Operations Management


Sub Code : 10MBA33 No. of Lecture Hrs/week :04+01(extra) Total no .of Lecture Hrs : 56

Operations Management 

MODULE 1- Introduction and Break even analysis (7 hours) -- 1 MODULE 2- Forecasting (7 hours) -- 3 MODULE 3- Facility Planning (6 hours) -- 2 MODULE 4- Employee Productivity (6 hours) -- 6 MODULE 5- Capacity Planning (6 hours) -- 4 MODULE 6- Materials Management (6 hours) -- 5 MODULE 7- Quality Management I (12 hours) -- 7 MODULE 8- Quality Management II (6 hours) -- 8

MODULE 1- Introduction and Break even analysis (7 hours) -- 1  

Break even analysis - Break even analysis in terms of physical units, sales value, and percentage of full capacity. Break even for Multi Product situations, Capacity expansion decisions, Product add or drop decisions, Make or Buy decisions, Equipment Selection decisions, Production process selection decisions, Managerial uses of break even analysis, Limitations of Breakeven analysis. Note: The module will cover both theory and numerical problems with emphasis on decision making for competitive advantage.

noise control. service operations. Materials handling . Note: The module will cover theory focusing on safety. sanitation. ventilation. air conditioning. principles.Facility Planning (6 hours) -. principles.MODULE 3.2     Facilities location decisions. Numerical problems on location selection . and productivity. and office operations. Factors influencing layout changes.. Layout and its objectives for manufacturing operations. factors affecting facility location decisions and their relative importance for different types of facilities. Facility layout planning. psychological factors. Facilities utilities ± lighting. hybrid layouts. process layout. types of plant layouts ± product layout. warehouse operations. types. fixed position layout. Facility location models.objectives. cellular manufacturing layouts.

Measurement of errors. short and long range forecasting. types of forecasting. Moving average. Exponential smoothing. Monitoring and Controlling forecasting models. quantitative forecasting models .Forecasting (7 hours) -.Linear regression . Exponential smoothing with trends.MODULE 2.3   Forecasting as a planning tool. qualitative forecasting techniques. forecasting time horizon. Weighted moving average. sources of data. Note: The module will cover both theory and numerical problems .

capacity augmentation strategies. Capacity requirement planning. Job shop scheduling n jobs on 1 machine. Capacity requirement planning and strategies thereto. financial impact of capacity decisions. capacity and value. benefits of MRP. Demand and capacity options and strategies in production and services. material requirement planning. capacity planning and steps. BOM. purpose. concepts of yields (productivity) and its impact on capacity. elements of MRP. Matching demand and capacity. Managerial importance of aggregate plans. alternatives for managing demand and supply. capacity requirement planning. economic production quantity. objectives of MRP. demand chase aggregate planning.4  Concept and overview of aggregation.Capacity Planning (6 hours) -.MODULE 5. Planning hierarchies in operations. Materials requirement planning. Resource requirements planning system. level production aggregate planning. necessity and importance of aggregate planning. aggregate planning. Note: Numerical problems on job shop scheduling   . aggregate planning types and procedure. n jobs on 2 machines.

Inventory Management : Concepts of inventory. ethics in purchasing. forms used and records maintained. Classification. Inventory records. Inventory costs. Discounts .5    Role of Materials Management. Re order point. Vendor rating. Procurement procedures including bid systems. selective inventory management. Note: Numerical problems on vendor rating. Purchase functions. ABC analysis. ABC VED. types. amendments. safety stocks. purchase requisition.MODULE 6. Concepts of lead time. Roles and responsibilities of purchase professionals. purchase order. Inventory models. Inventory models ± EOQ.types. Vendor selection and development. Stores.Materials Management (6 hours) -.materials and profitability. Quantity discounts. functions. and FSN analysis. roles responsibilities.

Work sampling study. Productivity and the organization. Method Study Introduction to Method Study. variables affecting labour productivity.Employee Productivity (6 hours) -. Worker area study.6    Productivity and work study Productivity and the standard of living. Material flow and material handling study. Worker flow study. work content and time. examining. Data collection. productivity. and improving work. Time study and setting standards Numerical problems on productivity measurement. time study and work standards . recording. Work Study and related working conditions and human factors.MODULE 4. Work Measurement Introduction to Work Measurement.

