Unit-1: Introduction To Operation Management and Forecasting of Demand

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UNIT-1: INTRODUCTION TO OPERATION MANAGEMENT AND FORECASTING OF DEMAND

PRODUCTION AND OEPERATIONS MANAGEMENT: Production/operations management is the process which combines & transforms various resources of the organization into values added products and services in a controlled manner as per the policies of the organization. The set of interrelated management activities which are involved in manufacturing certain products is called as production management. If the same concept is extended to service management then the corresponding set of management activities is called as operations management.

5 Ps OF PRODUCTION: 1. Product: What is to be produced? market considerations, product range, technology needed to make the products, cost analysis regarding the product. 2. Plant: location of the plant, type of plant and equipment, amount and level of technological sophistication, maintenance of plant and equipment. 3. Process: type of manufacturing process, customer order sizes ,process time and number of changeover in parts of the machinery etc. 4. People: It includes who all will handle the machinery, their number, location and skills. Also how do they perform and legal obligations regarding them. 5. Programs: It includes integrating the technology with existing tehcnology, forecasting about production etc. ROLES OR ACTIVITIES OF PRODUCTION MANAGER: 1. MATHEMATICAL MODELLING: creating and using mathematical representation of management problems and organisations to predict outcomes of proposed courses of action.

2. PLANNING: the operations manager defines the objectives for the operations subsystem of the organization and the policies, programs and procedures for achieving the objectives. This stage includes clarifying the role and focus of operations in the organizations overall strategy. It also involves product planning, facilities designing and using the conversion process. 3. ORGANISING: operations managers establish a structure of roles and the flow of information with in the operations subsystem. They determine the activities required to achieve the operations subsystems goals and assign authority and responsibility for carrying them out. 4. CONTROLLING: to ensure that the plans for the operations manager must also exercise control by measuring actual outputs and comparing them to planned outputs, controlling costs, quality and schedule is at the very heart of operations management. 5. BEHAVIOUR: operations managers are concerned with how their efforts to plan, organize and control effect human behavior. They also want to know how the behavior of sub-ordinates can affect managements planning, organizing and controlling actions. 6. MODELS: as operations managers plan, organize and control the conversion process, they encounter many problems and must make many decisions. They can frequently simplify these difficulties by using models.

TYPES OF TRANSFORMATIONS: Physical --- manufacturing Locational- transportation Exchange- retail Storage- warehousing Physiological- health care Information- telecommunication

TYPES OF PRODUCTION SYSTEM: The requirements of production system depends on the type of product that the company offers and the strategy that it employ to serve its customers.

BASIS Types of output

CLASSIFICATION products services

EXAMPLES Furniture, tv, radio etc Transportation, banking services, etc. health,

Types of flows

projects

Construction of bridge, dams, roads etc

Job shop

Hospital, auto repair machine shops etc.

Flow shop

High volume TV factory, auto factory etc.

Continuous process

Postal

services,

telephone

company, oil refinery etc. Type of specification under customized service type standardized Insurance, wholesale stores Medical care, legal services

Flow shop: this is the conversion process in which successive units of output undergo the same sequence of operations, using specialized equipment usually positioned along a production line. Eg: auto assembly, assembling of television sets and computer keyboards etc. Note* extreme form of flow shop is sometimes treated as a continous process in which there is a constant flow of materials eg. Oil refining, chemical processing (here there is no way to identify successive units of output)

Flow shop is of two types: continuous flow shop Intermittent flow shop Continous flow shop produces the same type of output like cigarettes, fertilizers, cement etc. Intermittent flow shop process is interrupted to set it up to handle different specifications of the same basic design. In each run, however, all units will follow the same sequence. Eg, bottling factories , production of clothing etc.

Job shop: this is a conversion process in which units of different type of prodcuts follow different types of products follow different sequences through different shops. Note* system has more flexibility. This system results into more setup time, more in process inventory, complex scheduling and varying quality.

Batch manufacturing: a batch manufacturing facility produce some intermediate varieties of products with intermediate volumes. The volume of any single product may not be sufficient to justify the use of a dedicated set of equipments for its production. A few or several products will have to share the production resources to balance their utilization. Note* production equipment in batch manufacturing must be capable of performing a variety of tasks, but the range of possible operations is much narrower than in a job shop.

