 100,000 150,000 100,000 100,000
Cost of goods -80,000 -120,000 -80,000 -64,000
Gross margin 20,000 30,000 20,000 36,000
Finance costs -6,000 -6,000 -3,000 -6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% -3,500 -6,000 -4,250 -7,500
Contribution 10,500 18,000 12,750 22,500

• Increase Sales 50% - 7,500 or 51%

• Reduce Cost 50% - 2,500 or 21%
• Reduce PC 20% - 12,000 or 114%
 NEED FOR OPERATIONS
MANAGEMENT
• The increased complexity of running a successful
business
• Lots of information, but no decision
• Banks are using OM techniques to configure
complicated financial instruments for their customers
• Retail enterprises are using OM methodology for
making decisions about customer relationship
management.
 WHAT IS QUANTITATIVE ANALYSIS?
QUANTITATIVE ANALYSIS
RAW DATA

- is a scientific approach to managerial

decision making whereby raw data are
processed and manipulated resulting in
meaningful information. QUANTITATIVE
ANALYSIS

- is the process of collecting and

evaluating measurable and verifiable
data such as revenues, market share, MEANINGFUL
and wages in order to understand the INFORMATION
behavior and performance of a business
 WHAT IS QUANTITATIVE ANALYSIS?
QUANTITATIVE FACTORS
might be different investment alternatives,
interest rates, inventory levels, demand, or labor
cost
QUALITATIVE FACTORS
such as the weather, state and federal
legislation, and technology breakthroughs
should also be considered
 THE QUANTITATIVE ANALYSIS
APPROACH

DEVELOPING A
MODEL ACQUIRING
INPUT DATA
DEFINING THE
PROBLEM
DEVELOPING A
SOLUTION TESTING THE
SOLUTION ANALYZING THE
RESULT

IMPLEMENTING THE RESULT

 DEFINING THE PROBLEM

Need to develop a clear and concise

statement that gives direction and meaning to
the succeeding steps of quantitative analysis
approach
 DEVELOPING A MODEL
• Quantitative analysis models are realistic, solvable,
and understandable mathematical representations of
a situation

• Models generally contain variables (controllable and

uncontrollable) and parameters
• Controllable variables are generally the decision
variables and uncontrollable variables are generally
unknown
• Parameters are known quantities that are a part of the
problem
 ACQUIRING INPUT DATA

• Data may come from a variety of sources such as

company reports, company documents, interviews,
on-site direct measurement, or statistical sampling

• Input Data MUST be ACCURATE

 DEVELOPING A SOLUTION
• The best (optimal) solution to a problem is found by
manipulating the model variables until a solution is found
that is practical and can be implemented
• Common techniques are
• Solving equations
• Trial and error – trying various approaches and picking
the best result
• Complete enumeration – trying all possible values
• Using an algorithm – a series of repeating steps to reach
a solution
 TESTING THE SOLUTION

• Both input data and the model should be tested for

accuracy before analysis and implementation
• New data can be collected to test the model
• Results should be logical, consistent, and
represent the real situation
 ANALYZING THE RESULTS
• Determine the implications of the solution
• Implementing results often requires change in an organization
• The impact of actions or changes needs to be studied and
understood before implementation

SENSITIVITY ANALYSIS
- determines how much the results of the analysis will change if the
model or input data changes
 IMPLEMENTING THE RESULTS
Implementation incorporates the solution into the company
• Implementation can be very difficult
• People can resist changes
• Many quantitative analysis efforts have failed because a
good, workable solution was not properly implemented
Changes occur over time, so even successful
implementations must be monitored to determine if
modifications are necessary
 HOW TO DEVELOP A QA MODEL

PROFIT = REVENUE - EXPENSES

 SAMPLE PROBLEM #1

Assume you are the new owner of JDCruz’s

Malunggay Bread and you want to develop a
mathematical model for your daily profits and
breakeven point. Your fixed overhead is $100
per day and your variable costs are 0.50 per
bread. You charge $1 per bread.
 SAMPLE PROBLEM #2

A company buys, sells, and repairs old

clocks. Rebuilt springs sell for $10 per
unit. Fixed cost of equipment to build
springs is $1,000. Variable cost for
spring material is $5 per unit.