Mulwa

DOM 102 : Principles of Operations Management Distance Learning Manual

Course Objectives:

The course aims to introduce students to management of business operations. By the end of the
course, you should be able to appreciate the basic principles of organizational operations
competitiveness including value creation and operational objectives. The course also aims at
introducing the field of Operations Management as an independent functional area of
management and provides a rationale for the study of Operations Management as a field of
specialization.

Course Contents
Lecture 1: Introduction to Operations Management

1.1 Introduction
1.2 Objectives
1.3 Operations Management Overview
1.4 The Value of Operations Management Study
1.5 Principles of Operations Management
1.6 Historical Development of Operations Management
1.7 Life cycle of an operating system

Lecture 2: The Concept of Value addition

1.1 Introduction
1.2 Objectives
1.3 Input-Transformation-Output Model
1.4 Value addition in Manufacturing Firms
1.5 Value addition in Service Firms
1.6 Operations as a Service

Lecture 3: Operations and Competitiveness

1.1 Introduction
1.2 Objectives
1.3 Operations Competitive Dimensions
1.4 Orders Qualifiers and Order Winners

Lecture 4: Process Selection in operations

1.1 Introduction
1.2 Objectives

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1.3 Introduction to process terminologies

1.4 Types of Processes
1.5 Process Flow Structures; Job, Batch, Assembly Line & Continuous Flow

Lecture 5: Facility Location

1.1 Introduction
1.2 Objectives
1.3 Considerations in Facilities location
1.4 Methods used in facilities location

Lecture 6: Capacity Management

2 Capacity Defined
3 Capacity Dimensions
4 Capacity Planning Concepts
4.1 Economies and Diseconomies of scale
4.2 Capacity Availability and Utilization
4.3 The Experience Curve
4.4 Capacity Focus
4.5 Capacity Flexibility
Lecture 7: Facility Layout

 Definition and Importance of layout planning

 Basic Layout Types
 Office layout
 Retail Service Layout
Lecture 8: Operative Decisions

 Introduction to aggregate planning

 Introduction to operations Scheduling
Lecture 9: Inventory Management

 Definition, Purposes and Costs of Inventory

 Inventory Systems
 Fixed-Order Quantity Models
 Fixed-Time Period Models
 Inventory Management Methods; Bin System & ABC Analysis
Lecture 10: Quality Management

Suggested Texts

1. The Management of Operations: A Conceptual Emphasis by Jack R. Meredith

2. Operations Management by William Stevenson
3. Operations Management by Nigel Slack

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4. Production and Operations Management: Manufacturing and Services by Chase,

Aquilano and Jacobs
5. Operations Management for competitive advantage by Chase, Aquilano, Jacobs &
Agarwal.
6. Operations Management in service Industries and the Public Sector by C. Voss et al
7. Production/Operations Management by Thomas E. Hendrick and Franklin G Moore
8. Production and Operations Management by Raymond R. Mayer
Course Assessment

 Assignments 10%
 CAT 20%
 Final Exam 70%

LECTURE 1: INTRODUCTION TO OPERATION MANAGEMENT

1.1 INTRODUCTION

In this lecture, you be introduced to the discipline of operations management and the
fundamental role it plays in ensuring that the goods and services we use in our day to day life are
produced and successfully delivered to use. This lecture will also make you understand the
difference between operations management and general management.

1.2 Objectives

By the end of this lecture, you will be able to;

1. Define operations management

2. Explain the value of operations management knowledge
3. Narrate the historical developments in Operations Management
4. Explain the principles of operations management

1.3 OVERVIEW OPERATIONS MANAGEMENT

The discipline of operations management involves ensuring that goods and services are produced
and delivered successfully to customers. Operations management is the only means by which
managers directly affect the value delivered to all stakeholders,- customers, investors employees

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and society. Effective operations management deliver high quality goods or services that meet
customers demand, motivate and develop skills of people who do the actual work and maintain
efficient operations for adequate return on investment while at the same time protecting the
environment.
Chase and Acquilano also define Operation Management as a design, operation and
improvement of the production/service delivery system that creates the firms products or
services. A critical analysis of this definition follows;
i) Design;
Involves coming up with new products and services to satisfy unmet customer requirements. It
also covers design of production capacity and facilities layout for effective and efficient work
flow. Design still encompasses design work of work systems which entails use of shifts to reduce
fatigue and performance measurement systems.
ii) Operation;
The operating system has to be run to produce a good or offer a service. The key issues of
consideration include the length of the shifts, scheduling orders for actual production and
production /operation planning strategies for demand management.
iii) Improvement;
The system has to be improved to offer a better service or to produce. Improvement of operating
systems is not an option but is mandatory because of three reasons;
 Tastes and preferences of customers keep on changing with time making customers demand
different products or services.
 Technology improvement gives opportunity to organizations to serve customers better.
Organizations have to take advantage of technology to design new goods or services of
modify methods of delivery.
 Competition will challenge organizations to improve their outputs.

1.4 THE VALUE OF OPERATION MANAGEMENT STUDY

Many undergraduate students out of curiosity ask, “If I specialize in operations management will
I really get a job?” This may also be the same question you are asking. Below is a narrative of
the careers in this discipline and an exploration of other reasons why general knowledge in
operations management is necessary to you even if you will not be an operations major.

1. For career opportunity e.g.

There are a wide variety of career options in the field of operations management. Some
key opportunity areas are:
i) Operations Manager

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The operations manager is focused on optimizing general corporate infrastructure

by monitoring and changing the work environment, vendor selection, supply
chain management, real estate and budgets.
ii) Materials Manager
Stores a product through all phases from production to finished goods, shipping
between departments, transportation to distribution centers, warehouses, and
customers. Materials mangers must insure that the firm has the right item, at the
right time, for the right price.
iii) Industrial Production Manager
Coordinates the activities of production departments of manufacturing firms.
They are responsible for the production scheduling, staffing, quality control,
equipment operation and maintenance, inventory control, and coordinating the
unit's activities with that of the other departments. Jobs include: line supervisor,
manufacturing manager, production planner, production manager.
iv) Operations Research Analyst
Decides on the best allocation of resources within an organization or system.
Resources include time, money, people, space, and raw materials. They might
also compare competing research projects to determine what one performs best on
time, results, and cost given a fixed set of resources and recommend what project
to keep and what project to drop. Jobs include: industrial engineer, systems
analyst, office manager, forecaster.
v) Quality Assurance Manager
Works on the prevention of product deficiencies through prevention, detection,
and correction. They ensure that production goals and quality are met. They might
sample, inspect, and test operations and set standards. Jobs include: quality
assurance manager, inspector, technician.
vi) Facilities Coordinator
Designs the physical environment of a company. Work on building design,
furniture and associated equipment.
vii) Logistics Manager
Responsible for supply chain management in a key area of an organization.
Focused on timeliness, efficiency and accuracy in receiving and shipping goods.

