13.
Operations management
Operations activities
All the activities carried out
relevant to the conversation of inputs (resources) into output (goods or
service) within the production process is referred to as operations activities.
Operations activities are carried out in goods producing businesses as well as
in service producing businesses.
1.
Tangible
goods are mainly produced in goods producing businesses.
Examples ;Sandles, Milk Powder, Soft drinks.
2.
Intangible goods are produced in service producing
businesses
Example; Medical Service, Transportation
Service, Insurance Service
The group of managerial
activities relevant to the planning, organizing, leading and controlling of the
operation activities to attain the aims and objectives of an organization is
the Operations Management. Accordingly, the operations management can be
referred to as a complex management process which comprises of leading and
regulating the functions such as production engineering, production planning, purchase
of materials, production control and research development.
While the operations management
contributes of the fulfillment of the aims and objectives of an organization,
the basic function of operations management is to produce high quality goods and
services using resources (inputs)
The importance of Operations
Management
·
The
ability to produce high quality goods and services.
·
The
ability to improve efficiency and effectiveness of the operational process.
·
The
ability of reduce productions cost and improve profit
·
The
ability to face the competition successfully in the global environment.
·
The
ability to introduce goods and services with novelty.
·
The
ability to contribute towards the sustainable development of the organization
as well as the country through fulfilling the social responsibilities.
Transformation of inputs into
outputs is known as conversion process and that can be illustrated as the
following diagram.
The value of the product
increases by adding a value to the inputs at each stage in the conversion
process and that is referred to as added value.
Examples : In apparel production
the value of apparels will be increased having them been passed through the
stages. Such as cutting of materials. sewing, ironing and packing etc….
The functions belong to
operations management can be shown as follows
·
Production
Engineering
·
Production
Planning
·
Purchasing
Materials
·
Production
Controlling
·
Research
and Development
Production Engineering
Making decisions on the production process,
required plant and machinery, production schedule, required materials, deciding
of required quantity of materials and their quality etc. is referred to as
production engineering.
Production planning
The activities relevant to
determining of the requirements such as required plants, machinery, materials,
labor etc. by a firm for its production process are referred to as production
planning. The program generated by the production planning prepared
purposefully at present is known as production plan. The production plans thus
made can be categorized as short-term production plans and long-term production
plans.
Purchasing Materials
Obtaining the right materials in required
quantity, at required time and at minimum cost is known as purchasing
meterials.
Production Control
Inspecting if the goals
established in accordance with production engineering and production planning,
are being reached and if not, determining necessary remedial actions for them,
are done under production control. Machinery control, Stock control, quality
control, cost control etc… belong to production control.
Research and Development
Collecting information regarding
existing product, production process, new production planning and developing
them are referred to as research and development.
Production Methods
Various ways that a production
firm conducts its production is referred to as production methods.
Production methods can be
categorized as follows
1.
Job
production/ one-to-one production
2.
Batch
production
3.
Flow
production
Job Production
Job production refers to the
production for a specific order of a customer in which one item is produced
from the beginning to the end based on the current demand.
Example: Sewing outfits for a
bride / Making a cake for a birthday party /Designing an architect planning for
the need of a person
Favorable Characteristics of Job
production:
·
Producing
on the need and want of a customer
·
High
level consumer satisfaction can be maintained
·
No
risk since production is done to an order
Unfavorable
Characteristics of Job production:
·
Cost
is higher
·
Always
skilled and trained employees are needed
·
Special
multi use equipment and tools are required.
·
Production
is not done mainly focusing on the market.
Batch Production
Here, the production of similar items take
place at one time. While the production is carried out in a continuous process;
the material, labour, the number of units, types and working hours can be
different from batch to batch through they are similar in nature mostly.
Example: Production of bakery
items. / Sewing the uniforms for pre-school students.
Favorable characteristics of batch production
:
·
The
finish of the product can be modified from one batch to another.
·
Receiving
discounts since a large amount of materials are purchased.
·
Unit
cost is less, compared to job production.
Unfavorable
characteristics of batch production
·
Cost
is high as machines and equipment have to be readjusted from one batch to another.
