MODULE 3

OPERATIONS MANAGEMENT

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WHAT IS OPERATIONS MANAGEMENT?
• Operations management (OM) is the administration of business practices
to create the highest level of efficiency possible within an organization.
• It is concerned with converting materials and labour into goods and
services as efficiently as possible to maximize the profit of an organization.
• Operations management teams attempt to balance costs with revenue to
achieve the highest net operating profit possible.
• Operations management involves utilizing resources from staff, materials,
equipment, and technology. Operations managers acquire, develop, and
deliver goods to clients based on client needs and the abilities of the
company.

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WHAT IS OPERATIONS MANAGEMENT?
• Operations management handles various strategic issues, including
determining the size of manufacturing plants and project management
methods and implementing the structure of information technology
networks.
• Other operational issues include the management of inventory levels,
including work-in-process levels and raw materials acquisition, quality
control, materials handling, and maintenance policies.
• Operations management entails studying the use of raw materials and
ensuring minimal waste occurs. Operations managers utilize numerous
formulas, such as the economic order quantity formula to determine when
and how large of an inventory order to process and how much inventory to
hold on hand.

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CONTRACTS
• A contract is a legally binding agreement that defines and governs the
rights and duties between or among its parties. A contract is legally
enforceable when it meets the requirements of applicable law. A
contract typically involves the exchange of goods, services, money, or
a promise of any of those.
• Engineering contracts are legal agreements between a business and
an engineering company detailing services promised, and payment
for those services.

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TYPES OF ENGINEERING CONTRACTS
• In construction, the main important thing is that work information is
enough to carry out the works.
• The reason behind to include the contract is for helping to parties to
overcome the situation where something goes wrong then no parties
are willing to accept the fault or consequence of the problem.
• A formal contract incorporating the terms described in
the tender may be sent to the successful bidder for execution.

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ENGINEERING CONTRACTS
• The following are the various types of contracts, for execution of engineering
works:
• Lump Sum or Fixed Price Contract
• Measurement contract
• Turnkey Contract
• Design and Build
• Cost Plus Contracts
• Unit Price Contracts
• Time and Material Contracts
• Item rate contract
• Percentage rate contract
• Labour contract
• Piece-Work agreement
• Target Contract

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LUMP SUM OR FIXED PRICE CONTRACT
• Under a Lump Sum or Fixed Price Contract, the contractor agrees to
perform the work specified and described in the contract for a fixed
price. The price of a fixed contract can only be changed upon the
execution of a change order, under which the owner and the
contractor either
• Agree for the contractor to perform additional work that falls outside the
scope of the original work for an agreed upon extra compensation or
• Agree to remove certain work from the original scope of work and reduce the
price of the contract in proportion to the work that the contractor no longer
has to perform.
• These types of contracts are appropriate when a clear scope and a
defined schedule have been reviewed and agreed upon.
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LUMP SUM OR FIXED PRICE CONTRACTS
• Advantages:
• Lower financial risk to Employer.
• Higher financial risk to Contractor.
• Minimum Owner supervision related to quality and schedule.
• Contractor has higher incentive to achieve earlier completion and better performance.
• Contractor selection is relatively easy.
• Disadvantages:
• Changes difficult and costly. (but it usually is)
• Need to substantially complete design prior to bidding.
• Contractor inclined to choose lowest methods / materials to comply with specification.
• Hard to build relationship. Each project is unique.
• Bidding expensive and lengthy.
• Contractors may include high contingency within each Schedule of Rate item

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MEASUREMENT CONTRACT
• Measurement contracts (sometimes called “re-measurement” or ‘measure
and value’ contracts) contains a Bill of Quantities ( BOQ ) provided by the
employer or its consultants, can be used in situations where the design (or
type of works) can be described in reasonable detail, but the amount
cannot.
• The contractor will quote against each BOQ item and enter a unit rate or
unit price to build up the total contract price on basis of those BOQ
quantities. During the construction period, the actual quantity of works
executed under each BOQ item will be jointly measured and valued at the
quoted rate for interim payment purpose.
• A measurement contract might also be appropriate on projects where the
design has not been completed in sufficient detail for bills of quantities to
be produced.