QS 9000 clauses. cycle time and value. their main focus. Quality Function Deployment and its benefits. costs. Juran¶s quality trilogy Impact of quality on costs ± quality costs. six sigma concepts. linkage with generic strategies. Role of management in implementing quality systems.  . Relationships between quality. coverage. coverage. organizing for continuous improvement. Quality circles.Quality Management I (12 hours) -7  Basic concepts of quality of products and services. linkages with functional domains like production. dimensions of quality. benefits. Quality Systems ± Need. PDCA cycle.MODULE 7. Baldrige award. awards and standards awards ± MBNQA. Excellence models. ISO 9000 ± 2000 clauses. Demings prize. Demings 14 principles.. marketing. productivity. Quality improvement and cost reduction ± 7 QC tools and 7 new QC tools.

Process control and control charts for both attributes and variable data. statistical control limits.Quality Management II (6 hours) -. .8  Concept of specification limits.MODULE 8. Operators role in quality assurance.

Reference Books: 1. Ashwathappa.Operations Management  The course will cover both theory and numerical problems ( theory and numerical in the ratio of 40 : 60 ratio) Recommended books: Operations Management Theory and Practice. K. B. Pearson education. K Sridhar Bhat. Production and Operations Management ± Prof. Second impression 2007  1.Mahadevan. Himalaya Publications  .


INTRODUCTION     Manufacturing. hospitals and banks. service and agriculture are the major economic activities in any country. automobile garages. In India manufacturing and services together constitute nearly 75 percent of the GDP. A service organization addresses the requirements of its customers using a service delivery system and provides the required service. A manufacturing firm essentially engages in converting several inputs into products that are useful for individuals and organizations. Examplesmanagement consultancies (Information). . hotels (materials consumed).

These inputs and outputs can be physical things such as materials and / or informational. and could fetch revenue to the organization.   .Definition of Operations Management Operations management is a systematic approach to address all the issues pertaining to the transformation process that converts some inputs into output that are useful.

Production and Manufacturing  Production is the process by which raw materials and other inputs are converted into finished products.    Manufacturing engages in converting several inputs into products that are useful for individuals and organizations. Manufacturing --only tangible goods Production --both tangible goods and intangible services .

Conversion sub-system and iii. ii. . Control sub-system. Production system.Production as a System Production system model comprises: i.

A Production System Model .

Breakeven analysis .

The volume of sales and the volume of production are equal In case of multi product firms.Assumptions underlying Break-Even analysis. All revenue is perfectly variable with the physical volume of production. the product mix should be stable. .     All the costs are either perfectly variable or absolutely fixed over the entire range of production.

B.   Break-even volume is the number of units of a product which must be sold to earn enough revenue just to cover all expenses.P = Fixed cost Selling price .Variable cost per unit. .Break-even point in terms of physical units.E. The BEP is reached when sufficient number of units have been sold so that the total contribution margin of the units sold is equal to the fixed costs.

Variable cost Sales value .E.Break-even point in terms of sales value. In these firms it is convenient to determine their BEP in terms of total rupees sales. B.   Multi product firms are not in a position to measure the BEP in terms of any common unit of product.P = Fixed cost Contribution ratio Contribution ratio = Selling value .

Breakeven for multi product situations .

Capacity expansion decisions .

what would be consequent effects on revenue and costs? .Product add or drop decisions   Should a new product be added in view of the estimated revenue and cost? If the product is dropped from the line.

Make of Buy decisions     This is the very first step in process planning. many large firms favour the make option resulting in backward integration and ownership of a large range of manufacturing and assembly facilities. It involves considering whether to make or buy some or all of a product or service. . Traditionally. Increased competition has created pressure on large firms to reduce cost--focus on core competencies-hence the trend is now towards outsourcing.

its documents like product structure tree. drawings for parts.Make of Buy decisions   At the completion of product design. components etc are produced. considering a number of factors. . The process planning engineers are required to make the important decision of make-orbuy. part lists.

     Available capacity Expertise Quality considerations Nature of demand Cost. .Various factors considered in Make-or Buy decisions.

Better control of quality on in-house operations. . Need to preserve trade secrets and design secrets Savings on transportation costs of items. Assurance of timely availability.When to make?       Higher purchase price per unit. Availability of the required facilities and capacities in house.

