Details Module - Production and Operations Management

Production and Operations Management 1
Course Module
Of
Production And Operations Management
2 Course Module
Course Module
Of
Production And Operations Management
Mahbub Parvez
Associate Professor & Head
Department of Tourism and Hospitality Management
Faculty of Business and Entrepreneurship, DIU
Dr. Sayedul Anam

Assistant Professor
Department of General Educational Development
Faculty of Science and Information Technology, DIU
Sayma Suraiya
Assistant Professor
Department of General Educational Development
Faculty of Science and Information Technology, DIU
Preface
Production And Operations Management (POM) is concerned with the management of
resources and activities that produce and deliver goods and services for customers. Efficient
and effective operations can provide an organization with major competitive advantages
since the ability to respond to customer and market requirements quickly, at a low cost, and
with high quality, is vital to attaining profitability and growth through increased market
share. As competition becomes fiercer in an increasingly open and global marketplace, a
company's survival and growth become greatly contingent on its ability to run its operations
efficiently and to exploit its resources productively.
The course focuses on the basic concepts, issues, and techniques for efficient and effective
operations. Special emphasis is placed on process improvement and supply chain
management. Topics included are operations strategy, product and service design, process
design and analysis, capacity planning, lean production systems, materials and inventory
management, total quality management, project management, and statistical process control.
All chapters are related either with marketing, management, analysis of business data,
probability and its impact to choose alternatives and finally with profit maximization or with
cost minimization. As we know the ultimate objective of any company is to increase
productivity which in terns related to maximize profit or to minimize cost, so the topics of
this course are the activities of operations management related to start up any business
through brain storming and design a outline of that business starting from Strategy
Formulation and end with Quality Management. In between different steps of process like
inventory management, make or buy options, break-even analysis, process selection, time
management, statistical decision theory and process control are discussed.
I am grateful to the authority of The Daffodil International University Press for providing me
the opportunity to write and publish the thought of the lectures in written form which will
ultimately eliminate the gap of knowledge between teachers and students.
Mahbub Parvez
Associate Professor & Head
Department of Tourism And Hospitality Management
Faculty of Business and Entrepreneurship
Daffodil International University
4 Course Module
Table of Contents
6 Course Module
Outline of the Course Module

Of
Production and Operations Management
Contents:
• Operations And Competitiveness
• Operations Strategy
• Decision Analysis.
• Processes and Technologies
• Inventory Management
• Quality Management
• Project Management & Schedule
• Statistical Process Control
Learning Objectives:
• To identify the Sector of Business Opportunities related to the economy.

• To know about the demanding products related to the sector.
• To identify the Barriers for a new Entry.
• To know about the different types of products and production process in general.
• To learn the process of choosing alternatives under the Environment of Risk.
• To understand the process of strategy formulation and implementation for a new
product.
• To evaluate the factors that will help to position the firm in the market place.
• To identify the process selection with breakeven analysis.
• To manage supply chain with concepts of inventory.
• To know the different type of production process with specific emphasis on project
management including maintaining project schedule.
• To know the procedure using control charts to see if any part of production process is
not functioning properly and could cause poor quality.
• To determine the Effect of Quality Management on Productivity
Course Description :
(1) Course code: MGT 304
(2) Course Title: Production and Operations Management
(3) Number of unit: 3
(4) Course type: Core Course
(5) Prerequisite: Fundamentals of Management, Principles of Marketing, Business

Mathematics, Basic Statistics.
(6) Course synopsis: The course focuses on the basic concepts, issues, and techniques for
efficient and effective operations. Special emphasis is placed on process improvement and
supply chain management. Topics included are operations strategy, product and service
design, process design and analysis, capacity planning, lean production systems, materials
and inventory management, total quality management, project management, and statistical
process control.
(7) List of possible experiments: N/ A
(8)Teaching-learning and assessment strategy

Lecture : 42 hours (3 credits)
Teaching – learning: Lectures, tutorials, case studies, group discussion and presentation,
and problem solving.
Assessment strategy: Students will be assessed by coursework during the semester
followed by Mid Term and at the end of the semester Final Examination. Coursework
involves quizzes, individual assignment, group project and report presentation, and case
studies.
Lecture Schedules
Chapter Chapter Name Topics to be covered
Chapter 01 Operations and Definition of Operations Management & Operation-
The Operations function & its Activities- Operations
Competitiveness Management in an E-Business Environment-
Competitiveness & Measure of Competitiveness
through Productivity and Productivity improvement-
Barriers to Entry for new firms
Chapter 02 Operations Strategy Define Strategy-Competitive Priorities of a
company – Strategic Decisions in Operations-
Strategy Deployment & Effective ways to
deploy strategy
Chapter 03 Operational Decision Elements of Decision Problems Decision
Making Under Certainty Decision Making
Making Tools-
Under Risk(EMV, EOL, EVPI) - Decision
Decision Analysis Making Under Uncertainty (Pessimistic,
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Optimistic, Equal probability, Regret, Hurwicz

criterion).
Chapter 04 Process And Defines Process- Process Strategy-Process
Selection with Break –Even Analysis- Process
Technologies
Planning (Make –or-Buy decisions)- Process
Analysis- Process Reengineering.
Chapter 05 Inventory Model Nature of Inventory Problem- Inventory Cost-
EOQ model with Static demand- EOQ Model
with Non instantaneous Receipt -Quantity
Discounts with Constant Carrying cost.
Mid-Term Examination
Chapter 06 Quality Management Meaning of Quality from Consumer’s
Perspective and Producers Perspective- Total
Quality management (TQM)- Principles of
TQM- The Cost of Quality.
The effect of Quality
Management on Measuring Product Yield and Productivity, The
Quality Productivity Ratio, Quality Awards,
Productivity
Chapter 07 Project Management Project Planning, Elements of a Project Plan,
Project Management Tools, Global and Diversity
Issues in Project Management, Project
Scheduling, Project Control.
Chapter 08 Project Schedule: Schedule- Benefits of Scheduling- CPM &
PERT- Activity, Event, Path & Dummy activity-
PERT and CPM
Calculation of activity and event slack, PERT
uses three times estimates- Project Scheduling
using MS Project 2007.
Chapter 09 Process Capability and Meaning- Quality Measures- Statistical Process

Statistical Process Control (SPC) Procedure- Control charts- p
Control chart, c chart, mean chart, range chart- Process
capability analysis.
Final Examination
Note 1: Possible Assessment (Assessment mode can vary from semester to

semester based on suitability)
Grading Policy: Marks will be awarded on the basis of a combined score from
examination, assignments, class participation etc. No excuse will be
allowed for late submission of assignments. Letter grades will be

awarded as per the rules of DIU.
Problem –Based Learning (PBL) Projects
Project
1 Formulate the strategy for a new product, identify core competency, positioning
and Implement the identified strategy. Barriers could be demonstrate for the
start up. Choose the best alternative among severals under the environment of
uncertainty.
2 Factory visit to observe production process and submit an assignment
Evaluation Strategy: Class Participation/ attendance: 7%,
Quiz: 15%
Assignment: 5%
Presentation/ Viva: 8%
Mid-Term: 25%
Final: 40%
Total 100%
List of text books and references:
Text books: Roberta S. Russell and Bernard W. Taylor.
Operations Management (7th E)
1. Reference books : Lee J krajewski and Larry P Ritzman
Operations Management: Process and Value Chain (7th Edition)
2. William J. Stevenson Operations Management
Note 2 : Delivery Mode

Lecture; Problem solving; Questioning; Supplemental reading; Study session;
Computer simulation; Project development; Presentation; Report;
Note 3 : Verbs Used In Teaching Plan
Define, Repeat, Remember, Describe, Explain, Discuss, Relate, Illustrate,
Analyze, Derive, Apply, Compare, Solve, Calculate, Identify, Perform, Design,
Propose, Produce, Evaluate, Justify.
Note 4 : Production And Operations Management Sectors related to Primary,
Secondary and Tertiary Economy:
Under Primary Economy: Under Secondary Economy: Under Tertiary Economy:

• Sea
• RMG • Restaurant
• Hills
• Jute • Hospital
• Forest
• Fisheries • Day care
• Rivers
• Necessary Item • Educational Institute
• Natural Beauty etc.
production • Travel Agency
• Banks and Financial • Club, Hotels and Resort
Institutions etc. • Airlines & Transportation
etc .
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Chapter 01
Operations and Competitiveness
Definition of Operations Management & Operation- The Operation functions & its Activities-
Operations Management in an E-Business Environment- Competitiveness & Measure of
Competitiveness through Productivity and Productivity improvement- Barriers to Entry for new
firms
Production & Operations Management:
Definition: Operations management refers to the activities, decisions and responsibilities of

managing the resources which are dedicated to the production and delivery of products and
services.
The part of an organization that is responsible for this activity is called the operations
function and every organization has one as delivery of a product and/or service is the reason
for existence.
The set of interrelated management activities which are involved in manufacturing certain
products is called as production management. If the same concept extended to the services
management, then the corresponding set of management activities is called as operations
management.
The management decisions are classified into strategic decisions, tactical decisions and
operational decisions. The strategic decisions e.g defining the goals, making policies and
determination of organizational objectives etc are taken at the top management level. The
tactical decisions are taken of the middle management level, which include acquisition of
resources, plant location, new products establishments and monitoring of budgets etc. The
operational decisions are taken at the bottom level of management like effective and efficient
use of existing facilities and resources to carry out activities within the budget constraints.
Operations managers are the people who are responsible for overseeing and managing the
resources that make up the operations function. The operations function is also responsible
for fulfilling customer requests through the production and delivery of products and services.
OM designs and operates productive systems- systems for getting work done. Operations
managers are found in banks, hospitals, factories and in government organizations. They
design system, ensure quality, produce products and deliver services. They work with
customers and suppliers, the latest technology and global partners. The food we eat, the
movie we watch, the book we are reading are provided by the people in operation.
Operation: Operation is a function or system that transforms inputs into outputs of

grater value.
Inputs Transformation Process Output
 Materials Goods / Products

 Machines Services
 Labor
 Management
 Capital Feed Back
Requirement
The transformation process itself can be viewed as a series of activities along a value chain
extending from supplier to customer. Any activities that do not add value are superfluous and
should be eliminated.
System and Its Structure: A system is a collection of people, resources, concepts, and
procedures that is intended to perform some identifiable function or to serve a goal. The
structure of a system divided into three parts: Input, Process, Output and they are
surrounded by an environment and are frequently connected by a feedback mechanism.
Inputs: Inputs include those elements that enter the system.
Process: All the elements necessary to convert the inputs into outputs are included in
the processes.
Output: Outputs describes the finished products.
Feedback: The flow of information to the decision maker concerning the system’s
output is called feedback. Based on this information the decision maker can modify
the inputs, or the processes or both.
The environment: There are several elements that lie outside the system in the sense
that they are not inputs, outputs or processes. However, they have an impact on the
system’s performance and consequently on the attainment of its goal. These are
termed the environment.
# Open and Closed System: The system which is isolated from the environmental
influences and are totally independent is called closed system, where as the open system
exchanging information, material or energy with the environment and are very dependent.
# The system approach: Operations Research recognizes that a decision made in one
segment of the organization may have a significant effect, not only on the operation of that
particular segment, but on the operation of other segment as well. Therefore, when possible,
the overall organization point of view is adopted. Such an approach is termed a system point
of view or systems approach.
Functional Subsystem of Organization: The four primary functional areas of a firm are
marketing, finance, operations and human resources. For most firms operation is the
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technical core or ‘hub’ of the organization, interacts with other functional areas to produce
goods and provide services for customers. For example to obtain monetary resources for
production, operations provide finance and accounting with production and inventory data,
capital budgeting requests and capacity expansion and technology plans. Finance pays
workers and suppliers, performs cost analysis, approves capital investments and
communicates requirements of shareholders and financial markets.
Activities: Activities in operations management include organizing work, selecting
processes, arranging layouts, locating facilities, designing jobs, measuring performance,
controlling quality, scheduling work, managing inventory and planning production.
Operations managers deal with people, technology and deadlines. These managers need good
technical, conceptual and behavioral skills. There activities are closely interrelated with other
functional areas of a firm, including the following scopes, issues, concepts and techniques
associated with the field of OM.
Finance / Accounting
Production and Budgets

Inventory data Cost Analysis
Capital budgeting request Capital Investments
Capacity expansion and Capacity expansion and
Technology plans Stock holders requirements
Orders for materials Product / Service

Production and delivery availability
schedule Lead-time estimates
Quality requirements Status of order
Design/ performance Delivery schedules
Marketing
specification
Suppliers
Operations
Material availability Sales forecasts

Quality data Customer orders
Delivery schedules Customer feedback
Designs Promotions
Personal needs Hiring / firing

Skill sets Training
Performance evaluations Legal requirements
Job design Union contract negotiations
Work measurement
Human Resources
Figure: Operations as the Technical Core or ‘Hub’

1. Strategy: Strategy is a common vision that unites an organization, provides consistency

in decisions and keeps the organization moving in the right direction. Strategy
formulation consists of four basis steps:
2. Forecasting demand for Products and Services: Forecasting involves using a number
of different methods and quantitative techniques to provide accurate estimates of
demand, which are later used to make production decisions.
3. Production Planning and Scheduling: Production planning represents a major area of
decision making in operations management. ‘Capacity and Aggregate Planning’,
‘Inventory Management’, ‘Enterprise Resource Planning’, ‘Just-in-Time and lean
Production’ are the topics of production planning and scheduling.
4. Ensuring Quality: Quality underlines all operational decisions. Ensuring quality entails
establishing a quality management system using statistical quality control, improving
customer service and managing human resources wisely. Topics are ‘Statistical Process
Control, ‘Quality Management’, and ‘Human Resources in Operations Management’.
5. Product and Services: The traditional starting point in the production process in
designing the product or service. Decisions related to design include converting customer
requirements to product or service characteristics determining the desired level of
quality, selecting materials and evaluating the resulting production cost.
Suppliers R & D Customers
Idea Generation
Marketing Competitors
Product
Or
Service Concept
Feasibility Study
Performance
Specification
Form
Preliminary
design
Functional design Production design
Design Manufacturing
Specification and delivery
Specifications
Pilot run and final
t t
Final design &

Process Plans
New product
or service
launch
Figure: Design Process
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The kinds of products and services offered by a company drive operations strategy. Products
and services can be classified as make-to-order, make- to- stock or assemble-to-order.
i. Make-to-order: Products & Services are designed, produced and delivered to

customer orders. Examples include wedding invitation, custom-built homes,
custom-tailored clothes etc.
ii. Make –to- stock: Products & Services are designed and produced for
‘Standard’ customers in anticipation of demand. Examples includes furniture
of otobi, televisions, airlines flights etc.
iii. Assemble-to-order: Products & Services also known as build-to-order are
produced in standard modules to which options are added according to
customer specifications. Thus, components are made –to-stock and then
assemble to order after the customer order has been received. Examples
include computer system, industrial equipment, corporate training etc.
6. Process & Technology:

A process is a group of related tasks with specific inputs and outputs. Processes exist to
create value for the customer, the shareholders or society. Process design defines what
tasks need to be done and how they are to be coordinated among functions, people and
organizations. Plans are developed for acquiring materials, determining the types of job
skills, equipment and technology required and managing the process.
Production process can be classified into projects, batch production, mass production and
continuous production.
A project is a one-at-a time production of a product to customer order which has a

well defined starting and finished time. Examples include construction projects, new
product development etc.
Batch production processes many different jobs through the production system at the
same time in groups or batches. Examples of batch production include printers,
education, bakeries etc.
Mass production produces large volumes of a standard product for a mass market.
Product demand is stable and product volume is high. Examples include automobiles,
televisions, fast food, computer goods etc.
Continuous production is used for very high volume commodity products that are
very standardized. The system is highly automated and is typically in operation
continuously 24 hours a day. Examples include refined oil, water treatment plants,
food stuffs etc.
7. Facilities:
The production process that has been designed must be physically housed in a facility
and laid out in an effective manner so that the product can be produced or service
delivered as efficiently as possible.
8. Project Management:
Project management is a technique that breaks down complex processes, schedules
activities and ensures that the project is completed on time and on budget.
9. Managing Supply Chain:
A supply chain encompasses all the facilities, functions and activities involved in
producing and delivering a product or service from the suppliers to the customer.
# Operations Management in an E-Business Environment
Trade that occurs over the internet (or any computer network) is called electronic commerce,
e-commerce or e-business.
Category of E-Commerce: Electronic commerce can take the form of trade between
businesses, between consumers or between businesses and consumers
Business – to- business (B2B) : Trade typically involves companies and their
suppliers.
Business – to – consumer (B2C) : Trade can the form of online retailing, like
Amazon.com or online stockbrokerage.
Consumer – to – business (C2B) : Transactions reverse the normal flow of trade
by having customers post
what they want and having businesses accept
or reject their offers. Such as giving passengers
the opportunity to bid on airline seats.
Consumer- to – consumer (C2C) : Transactions involve consumer auction sites
like eBay, or consumer exchange sites like
Napster.
Business Consumer
Business B2B B2C
Consumer C2B C2C
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# Competitiveness:
Definition: The degree to which a nation can produce goods and services that meet the test
of international markets while simultaneously maintaining or expanding the real incomes of
its citizens.- The U.S Department of Commerce.
Most common measure of competitiveness is productivity, which is calculated by dividing

units of output by units of
input. Productivity= Output/ Input
Industry competitiveness can be measured by the number of major players in an industry and
the market share of the industry leader. By these measures, the most competitive industries
worldwide are banking, food and drug stores and electronics. Industries with low barriers of
entry are more competitive. Internet –based start-ups rise quickly since very little capital or
physical facilities are needed to enter the industry, but they can also fall quickly when the
number of competitors is more than the market can handle. Many of the barriers to entry-
make it difficult for new firms to enter an industry.
1. Economies of scale: As the number of units produced increases the cost of

producing each individual unit decreases, which is known as economic of scale. New
companies entering such an industry may not have the demand to support large
volume of production; thus their unit cost would be higher.
2. Capital Investment: Large initial investments in facilities, equipment and training
may be required to open a new hospital. In contrast a day care center may operate out
of an existing home with only minimal equipment, training and licensing
requirements.
3. Access to supply and distribution channel: Existing firms within an industry have
established supply and distribution channels that may be difficult for new firms to
replicate.
4. Learning curves: Lack of experience can be a barrier to entry in an industry with
significant learning curves.
Case Study:
The Government of Bangladesh is doing all they can to encourage investors; hence the
establishment of several export processing zones. If you intend to come into Bangladesh as a
social entrepreneur, then you may be coming into a safer environment because the country
has a vibrant social enterprise sector and it is noted as one of the most efficient
production/manufacturing hub in the world.
No doubt Bangladesh is recognized globally as one of the leaders when it comes to the
production of textile and garments. This is so because the country can boast of cheap and
vibrant labor and also cheap raw materials. Some big – time textile manufacturing companies
in developed countries have their textile and garment factory established in Bangladesh
because of cost effectiveness. So, even if you don’t intend to live in Bangladesh as an
investor, you can consider establishing your own textile and manufacturing company there
and you will be sure to continue to reap good returns on your investment.
Question:
1. As a new entry in the operations, what are the barriers of entry for new firms to enter into
the industry? Discuss.
2. From your personal experience suggest a new investor what he/she can do to overcome the
entry barriers.
# Productivity Improvement:
Productivity is the value of outputs (services and products) produced divided by the values of
input resources (wages, cost of equipment) used.
Ex: 1 Calculate the productivity for the following operations

a. Three employees process 600 insurance polices in a week. They work 8 hours per
day, 5 days per week.
b. 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 materials and $300 for overhead.
Solution:
Polices Pr ocesses
a. Labour Pr oductivity 
Employee hours
600 Polices