·
Unit
cost is high relative to flow production.
·
Reduction
in economies of large scale.
Flow production
Flow production refers to the
production of large amount of one kind of product on a continued basis, with an
unbroken flow based on the future demand
Example : Production of soft
drinks / Production of motor vehicles
Favorable characteristics of flow
production
·
Unit
cost falls due to economies of large scale advantages
·
Mostly
the flow production can be controlled by few employees.
·
New
technology can be used easily.
Unfavorable characteristics of
flow production
·
Financial
difficulties since Requiring a large investment
·
Difficulty
in making any changes as production occur on serial orders as decided earlier.
·
Has
to face market risk.
Differences in Production Methods
|
Criteria
|
Job
production
|
Batch
production
|
Flow
production
|
|
Volume
of output
|
Very
low
|
Medium
quantity
|
Very
high
|
|
Product
range
|
Varied
|
Only
few
|
Only
one
|
|
Flexibility
of production process
|
Very
high
|
Normal
|
Very
low
|
|
Make
to order or for stock
|
For
one order
|
Make
to order and for stock
|
Foe
stock wise
|
Factors to be considered in selecting
a production method
1.
Nature
of the product
2.
Market
size
3.
Technology
used and equipments required
4.
Cost
incurred
5.
Purchasing
pattern (always?/occasionally?)
6.
Convenience
in obtaining resources
Layout planning
Planning of physical facilities
such as workstation centers, materials, machinery and equipment, supporting
services etc. for an efficient production procedure is known as operational
layout planning.
The necessity of a operational
layout planning
1.
Growth
in efficiency in the use of materials and machinery
2.
Maximum
use of the available space
3.
The
cost in making use of materials can be reduced.
4.
Barriers
while handling materials and employees are reduced.
5.
Reduction
in industrial accidents.
6.
Easy
communication, coordination and supervision
7.
Improved
employees’ morale
8.
Time
can be managed well
Operational layout planning can
be categorized as follows
1.
Process
layout
2.
Product
layout
3.
Cellular
layout
4.
Fixed-position
layout
Process Layout
Preparing the layout to conduct
all the activities to complete one stage of a production process at one place
is known as process layout. Here, the employees involved in the similar
function are located together in one section. Functions are planned to flow
along the production process.
Example : Planning the layout of
a furniture factory
Product Layout
Preparing the layout to flow the
total production process from one workstation to another in linear way is known
as product layout.
Example: Planning the layout of a
firm producing motor vehicles.
Cellular Layout
Preparing the layout by fixing
similar and scalene machinery in separate cells to flow the functions of
production in a production process is known as cellular layout.
Example: Planning the layout of
an apparel factory
Fixed Position Layout
Preparing the layout to conduct
the production by bringing inputs such as materials, labour, power and tools
etc.to the place itself where the production takes place is known as fixed
position layout.
Example: Construction of
buildings
The Break Even point
Fixed cost
The cost, which up to a certain
production level, doesn’t change with the number of units produced is known as
fixed cost.
Example: Rent of the factory,
Assessment tax of the factory.
Fixed cost doesn’t change either the maximum
capacity is produced within a short period
of time or not produced at all.
Variable cost
The cost that changes with the number of units
produced is known as variable cost.
Example: Direct material cost,
direct labour cost
The sum of the fixed cost and
variable cost is the total cost.
Total
Cost = Fixed Cost - Variable Cost
Total revenue
The revenue that businesses
receive from selling its products in a specific period of time is known as
total revenue.
Total
revenue = Number of Selling units x Selling price per unit
The Contribution
The contribution can be
calculated by subtracting variable cost from total revenue.
Contribution
= Total revenue – variable cost
The contribution can be
calculated as total contribution and unit contribution.
Profit
Profit can be calculated by
subtracting total cost from total revenue.
Profit
= Total revenue - Total cost
Break Even Point
The production or the selling
level at which a business receives neither profit nor loss is the Break Even
Point (BEP). At this point, the total revenue is equal to the total cost. The
selling units or the production unit of this point is the number of units of
Break Even Point.
Break Even Point can be
represented by a equation as well.
