Operation Management- (ICWA Inter)

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Operation Management - (ICWA Inter) : Notes for students.


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Operations Management – (ICWA – Inter) - Notes:

Operations Management – ( ICWA – Inter) - Notes Presentation by: Ulhas D Wadivkar - BE ( Electrical), MBA ( Finance) Retired Vice President, Graphite India Limited Satpur , Nashik, Maharashtra. Chief Executive Adviser – Nirman Group - Nashik Guest Faculty in MBA Institutions in Nashik

Operations Management:

Operations Management Management : " To manage is to forecast and to plan, to organise, to command, to co-ordinate and to control." – Henry Fayol "Management is a multi-purpose organ that manages business and manages managers and manages workers and work." – Peter Drucker "Management is the art of getting things done through people." - Mary Parker Follet , Operation Management is the management of that part of an organization that is responsible for producing goods and / or services. An Operating System is defined as a configuration of resources combined for the provision of goods or services.

Operating System:

Operating System Any operating system converts inputs, using physical resources, to create outputs, to satisfy customer`s wants. The creation of goods or services involves transforming or converting inputs into outputs. Various inputs such as capital, labour, and information are used to create goods or services using one or more transformation processes (e.g., storing, transporting, and cutting). To ensure that the desired output are obtained, an organization takes measurements at various points in the transformation process (feedback) and then compares with them with previously established standards to determine whether corrective action is needed (control).

Resources in an operating system :

Resources in an operating system The physical resources generally utilized by operating systems can be categorized for convenience in the in the following manner:- Materials: Physical items that are consumed or converted by the system. e.g. - raw materials, fuel, indirect materials, etc. Machines / (Facilities): Those physical items that are utilized by the system, so that the consumption / conversion of materials can be done in an optimum manner. e.g. - plant, tools vehicles, buildings etc. Labour : The people who provide or contribute to the operation of the system and ensure that the machines and materials are effectively used.

Principal functions of an Operating System - 1 :

Principal functions of an Operating System - 1 The functions of an operating system are a reflection of the purpose it serves for its customers. The following four principal functions identified below also relate to the basic four operations done in any organization: 1) Manufacture: Manufacturing function is the one which involves some physical transformation or a change in the form utility of the resources. Something is physically created and the output consists of goods which differ physical (e.g., in terms of form, content etc.) from those materials input to the system. 2) Transport: This function of operating system provides a change in the place utility of something or someone in order to satisfy customer. The customer or something belonging to the customer is moved from place to place and thus results in the change in location. There is no major change in the form of resources . …….contd.

Principal functions of an Operating System - 2:

Principal functions of an Operating System - 2 3 ) Supply: This function provides a change in the possession utility of a resource, i.e., the ownership or possession of goods is changed. Unlike manufacture, outputs of the system are physically same as the inputs. 4 ) Service: This function primarily results in a change in the state utility of a resource. The principal common characteristic is the treatment or accommodation of something or someone. The state or condition of the physical outputs will differ from the inputs as they have undergone same kind of treatment.   Most large and complex organizations have to perform all the principal four functions of operating systems, discussed above. Thus we may redefine operating system as a configuration of resources combined for the function of manufacture, transport, supply or service .

Structures for operating systems::

Structures for operating systems: S = Stock, O = Operation, D = Direct, Q = Customer Queue, C = Customer direct Input (a) SOS - ‘Make from stock, to stock, to customer’ , i.e. all input resources are stocked and the customer is served from a stock of finished goods . ( b) DOS - ‘Make from source, to stock, to customer’ , i.e. no input resource stocks are held, but goods are produced to stock . ( c) SOD - ‘Make from stock, direct to customer’ , i.e. all input resources are stocked but goods are made only against and on receipt of customers’ orders . ( d) DOD - ‘Make from source, direct to customer’ , i.e. no input resource stocks are held and all goods are made only against and on receipt of customers’ orders . ( e) SCO - ‘Function from stock, and from customer’ , i.e. input resources are stocked, except in the case of customer inputs where no queuing exists . ( f) DOQ - ‘Function from source, and from customer queue’ , i.e. no input resources are stocked although customer inputs accumulate in a queue (or stock ). ( g) SQO - ‘Function from stock and from customer queue’ , in which all inputs are stocked and/or allowed to accumulate in stocks.

