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Operations Management

Semester II - IBS

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What is Operations Management?

The direction and control of the processes that transform inputs into products and services

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Operations ManagementOperations Management is a set of decisions that the Operations Manager makes these could be strategic & tactical namely:• Strategic • Process• Quality• Capacity, Location and Layout• Operating decision

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Operations Management as a Function

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OM Decisions1. Strategic Choices

These decisions affect the company’s future direction. Operations Managers help determine the company’s global strategy and competitive priorities. How the OM’s will best design the process to fit with its competitive priorities.

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OM Decisions2. Process

The Operations Managers make process decisions about the types of work to be done in-house, the amount of automation to be used, methods to improve current processes and technologies to pursue to become market leaders.

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OM Decisions3. Quality

Quality issues underlie all processes and work activity. Operations Managers help in establish quality objectives and seek ways to improve the quality of the firms products/services and use various statistical methods to monitor the quality produced by various processes.

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OM Decisions4. Capacity, Location and Layout

The types of decisions in this category require long term commitments. Operations Managers help to determine the systems capacity, location of new facility including global locations and organizing of the departments physical layout.

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OM Decisions5. Operating Decisions

These deal with operating the facility after it is built, this requires Operations Managers to help co-ordinate with internal and external supply chain, manage inventory, control output and staffing levels, do resource planning, implement new techniques etc.

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Manufacturing v/s ServicesManufacturing Services

Physical Product Intangible product

Output can be inventoried Output cannot be inventoried

Low customer contact High customer contact

Long response time Short response time

Regional, national or international markets

Local Markets

Large facilities Small facilities

Capital intensive Labor intensive

Quality easily measured Quality not easily measured

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Operations Strategy a Competitive Weapon

• An Organization that wants to succeed in a competitive business needs needs a sound strategy.

• A strategy is a broad long term plan conceived in order to achieve business objectives.

• Strategies are developed at 3 levels:• Corporate level• Business level• Functional level

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Operations Strategy a Competitive Weapon

Key objective of any business organization is to attract more customers than its competitors and they do that with:• Product/Process Expertise • E.g. Intel Corp using superior chip

technology• Quick Delivery – An organization with

flexible capacity, an adaptive production process and satisfy customer needs• E.g. 1 hour photo• “Same-day” dry-cleaning

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Elements of Operations Strategy

• Designing the production system. • Product/Service design and development. • Technology selection and process

development.• Allocation of resources to strategic

alternatives• Facility planning

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Designing the Production System

• Product Design• Customized product design: high level of

customization and quantity produced is low. E.g. Rolls Royce, Handmade watches etc.

• Standard Product design: Production of limited variety of products but produced in large batches. E.g. Ford Model T, coolers, fan, televisions etc.

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Designing the Production System

• Production System• Product-focused systems: used generally

employed in mass production units where there are groups of machines, tools and workers arranged according to tasks. E.g. cars, televisions etc.

• Process-focused systems: Designed to support departments that perform a single task like painting or packing .

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Finished Good Inventory Policy

• Produce-to-stock: Products are produced well in advance and are stored in warehouses from where they are dispatched as per customer orders

• Produce-to-order: This allows production to start only after the company receives customer orders and halts production until another order is received

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Product/Service Design and Development

The following are the important steps in the development of new products:• Idea Generation• Feasibility Studies• Prototype Design• Prototype Testing• Initial Design of Production Model• Economic Evaluation• Market Testing• Final Design of Production Model

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Product/Service Life Cycle

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Product/Service Life Cycle

Once Product Design is finalized:• Technology selection and process

development: This involves thorough analysis and planning or the production process and facilities

• Allocation of resources to strategic alternatives: Minimizing wastage and optimal use of resources

• Facility Planning: Set up facility with adequate capacity and proximity to raw materials

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Developing Operations Strategy

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Financial and Economic Analysis

Productivity = ---------------------Output

Input

Two types of Productivity:• Labor Productivity – Index of output per

person or per hour worked• Multifactor Productivity – output provided

by more than 1 resource used in input

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Productivity CalculationsCalculate the productivity for the following operations:1. Three employees process 600 insurance

policies in a week. They work 8 hours per day and 5 days per week

2. A team of workers make 400 units of a product, which is valued by its standard cost of $10 each. The accounting department reports that for this job the actual costs are $400 for labor, $1000 for material and $300 for overhead

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Productivity Calculations

Labor Productivity = -------------------------Policies Processed

Employee hours

Labor Productivity = -------------------------600 policies

(3 employees)(40hrs/employee)

= 5 policies/hour

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Productivity Calculations

Multifactor Productivity = -------------------------Quantity at standard cost

Labor cost+Material cost+overhead cost

Multifactor Productivity = -------------------------(400 units)($10/unit)

$400+$1000+$300

= $4000/$1700

= 2.35

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Productivity CalculationsCalculate the productivity for the following operations:1. 5 employees create 800 units of chairs in a

week. They work 10 hours per day and 6 days per week

2. A team of workers make 500 units of television, which is valued by its standard cost of $150 each. The accounting department reports that for this job the actual costs are $300 for labor, $800 for material and $400 for overhead

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Financial and Economic Analysis

Two methods to evaluate the cost effectiveness of an investment:• Payback Method• Net Present Value (NPV) method

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Financial and Economic Analysis

Payback Method:

Payback period = ---------------------Net Investment

Net Annual income

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Productivity CalculationsCalculate the productivity for Payback Method:1. The initial investment for a factory is 12

lakhs and is expected to generate an income of 3 lakhs per annum what is the payback period

2. The initial investment in a call center is 45 lakhs and is expected to generate a revenue of $20,000/- per annum, what is the payback period.

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Financial and Economic Analysis

Net Present Value (NPV):

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Financial and Economic Analysis

Net Present Value (NPV):

If the NPV is greater than 1 then the project is acceptable. If the NPV is less than zero the project is rejected.The greater the NPV of a project the better the profitabilityWhen multiple projects are being considered then project with highest NPV is selected