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Operations Management

By Prof Haresh



Course Content :a) Introduction / Operations strategy / Competitive advantage / Time based

competition.b) Product Decision and analysis/ Product Development

c) Process selection / Process Design / Process Analysisd) Facility locatione) Facility layoutf) Capacity planning, Capacity decisions / Waiting linesg) Aggregate Planningh) Basics of MRP / ERP

i) Basics of scheduling j) Basics of Project Managementk) Basics of work study/ job design / work measurementl) Basics of Quality control / SQC / TQMm) Basics of Environmental management and ISO 14000 / 9000.

n) Value Engineering and Analysis.

Reference Text :1. Production and OM ± S.N. Chary2. Production and OM ± James B. Dilworth3. Modern Production management ± Buffa

4. Production and OM ± Norman Gaither



a

Introduction /

Operations Strategy /

Competitive Advantage /

Time based Competition



Definitions of Operations management :

Some terms to be understood before,

Efficiency and effectiveness :

-Efficiency means doing something at the lowest possiblecost.

-Effectiveness means doing right things to create the mostvalue for the company.

- Often Maximizing effectiveness and efficiency at the sametime creates a conflict and hence a trade off is always sought.

Value : It can be understood as QUALITY in comparison with

PRICE.eg Better car at same price «Value has gone up

Better car at lower price «value goes way up.

It is a challenge for management to achieve higher

levels of value on continuous basis.



Why study Operations Management ? ± A business education is incomplete without an understanding of modern

operations tools used for managing operations: Supply chainmanagement, TQM, BPR , JIT, Six sigma etc fall under the OM umbrella

± Operations management provides a systematic way of looking atorganisational processes. It develops analytical frame of mind to dealwith real world problems may it be global expansion or traffic at bankteller window.

± Operations management presents interesting career opportunities.

± The concepts, models , tools of OM are widely used in managing other functions of a business.

What is Operations Management ?

± It is the design, operation and improvement of the systems that createand deliver the firm¶s products or services

± Tools like OR ( operation research) , IE ( industrial Engg) , MS ( Managementscience) etc are used in OM.



Supply chain of typical OEM

O E M

Manufacturingcompany

Warehouse

Dealer

Distributor

Direct sales

force

Retail

Retailer

Retail

Var iou

s

CUst

omer s

Web site

Tier 1 suppliers

Tier 2 & 3 suppliers



- OM is concerned with effective management of

all the individual processes involved in thesupply chain.

- With in operations function, management decisions canbe divided into three broad areas :

1. Strategic ( Long Term ) decisions

2. Tactical ( Intermediate term) decisions

3. Operational planning and control ( Short term)decisions



Production systems :

- A production system uses resources to transform inputs intosome desired output

- Transformation processes can be categorised as follows:1. Physical ( Manufacturing)

2. Location ( Transportation)

3. Exchange ( Retail)

4. Storage ( Warehousing)5. Physiological ( Health Care)

6. Informational ( Telecommunication)

- Next 2 slides are ,1. ³Input- transformation- output́ for some typical systems

2. Historical development of OR



Fast delivery,availability of SKUs

Storage andredistribution

Storage space, bins,stock keepers

Stock keepingunits ( SKUs)

DistributionCentre

Educatedindividuals

Impartingknowledge andskills, etc

Teachers, books,classrooms, etc

High schoolgraduates

College or university

High quality carsFabrication and

assembly of cars,etc

Tools, equipments,

workers, etc

Sheet steel,

engine parts

Automobile

factory

Satisfiedcustomers

Well prepared ,served, food , etc

Chefs, Food,ambience, etc

Hungrycustomers

Restaurant

On time, safe

delivery todestinations

Move to destination Airplanes, crews,

ticketing systems , etc

Travelers Air line

Sales to satisfied

customers

Attract shoppers,

get orders, etc

Goods, Sales staff,

Displays, etc

ShoppersDepartmental

store

Healthy

Individuals

Health careDoctors, Nurses,

Medical equipmentetc.