The
number of units of the BEP = Total
Fixed cost
Contribution per unit
Contribution Per Unit = Selling
price per unit - Variable cost per unit
|
Figure
|
Formulas
|
|
Total
cost
|
Fixed
cost – variable cost
|
|
Total
revenue
|
Number
of selling units x selling price per unit
|
|
Contribution
|
Total
revenue – variable cost
|
|
BEP
|
Total
fixed cost / contribution per unit
|
|
Contribution
per unit
|
Selling
price per unit – variable cost per unit
|
|
Profit
|
Total
revenue – total cost
|
Calculating the Break Even Point
and representing the Break Even Point graphically can be done using the
following manner example.
Example : The production volume
of a certain company’s product is 1000 units per month. The other relevant
details of that product are as follows.
·
The
selling price per unit Rs. 10
·
The
variable cost per unit Rs. 5
·
The
fixed cost Rs. 3000
·
The
expected units of production 800 units.
The
number of units of the BEP = Total
Fixed cost
Contribution per unit
3000
5 =
600 units
The contribution per unit = The selling price per unit (s) - The
variable cost per unit ( c)
=
10 – 5
=
5
The following table can be
prepared to represent the Break Evan Point graphically.
The Break Even point can be
shown graphically as follows
|
The
number of units
|
The
price per unit
|
Total
revenue
|
Fixed
cost
|
Variable
cost
|
Total
cost
|
|
100
|
10
|
1000
|
3000
|
500
|
3500
|
|
200
|
10
|
1000
|
3000
|
1000
|
4000
|
|
300
|
10
|
1000
|
3000
|
1500
|
4500
|
|
400
|
10
|
1000
|
3000
|
2000
|
5000
|
|
500
|
10
|
1000
|
3000
|
2500
|
5500
|
|
600
|
10
|
1000
|
3000
|
3000
|
6000
|
|
700
|
10
|
1000
|
3000
|
3500
|
6500
|
|
800
|
10
|
1000
|
3000
|
4000
|
7000
|
The profit or loss at various
production or selling levels can be shown as follows.
|
No
of production units
|
Total
revenue
|
Total
cost
|
Profit
or loss
|
|
600
|
6000
|
6000
|
0 (No profit
no loss)
|
|
400
|
4000
|
5000
|
-1000
(loss)
|
|
700
|
7000
|
6500
|
500
(profit)
|
Benefits of the Break Even Point
analysis.
1.
Ability
to use as a controlling instrument for cost, profit and volume in business.
2.
Useful
in production planning as well as in price determination.
3.
Ability
to analyze the deviations in the areas of business revenue, cost and price.
4.
Ability
to point out the profit or loss at various levels in production or turnover.
5.
Ability
to understand the nature of risk of falling sales by identifying safety margin.
Limitations of the Break Even
Analysis.
1.
Though
the Break Even Point analysis is important for short-term decision makings, it is
not successful in using for long-term decision makings.
2.
The
limitations made through the assumptions at the Break Even Point analysis.
Example : Though the fixed cost
doesn’t change according the production or sales in short period, it can be
changed with a long period.
Purchasing materials
Various items are required to be
purchased in the process of production and they can be categorized mainly as
materials and services.
Materials Purchased can be
1.
Materials required for production activities
of a business.
Examples
: raw materials, capital equipment, elements, fuel
2.
Materials required for the consumption of a
business
Examples
: stationary, office equipment
3.
Purchased Services
Examples
: Security Services, maintenance services, transport services,clearing
services, electricity and water etc.
There is
a separate department or a manager in charge of purchasing materials in some of
the businesses. (Purchasing manager)
The
steps of purchasing process
·
Notifying
the materials requirements to the purchasing department.
·
Finding
of a supplier
·
Placement
of order
·
Receipt
of goods
·
Payment
of cash
Few of the matters that have to
be considered in purchasing materials
·
Product
specification
·
Quality
of materials
·
Price
·
Speed
in supply and the continues availability
·
Trustworthiness
of suppliers
·
Lead
time
·
Terms
of payment
Stock control
Maintaining stocks at an optimum
level with the low cost in order to maintain the continuity of the
manufacturing process is known as the stock control. Holding stocks so as not
to create any shortage nor excess of stocks is meant by optimum stock.
