CHAPTER: 04

Operations Management
 Operations Management (OM)
Meaning
• OM involves the planning, coordinating, and
executing all activities that create goods and
services.

• Operation management: The management of

systems or processes that creates goods and/or
provides service
 Operations Management
• Create operational systems.
• Manage (plan, organize, staff, direct and
control) the activities relating to the production
of goods and/or services with maximum
efficiency (at the lowest cost) and effectiveness
(in the eyes of the customer).
• Improve those processes continuously to
create competitive advantage.
 Operations Management

Structural
Elements
Create the
Technology New Product Development
Process
Vertical Integration
Innovation
Capacity
Facilities

> >> >> Manage the

Infrastructural Inputs Conversion Outputs Process
Elements
Quality Management
Planning & Control Evaluate
On
Workforce Improve the
Organization
Time Flexibility Process
Cost Service
Quality
 The Operations System

The operations system transforms inputs into

desired goods and services.
EXTERNAL
FACTORS

INPUTS PROCESS OUTPUTS

FEEDBACK

Material flow
Information Flow
 Corporate Strategy

Business Unit Strategy

Competitive Priorities & Positioning

Cost, Quality, Time, Flexibility, Service

Marketing Operations Strategy

Operations Strategy

Managemen 4 Ps
Structural
Facility Location
Infrastructural
Workforce
t Place
Product
Capacity Quality
~ Vertical Integration Policies/Procedures
Price
Process Technology Organizational Structure
The Context Promotion

Execution Processes

Customer Satisfaction (Internal & External) Performance

Market Share Measures
Quality Measures
Cost Measures
 Types of Conversions
• Physical
• Chemical
• Locational
• Educational
• Entertained
 The Organization

Organization

Finance Operations Marketing

 Operation

• Consists of all activities directly related to

producing goods or providing services.
• The production function exists both in
manufacturing and service,
• Inputs are used to obtain finished goods or
services using one or more transformation
process (storing, transporting, cutting).
 Food Processor

Inputs Processing Outputs

Raw Vegetables Cleaning Canned

Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
 Hospital Process
Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
 Scope of Operations
Management
• Operations Management includes:
– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– Supply chain management
– And more . . .
 Facilities Lay out
• Meaning
• Importance of layout
• Reasons of layout
• Types of layout
• Product layout or line balancing
• Layout refers the configuration of
departments,work centers, and equipment with
particular emphasis of movement of
work(customer or material) through the system.
• Layout decision are important for three reasons
• Substantial investment
• Long term commitment
• Significant impact on cost and efficiency
 Reasons of Layout
• Most common reasons are
• Inefficient operation
• Accident or safety
• Introduction of new product
• Change in the volume of output
• Change in machine and equipment
• Change in environmental or legal requirement
 Types of Layout

i. Product Layout

ii. Process Layout

iii. Fixed position layout

iv. Combination-Hybrid
 Product layout or Line balancing

 is the process of assigning tasks to

workstations in such a way that

 The workstations have approximately

equal time requirements.
 Steps of Line Balancing
i. Draw precedence diagram
ii. Determine workstation cycle time
iii. Determine theoretical minimum workstation
iv. Select assignment rule
i. Prioritize tasks in order of largest following tasks
ii. Prioritize in order of longest task time where ties exist
v. Assign task to workstation
vi. Calculate efficiency
• Cycle Time:
Cycle time is the maximum time
allowed at each workstation to
complete its set of tasks on a unit

OT
Output rate =
CT

OT operating time per day

D = Desired output rate

OT
CT = cycle time =
D
Determine the Minimum
Number
of Workstations Required

( t)
N=
CT

 t = sum of task time

 Precedence Diagram
• Precedence diagram: Tool used in line
balancing to display elemental tasks and
sequence requirements

0.1 min. 1.0 min.