PatientsHospital

Typical

Desired

Output

Primary

Transformationfunctions

ResourcesPrimary

Inputs

System



OR group ( UK), George Dantzig (USA)

Linear ProgrammingMultidisciplinary teamapproach to complexproblems

1940s

Many groups in USA & EuropeSimulation, waiting line, decisiontheory, PERT, CPMExtensive development of OR research tools1950-60 s

IBM,

Joseph Orlicky &Oliver Wight ± MRP,

McDonald's restaurant

Shop scheduling, inventorycontrol, forecasting, projectmanagement, MRP, massproduction in service sector

Widespread use of computers, Service qualityand productivity

!970s

Walter Shewhart, Elton Mayo ( USA)Sampling inspection, SQC,activity sampling

Quality Control

Worker Motivation

1930s

Frederick Taylor, Henry Ford, FrankGilberth ( USA)

Time study, work study, motionstudy, activity scheduling chart,inventory control

Principles of scientificmanagement, Industrialpsychology, Economic lotsize

1910s

Amazon, Yahoo, Google, Online

shopping sites

Internet, wwwE - Commerce2000s

National society of standards , American society of quality control,Netscape, Microsoft, Oracle

ISO 9000, Value engg,concurrent engg, Internet, www,Client server software

TQM, BPR, Electronicenterprise, Supply chainmanagement

1990s

Harvard faculty ,Toyota motors

Manufacturing as competitivetool, Kanban, CAD/CAM, Robots,Bottleneck analysis, TOC

Manufacturing strategy, JIT,TQC, Factory automation1980s

Originator ToolsConceptYear



Current issues in operations management:

1. Effectively consolidating the operations resulting

from mergers and acquisitions.2. Developing flexible supply chains to enable mass

customization of products and services.

3. Managing global supplier, production and

distribution networks.4. Increased ³commoditization´ of suppliers.

5. Achieving the ³service factory´

6. Enhancing value added services7. Making efficient use of internet technology

8. Achieving good service from service firms.



Competitive Strategy :

± It is about being different from the competition in the local or global market place.

Competitive operations strategy breaks down into 3 components , ± Operations effectiveness : Relates to the core business

processes that are needed to run the business. It getsreflected in the costs associated with doing business.

± Customer Management : It relates to understanding andleveraging customer relationships better.

± Product Innovation : It involves the development of newproducts, markets and relationships to sustain growth.

It is concerned with setting broad policies and plans for using theresources of a firm to best support its long term competitivestrategy



Operations competitive dimensions :

Since different customer are attracted by differentattributes, it gives rise to different competitive positions

of a company or different competitive dimensions,1. Cost ± ³ Make it Cheap´

2. Product Quality and reliability- ³Make it Good´ ± goal is proper level of product quality as per the requirements of customer, noover design nor under design. Also ³Process Quality´ goal is to

produce error free products.3. Delivery speed ± ³ Make it fast´ , compared to competition

4. Delivery reliability ± Deliver it when promised.

5. Coping with changes in demand ± ³ Change its volume´

6. Flexibility and new product introduction speed ± ³ Change it´ ±

ability to offer a wide variety to customers and time required todevelop new product and change its processes to offer the newproduct to customers.

7. Other Product specified Criteria ± ³ Support It´ eg Technicalliaison and support , Meeting a launch date, Supplier after sale

support , Product mix options etc.



The Notion of Trade-offs:

± Generally an operation can not excel simultaneously on allcompetitive dimensions and has to decide which parameters

of performance are critical to the success of the businessand then concentrate the resources on it. Eg trade off of highquality vs. low cost.

Time based competition :

± Time is an important factor from operations point of view. ± Important from ³availability of product when required´ point

of view which demands need to manage the operations tomeet time targets.

± Catching up with the launch dates of promotional campaigns ± Very crucial in case of NPD.



b

Product decisions &

Analysis /

Product Development



PRODUCTIONWISE CLASSIFICATION

Above terminology, classifications, characterictstics , etc., are

important ingredients of production / operation management.

Sr No.