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The customers exert some ‘push’ on the system. In manufacture and supply the customers act directly on output: they ‘pull’ the system, in that they pull goods out of the system whether direct from the function (structures (c) and (d)) or from output stock (structures (a) and (b)). In transport and service the customers push the system: they act directly on input. In such systems, therefore, some part of the resource input is not directly under the control of operations management. In these ‘push’ systems the customers control an input channel, and we must therefore distinguish this channel when developing models of systems.

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  Operation Management is defined as the management which is concerned with the design and the operation of systems for manufacture, transport, supply or service.   Manufacture: Goods at given Specification, acceptable cost, delivered at desired time. Transport : Movements from destination to destination at given cost, delivered at given time. Supply : Procurement of Goods at given Specification at reasonable price at required time. Service : Providing a service (Treatment) at given desired specification of Customer in given time at given cost in required time.   Operation Management has also a responsibility of being effective. The effectiveness is the difference between Input Cost plus cost of value adding costs and also non value adding costs i.e. the cost of output goods and Price available in Market.

The scope of operations management::

The scope of operations management: Design & Planning: Involvement in design / specification of the goods / services , design / specification of process / system, location of facilities 1) Layout of facilities / resources and materials handling . 2 ) Determination of capacity / capability 3) Design of work or jobs 4) Involvement in determination of remuneration system and work standards Operation and control: Planning and-scheduling of activities Control and planning of inventories Control of quality Scheduling and-control of maintenance Replacement of facilities Involvement in performance measurement Capacity Management and Demand Matching operating system: : Activity Scheduling : Planning : Timing the conversion activities   : Inventory Management : Planning and controlling physical stocks

Responsibilities for Operation Management:

R esponsibilities for Operation Management Inventories, Quality , Maintenance and replacement of facilities, Scheduling of activities , Location , layout , Capacity determination and staffing. Goods / Services Design and Specification, Process / System Design and Specification , Location of Facilities , Layout of Facilities Resources and Materials Handling , The Design of Work and of Jobs , Remuneration System Design , Operations Control , Quality Control and Reliability , Maintenance and Replacement, Performance Measurement

The operations management decision-making process:

T he operations management decision-making process O perations management decision-making process i s ‘the formulation of overall strategies for operations, typically involving interrelated areas of responsibility within operations management, and the making of decisions in these areas in pursuit of these strategies within the broader business context. Quality-based strategy that focuses on quality in all phases of an organization: Quality-based Strategies: : Attracting and retaining Customers : Catch up with competition : Maintain existing image : Cost reduction : Increased Productivity : Reduced delivery Time

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Time-based strategy that focuses on reduction of time needed to accomplish tasks: : Planning time : The time needed to react to a competitive threat, to develop strategies and select tactics . : Product / service design time : The time needed to develop and market new or redesigned products or services . : Processing time : The time needed to produce goods or provide services. This can involve scheduling repairing equipment, methods used, inventories, quality, and training : Changeover time : The time needed to change from producing one type of product or service to another. This may involve new equipment settings and attachments, different methods, equipment, schedules, or materials . : Delivery time : The time needed to fill orders . : Response time for complaints : These might be customer complaints about quality, timing of deliveries, and incorrect shipments. These might also be complaints from employees about working conditions (e.g., safety, lighting, heat or cold), equipment problems, or quality problems.

