Unit 4 � Operations Management:

Operations Management - Resources - Types of Production system - Site selection, Plant Layout, Steps in Production Planning and Control - Inventory - EOQ Determination.

Operations Management

What is operations?

• The part of a business organization that is responsible for producing goods or services

How can we define operations management?

• The management of systems or processes that create goods and/or provide services

Three basic functions:

• Finance
• Operations
• Marketing

​

• Production/operations management is the process, which combines and transforms various resources used in the production/operations subsystem of the organization into value added product/services in a controlled manner as per the policies of the organization.
• Therefore, it is that part of an organization, which is concerned with the transformation of a range of inputs into the required (products/services) having the requisite quality level.
• The set of interrelated management activities, which are involved in manufacturing certain products, is called as Production Management.
• The main objective of production management is ‘to produce goods services of right quality and quantity at the right time and right manufacturing cost’.

​

The Transformation Process

Feedback = measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established standards to determine if corrective action is needed.

Goods vs. Service operations

Production of goods (goods oriented)

• Tangible products
• Automobile
• Refrigerator

Services (TV and auto repair, lawn care)

• Government
• Regulatory bodies, FAA, FDA
• Wholesale/retail
• Financial services
• Education

​

Function/Scope of Operations Management

• Forecasting
• Location of facilities
• Plant layouts and material handling
• Product design
• Process design & Capacity planning
• Production and planning control -planning, routing, scheduling, dispatching and follow-up.
• Quality control
• Materials management
• Maintenance management.
• Supply chain management

​

Operation Management

• What – What resources is needed and in what amount?
• When – When will each required?

-When work is Scheduled?

- When to order the materials?

- When corrective actions required?

• Where – Where will the work be done?
• How – How will the product or service be designated?

- How will be the work be done?

- How will resources be allocated?

• Who – Who will do the work?

Organizing

• Degree of centralization
• Process selection

Staffing

• Hiring/laying off
• Use of Overtime

Directing

• Incentive plans
• Issuance of work orders
• Job assignments

Facility Location

Plant Location: It is a process whereby a best suitable site is selected for the establishment of business factory (generally for the manufacturing concern).

The Need for Location Decisions:

• Expansion Purposes
• Growth in demand
• Depletion of basic inputs

Factors that affect Location Decisions�

• Near to customer/market
• Near to raw material
• Good transport facility
• Availability of power/fuel supply
• Water Supply
• Availability of cheap, skillful and efficient labor
• Government Policies
• Environmental considerations
• Easy availability of cheap land
• Future plans for expansion
• Less construction cost

​

Making Location Decisions

• Decide on the criteria
• Identify the important factors
• Develop location alternatives
• Identify the general region for a location
• Identify a small number of community alternatives
• Identify site alternatives among the community alternatives
• Evaluate the alternatives
• Make selection

​

Location Decision Factors

Regional Factors

• Location of raw materials
• Location of markets
• Labor factors
• Climate and taxes

Community Considerations

• Quality of life
• Services
• Attitudes
• Taxes
• Environmental regulations
• Utilities
• Developer support

​

Site Related Factors

• Land
• Transportation
• Environmental
• Legal
• Multiple Plant Strategies
• Product plant strategy
• Market area plant strategy
• Process plant strategy

Process Selection and System Design

Process Selection � (Types of Production systems)

Process Types

• Job shop

Small lots, low volume, general equipment, skilled workers, high-variety (tool & die shop, Dentist hospital)

• Batch

Moderate volume and variety. Variety among batches but not inside (bakeries, paint & ice-cream manufacturers )

• Repetitive/assembly line/Mass

Semi continuous, high volume of standardized items, limited variety (automobile, television sets, computers manufacturers)

• Continuous

Very high volumes of non-discrete goods, no variety

– (steel, oil, petroleum, sugar, salt manufacturers, power stations)

Plant Layout

• Layout: the configuration of departments, work centers, and equipment, with particular emphasis on movement of work (customers or materials) through the system
• Objectives of layout design
• To facilitate a smooth flow of work, material and information through the system.
• To facilitate attainment of product or service quality
• To use workers and space efficiently
• To avoid bottlenecks
• To minimize material handling costs
• To eliminate unnecessary movements of workers or materials
• To minimize production time or customer service time
• To design for safety

Basic Layout Types

• Product layouts
• Process layouts
• Fixed-Position layout
• Combination layouts