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MEASUREMENT CONTRACT
• It should be possible to describe the works in sufficient detail to determine
a programme and to obtain rates from tenderers. Generally tenderers rates
will be based on drawings and approximate quantities.
• The actual contract sum (sometimes called the ‘ascertained final sum’)
cannot be determined when the contract is entered into, but is calculated
on completion, based on “re-measurement” of the actual work carried out
and the rates tendered.
• Measurement contracts can allow an early start on site, before design is
complete, and they can allow changes to be made to the works relatively
easily. However, there is inevitably some risk for the client as the cost of
the works is not known. In effect, the client is taking the risk for any
‘unknowns’, and whilst this can result in competitive prices from
contractors, the level of uncertainty for the client means that
measurement contracts are rare other than on engineering projects.

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TURNKEY CONTRACT
• A turnkey contract is a business arrangement in which a project is
delivered in a completed state. Rather than contracting with an
owner to develop a project in stages. The developer is hired to finish
the entire project without owner input. The builder or developer is
separate from the final owner or operator, and the project is turned
over only once it is fully operational. In effect, the developer is
finishing the project and “turning the key” over to the new owner.
• This type of arrangement is commonly used for construction projects
ranging from single buildings to large-scale developments.

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DIFFERENCE BETWEEN LUMP-SUM CONTRACT
& TURNKEY CONTRACT
• Under a traditional lump-sum contract, the owner agrees to pay the
developer to complete a project that is built to the owner’s specifications.
The owner is given many opportunities to make decisions throughout the
project, and to make changes as needed. In a turnkey contract, the owner
is generally left out of the building process entirely as the developer
handles all decisions and problems related to construction.
• A contract of this kind may also be used in the residential home building
industry. With a turnkey agreement, a builder or developer completes both
the construction and the finishes in the home before turning it over to the
homeowner. The homeowner is often offered a chance to select finishes,
including curtains, paint colors and carpeting.

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 DESIGN AND BUILD CONTRACTS
• Design and Build procurement works on the basis that the main contractor
is responsible for undertaking both the design and construction work on a
project, for an agreed lump-sum price.

• Design and build projects can vary depending on the extent of the
contractor’s design responsibility and how much initial design is included in
the employer’s requirements. Nevertheless, the level of design
responsibility and input from the contractor is much greater on design and
build projects than a traditional contract with a contractor’s designed
portion.

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DESIGN AND BUILD CONTRACTS
• Adequate time must be allowed to prepare the employer’s requirements (the
employer usually appoints consultants to facilitate this), as well as time for the
contractor to prepare their proposal and tender price. It is vital that the proposal
matches all of the employer’s requirements before any contract is entered into.

• The employer has control over any design elements of the project that are
included in their requirements, but once the contract is let responsibility over
design passes to the contractor, so the employer has no direct control over the
contractor’s detailed design.

• The contractor can carry out the design in a number of ways. Often they will
appoint their own consultants or use their own in-house team. It is also common
practice for the contractor to take on the employer’s consultants and continue to
use them to complete the detailed design under what is known as a novation
agreement.

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FEATURES OF DESIGN AND BUILD CONTRACTS
• As design and construction can be carried out in parallel, the overall programme
time of design and build projects can be shorter. However this depends on how
much design the contractor is responsible for.
• There is reasonable certainty over costs because the contract price is known at
the outset. Provided the employer does not order changes during the
construction of the work, the contractor will be obliged (subject to the
conditions) to complete the project for the contract sum. If the employer does
require design or specification changes during the construction period, the
contractor advises as to the effect this may have on costs or additional time
needed.
• Design and Build is a relatively low risk procurement option for the employer, in
terms of cost and time. There can be a risk related to design and quality,
particularly if the employer’s requirements were not properly gathered and if
insufficient time went into examining the contractor’s proposal.