(3 employee)  (8  5 hours / employee)
600
  5 polices / hour.
120
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Quantity at S tan dard cos t

b. Multifacto r Pr oductivity 
Labor Cost  Materials Cost  Overhead Cost
( 400 units ) ($ 10 / Unit ) 4000
   2 . 33
$ 400  $ 1000  $ 300 1700
Exercise:
1. Student tuition at Boehring university is $ 100 per semester credit hour. The state
supplements school revenue by matching student tuition dollar for dollar.
Average class size for a typical three credit course is 50 students. Labor costs are
$4000 per class, materials costs are $ 20 per student per class and overhead costs
are $ 25000 per class.
a. What is multifactor productivity ration for this course process?

b. If instructor work an average of 14 hours per week for 16 weeks for each
three credit class of 50 students, what is the labor productivity ratio?
2. Natalie Attired makes fashionable garments. During a particular week employees

worked 360 hours to produce a batch of 132 garments of which 52 were ‘seconds’
(meaning that they were flawed). Seconds are sold for $ 90 each at Attired’s
Factor outlet store. The remaining 80 garments are sold to retail distribution at
$200 each. What is the labor productivity ratio of this manufacturing process?
Chapter 02
Operations Strategy
Define Strategy-Competitive Priorities of a company – Strategic Decisions in Operations-

Strategy Deployment & Effective ways to deploy strategy
Definition of Strategy: Strategy is a common vision that unites an organization, provides

consistency in decisions and keeps the organization moving in the right direction. Strategy
formulation consists of five basic steps:
1. Defining a primary task: The primary task represents the purpose of a firm-
what the firm is in the business of doing. It also determines the competitive
arena. As such, the primary task should not be defined too narrowly.
2. Assessing core competencies: Core competencies are what a firm does

better than anyone else, its distinctive competence. A firm’s core competence
can be exceptional service, higher quality, faster delivery or lower cost. One
company may strive to be first to the market with innovative designs, whereas
another may look for success arriving later but with better quality.
3. Determining order winners and order qualifiers: Order qualifiers are the
characteristics of a product or service that qualify it to be considered for
purchase by a customer. An Order winner is the characteristics of a product
or service that wins orders in the marketplace- the final factor in the
purchasing decision.
4. Positioning the firm: No firm can be all things to all people. Strategic
positioning involves making choices- choosing one or two important things on
which to concentrate and doing them extremely well. A firm’s positioning
strategy defines how it will compete in the marketplace – what unique value it
will deliver to the customer. An effective positioning strategy considers the
strengths and weaknesses of the organization, the needs of the marketplace,
and the position of competitors.
A company that has positioned itself to compete on cost, quality, flexibility

and speed.
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Competing on cost: Carefully designed service, efficient operations and

committed personnel help to establish strategy of low cost and support control
growth. Companies that compete successfully on cost realize that low cost
cannot be sustained as a competitive advantage if increases in productivity are
obtained solely by short-term cost reductions. A long-term productivity
‘portfolio’ is required that trades off current expenditures for future reductions
in operating cost. The portfolio consists of investments in updated facilities
and infrastructure, equipment, programs and systems to streamline operations
and training and development that entrance the skills and capabilities of
people.
Competing on quality: Most companies approach quality in a defensive or

reactive mode; quality is confined to minimizing defect rates or conforming to
design specifications. To compete on quality, company must view it as an
opportunity to please the customer, not just a way to avoid problems or reduce
rework cost.
Competing on flexibility: Flexibility is the ability to adjust to changes in

product mix, production volume, or design. Flexibility has become a
competitive weapon. It includes the ability to produce a wide variety of
products, to introduce new products and modify existing ones quickly and to
respond to customer needs. Like windows system, different models of handset
etc.
Competing on speed: Competing on speed requires an organization

characterized by fast moves, fast adaptations and tight linkages. The internet
has conditioned customers to expect immediate response and rapid product
shipment. Service organizations such as SA Poribohon, Amazon.com,
McDonald’s have always competed on speed.
5 Deploying the strategy: Implementing strategy can be more difficult than

formulating strategy. Different departments or functional areas in a firm may
interpret the same strategy in different ways. If their efforts are not co-
ordinate, the results can be disastrous.
Effective ways to deploy strategy:
i. The strategic planning Hierarchy: Senior management with input and

participation from different levels of the organization develops a corporate
strategic plan in concurrence with the firm’s mission and vision, customer
requirements (voice of the customer) and business conditions (voice of the
business). The strategic plan focuses on the gap between the firm’s vision and
its current position. It identifies what needs to be done to close the gap and
provides direction for formulating strategies in the functional areas of the firm
such as marketing, operations and finance. It is important that strategy in each
of the functional areas be internally consistent as well as consistent with the
firm’s overall strategy.
ii. Policy Deployment: Policy deployment also known as hoshin planning tries to
focus everyone in an organization on common goals and priorities by
translating corporate strategy into measurable objectives throughout the
various functions and levels of the organization. As a result, everyone in the
organization should understand the strategic plan, be able to drive several
goals from the plan and determine how each goals tie into their own daily
activities.
iii. Balanced Scorecard: Balanced scorecard measuring more than financial
performance, which examined a firm’s performance in four critical areas.
Finance : How should we look to our shareholders?

Customer : How should we look to our customers?
Processes : At which business processes must be excelling?
Learning and Growing : How will we sustain our ability to change
and improve?
Case Study:
Daraz is an e-commerce venture which started in Pakistan in 2012. Financed by three
German brothers, it has since expanded into both Myanmar and Bangladesh. Following a soft
opening last October, Daraz officially opened in Bangladesh this February and has since then
become a frontrunner in the e-commerce industry. Daraz's specialty is exclusive products and
deals and they have already successfully partnered with major local brands such as Bata,
Ecstasy and Yellow as well as with tech giants Symphony, Samsung and Butterfly. It has
certainly taken the e-commerce market by storm with the website attracting around two
million visitors every month.
According to co-founder Sumeet Singh, one of Daraz's aims is to become the biggest online
market in Bangladesh. “We are choosy in terms of what kind of products and sellers we
bring onboard. What makes Daraz different from everything else here is that we are a curated
market place,” he said, during a sit down with Lifestyle at their head office. “We are also
very committed to providing the most convenience and also the best available deals and
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prices,” he added. It is one of a kind in the sense that they are indeed providing amazing
deals on their website for a whole array of products from electronics to accessories to
clothing products.
The deals are about to get even sweeter since they recently announced that, in collaboration
with their other offices in Pakistan and Myanmaar, Daraz will have a massive sale starting on
December 4 in their South Asian markets. The sale - called Fatafati Friday - is set to host
huge deals and discounts exclusive only to Daraz. “We adopted the Black Friday concept
from the west and applied it to our market in Africa and it was a huge success. So this year,
we think that it'll blow up here. We are running a lot of campaigns to provide the customer
with discounts. Companies like Samsung and Symphony will be giving away huge discounts
on our website and fashion items will also be available up to 70 percent off. We want to
create a huge impact and make this the biggest e-commerce sales event in the country,” said
Sumeet Singh.
Despite their drastic rise to the top in the e-commerce industry, Daraz continues to face
challenges that they have had to work hard to overcome. Initially, one of their main
challenges was deliveries. At the time, Bangladesh did not have a cash-on-delivery concept
so cash collection in itself was a big challenge. To eliminate this problem, Daraz introduced
Easypayway to their website so that customers could pay online and also set up their own
logistics network in Dhaka. Also, to ensure that all deliveries are on time during the Fatafati
sale, Daraz has multiplied their delivery capacity by ten. Another big challenge that Daraz
faces is changing the habit of the customers and getting them to trust and buy online. Since
this is still a relatively new concept in Bangladesh, Daraz sought the help of the former
captain and local hero, Mushfiqur Rahim, to gain the trust of the local public.
It is clear that Daraz is here to stay. Their office centres around a huge room with benches
where all their employees sit together on their laptops and work side by side. It is very
interactive and emits a Silicon Valley vibe. Coupled with an excellent customer service
section and a foosball lounge where the employees can let off some steam, Daraz seems to
have captured the perfect work environment.
Question:
1. Prepare a business strategy for Daraz.
2. Discuss the Effective way to deployment the strategy of Daraz.
# Strategic Decisions in Operations: Strategic decisions in operations involve

products and service, processes and technology, capacity and facilities, human resources,
quality, sourcing and operating systems.
1. Product and Services: The kinds of products and services offered by a company
drive operations strategy. Products and services can be classified as make-to-order,
make- to- stock or assemble-to-order.
iv. Make-to-order: Products & Services are designed, produced and delivered to
customer orders. Examples include wedding invitation, custom-built homes,
custom-tailored clothes etc.
v. Make –to- stock: Products & Services are designed and produced for
‘Standard’ customers in anticipation of demand. Examples includes furniture
of otobi, televisions, airlines flights etc.
vi. Assemble-to-order: Products & Services also known as build-to-order are
produced in standard modules to which options are added according to
customer specifications. Thus, components are made –to-stock and then
assemble to order after the customer order has been received. Examples
include computer system, industrial equipment, corporate training etc.
2. Process and Technology: Production process can be classified into projects, batch
production, mass production and continuous production.
A project is a one-at-a time production of a product to customer order which has a

well defined starting and finished time. Examples include construction projects, new
product development etc.
Batch production processes many different jobs through the production system at the
same time in groups or batches. Examples of batch production include printers,
education, bakeries etc.
Mass production produces large volumes of a standard product for a mass market.
Product demand is stable and product volume is high. Examples include automobiles,
televisions, fast food, computer goods etc.
Continuous production is used for very high volume commodity products that are
very standardized. The system is highly automated and is typically in operation
continuously 24 hours a day. Examples include refined oil, water treatment plants,
food stuffs etc.
3. Capacity and Facilities: Capacity decisions affect product lead times, customer
responsiveness, operating costs and a firm’s ability to compete. Inadequate capacity
24 Course Module
can lose customers and limit growth. Excess capacity can drain a company’s
resources and prevent investments in more lucrative ventures. When, how much and
in what form to alter capacity are critical decisions.
4. Human Decisions: Strategic issues in human resources involve determining the skill
levels and degree of autonomy required to operate the production system, outlining
training requirements and selection criteria and setting up policies on performance
evaluations, compensation and incentives.
5. Quality: Quality permeates virtually every strategic decision. What is the target level
of quality for our products and services? How will it be measured? How will
employee be involved with quality? What types of training are necessary? How will
customer perceptions of quality be determined?
6. Sourcing: On what basis should particular items be made-in-house? When should

items be out sourced? A firm that sells the product, assembles the product, makes all
parts and extracts the raw material is completely vertically integrated. But most
companies cannot or will not make all of the parts that go into a product. A major
strategic decision, then, is how much of the work should be done outside the firm.
This decision involves questions of dependence, competency building and proprietary
knowledge as well as cost.
Operating Systems: Operating systems execute strategic decisions on a day to day basis, so
it is important that they be designed to support how the firm competes in the market place.
The IT system must be able to support both customer and worker demands for rapid access,
storage and retrieval of information. Planning and control systems must be set up with timely
feedback loops and consistent decision making criteria. Inventory levels, scheduling
priorities and reward systems should align with strategic goals.
Chapter 03
Operational Decision Making Tools: Decision Analysis
Elements of Decision Problems, Decision Making Under Certainty, Decision Making

Under Risk (EMV, EOL, EVPI) - Decision Making Under Uncertainty (Pessimistic,
Optimistic, Equal probability, Regret, Hurwicz criterion).
Decision Analysis: Decision analysis is a set of quantitative decision making techniques

for decision situations in which uncertainty exists.
Now, uncertainty can be classified into two ways/ types:
1. Subjective Probability : Subjective probability is the degree of belief to

occurrence of the event.
2. Objective Probability : Objective probability is the probability which can be

derived either based on historical occurrences or based on experimentation.
Alternatively can be derived from statistical formula.
Consistency requirement: If the probability of an event A is 0.65, then the probability of

event B must be 0.35.
i.e. P(A) + P(B) = 1
Mathematically, if A, B Є E
Then
A, B  E
A B = φ
P(A) + P(B) = 1, which is called Consistency requirements.
# Elements of Decision Problems:
A decision problem is usually viewed as having four common elements
1. The alternative course of action: The alternative course of action involves

two or more options or alternative course of action. One and only one of these
alternatives must be selected.
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2. The states of nature: The state of nature are factors that affect the outcome of
a decision but are beyond control of the decision maker, such as rain,
inflation, political development etc.
3. Payoff table: A payoff table is the combination for each possible combination
of alternative course of action and state of nature.
4. Uncertainty: The decision maker is uncertain about what state of nature will
occur. However choose the criterion that results in the largest payoff.
#Types of Decision –Making Environment:
The types of decisions people make depend on how much knowledge or information they
have about the situation. Three decision making environments are defined and explained as
follows:
Type 1: Decision Making Under Certainty: In the environment of decision making

under certainty, decision makers know with certainty the consequence of every alternative
that will maximize their- well – being or will result in the best outcome. Let’s say that you
have $ 1000 to invest for a one year period. One alternative is to open a savings account
paying 6% interest and another is to invest in a government treasury bond paying 10%
interest. Both investment are secure and guaranteed, but as treasury bond will pay a higher
return, you may choose that one.
Type 2: Decision Making Under Risk: In decision making under risk, the decision maker
knows the probability of occurrence of each outcome. For example, that the probability of
being dealt a club is 0.25. The probability of rolling a 5 on a die is 1/6. In decision making
under risk, the decision maker attempts to maximize his or her expected well-being. Decision
theory models for business problems in this environment typically employ two equivalent
criteria: maximization of expected monetary value and minimization of expected loss.
Type 3: Decision Making Under Uncertainty: In decision making under uncertainty the
decision maker does not know the probabilities of the various outcomes. As an example, the
probability that a BNP personnel will be president of Bangladesh 25 years from now is not
known. Sometimes it is impossible to assess the probability of success of a new undertaking
or product.
Decision Making Under Risk
Decision making under risk is a probabilistic decision situation. Several possible states of
nature may occur, each with a given probability.
There are three types of methods or criteria available, which could be of help to the decision
maker.
1. Expected Monetary Value: EMV is the weighted sum of possible payoffs for each
alternative.
i.e. EMV (alternative i ) = (Payoff of first state of nature) x ( Probability of

first state of nature)
+(Payoff of second state of nature)x(Probability of
second state of nature)
+ …. + (Payoff of last state of nature)x(Probability
of last state of nature).
Example: 1
Mc Douglas a national chain fast food restaurant, has been offering a traditional selection of
hamburgers, French fries, soft drinks etc. The company want to introduce breakfast items to
the menu.
Breakfast items are relatively easy to prepare and would not require a large capital outlay for
additional cooking equipment. Most important such items would be sold in the morning
when the demand for the company’s traditional products has been very week. However,
because
a. Many people are known to skip breakfast and
b. The company does not know how competitors may react, the
demand for the new products is uncertain.
So, they consider three levels of customer demand- strong, average and weak.
There are two alternative acts available to Mc Douglas
A1 : Introduce breakfast items.

