CHAPTER 5: INTRODUCTION TO THE OPERATIONS SUBSYSTEM

INES HERRERO CHACÓN

UNIVERSIDAD PABLO DE OLAVIDE
SEVILLA

BUSINESS ADMINISTRATION SYLABUS

MODULE I: FUNDAMENTALS
Topic 1. Enterprises & businesspeople
Topic 2. Types of enterprises
Topic 3. Environment
Topic 4. Introduction to the management subsystem

MODULE II: FUNCTIONAL SUBSYSTEMS

Topic 5. Introduction to the operations subsystem
Topic 6. Enterprises & marketing management
Topic 7. The financial functioning of enterprises
Topic 8. Human Resources

MODULE III: BUSINESS DEVELOPMENT

Topic 9. Business Evolution over time.
Topic 10. Business cooperation.

1
CHAPTER 5: INTRODUCTION TO THE OPERATIONS SUBSYSTEM

Specific reading:

Class notes

Heizer, J, and Render, B. (2006): Operations Management.

Ed. Prentice Hall:

 Chapter 1
 Chapter 7
 Suplement 7

CHAPTER 5: INTRODUCTION TO THE OPERATIONS SUBSYSTEM

 Introduction

 Types of production processes

 Objectives of the production subsystem

 Design of the production subsystem

2
INTRODUCTION

PRODUCTION OPERATIONS

Similar problems to Application to the

SERVICES those of the concept and techniques
industrial activity of industrial firms

Production function Operation function

Production Management Operations Management

INTRODUCTION

Nowadays PRODUCTION equivalent to OPERATIONS

GOODS

PRODUCT

SERVICES

3
 Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction

Characteristics of Service
 Intangible product
 Produced and consumed at
same time
 Often unique
 High customer interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed

4
 Goods Versus Services
Attributes of Goods Attributes of Services
(Tangible Product) (Intangible Product)
Can be resold Reselling unusual
Can be inventoried Difficult to inventory
Some aspects of quality Quality difficult to measure
measurable
Selling is distinct from Selling is part of service
production
Product is transportable Provider, not product, is
often transportable
Site of facility important for cost Site of facility important for
customer contact
Often easy to automate Often difficult to automate
Revenue generated primarily Revenue generated primarily
from tangible product from the intangible service

Table 1.3

Goods and Services

Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

Percent of Product that is a Good Percent of Product that is a Service

5
 What is Operations Management?

Production is the creation of

goods and services

Operations management (OM)

is the set of activities that
creates value in the form of
goods and services by
transforming inputs into outputs

Types of decisions in OM
STRATEGIC Design of the Long
LEVEL subsystem term

Process and capacity Medium

design term
C
O
TACTICAL N
T
Production Short
& R
programming O term
L
OPERATIONAL
Very short
LEVEL Execution term

Inventary of Inventary of
products raw materials

6
 Organizational Charts
Manufacturing

Operations Finance/ Marketing

Facilities accounting Sales
Construction; maintenance Disbursements/ promotion
Production and inventory control credits Advertising
Scheduling; materials control Receivables
Payables Sales
Quality assurance and control
General ledger Market
Supply-chain management research
Funds Management
Manufacturing
Tooling; fabrication; assembly Money market
International
Design exchange
Product development and design
Detailed product specifications Capital requirements
Industrial engineering Stock issue
Efficient use of machines, space, Bond issue
and personnel and recall
Process analysis
Development and installation of
production tools and equipment

Organizational Charts
Commercial Bank

Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Accounting Personal
processing
Facilities Mortgage
design/layout
Auditing
Vault operations
Trust Department
Maintenance
Security

7
 Organizational Charts
Airline

Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science

Process Strategies

 How to produce a product or provide a

service that…
 Meets or exceeds customer requirements
 Meets cost and managerial goals
 Has long term effects on…
 Efficiency and production flexibility
 Costs and quality

8
 Process Strategies
Four basic strategies
 Process focus
 Repetitive focus
 Product focus
 Mass customization
Within these basic strategies there are
many ways they may be implemented

