Operations ManagementOperations Management Introduction Introduction

A. A. ElimamA. A. Elimam

Operations ManagementOperations Management

ACTIVITIES THAT RELATE TO THE CREATION OF GOODS AND SERVICES

THROUGH THE TRANSFORMATION OF

INPUTS INTO OUTPUTS

Transformation ProcessTransformation Process

InputPeopleMaterialsEquipmentMoneyManagement

InputPeopleMaterialsEquipmentMoneyManagement

TransformationTransformation

Output

GoodsServices

Output

GoodsServices

FeedbackFeedback

FeedbackFeedback

Manufacturing and ServicesManufacturing and Services

Physical product Output inventoried Low customer

contact Long response

time

Intangible product Cannot inventoried High customer

contact Short response

time

Manufacturing and ServicesManufacturing and Services

World markets Large facilities Capital intensive Quality easily

measured

Local markets Small facilities Labor intensive Quality not easily

measured

MAJOR CHALLENGES TO MAJOR CHALLENGES TO OPERATIONS MANAGERSOPERATIONS MANAGERS

Increase the VALUE of output relative

to the COST of input.

Increase PRODUCTIVITY

PRODUCTIVITY = OUTPUT

INPUT

PRODUCTIVITYPRODUCTIVITY

Productivity is the quotient obtained by dividing output by one of the factors of production. One can speak of productivity of capital, labor, raw materials, etc.

WAYS TO IMPROVE WAYS TO IMPROVE PRODUCTIVITYPRODUCTIVITY

INCREASE OUTPUT MINIMIZE DEFECTS IMPROVE QUALITY

REDUCE INPUTS ELIMINATE WASTE FEWER HOURS LOWER ENERGY IMPROVE QUALITY

Example : ProductivityExample : Productivity

Example: Output = $1000

Inputs: human = $300 material = $200

capital = $300 energy = $100 other exp.= $50

Human Productivity = 1000 / 300 = $ / $ 3.33

Total Productivity = 1000 / 950 = $ / $ 1.053

Example : ProductivityExample : Productivity

Output = 600 insurance policies

Inputs: human = 3 employees

working 8 hours / day for 5 days

Labor Productivity = 600 / (3)(5)(8)

= 5 policies / hour

Decision MakingDecision Making

Positioning DecisionsProduct Planning--Positioning Strategies and Quality

Management Design Decisions

Process Design, Work Force Management, Capacity, Location, Layout

Operating DecisionsMaterials Management, Production Planning and

Scheduling, Inventory, Supply Chain, Project Scheduling, Quality Control

Decision Making HorizonsDecision Making Horizons

Strategic Planning: 5 - 10 yr.Less certainty - Less detail - Goal-oriented

Operational Planning: 3 mos - 3 yr.More Certainty - More Means-oriented - Better Defined

Scheduling: weekly - monthlyMore attention to detail

Sequencing/Dispatching: hourly - dailyExact order and time of implementation

Control: hourly - dailyFeedback on implementation

Steps in Product PlanningSteps in Product Planning

Step 1:Idea Generation

Step 2:Screening

Step 3:Development &testing

Step 4:Final product design

Rejected Ideas

Screening Approaches:Screening Approaches:Preference MatrixPreference Matrix

Weighted Score for each Product

based on performance measures

Selection: total score exceeds

threshold

Deficient approach - Why ?

Screening Approaches:Screening Approaches:Break-Even Analysis (BEA)Break-Even Analysis (BEA)

When do revenues exceed costs? Total Annual Revenue = Total Annual Cost Total Annual Revenue = Ann. Fixed Cost +

Ann. Variable Cost PQ = F + c. Q

• P = Price in $ / unit• c = Variable cost in $/unit• F = Annual Fixed Cost, $/yr.• Q = Number of units produced

Screening Approaches:Screening Approaches:Break-Even Analysis (BEA)Break-Even Analysis (BEA)

Production determines: F & c Marketing determines: P & Demand Use BEA to determine if the product

BREAKS EVEN at the Expected Demand Yes --> Continue No --> Drop Product

Graphical Approach to BEAGraphical Approach to BEAGiven: p= $ 20/unit c=$10/unit F= $100,000