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COST PLUS CONTRACTS
• The Cost Plus Contract is a type of a construction contract under which the
owner agrees to pay the complete cost of the materials and labor needed
to needed to build the project along with a fee for the contractor’s
overhead and profit. This contract type is favored where the scope of work
is highly uncertain or indeterminate and the type of labor, material, and
equipment needed to build the project is also uncertain in nature.
• This type of contract involves payment of the actual costs, purchases or
other expenses generated directly from the construction activity. Under
this arrangement, complete records of all time and materials spent by the
contractor on the work must be maintained. Cost Plus Contracts must
contain specific information about certain pre-negotiated amount (some
percentage of the material and labor cost) covering contractor’s overhead
and profit. Costs must be detailed and should be classified as direct or
indirect costs.
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COST PLUS CONTRACTS
• The Cost Plus Contract is a type of a construction contract under which the owner agrees to pay the
complete cost of the materials and labor needed to needed to build the project along with a fee for the
contractor’s overhead and profit. This contract type is favored where the scope of work is highly uncertain or
indeterminate and the type of labor, material, and equipment needed to build the project is also uncertain
in nature.
• This type of contract involves payment of the actual costs, purchases or other expenses generated directly
from the construction activity. Under this arrangement, complete records of all time and materials spent by
the contractor on the work must be maintained. Cost Plus Contracts must contain specific information about
certain pre-negotiated amount (some percentage of the material and labor cost) covering contractor’s
overhead and profit. Costs must be detailed and should be classified as direct or indirect costs.
• There are multiple variations for Cost plus contracts, and the most common are:
• Cost Plus Fixed Percentage Contract– Compensation is based on a percentage of the cost;
• Cost Plus Fixed Fee Contract– Compensation is based on a fixed sum independent the final project cost. The owner agrees to
reimburse the contractor’s actual costs, regardless of amount, and in addition pay a negotiated fee independent of the
amount of the actual costs;
• Cost Plus Fixed Fee with Guaranteed Maximum Price Contract– Compensation is based on a fixed sum of money. The total
project cost will not exceed an agreed upper limit;
• Cost Plus Fixed Fee with Bonus Contract– Compensation is based on a fixed sum of money. A bonus is given if the project is
finished below budget, ahead of schedule, etc.;
• Cost Plus Fixed Fee with Guaranteed Maximum Price with Bonus Contract–Compensation is based on a fixed sum of money.
The total project cost will not exceed an agreed upper limit and a bonus is given if the project is finished below budget,
ahead of schedule, etc.; and

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COST PLUS CONTRACTS
• Cost Plus Fixed Fee with Arrangement for Sharing Any Cost Savings Contract– Compensation is based on
a fixed sum of money. Any cost savings are shared with the buyer and the contractor.
• The Cost Plus Fixed Fee construction contract is more predictable than Cost Plus Fixed Fee Percentage
Construction Contract because the contractor’s fee for overhead and profit is, as its name suggests,
predetermined. Regardless of what the cost of construction ultimately amounts to, the contractor’s fee
remains the same. Conversely, the Cost Plus Fixed Percentage Construction Contract provides more
variability with respect to the amount of the contractor’s fee because it is directly linked to the cost of
construction, which in these types of arrangements is inherently unpredictable. In fact, the Cost Plus
Fixed Percentage Construction Contract arguably incentivizes the contractor to not keep the costs low
because its fee increases with the cost of construction.
• The Cost Plus with Guaranteed Maximum Price Contract seeks to eliminate some of the risks associated
with Cost Plus Contracts in that it caps the owner’s overall financial exposure. Thus, while the contract
price is to be determined based on the cost of construction and the contractor’s fee, owner’s costs are
capped at a certain amount.
• These types of Cost Plus Construction Contracts are oftentimes grouped with
bonus contracts, built-in contingencies, or cost savings contracts which
incentivize the contractor to complete the project with agreed targets regarding
schedule, quality, and budget in exchange for additional compensation on the
project.