When the outside suppliers hold a patent on the needed item. .. machines and tools. Firm¶s requirement of an item is low and does not justify investment on special purpose equipments. When there is no problem of trade secrets or design secrets. When item does not have a long-term requirement. Ability of the outside supplier to supply the item at lower cost higher quality and fast delivery.When to buy?       When the purchase price per unit is less.

Inputs Conversion Process Outputs .Production Processes  Production processes : Conversion or transformation processes used to produce products.

Production Processes Manufacturing operations or processes convert inputs into tangible outputs. . Three basic categories of manufacturing processes are: ± Forming processes ± Machining processes ± Assembly processes.

Production Processes Forming processes Include casting. embossing. stamping. spinning. forging. etc. These processes change the shape of the work piece without necessarily removing or adding material. .

Production Processes Machining processesInvolve basically metal removal. . milling. by turning. grinding. drilling. etc.

riveting. Some of the common assembly processes are welding. . soldering.Production Processes Assembly processesInvolve the joining of component or piece parts to produce a single component that has a specific function. fastening with bolts and nuts. brazing.

Production Processes .

and its effect. Safety margin. . Volume needed to attain target profit.E. Whether to add a new product or drop production of any product. Whether to make or buy. 5. 3. before it starts incurring losses. 4.Managerial uses of break even analysis With the help of B. Whether to expand production capacity or not. 2.it decides the extent to which the firm can afford to decline in sales. Change in price.P analysis management of a production firm can take decisions related to the following. 6. 1.

Managerial uses of break even analysis 7. . and or reducing the variable expenses per unit. Selection of production machinery so as to get maximum profit for a particular volume of the product out of the available machineries. and or reducing the fixed costs. iv. ii. i. Improving profit performance byincreasing the volume of sales. iii. 8. and or increasing the selling price.

it can be sound and useful only if the firm in question maintain a good accounting system. 3. Breakeven analysis is not an effective tool for long range use and its use should be restored to the short run only. 6. The cost revenue-volume relationship is linear. But this is realistic only over narrow ranges of output. . Cost data of the past period may not hold good for the current period. It is based on the assumptions of given relationships between costs and revenues.Limitations of B. and input on the other. Selling costs may not remain constant. 5. 4.E. on one hand. Since break even analysis is based on accounting data therefore. 2.P 1.



Plant Location Plant location is the function of determining location for a plant for maximum operating economy and effectiveness. etc . efficient plant layout. --It is perhaps the most important problem faced by an entrepreneur. labour force. --Ensures supply of raw materials. proper utilization of production capacity.

4. When a company thinks that there is a possibility of reducing manufacturing cost by shifting from one location to another location. 3. for instance. 5. Other social or economic reasons. When there is no space for expanding the facilities at present location. 6. 2. The volume of business and sales has increased so there is a need for branches. inadequate labour supply. . A lease expires and the landlord does not renew the lease. shifting of the market etc.Need for location selection Arises for any of the following conditions: 1. When a new business is started.

To be systematic. 2. 3. the entrepreneur would do well to proceed step by step. Selection of the exact site. Selection of the locality or community. 4. Selection of the region. Within the country or outside.Steps in Location Selection  1. the steps being. in choosing a plant location. .

Existence of complementary and competing industries Finance and research facilities Soil. size and Topography .Factors influencing location decisions             Availability of raw materials Nearness to the market Availability of power Transport facilities Suitability of climate Government policy Competition between states Availability of labour Civic amenities for workers. availability of water and fire fighting facilities.

personal or business contacts seem to influence location decisions most followed by availability of infrastructure and so on. .Relative importance for different types of facilities  Among all the location factors.

Rural, Suburban and Urban site
All these offer advantages as industrial sites. Rural site: Land-cheaper Taxes-negligible Layout-spacious Wages-lower for unskilled, higher for skilled because they have to be mobilised. Smoke and waste- no restrictions Skilled workers--lack of supply Civic amenities-- lack for employees Lack of transport facilities

Rural, Suburban and Urban site
Urban site: Land-very high cost Taxes-house, water, sanitation and other similar taxes are high Layout-awkwardly shaped factory buildings, ill-lighted and illventilated. Wages-cost of labour is high Smoke and waste- restrictions are imposed Skilled workers--available in plenty Civic amenities-- all facilities are available to the employees Transportation facilities are no problems

Rural, Suburban and Urban site
Suburban site: Suburban sites offer a compromise between the city and village and have the advantages of both.