A2 : Do not introduce breakfast items.
And three possible states of nature
S1 : Strong demand
S2 : Average demand
S3 : Weak demand
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The management developed a set of payoffs for each act / state combination. The payoff
considered such items as capital outlay, depreciation policies, training costs, additional
advertising expenditures and so on. Act A2 , do not introduce breakfast items, has zero
payoffs for all states since three would be no incremental revenue or cost associated with this
decision.
Solution: The payoff table according to the data is
State Act
(demand) A1 A2
(Introduced) (Not
Introduced)
Strong, S1: 30 0
Average, 5 0
S2:
Weak, S3: -15 0
Status Quo, means do not

introduced anything.
Now the management assigns the subjective probability distribution based on the beliefs.
State
(demand) Probability
Strong, S1: 0.2
Average, 0.4
S2:
Weak, S3: 0.4
Hence the payoff matrix
S Act EMV (A1) = 30 (.2) + 5 (.4) – 15 (.4)

A1 A2 P = 6 + 2 – 6 = $2
(S)
S1: 30 0 0.2 EMV (A2) = 0(.2) + 0 (.4) + 0(.4) = 0
S2: 5 0 0.4
S3: -15 0 0.4
A1 is the optimal act. So, introduced

breakfast items.
Example: 2
A newspaper boy has the following probabilities of selling a magazine.
No. of copies Probabilities

Sold
10 0.10
11 0.15
12 0.20
13 0.25
14 0.30
Cost of a copy is 30 paisa, sale price is 50 paisa. He cannot return unsold copies. How many
copies should he order?
Solution: Sales magnitude are 10,11,12,13,14 . There is no reason to buy less than 10 or
more than 14.
Now from any possible combination of supply and demand. The conditional profit
table is
1. Stocking of 10 copies each day will always result in a profit of 200 paisa
irrespective of demand. Even if the demand on some day is 13 copies, he can sell
only 10 and hence his conditional profit is 200 paisa.
2. When he stocks 11 copies his profit will be 220 paisa on days when buyers
request 11, 12, 13 or 14 copies. But on days when he has 11 copies on stock and
buyers buy only 10 copies, his profit decreases to (200 – 30) = 170 paisa.
Thus the conditional profit in paisa is given by Payoff = 20 x copies sold – 30 x

copies unsold.
Conditional profit table
Possible Proba Possible Stock action

Demand bility 10 Copies 11 Copies 12 Copies 13 Copies 14 Copies
(no. of copies )
10 0.10 200 170 140 110 80
11 0.15 200 220 190 160 130
12 0.20 200 220 240 210 180
13 0.25 200 220 240 260 230
14 0.30 200 220 240 260 280
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Expected Monetary Value:

EMV (10) = .10 (200) + .15 (200) + .20 (200) + .25 (200) + .30 (200) = 20 + 30 + 40 + 50 + 60 = 200
EMV (11) = .10 (170) + .15 (220) + .20 (220) + .25 (220) + .30 (220) = 17 + 33 + 44 + 55 + 66 = 215
EMV (12) = .10 (140) + .15 (190) + .20 (240) + .25 (240) + .30 (240) = 14 + 28.5 + 48 + 60 + 72 = 222.5
EMV (13) = .10 (110) + .15 (160) + .20 (210) + .25 (260) + .30 (260) = 11 + 24 + 42 + 65 + 78 = 220
EMV (14) = .10 (80) + .15 (130) + .20 (180) + .25 (230) + .30 (280) = 8 + 19.5 + 36 + 57.5 + 84 = 205
The news boy must, therefore order 12 copies to earn the highest possible average daily
profit of 222.5 paisa.
2. Expected Opportunity Loss (EOL): It is an approach alternative to the EMV

approach.
Opportunity loss, sometimes called regret, refers to the difference between the optimal profit
or payoff and the actual payoff received. In other words, EOL is the cost of not picking the
best solution.
The minimum expected opportunity loss is found by constructing and opportunity loss table
and computing EOL for each alternative. The steps are:
i. The first step is to create the opportunity loss table. This is done by determining the
opportunity loss for not choosing the best alternative for each state of nature.
Define Lij = as the opportunity loss under state Si for act Aj and Li j = M ij  M i*
Where Mi* =The
best pay off
under state Si.
ii. The second step is to compute EOL by multiplying the probability of each state of nature
times the appropriate opportunity loss value.
Example: 3
Mc Dougla’s payoff matrix
S Act EOL (A1) = 0 (.2) + 0(.4) + 15 (.4)

A1 A2 P = $6
(S) EOL (A2) = 30(.2) + 5 (.4) + 0(.4) = 8
S1: 30 0 0.2
S2: 5 0 0.4
S3: -15 0 0.4
Now, Li j = M ij  M i* i.e. L11 = M11 M1*  30 30  0 , L12 = M12 M1*  0 30 30,
L21 = M 21  M 2*  5  5  0 , L22 = M 22  M 2*  0  5  5 ,
L31 = M 31  M 3*   15  0 15 , L32 = M 32  M 3*  0  0  0 ,
Hence the opportunity loss table on the basis of the original matrix is
S Act
A1 A2 P
(S)
S1: 0 30 0.2
S2: 0 5 0.4
S3: 15 0 0.4
Hence A1 is the optimal act as it minimize EOL.
Example: 4
The Conditional Profit Table of the news paper boy is given

(no. of copies )
10 0.10 200 170 140 110 80
11 0.15 200 220 190 160 130
12 0.20 200 220 240 210 180
13 0.25 200 220 240 260 230
14 0.30 200 220 240 260 280
The Opportunity Loss Table / Conditional Loss table (Paisa)

(no. of copies )
10 0.10 0 30 60 90 120
11 0.15 20 0 30 60 90
12 0.20 40 20 0 30 60
13 0.25 60 40 20 0 30
14 0.30 80 60 40 20 0
Hence EOL (10) = .10 (0) + .15 (20) + .20 (40) + .25 (60) + .30 (80) = 0 + 3 + 8 + 15 + 24 = 50 (Paisa)
EOL (11) = .10 (30) + .15 (0) + .20 (20) + .25 (40) + .30 (60) = 3 + 0 + 4 + 10 + 18 = 35
EOL (12) = .10 (60) + .15 (30) + .20 (0) + .25 (20) + .30 (40) = 6 + 4.5 + 0 + 5 + 12 = 27.5
EOL (13) = .10 (90) + .15 (60) + .20 (30) + .25 (0) + .30 (20) = 9 + 9 + 6 + 0+ 6= 30
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EOL (14) = .10 (120) + .15 (90) + .20 (60) + .25 (30) + .30 (0) = 12 + 13.5 + 12 + 7.5+ 0= 45
Hence stocking 12 copies each day will minimize expected opportunity loss, which is 27.5
paisa.
3. Expected Value With Perfect Information: (EVPI)
Complete and accurate information about the future demand, referred to as perfect
information would remove all uncertainty form the problem. With this perfect information,
the decision maker would know in advance exactly about the future demand.
EVPI represents the maximum amount he would pay to get the additional information on
which may be based the decision alternative.
EVPI = Expected profit with perfect information – EMV i.e EVPI = EPPI – EMV (max)
Example: 5 Given Mc Douglas payoff matrix
S Act
A1 A2 P
(S)
S1: 30 0 0.2
S2: 5 0 0.4
S3: -15 0 0.4
Let Mi* = Maximum payoff or best outcome for first state of nature.
 EPPI  M 8
i . P ( Si )
S M i* P M i8 . P( Si )
(Si)
S1: 30 0.2 6
S2: 5 0.4 2
S3: 0 0.4 0
 M i . P ( Si ) = 8
8
 EPPI  8 Also Max EMV = 2
 EVPI  8  2  $6 * EVPI is sometimes termed the cost of uncertainty.

Exercise: 1 An ice-cream retailer buys ice-cream at a cost of Tk. 5 per cup and sells it for
Tk. 8 per cup; any remaining unsold at the end of the day can be disposed of at a salvage
price of Tk. 2 per cup. Past sales have ranged between 15 and 18 cups per day; there is no
reason to believe that sales volume will take on any other magnitude in future. Find the
EMV, EOL and EVPI if the sale history has the following probabilities:
Market size: 15 16 17 18
Probability: 0.10 0.20 0.40 0.30
Exercise: 2 A TV dealer finds that the cost of a TV in stock for a week is Rs. 30 and the
cost of a unit shortage is Rs. 70. For one particular model of TV the probability distribution
of weekly sales is as follows:
Weekly Sales: 0 1 2 3 4 5 6
Probability: 0.10 0.10 0.20 0.25 0.15 0.15 0.05
Find the number of TV that dealer should stock every week.
Exercise: 3 Your Company manufactures goods for a market in which the technology of
the products is changing rapidly. The research and development department has produced a
new product which appears to have potential for commercial exploitation. A further Rs.
60,000 is required for development testing.
The company has 100 customers and each customer might purchase, at the most , one unit of
the product. Market research suggests a selling price of Ts. 6000 for each unit with total
variable costs of manufacture and selling estimated at Rs. 2000 for each unit.
As a result of previous experience of this type of market, it has been possible to derive a
probalility distribution relating to the proportions of customers who will buy the product, as
follows:
Proportion of customers: 0.04 0.08 0.12 0.16 0.20

Probability: 0.1 0.1 0.2 0.4 0.2
Determine Expected Opportunity Losses, given no further information than that stated above
and state, whether or not, the company should develop the product.
Exercise: 4 A company has recently installed new machinery but has not yet decided on
the appropriate number of a certain spare part required for repairs. The part will cost Rs.
2000 each but are only available if ordered during the time of installation. After installation if
there will be required any that will cost Rs. 15000 considering transportation and setup cost.
The plant has an estimated life of 10 years. Following are the probability distribution of
failures during this time, based on the experience with similar plants;
34 Course Module
No. of failure over 10 years period: 0 1 2 3 4 5 and over

Probability: 0.1 0.4 0.3 0.1 0.1 nil
Decision Making Under Uncertainty
When a manager cannot assess the outcome probability with confidence or when virtually no
probability data are available, other decision criteria are required. This type of problem has
been referred to as decision making under uncertainty. The criteria or method that we cover
in this section include
1. Maximax (optimistic)
2. Maximin (pessimistic)
3. Minimax
4. Hurwicz Criterion (Criterion of realism)
5. Laplace Criterion or Equally likely criterion or Criterion of Rationality.
1. Maximax (Optimistic) Criterion: Under this the decision maker finds the maximum
possible payoff for each alternative and then chooses the alternative with maximum
payoff within this group.
2. Maximin (Pessimistic) Criterion: To use this criterion the decision maker finds the
minimum possible payoff for each alternative and then chooses the alternative with
maximum payoff within this group.
3. Minimax Criterion : The decision maker tries to minimize the regret before actually
selecting a particular alternative. For this he determines the maximum regret amount
for each alternative and then choose the alternative with the minimum of the above
maximum regrets.
4. Hurwicz Criterion: Also called the weighted average criterion. It is a compromise

between the maximax and maximin decision criteria. It takes both of them into
account by assigning them weights in accordance with the degree of optimism or
pessimism.
Select α = Index of optimism, If α = 0 pessimistic, then α = 1 optimistic.
Hence α is specified (0,1) range. Also α = 0.5 implies neither optimistic nor
pessimistic.
5. Laplace Criterion: It is based on what is known as the principle of insufficient

reason. Because of the probability distribution of the states of nature is not known,
the criterion assigns equal probabilities to all the events of each alternative and select
the alternative associated with the maximum expected payoff.
Example: 6
The following matrix gives the payoff of different strategies (alternatives) S1,S2, S3
against conditions (events) N1, N2, N3 & N4 .
N1 N2 N3 N4
S1 Rs. 4000 Rs. –100 Rs. 6000 Rs.
18000
S2 20000 5000 400 0
S3 20000 15000 -2000 1000
Indicate the decision taken under the following approach:
a. Pessimistic b. Optimistic c. Equal Probability d. Regret

e. Hurwicq Criterion, degree of optimism being 0.7
Solution:
Pessimistic Optimistic Equal Probability Value
S1 -100 18000 Rs. ¼ ( 4000 – 100 + 6000 + 18000) =

6975
S2 0 20000 Rs. ¼ ( 20000 + 5000 + 400 + 0) = 6350
S3 -2000 20000 Rs. ¼ ( 20000 + 15000 -2000 + 1000) =
8500
i. S2 is the optimal decision.

ii. S2 or S3 is the optimal decision.
iii. S3 is the alternative to be selected.
iv. Under regret criterion
i th regret = (maximum payoff – i th payoff) for the jth event.

36 Course Module
N1 N2 N3 N4 Maximum
regret
S1 16000 15100 0 0 16000
S2 0 10000 5600 18000 18000
S3 0 0 8000 17000 17000
The decision alternative S1 would be chosen since it corresponds to the minimal of

the maximum possible regrets.
v. For the given payoff matrix the minimum and the maximum payoff for
each alternative are given below.
Minimum Maximum Payoff = α. Maximum + (1- α) minimum

payoff payoff Where α = 0.7
S1 -100 18000 .7 x 18000 + .3 x (-100) = 12570
S2 0 20000 .7 x 20000 + .3 (0) = 14000
S3 -2000 20000 .7 x 20000 + .3 (-2000) = 13400
Thus under Hurwicz rule, alternative S2 should be chosen as it is

associated with the highest payoff of Rs. 14000.
Exercise: 5 Tele comp is a U.S.-based manufacturer of cellular telephones. It is planning

to build a new manufacturing and distribution facility in either South Korea, China, Taiwan,
Poland, or Mexico. The cost of the facility will differ between countries and will even vary
within countries depending on the economic and political Climate, including monetary
exchange rates. The company has estimated the facility cost (in $ millions) in each country
under three different future economic/political climates as follows.
Economic/Political Climate
Country Decline Same Improve
South Korea 21.7 19.1 15.2
China 19.0 18.5 17.6
Taiwan 19.2 17.1 14.9
Poland 22.5 16.8 13.8
Mexico 25.0 21.2 12.5
Determine the best decision using the following decision criteria. (Note that since the payoff
is cost, the Maximax criteria becomes minimin and maximin becomes minimax.)
a. Minimin b. Minimax c. Hurwicz (α = 0.40) d. Equal likelihood
Exercise: 6 A global economist hired by tele comp, the U.S.-based computer

manufacturer in Exercise 1, estimates that the probability that the economic and political
climate will decline during the next five years is 0.30, the probability that it will remain
approximately the same is 0.40, and the probability that it will improve is 0.30. Determine
the best country to construct the new facility in and the expected value of perfect
information.
Exercise: 7 Landloc, a real estate development firm, is considering several alternative

development projects. These include building and leasing an office building, purchasing a
parcel of land and building a parking lot, buying and leasing a warehouse, building a
shopping mall, and building and selling condominiums. The financial success of these
projects depends on interest rate movement in the next five years. The various development
projects and their five-year financial return ($ millions) given that interest rates will decline,
remain stable, or increase are shown in the following payoff table.
Determine the best investment using the following decision criteria.
a. Maximax b. Maximin c. Equal likelihood d. Hurwicz (α = 0.3)
Interest Rates
Project Decline Stable Increase
Office building 0.5 1.7 4.5
Parking lot 1.5 1.9 2.4
Warehouse 1.7 1.4 1.0
Shopping mall 0.7 2.4 3.6
Condominiums 3.2 1.5 0.6
Exercise: 8 Nicole Nelson has come into an inheritance from her grandparents. She is
attempting to decide among several investment alternatives. The return after one year is
dependent primarily on the interest rate during the next year. The rate is currently 7%, and
she anticipates it will stay the same or go up or down by at most 2 points. The various
investment alternatives plus their returns ($10,000s) given the interest rate changes are
shown in the following table.
Interest Rates
Investments 5% 6% 7% 8% 9%
Money market fund 1.7 2.8 3.0 3.6 4.5
Stock growth fund -5 -3 3.5 5 7.5
Bond fund 5 4 3.5 3 2
Government fund 4 3.6 3.2 2.8 2.1
Risk fund -12 -7 4.2 9.3 16.7
Savings bonds 3 3 3.2 3.4 3.5
38 Course Module
Determine the best investment using the following decision criteria.

a. Maximax b. Maximin c. Equal likelihood
d. Assume that Nicole, with the help of a financial newsletter and some library research, has
been able to assign probabilities to each of the possible interest rates during the next year as
follows:
Interest Rate 5% 6% 7% 8% 9%
Probability 0.1 0.2 0.4 0.2 0.1
Using expected value, determine her best investment decision
Exercise: 9 The Dynamax Company is going to introduce one of three new products: a
widget, a hummer, or a nimnot. The market conditions (favorable, stable, or unfavorable)
will determine the profit or loss the company realizes, as shown in the following payoff
table.
Market Conditions
Favorable Stable Unfavorable
Product 0.2 0.5 0.3
Widget $160,000 $90,000 $50,000
Hummer 70,000 40.000 20,000
Nimnot 45,000 35,000 30.000
a. Compute the expected value for each decision and select the best one.
b. Determine how much the firm would be willing to pay to a market research firm to gain
better information about future market conditions.
c. Assume that probabilities cannot be assigned to future market conditions, and determine
the best decision using the maximax, maximin, minimax regret, and equal likelihood criteria
Exercise: 10 John Wiley Publishing Company publishes an operations management

textbook that is scheduled for a revision. The book has been moderately successful, but each
year more new books enter the market, some existing books are dropped by publishers, and
various innovative pedagogical approaches are introduced by authors and publishers, such
that the competitive market is always highly uncertain. In addition, the role the Internet will
play in future textbook publishing is an unknown. As a result, Wiley is trying to decide
whether to publish the next edition of the OM book as a smaller paperback, publish a new
edition very similar in size and content to the current edition, significantly revise the book
with an emphasis on services and processes, or make a major revision with significant
physical changes including adding color and more graphics. The following payoff table
summarizes the possible revision decisions with profits (or losses) for the three-year lifecycle
of the new edition, and the future states of nature relative to the competitive market.
Competitive Market
Publication Decision Unfavorable Same Favorable
Paperback $68,000 $170,000 $395,000
Similar revision 24,000 375,000 672,000
Major content revision 31,000 515,000 725,000
Major physical revision 105,000 280,000 972,000
Determine the best decision for the publisher using the following criteria.
a. Maximax b. Minimax c. Equal likelihood d. Hurwicz (α= .35)
Exercise: 11 The manager of the greeting card section of Harvey’s department store is
considering her order for a particular line of holiday cards. The cost of each box of cards is
$3 each box will be sold for $5 during the holiday season. After the holiday season, the cards
will be sold for $2 a box. The card section manager believes that all leftover cards can be
sold at that price. The estimated demand during the holiday season for the cards, with
associated probabilities, is as follows:
Demand (boxes) Probability
25 0.10
26 0.15
27 0.30
28 0.20
29 0.15
30 0.10
a. Develop the payoff table for this decision situation and compute the expected value for
each alternative and identify the best decision.
b. Compute the expected value of perfect information.
Exercise: 12 A machine shop owner is attempting to decide whether to purchase a new drill
press, a lathe, or a grinder. The return from each will be determined by whether the company
succeeds in getting a government military contract. The profit or loss from each purchase and
the probabilities associated with each contract outcome are shown in the following payoff
table. Compute the expected value for each purchase and select the best one.
Contract No Contract
Purchase 0.40 0.60
Drill press $40,000 $8,000
Lathe 20,000 4,000
Grinder 12,000 10,000
40 Course Module
Exercise: 13 Alex Mason has a wide-curving, uphill driveway leading to his garage. When
there is a heavy snow, Alex hires a local carpenter, who shovels snow on the side in the
winter, to shovel his driveway. The snow shoveler charges $30 to shovel the driveway.
Following is a probability distribution of the number of heavy snows each winter.
Heavy Snows 1 2 3 4 5 6 7
Probability 1.12 0.19 0.24 0.22 0.13 0.08 0.02
Alex is considering the purchase of a new self-propelled snow blower for $575 that would
allow him, his wife, or his children to clear the driveway after a snow. Discuss what you
think Alex’s decision should be and why.
Exercise: 14 Dr. Thomas has been thinking about starting his own independent nursing
home. The problem is to decide how large the nursing home should be. The annual returns
will depend on both the size of nursing home and a number of marketing factors. After a
careful analysis. Dr. Thomas developed the following table:
Size of the Nursing Good Fair Poor

Home Market Market Market
(Rs) (Rs) (Rs)
Small (S) 50,000 20,000 -10,000
Medium (M) 70,000 35,000 -25,000
Large (L) 90,000 35,000 -45,000
Very Large (VL) 2,00,000 25,000 -1,20,000
Make the decision under the environment of Uncertainty. For Hurwicz Criterion,
consider degree of realism is 0.8
Exercise: 15 An investor was considering stock purchase in two companies. He determined

the following payoff table contingent upon whether company A or B wins a competition for
share of the market.
State a1 (Investment in A) a2(Investment in B)