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OTHER CONTRACTS
• Unit Price Contracts : Unit Price Contracts are based on anticipated quantities of
items which are counted in the project in addition to their unit prices. The final
price of the project depends upon the quantities required to carry out the work.
Generally, these types of contracts are suitable only for construction and supplier
projects which involve accurate identification of different types of items, but not
their numbers, in the contract documents. These types of contracts are
oftentimes used on excavation projects.
• Time and Material Contracts: Time and Material Contracts are usually preferred
if the project scope is not clear, or has not been defined. The owner and the
contractor must establish an agreed hourly or daily rate, including additional
expenses that could arise in the construction process. The costs must be classified
as direct, indirect, mark-up, and overhead. Sometimes the owner might want to
establish a cap or specific project duration to the contractor that must be met, in
order to have the owner’s risk minimized.
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OTHER CONTRACTS
• Item rate contract: For this contract, contractors are required to quote rates for
individual items of work on the basis of schedule of quantities furnished by the client’s
department.
• Percentage rate contract: In this form of contract, the client’s department draws up the
schedule of items according to the description of items sanctioned in the estimate with
quantities, rates, units and amounts shown therein.
• Labour contract :This is a contract where the contractor quotes rates for the item work
exclusive of the elements of materials which are supplied by the client’s Department.
• Piece-Work agreement: This is that for which only a rate is agreed upon without
reference to the total quantity of work to be done or the quantity of work to be done
within a given period.
• Target Contract: This is the type of contract where the contractor is paid on a cost-plus
percentage work performed under this contract. In addition, he receives a percentage
plus or minus on savings or excess effected against either a prior agreed estimate of total
cost or a target value arrived at by measuring the work on completion and valuing at
prior agreed rates.

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MAINTENANCE
• Maintenance, in general, can be defined as efforts taken to keep the
condition and performance of a machine always like the condition and
performance of the machine when it is still new.
• Maintenance activities can basically be divided into two parts: planned
maintenance activities and unplanned maintenance activities.
• Planned maintenance is maintenance that is organized and carried out with
thought to the future, control and recording in accordance with the plans
that have been determined previously.
• The type of maintenance cannot be equated for each equipment, which
depends on the method, cost and critical level.
• The following types of maintenance methods are commonly used in several
industries;
• Preventative Maintenance, Predictive Maintenance, Corrective Maintenance and
Breakdown Maintenance

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 MAINTENANCE
Preventive Maintenance:
• It is a method for preventing damage to equipment by periodically replacing parts
based on time of use and carrying out minor maintenance and inspections to find out
the current state of the equipment / machinery.
• Example: Cleaning, checking, lubricating, bolt tightening Periodic inspection Periodic
and small over haul restorations
• Predictive Maintenance:
• Predictive maintenance is a method for doing maintenance by replacing parts based
on predictions using a tool. The point is if the preventive method is only based on the
schedule, then the predictive method is based on the results of the measurement.
• This method can also use the five senses, for example in bearing inspection can be
distinguished from the sound produced. Or checking temperature, by touching it we
can feel the difference or abnormality of the equipment.
• Examples: Tachometer, to measure the rotation of the Thermometer, to measure the
temperature of the Ampermeter, to measure amperage

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MAINTENANCE
• Corrective Maintenance:

• It is a method intended to improve the reliability of equipment/machines by

improvising. In addition to equipment, it is also intended for parts that have a
short life cycle (reduce the frequency of damage) and speed up repair time.

• In other words, this method is to extend MTBF (Mean Time Between Failure)
and accelerate MTTR (Mean Time To Repair) because of its reliability (activity
to prevent recurrence of damage) and maintenability (activity to speed up
repair time).
• Example: The operator has difficulty checking the oil volume of the generator engine, so
improvisation is done by making a measuring cup equipped with a scale.

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MAINTENANCE
• Breakdown Maintenance

• It is a method where inspection and replacement of parts are not carried out,
so with this method we leave the equipment damaged and then we fix it or
replace it
• Usually this method is applied to equipment / machines with consideration:
• Equipment is only optional (additional) so that if it is damaged it does not
interfere with production
• The cost of repairing / replacing cheap parts
• Insignificant damage
• Easy and fast repair

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MAINTENANCE
• Total productive maintenance (TPM):
• Total productive maintenance is a maintenance activity that involves
production operators in maintaining equipment / machinery in addition to
activities carried out by maintenance operators.
• Examples are cleaning, lubricating, tightening nuts & bolts, daily checking
(checking equipment / machine state), simple repairs (replacing leaking
hoses, welding tips) etc.
• The objectives of the TPM are:
• Develop operators that are able to detect damage signals as early as possible. Because it
is the production operator that really knows the state of the equipment to even the most
detailed part.
• Creating a neat, clean workplace so that any irregularities can be detected as early as
possible