Process, Volume, and Variety

Volume
Low Repetitive High
Volume Process Volume
High Variety
one or few Process Focus Mass Customization
units per run, projects, job shops (difficult to achieve,
high variety (machine, print, but huge rewards)
(allows carpentry)
customization) Standard Register
Changes in
Modules Repetitive focus
modest runs, (autos, motorcycles)
standardized Harley Davidson
modules
Changes in
Attributes Product Focus
(such as grade, (commercial
quality, size, Poor Strategy baked goods,
thickness, etc.) (Both fixed and steel, glass)
long runs only variable costs Nucor Steel
are high)

9
 Process Focus
 Facilities are organized around specific
activities or processes
 General purpose equipment and skilled
personnel
 High degree of product flexibility
 Typically high costs and low equipment
utilization
 Product flows may vary considerably
making planning and scheduling a
challenge

Process Focus
Print Shop

High
Many variety
inputs of
outputs

10
 Repetitive Focus
 Facilities often organized as
assembly lines
 Characterized by modules with parts
and assemblies made previously
 Modules may be combined for many
output options
 Less flexibility than process-focused
facilities but more efficient

Repetitive Focus
Automobile Assembly Line

Raw Modules
materials combined
and for many
module output
inputs options

Few
modules

11
 Product Focus
 Facilities are organized by product
 High volume but low variety of
products
 Long, continuous production runs
enable efficient processes
 Typically high fixed cost but low
variable cost
 Generally less skilled labor

Product Focus
Bottling Plant

Output
variation
Many in size,
inputs shape,
and
packaging

12
 Mass Customization

 The rapid, low-cost production of

goods and service to satisfy
increasingly unique customer
desires
 Combines the flexibility of a
process focus with the efficiency
of a product focus

Mass Customization
Repetitive Focus
Modular design
Flexible equipment

Modular techniques

Mass Customization
Effective Rapid
scheduling throughput
techniques techniques

Process-Focused Product-Focused
High variety, low volume Low variety, high volume
Low utilization (5% to 25%) High utilization (70% to 90%)
General-purpose equipment Specialized equipment

13
 Comparison of Processes

Process Focus Repetitive Focus Product Focus Mass

Customization

Small Long runs, Large Large

quantity, standardized quantity, small quantity, large
large variety product made variety of variety of
of products from modules products products

General Special Special Rapid

purpose equipment purpose changeover on
equipment aids in use of equipment flexible
assembly line equipment

Comparison of Processes
Process Focus Repetitive Focus Product Focus Mass Customiz.
(Low volume, (Modular) (High-volume, (High-volume,
high variety) low-variety) high-variety)

Operators are Employees Operators are Flexible

broadly are modestly less broadly operators are
skilled trained skilled trained for the
necessary
customization

Many job Repetition Few work Custom

instructions reduces orders and job orders require
as each job training and instructions many job
changes changes in because jobs instructions
job standardized
instructions

14
 Comparison of Processes
Process Focus Repetitive Focus Product Focus Mass
(Low volume, (Modular) (High-volume, Customization
high variety) low-variety) (High-volume,
high-variety)

Units move Movement is Swift Goods move

slowly measured in movement of swiftly
through the hours and unit through through the
plant days the facility is facility
typical

Finished Finished Finished Finished

goods made goods made goods made to goods often
to order to frequent forecast and made to order
forecast stored

Comparison of Processes
Process Focus Repetitive Focus Product Focus Mass
(Low volume, (Modular) (High-volume, Customization
high variety) low-variety) (High-volume,
high-variety)
Fixed costs Fixed costs Fixed costs Fixed costs
low, variable dependent on high, variable high, variable
costs high flexibility of costs low costs must be
the facility low

Costing Costs usually High fixed High fixed

estimated known due to costs mean costs and
before job, not extensive costs dynamic
known until experience dependent on variable costs
after job is utilization of make costing a
complete capacity challenge