The necessity of stock control
1.
To
continue the production and marketing activities.
2.
To
reduce the cost of holding the excess or the insufficient stocks.
3.
To
get the maximum use of resources such as machinery, labour etc.
4.
To
face unexpected situations of demand.
Stock Control Methods
1. Stock Level Determining System
Making an attempt to hold stocks
by determining various stock levels such as maximum stock level, minimum stock
level re order level and economic ordering quantity is known as stock level
determining system.
2. ABC Analysis
Firm that hold a great number
material items use ABC analysis for controlling stocks. This method is done on
the value of the items and required space.
Keeping stock with higher value but less
number of units denoted by A, the stocks with average value and average number
of units denoted by B and the Stocks with low value and more units denoted by C
is known as ABC analysis.
3. Two bin System
By keeping the same kind of
stocks in two bins one large and the other small, first the stock in the large
bin is used until they are finished. Then the stock having been ordered, the
stock in small bin is used until the receipt of the ordered stock. This method
is known as two bin system. After receiving the ordered stock, filling the small
bin first then the large one and using them is a significant characteristic of
this.
4. Continuous Stock Recording
System
Recording the changes in stocks
then and there and keeping the records so as to know the balance in the store
at any time is known as continuous stock recording system. Example : Bin Card
In this method separate bin cards
are used for each stock item for recording the issue and receipt of stock items
then and there.
5. Computer Program.
Using computer software developed
for controlling stock is known as controlling of stocks using computer
programs.
6. JIT Method
The Method of obtaining materials
for production at the required time in correct quantity and delivery the output
to the market immediately is known by this. This method can be introduced as a
method that minimizes the storage cost by keeping finished goods stock and
materials tocks at zero level. Since a considerable cost that is included in
production cost is storage cost, JIT method is implemented by reading storage
cost where storage of finished goods and materials doesn’t take place.
Necessary Stock Levels to
maintain an optimum stock
An optimum level of stock is maintained by an
efficient stock controlling method. Several facts to be considered in computing
stock levels are given below.
1.
Consumption
of materials in relation to a period.
2.
Re-order
period
3.
Re-order
quantity.
Required quantity of materials
for the production or selling activities in a particular period such as a day
or a week or a month is known as the consumption of materials in
relation to a period.
This consumption can be
determined in accordance to the changes occur in the amount of production or
selling of a firm as,
·
Maximum
quantity of consumption
·
Minimum
quantity of consumption
·
Average
quantity of consumption
Lead time
Duration of time from the event
of ordering to the event of stocks reaching the stores is known as the re-order
period (Lead Time) . This period also can be differed on various reasons Those
period can be differed as minimum order period, average order period and maximum
order period.
Economic Order Quantity
Number of units included in a
single order so as to minimize stock holding cost and ordering cost is known as
Economic Order Quantity (EOQ).
Few crucial stock levels in
maintaining an optimum stock level are given below.
·
Re-order
level
·
Minimum
Stock level
·
Maximum
Stock level
Re order level - The stock level at which a firm decides to
place an order again while the stock is being decreased gradually with the
consumption of stocks for production or selling of a firm is known as re-order
level.
Re-Order level = Maximum Usage x
Maximum Order Period
Minimum stock level - Minimum stock level means the stock level at
which the stocks are not allowed to drop further. This stock level should be
maintained for the conduct of continuous production of or selling activities.
The following unfavorable consequences may
occur if the stocks in the stores drop below the minimum stock level.
·
Interruption
in continuous production process.
·
Inactive
cost may occur to business from machinery.
·
The
idle time of employees being increased.
·
Inability
to complete instant orders.
·
No
receipt of orders for a business.
Minimum stock level = Re-order level –
(Average usage x Average order period)
Maximum stock level - Maximum stock level means the stock level at
which the stocks are not allowed to increase further.
This is the highest amount of
stocks that can be held in the stores and it is not advisable to exceed this
level. The following unfavourable consequences may occur there.
