chapter 12 operations management

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CHAPTER 12OPERATIONS MANAGEMENT


Objectives

The objectives of this chapter are to: introduce operations management, production system, its

importance in business and how it relates to other business functions

discuss issues on location, layout, process set up, production and capacity planning, inventory management, material requirement planning, quality and cost management


Learning Outcomes

At the end of this chapter, students should be able to: understand, analyse and apply the knowledge on production

management to their business practicum project and in their life after graduation.


Introduction to Operations Management

Operations management or production management can be defined as:

the management of the process of marshalling resources (inputs), organizing and designing the transformation process (production process) to produce products and services (outputs) according to the target quality, cost, quantity, delivery time and safety.


Introduction to Operations Management (cont.)


Operations Management and Business Strategies

Examples of business strategies that involve operations management:product design and development to produce a better or a new product to the customersmanaging quality management systemprocess and capacity designlocation strategylayout strategyhuman resources and job designsupply-chain managementinventory and material requirement planningjob scheduling and project managementmaintenance


Productivity index is a measurement of the ratio between total value of outputs to the total value (cost) of input.

Productivity index = Total value of output ÷ Total value of input In order for a business to be sustainable, productivity index

must be greater than one. If the transformation process creates a high value added

output, then this ratio will be greater.

Operations Management and Business Strategies (cont.)


Location Planning

It is crucial for an entrepreneur to choose the right location for his business because a good location can result in higher sale, lower operating cost and higher profit.

In general, the choice of location will depend on the following factors: close proximity to customers close proximity to raw materials lower rental cost availability of good infrastructures and facilities availability of manpower


Location Planning (cont.)

easier accessibility convenient parking space less risk to crime availability of services such as school, hospital, bank, sport facilities,

etc. in case of retail outlet or a restaurant, the monthly sale forecast from

market study for the selected location must be greater than the break-even sale volume required to cover all the monthly fixed costs


Layout Plan

The layout plan refers to the arrangement of the floor plan of the operation areas. The following are the objectives that need to be considered when designing the layout:Ideally the area required should be economical, i.e. minimal but adequate. Calculation has to be made to estimate the required area for each of the activities on the process flow diagram.Layout design should facilitate higher utilization of space, equipment, and people. It should improve flow of information, materials, or people. Based on process flow or sequence, certain activities may need to be placed in close proximity or clustered together to facilitate (minimize) material movement, minimize workers movement, create convenience working arrangement and enable effective supervision.Wet area, hot area or dangerous area may need to be separated for safety reason.


Where possible the layout plan should be flexible and can possibly accommodate future expansion.

The layout must provide for adequate space and accessibility for service and maintenance work.

Specific or customized business objectives may need to be considered depending on the type of business, e.g. a retail business shall need a layout arrangement that is attractive, accessible, and convenient to the customers while at the same time, it is easier for the entrepreneur to protect goods against theft. The used of gondola will allow more products to be displayed and generate more sales per square feet of floor area.

Layout Plan


Type of Layout

The type of layout can be broadly divided into:– office layout– retail layout– warehouse layout– fixed position layout such as ship building or building

construction– process layout such as metal press job shop– product oriented layout such as assembly line

production


Type of Layout (cont.)


Production Planning and Capacity Management

Basically, an entrepreneur must plan and decide on the:production output rates and raw materials required number of employeesnumber of working hours inventory levels (quantities)numbers of machines (capacities) work that needs to be subcontractednumber of suppliers


Production Planning and Capacity Management (cont.)


Capacity Management

Capacity is the maximum output, or throughput, or the number of units a facility or a system can produce, hold, store or accommodate in a period of time (Heizer &Render, 2008).

Capacity is the upper limit or yield an operating system can handle or perform (Stevenson, 2009).

The objective of capacity planning is to specify the capacity level that will meet the market demands in a cost efficient way.


Capacity Management (cont.)


The importance of capacity planning is for planning purposes; it affects decisions or plans related to orders and market demand (Stevenson, 2009). Following are some of its importance:The ability to meet future demands for product and services. Having capacity to satisfy demand will allow you as entrepreneur to capture business opportunities.Capacity planning affects initial set up costs and operating costs. Practically, it is best that capacity and demand requirements match so as to minimize operating costs. Running a business with under capacity is not economical for business. The greater the capacity, per unit cost is lesser.



The importance of capacity planning is for planning purposes; it affects decisions or plans related to orders and market demand (Stevenson, 2009). Following are some of its importance:Capacity planning involves long-term commitment and resources. This also affect competitiveness in businessFactors such as types of product, processes, use of facilities (electricity, water and gas) need to be considered during capacity planning. The example below shows the capacity planning for an oven for a bakery operation.



Production Schedule

The main objective of a production schedule is:to ensure that the quantity of production is enough to fulfil the expected market demand for the schedule period, say for the next four months. Normally the market demand varies from month to month. An entrepreneur can decide to have a level production strategy where he produces equal amount of quantities every month and uses the finished good inventory as a buffer to meet varying demand.


Production Schedule (cont.)

He also can use a chase production strategy where his quantity of production varies according to the demand. Normally, a manufacturing business will opt for a level production strategy as it is more convenient and economical to plan and stock finished goods.