A wins 30 0
B wins 40 80
What is the Maximax and Maximin strategy? At what probability of A’s winning is the
expected value the two strategies the same?
Chapter 04
Process And Technologies
Defines Process- Process Strategy-Process Selection with Break –Even Analysis- Process
Planning (Make –or-Buy decisions)- Process Analysis- Process Reengineering.
A process is a group of related tasks with specific inputs and outputs. Processes exist to
create value for the customer, the shareholder or society. Process design defines what tasks
need to be done and how they are to be coordinated among functions, people and
organizations.
Process Strategy is an organizations overall approach for physically producing goods and
providing services. A firm’s process strategy defines its
1. Vertical Integration: The extent to which the firm will produce the inputs
and control outputs of each stage of the production process.
2. Capital intensity: The mix of capital (i.e equipment, automation) and labor
resources used in the production process.
3. Process flexibility: The ease with which resources can be adjusted in
response to changes in demand, technology, products or services and resource
availability.
4. Customer involvement: The role of customer in the production process.
# Types of production processes

There are four types of production process
1. Projects: Projects take a long time to complete, involve a large investment of
funds and resources, and produce one item at a time to consume order. Examples
include construction projects, shipbuilding, new-product development and aircraft
manufacturing.
2. Batch production: Batch production processes many different jobs through the
production system at the same time in groups or batches. Products are typically made
to customer order, volume (in terms of customer order size) is low, and demand
fluctuates. Examples of batch production include printers, bakeries, machine shops,
education and furniture making.
3. Mass production: Mass production produces large volumes of a standard product

for a mass market. Product demand is stable, and product volume is high. Goods that
are mass produced include automobiles, televisions, personal computers, fast food
and most consumer goods.
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4. Continuous production: Continuous production is used for very high-volume

commodity products that are very standardized. The system is highly automated and
is typically in operation continuously 24 hours a day. Refined oil, treated water,
paints, chemicals and foodstuffs are produced by continuous production.
Continuous
Production
High
Mass
Production
Volume
Batch
Production
Projects
Low
Low High
Standardization
Figure: The Product-Process Matrix
Case Study:
If you are looking for contemporary solid wood and office furniture with attractive design for
your home or office solution, you can consider the Akhtar Brand. Since 1976, Akhtar
Furnishers Ltd. strives for their designs to reflect customer taste and needs as well. Akhtar
Furnishers Ltd. has core values like ensuring top notch quality, sincerity in providing service,
commitment to teamwork, professionalism and integrity. In recognition to Akhtar Furnishers
Ltd.’s commitment and good practice, the company was awarded ISO 9001: 2008 Quality
Certification in 2001. The 140,000 square feet manufacturing plant is equipped with modern
and sophisticated technology and production facilities. We have automatic wood seasoning
and chemical plant. The machining section is fully equipped with European automatic wood
working machineries and is managed by skilled engineers. The finishing section is in a dust
free controlled environment. Akhtar Furnishers Ltd. completed many prestigious projects
like the National Parliament Building (Jatiyo Sangsad Bhaban), National Museum, CDP,
Ashugonj Fertilizer Project and Paksey Bridge etc. Finally, they started their endless journey
in improving customer satisfaction.
Question:
1. Which type of production process does Akhter furniture use to produce its product
and why?
2. Akhter furniture is going to expand its business toward district level, discuss which
option (buy/make) will be effective?
# Process selection with Break-Even Analysis
There are several quantitative techniques available for selecting a process. One that
bases its decision on the cost trade –offs associated with demand volume is break-even
analysis. The components of break-even analysis are volume, cost, revenue and profit.
Volume is the level of production, usually expressed as the number of units produced and
sold. We assume that the number of units produced can be sold.
Cost is divided into two categories, fixed and variable. Fixed costs remain constant
regardless of the number of units produced, such as plant and equipment and other elements
of overhead.
Break Even Interpretation I: (Based on Quantity)
Break-even means neither make a profit nor suffer a loss. Simple means that revenues must
equal costs.
We know, Profit = Revenue – Cost
Cost is divided into two categories, fixed and variable. Fixed costs remain constant
regardless of the number of units produced, such as plant and equipment and other elements
of overhead.
Variable costs vary with the volume of units produced, such as labor and material. Thus
Total cost = Variable cost + Fixed cost
C = vq + F
Revenue on a per unit basis is simply the price at which an item is sold. Total revenue is
price times volume sold. Total revenue = Price per unit X Volume , R = pq
So that Profit = ( Price per unit)(Number of units sold) – {( Variable cost per unit)
(number of units) +Fixed Cost}
i.e. P = pq- (Vq +F)
At break even profit = 0 (or, Revenue = Cost)

which implies,
0 = pq- (Vq +F)
F
 q= , break-even quantity.
P V
44 Course Module
Example: 1
Travis and Jeff own an adventure company called Whitewater Rafting. Due to quality and
availability problems, the two entrepreneurs have decided to produce their own rubber rafts.
The initial investment in plant and equipment is estimated to be $2000. Labor and material
cost is approximately $50 per raft. If the rafts can be sold at a price of $100 each, what
volume of demand would be necessary to break even?
Solution: Fixed cost F = $2000

Variable cost/ raft v = $50
Price/ raft p = $100
F 2000
Then the break-even quantity is q   40 rafts
p  v 100  50
Total cost at break even = vq + F = 50 x 40 + 2000 = $4000
Total revenue at break even = pq = 100 x 40 = $ 4000
Revenue line
Total Cost & Revenue

Axis
Cost Line
Profit
5000
Break even point

4000
3000 Variable Cost= $2000
loss
2000
Fixed cost = $2000

1000
Quantity Axis
10 20 30 40 50
Example: 2
The owners of Whitewater Rafting believe demand for their product will far exceed the
break-even point in example 1 They are now contemplating a larger initial investment of
$10,000 for more automated equipment that would reduce the variable cost of manufacture to
$20 per raft. The labor cost of constructing and customizing a raft remains at $10 per raft.
Compare the old manufacturing process described in Example 1 with the new process
proposed here. For what volume of demand should each process be chosen?
Solution: If we called the old process = A & new process= B
The point of indifference between A and B is

Process A Process B
$ 2000 + $50q $ 10,000 + $30q
or 20q = $8000
i.e q = 400, q = 400 rafts
If demand ≤400 rafts, the alternative with the lowest fixed cost, process A should be chosen.
If demand ≥ 400, the alternative with the lowest variable cost, process B is preferred.
As the rafts are sold for $100 a unit regardless of which process is used to manufacture them,
without revenue line the graph confirmed the following.
Total cost of Pro : A
Total cost of Pro : B
20000
15000
10000
Fixed cost for Process B

5000 Choose Choose
Process A Process B
2000
Fixed cost for Process A
200 400 600 800

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Point of indifference = 400 units.
Total Cost for process A = vq + F

= 50 x 400 + 2000
= $22000
Total Cost for process B = vq + F

= 30 x 400 + 10000
= $22000
If demand ≤400 rafts, the alternative with the lowest fixed cost, process A should be chosen.
If demand ≥ 400, the alternative with the lowest variable cost, process B is preferred.
As the rafts are sold for $100 a unit regardless of which process is used to manufacture them,
without revenue line the graph confirmed the following.
Assumptions underlying Break-Even Analysis:
1. All the costs are either perfectly variable or absolutely fixed over the entire range of
production.
2. All revenue is perfectly variable based on quantity produced.
3. The volume of sales and volume of production are equal.
4. In case of multi product firms, the product mix should be stable.
Example: 3
A manufacturer has a fixed cost of $60,000 and a variable cost of $2 per unit made and sold.
Selling price is $5 per unit.
a. Find the revenue, cost & profit functions using q for number of unit.
b. Compute profit if 10,000 units are made and sold.
c. Find Break-Even quantity and Break-even sales volume. Construct the break even
chart.
Solution: a. Cost function is, C

= vq + F
= 2q + 60000
And, Revenue function is, R = pq
= 5q
Profit function is, P = R–C

= 5q – 2q -60000
= 3q-60000
b. If 10,000 units are made and sold, then
Profit, P = 3x 10000 -60000

= -$30000 ( ie. loss = $30,000)
c. Break Even Quantity,
F 60000
q   20,000 units.
p  v 52
Break Even dollar volume of sales = 20,000 X 5 = $ 100,000
Break Even chart: Revenue Function
Profit Cost function.

Total Revenue & cost
Axis 100
BEQ
80
60
40 loss
Fixed Cost = 60,000
20
Quantity Axis
5 10 15 20 (In Thousand)
Example: 4
A company has a linear total cost function and has determined that over the next three
months it can produce 1000 units at a total cost of $300,000. This same manufacturer can
produce 2,000 units at a total cost of $400,000. The units sell for $ 180 each.
a. Determine revenue, cost and profit functions using q for number of units.
b. What is marginal cost?
c. Find Break –even quantity and break-even dollar volume of sales?
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d. What would be the company’s cost if it decided to shut down operations for the next
three months? If, because of a strike, the most the company can product is 1000 units,
should it shut down? Why or why not?
Solution: We know the cost function is C = vq + F
Total cost is $300,000 for producing 1000 units.
So that we have 300,000 = 1000v + F………(i)
Also Total cost is $400,000 for producing 2000 units.
So that we have 400,000 = 2000v + F………(ii)
By solving equation (i) and (ii), we have

100,000 = 1000v
Which implies, v = 100 (variable cost per unit)
Putting the value of v in equation (i), we have, F = 200, 000 (Fixed cost)
Hence cost function is C = 100q + 200,000

Revenue function is R = 180q
Profit function is P = R- C
= 180q – 100q – 200,000
= 80q – 200,000
b. Marginal cost is 100 which is variable cost per unit.
c. At Break Even Point, Profit = 0
80q = 200,000
q = 2500 units.
Break even sales volume = 2500 x 180 = $ 450,000
d. If 1000 units is produced because of strike,
Profit = 80 x 1000 – 200,000

= -120,000 (loss is 120,000)
The company should not shut down. Because if it does the loss will be $ 200,000 .
But here the loss is 120,000 for producing 1000 units, which is smaller than $200,000.
Question: Explain how the ‘Break –Even-point theory’ helps in decision making?
Answer: This analysis is used as a tool by management to aid in making decisions.
1. It can be applied to identify minimum quantity to avoid losses.

2. It helps to determine the unit cost of a product corresponding to any
particular quantity of production.
3. It suggests about the selling price determination.
4. It informs about the percentage financial yield for a project.
5. It informs about the fact that the company must run at its scheduled target
to get advantage of the optimal cost of production per unit.
Break Even Interpretation II: (Based on Sales)
Suppose that an item is cost $ 120 and priced to sell at $200. The markup is therefore $70.
That is
Cost = $130
Retail Price = $200
Markup = Retail Price – Cost = $200 - $130 = $70
Now markup can be viewed from two perspective. A function of the cost or a function of the
retail price.
Markup 70
That is   0.54 or 54%
Cost 130
On the other hand, in financial statements, accountants use the concept of margin, which is
the markup percentage on retail price. That is
Markup 70
  0.35 or 35%
Re tail Pr ice 200
This means that 35 percent of the retail price of $200 is margin, and the other 65 percent of
$200, which is
50 Course Module
0.65 (200) = $130 is the cost.
Thus cost of goods sold = 0.65s

Consider other cost is the 10 percent of sales. Which is then 0.10s
Finally , the company budgets fixed expense at $12000, So that fixed expense, F = $12000
So, by considering all costs , we have C(s) = 0.65s + 0.10s + 12000
Or, C(s) = 0.75s + 12000
Now, if the firm sells $s worth of merchandise, its revenue will clearly be the same $s. So
that the revenue function is
R(s) = s
Hence profit function is P(s) = R(s) – C(s)

= s- 0.75s-12000
= 0.25s – 12000
12,000
At break even, profit = 0, so that break even sales volume here is, s =  $48000
0.25
Note: It we consider the variable cost per dollar of sales is $m, then the variable cost will be
ms
Then C(s) = ms + F
R(s) = s
P(s) = s – ms – F
At break even, s – ms = F
F
Break Even Sales, S e 
1 m
12000
Consider the previous data we have, S e   $48000
1  0.75
Example 5:
A company expects fixed cost of $22,800. Margin is to be 55 percent of retail. Variable cost
is addition to costs of goods is estimated at $0.17 per dollar of sales.
a. Find revenue, cost and profit functions using s for sales volume.
b. Find break even point and draw break even chart.
c. What will net profit before taxes be on sales of $75000?
Solution: Fixed Cost, F = $22.800

Margin = 55%
Hence Cost = 45% = 0.45
Cost of goods sold = 0.45s
Variable cost in addition to costs of goods is estimated at $0.17
a. Cost function C(s) = 0.45s + 0.17s + 22,800
= 0.62s + 22,800
Revenue function R(s) =s

Profit function, P = s – 0.62s – 22,800
= 0.38s – 22,800
b. At break even, profit = 0

Hence break even sales volume = $ 60,000
Cost & Revenue, R = s

Revenue
Cost = 0.62s + 22,800
80
60 BEP ( 60000, 60000)
40 Variable cost
20
F = $22,800
Sales
20 40 60
(In Thousand)
c. If sales is $ 75,000
Then profit = 0.38s – 22,800
= 0.38 x 75000 – 22,800
= $5700
Example: 6
A department store has overhead costs of $250,000 and a linear total cost function. The
controller has set the store’s margin policy using the example of a $140 markup on a item
52 Course Module
retailing for $500. The controller has also estimated that other variable costs on the same
retail item selling for $500 are $15.
a. Find revenue, cost and profit functions.
b. Find break even dollar volume of sales. What will be the profit if sales are $30,00000
Solution: Fixed cost F = $250,000
Markup 140
Margin =   0.28  28%
Re tail Pr ice 500
Cost = 72%
Cost of goods sold =0.72s
15
Other variable cost = x 100 = 3% = 0.03s
500
Cost function C(s) = 0.72s + 0.03s + 250,000 = 0.75s + 250,000

Revenue function R(s) = s
Profit function Profit = s – 0.75s – 250,000
= 0.25s – 250,000
Break even sales volume, s = $10,00000
If sales is $ 30,00000 , Then Profit = 0.25(3000000) – 250000 = $500,000
Exercise 1: A company has a linear total cost function and has determined that is has a
total cost of $30,200 on sales of $20,000. This same company has a total cost of $33,400 on
sales of $30,000.
a. Find revenue, cost and profit functions using s for sales volume.
b. The variable cost per dollar of sales.
c. The fixed cost.
d. The variable cost on sales of $40,000
e. The total cost on sales of $40,000
f. Break Even dollar volume of sales.
g. Profit before taxes on sales of $30,000.
# Process Planning (Make –or – Buy decisions)
Question: Explain the different factors involved in ‘make or buy’ decision.
Process planning determines how a product will be produced or a service provided. It decides
which components will be made in house and which will be purchased from a supplier,
selects processes and specific equipment and develops and documents the specification for
manufacturer and delivery.
Make-or- Buy decision: Companies that control the production of virtually all of their
component parts including the source of raw materials are said to be vertically integrated.
For process planning we need to decide which items will be purchased from an outside
supplier and which items will be produced in our own factories. This first cut sourcing
decision is called make – or – buy, which depends on the following factors:
a. Cost:
 Make or buy, which is cheaper?
 To perform the service in house or subcontract it out?
 Cost includes overhead and manufacturing.
b. Capacity: Depends on the stability of demand and the capacity of the
process, the
company produce in –house those parts or products with steady
demand that consume a set capacity, where as those whose
demand patterns are uncertain or volatile are usually
subcontracted.
c. Quality: The capability to provide quality parts consistently is an
important consideration. It is easy to control quality of items
produced at home. However, standardization of parts, supplier
certification and supplier involvement in design can improve
the quality of supplied parts.
d. Speed: Sometimes components are purchased because a supplier can
provide goods sooner than the manufacturer. Speed is useful
only if it is reliable.
e. Reliability: Suppliers need to be reliable in both the quality and the timing
of what they supply. Many companies today are requiring their
suppliers to meet certain quality and delivery standards to be
certified as an approved supplier. ISO is the European
Community’s quality certification program.
f. Expertise: Companies that are especially good at making or designing
certain items may want to keep control over their production.
54 Course Module
# Evaluating Process:
Let Fb = Fixed cost of buy option / year
Fm = Fixed cost of make option /year
Vb = Variable cost per unit of buy option
Vm = Variable cost per unit of make option.
Total cost for buy option = Fb + VbQ .

