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OPERATION MANAGEMENT DPB50133 CHAPTER 1 INTRODUCTION TO OPERATION MANAGEMENT AND PRODUCTIVITY 3
DEFINITION OPERATION MANAGEMENT 4 Operation Management can be defined as activities related to the creation of goods and services by converting or transforming inputs into outputs. Creation of goods and services involves production. defined as the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services.
PRODUCTION PROCESS 1. Input ◦ Input or resources are the basic materials needed for the purpose of producing goods and services. ◦ Examples: raw material, financial support, human resources, equipment and information. 2. Transformation Process ◦ The transformation process refers to the activities related to the conversion of inputs into outputs that involve operating strategies. 3. Output ◦ Outputs are the final results obtained after the transformation process which include goods and services. 4. Feedback ◦ Feedback acts as a control mechanism, measuring the actual performance against the expected or planned performance. 5
THE IMPORTANCE OF OPERATION MANAGEMENT 6 (1) Important to know how operation management work as it is one of the major functions in an organization besides marketing, finance and other functions. (2) Operation management enables us to know how goods and services are produced, as it is concerned with the quality. (3) Operation management allows us to understand what operations managers do and their responsibilities. (4) Operation management is such as costly part of an organization and it has impact on the revenues. (5) Operation management allows us to know how to organize worker to be more productive as well as to ensure high productivity in organization.
OBJECTIVES OF OM 1) Achieving customers’ satisfaction 2) Using resource efficiently 3) Smooth production processes 4) Meeting expected demand and delivery dates 5) Being an effective producer 6) Adapting for future survival 7
OBJECTIVES OF OM Providing customers with what their want to ensure customers satisfaction. The operating system must provide something which can satisfy the customer needs’ in term of cost and timing. 1) Achieving customers’ satisfaction The utilization of the resources might be expressed in terms of the workforce needed, available time used or occupied, space utilization levels, machines and materials 2) Using resource efficiently An efficient production process enables the organization to produce a greater amount of outputs with lesser inputs. 3) Smooth production processes 8
OBJECTIVES OF OM * With efficient use of resources and a smooth production process, the organization is able to fulfil and deliver customers’ demands on time. * This will lead to customer satisfaction. 4) Meeting expected demand and delivery dates * Operation management helps the organization to produce products according to specifications and standards, thus maximizing the products’ value. * Customer receive more benefits from a product, which depicts the organization as an effective producer. 5) Being an effective producer * Operation management enables a flexible production system. * Thus, the organization is able to respond rapidly to changes in a product or process 6) Adapting for future survival 9
RELATIONSHIP BETWEEN OPERATIONS AND OTHER FUNCTIONS IN A ORGANIZATION 10 OPERATION FINANCE/ ACCOUNTING MARKETING HUMAN RESOURCES SUPPLIERS • Production and inventory data • Capital budgeting analysis • Budget • Cost analysis • Capital investments • Production and Sales forecast • Customer orders • Customer feedback • Promotions • Job design • Hiring/firing • Training • Performance evaluation • Work measurement • Orders for material • Quality requirement • Production and delivery schedules • Material availability
CHARACTERISTICS OF SERVICE AND MANUFACTURED PRODUCTS 11
CHARACTERISTICS OF SERVICE AND MANUFACTURED PRODUCTS 12 MANUFACTURED PRODUCTS SERVICES Tangible products • Can be seen or touched • Eg: automobiles, shirts, pen Intangible outputs • Service are intangible; they cannot be seen or touched. • Eg.: delivery service (pizza, florist,etc), medical services (consultation, X-ray,etc), and transportation services (taxi services, ridesharing services, etc.) • Customer can only use the service. Outputs that can be stored • Goods are often produced and stored until customer need them. • Eg: Perodua produce cars and stored until customer place order Outputs that cannot be stored • Services are intangible, it is not possible to store or categorize them as inventory. • Eg: a courier company need to perform quick delivery services. Low interaction with customers • Customers do not specify what they want from manufactured products. • They just purchase the products that suit their needs. High interaction with customers • Customers need to be present to specify and communicate what they want from services. • Customers have different demands in terms of services(uniqueness), thus they pay different prices. Capital intensive • Companies producing goods tend to use high technology machines during the operations. They need to invest a huge capital to purchase the machines. Labour intensive • Employees play an important part in servicesrelated companies, because service delivery requires customers to interact face-to-face with the service provider.(Eg: A courier service company needs many personnel to deliver parcels) Ease in measuring quality • There are certain standards and specifications that are set by the manufacturer to produce tangible products. • the quality of product is achieved once this standard and specifications is met. • For example, a bakery wants their cakes to have a certain level of thickness. Difficulty in measuring quality • Service quality may vary from one situation to another. • The same service delivered to different customers may result in different acceptance levels from them. • Eg: a customer who is entertained by a talkative staff might enjoy the service, but another customer who feel annoyed and not enjoy the service by the talkative staff.