Strategic operations management decisions::

Strategic operations management decisions: 1. Product and service design: Costs, quality, liability and environmental issues 2. Capacity: Cost structure, flexibility 3. Process selection and layout: Costs, flexibility, skill level needed, capacity 4. Work design: Quality of work life, employee safety, productivity 5. Location: Costs, visibility 6. Quality: Ability to meet or exceed customer expectations 7. Inventory: Costs, shortages 8. Maintenance: Costs, equipment reliability, productivity 9. Scheduling: Flexibility, efficiency 10. Supply chains Costs, quality, agility, shortages, vendor relations: 11. Projects: Costs, new products, services, or operating systems  

The Role of Operations in Designing of a new Product:

The Role of Operations in Designing of a new Product Preliminary Stages: Information and Intelligence from Markets , Suppliers, Competitors, Regulators etc. Stage 1: Ideas Generation : Operations has a contribution to make in stages 2, 3, 4, 5, 6 and 7 for there is little benefit in conceiving a product which cannot efficiently, fully or economically be provided. Hence operations must enter into the design dialogue as follows: Market-or technology-oriented ideas New concepts or incremental developments Internally or externally generated Stage 2: Screening and selection: Can the product / service be provided by the operating system? Do we have the processes, technology and skill? Do we have the capacity? Market analysis test, Technological feasibility, Competitive advantage, Risk assessment

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Stage 3: Initial design: What is the most appropriate design required for providing, at the required quality and probable cost? Specification of major aspects/features, Initial model/’mock-up’ Stage 4: Economic analysis: How much would it cost to make the appropriate volumes, and at the required quality? Estimate of development cost, Estimate of provision cost, Estimate of final cost Estimate of price Stage 5: Prototype testing: Check providability through operating system Performance / function testing, Consumer tests, Test of Providability ’ Stage 6: Redesigning / modification: Introduce modifications to providability , Improvements, corrections and modifications, Retesting if necessary, Approval for final design Stage 7: Final specification: Future appropriate quality specifications. Begin process specification in marketing the above contribution, operations must have regard to the following: Full detailed specification of content, structure, function and performance

PowerPoint Presentation:

( a) Computer Aided Design: Computers are increasingly used for product design. CAD uses computer graphics for product design. The design can be maneuvered on the screen, it can be rotated to provide the designer different views of the product, it can be split apart to have a view of the inside and a position of the product can be enlarged for closer view. The printed version of the completed design can be taken and also the design can be stored electronically. Also a database can be created for manufacturing which can supply required information on product geometry and dimensions, tolerances, material specifications etc. Also , some CAD systems facilitate engineering and cost analyses on proposed designs, for example, calculation of volume and weight and also stress analysis can be done using CAD systems. It is possible to generate a number of alternative designs using computer aided design systems and identify the best alternative which meets the designer’s criteria.

Value Engineering / Value Analysis in Product Design: :

Value Engineering / Value Analysis in Product Design: Value engineering or value analysis is concerned with the improvement of design and specifications at various stages such as research, design and product development. Benefits of value engineering are: Cost reduction. Less complex products. Use of standard parts/components. Improvement in functions of the product. Better job design and job safety. Better maintainability and serviceability. Robust design. Value engineering aims at cost reduction at equivalent performance. It can reduce costs to the extent of 15% to 70% without reducing quality. While value engineering focuses on preproduction design improvement, value analysis, a related technique seeks improvements during the production process. Once launched, even good products have limited lives and, to remain viable, the organization seeks a flow of new product possibilities. Let’s examine the product’s birth-to-mortality pattern.

Product Life Cycle:

Product Life Cycle Products, like men, are mortal. They flourish for a time, then decline and die.   A product that has not built up its potential during its formative years is likely to be relatively unsuccessful on its maturity.   The product, thus, has “life cycles” just as human beings have. From its birth, a product passes through various stages, until it is finally abandoned, i.e . discontinued from the market.   These stages taken together are referred, to as “ The product life cycle ”.   This life cycle of the product comprises four stages: Introduction, Growth, Maturity and Decline.