Total cost for buy option = Fm + VmQ
To find the break-even quantity, we set two cost functions equal and solve for Q
Fm  Fb
Fb + VbQ = Fm + VmQ Which implies Q=
Vb  Vm
The make option should be considered ignoring qualitative factors, only if its variable
costs are lower than those of the buy option. The reason is that the fixed costs for
making the services or product are typically higher than the fixed costs for buying.
Again buy option is best if production volumes are less than the break-even quantity.
Example: 7
The manager of a fast food restaurant featuring hamburgers is adding salads to the menu.
There are two options and the price to he customer will be the same for each. The make
option is to install a salad bar stocked with vegetables, fruits and toppings and let the
customer assemble the salad. The salad bar would have to be leased and a part time
employee hired. The manager estimates the fixed costs at $ 12000 and variable costs taking $
1.50 per salad. The buy option is to have pre-assembled salads available for sale. They would
be purchased from a local supplier at $ 2.00 per salad. Offering pre-assembled of additional
refrigeration, with an annual fixed cost of $2400. The manager expects to sell 25000 salads
per year. What is the break-even quantity?
Fm Fb
Solution: The formula for the break-even quantity yields Q =
Vb Vm
12000  2400

2  1.5
19200 salads
The make option is preferred as the 25000 salad sales forecast exceeds this amount.
Cost (25000, 52400)- Cost of P:2
(25000, 49500) –Cost of P:1

40,800
Process 1
20
(In Thousand)
10 Process 2
2 19200
5 10 15 20 25
(In Thousand)
Process: 1 Process: 2
Fixed cost: 12000 Fixed cost: 2400

V. cost /unit: 1.50 V. cost / unit: 2.00
Expected demand: 25000 Expected demand: 25000
Break – Even Quantity: 19,200

Decision: Process 1 should be selected.
# Process Analysis:
Process Analysis is the systematic examination of all aspects of a process to improve its
operation-to make it faster more efficient, less costly or more responsive to the customer.
The basic tools of process analysis are process flowcharts, process diagrams and process
maps.
Process flowcharts look at the manufacture of a product or delivery of a service from a broad
perspective. The chart uses five standard symbols
O- For operations  - For transportation □ – For Inspection D- For delay ∆ - Storage

56 Course Module
By incorporating non productive activities (inspection, transportation, delay, storage), as well

as productive activities (operations) process flow charts may be used to analyze the
efficiency of a series of process and to suggest improvements.
Process diagram detail each step of a process in simple graphic form. Decision points can be
added as well as parallel process flows (more complex process diagram are often called
process maps)
# Process Reengineering: ( is the total redesign of a process)
Processes are planned in response to new facilities new products, new technologies, new
markets or new customer expectations. Processes should be analyzed for improvement on a
continuous basis. When continual improvement efforts have been exhausted and
performance expectations still cannot be reached with an existing process, it is time to
completely redesign or reengineer the process.
Example: 8
The owner of a small manufacturing business has patented a new device for washing dishes
and cleaning dirty kitchen sinks. Before trying to commercialize the device and add it to her
existing product line, she wants reasonable assurance of success, variable cost are estimated
at $7 per unit produced and sold. Fixed cost $56000 per year.
a. If the selling price is $25, find break-even Qty. Show graphically and
algebraically.
b. Forecast sales for the first year are 10,000 units if the price is reduced to $15,
with this pricing strategy, what would be the product’s total contribution to
profits in the first year?
F 56000
Solution: a. Break-even quantity is q   3111 units
p  v 25  7
b. Total cost = VQ +F
= 7Q + 56000 = 7 X 3111 + 56000
= 77,777
Total Revenue = 25Q = 77,775
Total profit contribution = Total revenue- Total cost

= PQ – (VQ + F)
= 15(10000) – [ 56000 + 7(10000)]
= $124000
Exercise: 2 OM explorer owner of Williams products estimates the variable costs of each
unit produced and sold at $6 and the fixed costs per year at $ 60,000.
a. If the selling price is set at $ 18 each, how many units must be produced and sold
for Williams to break even? Draw the chart also.
b. Williams forecasts sales of 10,000 units for the first year if the selling price is set
at $14 each. What would be the total contribution to profits from this new product
during the first year?
c. If the selling price is set at $12.50, Williams forecasts that first year sales would
increase to 15000 units. Which pricing strategy ( $14 or $12.5) would result in the
greater total contribution to profits?
Exercise: 3 A product at the Jennings Company has enjoyed reasonable sales volumes,
but its contribution to profits have been disappointing. Last year 17500 units were produced
and sold. The selling price is $22 per unit, variable cost per unit is $18 and fixed cost is
$80,000
a. Find BEQ
b. Jennings is considering ways to either stimulate sales volume or decrease
variable costs. Management believes that sales can be increased by 30 percent
or that v can be reduced to 85 percent of its current level. Which alternative
leads to higher contributions to profit, assuming that each is equally costly to
implement?
Exercise: 4 An interactive television service that costs $10 per month to provide can sold
on the information highway for $15 per client per month. If a service area includes a
potential of 15000 customers, what is the most a company could spend on annual fixed costs
to acquire and maintain the equipment?
Exercise: 5 A restaurant is considering adding fresh brook trout to its menu. Customers
would have the choice of catching their own trout from a simulated mountain stream or
simply asking the waiter to net the trout for them. Operating the stream would require $
10,600 in fixed cost per year. Variable costs are estimated to be $6.70 per trout. The firm
wants to break even if 800 trout dinners are sold per year. What should be the price of the
new item?
Example: 9
Gabriel manufacturing must implement a manufacturing process that reduces the amount of
toxic by products. Two processes have been identified that provide the same level of toxic by
product reduction. The first process would incur $300,000 of fixed cost and $600 per unit of
58 Course Module
variable cost. The second process has fixed cost of $120000 and variable costs of $900 per
unit.
a. What is BEQ beyond which the first process is more attractive?
b. What is the difference in total cost if the quantity produced is 800 units?
Solution: First Process Second Process
Fixed cost = $300000 Fixed cost = $120000

V. cost / unit = $600 V. cost / unit = $900
BE qty 300000 + 600q = 120000 + 900q

Which implies q = 600 units
c. If q = 800 units
Total cost for P:1 = 300,000 + 600q
= 300,000 + 600 (800)
= 780,000
Total cost for P: 2 = 120, 000 + 900 (800)

= 840,000
Hence difference is $ 60000 more if P:2 is selected.
Example: 10
Texloy Manufacturing Company must select a process for its new product, TX2, from among
three different alternatives. The following cost data have been gathered.
Process A Process B Process C
Fixed Cost $10.000 $ 40,000 $70,000

Variable Cost $ 5/unit $2/unit $1/unit
For what volume of demand would each process be desirable?
Solution: If q represents the number of TX2s demanded and we assume produced, then
Total cost for process A = 5q + 10,000

Total cost for process B = 2q + 40,000
Total cost for process C = 1q + 70,000
We calculate the points of indifference between each pair of processes by equating their total
costs and solving for demand volume, q . Always begin with the process that has the lowest
fixed cost and compare it to the process with the next lowest fixed cost, and so on.
Comparison 1: Process A and Process B
5q + 10000 = 2q + 40,000
q = 10,000 units.
If demand ≤ 10,000. We should choose the alternative with the lowest fixed cost, process A.
If demand ≥ 10,000. We should choose the alternative with the lowest variable cost, process B.
At 10,000 units we can actually choose either A or B.
Comparison 2:Process B and Process C

2q + 40000 = 1q + 70,000
q = 30,000 units.
If demand ≤ 30,000. We should choose process B.
if demand ≥ 30,000. We should choose process C
So, Below 10,000 units, choose process A

Between 10,000 and 30,000 units, choose process B.
Above 30,000 units, choose process C.
Exercise: 6 Nano Tech is ready to begin production of its exciting new technology. The
company is evaluating three methods of production: (A) a small production facility with
older equipment, (B) a larger production facility that is more automated, and (C)
subcontracting to an electronics manufacturer in Singapore. The costs of each alternative are
shown below. Determine for what level of Volume each production process should be
chosen.
Process Fixed Cost Variable Cost

Process A $200,000 $40
Process B $600,000 $20
Process C $0 $60
60 Course Module
Chapter 05
Inventory Model
Nature of Inventory Problem- Inventory Cost- EOQ model with Static demand- EOQ
Model with Non instantaneous Receipt -Quantity Discounts with Constant Carrying cost.
Inventory is a stock of items kept by an organization to meet internal or external customer

demand. The purpose of inventory management is to determine the amount of inventory to
keep in stock –how much to order and when to replenish or order.
Nature of Inventory Problem:
The nature of the inventory problem consists of repeatedly placing and receiving orders of
given sizes at set intervals. From this stand point an inventory policy answers the following
two questions.
1. How much to order?

2. When to order?
How much to order determines the Economic Order Quantity (EOQ) model by minimizing
the cost.
When to order highly connected and represents ordering and placing time.
When to order includes: 1. Periodic order / review (discrete)

2. Continuous order / review.
If the system requires periodic review (e.g every week or month) the time for receiving a
new order coincides with the start of each period.
Alternately if the system is based on continuous review, new orders are placed when the
inventory level drops to a pre specified level, called the reorder point.
The deterministic model of inventory are of two types:

1. Static, which have constant demand over time.
2. Dynamic, in which the demand varies.
Inventory cost:
Total Inventory Cost = Purchasing cost + Setup cost + Holding cost + Shortage cost
All cost must be expressed in terms of the desired order quantity and the time between
orders.
Purchasing cost: The price per unit of the item. It may be constant, or it may be offered at a
discount that depends on the size of the order.
Setup cost : Represents the fixed charge incurred when and order is placed. This is
independent of the size of the order.
Holding Cost: Represents the cost of maintaining the inventory in stock. It includes
storage, interest on capital, maintenance and handling.
Shortage Cost: Shortage cost is penalty incurred when we run out of stock.
EOQ model with static demand:
The simplest of the inventory model involves constant rate demand with instantaneous order
replacement and no shortage.
y = Order Quantity (number of units)
D= Demand rate (units per unit time)
t0 = Ordering cycle length (time units)
Inventory
level Points in time at which orders are received.
y
Reorder
Point
Average Inventory
= y/ 2
to = y / D L L
Time
An order of size y units is placed and received instantaneously when the inventory
level is zero. And the demand rate is constant.
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The ordering cycle for this pattern is to = y/D time units.
The average inventory level is y/2 units
There are two cost parameters
K = Setup cost associated with the placement of an order.

h = Holding cost (dollars per inventory unit per unit time)
So, the total cost per unit time
TCU (y) = Setup cost per unit time + Holding cost per unit time
Setup Cost Holding Cost

 
t0 t0
K h  y
    t0
t 0 t0  2 
K  y
 h 
t0 2
K  y
 h 
y/D 2
To find the optimum value of y (minimizing y) set first derivative equal to 0.
d (TCU ( y )) d  KD hy  KD h
     2   0
dy dy  Y 2 y 2
KD h 2kD 2kD
Which implies ,   y2   y
y2 2 h h
The condition is also sufficient because TCU(y) is convex. The solution of the
equation yields the EOQ y* as
2kD
y* =
h
2kD
i.e. Order y* = units every t0* = y* / D time units.
h
Example: 1
Neon lights on the U of A campus are replaced at the rate of 100 units per day. The physical
plant orders the neon lights periodically. It costs $100 to initiate a purchase order. A neon
light kept in storage is estimated to cost about $0.02 per day. The lead time between placing
and receiving an order is 12 days. Determine the optimal inventory policy for ordering the
neon light.
Solution: We have D = 100 units / day

K = $ 100 per order
h =$0.02 per unit / day
L = 12 days
2kD 2 100 100

Optimum order quantity y* = =  1000000  1000
h 0.02
neon light
The associated cycle length is t0* = y* / D = 1000 / 100 = 10 days
Since L = 12 > t0* = 10 days , we have to fine the effective lead time Le .
L
Where Le = L – nt0* Consider n = ( Largest integer) ≤
t0
12
= 12 – (1)10 = Largest integer ≤
10
= 2 days =1
The reorder point thus occurs when the inventory level drops to LeD = 2 x 100 = 200
units.
So, the inventory policy for ordering the neon light is order 1000 units whenever the
inventory level drops to 200 units.
Also, the daily inventory cost associated with the proposed inventory policy is
TCU (y) = KD / y + h (y / 2)
= (100 x 100) / 1000 + .02 ( 1000 / 2)
= 10 + 10 = $ 20 per day.
64 Course Module
Exercise: 1 A company stocks an item that is consumed at the rate of 50 units per day. It
costs the company $ 20 each time an order is placed. An inventory unit held in stock for a
week will cost $ 0.35.
a. Determine the optimum inventory policy, assuming a lead time of 1 week.
b. Determine the optimum number of orders per year (365 days)
[ Ans: a. Order 200 units when ever inventory drops to 150 units. TCU (y) = $ 10 / day. ]
Exercise: 2 In each of the following cases, no shortage is allowed and the lead time
between placing and receiving an order is 30 days. Determine the optimal inventory policy
and the associated cost per day.
a. K = $ 100, h = $ 0.05, D = 30 units per day, Also L = 30 [Ans: Order 346.5 units
when ever inventory
drops to 207 units. TCU = 17.32 per day]
b. K = $ 50, h = $ 0.05, D = 30 units per day, L = 30 [ Ans: Order 245 units when ever inventory
drops to165 units. TCU = $12.246 per day]
c. K = $ 100, h = $ 0.01, D = 40 units per day, L = 30 [ Ans: Order 894 units when ever inventory
drops to 305 units; TCU = $ 8.94 per day]
d. K = $100, h = $0.04, D = 20 units, L = 30 [ Ans: Order 316 units when ever inventory drops
to 284 units. TCU = $12.65 per day]
Example: 2
McBurger orders ground meat at the start of each week to cover the week’s demand of 300
lb. The fixed cost per order is $20. It costs about $0.03 per lb per day to refrigerate and store
the meat.
a. Determine the inventory cost per week of the present ordering policy.
b. Determine the optimal inventory policy that McBurger should use, assuming zero
lead time between the placement and receipt of an order.
c. Determine the difference in the cost per week between McBurger’s current and
optimal ordering policies.
Solution: We have D = 300 lb / week=
K = $ 20 per order
h =$0.03 per lb / day = 0.21/ week
L = 0 days
a. Under present ordering policy:

kD hy 20 x300 0.21x300
Total cost of unit (TCU) =  =  = 20 + 31.3 = $51.5
y 2 300 2
b. Under Optimum Inventory Policy:

2kD 2  20  300
Optimum order quantity y* = =  57142.86  239.04 lb
h 0.21
The associated cycle length is t0* = 239.04 / 300 = 0. 8 weeks
Order 239 lb, whenever inventory drops to Lx D = 0 x 300 = 0 lb
kD hy 20 x 300 0.21x 239.04

TCU (y) =  =  = 25.1 + 25.1= $50.2
y 2 239.04 2
c. The difference in the cost per week between McBurger’s current and optimal
ordering policies is
$51.5 - $50.2 = $1.3
Example: 3
Two inventory policies have been suggested by the purchasing department of a company.
Policy 1. Order 150 units. The reorder point is 50 units, and the time between
placing an order and receiving the next one is 10 days.
Policy 2. Order 200 units. The reorder point is 75 units, and the time between
placing an order and receiving the next one is 1015 days.
The setup cost per order is $20, and the holding cost per unit inventory per day is
$0.02.
a. Which of the two policies should the company adopt?

b. If you were in charge of devising an inventory policy for the company, what
would you recommend assuming that the supplier requires a lead time of 22 days?
Solution: For Policy 1: Order size, y = 150 units

Reorder point, LD = 50 units
Where L = 10 days.
So that we have D = 5 units/day.
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kD hy 20 x 5 0.02 x 150
Hence TCU =  =  = 0.66 + 1.5 = 2.16
y 2 150 2
For Policy 2: Order size, y = 200 units

Reorder point, LD = 75 units
Where L = 15 days.
So that we have D = 5 units/day.
kD hy 20 x 5 0.02 x 200
Hence TCU =  =  = 0.5 + 2 = 2.5
y 2 200 2
As minimum cost occurs at policy 1, so the company should adopt policy 1
b. Given lead time is 22 days, and according to the policies demand is 5 / day.
2 x 20 x5
So I will develop EOQ Model, under which, y = = 100 units.
0.02
Associated Cycle Length, t0 = y/D = 100 / 5 = 20
Since, L > t0, We should determine effective lead time,
L
Where Le = L – nt0 Consider n = ( Largest integer) ≤
t0
22
= 22 – (1)20 = Largest integer ≤
20
= 2 days =1
he reorder point thus occurs when the inventory level drops to LeD = 2 x 5 = 10
units.
So, the inventory policy for ordering the neon light is order 100 units whenever the
inventory level drops to 10 units.
TCU (y) = KD / y + h (y / 2)
= (20 x 5) / 100 + .02 (100/2)
= 1 + 1 = $ 2 per day.
Which is the lowest among all.
# The EOQ Model with Non instantaneous Receipt
The non instantaneous receipt model is an inventory system in which an order is received
gradually, as inventory is depleted.
In the basic EOQ Model, average inventory was half the maximum inventory level or y/2,
but in this model variation the maximum inventory level is not simply y; it is an amount
somewhat lower than y, adjusted for the fact the order quantity is depleted during the order
receipt period.
In order to determine the average inventory level, we define the following parameters unique
to this model.
P= Daily rate at which the order is received over time (production rate)
d= Daily rate at which inventory is demanded.
As we know no shortages are possible. The demand cannot exceed production rate. i.e p≥ d
The time required to receive and order is the order quantity divided by the rate at which the
order is received or y/p. For example if the order size is 100 units and the production
received in 5 days. The amount of inventory that will be depleted or used up during this time
period is determined by multiplying by the demand rate: y/p(d)
For example, if it takes 5 days to receive the order and during this time inventory is depleted
at the rate of 2 units per day, then 10 units are used. As a result, the maximum amount of
inventory on hand is the order size minus the amount depleted during the receipt period,
computed as
y d
Maximum inventory level = y (d )  y (1  )
p p
1   d 
Hence average inventory level =  y1  
2  p 
y d 
Total holding cost = h. 1  
2 p
KD hy  d 
TCU =  1  
y 2  p
Solving this function for the optimal value of y
2kD
y
d
h(1  )
p
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Example: 4
The 1-75 Carpet Discount store in North Georgia stocks carpet in its warehouse and sells it
through an adjoining showroom. The store keeps several brands and styles of carpet in stock;
however, its biggest seller is super shag carpet. The store wants to determine the optimal
order size and total inventory cost for this brand of carpet given an estimated annual demand
of 10,000 yards of carpet, and annual carrying cost of 0.75 per yard and an ordering cost of
$150. The store like to know the number of orders that will made annually and time between
orders, given that the store is open every day except Sunday. Thanksgiving Day and
Christmas day (which is not a Sunday)
Solution: Demand D = 10,000 yards / year

Holding Cost h = 0.75/year
Ordering Cost K = 150/ order
2kD 2  150 10000

The optimum order qty y   2000 yards
h 0.75
y 2000
Time between orders t0 
  0.2 years
D 10000
Given that the store is open 311 days annually (365- 52 Sundays – Thanks giving and
Christmas)
Hence to = 0.2 x 311 = 62.2 storedays
1 D 10000
No. of orders     5 orders / year
to y 2000
KD hy 150  10000 0.75  2000

TCU      750  750 1500
y 2 2000 2
Example: 5 (Quantity Discount with constant carrying cost)
Comptek Computers wants to reduce a large stock of PCs it is discontinuing. It has offered
the university bookstore at Tech a quantity discount pricing schedule as follows:
Quantity Price
1-49 $1400
50-89 $1100
90+ $900
The annual carrying cost for the bookstore for a PC is $190, the ordering cost is $2500 and
annual demand for this particular model is estimated to be 200 units. The bookstore wants to
determine if it should take advantage of this discount or order the basic EOQ order size.
Solution: K =2500
D =200 units / year
h =190/ year
2kD 2  2500  200

y   72.55 pcs
h 190
The order size is eligible for the first discount $1100. Therefore, this price is used to
compute total cost
KD hy 2500 200 190 72.55
TCU    PD    (1100 200)  6891.79 6892.2  220000 233784
y 2 72.55 2
Since there is a discount for a larger order size than 50 units. This total cost of 233784 must
be compared with total cost with an order of 90 and discounted price of $900
KD hy 2500 200 190 90