A Simple Precedence
a b Diagram

c d e
0.7 min. 0.5 min. 0.2 min.
 Calculate Percent Idle Time

I
dlet
imeperc
yc
le
P
er
cen
ti
d l
e t
ime=
(
N)(
CT)

Efficiency = 1 – Percent idle time

( t)
Efficiency =
Na * CT

 t = sum of task time

 Example:

Task of a product Immediate task Task time(minutes)

a - .2
b a .2
c - .3
d c .6
e b .3
f e, d 1
g f .4
h g .3
i. Draw precedence diagram
ii. Assign Task to workstations
iii. Find out the efficiency
Assuming an eight-hour workday, compute the cycle time needed to obtain an o
of 400 units per day.
 Steps to be followed
i. Draw precedence diagram
ii. Determine workstation cycle time
iii. Determine theoretical minimum workstation
iv. Select assignment rule
i. Prioritize tasks in order of largest following tasks
ii. Prioritize in order of longest task time where ties exist
v. Assign task to workstation
vi. Calculate efficiency
 Example

a.2 b.2 e.3

f1 g.4 h.3
c.3 d.6
Solution

 CT= OT/D= 8*60/400 =1.2

 No of workstation= 3.3/1.2=2.66=3

( t)
Efficiency =
Na * CT

 t = sum of task time

 Solution to Example

Station 1 Station 2 Station 3 Station 4

a b e

f g h

c d
 Example-2
• Desired daily output of an assembly line is 360 units, operates 450
minutes per day. Following table contains info regarding task, time and
preceding task
Time in seconds Preceding task/s
A 30 -
B 35 A
C 30 A
D 35 B
E 15 C
F 65 C
G 40 EF
H 25 DG

i. Draw precedence diagram

 Inventory Management
 Inventory meaning

 Independent demand VS Dependent demand

 Types of inventory

 Functions of inventory

 Objectives of inventory

 Requirements for effective inventory management.

 Inventory models
 Basic EOQ model

 EPQ model

 Re-order model

 Single period model

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 Inventory
• a stock or store of goods
Independent Demand

A Dependent Demand

B(4) C(2)

D(2) E(1) D(3) F(2)

Independent demand is uncertain.

Dependent demand is certain. 30
 Independent vs dependent

• Independent demand – finished goods, items

that are ready to be sold

– E.g. a computer

• Dependent demand – components of finished

products
– E.g. parts that make up the computer

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 Types of Inventories
• Raw materials & purchased parts
• Partially completed goods called
work in progress
• Finished-goods inventories
– (manufacturing firms)

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 Types of Inventories

• Replacement parts,
tools, & supplies
• Goods-in-transit to
warehouses or
customers

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 Functions of Inventory

• To meet anticipated demand

• To smooth production requirement

• To protect against stock-outs

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 Functions of Inventory (Cont’d)

• To help hedge against price increases

• To permit operations

• To take advantage of quantity discounts

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 Objective of Inventory Control
• To achieve satisfactory levels of customer
service while keeping inventory costs within
reasonable bounds
– Level of customer service
– Costs of ordering and carrying inventory

Inventory turnover: is the ratio of average cost of

goods sold to average inventory investment.

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 Effective Inventory Management
i. A system to keep track of inventory
ii. A reliable forecast of demand
iii. Knowledge of lead times
iv. Reasonable estimates of
i. Holding costs
ii. Ordering costs
iii. Shortage costs
v. A classification system

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 Key Inventory Terms

• Lead time: time interval between ordering and

receiving the order
• Holding (carrying) costs: cost to carry an item in
inventory for a length of time, usually a year
• Ordering costs: costs of ordering and receiving
inventory
• Shortage costs: costs when demand exceeds
supply
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 ABC Classification System

Classifying inventory according to some measures of

importance and allocating control efforts accordingly.
A - very important
B - mod. Important
C - least important
High
A
Annual
$ value
of items B

Low C
Low High
Percentage of Items

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 Economic Order Quantity Models

• Economic order quantity (EOQ) model

– The order size that minimizes total annual cost

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 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

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 The Inventory Cycle

Profile of Inventory Level Over Time

Q Usage
Quantity rate
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order

Lead time 42
 Total Cost

Annual Annual
Total cost = carrying + ordering
cost cost
Q + DS
TC = H
2 Q

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 Cost Minimization Goal

The Total-Cost Curve is U-Shaped

Q D
TC  H  S
Annual Cost

2 Q

Ordering Costs

QO (optimal order quantity)

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 Deriving the EOQ
Using calculus, we take the derivative of the total
cost function and set the derivative (slope)
equal to zero and solve for Q.