2. To understand cross functional relationships

I our today’s work environment, employees work in cross-functional teams which is a group
of people with different functional expertise working towards a common goal. The team may
include people from finance, marketing, operations, and human resources departments.
Typically, it includes employees from all levels of an organization. Members may also come
from outside an organization (in particular, from suppliers, key customers, or consultants).
Cross-functional teams require a wide range of information to reach their decisions. They
need to draw on information from all parts of an organization’s information base and all
functional areas.
3. It provides a systematic way of understanding business processes/organizations

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Operations management knowledge enables you develop analytical skills which form the
fundamentals of good decision-making skills. Analytical skills allow you to deconstruct a
situation and look at its barest. When you are able to see a situation for what it really is and
then understand the factors and everything that is involved in it, you will have a more
rational approach in finding a solution for it. In the end, you make decisions that will be the
most beneficial to the business; decisions based on rational reasoning and not gut feelings
only.

For example if you want to reduce production cost, you can know what to attack to reduce
the cost by breaking it into constitute elements as follows;

Constituents of production cost and how to reduce it;

Purchase of raw materials changing the source to cheaper areas/sources

Delivery of raw materials use the cheapest means of transport

Storage/warehouse purchase the goods just when needed ( just-in-time)

1.4 OPERATIONS MANAGEMENT: HISTORY

The first step in understanding and identifying the key issues in Operation Management(OM)

situations is to review the historical perspectives that dominated management thought since the

19th century. Many aspects of earlier viewpoints, philosophies and schools of thought remain

relevant today and can provide the careful observer with valuable insight into present day OM

situations. Historical development in essence gives a picture of, where we have come from, are

and are going.

Since 1900, the major schools of thought, have fallen within one of historical perspectives, of

management thought: The structural perspective, generally held at the turn of the 19 th century,

evolved from that time to encompass the theory of scientific management, classical theory,

bureaucracy, decision theory and systems theory. The human perspective, which first appeared in

the 1920s, eventually included schools of thought focused on human relations, group dynamics,

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and leadership research. The development of management theory dates back to the days of

ancient civilizations of Egypt, Greece and Rome.

Traditionally management has been defined as Forecast and Plan, Organize, Command,

Coordinate and Control. Management is the process of designing & maintaining an environment

in which individuals working together, in-groups, efficiently to accomplish selected aims:

As managers, people carry out the function of planning, organizing, staffing, leading and

controlling and applies to any kind of organization & managers at all levels. The aim of all

managers is the same, to create a surplus. Managing is concerned with productivity;

effectiveness & efficiency.

INDUSTRIAL REVOLUTION

Historically, the field of Operations Management has evolved in a very shot span of time. Its

roots go back to the Industrial Revolution, which started in the 1770s with the following

important developments:

 The division of labour concept, espoused by Adam Smith

 The steam engine invented by James Watt

 The interchangeable parts’, concept developed by Eli Whitney

Despite a lack of formal theory, economists such as Adam Smith sowed the seeds of labour

theory. Smith spoke approvingly of a pin manufacturer who divided the work into a number of

branches’, causing the separation of pin manufacturing into 18 different operations. This

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separation of activities permitted workers to concentrate on only one task & thus radically

increased the quality of pins that could be manufactured in a day. Smith also emphasized the

importance of proper machinery to facilitate labor. However, management prior to 1900 can be

best described as using the rule of thumb.

Adam smith is given much of the credit for the theoretical development of the economics of

modern production. In his book, The Wealth of Nations, he pointed out that where workers are

organized to produce large quantities of an item, the labor required should be divided into

discrete tasks. He believed that this division of labor would produce several benefits such as.

 Workers who continually performed the same task would acquire skill at it.

 Time normally lost in switching from one task to another, would be saved

 A worker’s increased concentration on a task would lead to the development of special tools

& techniques for its easier/faster accomplishment.

Division of labor characteristic described by Adam Smith has continued its evolution and

refinement all the way to the factories, hospitals, schools, government agencies, stores, libraries,

restaurants and other organizations.

In 1832 a mathematician, Charles Babbage, extended Smith’s work by recommending the use of

scientific methods to analyse problems. In particular he suggested the use of time study, unit

costing, research & development, economic location analysis, bonus payments & pay on the

basis of skill requirements.

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Babbage is also known for his ‘difference engine’, and his ‘analytical engine’ the forerunners of

today’s computer. Both were never completed because, difference engine was faced by lack of

tooling technology & financial backing was withdrawn for the analytical engine by the

Chancellor of the Exchequer since it was believed to be indefinitely expensive.

SCIENTIFIC MANAGEMENT

Frederick Winslow Taylor

Almost half a century passed after Babbage before anyone addressed the problem of managing

factories. In 1898, a US National Tennis Champion, Frederick Winslow Taylor, turned his

attention to the factories and began a movement that eventually earned him the title, ‘father of

scientific management’. He gave up going to college and started as an apprentice pattern maker

and machinist in 1875. In 1878, he began working for the Midvale Steel Company whose

president, William Sellers, was an advocate of experimentation in factory methods. Taylor

adopted some of Sellers’ ideas among many other of common knowledge, and organized them to

form a unique philosophy of management.

He worked as a machinist (apprentice/common laborer), foreman, master mechanic and finally as

Chief Engineer after earning a degree through evening study. He invented high-speed steel –

cutting tools. These gave him ample experience and opportunity to know first-hand the problems

and attitudes of workers & saw the great opportunities for improving management quality.

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Always looking for the best way to do things, he developed techniques to systemize & improve

economies of work motion. He established a complete management philosophy that included

time analysis, wage incentives, infrastructure to separate the responsibilities of management

(planning) and workers (doing), an accounts system & principles for running business on a

scientific basis.

Taylor described his new management philosophy in the book, “The Principles of Scientific

Management’, Published in 1911. In this classical book, Taylor offered the following definition

of the Scientific Management “The kind of management, which conducts business or affairs by

standards established by facts or truths gained through systematic observation, experiment or

reasoning”. Scientific management was mainly concerned with improved methods of production.

It was a rebellion against the old managerial problem solving through trial & error, the rule of

thumb. The advent of scientific management around the turn of the 20 th century is probably the

major historical landmark for the field. Therefore, this event more than any other can be

considered as the beginning of the field of Operations Management.

Taylor was convinced that, the scientific method, which provides a logical framework for the

analysis of problems, could be applied to the management process. The method consists of

defining the problem, gathering data, analyzing data, developing alternatives & selecting the best

alternative. He believed that use of scientific method would direct the manager to the most

efficient way work could be performed. Taylor sincerely believed that scientific management

practices would benefit employer through increased output and workers, who would receive

more income. But he stressed that scientific management would require both manager &

employees to undergo a revolution in thinking.