Project: a project refers to process of creating a complex on of a kind product or service with a set of well-defined tasks in terms of resources required and time phasing. Eg., dam construction, starting new industries, fabricating bottles etc. FORECASTING:

A forecast is an estimate of an event which will happen in future. The event may be demand of a product, rainfall at a particular place, population of a country or growth of a technology. The forecast value is not a deterministic quantity. Since, it is only an estimate based on that past data related to a particular event, proper care must be given in estimating it. Forecast may be classified into: 1. Technology forecast: it is a prediction of the future characteristics of useful machines, products, process, procedures or techniques. It deals with certain characteristics such as level of technical performance, rate of technological advances. 2. Economic forecasts: government agencies and other organizations involve in collecting data and prediction of estimate on the general business environment. These will be useful to government agencies in predicting future tax revenues, level of business growth, employment and inflation. 3. Demand forecast: the demand forecast gives the expected level of demand for goods or services. This is the basic input for business planning and control. Hence, the decisions for all the functions of any corporate house are influenced by the demand forecast.

TECHNIQUES FOR FORECASTING: Quantitative techniques include Method of semi average Moving average method

Weighted moving average method Single exponential smoothing method Double exponential smoothly method Regression analysis

Qualitative forecasting includes: Delphi method

Marketing research Educated guess Executive commentee consensus Survey of sales force

Delphi method: it is a forecasting technique applied to subjective nature of demand values. In view of globalization in India, Indian companies will have difficulties in estimating demand of their products mainly because of possible mixed reaction of customers. Towards various attributes of a specific product which is manufactured by multinational and indigenous firms. In Delphi method of forecasting, several knowledgeable persons are asked to provide subjective estimates of demands or forecasts of possible advances in technology. The experts may provide several opinions and based on those opinions, a consensus will be arrived at a demand of product/advances of technology. The essential precautions to be followed in this method are as follows: Panel members must be unknown to each other. The initial questionnaire should be unambiguous and it should explain every matter about which opinion is sought. After getting opinions from panel members, they are to be compared for similarity. If the variation among the opinions is too much, the summary of them is to be circulated again among the members without mentioning the names of persons who provide the opinions. 50% of the estimate is treated as the basis for comparison. The panel members whose opinion differ significantly from the middle 50% of the estimate will be asked to reconsider their opinions. Still, if they want to stick to their original opinions, they will be asked to provide rationale for the same. Educated guess: this is made when one person uses his/her best judgment based on the experience and intuition to estimate a sales forecast. This approach is often used for short term forecast when the cost of forecast in-accuracy in low. Executive commentee consensus: knowledgeable executives from various departments within the organization forms a committee charged with responsibility of developing a sales forecast.

This committee may use many inputs from all parts of the organization and may have staff analyst which provide analysis as needed. Such forecast is tend to be compromised forecast not reflecting the extremes that could be present had they been prepared by individuals Survey of sales force: estimates of future regional sales are obtained from individual members of the sales force. These estimates are combined to form an estimate of sales for all regions. Managers must transform this estimate into sales forecast to ensure realistic estimate. This is a popular method where companies have good communication system that has sales person who sell directly to the customer.

PRODUCTIVITY: It is a relationship between the output (product/services) and the input (resources consumed in providing them) of a business system. Productivity= output/input For survival of any organization, productivity ratio must be atleast 1. If it is less than 1, the organization is in a comfortable position. Strategies for improving productivity are: 1. Increased output for same input: the output is increased while keeping the input constant. For example; assume that in a steel plant, the layout of existing shops is not proper. By slightly altering the location of the billet-marking section i.e bringing it closer to the furnace which produces hot metal, the scale formation at the top of ladles can be reduced to great extent. The molten metal is usually carried in ladles to the billet-marking section. In long run, this would give more yield in terms of tons of billet produced. Note*: there is no extra cost involved. The only task is the relocation of the billet-making facility by shifting it closer to the furnace which involves insignificant cost.

2. Decreased input for same output: the input is decreased to produce the same output. For example: assume that there exists a substitute raw material to manufacture a product which has the required properties and it is available at lower prices. IF WE CAN IDENTIFY SUCH MATERIAL AND USE IT FOR MANUFACTURING THE PRODUCT, THEN CERTAINLY IT WILL REDUCE THE INPUT COST. Note* the job of purchase department is to identify an alternative substitute material. The process of identification does not involve any extra cost. Also, the productivity ratio will increase because of the decreased input by way of using the cheaper raw material to produce the same output.