​

Product Layout

• If all the machines are arranged in a line sequence according to the sequence of operations of the products then it is known as Product or Line Layout.
• Used for Repetitive Processing Repetitive or Continuous
• Examples: chemical, paper, rubber, refineries, cement industry, automobile assembly

​

​

Advantages & disadvantages of Product Layout

ADVANTAGES DISADVANTAGES

• High rate of output
• Low unit cost
• Labor specialization
• Low material handling cost
• High utilization of labor and

equipment

• Established routing and scheduling
• Routing accounting and purchasing

• Creates dull, repetitive jobs
• Poorly skilled workers may not maintain equipment or quality of output
• Fairly inflexible to changes in volume
• Highly accessible to shutdowns
• Needs preventive maintenance
• Individual incentive plans are impractical

�Process layouts�

• In this type of layout machines of a similar type are arranged together at one place.
• The specialized machines and equipments are arranged one after another in the order of sequence required in the production process

Advantages & disadvantages of Process Layouts

ADVANTAGES

• Can handle a variety of processing requirements
• Not particularly vulnerable to equipment failures
• Equipment used is less costly
• Possible to use individual incentive plans

DISADVANTAGES

• In-process inventory costs can be high
• Challenging routing and scheduling
• Equipment utilization rates are low
• Material handling slow and inefficient
• Complexities often reduce span of supervision
• Special attention for each product or customer
• Accounting and purchasing are more involved

Fixed Position Layouts

• Layout in which the product or project remains stationary, and workers, materials, and equipment are moved as needed

​

Combination Layouts

• Some operational environments use a combination of the three basic layout types:
• Hospitals
• Supermarket
• Shipyards
• Some organizations are moving away from process layouts in an effort to capture the benefits of product layouts
• Cellular manufacturing
• Flexible manufacturing systems

​

Cellular Layouts

• Cellular Production
• Layout in which machines are grouped in cell that can process items that have similar processing requirements
• Group Technology
• The grouping into part families of items with similar design or manufacturing characteristics

​

​

​

Group Technology

Production Planning and Control (PPC)

• Production Planning is a managerial function which is mainly concerned with the following important issues:
• What production facilities are required?
• How these production facilities should be laid down in the space available for production?
• How they should be used to produce the desired products at the desired rate of production?
• Production control is a mechanism to monitor the execution of the plans. It has several important functions
• Making sure that production operations are started at planned places and planned times.
• Observing progress of the operations and recording improperly.
• Analyzing the recorded data with the plans and measuring the deviations.
• Taking immediate corrective actions to minimize the negative impact of deviations from the plans.
• Feeding back the recorded information to the planning section in order to improve future plans

Objectives of PPC

• Optimum Utilization of Capacity
• Inventory control
• Economy in production time
• Ensure quality

​

An effective PPC contributes to time, quality, quantity and cost parameters of entrepreneurial success.

It solves low productive problems.

It helps to max production & profitability.

COMPARISON BETWEEN PRODUCTION PLANNING & PRODUCTION CONTROL�

Main Functions of Production Planning and Control Department

ESTIMATING

To make a tentative idea and to estimate:

• the operation timings
• manpower requirement
• capacity of machine and
• materials requirement

so as to plan the production for various given time schedules and to increase production efficiency.

​

ROUTING

• Routing is the first step in production planning and control.
• Routing can be defined as the process of deciding the path (route) of work and the sequence of operations.

Routing fixes in advance:

• The quantity and quality of the product.
• The men, machines, materials, etc. to be used.
• The type, number and sequence of manufacturing operations, and
• The place of production.

Scheduling

• Scheduling is the second step in production planning and control. It comes after routing
• Scheduling means to:
• Fix the amount of work to do.
• Arrange the different manufacturing operations in order of priority.
• Fix the starting and completing, date and time, for each operation.

The pattern of scheduling differs from one job to another:

• Production Schedule
• Master Schedule
• Manufacturing Schedule
• Job order manufacturing schedule

​

​

​

Loading

• It is the process of assigning specific jobs to machines, men or work centre’s based on relative priorities and capacity utilization.
• It ensures maximum possible utilization of productive facilities and avoids bottlenecks in production.
• Loading determines who will do the work
• Routing determines where
• scheduling determines when it shall be done.

​

SEQUENCING

• Concerned with determining the order in which jobs are processed

​

• The order of processing is important with respect to the cost of waiting and the cost of idle time.