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The greater part of Taylor’s work was oriented towards improving management of production

operations. The classic case of the pig iron experiment at Bethlehem Steel Company where

laborers would pick up 92 pounds pigs in the car. In a group of 75 laborers, Taylor determined

the average output was about 12.5 tons per man per day. By applying the scientific method, he

developed;

o An improved method of work

o A prescribed amount of rest on the job

o A specific standard of output and

o Payment by the unit of output

After Taylor’s recommendations were implemented, the average output per worker rose from

12.5 to 48 tons per day, and the daily pay rose form $1,15 to $1,85 under the incentive system.

He concluded that the problem of productivity arose from ignorance of both management and

workers. Part of this ignorance was due to the fact that both the managers and the workers did

not know what constituted a ‘fair day’s work’ and a ‘fair day’s wage’. Also both the managers

and workers were concerned with how they would divide the profit, rather than increasing the

profit so that both owners & workers could get more. Taylor’s patterns for high-speed steel-

cutting tools & other inventions as well as his early engineering consulting works made him very

well off.

Taylor’s dedication to systematic planning and study of processes of all kinds pervaded his life.

With a specially designed tennis racket, he played on a national doubles, tennis championship

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team. When playing golf, he used clubs designed individually to achieve a predictable lie; his

friends reportedly refused to play with him when he used a particular putter because of its

accuracy. Legend has it that Taylor died of Pneumonia in a hospital with his stopwatch in his

hands.

Taylor’s philosophy was not greeted with approval by all of his contemporaries. Some unions

resented or feared scientific management, with some justification. In too many instances,

managers of the day were quick to embrace the mechanisms of Taylor’s Philosophy, time study,

incentive plans and so forth, but ignored their responsibility to organize and standardize the work

to be done. Hence there were numerous cases of rate cutting, labor overwork & poorly designed

work methods. Taylor’s ideas were however widely accepted in contemporary Japan where his

books, the Principles of Scientific Management, The Secrete of Saving Lost Motion, translated

into Japanese, sold more than two million copies. To date there is a strong legacy of Taylorism in

Japanese approaches to manufacturing management (Chase Aqilano & Jacobs).

Taylor inspired legions of contemporaries, colleagues and followers who were many and

included the following; Frank & Lillian Gilbreth, Henry Ford, Henry Gantt whose works are well

known to management scholars.

Frank and Lillian Gilbreth

Among the earliest proponents of eliminating waste were husband and wife team of Frank

(1868 – 1924) and Lillian (1878 – 1972) Gilbreth. They extended Taylor’s time study to detailed

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analysis of motion. Their philosophy of work smarter and not harder meant that every task had to

be carefully studied and all wasted motion should be eliminated to arrive at the one best way to

do the job. During their lifetimes, they applied this philosophy to almost every conceivable kind

of work. Frank owned a construction company that specialized in brick building. Applying one-

best way philosophy to the task of bricklaying, he reduced the number of basic motions for

laying a brick from 8 to 6. At a time when bricklayers were laying about 500 bricks a day his

bricklayers averaged 2600.

Frank, is considered by most people, as the father of motion study. He stressed the application of

principles of motion economy to the most, minute details of tasks in an attempt to identify the

‘one best way’ of performing a given task. He also developed the well-known motion study

technique involving the use of ‘therbligs’ and chronocyclegraphs. He introduced new detailed

techniques of analyzing job from the point of view of time, motion and fatigue.

Lillian is known for human relation work in the field. Her book, “The Psychology of

Management”, is one of the earliest works concerning the human factor in business

organizations. From her studies dealing with worker fatigue and psychology, she gained the title

of the ‘first lady of management’.

Though important contributors to management thought, they could hardly be called the parents

of TQM or JIT since these go far beyond their thinking & in some instances stand counter to it.

 They were specifically interested in the waste of motion while there are many types of

waste;

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 In any process, there is no such a thing as one-best-way, if there ever was, it would only

be temporary & superseded by still better way CI;

 JIT/TQM stand by the premise that seeking out waste and finding better ways is the

responsibility of everyone not just managers

Henry Gantt: 1913

Henry Gantt’s best known contribution to management is the charting system he developed for

the Work Scheduling in Production. However he also developed some original incentive pay

systems and emphasized the importance of worker psychology in areas such as morale. He

advocated efficiency and argued, that workers should be given bonuses to ensure that they

completed jobs on time. Gantt also emphasized that corporations should publicly state the social

responsibility of management and business.

Henry Ford, 1912 – 1930

Ford utilized Eli Whitney’s idea of interchangeable parts and a continuous workflow concept he

saw in Switzerland to bring ‘mass production’ to large scale industry. He arranged, workstations

into an assembly line with a moving belt for parts, each worker performing a specialized task on

the parts as they went by.

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Ford is known for his concern for human elements in production, with his first ‘sociological

departments’ being the framework for today’s HR departments.

Moving assembly line: the year 1913 saw the introduction of one of the machine age’s greatest

technological innovations, the moving assembly line for the manufacture of Ford Cars. Before

the line was introduced, in August of that year one worker assembled each autoworker

performing a small unit of work and the chassis being moved mechanically, the average labor

time per chassis was 93 minutes. This technological breakthrough, coupled with concepts of

scientific management, represents the classic application of labor specialization.

HUMAN RELATIONS SCHOOL

Elton Mayo, 1933

Mathematical and statistical developments, dominated the evolution of OM from Taylor’s time

up to around the 1940s. An exception was the Hawthorne studies, conducted in the 1930s by a

research from the Harvard Graduate School of Business administered and supervised by

sociologist Elton Mayo. These experiments were designed to study the effects of certain

environmental changes on assembly workers’ outputs at the Western Electric Plant in

Hawthorne, Illinois. The unexpected finding, reported in Management and the worker (1939) by

F. J. Roethlisberger and W. J. Dickson, intrigued sociologists & students of traditional scientific

management. To the surprise of the researchers, changing the level of illumination for example

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had much less effect on output than did the way in which the changes were introduced to the

workers. I.e. reduction in illumination, in some instances led to increased output because workers

felt an obligation to their group to keep output high. Discoveries such as these had tremendous

implications for work design & motivation and ultimately led many organizations to establish

personnel management & human relations departments.

Mayo emphasized the human & social factors in work. The emphasis on human relations in

management for so many years following this study gave birth to the term the human relations

school of management thinking. Mayo felt that ‘scientific management’ often emphasized

technical skills at the expense of adaptive skills.

Further research established prepositions of the human relation school, such as:

 Employee’s behavior depends primarily on the social and organizational circumstances of

work

 Leadership style, group cohesion and job satisfaction are major determinants of the

output of working groups

 Employees work better if they are given a wide range of tasks to complete

 Standards set internally by a working group influence employees attitudes and

perspectives more than standards set by management.