PRODUCTIVITY A total output (goods and services) per one unit of a total input(resources, eg; labour and capital) Productivity is a measure of how efficiently a process runs and how effectively it uses resources. An organization is considered productive if it is able to achieve its goal through the conversion of inputs into outputs at a lower cost. An organization’s productivity can be increased in two ways: i. Reducing inputs while keeping outputs constant ii. Increasing outputs while inputs constant 13
THE IMPORTANCE OF PRODUCTIVITY Productivity is important for three reasons: 1. Low unemployment ▪ Production requires inputs, such as labour, capital and management, to be converted into goods and services. ▪ These inputs are integrated in the production system. ▪ High production of goods and services indicates that more human capital is required, which means many people will have jobs, thus leading to low unemployment rates. 14 1) Low Unemployment 2) Improved Living Standards for the Nation 3) Reduced Operating Costs and Increased Revenue
THE IMPORTANCE OF PRODUCTIVITY Productivity is important for three reasons: 2. Improved living standards for the nation ▪ An increase in productivity allows labour, capital and management to receive additional payments. ▪ Labour will receive a higher payroll and be able to spend more on quality products. ▪ Goods and services are improved, due to increased capital and better management. 3. Reduced operating costs and increased revenue ▪ Productivity is increased when output is increased using the same amount of inputs. ▪ Economically, this shows that with the same amount of money spent on the inputs, an organization is able to produce and sell more. ▪ Utilization of organization resources. 15
CALCULATE THE PRODUCTIVITY 16
Example 1 A wrapping-paper company produced 2000 rolls of paper in one day. Labor cost was RM160, material cost was RM50, and overhead was RM320. Determine the labor productivity and the multifactor productivity. a) Labor Productivity = Output Labour = 2000 160 = RM12.50 b) Multifactor productivity = Output Labor cost+Overhead = 2000 160+320 = RM4.12 17
Example 2 Marcos Plastics makes 5000 plastic chairs each month. Total monthly labor hours are 1250. What is labor productivity (hours per unit)? ✓ Labor productivity = Output Labor hours = 5000 1250 = 4hours 18
Example 3 Premier Production intends to assess its current productivity level. The company is considering to adopt a new system to increase its productivity level. The following data was gathered: ❖ Current system = +++ℎ = 5000 2500+1000+400+100 = RM 1.25 ❖ New System = 6500 3000+ 1000+400+100 = RM 1.44 ❖ Decision : Premier Production should proceed with new system because the productivity of RM1.44 is higher than productivity current system which is RM1.25. Current (Old) system Output level : 5000 units Labor cost : RM2500 Material : RM1000 Capital : RM400 Overheads : RM100 New system Output level : 6500 units Labor cost : RM3000 Material : RM1000 Capital : RM400 Overheads : RM100 19
CHAPTER 2 PLANT LOCATION STRATEGIES 20
LOCATION DECISION Location is one of the most important decisions that an operations manager has to make. It entails deciding on a place to build or operate a business. Plant location decision refers to deciding a suitable location, area or place where the plant will start functioning The objective of location strategy is to maximize the benefit of location to the firm. Location option include; i. Expanding an existing facility instead of moving. ii. Maintaining current sites while adding another elsewhere. iii. Closing the existing facility and moving to another locations. 21
THE NEEDS FOR LOCATION DECISION Five reasons why location is crucial for organizations: 22 1- Location affects the fixed cost and variable cost of the organizations 2 - Location also has an impact on the overall risk and profit. 3 - A new location is necessary id demanded has exceeded the current production capacity. 4 - Changes in labor productivity, labor cost or community attitudes. 5 - Shifts in demographic and customer demand.
THE FACTORS AFFECTING LOCATION DECISION There are several factors to be considered in making location decision; 23 1. Proximity to market or customers • Customers want to buy products or services which are easily accessible. • The proximity helps to ensure that the customers’ needs are incorporated into products being developed and built. 2. Proximity to suppliers • Being located close to suppliers indicates that the firm is near to raw materials and resources. • It helps to reduce the production cost especially cost of transportation. 3. Proximity to competitors • Close to the competitors meaning that, major resources, such as labour, material, infrastructure and information, are available at that area. • Being near to competitors also increases the probability of getting many potential customers. 4. Labour supply • Firms that require a lot of labour normally choose a location that has high availability of labour, particularly skilled labour. • Availability of skilled labour in a particular area can also minimize training costs. 5. Availability of facilities • Facilities such as telecommunication and transportation are crucial in selecting a location. • Having telecommunication facilities will assist organization to stay connected with supplier, customers and even the government. • Transportation will helps organization in transporting materials and finished products easily. 6. Government incentives • Incentives such as subsidies or tax inducements, are provided by the government in some areas. • The purpose to attract firms to base their facilities in that area.