Productionsystem

Product Character Product Variety Examples

1 Continuous Homogenous Single product Sugar,paper,cement

2 Mass Heterogeneous Few products/

varieties

Plastic

goods3 Batch Heterogeneous Several

product/varietiesMotors,switchgears, pharma

4 Jobbing Custom Built Few Jobs Furnace,

Ship , etc



Some typical PLCs,

a) PLC curve of consumer product is fewmonths viz. fashion garments 12 months.

b) PLC curve of consumer durable product fewyears viz. 3 ±5 years for fan, frig, car etc.

c) PLC curve of Industrial products several

years viz. 5 ± 10 years lathe machine. PLC stages of TV industry for various

technological products, in Indian city / urban area,are,

1. Plasma TV ± introduction stage.

2. LCD TV ± Growth stage

3. Colour T.V. - maturity stage

4. Black & White ± Declination



3) PRODUCT DECISION Product decisions are required due to following circumstances:-

a) Due to decline in product life stage, new product required

(or modify existing product )b) For corporate expansions new products are required.

Following approaches may be used :-

(i) Vertical Expn : Forward integration of existing product viz.compressor manufacturer like Kirloskar can go from production

of Refrigerator, Air Conditioner etc. By backward integration viz.Frig, manufacturer like Godrej has already made backwardintegration by manufacturer compressor in house.

(ii) Horizontal Expn : Similar product manufacturer likeGodrej , producing Refrigerator as well bottle coolers

(iii) Concentric Expn : Expn. In same type of product classviz. ONIDA is producing Colour T.V. and Air conditioner for theluxurious products.



Above approaches have synergy of marketstrength as well as using / modifying existing

production facility. Realignment looks into,

1. Increase existing plant capacity.

2. Add / remove machineries.3. New Product design to use existing parts/components.

4. Train existing staff for new producttechnology

5. Possible use of existing tools, jigs andfixture.



GOOD DESIGN FACTORS A good design of product should incorporate following factors :1. Function : Design should lead to a product which mustperform functional benefits to consumer.

Illustration : A gas lighter mfd. from design must instantlyignite gas stove.2. Reliability : The product should smoothly functionthroughout it¶s stated life span. This is called reliability of designfunctions.

Thus in above illustration of gas lighter, say 10,000 nos. of successful ignition function must be performed during the uses.3. Quality : A design must specify good quality of parts,components, etc., used in Product. Wherever required IndianStandard specification no. should be stipulated for inputs. Also

for final products if ISI is available, if should be stipulated.Illustration : For PVC coated copper wire (electric housewiring) manufacturer states conformance to Indian StandardNo. 694. This is as per Govt. directive for domestic use for electric wire. ISI states specification of conductivity of tensilestrength of Copper wire (input) and also final product¶s PVC

coating Voltage strength etc.



4. Producibility : Design drawings, specifications etc., should besimple and technically feasible for smooth production fromexisting / proposed machines, tools, dies etc., Also productioncycle time should be reasonable short.

Thereby plant and machinery will produce full capacity of product viz. production of 200 nos. of gas lighters per day.

5. Standardization : Design should specify maximum use of standard available input parts, components, raw material etc.Further it should also specify minimum variety and regular lotquantity of such inputs available in the market.

6. Minimum Production Cost : Cost of raw material, labour charges, overheads, etc. should be as minimum as possible.Thus when product margin is added to product cost, sales priceshould be competitive.



Product design ± specifies and takescare of characteristics like,

appearance, materials,

dimensions,

tolerances, and

performance standards

Product design must support productmanufacturability (the ease with whicha product can be made)



Product Design Process, 4 major steps,

Step 1 - Idea Development

- Someone thinks of a need and a product/service design

to satisfy ite.g. customers, marketing, engineering, competitors,

benchmarking, reverse engineering

Step 2 - Product / idea Screening

- Every business needs a formal/structured evaluationprocess

e.g. fit with facility and labor skills, size of market,contribution margin, break-even analysis, return on sales