TCU    PD    (900 200)  5555.55  8550 180000 $194105
y 2 90 2
Since the total cost is lower, the maximum discount price should be taken and 90 units
should be ordered.
Example: 6
The 1-75 Outlet has its own manufacturing facility in which it produces super shag carpet.
The ordering cost k is $150 cost of setting up the production process to make super shag
carpet. Recall that h = $0.75 per yard and D= 10,000 yards per year. The manufacturing
facility operates the same days the store is open( i.e 311 days) and produces 150 yards of
carpet per day. Determining the optimal order size, total inventory cost, the length of time to
receive an order, the number of orders per year and the maximum inventory level.
Solution: K =150/order
D =10000/year
h =0.75/ yard/ year
d = 10000/ 311 = 32.2 yards / day
p = 150 yards per day
2kD 2  150 10000
The optimum order qty y   2256.8 yards
d 32.2
h(1  ) 0.75(1  )
p 150
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KD hy  d  150  10000 0.75  2256.8  32.2 

TCU   1     1  
y 2  p 2256.8 2  150 
 664.65  846.3 (0.7854)  664.65  664.63
= 1329.27
The length of time to receive an order for this type of manufacturing operation is commonly
called the length of the production run.
y 2256.8
Production run   15.05 days per order
p 150
Given that the store is open 311 days annually (365- 52 Sundays – Thanks giving and
Christmas)
D 10000
No. of orders per year    4.43 runs / year
y 2256.8
d 32.2
Maximum Inventory level  y (1  )  2256.8(1  ) 1772 yards
p 150
Exercise: 3 A firm is face with the attractive situation in which it can obtain immediate
delivery of an item it stocks for retail sale. The firm has therefore not bothered to order the
item in any systematic way. However, recently profits have been squeezed due to increasing
competitive pressure, and the firm has retained a management consultant to study its
inventory management. The consultant has determined that the various costs associated with
making an order for the item stocked are approximately $70 per order. She has also
determined that the costs of carrying the item in inventory amount to approximately $27 per
unit per year. Demand for the item is reasonably constant over time, and the forecast is for
16,500 units per year. When an order is placed for the item, the entire order is immediately
delivered to the firm by the supplier. The firm operates 6 days a week plus a few Sundays, or
approximately 320 days per year. Determine the following.
a. Optimal order quantity per order.
b. Total annual inventory cost.
c. Optimal number of orders to place per year.
d. Number of operating days between orders, based on the optimal ordering.
Exercise: 4 The Sofaworld Company purchase upholstery material from Barrett Textiles.
The company uses 45,000 yards of material per year to make sofas. The cost of ordering
material from the textile company is $ 1,500 per order. It costs Sofaworld $0.70 per yard
annually to hold a yard of material in inventory. Determine the optimal number of yards of
material Sofaworld should order, the minimum total inventory cost, the optimal number of
orders per year, and the optimal time between orders.
Exercise: 5 The East Coasters Bicycle Shop operates 364 days a year closing only on
Christmas Day. The shop pays $300 for a particular bicycle purchase from the manufacturer.
The annual holding cost per bicycle is estimated to be 25% of the dollar value of inventory.
The shop sells an average of 18 bikes per week. The ordering cost for each order is $250.
Determine optimal order quantity and total minimum cost.
Exercise: 6 The Ambrosia Bakery makes cakes for freezing and subsequent sale. The
bakery, which operates five days a week, 52 weeks a year, can produce cakes a the rate of
116 cakes per day. The bakery sets up the cake production operation and produces until a
predetermined number (Q) have been produced. When not producing cakes, the bakery uses
its personnel and facilities for producing other bakery items. The setup cost for a production
run of cakes is $700. The cost of holding frozen cakes in storage is $9 per cake per year. The
annual demand for frozen cakes, which is constant over time is 6000 cakes. Determine the
following:
a. Optimal production run quantity (Q)
b. Total annual inventory costs.
c. Optimal number of production runs per year.
d. Optimal cycle time (time between run starts)
e. Run length in working days.
Exercise: 7 Country Hospital orders syringes from a hospital supply firm. The hospital
expects to use 40,000 per year. The cost to order and have the syringes delivered is $800.
The annual carrying cost is $1.90 per syringe because of security and theft. The hospital
supply firm offers the following quantity discount pricing schedule.
Quantity Price
0-999 $ 3.40
1000 – 19,999 $ 3.20
20,000 – 29,999 $ 3.00
30,000 – 39,999 $ 2.80
40,000 – 49,999 $ 2.60
50,000 + $ 2.40
Determine the order size for the hospital.
72 Course Module
Case Study:
HATIL traces its roots to H.A. Timber Industries Ltd., a company established in 1966 by late
Al-Haj Habibur Rahman. Following his footsteps, HATIL, as a singular furniture brand,
came into being under the leadership of Selim H. Rahman, a veteran and visionary leader in
country’s furniture industry.
Over the years, HATIL made itself a synonym to Elegant, Contemporary and Affordable
furniture collection. Outstanding product quality and design backed by unique customer
service are a few traits that helped HATIL lead being in the front. It’s worth mentioning that
to ensure the best possible quality HATIL has been practicing Japanese Quality Management
Philosophy “Kaizen” since 2007. And, being an environment-sensible company, HATIL uses
woods that are only collected from FSC certified forests.
All these things contributed in a great way making HATIL a favorite name across markets
like US, Canada, Australia, Saudi Arabia, Kuwait, UAE, Thailand, Egypt, Russia, Nepal,
Bhutan and India. In Bangladesh market, HATIL has been a proud awardee of HSBC-Daily
Star Climate Award, 2013 in Green Operation Category.
HATIL stock huge items in their showroom to serve the customer. Customer can observe
their items as well as they can take tangible feelings from their item to make buying decision
easy.
Question:
1. In case of a small town, between a local furniture seller and HATIL, who will get
competitive advantage and why? Please discuss in your words.
Chapter 06
Quality Management
Meaning of Quality from Consumer’s Perspective and Producers Perspective- Total Quality
management (TQM)- Principles of TQM- The Cost of Quality.
Meaning of quality: “ A degree or level of Excellence”

Definition: The totality of features and characteristics of a product or service that bears on its
ability to satisfy given needs.
Meaning of quality from different perspective
1. Consumer’s Perspective: “The consumer is the most important part of the product
line. Quality should be aimed at he needs of the consumer, present and future.” From this
perspective, product and service quality is determined what the consumer wants and is
willing to pay for. Since consumers have different product needs, they will have different
quality expectations. These results in a commonly used definition of quality as a services or
products fitness for its intended use, or fitness for use, means how well the product or service
does what it is supposed to.
The dimensions of quality for manufactured products a consumer looks for
i. Performance: The basic operating characteristics of a product; for example,

how well a car handles or its gas mileage.
ii. Features: The ‘extra’ items added to basic features such as CD or leather
interior in a car.
iii. Reliability: The probability that a product will operate properly within an
expected time frame.
iv. Conformance: The degree to which a product meets pre-established standards.
v. Durability: How long the product lasts; its life span before replacement.
vi. Service ability: The ease of getting repairs, the speed of repairs and the
courtesy and competence of the repair person.
vii. Aesthetics: How a product looks, feels, sounds smells or tastes?
viii. Safety: Assurance that he customer will not suffer injury or harm from a
product; an especially important consideration for automobiles.
ix. Other Perceptions: Subjective perceptions based on brand name, advertising
and the like.
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Dimensions of service quality:
i. Time and timeliness: How long a customer must wait for service and if it is
completed on time.
ii. Completeness: Is everything the customer asked for provided? For example, is
a mail order from a catalog company complete when delivered?
iii. Courtesy: How customers are treated by employees. For example, are catalog
phone operators at Lands’ End nice and are their voices pleasant?
iv. Consistency: is the same level of service provided to each customer each
time? Is your newspaper delivered on time every morning?
v. Accessibility and Convenience: How easy it is to obtain the service. For
example, call centers provide their services easily.
vi. Accuracy: is the service performed right every time? Is your bank or credit
card statement correct every month?
vii. Responsiveness: How ell the company reacts to unusual situations?
2. Producer’s Perspective: Once the product design has been determined, the
producer perceives quality to be how effectively the production process is able to conform to
the specifications required by the design referred to as the quality of conformance, which
make sure that the product or service is produced according to design, depends on
technology, production process, raw materials, training and supervision of employees and
cost.
Quality is approached from two perspectives, the consumer’s and the producer’s. These two
perspectives are dependent on each other. Although product design is customer motivated, it
cannot be achieved with the coordination and participation of the production process.
The Meaning of Quality
Producer’s Perspective Consumer’s Perspective

Production
Marketin
Quality of Conformance Quality of Design

 Conformance to  Quality
specification. characteristics
 Cost  Price
Fitness for consumer use

Total Quality Management (TQM)
Total quality management (TQM ) is a philosophy that stresses three principles for achieving
high levels of process performance and quality: customer satisfaction, employee involvement
and continuous improvement in performance.
Principles of TQM: Total quality management represents a set of management principles that
focus on quality improvement as the driving force in all functional areas and at all levels in a
company. These principles are;
1. The customer defines quality, and customer satisfaction is the top priority.
2. Top management must provide the leadership for quality.
3. Quality is a strategic issue and requires a strategic plan.
4. Quality is the responsibility of all employees at all levels of the organization.
5. All functions of the company must focus on continuous equally improvement
to achieve strategic goals.
6. Quality problems are solved through cooperation among employees and
management.
7. Problem solving and continuous quality improvement use statistical quality
control methods.
8. Training and education of all employees are basis for continuous quality
improvement.
# The Cost of Quality
Quality costs fall into two categories, the cost of achieving good quality, also known as the
cost of quality assurance and the cost associated with poor quality products, also referred to
as the cost of not conforming to specifications.
The cost of achieving good quality: There are two types of cost involved in quality
management programs
1. Prevention costs: Prevention costs are the costs of trying to prevent poor-quality
products from reaching the customer which includes
i. Quality planning costs: The cost of developing and implementing the quality
management program.
ii. Product design costs: The costs of designing products with quality characteristics.
iii. Process cost: The cost of productive process conforms to quality specifications.
76 Course Module
iv. Training cost: The cost of quality training programs for employees and
management
v. Information cost: The cost of acquiring and maintaining data related to quality.
2. Appraisal costs: Appraisal costs are the cost of measuring, testing and analyzing
materials, parts, products and the productive process to ensure that product quality
specifications are being met, which includes
i. Inspection and testing: The costs of testing and inspecting materials, parts and the
product at various stages and the end of the process.
ii. Operator costs: The cost of the time spent by operators to gather data for testing
product quality to make equipment adjustments to maintain quality and to stop
work to assess quality.
The cost of Poor Quality: Cost associated with poor quality are also referred to as the
cost of non conformance or failure costs. Which can be categorize as internal failure costs or
external failure costs.
1. Internal failure cost: Internal failure costs are incurred when poor quality products
are discovered before they are delivered to customer. Which includes
i. Scrap costs: The cost of poor-quality products that must be discarded including
labor, material and indirect costs.
ii. Rework cost: The costs of fixing defective products to conform to quality
specifications.
iii. Process failure costs: The costs of determining why the production process is
producing poor-quality products.
iv. Process downtime costs: The cost of shutting down the productive process to fix
the problem.
2. Internal failure cost: This is incurred after the customer has received a poor quality
product and are primarily related to customer service, which includes
i. Customer complaint costs: The costs of investigating and satisfactorily

responding to a customer complaint resulting from a poor quality product.
ii. Product return costs: The costs of handling and replacing poor-quality products
returned by the customer.
iii. Warranty claims costs: The costs of complying with product warranties.
iv. Product liability costs: The litigation costs resulting from product liability and
customer injury.
v. Lost sales costs: The costs incurred because customers are dissatisfied with poor
quality products and do not make additional purchases.
Cost of Quality
Cost of achieving good quality Cost of poor quality
Prevention Cost Appraisal Cost Internal failure External failure

 Quality Planning  Inspection and testing  Scrap cost  Customer complaint
 Product design  Test equipment  Rework  Product return
 Process cost  Operator costs  Process failure  Warranty claims
 Training cost  Process downtime  Product liability
 Information cost  Lost sales.
Case Study:
Square Hospitals Limited is a 400 beds tertiary care hospital and the leading contributor of
private healthcare services in Bangladesh. This has been achieved only through consistent
commitment to improving the lives of people through utmost service excellence since its
inception on 16th December 2006. Square Hospital is one of the ventures of Square Group
which is the top business group of the country. The reputation of Square Hospital is the result
of quality clinical outcome and comprehensive care, made achievable through world class
integrated healthcare facilities by highly trained professionals. Thus, Square Hospitals strives
to meet patients’ standards through quality healthcare and making a difference in their
lives. This hospital is an affiliate partner of Methodist Healthcare, Memphis, Tennessee,
USA; Christian Medical College-Vellore, India; Sing Health and Raffles Hospital,
Singapore. The outpatient department (OPD) of the hospital can serve up to 1800 patients
daily, through 100+ consultation rooms. The outpatient services are open daily, except
Friday, in a convenient morning, afternoon and late evening hours. Other than that our ER
(Emergency dept) is fully operational 24/7 round the year. Square Hospital has almost all
departments of medical service under one roof which enable us to deliver proper integrated
services to our patients. Square Hospital aims to provide unparalleled service to the people of
Bangladesh by delivering the highest possible level of care. For this, huge investment has
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been made on equipment and technology. Medical services will be provided as both
outpatient and inpatient services as well as an Ambulance service. Dental services are also
incorporated within the medical services.
On the other hand, The Dhaka Medical College Hospital (DMCH) is the central point of
public health services of all the government hospitals in Bangladesh. It was established in
1946. Everyday, on an average, 1,432 patients come to the outdoor and 450 to the emergency
units of the hospital, while 184 patients are admitted to the indoor for treatment. The patients
are supposed to receive medical treatment at a low cost as it is a government-run hospital.
However, it is alleged that the patients are regularly deprived of the health facilities due to a
number of irregularities and corrupt practices.
Question:
1. As an issue of customer satisfaction compare the quality of consumer service of
square hospital and Dhaka medical college hospital.
# The Effect of Quality Management on Productivity
Productivity is the ratio of output to input. Improving quality by reducing defects will
increase good output and reduce inputs
Productivity = Output/ Input
Measuring Product Yield and Productivity:

Product yield is a measure of output used as an indicator of productivity. It can be computed
for the entire production process ( or for one stage in the process) as follows
Yield = (Total input) (% good units) + (Total input) (1-%good units) (% reworked)
Y = ( I ) (% G) + ( I ) (1-%G) (%R)
Where I = Planned number units of product started in the production process

%G = Percentage of good units produced
%R = Percentage of defective units that are successfully reworked.
Example: 1
karim Jute company starts production for a particular type of jute product. The production
process begins with 100 tons of raw jute each day. The percentage of good jute products
produced each day average 80% and the percentage of poor-quality products that can be
reworked is 50%. The company wants to know the daily product yield and the effect on
productivity. If the daily percentage of good-quality product is increase to 90%, then what
would be the percentage of productivity output?
Solution: We know Yield Y = ( I ) (% G) + ( I ) (1-%G) (%R)

= (100) (0.80) + (100) ( 1- 0.80) (0.50)
= 90 tons
It product quality is increased to 90% good jute, the yield will be
Y = ( 100 ) (0.90)) + ( 100 ) (1-0.90) (0.50)
= 95 tons
A 10 percent increase in quality products results in a 5.5 percent increase in
productivity output.
Computing Product Cost Per Unit:
The product manufacturing cost is included with the productivity
( Direct Manufacturing Cost  Total Cost for all Re work units

Product Cost =
Yield
Product Cost =
( Manufacturing Cost per unit ) ( Input )  (Re work Cost per unit ) ( Re work Units )
Yield
( K d ) ( I )  ( K r ) ( R)
=
Y
Where,
Kd = Direct Manufacturing Cost per unit.