4. Various models are available which help identify a near ideal location. 2. The most popular models are: Factor Rating Method Point Rating Method Break-even Analysis Qualitative Factor Analysis .Facility Location Models  1. 3.

Location factor Factor rating Location 1 1.(2) 24 20 24 3 25 96 3 4 4 1 5 2. 5.No. 4. S. 3. is the best choice . Hence location 2.(3) 40 15 30 6 15 106 Facility utilization Total patient per month Average time per emergency trip Land ad construction costs Employee preferences Location factor Factor rating (1) 1.No. 2. 5. The total score for location 2 is higher than that of location 1. 4. 3.Factor Rating Method S. Facility utilization Total patient per month Average time per emergency trip Land and construction cost Employee 8 5 6 3 5 8 5 6 3 5 Location 1 Rating (2) 3 4 4 1 5 Total Total= (1). Answer: Rating Location 2 5 3 5 2 3 Location 2 Rating (3) 5 3 5 2 3 Total Total= (1).

Future availability of fuel Transportation flexibility and growth Adequacy of water supply Labour availability Pollution regulations Site topography Living conditions TOTAL . Maximum possible points 300 200 100 250 30 50 150 1080 Points assigned to locations Location A Location B 200 150 100 220 20 40 100 830 250 150 100 200 20 30 125 875 c. e. d.Point rating method Factors rated a. b. g. f.

Determine fixed and variable costs for each location 2. Plot the cost for each location 3. Select location with lowest total cost for expected production volume .Locational Break-Even Analysis Method of cost-volume analysis used for costindustrial locations Three steps in the method 1.

000 $150.000 $160.Locational Break-Even Analysis Example Three locations: Fixed Variable City Cost Cost Akron $30.000 Total Cost = Fixed Cost + Variable Cost x Volume .000 units Total Cost $180.000 $75 Bowling Green $60.000 $25 Selling price = $120 Expected volume = 2.000 $45 Chicago $110.

500 2.000 ± $150.000 ± ± $60.Locational Break-Even Analysis Example ± $180.000 1.500 3.000 ± ± ± $30.000 ± | ± 0 Annual cost Belgaum lowest cost | | Pune lowest cost | | | Mumbai lowest cost | 500 1.000 2.000 ± ± ± $80.000 ± ± $10.000 ± ± $160.000 ± ± $110.000 ± ± $130.000 Volume .

35 0.00 Scores for locations A 50 70 60 80 50 70 B 40 80 70 70 60 90 C 60 80 60 40 70 80 D 30 60 50 80 90 50 Production cost Raw material supply Labour availability Cost of living Environment Markets TOTAL Assigned weight is multiplied with the scores .20 0.25 0.Qualitative factor analysis method Relevant factors Assigned weight 0.10 1.05 0.05 0.

5 D 10.0 14.Qualitative factor analysis method Relevant factors Production cost Raw material supply Labour availability Cost of living Environment Markets TOTAL Weighted Score for locations A 17.5 B 14.5 12.0 02.0 02.0 63.0 20.0 04.0 03.0 12.0 60.5 07.0 04.0 66.0 49.5 05.5 08.0 .0 09.5 17.5 03.5 15.0 20.0 03.0 04.5 C 21.0 10.

³The improvements in layouts already in use in order to introduce new methods & improvements in manufacturing procedures.´ 2.´ . equipment & services for the first time in completely new plants. ³Planning & arranging manufacturing machinery. A more simple. clear and comprehensive definition is given by µKnowles & Thomson¶. 1.Plant layout Plant layout refers to the arrangement of machinery. equipment and other industrial facilities for achieving quickest and smooth production. They say that a plant layout involves.