 Application of the division of labor can make work so boring, trivial and meaningless

that productivity actually goes down.

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Human behavior theorists, notably Douglas McGregor and A. H. Maslow made significant

contributions to the theories of leadership, motivation and organizational design. Their school of

thought explicitly recognized the role of interpersonal relations in determining workplace

behavior, and this demonstrated that factors other than pay, can motivate workers.

OPERATIONS RESEARCH

Scientists & engineers have been involved with military activities for as long as the recorded

history. World War II, with its complex problems of logistics control & weapons systems design,

provided the impetus for the development of the interdisciplinary, mathematically oriented field

of operations research (OR). It brings together practitioners in such diverse fields as

mathematics, psychology & economics. Specialists in those disciplines form a team to structure

& analyze a problem in quantitative terms so they can obtain mathematically optimal solutions.

It provides many of the quantitative tools used in OM as well as other management disciplines.

OR is the application of scientific methods to study & devise solutions to managerial problems.

Employing a decision focus, the systems approach, & mathematical models, OR has helped solve

allocation, scheduling, planning, inventory, layout, control and location problems.

OPERATION MANAGEMENT’S EMERGENCE AS A FIELD:

In the late 1950s scholars & researchers in the field began to generalize the problems &

techniques for manufacturing management to other productive organizations, such as petroleum

& chemical processors and wholesalers and the name for the field evolved into ‘production

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management’. The intent of this term was to stress the fact that the field had become a

functional management discipline in itself and not just a set of manufacturing techniques.

In the late 1950s & early 1960s, scholars began to deal specifically with OM as opposed to

industrial engineering or OR. Writers such as Edward Bowman and Robert Fetter. (Analysis for

Production and Operations Management (1957) and Elwoord S. Buffa (Modern Production

(1961) noted the commonality of problems faced by all productive systems and emphasized the

importance of viewing production operations as a system. They also emphasised the useful

applications of waiting line theory, simulation & linear programming that are now standard

topics in the field.

In later 1960s the field expanded even further to embrace the service sector of the economy.

Since the word production seemed to connote product organizations, the more general term

‘operations” was substituted to emphasize the general basis of the field. Transition from

production to operations is ongoing.

The marked increase in demand for services has been mainly, negative, lack of productivity

growth. The inefficiency of services is evidenced by the constant and often bitter criticism of for

instance, railroads, public schools, health care & many other such systems. Only in recent

years(Jack, Meridith) have service sector organizations received the same attention from

researchers, as had been paid to manufacturers. Many of the concepts and ideas developed for

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the manufacturing sector can be modified & applied to service industries. For example, the

problem of school bus routing, health centre scheduling & layout have been addressed with

modification of manufacturing management methods with encouraging results. In 1973 Chase

Aquillano’s first edition of operations management, stressed the need “to put the management

back into operations management”.

SUPPLY CHAIN MANAGEMENT

The Origins & Roots of purchasing & Supply Management: Purchasing has been considered one

of the basic functions common to an organization. Charles Babbage addressed the topic in his

book, on the Economy of the Machinery and Manufacturing, 1832.

There are few historical records on the origin of purchasing. This is due to the fact that in the dim

past people bought materials of suppliers to make articles for sale and not for use. Before 1900

there were few instances of purchasing departments separate and distinct from production and

other operating departments. The first book dealing specifically with the purchasing function was

published in 1887. These were railroad publications, written by railroad personnel. This can be

explained by the predominance, at that time, of the railroad organizations.

At about the same time, occasional articles began to appear in some trade publications dealing

with some purchasing aspects. James M. Cremer, ‘ the engineer as a purchasing agent, August

1908 issue of Cassier’s Magazine. John C. Jay, Jr., general manager of sales of Pennsylavia steel

Corporation: Iron Age: January 1913: suggested the organization of a group to promote the

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interests of purchasing agents through more publicity regarding their activities. This did not

result in the formation of National Association of Purchasing Agents immediately, but it

indicated an emerging interest in the purchasing function. The National Association of

Purchasing Agents of America was founded in 1915. Purchasing came of age during the early

part of World War 1, under the impact of expanded production brought about by the war. At its

fifty second annual convention in Washington, D. C in May 1967, the association voted to

change its name to “The National Association of Purchasing Management” in recognition of the

managerial status that purchasing had attained.

Many of the scholarly principles on which purchasing & supply are built are taken from

economics. The principles of determining the organization’s requirements, selecting the optimal

source, establishing a far & reasonable price & establishing & maintaining mutually beneficial

relationships with the most desirable supplier provide the conceptual backbone of the purchasing

and supply function. The evolutionary nature of management in this field is such that continued

study and self improvement are necessary.

Harvard University has long recognized the importance of purchasing and supply management.

They offered the first course during 1917 – 1918 academic year. Today, the Harvard Business

Review continues Harvard’s tradition by publishing numerously timely articles on the subject.

Today over forty colleges and universities in the United States offer degree-granting programs in

the area of purchasing and supply management. Similar programs exist in Europe, Australia,

Asia and the rest of the Americas. The impact of procurement professional on the quality, cost

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and productivity of their organization is one of the keys to competitiveness in the marketplace

and such competitiveness is the basis of value adding employment.

H. B. Twyford, purchasing: Its Economic Aspects and Proper Methods, 1915, was prophetic

when he wrote “A (purchasing) staff which is entirely unsympathetic with the particular needs of

the user of the material will fail to grasp what is one of the essential things for their department.

They will be dealing with papers and accounts not with men and things.

Howard T. Lewis of Harvard University, Industrial Purchasing 1938. The recent past has

witnessed major events, which have had a direct impact upon the significance of the procurement

function in business and the economy. Some of these events have triggered renewed interest in

developing close vendor relations to minimize safety margins of inventories. In addition,

increased international competition has forced industries to look at foreign purchasing practices,

resulting in a renewed respect for Japanese style of close vendor relations. High interest rates and

expensive inventories have caused increased respect for output-input system, in which purchased

materials would ideally move from the seller’s finished goods line to the buyer’s using areas.

The 1950’s recession diverted the attention to cost-cutting efforts on purchased supplies. I960s

and 1970s, Purchasing and management frequently used manual systems to manage inventory.

Buyer’s major focus was price reduction and shutdowns prevention. The idea is to apply a total

system approach to managing the flow of information, materials & services from raw material

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suppliers, through factories & warehouses to the final customer. Recent trends such as

outsourcing & mass customization are forcing companies to maximize the speed of response to

change in customer expectations.

COMPUTER AND MRP CRUSADE

The computer allowed the fast & relatively inexpensive development of management

information, expedited the solution of OR models that were heretofore too large for manual

solution, provided support for business functions & formed a basis for automation.