I = Input
Kr = Rework cost Per Unit
R = Rework Units
Y = Yield
Example: 2
karim Jute company has a direct manufacturing cost per unit is Tk. 30 and the jute products
that are of inferior quality can be reworked for Tk 12 per unit. From previous example 100
tons of jute used daily. 80% are good quality and 20% are defective. Of defective, half can be
reworked to yield good quality products. Determine Product Cost. Through its quality
management program, the company has discovered a problem in its production process that,
when corrected (at a minimum cost) will increase the good quality products increase to 90%.
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The company wants to assess the impact on the direct cost per unit of improvement in
product quality.
Solution: The manufacturing cost per unit is
( K d ) ( I )  ( K r ) ( R) (30) (100)  (12) (10)

= = = $ 34.67 per unit.
Y 90
The manufacturing cost per unit with the quality improvement is
( K d ) ( I )  ( K r ) ( R ) (30) (100)  (12) ( 5)
Product Cost = = = $ 32.21 per unit.
Y 95
Decrease is $ 2.46 per unit or 7.1%
Computing Product Yield for a Multistage Process:
Y = ( I ) (% G1) (% G2) (% G3) (% G4)……. (% Gn)
Where, I = Inputs of items to the production process that will result in finished
products
Gi = Good quality, work in process products at stage i.
Example: 3
Let Karim Jute company produced in a four stage process. Products are inspected following
each stage with percentage yields (on average ) of good quality in process units as follows:
Stage Average Percentage good quality

1 0.93
2 0.95
3 0.97
4 0.92
The company wants to know daily product yield for product input of 100 tons. Further it
would like to know how much input it would have to start with each day to result in a final
daily yield of 100 tons good quality units.
Solution: Y = ( I ) (% G1) (% G2) (% G3) (% G4)

= ( I )) (% G1) (% G2) (% G3) (% G4) = (100) (0.93) (0.95) (0.97)

(0.92)
= 78. 8 tons
To determine the product input that would be required to achieve a product yield of
100 tons, I is treated as a decision variable when Y equals 100.
Y
I =
(% G1) (% G2) (% G3) (% G4)
100
= = 126. 8 tons.
(0.93) (0.95) (0.97) (0.92)
To achieve 100 good – quality tons, the production process must start with
approximately 127 tons.
Quality Productivity Ratio:
Quality Productivity ratio is a productivity index that includes productivity and quality costs.
(Good Quality units )

QPR = x 100
( Input ) (Pr oces sin g Cost )  ( Defective units ) (Re work Cost )
Example: 4
karim Jute company has a direct manufacturing cost per unit is Tk. 30 and the jute products
that are of inferior quality can be reworked for Tk 12 per unit. From previous example 100
tons of jute used daily. 80% are good quality and 20% are defective. Of defective, half can be
reworked to yield good quality products. The company wants to determine QPR. The
company also wants to examine the effects of
a. Increasing the production rate to 250 tons.

b. Reducing processing Cost to Tk 26 and the rework cost to Tk. 10
c. Increasing good quality products to 95%
80  10
Solution: QPR= x 100 = 2.89
(100) (30)  (10) (12)
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Case a. Increase the production rate to 250 tons.
200  25
QPR= x 100 = 2.89
(250) (30)  (25) (12)
Case b. Reducing processing cost to Tk. 26 and the rework cost to Tk. 10
80  10
QPR= x 100 = 3.33
(100) (26)  (10) (10)
Case c. Increasing good quality products to 95%

95  2.5
QPR= x 100 = 3.22
(100) (30)  (2.5) (12)
Example: 5
The Omega Shoe Company manufactures a number of different styles of athletic shoes. Its
biggest seller is the X-pacer running shoe. In 2008 Omega implemented a quality
management program. The company’s shoe production for the past three years and
manufacturing costs are as follows:
2008 2009 2010

Units Produced/Input 32000 34600 35500
Manufacturing Cost 278000 291000 305000
Percent good quality 78% 83% 90%
Only one quarter of the defective shoes can be reworked at a cost of $2 a piece. Compute the
manufacturing cost per good product for each of the three years and indicate the annual
percentage increase or decrease resulting from the quality-management program.
Solution: For the year 2008, Yield = (I) (%G) + (I) (1-%G) (%R)
= 32000 (.78) + 32000 (.22) (.25)
= 24960 + 1760
= 26720
Direct Manufacturing Cost Total Cost for all reworkedunits

Manufacturing Cost / shoe =
Yield
278000  (2.00) (1760)
= = $10.53
26720
For the year 2009, Yield = (I) (%G) + (I) (1-%G) (%R)
= 34600 (.83) + 34600 (.17) (.25)
= 28718 + 1470.5
= 30188.5
Direct Manufacturing Cost  Total Cost for all reworkedunits

Yield
291000  (2.00) (1470)
=
30188.5
= $9.73
For the year 2010, Yield = (I) (%G) + (I) (1-%G) (%R)
= 35500 (.90) + 35500 (.10) (.25)
= 31950 + 887.5
= 32837.5
Direct Manufacturing Cost  Total Cost for all reworkedunits

Yield
305000  (2.00) ( 887.5)
= = $9.34
32837.5
2008-2009, Manufacturing Cost / shoe decreased is 10.53 – 9.73 = $ 0.8

i.e 7.60%
2009 – 2010, Manufacturing Cost / shoe decreased is 9.73- 9.34 = $ 0.39

i.e 4%
Example: 6
The Backwoods American Company operates a telephone order system for a catalogu of its
outdoor clothing products. The catalogue orders are processed in three stages. In the first
stage, the telephone operator enters the order into the computer, in the second stage, the
items are secured and batched in the warehouse and in the final stage, the orders products are
packaged. Errors can be made in orders at any of these stages, and the average percentage of
errors that occurs at each stage are as follows:
Stage %Errors
1 12%
2 8%
3 4% In an average of 320 telephone orders are processed
each day, how many errorless orders will result?
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Solution: We know Yield = ( I ) (% G1) (%G2 ) (%G3) ………..(%Gn)

= 320 (.88) (.92) (.96)
= 248.7 orders
Exercise: 1 The Colonial House Furniture Company manufactures two drawer oak file
cabinets that are sold unassembled through catalogues. The company initiates production of
150 cabinet packages each week. The percentage of good-quality cabinets averages 83% per
week, and the percentage of poor quality cabinets that can be reworked is 60%.
a. Determine the weekly product yield of file cabinets.
b. If the company desires a product yield of 145 units per week, what increase in the
percentage of good quality products must result?
c. Considering the above problem if the direct manufacturing cost for cabinets is
$27 and the rework cost is $8, compute the manufacturing cost per god product.
Determine the manufacturing cost per product if the percentage of good quality
file cabinets is increased from 83% to 90%.
Exercise: 2 The Colonial House Furniture Company manufactures four-drawer oak filing
cabinets in six stages. In the first stage, the boards forming the walls of the cabinet are cut
in the second stage, the front drawer panels are wood- worked; in the third stage, the
boards are sanded and finished; in the fourth stage, the boards are cleaned, , stained, and
painted with a clear finished; in the fifth stage the hardware for pulls, runners, fittings is
installed; and in the-final stage, the cabinets are assembled. Inspection occurs at each stage
of the process, and the average percentages of good-quality units are as follows.
Stage Average Percentage Good Quality

1 87%
2 91%
3 94%
4 93%
5 93%
6 96%
The cabinets are produced in weekly production runs with product input for 300 units.
a. Determine the weekly product yield of good-quality cabinets.
b. What would weekly product input have to be in order to achieve a final weekly product
Yield of 300 cabinets?
Exercise: 3 Airphone, Inc, manufactures cellular telephones at a processing cost of $47

per unit. The company produces an average of 250 phones per week and has a yield of 87%
good- quality phones, resulting in 13% defective phones all of which can be reworked. The
cost of reworking a defective telephone is $16.
a. Compute the quality-productivity ratio(QPR)
b. Compute the QPR if the company increased the production rate to 320 phones per week
while reducing the processing cost to $42, reducing the rework cost telephone $12, and
increasing the product yield of good-quality-telephones 94% .
Exercise: 4 The total processing cost for producing the X-Pacer running shoe in the
previous problem is $18. The Omega Shoe Company Starts production of 650 pairs
of the shoes weekly, and the average weekly yield is 90%, with 10% defective shoes.
One quarter of the defective shoes can be reworked at a cost of $3.75
Compute the quality –productivity ratio (QPR) (Ans: 5.11)
a. Compute the QPR if the production rate is increased to 800 pairs of shoes per
week. ( Ans. 5.11)
b. Compute the QPR if the processing cost is reduced to $16.50 and the rework cost
to $3.20 (Ans. 5.58)
c. Compute the QPR if the product yield is increased to 93% good quality. ( Ans.
5.244)
Exercise: 5 A retail telephone catalogue company takes catalogue orders from customers
and then sends the completed orders to the ware houses to be filled. An operator processes an
average of 45 orders per day. The cost to processing an order is $1.15 and it costs $ 0.65 to
correct an order that has been filled out incorrectly by the operator. An operator averages 7%
bad orders per day, all of which are reworked prior to filling the customer order. Determine
the quality productivity ratio for an operator. ( Ans. 83.65)
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Chapter 07
Project Management
Project Planning, Elements of a Project Plan, Project Management Tools, Global and
Diversity Issues in Project Management, Project Scheduling, Project Control.
Project: A project is a unique venture with a well defined beginning and end. It consists of a
set of tasks be formed in a definable time period to meet a specific set of objectives. Example
of different types of Project: Construct a building, bridge, factories, Develop a new product,
weapon, aircraft, planning for a concert, marriage ceremony occasion, cricket tournament.
Features of a project:
1. A project is goal oriented.
2. It consists of a set of interrelated tasks.
3. Each project has a well defined life cycle. That is, it has a well defined beginning and
end.
4. Each project must be certain degree unique (distinctive/new) in nature.
5. It involves use of multiple resources.
6. A project consists of non-repetitive, non-routine, one-off (one time) activities.
7. A project may require a special management setup.
8. It should have a budget.
Project Management:
Project management is the management of the work to develop and implement an innovation
or change in an existing operation.
It encompasses planning the project and controlling the project activities, subject to resource
and budget constraints, to keep the project on schedule.
Triple Constraints to Project Management

A project is successful when it is completed within the given time schedule and within the
given budget, and if it meet the technical performances or quality standards. So the three
constraints project parameters are
1. Time or Schedule
2. Budget or Cost
3. Technical performance or quality standards.
Failure to manage any constraints consequently can lead to project failure. So a project
manager should concentrate on these triple constraints to make the project successful.
Technical Performance or quality Standards
Cost or Budget Time or Schedule
The Project Manager:

The most important member of the project team is the project manager. Managing a project
is the subject to lots of uncertainty and the distinct possibility of failure.
Once the project is selected, a project manager must be chosen. The qualities of a good
project manager should be well aligned with the roles a project manager must play.
Facilitator: The project manager often must resolve conflicts between individuals or
departments to ensure that the project has the appropriate resources for the job to be
completed. Successful project managers have good leadership skills and a systems view,
which encompasses the interaction of the project, its resources, and its deliverables with the
firm as a whole.
Communicator: Project progress and requests for additional resources must be clearly
communicated to senior management and other stakeholders in a project. The project
manager must also frequently communicate with the project team to get the best
performance.
Decision Maker: Good project managers will be sensitive to the way the team performs best
and be ready to make tough decisions, if necessary. The project manger must organize the
team meetings, specify how the team will make decisions, and determine the nature and
timing of reports to senior management.
The Project Team:

The project team is typically cross functional, consisting of a group of individuals selected
from other areas in the organization or from outside the organization because of their special
skill, expertise, and experience related to the project activities. Selecting the project team is
just as important as the selection of the project manager. Several characteristics should be
considered.
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Technical Competence: Team members should have the technical competence required for
the tasks to which they will be assigned.
Sensitivity: All team members should be sensitive to interpersonal conflicts that may arise.
Senior team members should be politically sensitive to help mitigate problems with upper-
level management.
Dedication: Team members should feel comfortable solving project problems that may spill
over into areas outside their immediate expertise. They should also be dedicated to getting
the project done, as opposed to maintaining a comfortable work schedule.
Key Decisions in project management:

Deciding which projects to implement: This involves determining the criteria that will be
used to decide which projects to pursue. Typically factors include budget, availability of
appropriate knowledge and skill personnel, and cost benefit considerations.
Selecting a project manager: The project manager is the central person in the project. The
following section on project managers discusses this topics
Selecting a project team: The team can greatly influence the ultimate success or failure of a
project. Important considerations include not only a person’s knowledge and skill base but
also how well the person works with others, enthusiasm for the project, other projects the
person is involved in, and how likely those other projects might be to interfere with work on
this project.
Planning and designing the project: Project planning and design require decisions on project
performance goals, a timetable for project completion, the scope of the project, what work
needs to be done, how it will be done, if some portion will be outsourced, what resources will
be needed, a budget, and when and how long resources will be needed.
Managing and controlling project resources: This involves managing personnel, equipment,
and the budget; establishing appropriate metrics for evaluating the project; monitoring the
progress; and talking corrective action when needed.
Deciding if and when a project should be terminated: Sometimes it is better to terminate a

project than to invest any more resources. Important consideration here are the likelihood of
success, termination costs, and whether resources could be better used elsewhere.
Project Life Cycle:

A project has a finite (limited) and well-defined life cycle. The life cycle of a project can
broadly be classified into four stages:
Stage I: Conceptual
Stage II: Planning
Stage III: Implementation
Stage IV: Termination or Phase out.
I. Conceptual Stage: Generating the project ideas and select the best one by using
different evaluating and selecting process involves in this stage. Actually the
project is in conceptual from in this stage.
II. Planning: In this stage the detail plan is prepared to done the project. Output of the
plan is planning. Planning consists of project appraisal which takes place at the
end of the planning stage and before implementation stage. Project appraisal
seeks in determining the viability or investment worth of a project. This is, it tries
to assess whether a project is feasible or viable (sound) enough from managerial,
marketing, technical, financial and socio-economic points of view.
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III. Implementation: If project appraisal is positive and the promoters are agreed to
launch that .The project enters into the implementation phase. What was prepared
in papers, this is take place in physical from is implementation.
Project monitoring is a continuous process that takes place during the

implementation stage of a project. It tries to continuously assess the actual
progress status compared to the planned progress status of activities, schedule
quality and resources. If there is any deviations seen between actual and planned
progress status, then corrective action is need to be undertaken.
Project monitoring can be classified as
Time Monitoring: Time management is the process of making sure the project
schedule does not slip and it is on time. This requires the monitoring of
individual activity schedules and frequent update.
Cost Monitoring: Cost management is often closely tied to time management

because of the time cost tradeoff occurrences that we mentioned previously. If
the schedule is delayed, costs tend to increase in order to get the project on
schedule.
Quality Monitoring: Quality Management and control are an integral part of

the project management process. The process requires that project work be
monitored for quality and that improvements be made as the project
progresses just the same as in a normal production or manufacturing
operation.
Performance Monitoring: Performance management is the process of

monitoring a project and developing timed (daily, weekly, monthly) status
reports to make sure that goals are being met and the plan is being followed.
Techniques that can be used to monitor a project are:
 Site visit, involving physical inspection.

 Submission of progress reports periodically. i.e, daily, monthly etc.
 Progress review meeting.
 Project monitoring format
iv. Termination/transfer or Phase out: It involves winding-down the project by releasing

staff, handing over deliverables to the customer and completing a post implementation
review.
Tools that can be used to monitor a project is
Work breakdown structure: An initial planning tool that is needed to develop a list of
activities, activities sequences, and a realistic budget.
Network diagram: A big picture visual aid that is used to estimate project duration, identify
activities that are critical for timely project completion, identify areas where slack time
exists, and develop activity schedules.
Gantt charts: A visual aid used to plan and monitor individual activities.
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Project Management and Operations Management
Project Management: A project is a unique venture with a well defined beginning and end. It
consists of a set of tasks performed in a definable time period to meet a specific set of
objective. So with the help of technical resources, timely finished a project together with
quality standards and within given budget is called project management.
Operations Management: Operations Management may be defined as the design, operations

and improvement of the production system that create the firm’s primary products or services
according to the need of the customer.
Project Management Operations Management

1. Short term oriented. 1. Long term oriented.
2. Self destructive. 2. Aimed to be sustainable / self
3. Project Management is relatively sustainable.
more difficult, stressful and 3. Relatively less stressful, less
challenging. challenging and simpler to manage.
4. Higher intensity of conflicts. 4. Less intensity of conflicts.
5. Greater consequences of error. 5. Less consequences of error.
6. Shifting targets. 6. Continuing targets.
7. Characterized by non routine, non- 7. Characterized by routine and
repetitive activities. repetitive activities.
Case Study:
Chikungunya is a viral disease transmitted by mainly Aedes aegypti and Aedes albopictus
mosquitoes. In 2017, Chikungunya virus was introduced into the Dhaka city of Bangladesh
and triggered a massive outbreak which affected millions of lives and forced upon significant
damages in socioeconomic factors. Since the disease appeared quite recently in this region
and this is the first time such a widespread transmission occurred, there is a lack of adequate
data to assess the viral burden in the population and the effectiveness of laboratory
procedures that can be implemented in resource limited countries like Bangladesh. Hence,
this study was conducted to evaluate the rapid techniques available for the serological
diagnosis of Chikungunya. For this research, a population based cross-sectional study was
carried out to correlate the clinical cases with laboratory confirmation by two main
serological techniques called ICT and ELISA. Immunochromatographic (ICT) test was
performed on a total of 1201 collected convalescent blood samples and among them Enzyme
linked immunosorbent assay was performed on a total of 81 individuals who were selected
94 Course Module
through proper sampling technique for the detection of IgM or IgG antibodies against
CHIKV which confirms the infection. The sensitivity and specificity of the ICT test was
determined as 83% and 100% respectively by taking ELISA as the reference method. The
seroprevalence of the convalescent samples drawn by the rapid test is 75.2%. Gender
distribution of Convalescent seropositive Chikungunya cases showed a higher infection rate
in male than female with seroprevalence rates of 79.7% and 68.5% respectively. The data of
age distribution revealed that seroprevalence rate is much higher in older people than
younger people. In addition, statistical analyses confirmed the association of age and gender
with seropositivity determining them as possible risk factors. Furthermore, it was detected
that fever, joint pain and rash were significantly related with CHIKV seropositivity. Overall,
considering all these findings Chikungunya infection must be given considerable weight and
proper diagnostic procedure and management strategies should be taken to control the
situation.
Question:
1. A pharmaceutical company want to produce medicine of this disease, which process
they have to follow; general operations or project and why?
Chapter 08
Project Schedule: PERT and CPM
Schedule- Benefits of Scheduling- CPM & PERT- Activity, Event, Path & Dummy
activity- Calculation of activity and event slack, PERT uses three times estimates- Project
Scheduling using MS Project 2007.
Schedule: A schedule is the conversion of a project action plan into an operating timetable.
It serves as a fundamental basis for monitoring and controlling project activity.
The basic approach of all scheduling techniques is to form an actual or implied network of
activity and event relationships that graphically portrays the sequential relations between the
tasks in a project.
The benefits of scheduling:
1. It is a consistent framework for planning, scheduling, monitoring and

controlling the project.
2. It illustrates the interdependence of all tasks, work packages and work units.
3. It determines an expected project completion date.
4. It identifies the critical activities.
5. It also identifies activities with slack that can be delayed for specified periods
without penalty.
6. It illustrates which tasks must be coordinated to avoid resource or timing
conflicts.
7. It also identifies which tasks run in parallel or simultaneously to achieve the
predetermined project completion date.
Critical Path Method: (CPM)
CPM is a network technique used mainly for activity and time planning (or
scheduling)
CPM is a deterministic technique in the sense that it uses only one time estimate for
each activity.
Program Evaluation and Review Technique: (PERT)
PERT is modified version of CPM and is a Probabilistic technique in the sense that it
uses three time estimates for each activity. They are:
 One optimistic time estimate for an activity

 One normal time estimate for an activity
 One pessimistic time estimate for an activity.
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Hence PERT technique is more reliable and reasonable to use because nothing is
100% certain in this world.
Activity, Event & Path:
Activity: An activity is a task that requires resources and time for its completion. An
activity is denoted by arrow: The length of the arrow does not
represent time length. The direction of the arrow show flow direction of an activity.
Event: An event is usually the end state of one or more activities. An event is a point
in time, but it has no duration. It is denoted by a ‘node’ or a ‘Circle’
Path: A path is a series of interconnected activities and events.
Example:
d
2 4
3 g
a 11
7 C 6
1 2
b f
Start e End
10 12
3 5
4
Now,
a, b, c, d, _______ are called activities
1 2 are called events
Paths are:
a – d – g = 7 + 3 + 11 = 21 weeks
b – c – g = 10 + 2 + 11 = 23 weeks
b – e – f = 10 + 4 + 12 = 26 weeks
Hence the Critical path is : Largest of all paths

i.e. b – e – f = 26 weeks. And the duration of critical path shows the project
completion time. That means it will take 26 weeks to
complete the project.
Basic rules:
 Activity a is the predecessor to activity d
 & Activity d is the successor to activity a.
 Activity a and b can be done concurrently (or simultaneously)
Alertness: Looping is strictly prohibited. That is no arrow should not be in

reverse order.
Exercise:1 Construct a CPM network from the table given below.
Tasks Precedence Time (Week)
a _____ 5
b _____ 4
c a 6
d b 2
e b 5
f c, d 8
Dummy Activity: A dummy activity is used if two activities occur between the
same two events.
Actually dummy activity is not an activity. It does not consume
any resources and does not need time for completion. It
is denoted by dotted arrow :
Dummy is an artificial connector that is used in the network

diagram to logically connect activities and events.
Exercise: 2 Construct a network from the following table.
Activity Immediate Duration (Week)