(iv) Minimum movement of workers (v) Least chances of accidents. etc.Objectives of a good layout The objectives of good facility layout are as follows: [A] Objectives related to material (i) Less material handling and minimum transportation cost (ii) Less waiting time for in-process inventory . etc. . (iii) Fast travel of material inside the factory without congestion or bottleneck. lighting. worker. (vi) Proper space for machines. etc. fire. [B] Objectives related to work place (i) Suitable design of work-stations and their proper placement (ii) Maintaining the sequence of operations of parts by adjacently locating the succeeding facilities (iii) Safe working conditions from the point of ventilation. (vii)Utilization of vertical height available in the plant. tools.

better product quality. common workers for different machines.Objectives of a good layout [C] Performance related objectives (i) Simpler plant maintenance (ii) Increased productivity. etc. and reduced cost (iii) Least set-up cost and minimal change-over (iv) Exploitation of buffer capacity. [D] Objective related to flexibility (i) Scope for future expansion (ii) Considerations for varied product mix (iii) Considerations for alternate routings .

Warehouse operations .

Warehouse operations .

Office layout .

Product layout or line processing layout or flowline layout. iv. ii. Combination layout or Hybrid layout.Types of Layout i. Fixed position layout or static layout. iii. . Cellular manufacturing (CM) layout or Group Technology layout. v. Process layout or functional layout or job shop layout.

Process Layout or Functional Layout or Job Shop Layout .

Line Layout or Product Layout .

Fixed Position Layout or Static Layout .

Cellular Manufacturing Layout or Group Technology Layout .

Combined Layout or Hybrid Layout for Gear Manufacturing .

.Service Facility Layout  Service facility layout should provide easy entrance to service facilities from free ways and busy thoroughfares.

Factors Influencing facility Layout        Materials Product Worker Machinery Types of Industry Location Managerial Policies .

Problems Numerical problems on Location selection .


FORECASTING  Forecasts are the prediction of future events used for planning purposes Forecasting is estimating future demand for products and services and the resources necessary to produce these outputs  .

competitive and volatile Better planning and allocation of resources  Specific purposes ± ± ± ± Appropriate production scheduling Inventory control Determining appropriate pricing policies Setting sales targets and establishing controls and incentives .WHY DEMAND FORECAST?  General Purpose ± ± Market is dynamic.

.TYPES OF FORECASTS  Short ± term Forecasting: Short-term Forecasting is employed to fine tune an existing plan based on the new information obtained  Medium ± term forecasting: Medium ± term forecasting is used as a starting point to the annual business planning exercise  Long ± term Forecasting: Long ± term forecasting involves purely strategic decisions.

Forecast horizon Time span Nature of decisions Key Considerations Nature of data Degree of uncertainty Some Examples Short ± term 1 To 6 months Purely tactical Random (short-term Effects Mostly qualitative Low Medium-term 1 to 2 years Tactical and strategic Long ± term 5 to 10 years Purely strategic Seasonal and cyclical Long term effects effects Quantitative & Qualitative Significant Largely Quantitative High Revising quarterly prodn plans Rescheduling supply of raw materials Annual prodn planning New business development New product introduction Facility location decisions .

Qualitative Methods or Judgemental Methods Qualitative methods are not based on past record. but on the opinions of experts in the relative field.      Executive committee consensus/Jury or Executive¶s Opinion Survey of Sales force/Field Expectation Method Survey of Customers/User¶s Expectation Method Historical Analogy The Delphi Method .

Dt = actual demand in period t n = total number of periods in the average Ft+1 = forecast for period t+1 .QUANTITATIVE METHODS   Quantitative methods are purely based on past data. Methods of Forecasting Moving Average M1 Ft+1 = Sum of last n demands n = Dt+Dt-1+Dt-2+Dt-3+«+Dt-n+1 n Where.

8/25/2009 .Slide 78 M1 MBA.

Et = forecast error for period t Dt = actual demand for period t Ft = forecast for period t .FORECAST ERROR  Forecast error is simply the difference found by substracting the forecast from actual demand for a given period or. Et = Dt ± Ft Where.

QUANTITATIVE METHODS Weighted Moving Average:  A type of moving average in which greater weight is given to the latest data.  WMA = Three Months Weighted Moving Total* Total Weight *for three months weighted moving average . and less weight is given to older data. Waited moving average gives more weight for more recent data.

))Ft (Dt-Ft) Ft+1 = Or Ft+1 = Ft + . (Demand for this period) +(1.) (Forecast calculated last period) = Dt + (1.EXPONENTIAL SMOOTHING  In exponential smoothing weight assigned to a previous period¶s demand decreases exponentially as that data gets older.