The major development of the 1970s was the broad use of computers in operations problems. For

manufacturing, the breakthrough was the application of the Materials Requirement Planning

(MRP) to production control. This approach ties together in a computer program all the parts that

go into complicated products. This program then enables production planners to quickly adjust

production schedules & inventory purchase to meet changing demands for final products.

Clearly, the massive data manipulation required for changing schedules of products with

thousands of parts would be impossible without such programs & the computer capacity to run

them. The promotion of this approach, pioneered by Joseph Orlicky of IBM & consultant Oliver

Wight by the American Production and Inventory Control Society (APICS) is termed the MRP

Crusade.

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JIT, TQC & FACTORY AUTOMATION

The 1980s show a revolution in the management philosophies and the technologies by which

production is carried out. Just-in-time (JIT) production is the major breakthrough in

manufacturing philosophy. Pioneered by the Japanese, JIT is an integrated set of activities

designed to achieve high-volume production using minimal parts that arrive at the workstation

just in time. This philosophy coupled with TQC, which aggressively seeks to eliminate causes of

production defects, is now a cornerstone in many of manufacturers’ production practices.

As profound as JIT’s impact has been, factory automation in its various forms promises to have

even greater impact on OM in coming decades. Such terms as Computer Integrated

Manufacturing (CIM) Flexible Manufacturing Systems (FMS) and Factory of the Future (FOF)

are already familiar & are becoming everyday concepts to OM practitioners.

Kanban – As a result of JIT revolution against waste, the Japanese introduced Kanban. A

system of pulling inventory through the factory in an ideal lot size.

Poka Yoke – Idea is that each process & each employee treat the next step in the process as the

customer ensuring perfect product to the next ‘customer’ in the assembly line/production

process. Poka Yoke is therefore a foolproof technique that ensures production of units every time

through the use of checklists & controls.

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MANUFACTURING STRATEGY PARADIGM

The late 1970s & early 1980s saw the development of the manufacturing strategy paradigm by

researchers at the Harvard Business School. This work by professors William Abernathy

Skinner, emphasized how manufacturing executives could use their factories capabilities as

strategic competitive weapons. The paradigm itself identified how the five Ps of OM can be

analyzed as strategic & tactical decision variables. Central to their thinking was the notion of

factory focus & manufacturing trade-offs. They argued for a strategy of creating a focused

factory that does a limited set of tasks extremely well. This raised the need for making trade-offs

among such performance measures as low cost, high quality & flexibility in designing and

managing factories.

SERVICE QUALITY AND PRODUCTIVITY

The great diversity of service industries, ranging from airlines to zoos with about 2000 different

types in between, precludes identifying any single pioneer or developer that has made a major

impact across the board in these areas. However, one service company’s McDonald’s unique

approach to quality and productivity has been so successful that it stands as a reference point in

thinking about how to deliver high-volume standardized services. In fact, McDonald’s operating

system is so successful that the president of Chaparral Steel used it as a model in planning the

company’s highly efficient minimills.

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TOTAL QUALITY MANAGEMENT AND QUALITY CERTIFICATION

The unquestioned major development in the field of OM, as well as in management practice in

general is TQM. Though practiced by many companies in the 1980s, TQM became truly

pervasive in the 1990s. all operations executives are aware of the quality put forth by the so

called, quality gurus, W. Edward Deming, Joseph M. Juran & Philip Crosby. Helping the quality

movement along is the Baldrige National Quality Award, which was started in 1986 under the

direction the American Society of Quality Control and the National Institute of Standards of

Technology. The Baldrige Award recognizes up to five companies a year for outstanding quality

management systems. The ISO 9000 certification standards put forth the International

Organization for Standardization now play a major role in setting quality standards for global

manufacturers in particular. Many European companies require that their vendors meet these

standards as a condition for obtaining contracts.

The American Society for Quality Control defines quality as the totality of features and

characteristics of a product or service that bear on its ability to satisfy stated in implied needs.

Quality experts, Edward Deming and others are the ones who reinforced the need for quality in

organizations and this is how TQM school of thought emerged. TQM stresses a commitment by

management to have a continuing company wide toward excellence in all aspects of products and

services that are important to the customer. TQM programs rests on:

 Continuous Improvement: TQM requires a never-ending journey of CI. The end goal is

perfection which is always sought. The Japanese call it Kaizen. The Americans call it zero

defects or six stigma.

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 Employee Empowerment: Involves employees at every step in the process is key. Techniques

for building employee empowerment networks include:

o Building communication networks that include employees

o Open, supportive supervisors

o Moving responsibility from management to production employees

o Building high morale organizations

o Formal techniques such as team building and quality circles;

 Benchmarking: Involves selecting a demonstrated standard of performance that represents

the very best performance for processes or activities very similar to yours. The steps for

developing benchmarks are:

o Determine what to benchmark

o Form a benchmark team

o Identify benchmark partners

o Collect and analyze benchmarking information

o Take action to match or exceed the benchmark

 Just in time: Reduces the amount of inventory a firm has on hand by establishing quality and

purchasing control that bring inventory to the firm just in time for use. The JIT is related to

quality in 3 ways:

o It cuts the cost of quality

o It improves quality

o Better quality means less inventory

 Knowledge of TQM Tools:

Quality function deployment

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o Taguchi Technique

o Pareto Charts

o Process Charts

o Cause and Effect Diagram – Ishikawa

o Statistical Process Control Charts

The leaders in the fight for quality are:

W. Edward Deming – After World War II, Dr. Deming went to Japan to each quality. In his

quality crusade, Deming insisted that management accept responsibility for building good

systems. The employee, he believed, cannot produce products that on the building average

exceed the quality of what the process is capable of producing. Deming’s 14 points of

implementing quality improvement:

o Create consistency of purpose

o Lead to promote change

o Build quality into the product, stop depending on inspections to catch problems

o Build long term relationships based on performance instead of awarding business on the

basis of price

o Continuously improve product, quality, and service

o Start training

o Emphasize leadership

o Drive out fear

o Break down barriers between departments

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o Stop haranguing workers

o Support help and improve

o Remove barriers to pride in work

o Institute a vigorous program of education and self improvement

o Put everybody in the company to work on the transformation

J. M. Juran he believed in strong top management commitment, support and involvement in the

quality effort. He is also a believer in teams that continually seek to raise quality standards. Juran

varies from Deming somewhat in focusing on the customer and defining quality as fitness for

use, not necessarily the written specifications.

Philip B. Crosby – quality is free was Crosby’s attention getting book published in 1979. His

traditional view has been “with management and employee commitment great strides can be

made in improving quality. He insists that the cost of poor quality should include all of the things

that are involved in not doing the job right the first time.

Other issues in quality management include the development of international quality standards.