·
Stocks
being perished, , obsolescence of stock and damages for stock
·
Increase
in storage cost and safety cost
·
Difficulty
in working capital
Maximum Stock = Re-order – (Minimum
usage x Minimum Order + Re level of stock period quantity)
Various Stock levels can be
represented as graphically follows
·
Minimum
stock level (safety stock) - Q1
·
Re-order
quantity – Q2
·
Maximum
stock level – Q3
·
Cyclical
time – T
·
Lead
Time – T1
Example :
Information regarding the stocks
of Ashani’s business are given below.
Minimum Consumption of stock - 40 units per day
- 60
units per day
Re-order period
- Minimum 10 days
-
Maximum 10 days
Re-order Quantity - 3000 units
Using the above information,
calculate
1.
Re-order
level
2.
Minimum
stock level
3.
Maximum
stock level
4.
Average
stock
5.
Represent
the above stock levels graphically
Calculates the Economic Order
Quantity considering the cost of stock
Total cost of stocks of a particular firm
consists of two types as stock ordering cost and stock holding cost of stock.
Ordering cost. - Expenses of preparing the order,
purchase price, expenses of checking the materials and the transport expenses
of materials are example for ordering cost.
Stock holding cost
- All the expenses from receipt of the stock to the store to issue of
the stock (either to production division or to marketing division) from the
store are considered as stock holding cost.
Storage expenses, electricity
expenses of stores, material moving expenses, expenses of watchman of the
store, insurance premiums for store, record keeping expenses and damages to
stock etc. are examples for stock holding cost.
EOQ - Number of units to be ordered
ones so as to minimize the total stock cost is known as the Economic Order
Quantity (EOQ). At EOQ, the stock ordering cost and the stock holding cost are
equal to each other.
EOQ can be calculated through the
following graph.
·
EOQ
= Economic Order Quantity
·
Co
= Cost per Order
·
PCs
= Cost of holding per unit for period (a year)
·
D
= Annual stock requirement / Annual Demand (Consumption)
Examples :
Given below are some information
regarding the stock holding expenses of a trade centre of stock of paddy. (Values
are given in thousands)
·
Cost
per order Rs.50.
·
Stock
requirements for a specific period is 10,000units.
·
Cost
of holding per unit for a specific period is Rs.100.
Calculate the
Economic order quantity
The quality control methods to
assure the quality of products
The ability of a good or a
service to satisfy the consumer needs and wants is known as “Quality” .
The quality of a product is a
collection of certain elements such as,
1.
Proper
functioning
2.
Durability
3.
Reliability
4.
In
accordance with standards
5.
Suitability
6.
Safety
The elements which
influence the quality differ according to the nature of the good or service.
Quality control
The process of confirming if the
production is done so as to meet the standards established by a production firm
and to meet the minimum legal requirements is known as quality control. Steps
such as sample test and input output test etc… are used for quality control.
Quality is important for a firm
because of the following facts.
·
Ability
to provide goods with expected quality.
·
Ability
to reduce wastage by decreasing damages and breakage.
·
Ability
to face competition successfully and retain in the marked continuously.
·
Consumer
loyalty is enhanced through maximizing of consumer satisfaction.
·
Ability
to work in accordance with a legal condition.
·
Existence
of the business is established through improvement of the profit.
·
Minimizing
of the entire cost of the firm.
·
Ability
to enter the market easily.
Some techniques used in quality
control are mentioned below.
·
Quality
Circles
·
Zero
Defects
·
Quality
Assurance
·
Quality
Standards
·
Statistical
Process Control.
Quality circles
The employees, who perform the
similar task, present solutions by identifying and discussing the problems
(related to job and duties) faced by them having gathered in to small group is
known as quality circles.
Zero defects
Assuring that every products is
produced without any defect is known as zero defects technique. Accordingly,
making arrangements to produce correctly at first time itself rather than
accepting that error effort is unavoidable is done by the zero defects technique.
Quality assurance
The procedures followed to
perform every stage of the production process with a formal examination in
order to confirm the quality of the product is known as quality assurance. The
purpose of it is to prevent problems than finding out problems.