3. Proportionate increase in the output is more than the proportionate increse in the input: For example: introducing a new product into the existing product mix of an organization. Assume that the existing facilities are not fully utilized. So, the R&D wing of the company has identified a new product which has a very good market and which can be manufactured with the surplus facilities of the organization. If the new product is taken up for production, then the following will result: There will be an increase in the revenue of the organization by way of selling the new product in addition to the existing product mix. There will be an increase in the material cost, and operations and maintenance cost of machineries because of producing the new product. Note* the proportionate increase in the revenue will be more than the proportionate increase in the input cost which implies increase in productivity.

4. Proportionate decrease in the input is more than the proportionate dcrease iin the output: dropping an uneconomical product form existing product mix will result in the following; There will be decrease in the revenue of the organization because of dropping a product from the existing product mix. There will be a decrease in material cost, and operations and maintenance cost of machineries because if dropping an existing product from the product mix.

Note* from these two decreases, the proportionate decrease in the input cost will be more than the proportionate decrease in the revenue which implies increase in productivity.

UNIT-2: WAITING LINE AND INVENTORY MANAGEMENT INVENTORY MANAGEMENT: Opposing view of inventories; Why we want to hold inventories: Improve customer service Reduce certain costs such as ordering costs, stockout costs, acquisition costs ans startup quality costs. Contribute to the efficient and effective operation of the production system. Finished goods; essential in produce-to-stock positioning strategies, necessary in level aggregate capacity plan, products can be displayed to customers. Work in process; necessary in process focused production and may reduce material handling and production cost. Raw material; supplies may produce/ship material in batches, quantity discount and freight handling savings. Why we do not want to hold inventories: certain costs increase such as carrying costs, cost of customer responsiveness, cost of coordinating production, cost of diluted return on investment, cost of production problems. Two fundamental inventory decisions are;

How much to order of each material when orders are placed with either outside suppliers or production department within organisation. When to place an order.

Classification of inventory based on functions: 1. Transit inventory: which has been ordered but has not reached us as yet. Also known as pipeline inventory. It acts as a buffer or safety inventory and ensures that we do not run out of stocks. 2. Anticipating inventory: processing and storing goods whose demand is anticipated in near future or goods which are seasonal. 3. De coupling inventory: keeping stock of material which can be fed to the next machine if breakdown at a previous machine takes place. 4. Cycle inventory: ordering quantities in bulk to minimize, ordering& mass transportation costs.

Independent demmand inventory system: demand for an item carried in inventory is independent of the demand for any items in inventory eg; finished goods inventory. Demands are estimated from forecasts and/or customer orders. Dependent demand inventory system: items whose demand depends on the demands of other items eg; demand for raw materials and components can be calculated from the demand for finished goods. The system used to manage these inventories are different from those used to manage independent demand items.

INVENTORY COSTS: Costs associated with ordering too much (represented by carrying costs) Costs associated with ordering too little (represented by ordering costs) These costs are opposing costs as one increases and the other decreases. The sum of these two costs is the total stocking cost (TSC). When plotted against order quantity, the TSC decreases to a minimum cost and other increases. This cost behavior is the basis for answering the first fundamental question; how much to order? It is known as economic order quantity.

Behavior of EOQ: As the demand for the inventories items occur, the inventory levels drop. When the inventory level drops to a critical point, the order point, the ordering process is triggered. Th amount ordered each time an order is placed is fixed or constant. When the ordered quantity is received, the level of inventory increases. An application of this type system is two- bin system. A perpetual inventory

accounting system is usually associated with this type of system.

Calculating EOQ: Typical assumptions: Annual demand (D), carrying cost ( C) and ordering cost (S) can be estimated. Average inventory level is the fixed ordered quantity (Q) divides by 2 which implies; no safety stock, orders are received all at once, demand occurs at a uniform rate, no inventory when an order arrives.

Annual ordering cost= (avg number of orders per year) ( ordering costs)= (D/Q) S

Total annual stocking cost (TSC)= annual carrying cost + annual ordering quantity= (Q/2)C + (O/Q)S The order quantity where the TSC is at minimum (EOQ) can be obtained by taking derivative & equating to zero & solve for Q. EOQ= 2DS/C

Example: zartex co. produces fertilisers to sell to wholasalers. One raw materialcalcium nitrate is purchased from neraby suppliers at rs.22.50 per ton. Zartex estimates it will need 57,50,000 tons of calcim nitrate next year. The annual carrying cost for this material is 40% of the acquisition cost and ordering cost is rs.595 per order.