Step 3 - Preliminary Design and Testing

- Technical specifications are developed, prototypes built,testing starts

Step 4 ± Final Design

- Final design based on test results, facility, equipment,material, & labour skills defined, suppliers identified



Product Screening Tool ±

Break-Even AnalysisBreak-even analysis , includes calculating

A) Total cost ±> sum of fixed and variable cost

Total cost = F + (VC)*Q

B) Revenue ±> amount of money brought in from sales

Revenue = (SP) * Q

Where,

Q = number of units sold

SP = Selling price per unit

VC = Variable cost per unit

F= Fixed cost



To compute the Break Even Quantity i.e. thequantity of goods company needs to sell to

cover its costs, we equate the Total costs andRevenue at that quantity ie, Q BE.

We get by rearranging,

QBE = F/ (SP - VC)

QBE = Break even quantity

F =Fixed costsSP = selling price/unit

VC = Variable cost / unit



Break-Even Analysis: Graphical Approach

Plot the total revenue line andthe total cost line

Intersection is break-even ± Estimate graphically

± Solve exactly

Profit for any quantity Q isTotal Revenue ± Total Cost

Sensitivity analysis can bedone to examine changes inall of the assumptions made



Example : Given that the selling price is $ 20 per unit and thevariable cost is $ 8 per unit and the fixed cost is $ 70,000 . Findthe BEQ. The actual sale quantity at this price is 12000 units, Find

the profit or loss in this case. Examine the strategy which assuresthe drop in price by $ 2 per unit can raise the demand to 15000units.

Breakeven Analysis for Fine Mfg.

0

2 0 0 0 0

0 0 0 0

0 0 0 0

8 0 0 0 0

1 0 0 0 0 0

1 2 0 0 0 0

1 0 0 0 0

1 0 0 0 0

1 8 0 0 0 0

0 2 0 0 0 0 0 0 0 0 0 8 0 0 0 1 0 0 0 0

Quantity produced

d o

l l T o t a l e ve n u e

T o t a l o s t

Solution :-

a) Total Revenue = 20Q; Total Cost = 70,000+8Q



Breakeven Quantity

= Fixed Cost / (Selling Price-Variable Cost)

= 70,000/(20-8) = 5,833.3

B. Given that, At selling price of $20/unit, demand is12,000 units and we need to find out the profit or loss inthis situation,

Pr ofit = Total Revenue-Total Cost

= 20(12,000) - [70,000+8(12,000)] = $74,000



The strategy that sets the unit price at $18 has a

larger profit by $6000, and hence can be considered.

C. Given that , At selling price of $18/unit, demand is

15,000 units and we need to find the total profit or lossat this selling price, then, we have,

Profit = Total Revenue-Total Cost

= 18(15,000) - [70,000+8(15,000)] = $80,000



Factors Impacting Product Design

Need to Design for Manufacturing ±

DFM

Series of guidelines to follow inorder to produce a product easily

and profitably

± Simplification - Minimize parts

± Standardization

Design parts for multiple

applications

± Use modular design

± Simplify operations



Remember the Tucker!

The Tucker automobile of the late 1940s stands out asone of the most celebrated failures in the annals of

American business. With its aerodynamic sheet metal,rear-mounted engine, and a Cyclops headlight that turned in tandem with the steering wheel, theprototype Tucker 48 shown to the public in 1947generated quite a bit of excitement. But the Tucker 48

never made it into mass production. Only 51 modelswere produced, all largely fabricated by hand at tremendous expense.



Remember the Tucker!

Existing equipment and processes were not capable of executing the relatively sophisticated design of theTucker 48 on a large scale. Thus the Tucker 48

provides an object lesson in the need to design for manufacturing (DFM). DFM is part of the concurrent engineering movement that blossomed in the 1980s.DFM stresses the need to incorporate the perspectiveof manufacturing engineering into the earliest stages of product design.



c

Process selection ,

Design &

Process Analysis



I) PRODUCTION S YSTEMS Broadly there are 2 types of Production Systems viz.