DISPATCHING

• Dispatching means starting the process of production. It provides the necessary authority to start the work. It is based on route-sheets and schedule sheets
• Issue of materials, tools, fixtures, etc., which are necessary for actual production.
• Issue of orders, instructions, drawings, etc. for starting the work.
• Maintaining proper records of the starting and completing each job on time.
• Moving the work from one process to another as per the schedule.
• Starting the control procedure.
• Recording the idle time of machines.

FOLLOW-UP

• Follow-up finds out and removes the defects, delays, limitations, bottlenecks, loopholes, etc. in the production process.
• It measures the actual performance and compares it to the expected performance.
• It maintains proper records of work, delays and bottlenecks. Such records are used in future to control production.
• Follow-up is necessary when production decreases even when there is proper routing and scheduling. 

Inventory Management

• Inventory management is the process of ordering, handling, storing, and using a company’s non-capitalized assets .
• Inventory means stock of raw material, semi finished, WIP & finished goods maintained by company
• Raw Materials
• Works-in-Process
• Finished Goods
• Distribution Inventory
• Maintenance, Repair and Operating (MRO)

​

Functions of inventory

• To meet anticipated customer demand
• To decouple suppliers – production – distribution
• To hedge against inflation & price increases
• To protect against delivery variations
• To avoid production disruptions through use of Work-In-Process (WIP)
• To smooth production requirements
• To protect against stock-outs
• To take advantage of order cycles

​

Negative aspects of inventory

• Large inventories hide operational problems
• Financial cost in carrying excess inventories
• Risk of damage to goods held in inventory
• Risk of product obsolescence

​

Two Fundamental Inventory Decisions

• How much to order
• When to place the orders

Costs Involved in Inventory Models

• Ordering Costs
• Purchase Orders- Clerical costs of preparing purchase orders
• Shipping Fees -Costs for transportation of goods from suppliers to the warehouse.
• Handling Charges- Expenses for receiving and inspecting the inventory upon arrival.
• Order Processing Costs- Administrative costs related to order fulfilment, including labor and technology expenses.
• Ordering/Procurement Cost/Setup Cost
• Warehousing Fees- Costs for renting or operating storage facilities.
• Insurance: Expenses for insuring the inventory against risks such as damage or theft.
• Inventory Obsolescence: Costs related to products that become outdated or unsellable over time
• Spoilage: Costs incurred when inventory, particularly perishable goods, deteriorates before sale

STOCKOUT COSTS

• Costs that arise when inventory levels are insufficient to meet customer demand.
• Lost Sales: Revenue lost due to the inability to fulfill customer orders.
• Customer Dissatisfaction: Potential loss of customer goodwill and future sales.
• Production Delays: Additional costs incurred from halted production or expedited shipping to meet urgent demands.

Shrinkage Costs

• Losses due to theft, damage, or inaccuracies in inventory records.
• Theft: Losses resulting from stolen inventory.
• Damage: Costs related to inventory that is damaged during storage or handling.
• Errors in Records: Financial losses from discrepancies between physical inventory and recorded inventory levels

​

Carrying Costs

• A broader term that often encompasses both holding costs and costs associated with managing inventory.
• Storage Costs: General expenses for storing inventory.
• Capital Costs: Opportunity costs of tying up capital in inventory rather than investing elsewhere.

Spoilage Costs

• Costs associated with inventory that becomes unsellable due to deterioration or expiration.
• Product Loss: The value of inventory that has spoiled or expired and cannot be sold.
• Waste Management: Costs related to disposing of spoiled or expired goods.
• Replacement Costs: Expenses incurred to replace spoiled inventory, which can include purchasing new stock and any associated ordering or handling costs.

​

​

The Definition of EOQ

• Economic Order Quantity (EOQ), is defined as the optimal quantity of orders that minimizes total variable costs required to order and hold inventory.

Assumptions of EOQ Model:

• Only one product is involved
• Annual demand requirements known
• Demand is even throughout the year
• Lead time does not vary
• Each order is received in a single delivery
• There are no quantity discounts

​

Formula for Economic Order Quantity

Example

A local distributor for a national tire company expects to sell approximately 9600 steel-belted radial tires of a certain size and tread design next year. Annual carrying cost is $16 per tire, and ordering cost is $75. The distributor operates 288 days a year.

D= $ 9600 H= $ 16 S= $ 75

a) What is the EOQ?

b) No. Of orders per year

Given data:

Annual demand D=9600D = 9600D=9600 tires

Carrying cost per unit H=16 dollars per tire per year

Ordering cost S=75S = 75S=75 dollars per order

Number of operating days per year = 288 days