Break-evenQuantity

Graphical Approach to BEAGraphical Approach to BEA

400

300

200

100

5 10 15 20

Loss Fixed Cost

Total AnnualRevenues

Total AnnualCost

Profit

(20, 300)

(20, 400)

Dol

lars

(In

Tho

usan

ds)

Dol

lars

(In

Tho

usan

ds)

Units, Q (In Thousands)Units, Q (In Thousands)

Given: p= $ 20/unit c=$10/unit F= $100,000

Graphic Approach to Break-Even AnalysisGraphic Approach to Break-Even AnalysisGiven: F= $ 100,000 p= $30/patient c= $20/patient

Graphic Approach to Break-Even AnalysisGraphic Approach to Break-Even Analysis

Patients (Q)

500 1000 1500 2000

Fixed costs

Break-even quantity

Total annual costs(2000, 300)

Loss

0

400

300

200

100

Total annual revenues

Profits

(2000, 400)D

olla

rs (

in t

hou

san

ds)

Given: F= $ 100,000 p= $30/patient c= $20/patient

Example 1: Furniture PlantExample 1: Furniture Plant

Fixed cost = $600,000. Variable cost = $50 per unit. Marketing Research indicates firm can

sell 15,000 sets at $110 per set. Is it feasible to build the plant?Solution: Find the break-even point Q = F/(P - c) = 600,000/(110 - 50) = 10,000 patio furniture sets.

Therefore, firm should build plant.

Example 2: Luxor Inc.Example 2: Luxor Inc.

Began producing cheese in 1993. 1993 output reached 20,000 lb. at total

cost of $40,000 1994 output increased to 30,000 lb. at

total cost of $50,000

Example 2:(continued) LuxorExample 2:(continued) Luxor What is the variable cost (c) & the fixed cost

(F)? Costs stayed the same during 1993/94.Solution:

TC = F + c . Q

40,000 = F + 20,000.c for 1993 [1]

50,000 = F + 30,000.c for 1994 [2]

Subtracting [1] from [2],

10,000 = 0 + 10,000c, and c = $1 per lb.

Substituting for c in [2],

F = 40,000 - 20,000 (1) = $20,000 per year

Example 2: (continued)LuxorExample 2: (continued)Luxor

If the selling price =$ 2.80 in 1993 & $ 3.20 in 1994, find the productivity in 1993 & 1994.Solution:Solution:

Productivity = Output/Inputs or Productivity =Tot. A. Revenues/Tot. A. Costsor Productivity = (P . Q) / TCTherefore 1993 Productivity = 2.80 x 20,000/40,000=1.40 1994 Productivity = 3.20 x 30,000/50,000=1.92 so...Productivity improved in 1994 over 1993.

Example 2: (continued)Luxor

If the total cost in 1995 is expected to increase to $60,000, how many lb. should Luxor produce & sell to maintain the same productivity level of 1994? (selling price remains $3.20/lb)

Solution: Find the 1995 Q to keep productivity = 1.92

1.92 = 3.20 x Q / 60,000 Q = 36,000 lb.

BEA: Make or Buy DecisionsBEA: Make or Buy Decisions

Total Annual Cost of Making = Total Annual Cost of Buying

Fm + Cm . Q = Fb + Cb . Q

m = making b = buying Decision to make or buy Number of units needed per year

exceed BREAK EVEN VOLUME (Q)?

Make-Buy Decisions: ExampleMake-Buy Decisions: Example

In a PC assembly plant, to make hard drives Fixed costs = $200,000 Var. cost = $50/unit.

Hard drives cost $130 to buy. Should hard drives be made or bought?Solution:

Fm + CmQ = Fb + CbQ 200,000 + 50Q = 130Q; Q = 2500 unitsQ <= 2500 units -- buyQ > 2500 units -- make.