Product focused & Process focused. Each classification isfurther divided into 2 systems on the basis of nature andvolume of products.

1. PRODUCT FOCUSSED (Continuous) :

In this system, processing is completely adapted toproduct. Individual processes are physically arranged in the

sequence required, and the entire system is integrated for single purpose (product dedicated machines). Hence thiscontinuous system is called Product focused.

This system is suitable for highly standardised productwhich is required in large volume. viz. Paper Mill, Sugar Mill,

Cement Plant, Chemical Plant, Refinery etc. Thus this systemhas huge investment, large inventory, high degree of automation etc. But limited use of PPC. Exhibit I Edible oilrefinery Production Process.



Exhibit 1: Edible oil refinery process

Crude oil tank Physical refining

Chemical

refining usingsulphuric acidand centrifuges

Bleacher using

Bleaching earthand bleacher screens

SHE & Hot oilfurnace

Deodorizer

Polish filter Refined oil tank



2. PRODUCT FOCUSSED (MassProduction) :

In this system, main components / parts areproduced by continuous production system butthereafter assembled, tested and packed. Dueto this nature of production it is called 'Mass

Production System'. This System is suitable for Product with varieties and medium in volumeviz. Fan, Computer, Refrigerator, Automobiles

etc. It has a medium investment and inventory,semi-automation, & PPC applied. Exhibit IIshows Production of Refrigerator.



Exhibit II: Refrigerator Manufacturing

Compressor manufacturingand testingunit

Body and door moulding unit

Refrigerator assembly unit

Refrigerator

electricalwiring/ controlsunit

Evaporator coilfabrication andtesting unit

Refrigerator

final testingunit



3. PROCESS FOCUSSED (Batch Production) :

In this production system machines are generalpurpose and they are organized around (focused)production processes. Investments & Inventory aremedium value but no much automation (somemechanisation exists.) Machines are medium valuesviz. Lathe, Milling machine, ovens, bottling machinesetc.

Though operations are in sequence but the path maybe zig-zag leading. The production comes out in

batches eg Electric motors, pumps, switchgears,biscuit, soft drinks etc.

The final product is traceable up to the raw materialbatch which helps for trouble shooting.

Exhibit III shows process production of Biscuit making.



Exhibit III: Biscuit making ( Handling Marie, Snax, Goodday, Digestive etc on one line in batches)

Dough making facilitywhich mixers, voutator etcgeneral purpose machineswhich is required in allbiscuits

Cooling conveyor andmetal detector whichcan handle variousbiscuits

Layering and biscuitcutting or moulding

unit, which can beadopted to differenttypes of biscuits bychanging mould or cutter cylinder

Baking section withoven which canbake all types of biscuits

Packing section with different packingmachines arranged for different biscuitsand the biscuits are diverted usingdiverting guide to the required machines

Cartons to storagesection



4. PROCESS FOCUSEED (Jobbing work) :

In jobbing work, parts are manufactured at

various work stations in the plant like forgingstation, machining shop etc. and assembled /machined at site. Examples of jobs arefurnace, extruder, pressure vessel, reactor,

crane, conveyor belt etc. which are generallysupplied to product producing plants (describedabove.



Process Selection

Product design considerations mustinclude the process

Two broad process classificationsinclude ± Intermittent operations ± produce a

variety of products in lower volumes ± Repetitive operations ± produce one or a

few standardized products in high volume



Process Selection

Process selection is based on fiveconsiderations ± Type of process; range from intermittent to

repetitive

± Degree of vertical integration

± Flexibility of resources ± Mix between capital & human resources

± Degree of customer contact



Underlying Process Relationship BetweenVolume and Standardization Continuum

f



It is seen from the above diagram that stagesof product & process development areinterdependent and feed on each other.

Though volume depends on type of productionsystem, volume also depends on price/cost andquality competitiveness.

But organisation experience curve for improvedPPC, inventory, product / process design,layout, economy of scale etc. leads the

organisations to its own competitive strategy.