Quality standards
This function is conducted
through the inspection of employees on their own duties provision of guarantee
certificates for production and obtaining national and international standards
apart from the inspection of quality control inspectors.
Performing the manufacturing
activities so as to meet the national and international standards is meant by
the following of quality standards. By that, the consumer reliability on
quality could be gained.
Statistical process control
Collection of data regarding the performance
of the manufacturing process and communicating those data to relevant parties
in diagrams, tables and graphs is conducted through statistical process
control.
Approaches to increase
productivity
The ratio of the relationship
between inputs and outputs is known as productivity. Productivity can be used
as an important measurement to measure the effectiveness and the efficiency of
production.
Reasons for productivity being important for a
business
1.
To
make decisions regarding allocation of resources of the business.
2.
To
make decisions on expansion of the business.
3.
To
compare the productivity with other similar business entities.
4.
To
acknowledge the progress of the business
Methods through which the
productivity can be improved
1.
Increasing
outputs while having a fixed input.
2.
Decreasing
inputs while having a fixed output.
3.
Increasing
outputs and decreasing inputs.
4.
Decreasing
outputs at a speed less than the speed of decreasing inputs.
5.
Increasing
outputs at a speed higher than increasing inputs.
Basically productivity can be
measured as total productivity and partial productivity.
The ways of improving material
productivity
1.
Using
high quality materials
2.
Minimizing
waste and discards
3.
Maintaining
material stocks in an optimum level
4.
Reuse
and recycling of materials
The ways of improving machinery
productivity
1.
Using
machinery equipped with advanced technology.
2.
Using
unbroken machinery
3.
Maintaining
them properly
The ways of improving labour
productivity.
1.
Employing
trained employees
2.
Using
monetary and non-monetary employee incentives.
3.
Using
quality circles.
4.
Maintaining
a better employee relationships.
Methods of modern technology that
can be used to improve the productivity. Few modern methods that are used to
make the operations management process of large scale production firms more
efficient are as follows.
1.
Computer
Aided Design /CAD
2.
Computer
Aided Manufacturing /CAM
3.
Computer
Integrated Manufacturing /CIM
4.
Computerized
Numerical Control /CNC
Computer Aided Design /CAD method
Planning of the product using
computer graphics is known as Computer Aided Design. The computer designer
crates product designs using the relevant computer prgramme. A diagram designed
on a computer screen can be seen from various dimension rather than a diagram
on a sheet.
Computer technology is used in
CAD method for modernization of the existing product, designing of new products
and for examining the products in various angles.
Examples : The use of Auto Cad
for architectural designs, manufacturing of aircrafts in large scale rims and
for production of appeals.
Computer Aided Manufacturing
(CAM) method
The usage of computer program for
managing the production process is known as Computer Aided Manufacturing
method. This method is mostly used in flow production. CAM is used for
functions such as hard functions that are frequently conducted, functions that
are dangerous (use of Robotic Technology)
Examples : For the production and
repair of motor vehicles.
.Computer Integrated
Manufacturing /CIM method
The method used for the designing
of products and for managing the production process is known as Computer
Integrated Manufacturing. In other words, the computer technological technique
used for the development and control of the production process is known by
this. Through this method, even a single person has the ability of regulating a
factory. By observing the functions on a computer screen, the deviations of the
production can be corrected through a command given using a keyboard.
Computerized Numerical Control
(CNC) method
Control of machinery through computer program
that are used for implementing the operations activities of a firm is known as
Computerized Numerical Control method.
Control of the functioning of the
machinery of a factory using computers in numerical method takes place in this
method. Because of the mechanized production, the production of goods has been
so efficient.
Examples : Repair of vehicles;
lathe machines, cutters are controlled on time through computerized programme.
Benefits gained by business in using modern
technology.
1.
Minimize
the wastage.
2.
Ability
to introduce new products to market.
3.
Upliftment
the efficiency
4.
Ability
of employing less number of employees
Problems in using modern
technology
1.
Rapid
change in technology
2.
Required
a large investment
3.
Problems
arising from environment pollution.
4.
Interruption
for the whole production process due to sudden technological failure and
defects.
5.
Lack
if trained labours.