METHOD OF EVALUATING LOCATION FACTOR RATING TECHNIQUE Factor rating technique is allocation evaluation technique that considers quantitative and qualitative factors in choosing a location. These factors are called Tangible and Intangible factors. 24 Factor Rating Technique Tangible Factors Tangible factors are the COST factors which can be measured in monetary value. Eg: Labor cost, Transportation cost, Raw Material cost, etc Intangible Factors Intangible factors are those factors that are hard to be measured in monetary value. Eg: Labour availability, proximity to market, facility availability, political stability, etc.
METHOD OF EVALUATING LOCATION FACTOR RATING TECHNIQUE Tangible and intangible factors can result in two different best locations to be selected, based on the factors considered. Combining the two factors in evaluating the best location can also be done. This approach is called an Integrative Method. 25 Tangible Factors Intangible Factors Integrative Method
Example 2-1 FKL company produces black pepper sauce. The company intends to expand its operations to three different locations which are Lawas, Bintulu and Mukah. The following table are the annual operating cost (RM’000) and non-economic data gathered. 26 Tangible Factor (RM’000) Lawas Bintulu Mukah Labor 45 38 52 Raw Material 12 8 13 Transportation 11 12 22 Intangible Factor Lawas Bintulu Mukah Labour availability Outstanding Very Good Good Community acceptance Good Outstanding Fair Transportation quality Good Poor Good Among the intangible factors to be considered, labour availability is the most important factor, followed by transportation quality. The least important factor is community acceptance. a) Based on the total cost, which location is the most suitable? b) On the basis of intangible factors, which location should the company decide on? c) If your were to integrate both factors, which location would you recommend?
Example 2-1 (a) 27 Tangible Factor (RM’000) Lawas Bintulu Mukah Labor 45 38 52 Raw Material 12 8 13 Transportation 11 12 22 Total 68 58 87 Rank 2 1 3 Merit 2 3 1 Intangible Factor Weight Lawas Bintulu Mukah Labour availability 3 5x3=15 4x3=12 3x3=9 Community acceptance 1 3x1=3 5x1=5 2x1=2 Transportation quality 2 3x2=6 1x2=2 3x2=6 Total 24 19 17 Rank 1 2 3 Merit 3 2 1 Decision : Based on tangible factors, Bintulu is the best location because it has the lowest total cost. Example 2-1 (b) Set the highest weight for the most important factor Indication: Outstanding=5; Very Good=4; Good=3; Fair=2; Poor=1 Decision : Based on intangible factors, Lawas is the best location because it has the highest total score.
Example 2-1 (c) 28 Integratice Method Weight Lawas Bintulu Mukah Tangible factors 2 2x2=4 3x2=6 1x2=2 Intangible factors 1 3x1=3 2x1=2 1x1=1 Total 7 8 3 Rank 2 1 3 Merit 2 3 1 Decision : Based on the integrative method, Bintulu is the best location because it has the highest total score. Refer to the Merit of tangible factors and intangible factors
CHAPTER 3 29 FACILITIES LAYOUT AND PROCESS STRATEGIES
Definition of Facilities Layout 30 Facilities layout A facility layout is the physical location of the various departments, units, workstations and equipment within the premises of a facility. It can be defined as the process by which the placement of departments, workgroups within departments, workstation and machines within a facility is determined. It is very important to arrange the physical facilities efficiently to achieve high productivity and efficiency.
Objectives of Layout Planning 31 7. Minimum equipment investment 6. Reduced material handling cost 5. Improved customer and vendor interaction 4. Efficient use of labor 3. Improved employees’ morale and safer working conditions 2. Reduces bottlenecks in moving people or material 1. Higher utilization of space
Needs of Layout Planning An effective layout can help an organization achieve a strategy that supports differentiation, low cost or response. Layout planning in manufacturing and service organizations deal with the physical arrangement of various resources that are available in the system with the objective to improve the performance of the operating system, thereby better customer service. A good layout design will ensure that a vast majority of jobs in a manufacturing system may have to travel shorter distances before completing their processing requirements. 32
33 Fixed Position Layout Process Layout Product Layout 1. Product layout ◦ Refers to a production system, where the workstations and equipment are located along the line of production, as with assembly lines. ◦ It also called a flow-shop layout, which means that work processes are arranged according to the progressive steps taken for the product to be made. ◦ E.g: Manufacture of appliances (toasters, irons, refrigerators, electronic items) and automobiles. Layout Patterns
Layout Patterns 34 Fixed Position Layout Process Layout Product Layout 2. Process layout ◦ A design for the floor plan of a plant that involves arranging equipment and facilities according to their function, with the aim of improving efficiency. ◦ In a process layout, there is an assembly of similar operations or similar machinery in each department. ◦ E.g: In a fabrication department, an assembly department and a wiring department.