III PRODUCT PROCESS INNOVATIONS MODEL



III. PRODUCT - PROCESS INNOVATIONS MODEL

The competitiveness and profitability of firm depend in parton the design and quality of products and on the cost of

production. Therefore there exists a relationship of productinnovation to process technology and process innovation. It isdescribed in 3 stages of model below.

Rat

e

of

In

n0vation

Un coordinated processes ---------------------------------------------------------- Integrated Processes

Performance Maximization -------------------------------------------------------- Cost Minimization

Stages Of Development

Process Innovations

Cost Stimulated

Technology stimulated

Product Innovations

Need

Stimulated

Output rate stimulated



IV PROCESS SELECTION



IV. PROCESS SELECTION

Process Selection is based on the following factors :

(i) Type of Product

(ii) Volume of Product (iii) Automation desired

Pl ll th 'P d t Lif C l ' d



Please recall, as the 'Product Life Cycle' proceeds'Process Life Cycle' follows it. Though stages maytake several years, productive system is required to be

repositioned / realigned.

Production of gear for motors, engines, etc. wasonce upon a time custom built product. But now withthe course of time, in advancement of technology, ithas become Mass Production.

M l / M h i d d A t t d



Manual / Mechanized and Automated processes.

Manual Technology

Mechanized Technology

Low ± Volume

Variety Products

General Purpose Machines

High ± Volume

Standardized products

Special Purpose machines

Automated Technology

Robots

NC Machines

CAD/ CAM

FMS

CIM

Automated Technology

Hard Automation

Robots



V) PROCESS DESIGN



V) PROCESS DESIGN Process design is based on the following factors. (i) Product Specification (ii) Availability of Input (iii) Plant Capacity desired (iv) Availability of Machines / Equipments from Manufacturer

Following are design stages: I) Operation Design : Firstly operation is selected on the basis of raw material and availability

of machine/equipment. On the similar line subsequent machines areselected for intermediate as well as final steps to achieve the productspecification viz. Cutting, Welding, Forging, Casting, Forming etc.

II) Special Processes : Special Processes are required to be custom-built with machinery

manufacturer. viz. Heat Treatment Plant, special coating etc.

III) Process Integration : Sequential arrangement of operations and processes is called process

integration. This also involves design of plant layout. Further it includesdesign of material handling equipments, conveyor belt, other automationequipments etc.

IV) C it D i



IV) Capacity Design :

Based on Project Report Plant output

capacity must be produced. V) Design Flexibility :

Design should be flexible for variation in

specification of product and also for additionalcapacity for future.

VI)Environmental Equipment Design :

If the process is involving hazardous gases,affluent etc., then suitable selection of Environmental equipment should be made.(Thereby Pollution Control Laws are obeyed).



Designing Processes

Process design tools include

± Process flow analysis

± Process flowchart

Design considerations include

± Make-to-stock strategy

± Assemble-to-order strategy

± Make-to-order strategy



Process Design Tools

Process flow analysis is a tool used to analyzeand document the sequence of steps within a

total process. Usually first step in ProcessReengineering.

Process Re-engineering is a structuredapproach used when major business changesare required as a result of: ± Major new products

± Quality improvement needed

± Better competitors

± Inadequate performance



Flowchart Symbols

Tasks or operations

Examples: Giving anadmission ticket to acustomer, installing aengine in a car, etc.

Decision Points Examples: How much

change should begiven to a customer,

which wrench shouldbe used, etc.

Purpose and Examples

Source: Chase, Jacobs & Aquilano, Operations Management for Competitive Advantage, 11/e



Examples: Sheds,lines of people waitingfor a service, etc.

Examples: Customersmoving to a seat,mechanic getting a

tool, etc.

Storage areas or queues

Flows of materials or

customers

Purpose and Examples

Flowchart Symbols

Source: Chase, Jacobs & Aquilano, Operations Management for Competitive Advantage, 11/e

P Ch i t t i



Process Choice strategies



Decisions for the two types of operations

VI) PROCESS ANALYSIS



VI) PROCESS ANALYSIS

Performance of process can be analysed on

the following criteria: 1. Quality Achievement :

Eg. If the process produces the products

with less than 2-3% rejection rate, then it isconsidered to be good process design.