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RELIABILITY METRICS
• Reliability metrics are used to quantitatively expressed the reliability
of the software product. The option of which metric is to be used
depends upon the type of system to which it applies & the
requirements of the application domain.
• Some reliability metrics

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RELIABILITY
• Mean Time to Failure (MTTF)
• MTTF is described as the time interval between the two successive failures.
• An MTTF of 200 mean that one failure can be expected each 200-time units.
• The time units are entirely dependent on the system & it can even be stated
in the number of transactions.
• MTTF is consistent for systems with large transactions.
• Mean Time to Repair (MTTR)
• Once failure occurs, some-time is required to fix the error.
• MTTR measures the average time it takes to track the errors causing the
failure and to fix them.

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RELIABILITY
• Mean Time Between Failure (MTBR)
• We can merge MTTF & MTTR metrics to get the MTBF metric.
• MTBF = MTTF + MTTR
• Thus, an MTBF of 300 denoted that once the failure appears, the next failure
is expected to appear only after 300 hours. In this method, the time
measurements are real-time & not the execution time as in MTTF.
• Rate of occurrence of failure (ROCOF)
• It is the number of failures appearing in a unit time interval. The number of
unexpected events over a specific time of operation.
• ROCOF is the frequency of occurrence with which unexpected role is likely to
appear. A ROCOF of 0.02 mean that two failures are likely to occur in each 100
operational time unit steps.
• It is also called the failure intensity metric.

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RELIABILITY
• Probability of Failure on Demand (POFOD)
• POFOD is described as the probability that the system will fail when a service
is requested. It is the number of system deficiency given several systems
inputs.
• POFOD is the possibility that the system will fail when a service request is
made.
• A POFOD of 0.1 means that one out of ten service requests may fail.
• POFOD is an essential measure for safety-critical systems.
• POFOD is relevant for protection systems where services are demanded
occasionally.

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RELIABILITY
• Availability (AVAIL)
• Availability is the probability that the system is applicable for use at a given
time.
• It takes into account the repair time & the restart time for the system.
• An availability of 0.995 means that in every 1000 time units, the system is
feasible to be available for 995 of these.
• The percentage of time that a system is applicable for use, taking into account
planned and unplanned downtime.
• If a system is down an average of four hours out of 100 hours of operation,
its AVAIL is 96%.

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STRATEGY EXECUTION
• Total productive maintenance (TPM):
• Total productive maintenance is a maintenance activity that involves
production operators in maintaining equipment / machinery in addition to
activities carried out by maintenance operators.
• Examples are cleaning, lubricating, tightening nuts & bolts, daily checking
(checking equipment / machine state), simple repairs (replacing leaking
hoses, welding tips) etc.
• The objectives of the TPM are:
• Develop operators that are able to detect damage signals as early as possible. Because it
is the production operator that really knows the state of the equipment to even the most
detailed part.
• Creating a neat, clean workplace so that any irregularities can be detected as early as
possible

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STRATEGY EXECUTION
• In class discussion

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ENGINEERING REPORTS
• One of the main forms of communication in engineering is the
technical report. In the workplace, the report is a practical working
document written by engineers for clients, managers, and other
engineers.
• This means every report has a purpose beyond the simple
presentation of information. Some common purposes are:
• To convince the reader of something. For example:
• to convince a government agency of the effect of a particular course of action
• to convince a client that your solution will fulfill their needs
• to convince the public that a proposed project will bring benefits

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ENGINEERING REPORTS
• To persuade the reader to do something. For example:
• to persuade a government or council to adopt a particular course of action
• to persuade a client to choose one design over another
• to persuade an organisation to partner with your company on a project
• To inform the reader about something (usually for a further purpose).
For example:
• to provide a government department with information they will base policy
on
• to instruct other engineers who will work from your plans
• to present the outcomes of a project to stakeholders
• When planning an engineering report, your first step is to clarify its
purpose; that is, what you want it to achieve.
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ENGINEERING REPORTS STRUCTURE
• Most reports contain the sections listed below. Where each report will differ is in
the body; the sections you decide to include will depend on the type of report
and the specific topic. You will usually be expected to decide on the structure of
the body yourself.
• The best way is to put yourself in the place of the reader. Ask yourself:
• What does the reader need to know first?
• What is the most logical way to develop the story of the project?
• A report usually has the following components:
• Title page
• Summary
• Table of contents
• Introduction
• Body of the report
• Conclusions and recommendations
• References and appendices