The Japanese established the Industrial Standard z8101-1981. The Europe’s ISO 9000

Standard was developed by EU and is now gaining worldwide acceptance. The American

Quality Control Society has developed specifications equivalent to those of the EU-Q90-Q94. In

1988, the USA established the Malcolm Baldrige National Quality Award for quality

achievement. The award is named after former Secretary Commerce Malcolm Baldridge. Some

of the previous winners include Motorola, Xerox, IBM, Federal Express and AT&T.

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BUSINESS PROCESS REENGINEERING

The need to become lean to remain competitive in the global economic recession in the 1990s

pushed organizations to seek major innovations in the processes by which they ran their

operations. The flavour of business process reengineering (BPR) is conveyed in the title of

Michael Hammer’s influential article “Reengineering at Work: Don’t Automate, Obliterate”. The

approach seeks to make revolutionary changes as opposed to evolutionary changes, commonly

advocated in TQM. It does this by taking a fresh look at what the organization is trying to do in

all its business processes, and then eliminating non-value added steps and computerizing the

remaining ones to achieve the desires outcome.

Together with Information Technology other factors that played a significant role in the new

management thinking are:

o Globalization – with the formation of common markets and regional grouping meant that

national boundaries collapse. Companies became exposed to regional or international

competition previously not here. Internationalization of the media also meant that a localized

problem of a company can be internationalized by the media. A good example of this

phenomenon was the recent case of contamination of Coca Cola products in Belgium (a

localized problem) became a hot issue internationally forcing various Coca Cola branches

worldwide to issue statements assuring customers of quality.

o Liberalization – before the fall of Communism, Governments around the world heaving

protected their markets using tariffs and import bans. There was also a lot of subsidy element
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in their economies, thereby distorting the operations of various industries. When communism

collapsed in the early 1990s, it set the stage removal of protectionist policies and subsidies.

Under the World Trade Organization (WTO) (earlier referred to as GATT – General

Agreement on Trade and Tariffs) it seeks to harmonize world trade operations although it has

become very challenging to agree on the rules (the Seattle riots of 1999 attests to these

controversies). With the removal of government protection means companies have to stand

on their feet and survive the regional or international competition.

o These rapid and far-reaching changes led to the emergence of BPR. This management

paradigm is defined as the fundamental rethinking and radical redesign of business process to

bring about dramatic improvement in performance. Some of the results were remarkable for

instance: American Express has reported reducing its annual costs by over $1 billion through

reengineering, AT&T’s Global Business Communication Systems Unit turned a nine figure

loss into a nine figure profit by reengineering. Reengineering has enabled the semiconductor

group of Texas Instruments to reduce the cycle time of its order fulfillment process for

integrated circuits by more than half.

ELECTRONIC ENTERPRISE

The recent quick adoption of the Internet and the World Wide Web during the late 1990s is

amazing. Electronic Enterprise refers to the use of the Internet as an essential element of business

activity. The internet is an outgrowth of a government network called ARPANET, which was

created in 1969 by the Defence Department of the United States Government. The use of web

pages, forms, and interactive search engines is changing the way people collect information,

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shop and communicate. Even today, connections to the internet are relatively inexpensive, and

Microsoft and Netscape have led the way by making the “Web browsing” software virtually free.

1.6 Principles of operations management

To conclude this lecture, it will be important to highlight the principles of operations

management which form the backbone of this course. As the era of globalization &

liberalization dawned on organizations, leading companies began to adopt surprisingly

similar new practices in OM. New practices were aimed at serving the customers better so

as to achieve a competitive hedge in the global front. Schonberger advanced the following

principles of operations management

 Get to know the customer & the competition

 Cut: work in process (waiting lines), throughput times, flow distances & space

 Cut set up & changeover times

 Produce & deliver at the customer’s usage rate

 Cut the number of suppliers to a few good ones

 Cut the number of components in a product or service

 Make it easy to make or provide goods or services without error the first time

 Arrange the workplace to eliminate search time

 Cross-train for mastery of multiple skills

 Record & retain output volume, quality & problem data at the workplace

 Ensure that line people first crack at problem solving before experts

 Maintain & improve present equipment & human work before thinking about new

equipment

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 Look for simple, cheap & movable equipment

 Automate incrementally when process variability can not otherwise be reduced

 Seek to have plural rather than singular work stations, machines, cells & flow lines for

each product, service or customer

 Become dedicated to continual rapid improvement

ENVISIONING THE FUTURE

Businesses have to keep with an alarming rate of change and therefore Operations management

has become a dynamic subject. Evolution of ideas or the procedures and tools that accompany

them sometimes occurs rather suddenly and at times gradually. The information explosion, rapid

technology innovation, reduced product life cycles, global competition, changes in the

composition of the work force, and new organizational structures contribute to this turbulent

environment.

The rapid change is accompanied by ensuing unpredictability, which dictates that companies

must adopt new perspectives when planning for the future. Future oriented organization can be

described as organization designed for adaptability and change, resists pressures for short-term

results, and values preventive rather than curative action. “Future orientation therefore implies

aligning the organization to face a future environment that has not yet been defined”. This

requires the ability of leadership to develop a vision shared by a culture that is comfortable with

change, and produces innovation.

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LECTURE 2: THE CONCEPT OF VALUE ADDITION

In lecture one, you went through definition of operations management. In this lecture, you will

be able to appreciate the special role played by operating systems by adding value to inputs

through the use of people, plants, parts, processes and planning and control, popularly known the

5Ps of OM. The simple chart below represents the OM transformation model;

Figure 2.1 The OM transformation Process

Transformation process
Input 1) People Output (Higher
e.g. Raw materials 2) Plants value than the input)
Customers 3) Parts
4) Process Finished products
5) Planning & control

Let us look at two examples, one for a service organization and another for a manufacturing

concern so as to be able to fully understand the above transformation process;

Teaching transformation process

As a student, once you are admitted by the University for a Degree Programme, you

(student) become the input in the transformation process. The student goes through the

5Ps of OM and at the end of the degree program, the system produces an output of higher

value, a graduate or postgraduate. The 5Ps of OM in this example are as explained below;

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1. People:

What kind of people add value to a student in a teaching process? Think of the various

staff you daily interact with in campus. Below is an example of the groups of staff who

work add to make sure you learn;

- Lecturers – share knowledge and guide students on what to read. Participate in

curriculum development to focus student to skills requirement by the job market

- Support staff – ensure lecture halls, libraries, hostels and compounds are clean

and well arranged so as to provide a conducive learning environment.

- Security personnel – charged with responsibility of ensuring the learning facilities

and equipment provided by the university are secure. They also ensure security of

students belongings as stay on campus.