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The introduction stage is preceded by ‘production planning and development’. This period requires greater investment. This investment should be gradually recouped as the sales pick up. The concept of life cycle would give the management an idea as to the time within which the original investment could be recouped. In the growth stage, both sales and profits will begin to increase. It is here that similar other new products begin to appear in the market as substitutes and offer competition. At the end of this stage, the distribution arrangement is likely to get completed and the prices, if necessary, are reduced a little. The third stage is the maturity stage . During this stage the manufacturers introduce new or modified models or adopt methods to retain their position in the market. The number of buyers will continue to grow, but more slowly. In economic terms this is the stage where supply exceeds demand. Some of the promotional efforts may lengthen the span of this stage but they will not offer a permanent solution. At the final stage of decline , profit margins touch a low level, competition becomes severe and customers start using newer and better products. It is here that the story of a product ends-a natural but hard end.

Process Planning and Process Design: :

Process Planning and Process Design: At the time of designing and developing a product, due consideration is given for the manufacturability or producibility of the product using the current process technology and the capability of the firm to manufacture the product. If the firm already has the required technology, the facilities (machines and equipments) and the manufacturing processes, and the firm has sufficient capacity or can acquire the needed capacity to manufacture the product, then decision is taken to go ahead with the product design. After the final design of the product has been approved and released for production, the production planning and control department takes the responsibility of process planning and process design for converting the product design into a tangible product. As the process plans are firmly established, the processing time required for carrying out the production operations on the equipments and machines selected are estimated. These processing times are compared with the available machine and labour capacities and also against the cost of acquiring new machines and equipments required before a final decision is made to manufacture the product completely in house or any parts or sub-assemblies must be outsourced.

What is a Process?:

What is a Process? A process is a sequence of activities that is intended to achieve some result, typically to create added value for the customers. A process converts inputs into outputs in a production system. It involves the use of organisation’s resources to provide something of value. No product can be made and no service can be provided without a process and no process can exist without a product or service. Processes underlie all work activities and are found in all organisations and in all functions of an organisation. Deciding what processes to use is an essential issue in the design of a production system. Process decisions involve many different choices in selecting human resources, equipment and machinery, and materials. Process decisions are strategic and can affect an organisation’s ability to compete in the long run.

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Types of Processes: Basically, processes can be categorised as: ( i) Conversion processes, i.e., converting the raw materials into finished products (for example, converting iron ore into iron and then to steel). The conversion processes could be metallurgical or chemical or manufacturing or construction processes. a) Forming processes include foundry processes (to produce castings) and other processes such as forging, stamping, embossing and spinning. These processes change the shape of the raw material (a metal) into the shape of the work piece without removing or adding material. b) Machining processes comprise metal removal operations such as turning, milling, drilling, grinding, shaping, planing , boring etc. c) Assembly processes involve joining of parts or components to produce assemblies having specific functions. Examples of assembly processes are welding, brazing, soldering, riveting, fastening with bolts and nuts and joining using adhesives. ( ii) Manufacturing processes can be categorised into (a) Forming processes, (b) Machining processes and (c) Assembly processes. (iii) Testing processes which involve inspection and testing of products (sometimes considered as part of the manufacturing processes).

Process Planning::

Process Planning: Process planning is concerned with planning the conversion processes needed to convert the raw material into finished products. It consists of two parts: Process design and Operations design. Process Design is concerned with the overall sequences of operations required to achieve the product specifications. It specifies the type of work stations to be used, the machines and equipments necessary to carry out the operations. The sequence of operations are determined by (a) The nature of the product, (b) The materials used, (c) The quantities to be produced and (d) The existing physical layout of the plant.