At = exponentially smoothened average of the series in period t Tt = exponentially smoothened average of the trend in period t . Ft+1 = At+ Tt Where.EXPONENTIAL SMOOTHING WITH TRENDS   A trend in a time series is a systematic increase or decrease in the average of the series over time. The method for incorporating a trend in an exponentially smoothened forecast is called trend-adjusted exponential smoothing method.

) (At-1 + Tt-1). = smoothing parameter for the ave.EXPONENTIAL SMOOTHING WITH TRENDS At = (Demand this period) + (1.ß )(Trend estimate last period) = ß (At ± At-1) + (1. with a value between 0 & 1 ß = smoothing parameter for the trend. and Tt = ß (Ave this period ± Ave last period) + (1. with a value between 0 & 1 .)(Average + Trend estimation last period) = Dt + (1.ß ) Tt-1 Where.

Dependent variable is the variable that one wants to forecast Independent variables that are assumed to affect the dependent variable and thereby µcause¶ the results observed in the past. The linear equation is. Y = a + bX Where. Y = Dependent variable X = Independent variable a = Y ± intercept of the line b = slope of the line .LINEAR REGRESSION    It is a casual method in which one variable is related to one or more independent variables by a linear equation.

This can be ensured when the system overestimates the demand and underestimates it.  .ACCURACY OF FORECASTS  FORECAST ERROR: Et = Dt ± Ft A positive value of Et will indicate underestimation of demand and vice versa Sum Of Forecast of Error: SFE = ™E The value of SFE must be ZERO.

ACCURACY OF FORECASTS  MEAN ABSOLUTE DEVIATION: MAD = ™|Et| / n where. (to overcome the limitation of SFE. ™|Et| is the sum total of absolute forecast error and n is the number of periods. the absolute values of Et will be taken and averaging it over the µn¶ periods) MEAN ABSOLUTE PERCENTAGE ERROR MAPE = ™|Et| / Dt x 100 / n MEAN SQUARED ERROR MSE = ™ Et² / n TRACKING SIGNAL (TS) TS = SFE / MAD    .

Monitoring and controlling forecasting models .


Planning hierarchies in operations At first level. such as marketing and finance.     Should we meet the projected demand entirely or a portion of the projected demand? What are the implications of this decision on the overall competitive scenario and the firm¶s standing in the market? How is this likely to affect the operating system and planning in other functional areas of the business.business plan answers the following questions. What resources should we commit to meet the chosen demand during the planning horizon? .

  . material and other resources are available to meet the projected demand on periodic basis.detail planning to ensure the capacity. At second level.Planning hierarchies in operations  Once the level of resources to be committed is arrived at. At final level²the set of machines to be used for manufacturing and the time when the job needs to be launched into the system in order to meet the targeted completion time are decided. rough cut capacity planning needs to be done.

production rate (work hours per week) and inventory levels.  . aggregate planning involves planning workforce. For manufacturing operations.AGGREGATE PLANNING  It involves planning the best quantity to produce during time periods in the inter-mediate range horizon and planning the lowest cost method .

Why is aggregate planning necessary and important     Demand fluctuations Capacity fluctuations Difficulty level in altering production rates. Benefits of multi-period planning .

Matching the demand and supply 

For the supply capacity that an organisation has during a period, identify ways by which the demand could be suitably modified so that both are matched. For the targeted demand in every period, identify ways by which the supply is altered so that both are matched. During every period, adjust both the demand and the supply in such a way that both are matched.  

Alternatives for managing demand
Two strategies are used to manage demand. 

Reservation of Capacity Influencing Demand 

Alternatives for managing supply
Modifying supply can be done in one of the following ways: 

Inventory based alternatives Capacity adjustment alternatives

2. 3.

hiring/ lay-off of workers varying shifts varying working hours 

Capacity augmentation alternatives

the system is likely to experience cost advantages¶  .CAPACITY  The extent of availability of the resources for use by various processes Maximum output of products one can achieve by using the available resources. µwhen the output increases in an operating system.

high variety situation will use input measures capacity Output measures of capacity when the volume of production is higher than the variety. it is appropriate to use output measures of capacity Capacity put to use Total capacity available   Capacity Utilization = .MEASURES OF CAPACITY Input measures of capacity Firms operating in low volume.

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