2. Plants:
Plants generally refer to infrastructure which is capital intensive and is used for value

addition. In a university, this comprises the lecture halls, libraries, laboratories and the

mobile plant (vehicles). Lecture halls and labs provide a serene environment to follow

lecture proceedings, perform laboratory experiments and do exams away from the

destructive external environment of lots of sunshine, rain and dust.

3. Parts:

Parts constitute consumables used in service delivery process e.g. food, stationary, books,

marker pens, dusters etc. Without them it’s not easy to communicate with students or give

them study assignments.

4. Processes:

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Can also be referred to as the methods of adding value to a student. You lecturers have

used lectures, group discussions, CATs, individual assignments and industrial visits as

processes of value addition.

5. Planning and Control: This entails plans on how to offer the services the teaching service

and control to put in place to ensure quality of the services or waste is limited. Universities

decide when to start semesters or academic years, when to give tests and who is allowed to

sit for an exam. Controls also include the necessary student identification documents

which are mandatory for you to be allowed into an examination venue.

Example of a manufacturing firm - A Soda Ash Manufacturing Firm

Input Transformation Process Out put

Trona Soda Ash
The 5PS of OM : 1. People (Na CO3)
2. Plants

3. Parts

4. Processes

5. Planning & Control

The input transformed into soda Ash is Trona or Sodium sesquicarbonate . When it goes
through the transformation process, a different compound (Soda Ash) which has a variety
of uses is produced. Below lets examine how trona goes through the 5Ps of OM to be
converted to soda ash.

1. People:
The people used in the transformation process include but not limited to the following;

- Mining personnel to extract the Trona

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- Drivers for transportation of personnel and trona

- Plant operators to run the conversion plant

- Packing team to put final output in portable bags

- Managers to plan capacity and oversea day to day activities

- Maintenance personnel to fix the plant

- Lab technicians to test quality of raw material and final output

2. Plants

Infrastructure which is capital intensive and is used by soda ash manufacturers to add

value to trona;

- Dredges; vessel like machines that mine the soda ash from the lake

- Calcination plant where the raw material is burned to change form by

decomposition

- Grinding & screening plant which adds value by crashing soda ash into fine

particles

- Packing plant where final output is put into either 50kg or 1 tonne bags for

portability

- Laboratory which houses the quality testing equipment, chemicals, and personnel

3. Parts

Some of the consumables used in the manufacture of soda ash include;

- Heavy furnace oil which is the main fuel for burning the raw material

- Packing bags of e.g 50kg or 1 tonne for packing the soda ash for easy handling

- Stitching threads used for stitching the packing bags after packing soda ash

- Oil

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- Chemicals to test the quality of raw material and finished product

4. Processes

Processes refer to series of actions, changes, or functions bringing about a result, where

the result in this case is soda ash. Below let us go through some of the actions which lead

to production o f the final output;

- Transportation, the action of moving raw material from mining point to the plant or

workers from their houses to work areas

- Blending in which raw material with fewer impurities is mixed with material with

high impurities in the right proportions to produce final output is of desired

quality.

- Burning, which involves subjecting trona to high temperatures in a furnace so as to

change its chemical form

- Grinding, the act of breaking soda ash into fine particles by use a mill. Small

particles engulf substances being melted in furnace better for lower melting point.

- Screening, which involves separation of small particles from big particles to help

in further crashing the big particles online without wasting time and energy

crushing all particles

- Packing, putting the final output into 50kg, 1 tonne bags etc so as to enhance

portability

- Testing, the act of using chemicals to determine if the quality of raw material or

final output is within acceptable limits

5. PLANNING & CONTROL

When should a shift start?

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How many shifts should we run?

TRANSFORMATIONS

Physical – manufacturing

Location – transportation

Exchange in retailing

Storage – warehousing

Physiological/psychological/transformation – health care

Information transformation – telecommunication

OPERATION MANAGEMENT AND COMPETITIVENESS

The degree to which a firm can produce goods and services that meet the test of international
markets while simultaneously maintaining or expanding the wealth of its shareholders.

1. COMPETING ON COST

Eliminate all waste; in labour, maximize on capacity utilization

Invest in;

 Updated facilities & equipments by utilizing capacity utilization

 Steam lining operations
 Training & development (have skills)
2. COMPITING ON QUALITY

Please the customer by understanding their attitude and expectations of quality i.e. know
what the customer is looking for

3. COMPETING ON FLEXIBILITY
 Produce wide variety of products
 Introduce new products
 Modify existing products quickly
 Respond to customer’s needs
4. COMPETING ON SPEED
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 Fast
 Fast adaptations
 Tight linkage

LECTURE 3: TYPES OF PROCESSES

Batch process

1. Flow – mostly consistent but some processes are disconnected

2. Flexibility – reasonable but quite restricted
3. Products – a moderate range of products can be produced
4. Capital investment – some is often required in machines for the main process
5. Labour requirements – some skilled f labour is required
6. Volume – large batches produced but overall produce is not high

Assembly line process

1. Flow – fixed process of connected process

2. Flexibility – low as the line is designed to work at certain speed
3. Products – very few depending on the set up of the line
4. Capital investment – lots of machinery and capital required
5. Variable cost – low due to the specialist process
6. Labour requirement – mostly unskilled and few workers needed due to machinery
7. Volume – able to work at very high volume and efficiency

Continuous flow of a process

1. Flow – a continuous flow of a continuous product

2. Flexibility – almost none as the process is set to run at one speed
3. Products – only one
4. Labour requirements – workers are generally unskilled and low in no. but
supervisors often need to be skilled and experienced
5. Capital investment – vast amounts required for special machinery
6. Volume – high due to continuous production

OBJECTVES OF OPRATION SYSTEM

1. ON TIME DELIVERY; customers want their goods delivered in time e.g. The evening
before for faster running
2. VOLUME OF OUT PUT
3. COST (materials delivery, scrap…) should be mined at all times in order to reduce the
production cost

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4. UTILIZATION of labor and equipment

5. RETERN ON INVESTMENTS; aim of investing is to get profit
6. FLEXIBILITY of product/VOLUME change; if the no./vol. of work increases you’re
able to handle all of them
7. QUALITY & PRODUCT RELIABILITY

ORDER QUALIFIERS AND WINNERS

World–class manufactures no longer view cost, quality, speed of delivery and even flexibility as
tradeoffs. They are order qualifiers and winners

Order Qualifiers – a screening criterion that permits a firms products to be considered as possible
candidates for sale

Order winners – a criterion that differentiate the products or services of one firm from another

PROCESS SELECTION IN OPERATIONS

Process analysis terms

Process; is any part of an organization that inputs transforming them into output

Cycle time; average successive time between completions of successive units

Utilization; is the ratio of time a resource is actually activated related to the time that is available
for use

Process flowcharting

It’s the use of a diagram to present the major elements of a process

The basic elements can include tasks or operations, flow of materials or customers, decision
points and storage areas or queues

It’s an important methodology by which to begin analyzing a process

Other process terminology

Blocking

Occurs when the activities in a stage must stop because there is no place to deposit the items just
completed

If there is no room where the employee can place a unit or work down, they will hold on to it not
being able to continue working on another

Starving

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Occurs when

Bottle neck

Occurs when the limited capacity of a process causes work to pile up or become unevenly
distributed in the flow of a process

FACILITY LAYOUT

A layout is a process by which a placement of departments, working groups within department

work station, machines & stockholding point within a facility are determined.