2DS 2(Annual Demand )(Order or Setup Cost )

Q OPT = =
H Annual Holding Cost

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 Minimum Total Cost
The total cost curve reaches its minimum where
the carrying and ordering costs are equal.

Q = DS
H
2 Q

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 Example
• A local distributor for a national tire company expects to
sell approximately 9600 tires of a certain size. Annual
carrying costs are $16 per tire and ordering costs are
$75. The distributor operates 288 days a year.
• What is the EOQ?
• How many times per year does the store reorder?
• What is the length of an order cycle?

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 Solution

• EOQ=  2DS/H =  2*9600*75/16 = 300 tires.

• Number of orders per year D/EOQ = 9600/300
= 32
• Length of order cycle = EOQ/ D = 300/9600 =
1/32 of a year, which is 1/32 *288= 9 days

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When to Reorder with EOQ Ordering

• Reorder Point - When the quantity on hand of

an item drops to this amount, the item is
reordered

• Safety Stock - Stock that is held in excess of

expected demand due to variable demand rate
and/or lead time.

• Service Level - Probability that demand will not 49

 Determinants of the Reorder Point

• The rate of demand

• The lead time
• Demand and/or lead time variability
• Stock out risk (safety stock)

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 Safety Stock
Quantity

Maximum probable demand

during lead time

Expected demand
during lead time

ROP

Safety stock reduces risk of Safety stock

Khashru/13
Stock-out during lead time LT Time
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 Reorder Point

Service level
Risk of
a stockout
Probability of
no stockout

Quantity
Expected ROP
demand
Safety
stock
0 z z-scale
Khashru/13 01/06/2026
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 Problem: when demand and LT are
constant
• John takes two – a- day vitamins, which are delivered to
his home by a route man seven days after an order is
called in. At what point should John telephone his order
in.
• Solution:
• Usage = 2 vitamin per day
• Lead time= 7 days

• ROP= Usage* Lead-time = 2 vitamin per day* 7 days = 14

vitamins.
• Thus John should reorder when 14 vitamin tablets are left.

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When demand and LT variability are present

• ROP= Expected demand during LT* ZσdLT

• Where Z= no of std deviation and σdLT=std
deviation lead time demand

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 Single Period Model

• Model for ordering of perishables and other

items with limited useful lives
• Shortage cost: generally the unrealized profits
per unit
• CS = revenue-cost per unit
• Excess cost: difference between purchase cost
and salvage value of items left over at the end
of a period
• Ce =cost per unit- salvage value
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 Optimal Stocking Level

Cs Cs = Shortage cost per unit

Service level =
Cs + Ce Ce = Excess cost per unit
Ce Cs

Service Level

Quantity

So
Balance point

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 Example
• Ce = $0.20 per unit
• Cs = $0.60 per unit
• Service level = Cs/(Cs+Ce) = .6/(.6+.2)
• Service level = .75

Ce Cs

Service Level = 75%

Quantity

Stockout risk = 1.00 – 0.75 = 0.25

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 Problem

• A basket of fruits are delivered weekly to Jenny’s shop.

Demand varies uniformly between 300 kgs and 500 kgs
per week. Jenny pays 20 cent/kg and charges 80
cents/kg . Unsold fruits has no salvage value and can
not be carried over into the next week due to spoilage.
Find the optimal stocking level and its stock out risk.

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 Solution: When demand is uniform

• Cs = revenue per unit - cost per unit = $ .80- $. 20 = $. 60 per unit

• Ce = cost per unit – salvage value per unit = $ .20 - $0 = $.20
• SL= Cs/Cs+ Ce = .60/.60+.20 = .75
• Thus the optimum stocking level must satisfy demand 75 % of the
time. For the uniform distribution, this will be at a point equal to the
minimum demand plus 75% of the difference between maximum
and minimum demands.

• S = 300+ .75(500-300) = 300+ .75*200 = 450 kgs.

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 Operations Strategy
• Too much inventory
– Tends to hide problems
– Easier to live with problems than to eliminate them
– Costly to maintain

• Wise strategy
– Reduce lot sizes
– Reduce safety stock

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