2. Plant Capacity Achievement :

Eg. If the Plant can reach about 98-99% of installed capacity, then it is considered to begood achievement.



Process Technology in service and nonmanufacturing operations



Process Technology in service and nonmanufacturing operationsIn Service sectors also there is a clear trend in adopting moreadvanced process technologies to get the competitiveadvantage«some examples can be as below,

1. Containerization : By standardization of container sizes it has beenpossible to develop national and international systems for efficienthandling of large quantities of goods. Sophisticated computer andtelecommunication systems are used to support the need of container systems. Both sea and air freight reaps benefits from containerization.

2. Reservation systems in airline, railways etc, the interconnectionsbetween national and international carriers etc. Systems for check in,baggage check in and handling, seat allocation, special meals etc.

3. Warehousing: Advanced designs with computerized systems will storeand retrieve materials on command using controlled conveyors,

storage and retriever stackers etc.4. Point of sale systems : Bar coding and scanner systems, inventory

control systems etc.

5. Banking operations : ATMs, Electronic funds transfer, Check clearingusing MICR ( Magnetic ink character recognition)

Evaluation of alternatives and decisions : Use of Decision Tree



Evaluation of alternatives and decisions : Use of Decision Tree

Example : A firm is in situation of making a choice between ³Technology A´ . ³ Technology B´ and ³ Do Nothing´. In both the

alternatives A and B there is a ,chance of breakthrough asbelow,

Technology A : Chance of breakthrough 40%

Technology B : Chance of breakthrough 80%

The investments and annual operating costs are shown below.The do nothing alternative is a Manual technology and has noinvestment required .

A horizon of 5 years is adopted as representing the reasonableeconomic lives of technologies A and B, interest is at 10% and

the criteria is Expected Monetary value.

( from the present value table for a five year annuity at 10%interest is 3.79).

Evaluate the economic aspects of the 3 alternatives.



Investment and operating costs for Technology choices

Technology A Technology B Do Nothing

Investment $ 60,000 $ 40,000 -

Annual operatingcosts

$ 30,000

If breakthrough 1000 -

If No breakthrough 2000 -

If Breakthrough - 4000

If No breakthrough - 8000

Solution : Decision tree



Solution : Decision tree

A, investment- $ 60,000

B :Investment -$ 40,000

C : Do Nothing,

No investment

Annual op cost = $ 30,000

Present value = 3.791 X 30,000 = $ 113,730

Breakthrough successful, p= 0.4, Annualoperating cost = $ 1000,

Present value = 3.791 X 1000 = $ 3791

Breakthrough unsuccessful, p= 0.6, Annualoperating cost = $ 2000,

Present value = 3.791 X 2000 = $ 7582

Breakthrough successful , p= 0.8, Annual

operating cost = $ 4000,Present value = 3.791 X 4000 = $ 15164

Breakthrough unsuccessful, p= 0.2, Annualoperating cost = $ 8000,

Present value = 3.791 X 8000 = $ 30328

In order to evaluate the economic aspects of the 3 alternatives we



o de o e a ua e e eco o c aspec s o e 3 a e a es eproceed as follows,

1. Branches associated with A, the present value of the

annual operating expenses will be, considering the chanceaspect using related probabilities ,1. Breakthrough successful = $ 3791 X 0.4 = $ 1516.4

2. Breakthrough unsuccessful = $ 7582 X 0.6 = $ 4549.2

EMV = $ 6065.6

Present value of investment for A = $ 60,000.Total expected monetary value for alternative A is = $ 66,065.60

2. Similar calculations for alternative B will give us,

Total expected monetary value of alternative B is = $58196.8.

3. The do nothing alternative has a present value = $ 113,730

Expected Monetary values for the rolled back decision tree are,



In this case alternative B has lower EMV over a period of 5 yrs by$ 7868.8.