A services business may opt for a chase production strategy because the services offered to customers could not be inventoried. As an option, the problem of excess service capacity can be solved by pushing for a more aggressive marketing effort during a market demand.


Inventory Management

Managing inventory stocks is important to a business, particularly to meet market demand for your products. Inventory refers to stocks, or items, products or resource used in your business or operations. Inventory is actually valuable capital and having too much inventory will increase holding or storage (carrying) costs, and stocks also occupy more space; while too little inventory may cause stock out and affect service to customers.


The objective of inventory management is to determine the levels of inventory that should be maintained and secondly, when to order and replenish stocks, and thirdly how much (quantity) to order (Davis, Aquilano & Chase, 2008). The importance of inventory management is:To provide a stock of goods or products that will be able to meet demand by customers.To protect against shortages and uncertainty. Uncertainty may occur such as delays of raw materials, supply shortages, quality problems, and improper deliveries. Safety stocks or buffers in hand reduce risks of stock outs.To ensure operations to run smoothly and continue without delay or line stoppages by keeping or carrying some work in process (WIP) stocks.

Inventory Management (cont.)


The importance of inventory management is:To take advantage of quantity discounts and economies of scales. Bulk purchases can substantially reduce costs of products and cheaper cost per unit. Also, each time an order is placed, an order cost (set up costs) are incurred as we have to pay for the telephone, fax charges and the ordering clerk wages, and the supplier has to get ready the invoices, transportation and delivery of the order, respectively. To hedge against inflation and price changes or increase; it is advisable to keep stocks before prices of raw materials or resources increase so as to minimize the cost impact to the business.

• If stocks are available, we do not need to hassle the production staff to work longer hours for sudden or rush orders from customers. For example, if the product demand is high for specific festive seasons, one may build up and keep stocks during the low demand period. Most businesses keep high volume stocks on festive cookies for the festive Malay celebration or Chinese New Year.



There are several inventory models available to suit the nature of your business. The inventory models are:ABC store inventory model (for managing a store or retail business) Independent inventory model, economic order quantity (EOQ) modelDependent inventory model (materials requirement planning for purchase of raw materials)Just in time (JIT) delivery model



Dependent Demand Inventory System or Materials Requirements Planning (MRP)Master Production Schedule Bill of Materials (BOM) Inventory Stock Level Purchase Order (PO) Outstanding Lead Time Delivery



Quality Management

Quality is defined as the totality of features and characteristics of a product or service that bears on its ability to satisfy stated or implied needs (MS ISO9001: 2008 Standard).

Quality is defined as a measure of how close a product or service conforms to standards and specifications (Stevenson, 2009).

Quality is also defined as a product’s fitness for use; its success in offering features that consumers’ want (Juran, J.M).

Quality is simply innate excellence (in appearance, style, performance, price, delivery, or after sales service).


The objective of quality management is:to ensure the products or services produced are of high quality and meet the customer’s requirements (Heizer and Render, 2008). Producing high quality products/services assure customer satisfaction, and they will become regular and loyal customers. This simply means, higher sales will result in high profitability, and therefore assured repeated business and retained market share. Besides, quality drives company growth, and reduces operational costs, thus provides an additional competitive edge.

Quality Management (cont.)


The importance of quality in a business is to:remain competitive in market and business survivalretain market shareacquire profitabilityachieve customer satisfactionassure greater customer loyaltyproduce high quality products/services



The importance of quality in a business is to:reduce operational costs (reduced quality problems, scraps, yield loss, wastages)produce high productivity or yieldscontrol processes with less variationscreate sense of pride and image to the products and organizationestablish a quality management system in the organizationachieve ISO 9001: 2008 certification and to comply with international trade regulations



Entrepreneurs must realize that cost of non-quality is very high. The external cost of non-quality involves:poor reputation, loss of repeat customers, cost of rejected or return product. The internal cost involves:wasted cost on material and labour, rework cost and low workers’ morale.



An entrepreneur should focus of the preventive effort of eliminating defective products or services through:Identification of the most frequent form of defects and seek out the causes of the defects. The cause of the defects could be due to method, material, manpower, equipment, management procedure and system, layout and work place. Work out a suitable solution to solve the causes of these defects. As an implementation strategy, an entrepreneur can use ‘quality control circle’ (QCC) to mobilize his workers to solve his quality problems.



Operational Cost and Product Costing

One of the operation management objectives is to minimize the cost per unit of production so that product can be sold at competitive prices.

Operational cost includes cost of direct materials, direct labour and overhead. Direct materials and labours are money spent on materials and labours that are directly used for the production of the product. Overhead costs include other indirect cost such as wages for administrative, marketing and finance staff, rental, utility, transportation, maintenance, depreciation of asset (equipment) and interest.

Total operational cost = Direct cost of materials + Direct labour cost + Overhead cost

Cost per unit = Total cost/ Total number of output


Operation Plan

The sales forecast from market study will be the basis of an entrepreneur’s operation plan.

He has to decide on the product design, its specification, type of production process, capacity of production, input required, i.e. manpower, equipment, fixed asset, location, layout, control procedure, etc. He has to prepare operation budget which include cost of asset, working capital and other items (see Chapter 7).

chapter 12 operations management

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