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ENGINEERING REPORTS STRUCTURE
• Title page gives:
• the title of the report
• the authors' names and student IDs
• the unit name and code, the department, and university
• the date of submission.
• The title of the report should indicate exactly what the report is about. The
reader should know not only the general topic, but also the specific aspect of
the topic addressed in the report.

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ENGINEERING REPORTS STRUCTURE
• The Summary is usually written last of all.
• It provides a brief overview of the substance of the report. It is a stand-alone
document generally used by busy managers who might not have time to read the
full report. That’s why it is usually referred to as the Executive Summary in the
workplace.
• The Summary is not an introduction to the topic. It should focus on what you did,
how you did it, and the main outcomes and significance of your work.
• The Summary:
• states the topic of the report
• briefly outlines your approach to the task (if applicable)
• focuses on the results or outcome of the project, the findings of your investigation: or the key
aspects of your design
• states the significance or implications of the results.
• The Summary does NOT:
• provide background information on the topic
• explain the motivation for the project
• refer to figures, tables or references contained in the report.
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ENGINEERING REPORTS STRUCTURE
• The Contents page sets out the sections and subsections of the
report and their corresponding page numbers.
• It should clearly show the structural relationship between the
sections and subsections. A reader looking for specific information
should be able to locate the appropriate section easily from the table
of contents.
• Sections are numbered using the decimal point system. Section
numbers appear on the left margin, page numbers on the right.

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ENGINEERING REPORTS STRUCTURE
• The Introduction tells the reader what the report is about.
• It sets the project in its wider context, and provides the background
information the reader needs to understand the report.
• The Introduction:
• introduces the topic of the report in context
• explains the problem and/or motivation for the project
• states the aim/s of the project
• indicates the purpose of the report
• briefly outlines the report structure (not necessary in a short report).

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ENGINEERING REPORTS STRUCTURE
• The Introduction and Conclusions act as a frame for the body of the report,
which is where you present your own work.
• The information should be organized so that the reader can follow the
development of your project.
• You will therefore need to put some thought into ordering the sections and
choosing concise but informative headings and subheadings.
• The body of the report:
• presents the information from your research, both real world and theoretical, or
your design
• organizes information logically under appropriate headings
• conveys information in the most effective way for communication by means of:
• figures and tables
• bulleted or numbered lists
• formatting to break up large slabs of text.

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ENGINEERING REPORTS STRUCTURE
• The Conclusions and Recommendations may be combined or, in long
reports, presented in separate sections. If there are no recommendations
to be made as a result of the project, just call this section Conclusions.
• The Conclusions section sums up the key points of your discussion, the
essential features of your design, or the significant outcomes of your
investigation. As its function is to round off the story of your project, it
should:
• be written to relate directly to the aims of the project as stated in the Introduction
• indicate the extent to which the aims have been achieved
• summarise the key findings, outcomes or information in your report
• acknowledge limitations and make recommendations for future work (where
applicable)
• highlight the significance or usefulness of your work.
• The conclusions should relate to the aims of the work.
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ENGINEERING REPORTS STRUCTURE
• References
• All information, methods, data, diagrams and maps, whether obtained or
based on the work of others, must be acknowledged using one of the
referencing styles recommended for engineering. To learn more,
see Academic integrity or the Citing and referencing Library guide.
• Appendices
• Appendices contain material that is too detailed to include in the main report,
such as long mathematical derivations or calculations, detailed technical
drawings, or tables of raw data. The content should be summarized and
referred to at the appropriate point in the body of the report. The
conventions for appendices are as follows:
• each appendix must be labelled with a number (or letter) and title
• the appendix numbers and titles must be listed on the Contents page under the heading
Appendices (if more than one) or Appendix (if only one)
• each appendix must be referred to by number (or letter) at the relevant point in the text.

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