35 Fixed Position Layout Process Layout Product Layout 3. Fixed position layout ◦ The product produced is too fragile, bulky or heavy to move. ◦ In this layout, the product remains immobile for the entire manufacturing cycle. ◦ Resources such as personnel, supplies and equipment are brought to the site, where the product will be assembled. ◦ Eg.: Ships, house and aircraft. Layout Patterns
Process Strategy 36 Process Focus Product Focus Repetitive Focus Mass Customization Process Focus • The process focuses on low volume, high variety products are also called job shop. • Production facilities such as equipment, work centers, materials and workers are organized around specific activities or process. • E.g: In a factory, these processes might be departments devoted to wielding, grinding, and painting. • In an office the processes might be accounts payable, sales and payroll. • In a restaurant, they might be bar, grill and bakery.
Process Strategy 37 Process Focus Product Focus Repetitive Focus Mass Customization Product Focus • Product focus are high volume, low variety processes, also called continuous processes. • This type of facility requires a high fixed cost and the reward is high facility utilization. • E.g: products such as light bulbs, rolls of paper, and bolts.
Process Strategy 38 Process Focus Product Focus Repetitive Focus Mass Customization Repetitive Focus • Repetitive focus falls between the product and process focus. The repetitive process is a productoriented production process that uses modules. • Modules are parts or components of a product previously manufactured or prepared, often in a continuous process. • E.g: Fast-food firms are an example of repetitive process using modules.
Process Strategy 39 Process Focus Product Focus Repetitive Focus Mass Customization Mass Customization • It is rapid, low-cost production that caters to constantly changing unique customer desires. This process is not only about variety, it is about making precisely what the customer wants when the customer wants it economically. • Achieving mass customization is a challenge that requires sophisticated operational capabilities. • E.g: Variety of design for baju kurung during Raya festivals to fulfills different customer desire.
CHAPTER 4 FORECASTING AND AGGREGATE PLANNING 40
Definition of Forecasting in Operation Planning Forecasting may involve taking historical data It may be a subjective or an intuitive prediction It may also based on demand-driven data 41 Forecasting is the art and science of predicting future events.
The Strategic Importance of Forecasting Good forecasts are of critical importance in all aspects of a business. Forecasts of demand therefore drive decisions in many areas. The impact of product demand forecast on three activities: 42 Supply-Chain Management Human Resources Capacity
The Strategic Importance of Forecasting 43 Supply-Chain Management • Good supplier relations and the ensuing advantages in product innovation, cost, and speed to • market depend on accurate forecasts. Human Resources • Hiring, training, and laying off workers all depend on anticipated demand. If the human resources department must hire additional workers without warning, the amount of training declines, and the quality of the workforce suffers. Capacity • When capacity is inadequate, the resulting shortages can lead to loss of customers and market share. • This happened when the company underestimated the huge demand of their product. When excess capacity exists, costs can skyrocket.
Qualitative Decision-Making Approaches 44 Jury of Executive Opinion • The opinions of a group of high-level experts or managers, often in combination with statistical models, are pooled to arrive at a group estimate of demand. Delphi method ▪ There are 3 participants in: decision-maker; staff personnel; and respondents. • Decision-maker : usually consists of 5 to 10 expert who were making the actual forecast. Sales force composite ▪ In this approach, each salesperson estimates what sales will be in his or her region. • These forecast are then reviewed to ensure that they are realistic. Consumer market survey ▪ A forecasting method that solicits input from customers or potential customers regarding future purchasing plans.
Quantitative Approaches Naïve Approach Moving Average Exponential Smoothing Trend Projection 45
Quantitative Approaches 46 1. Naïve Approach A forecasting techniques that assumes that demand in the next period is equal to demand in the most recent period. Assumes demand in next period is the same as demand in most recent period e.g., If January sales were 68, then February sales will be 68 Sometimes cost effective and efficient Can be good starting point
Quantitative Approaches 47 2. Moving Average A forecasting method that uses an average of the n most recent periods of data to forecast the next period.
Quantitative Approaches 48 3. Exponential Smoothing A weighted-moving average forecasting technique in which data points are weighted by an exponential function. New Forecast = Last Period’s forecast + α (Last period’s of actual demand – Last period’s forecast)
Quantitative Approaches 49 4. Trend Projection A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts. Linear trends can be found using the least squares technique
Quantitative Approaches 50 4. Trend Projection Example Answer: The trend-line is: y = 56.70 + 10.54x