BEA: Selection Among Two BEA: Selection Among Two AlternativesAlternatives

Select one of 2 cars, Tonda & Hoyota Total Annual Cost of Tonda =

Total Annual Cost of Hoyota

FT + CT Q = FH + CH Q

Q = Break even miles Solve for Q : If # of miles driven < Q select the car with the lowest F > Q select the car with the lowest C

BEA: Selection Among Two BEA: Selection Among Two AlternativesAlternatives

Considering two Cars to lease.Annual Costs Hoyota TondaLease Cost, $ 5,000 8,000Variable Cost, $/mile 0.3 0.15

Which car would you lease and why?

Solution: FH + CHQ = FT + CTQ5,000 + 0.3Q = 8,000 + 0.15Q

Q = 20,000 miles Lease Hoyota if you drive < 20,000 miles.Otherwise Tonda

BEA: Selection Among Two BEA: Selection Among Two AlternativesAlternatives

What if the running cost of the Hoyota went down to $0.25 per mile?

Solution:

Find the BEP using new running cost:5000 + 0.25Q = 8000 + 0.15Q

Q = 30,000

Select Hoyota if you drive<30,000miles otherwise Select Tonda.

LP-Based Product SelectionLP-Based Product Selection Select product(s) that maximize profit while staying

within budget General Form: General Form: Maximize p1x1 + p2x2 + p3x3 + . . . + pnxn Subject to c1x1 + c2x2 + c3x3 + . . . + cnxn < B

xi = 1 if product I is selected, = 0 otherwisepi = Profit of product i, in $ci = Cost of product i, in $B = Budget limitation, in $ Solve and select products whose xi = 1

(a) Process focused

Product 1

Product 2

Product 3

Product 3Product 2

Product 1

A

D

B

E

C

F

Product 1

Product 2

Product 3

Product 1

Product 2

Product 3

(b) Product focused

A B D

D E C

E F A

Process-Focused StrategyProcess-Focused Strategy

Resources set around similar processes One center/resource type-no duplication Products compete for resources Products move in jumbled (Job Shop) flow Highly skilled manual operations Used for low volume customized products Intensive, frequent customer interaction Example: Aircraft, Building, Interior Design

Product-Focused StrategyProduct-Focused Strategy

Resources organized around product Duplicate operations for different products Products do not compete for resources Products move in line flow (Flow Shop) Highly automated/expensive facilities Product-specialized and efficient Used in high volume standard products Little or no customer interaction Example: Paper Clips, Tires, Floppy Disks

Five StagesFive Stages

Product Planning

Introduction

Growth

Maturity

Decline

Life-Cycle of a Product or ServiceLife-Cycle of a Product or Service

Life-cycle changes

An

nu

al d

olla

rs

0

Productplanning

Introduction Growth Maturity Decline

Annual profits

Annual sales

Life Cycle AuditLife Cycle Audit Identify stage of product, based

on changes in sales/profits Decide when to drop, revitalize

or introduce new products Cycles vary from product to

product

Life Cycle Audit : Example 1Life Cycle Audit : Example 1

This Avg. Change over lastYear Year 4 Years

Annual Sales, $ million 31 4 % 22 %Annual profits, $ million 7 2.4 % 19 %Profit margin, $/unit 2 1.8 % 15 %Price, $/unit 7 1.5 % 12 %

Stage :

Life Cycle Audit : Example 1Life Cycle Audit : Example 1

This Avg. Change over lastYear Year 4 Years

Annual Sales, $ million 31 4 % 22 %Annual profits, $ million 7 2.4 % 19 %Profit margin, $/unit 2 1.8 % 15 %Price, $/unit 7 1.5 % 12 %

Stage : Maturity

Life Cycle Audit : Example 2Life Cycle Audit : Example 2

This Avg. Change over last Year Year 4 Years Annual Sales, $ million 21 23 % 2 % Annual profits, $ million 7 18 % 3 % Profit margin, $/unit 2 1.8 % 5 % Price, $/unit 7 1.5 % 2 %

Stage :

Life Cycle Audit : Example 2Life Cycle Audit : Example 2

This Avg. Change over last Year Year 4 Years Annual Sales, $ million 21 23 % 2 % Annual profits, $ million 7 18 % 3 % Profit margin, $/unit 2 1.8 % 5 % Price, $/unit 7 1.5 % 2 %

Stage : Growth