Operations Design:

Operations Design Operations Design is concerned with the design of the individual manufacturing operation. It examines the man-machine relationship in the manufacturing process. Operations design must specify how much labour and machine time is required to produce each unit of the product. Framework for Process Design The process design is concerned with the following: Characteristics of the product or service offered to the customers. Expected volume of output. Kinds of equipments and machines available in the firm. Whether equipments and machines should be of special purpose or general purpose. Cost of equipments and machines needed. Kind of labour skills available, amount of labour available and their wage rates. Expenditure to be incurred for manufacturing processes. Whether the process should be capital-intensive or labour-intensive. Make or buy decision. Method of handling materials economically.

Process Selection:

Process Selection Process selection refers to the way production of goods or services is organised. It is the basis for decisions regarding capacity planning, facilities (or plant) layout, equipments and design of work systems. Process selection is necessary when a firm takes up production of new products or services to be offered to the customers. Three primary questions to be addressed before deciding on process selection are: ( i) How much variety of products or services will the system need to handle? ( ii) What degree of equipment flexibility will be needed ? ( iii) What is the expected volume of output?

Process Strategy:

Process Strategy A process strategy is an organisation’s approach to process selection for the purpose of transforming resource inputs into goods and services (outputs). The objective of a process strategy is to find a way to produce goods and services that meet customer requirement and product specification (i.e., design specifications) within the constraints of cost and other managerial limitations. The process selected will have a long-term effect on efficiency and production as well as flexibility, cost, and quality of the goods produced. Hence it is necessary that a firm has a sound process strategy at the time of selecting the process. Key aspects in process strategy include: ( i) Make or buy decisions : Make or buy decisions refer to the extent to which a firm will produce goods or provide services in-house or go for outsourcing (buying or subcontracting). ( ii) Capital intensity : Capital intensity refers to the mix of equipment and labour which will be used by the firm. ( iii) Process flexibility : Process Flexibility refers to the degree to which the system can be adjusted to changes in processing requirements due to such factors as changes in product or service design, changes in volume of products produced and changes in technology.

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Three process strategies: Virtually every good or service is made by using some variation of one of three process strategies. They are: ( i) Process focus (ii) Repetitive focus and (iii) Product focus . ( i) Process Focus: Majority (about 75 per cent) of global production is devoted to low volume, high variety products in manufacturing facilities called job shops. Such facilities are organised around performing processes. For example, the processes might be welding, grinding or painting carried out in departments devoted to these processes. Such facilities are process focussed in terms of equipment, machines, layout and supervision. They provide a high degree of product flexibility as products move intermittently between processes. Each process is designed to perform a wide variety of activities and handle frequent changes. Such processes are called intermittent processes. These facilities have high variable costs and low utilisation of facilities.

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( ii) Repetitive Focus: A repetitive process is a product oriented production process that uses modules. It falls between product focus and process focus. It uses modules which are parts or components prepared often in a continuous or mass production process. A good example of repetitive process is the assembly line which is used for assembling automobiles and household appliances and is less flexible than process-focused facility. Personal computer is an example of a repetitive process using modules in which the modules are assembled to get a custom product with the desired configuration . (iii) Product Focus: It is a facility organised around products, a product oriented, high-volume low variety process. It is also referred to as continuous process because it has very long continuous production run. Examples of product focussed processes are steel, glass, paper, electric bulbs, chemicals and pharmaceutical products, bolts and nuts etc. Product-focussed facilities need standardisation and effective quality control. The specialised nature of the facility requires high fixed cost, but low variable costs reward high facility utilisation.

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Process Management: Process management is concerned with the selection of inputs, operations, work flows and methods that transform inputs into outputs. The starting point of input selection is the make-or-buy decision (i.e., deciding which parts and components are to be produced in-house and which are to be purchased from outside suppliers). Process decisions are concerned with the proper mix of human skills and equipments needed to produce the parts in-house and which part of the processes are to be performed by each equipment and worker. Process decisions : It must be made when: (i) A new or modified product or service is being offered. (ii) Quality must be improved. (iii) Competitive priorities have changed. (iv) Demand for a product or service is changing. (v) Cost or availability of materials has changed (vi) Competitors are doing better by using a new technology or a new process.