(After this calculations if Manager is of the opinion that thisdifference is not substantial in comparison to the advantage of meeting higher quality standard which can be achieved byadopting technology A then he can justify the choice of alternative A over B.)

A, $ 66,065.6

B, $ 58,196.8

Do nothing, $

113,730.00



d

Facility Location

1) NEW FACILITY LOCATION :



1) NEW FACILITY LOCATION :

±WH Y?

1. New Venture

2. Expansion

3. Industry & Environment Laws

4. Industrial Unrest

5. Political Instability6. STRATEGIC DECISION

2) DOMINANT FACTORS



2) DOMINANT FACTORS

1) Raw Material Based Mfg. : Facilities

using huge natural resources2) Electric Power Based : Mfg. Facility usinglarge Electric Power

3) Good Infrastructure :4) Market Based :

5) Govt. Policy : Govt. Incentives & Politicalwillingness

6) Land Cost , topography, etc.

7) Environmental Laws : Pollution ControlBoard Policy for location.

3) GENERAL APPROACH FOR SITE SELECTION



3) G O C O S S C O

1. Analysing Environment w.r.t. your business

2. Location Decision :National or International :Dabur¶s factory for Herbal products in California,U.S.A.

3. Regional Decision : Multi region or singleregion, for example Pepsi had 19 plant spreadover India.

4. Sub Region Decision :Transportation, Banking,Port nearness etc

5. Site Selection : Land cost, size, soil,topography, Vastushastra

6. Techno commercial analysis, ROI analysis of proposed location

4) BROWN & GIBSON ANALYTICAL MODEL (For Sit S l ti )



Site Selection)

In 1972, Brown & Gibson developed AnalyticalModel for Site Selection for Multiattribute Plantcharacteristics. It has following 3 criteria.

1. Critical Criteria : A criteria which is absolutelyessential for plant location.

2.Objective Criteria : Monetarily measurable criteriafor raw material, labour, utilities, taxes etc. iscalled Objective criteria. This criteria can alsobecome Critical criteria.

3.Subjective Criteria : Non-measurable criteria likeCommunity attitude and support, degree of recreation facility etc. are subjective factors. Itcan be both critical & subjective.

LOCATION MEASUREMENT FORMULA



LM = CFM x (X OFM + (1-X) x SFM)

WHERE,CFM = Critical Factor Measure (CFM = 0 OR 1)

OFM = Objective Factor Measure (0<OFM<1)SFM = Subjective Factor Measure (0<OFM<1)

Since CFM is 0 or 1, it leads either adequacy of Critical Factor or not. If 0 then such site is eliminated.

OFM = (Max. OFC ± OFC) .( Max. OFC - Min. OFC.)

where OFC is Objective Factor CostSFM = (SFWK x SWK), Where,

SFWK

= Wt. of Subjective Factor K w.r.t. all subjectivefactors.

SWK = Evaluation of Site, relative to all potential sites.X = Objective factor decision weight selected bymanagement.

** Illustrates decision location example, refer excel sheet.



6) SERVICE FACILITY TO LOCATION



6) SERVICE FACILITY TO LOCATION

Single Service facility & multiple customers-

Weber problem , Solution is given by Kuhn &Kuenne in 1962.

Criteria : 1) Minimum cost of travel , or

2) Minimum time for transportation.Single Facility Location & 5 Users ±Illustration.



Distance = di = ¥(xi - x)2 + (yi -y)2If wi is a cost (Rs.) per KM. thenTotal cost of service for location facility at

(x,y) is,C(x,y) = (wi x di)

= wi x ¥(xi - x)2 + (yi -y)2,This Equation is to be solved for Minimization.

In special case where all wi are equal for

³m´ customer locations, the ideal locationwill be given by,x = xi / m , &y = yi / m

7) DISTRIBUTION METHODS



)

Distribution goods from facility to depot /

warehouse can be tackled by Linear Programming. Any one of the following 3methods can be used.

1.North-West Corner.

2.Least-Cost Method. (LCM)

3.Vogel's Approx. Method (VAM)

Let us understand with example one of thesemethods«.

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