15
 Changing Processes

 Difficult and expensive

 May mean starting over
 Process strategy determines
transformation strategy for
an extended period
 Important to get it right

Objectives of operations management

Classical Objective:

 Increase EFFICIENCY

Additional current objectives:

1. Reducing costs
2. Quality
3. Punctuality
4. Flexibility
5. Good custumer service

16
Objectives in Operations Management

REDUCING COSTS
Break-even analysis : Objective is to find the point in euros
and units at which cost equals revenue

“Amount of production at which cost (or expenses)

and revenue are equal: there is no net loss or gain ”

Less production => loss

Higher production => benefits

Break-even analysis

 Fixed costs are costs that continue even

if no units are produced
 Depreciation, taxes, debt, mortgage
payments

 Variable costs are costs that vary with

the volume of units produced
 Labor, materials, portion of utilities
 Contribution is the difference between
selling price and variable cost

17
Break-even analysis
Revenues

Break-even point
€
Total Costs

Fixed Costs

Fixed
Costs
Volume
loss Profits

Break-even analysis

–
Total revenue line
900 –

800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in euros

600 –

500 –

400 – Variable cost

300 –

200 –

100 – Fixed cost

|– | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Volume (units per period)

18
Process design

Flexible
Total
Costs
Mass production

Production

Fixed Cost: a > a’

Variable cost: b < b’

Break-even analysis
Assumptions
 Costs and revenue are linear functions
 Generally not the case in the real world
 We actually know these costs
 Very difficult to accomplish

BEPx = Break-even point in x = Number of units

units produced
BEP$ = Break-even point in TR = Total revenue = Px
dollars F = Fixed costs
P = Price per unit (after V = Variable costs
all discounts) TC = Total costs = F + Vx

19
 Break-even analysis

TOTAL REVENUES (TR) = TOTAL COST (TC)

Break-even point Break-even point

in time units P·x* = F + V·x* in monetary units
BEPt= BEPx·t= (P·x*)-(V·x*)=F BEP$ = P·BEPx =
=t·F/(P-V) x*·(P-V) = F = F/(1-V/P)

x* = BEPx = F/(P-V)

Break-even point
in physical units

Break-even example

50,000 –

Revenue
40,000 –
Break-even
point Total
30,000 –
Dollars

costs

20,000 –

Fixed costs
10,000 –

–
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

20
 Capacity

“The throughput, or the number of units a facility can

hold, receive, store, or produce in a period of time”

 Determines fixed costs

 Determines if demand will be satisfied
 Three time horizons

Design and Effective Capacity

 Design capacity:
maximum theoretical output of a system

 Effective capacity
capacity a firm expects to achieve given
current operating constraints
 Often lower than design capacity

21
 Capacity

DESIGN EFFECTIVE “DIMENSIÓN”

CAPACITY CAPACITY (Spanish)

Theoretical output Expected output Vertical Integration

in standard condit. under current condit. A process in business
(over a certain period) (over a certain period) where a company buys
another company that
supplies it with goods or
that buys goods from it
in order to control all the
processes of production

CAPACITY

So… How do we measure capacity?

Homogeneous Outputs per unit of time

Products (litres of beer, milk,…)

Heterogeneous Inputs per unit of time

Products (taylor)

22
CAPACITY

 The throughput, or the number of units

a facility can hold, receive, store, or
produce in a period of time
 Determines fixed costs
 Determines if demand will be satisfied
 Three time horizons

Planning over a time horizont

Long-range Add facilities

planning Add long lead time equipment *
Intermediate- Subcontract Add personnel
range Add equipment Build or use inventory
planning Add shifts

Schedule jobs
Short-range
planning * Schedule personnel
Allocate machinery

Modify capacity Use capacity

* Limited options exist

23
 Managing Demand
 Demand exceeds capacity
 Curtail demand by raising prices, scheduling
longer lead time
 Long term solution is to increase capacity

 Capacity exceeds demand

 Stimulate market
 Product changes

 Adjusting to seasonal demands

 Produce products with complimentary demand
patterns

24