What is the most economical order quantity? How many orders will be placed per year? How much time will elapse during orders?

Solution: D= 57,50,000 per year C= .40(22.50)= rs.9 per ton per year S= rs.595per order EOQ= 2DS/C = 27,573.135 tons per year. Total stocking cost(TSC)= (Q/2C + (D/Q)S = (27,535.135/2) (9.00) + (57,50,000/27,573.135) (595) = rs.248,158.22 Number of orders per year= D/Q = 57,50,000/27,573.135 = 208.5 order per year.

ABC Analysis: it is a technique which is used to classify the item in store based on the demand of the stock. It classifies the items into A,B and C class items. A class- approx. value 10% of items accounts for 70% of the annual consumption value of the items. B class- approx. 20% of the items accounts for 20% of the annual consumption value of the items. C class- approx. 70% of the items account for 10% of the annual consumption c=vaue of the items.

Procedure for ABC Analysis: 1. Input the following- total number of items, item code, nnual consumption in terms of units & init price for each of the items. 2. For each item, compute annual aoncumption value in terms of rupees by multiplying its annual consumption units with its unit price. 3. Arrange the items and their details in desending order of the annual consumption value computed in step 2. 4. Compute cumulative values of the annual consumption values. 5. Graph the items into A,B and C classes by dividing the items into 70%, 20% and 10% of the annual consumption values, resp from top to bottom in the sorted list of step 3.

WAITING LINE THEORY: Queue are a common situation which may take form of cars waiting for an auto service center, printing jobs waiting to be completed at a print shop etc. the body of knowledge about queuing theory, also called waiting lines theory, is an important part of services management and a valuable tool for every operations manager. Analysis of queues in terms of waiting line length, average waiting time and other factors help us understand service systems such as bank teller stations, shop floor control activities etc. A queue or waiting line is formed when customers arrive at a counter offering certain facilities and demand service. Structure of queuing system: Input source: the input surce is the source from which the customer comes and joins the queue. The input source of the customer s to the queuing system can be either finite or infinite. Arrival characteristics: the input source that generates arrivals for customers for the services. The arrival system has three characteristics as; size of arrival population, pattern of arrivals at the queuing system, behavior of the arrivals.

Size of the arrival population: population sizes are considered to be either unlimited or limited. For practical purposes. Examples of unlimited include cars arriving at highway toll gate, shoppers arriving at supermarket etc. most queuing models assume infinite arrival of population. An example of limited or finite includes photocopying shop with only eight copying machines, which might breakdown and require service. Pattern of arrival at the system: customers either arrive at a service facility according to some known schedule. For example; one patient every fifteen minutes. Arrivals are considered random when they are independent of one another and their occurrence cannot be predicted exactly. Behavior of the arrivals: most queuing models assumes that an arriving customer is a patient customer. Patient customers are people or machines that wait in the queue until they are served and do not switch between the lines. Customers who balk, refuse to join the waiting line because it is too long to suit their needs or interests. Reneging customers are those who enter the queue but then become impatient and leave without completing their transaction. Queuing length: the length of a line can be either limited or unlimited. A queue is limited when it cannot, by law or physical restrictions, increase to an infinite length as in the case in a small barbershop that has only a limited number of waiting chairs. Service mechanism: once the customer has entered for service, the service system has three characteristics as; time taken for service, service facility and service discipline of the system. Service time: service time may be either constant or random. If service time is constant, it takes the same amount of time to service each customer. This is the case in a machine-performed service operation such as an automatic car wash. Service facility: service facility is usually classified in terms of; Number of channels i.e. number of servers: a single channel queuing system, with one server, is typified by the drive-in-bank that has only one open teller, or by a drive-through fast food restaurant. Most banks today are multichannel service systems, as are most large super stores, airline ticket counters and post offices. Number of phases i.e. number of service stops that must be made: a single phase system is one in which the customer service from only one station and then exists the system. A

fast food restaurant in which the person who takes your order also brings you the food and takes your money in a single phase system. But if the restaurant requires you to place your order at one station, pay at a second, and pick up the food at a third service stop, it becomes a multi-phase system.

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