Predecessor
A _____ 16
B _____ 20
C A 6
D A, B 14
E A, B 12
F C 14
G D, F 10
H E, G 6
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i. Find the Critical Path.

ii. How long it will take to complete the project?
Exercise: 3 Given the following network
D
2 4
7 G
A
5
8 C 6 E 6
1 6
B H
Start F End
20 3
3 5
7
i. What is the critical path?

ii. How long it will take to complete the project?
Calculation of activity and event slacks:
The difference between the LST and EST for an activity is called its slack or float.
Thus:
Activity Slack = LST – EST
Where LST = Latest Starting Time

EST = Earliest Starting Time.
In LST, time is calculated from backward pass (Right to Left)

& EST, time is calculated for each activity from forward pass (Left to Right)
* It is obvious that all activity on the critical path have zero slack.
Similarly, Event Slack = LOT – EOT
Where LOT = Latest Occurrence Time

EOT = Earliest Occurrence Time.
Exercise: 4 Construct a network from the following table. Also determine the
Activity Slack and Event Slack.
Activity Immediate Duration (Week)

Predecessor
A _____ 16
B _____ 20
C A 6
D A, B 14
E A, B 12
F C 14
G D, F 10
H E, G 6
PERT uses three times estimates:
The three times estimates for the PERT techniques are:
1. Optimistic (a)
2. Pessimistic (b)
3. Most likely (m)
The most likely time m, is exactly that, the time most likely to occur.
The expected time or Average time is found by
TE = (a + 4m + b) / 6
Exercise: 5
Activity Optimistic Time(a) Most Likely Time(m) Pessimistic Time (b)
a 10 22 22
b 20 20 20
c 4 10 16
d 2 14 32
e 8 8 20
f 8 14 20
g 4 4 4
h 2 12 16
i 6 16 38
j 2 8 14
[Hints: We know
100 Course Module
TE = (a + 4m + b) / 6
 TEc = (4 + 4. 10 + 16) / 6 = 60 / 6 = 10
 Required time for activity c = 10]
Also variance = {(b-a)/6}2

 Vc = (16-4/6)2 = (12/6)2 = 4
The standard deviation is  = Vc  4  2
Exercise: 6 Given the following activities and precedents, draw a CPM diagram.
Activity Immediate
Predecessor
A ----
B ----
C A
D A, B
E A, B
F C
G D, F
H E, G
Exercise: 7 Given the following network.

D
2 4
7 G
A
5
8 C 3 E 6
1 6
B H
Start F End
10 3
3 5
7
a. What is the Critical Path?

b. How long it will take to complete this project?
c. Can activity B be delayed without delaying the completion of the project? If
so, how many days?
Example: 1
The following table shows the information of activities of completion of a project.
Days
S. No. Activity
ta tm Tb
1 1-2 2 5 14
2 1-6 2 5 8
3 2-3 5 11 29
4 2-4 1 4 7
5 3-5 5 11 17
6 4-5 2 5 14
7 6-7 3 9 27
8 5-8 2 2 8
9 7-8 7 13 31
Given that the scheduled date of completion of project is 38 days. Find out
i. The probability that project can be completed at scheduled time.
ii. The scheduled time for 94.5 percent probability of completion of the project.
iii. The probability of completion of path 1-6 - 7-8.
Solution:
t a  4t m  t b
Te = Expected time for each activity =
6
tb  t a
St = Standard Deviation =
6
Vt = Variance = S t 
2
D T E
Z
St
Z = Probability that project will meet the schedule or due date.
TE = Total project duration
D = Scheduled date = 38 days (given)
102 Course Module
Let us draw network diagram:
3 11
5
13 3
6
2
6 8
4 4
15
5 6 7
11
So Critical path is 1-2-3-5-8

Project duration on critical path, TE = 6+13+11+3= 33 days
Total variance on critical path= 4+16+4+1=25
Total project duration = 33 days
D = Scheduled date = 38 days
S t  Total variance on critical path  25  5
D T E
Substituting the value of D, TE and St in Z  we get
St
38  33
Z 1
5
Since Z= 1, the probability is 0.841. In other words there is a probability that the project shall
be completed in 38 days is 84.1%.
For the 94.5 % probability of the project being completed, let us look at the value of Z for
0.945 value of probability. So Z = 1.6
D T E
We know Z 
St
D  33
 1 .6 
5
 D  41 days.
Assuming critical path as 1-6-7-8

Project duration on critical path, TE = 5+11+15 = 31 days
Total variance on critical path= 1+16+16=33
D = Scheduled date = 38 days

S t  Total variance on critical path  33  5.74
D T E
Substituting the value of D, TE and St in Z  we get
St
38  31
Z  1.22
5.74
Since Z  1.22 , the probability of meeting the due date is 0.888 or 88.8%.
Example: 2
The following table shows the information of activities of completion of a project.
Given that the scheduled date of completion of project is 14 weeks. Find out the probability
that project can be completed at scheduled time.
104 Course Module
Solution:
t 0  4t m  t p
Te = Expected time for each activity =
6
tb  t a
St = Standard Deviation =
6
Vt = Variance = S t 
2
D T E
Z
St
Z = Probability that project will meet the schedule or due date.
TE = Total project duration
D = Scheduled date = 38 days (given)
Let us draw network diagram:
1 3 6
So Critical path is 1-3-5-6

Project duration on critical path, TE = 4+6+7= 17 Weeks
Total variance on critical path= 1+4+4=9
Total project duration = 17 Weeks
D = Scheduled date = 14 Weeks
S t  Total variance on critical path  9  3
D T E 14  17
Substituting the value of D, TE and St in Z  we get Z   1
St 3
Since Z= -1, the probability is 0.159. In other words there is a probability that the project
shall be completed in 14 weeks is 15.9 %.
Normal Table
z 3 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4
prob. 0.999 0.997 0.995 0.992 0.986 0.977 0.964 0.945 0.919
z 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4

prob. 0.885 0.841 0.788 0.728 0.655 0.572 0.500 0.421 0.345
106 Course Module
Chapter 09
Process Capability And Statistical Process Control
Meaning- Quality Measures- Statistical Process Control (SPC) Procedure- Control charts- p
chart, c chart, mean chart, range chart- Process capability analysis.
Statistical process control (SPC) is a statistical procedure using control charts to see if any
part of production process is not functioning properly and could cause poor quality.
SPC is a tools for identifying problems in order to make improvements. Process control is
achieved by taking periodic samples from the process and plotting these sample points on a
chart, to see if the process is within statistical control limits.
The application of statistical techniques to determine whether a quantity of material should
be accepted or rejected based on the inspection or test of a sample.
Application Statistical process control (SPC): The application of statistical techniques

is to determine whether a process is delivering what the customer wants. Like the quality
of a product or service can be evaluated using either an attribute of the product or service
or variables measures.
Note: 1. An attribute is a product characteristic that can be evaluated with a
discrete response such as good or bad, yes or no, acceptable or not attributes
could be color, cleanliness, surface, texture etc.
2. A variable measures is a product characteristics that is measured on
continuous scale such as length, weight, temperature etc.
Control Chart: Control charts are graphs that visually show if a sample is within
statistical control limits. They have two basic purposes, to establish the control limits for a
process and then to monitor the process to indicate when it is out of control. Control charts
exist for attributes and variables within each category there are several different types of
control charts. Among them p-chart, and c-chart are for attributes and mean (x ) and range
(R) control charts are for variables.
UCL
Nominal
LCL
Assignable causes likely
Two charts commonly used for performance measures based on attributes measures are the
p- and c-chart. The p-chart is used for controlling the proportion of defects generated by
theprocess. The c-chart is used for controlling the number of defects when more than one
defect can be present in a service or product.
p-chart: A chart used for controlling the proportion of defective services or products
generated by the process.
The p-chart is a commonly used control chart for attributes. The performance is counted
rather than measured, and the entire service or item can be declared good or defective. For
example, in the banking industry, the attributes counted might be the number of non-
endorsed deposits or the number of incorrect financial statements sent to customers. The
method involves selecting a random sample, inspecting each item in it, and calculating the
sample proportion defective, p, which is the number of defective units divided by the sample
size.
Sampling for a p-chart involves a “yes/no” decision: The process output either is or is not
defective. The underlying statistical distribution is based on the binomial distribution.
However, for large sample sizes, the normal distribution provides a good approximation to it.
The standard deviation of the distribution of proportion defectives, sp, is
p (1  p )
sp =
n
where, n=sample size
We can use sp to arrive at the upper and lower control limits for a p-chart:
UCLp = p + zsp and LCLp = p - zsp
Where, z = normal deviate (number of standard deviations from the average)

Z is occasionally equal to 2.00 but most frequently is 3.00. A Z values of 2.00 corresponds to
an overall normal probability of 95 percent and z=3.00 corresponds to a normal probability
of 99.74 percent. Management usually selects z=3.00 because if the process is in control if
wants a high probability that the sample values will fall within the control limits.
108 Course Module
Fig: Normal Distribution Curve

Example: 1
The Western Jeans company produces denim jeans. The company wants to establish a p-
chart to monitor the production process and maintain high quality. Western believes that
approximately 99.74 percent of the variability in the production process (corresponding to 3-
sigma limits, or z =3.00) is known random and thus should be within control limits, where as
0.26 percent of the process variability is not random and suggests that the process is out of
control. The company has taken 20samples (one per day for 20 days) each containing 100
pairs of jeans (n =100) and inspected them for defects, the results of which are as follows:
Number of Proportions of
Sample Defects Defects
1 6 0.06
2 0 0
3 4 0.04
4 10 0.1
5 6 0.06
6 4 0.04
7 12 0.12
8 10 0.1
9 8 0.08
10 10 0.1
11 12 0.12
12 10 0.1
13 14 0.14
14 8 0.08
15 6 0.06
16 16 0.16
17 12 0.12
18 14 0.14
19 20 0.2
20 18 0.18
Total 200
The proportion defective for the population is not known. The company wants to construct p-
chart to determine when the production process might be out of control.
Solution: Since p is not known, it can be estimated from the total sample;
Total defective 200
p   0 .1
Total sample observatio ns 20 (100 )
Now ,
p (1  p ) 0 .1(1  0 .1)
p    0 .03
n 100
UCL  p  z  p  0 .1  3 .00 ( 0 .03 )  0 .19
LCL  p  z  p  0 .1  3 .00 ( 0 .03 )  0 .01
Figure:
The process is below the lower control limits for sample 2 (i,e during day 2).
The above process was the upper limits during day 19.
Example: 2
The operation manager of the booking services department of hometown bank is concerned
about the number of wrong customer account numbers recorded by hometown personnel.
Each week a random sample of 2500 deposits is taken and the number incorrect account
numbers recorded. The results for the past 12 weeks are shown in the following table. Is the
booking process out of statistical control? Use three sigma control limits.
110 Course Module
Sample Number Wrong account Number Proportions of Defects

1 15 0.006
2 12 0.0048
3 19 0.0076
4 2 0.0008
5 19 0.0076
6 4 0.0016
7 24 0.0096
8 7 0.0028
9 10 0.004
10 17 0.0068
11 15 0.006
12 3 0.0012
Solution: Using past to calculate P

Total defectives 147
p    0 . 0049
Total Number of observatio ns 12 ( 2500 )
p (1  p ) 0 . 0049 ( 1  0 . 0049 )
 p    0 . 0014
n 2500
 UCL  p  z p  0 . 0049  3 ( 0 . 0014 )  0 . 0091
LCL  p  z p  0 . 0049  3 ( 0 . 0014 )  0 . 0007
Figure: Sample Proportion Defective
Management explores the circumstance when sample 7 was taken. The encoding machine
used to print the account numbers on the checks was defective that week. The following
week the machine was repaired; however, the recommended preventive maintenance was not
performed for months prior to the failure. Management reviewed the performance of the
maintenance department and instituted changes to the maintenance procedures for the
encoding machine. After the problem was corrected, an analyst recalculated the control limits
using the data without sample 7. Subsequent weeks were sampled and the booking process
was determined to be in statistical control.
C-Chart:
A c-chart is used when it is not possible to compute a proportion defective and the actual
number of defects must be used, for example, when automobiles inspected the number of
defects in the paint job can be counted for each car, but a proportion cannot be computed,
since the total number of possible defects is not known.
The underlying sampling distribution fora c-chart is the Poisson distribution. It is based on
the assumption that defects occur over a continuous region on the surface of the product
provision of service and that the probability on the surface or at any instant of time is
negligible. The mean of the distribution is c and standard deviation is c.
The control limits are;
UCL  c  z c  c  z c
LCL  c  z c  c  z c
Example: 3
The Ritz hotel has 240 rooms. The hotel’s housekeeping department is responsible for
maintaining the quality of the rooms’ appearance and cleanliness. Each individual
housekeeper is responsible for an area encompassing 20 rooms. Every room in use is
thoroughly cleaned and its supplies, toiletries and so on are restocked each day. Any defects
that the housekeeping staffs notice that are not part of the normal housekeeping service are
supposed to be reported to hotel maintenance. Every room is briefly inspected each day by a
housekeeping supervisor. However, hotel management also conducts inspection tours at
random for detailed through inspection for quality control purposes. The housekeeping
service defects like an inoperative or missing TV remote, poor TV picture quality or
reception defective lamps, a malfunctioning clock, tears or stains in the bedcover or curtains
or a malfunctioning curtain pull. An inspection sample includes 12 rooms i,e one room
selected at random from each of the twelve 20 room blocks serviced by a house keeper.
Following are the results from 15 inspection samples conducted at random during a one
month period.
112 Course Module
No. of No. of
Sample Defects Sample Defects
1 12 8 14
2 8 9 13
3 16 10 15
4 14 11 12
5 10 12 10
6 11 13 14
7 9 14 17
15 15
The hotel believes that approximately 99 percent of the defects (corresponding to 3 sigma
limits) are caused by non random variability. They want to construct a c-chart to monitor the
housekeeping service
Solution:
The population process average is not known, the sample estimate, c , can be used instead
190
c  12.67
15
The control lim its are computed u sin g z  3.00 as follow
UCL  c  z c  c  z c  12.67  3 12.67  23.35
LCL  c  z c  c  z c  12.67  3 12.67  1.99
Figure:
All the sample observations are within the control limits. Suggesting that the room quality is
in control.
Example: 4
The woodland paper company produces paper for the newspaper industry. As a final step in
the process, the paper passes through a machine that measures various product quality
characteristics when the paper production process is in control it averages 20 defects per roll.
a) Set up control chart for the number of defects per roll use 2 sigma control limits.
b) Five rolls had the following number of defects: 16, 21, 17, 22, 21 and 24 respectively.
The sixth roll using pulp from a different supplier had 5 defects. Is the paper
production process is control?
Solution: The average number of defects per roll is 20 , therefore

UCL  c  z c  20  2 20  28.94
LCL  c  z c  20  2 20  11.06
Figure:
The supplier for the first 5 samples has been used by wood land paper for many
years. The supplier for the sixth sample is new to the company. Management decided
to continue using the new supplier for a while, monitoring the number of defects to
see if it stays low. If the number remains below the LCL for 20 consecutive samples,
management will make the switch permanent and recalculate the control chart
parameter.
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What are the main topics covered in the course module?

What are the main topics covered in the course module?

What statistical process control charts are discussed?

What statistical process control charts are discussed?

Production and Operations Management 1

Dr. Sayedul Anam

Outline of the Course Module

• To identify the Sector of Business Opportunities related to the economy.

(1) Course code: MGT 304

(2) Course Title: Production and Operations Management

(3) Number of unit: 3

(4) Course type: Core Course

(5) Prerequisite: Fundamentals of Management, Principles of Marketing, Business

(8)Teaching-learning and assessment strategy

Optimistic, Equal probability, Regret, Hurwicz

Chapter 09 Process Capability and Meaning- Quality Measures- Statistical Process

Note 1: Possible Assessment (Assessment mode can vary from semester to

allowed for late submission of assignments. Letter grades will be

Note 2 : Delivery Mode

Under Primary Economy: Under Secondary Economy: Under Tertiary Economy:

Production & Operations Management:

Definition: Operations management refers to the activities, decisions and responsibilities of

Operation: Operation is a function or system that transforms inputs into outputs of

Inputs Transformation Process Output

 Materials Goods / Products

Production and Budgets

Orders for materials Product / Service

Material availability Sales forecasts

Personal needs Hiring / firing

Figure: Operations as the Technical Core or ‘Hub’

1. Strategy: Strategy is a common vision that unites an organization, provides consistency

Functional design Production design

Final design &

i. Make-to-order: Products & Services are designed, produced and delivered to

6. Process & Technology:

A project is a one-at-a time production of a product to customer order which has a

# Operations Management in an E-Business Environment

Most common measure of competitiveness is productivity, which is calculated by dividing

1. Economies of scale: As the number of units produced increases the cost of

Ex: 1 Calculate the productivity for the following operations

Quantity at S tan dard cos t

a. What is multifactor productivity ration for this course process?

2. Natalie Attired makes fashionable garments. During a particular week employees

Define Strategy-Competitive Priorities of a company – Strategic Decisions in Operations-

Definition of Strategy: Strategy is a common vision that unites an organization, provides

2. Assessing core competencies: Core competencies are what a firm does

A company that has positioned itself to compete on cost, quality, flexibility

Competing on cost: Carefully designed service, efficient operations and

Competing on quality: Most companies approach quality in a defensive or

Competing on flexibility: Flexibility is the ability to adjust to changes in

Competing on speed: Competing on speed requires an organization

5 Deploying the strategy: Implementing strategy can be more difficult than

Effective ways to deploy strategy:

i. The strategic planning Hierarchy: Senior management with input and

Finance : How should we look to our shareholders?

# Strategic Decisions in Operations: Strategic decisions in operations involve

A project is a one-at-a time production of a product to customer order which has a

6. Sourcing: On what basis should particular items be made-in-house? When should

Operational Decision Making Tools: Decision Analysis

Elements of Decision Problems, Decision Making Under Certainty, Decision Making