Major Process Decisions::

Major Process Decisions: Process Choice: The production manager has to choose from five basic process types — (i) job shop, (ii) batch, (iii) repetitive or assembly line, (iv) continuous and (v) project. (i) Job shop process: It is used in job shops when a low volume of high-variety goods are needed. Processing is intermittent, each job requires somewhat different processing requirements. A job shop is characterised by high customisation (made to order), high flexibility of equipment and skilled labour and low volume. A tool and die shop is an example of job shop, where job process is carried out to produce one-of-a kind of tools. Firms having job shops often carry out job works for other firms. A job shop uses a flexible flow strategy, with resources organised around the process. (ii) Batch process: Batch processing is used when a moderate volume of goods or services is required and also a moderate variety in products or services. A batch process differs from the job process with respect to volume and variety. In batch processing, volumes are higher because same or similar products or services are repeatedly provided, examples of products produced in batches include paint, ice cream, soft drinks, books and magazines .

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(iii) Repetitive process: This is used when higher volumes of more standardised goods or services are needed. This type of process is characterised by slight flexibility of equipment (as products are standardised) and generally low labour skills. Products produced include automobiles, home appliances, television sets, computers, toys etc. Repetitive process is also referred to as line processes as it include production lines and assembly lines in mass production. Resources are organised around a product or service and materials move in a line flow from one operation to the next according to a fixed sequence with little work-in-progress inventory. This kind of process is suitable to “manufacture-to-stock” strategy with standard products held in finished goods inventory. However, “assemble-to-order” strategy and “mass customisation” are also possible in repetitive process. (iv) Continuous process: This is used when a very highly standardised product is desired in high volumes. These systems have almost no variety in output and hence there is no need for equipment flexibility. A continuous process is the extreme end of high volume, standardized production with rigid line flows. The process often is capital intensive and operate round the clock to maximise equipment utilisation and to avoid expensive shut downs and shut ups. Examples of products made in continuous process systems include petroleum products, steel, sugar, flour, paper, cement, fertilisers etc.

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(v) Project process: It is characterised by high degree of job customisation, the large scope for each project and need for substantial resources to complete the project. Examples of projects are building a shopping centre, a dam, a bridge, construction of a factory, hospital, developing a new product, publishing a new book etc. Projects tend to be complex, take a long time and consist of a large number of complex activities. Equipment flexibility and labour skills can range from low to high depending on the type of projects.

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Vertical Integration: Vertical integration is the amount of the production and distribution chain, from suppliers of components to the delivery of products/services to customers, which is brought under the ownership of a firm. The management decides the level or degree of integration by considering all the activities performed from the acquisition of raw materials to the delivery of finished products to customers. The degree to which a firm decides to be vertically integrated determines how many production processes need to be planned and designed to be carried out in-house and how many by outsourcing. When managers decide to have more vertical integration, there is less outsourcing. The vertical integration is based on “make-or-buy” decisions, with make decisions meaning more integration and a buy decision meaning less integration and more outsourcing. Two directions of vertical integration are (a) Backward integration which represents moving upstream toward the sources of raw materials and parts, for example a steel mill going for backward integration by owning iron ore and coal mines and a large fleet of transport vehicles to move these raw materials to the steel plant, (b) Forward integration in which the firm acquires the channel of distribution (such as having its own warehouses, and retail outlets).

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Advantages of vertical integration are: Can sometimes increase market share and allow the firm enter foreign markets more easily. Can achieve savings in production cost and produce higher quality goods. Can achieve more timely delivery. Better utilisation of all types of resources. Disadvantages of vertical integration are: Not attractive for low volumes. High capital investment and operating costs. Less ability to react more quickly to changes in customer demands, competitive actions and new techniques.

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