Consider the following in layout planning

1. Centers to contain
2. Space & capacity for each center
3. Center space configuration
4. Center location (independent)

Strategic issues to consider in layout planning

1. Facilitating materials &information flow

2. Efficient & labour & equipment utilization
3. Customer convenience and sales
4. Reducing hazards to workers
5. Improving employee moral
6. Maximizing flexibility, coordination and visibility
Minimizing distance &cost
7. Creating inherent safety

Basic Production Layout

Process layout/ job shop/functional layout; Use of a single structure to measure the difference
needs of other e.g. using a lecture hall as a library

It’s an ideal for local production &resources are general purpose & less capital intensive. It’s
also ideal for variety production.

Production layout also called flow shop layout; is ideal for high volumes. Resources department
is dedicated for the particular line. The processing rates are too high.

Group technology layout

 Cellular layout
 One worker multiple machine

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Fixed position layout

Other layout types

a) Office layout; layout used for the administration of a business

Goal
i. Maximize customer production & communication across sections

Current trade office layout is the use of partial glass or wooden separations between
offices or use of open office layout.

Issues addressed by current trade office layout

1. Communication; you can use visual, verbal or non-verbal

 Communication costs are brought down
 Employees don’t spend too long calling on employee lines
 Use of personal phones is limited because you have no room to talk private things
2. Work flow sequence is maintained
3. Sharing of office equipment e.g. printers, photocopiers, scanners e.t.c.
4. Fast throughput; work flows faster in open offices than in enclosed

RETAIL SERVICE LAYOUT

Used by organizations that receives a lot of customers or are expected to accommodate a
large number of customers. Major goal of retail service layout is to maximize net profit
per square feet of floor space. Layout by banks, supermarkets, hotels, academic
institutions e.t.c. Retail service layout are referred to as service caps e.g.
 Spacious layout & functionality
 Signs, symbols & artifacts
 Ambient conditions
a) Ambient condition

Ambient conditions are like lightning, temperature, ventilation, humidity, noise level,
background, music etc.

These conditions affect the productivity and customer’s level of satisfaction with how
long they stay, the facility and the amount of money they spend.

b) Special layout and functionality

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Special is from the word space. This is to expose the customer to as much merchandise/
services as possible while keeping the circular path of customers clear

The person next to the entrance is assumed to have full knowledge of the organization
and its products and services by customers

c) Signs, symbols and artifacts

Signs identifies certain help centers where customers can get certain services. If signage
is not well done, customers tend to move up and down trying to locate help areas. This
creates congestion especially in organization where many customers get out easily.

Symbols and artifacts are items which are socially significant e.g. foundation of
knowledge is a symbol of Kenya court of arms.

Artifacts are more of curvings

Marks of a good layout of a manufacturing and bank office operation

 Production time predictable

 Inter stage storage of materials
 Open plant flows so that everyone can see what’s happening
 Work station are close together
 No unnecessary handling of material
 Easily adjustable to changing conditions
 Straight line flow pattern
 Bottle reck operations under control

Marks of a good layout

They are like in supermarkets

1) Adequate waiting facilities

2) Easy communication with customers
3) Easy service flow patterns
4) Clear entry & exit points with adequate checkout facilities
5) Departments and processes arranged so that customers see only what you want
them to see
6) Balance between service areas & waiting areas
7) Minimum walking up & down unnecessary
8) High sales volume per square foot facility

INVENTORY MANAGEMENT

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Inventory is any stock of an item or resource held by a firm & includes the following;

1) Finished goods
2) Raw materials
3) Components or parts
4) Working progress
5) Supplies e.g. stationery

An organization manages inventory through the use of inventory system which is a set of
policies & controls that monitor levels of inventory &maintain what level should be
maintained when stock should be replenished & how long large orders should be.

Importance of having inventory

 Independence of operation maintenance

 To meet variation in product demand
 Meet variation in raw material delivery time
 To take advantage of purchase order size i.e. motivation of quality discounts
 To maintain flexibility in production scheduling
 Expectation shortages or price increases in future

Inventory cost

A. Holding/carrying cost; costs incurred in case of having inventory in the store e.g.
operation cost of capital
Insurance cost; is directly proportional to inventory value
Wages& salaries of warehouses personnel
Rents & rates of warehouses
Cost of security system
Cost of maintenance if inventory e.g. reflegeration, heating
Material handling cost

B. Ordering cost; cost incurred so as to have inventory e.g. wages & salary of
procurement personnel
Stationary cost, communication cost, internet cost
Licenses of ERP systems
Carriage inwards
C. Set up or production change cost; cost incurred in producing inventory internally
for use by the same company
EBQ
Economic batch
quality

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usage
usage

Production
break

D. Storage; cost incurred because we don’t have inventory

Lost customer good will
Opportunity cost of not making a sale
Bank ordering cost
Cost of counseling& order
INVENTORT SYSTEMS CLASSIFICAITONS
1. Single period inventory model ; one time purchasing decision and
concern is usually to balance cost of inventory of stock and in
inventory under stock e.g. daily used papers
2. Mount period inventory model ; The inventory is bought for many such
periods e. g . months, years.
I. Fixed order quality models; the order pressed at any point at a time
is always of the same amount though the inventory purchased may
be used over a different duration e.g. economic order quality(EOQ)
II. Fixed time quality models; the order quality varies but the time
duration of an order is fixed e.g. monthly
31st Jan 2010
5,000
1st march 2010

Application analysis is classified into ;

I. Vital flow; items whose volume is low but value is very high
II. Moderate
III. Useful menu; volume is high but value is very low

Implications;

A class requires highly qualified personnel & serious management attention in terms of time

The class is the reserve i.e. won’t require serious management attention, high quality personnel

Bin system

I. One bin system

II. Two bin system
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Other advanced inventory systems;

Materials required system. Referred to as inventory system for independent demand used in
assembly operations

J-I-T (just in time) philosophy aims at high volume production using minimal resources

Economic Order Quantity Model

Assumptions;

 The demand of product is uniform throughout the period

 Lead time from ordering to recipient of goods is also constant
 price per unit of the product is constant
 inventory holding cost is based on average inventory
 ordering or set-up costs are constant
 all demands of the product are satisfied i.e. No back orders

TC=DC+(D/Q)S+(Q/2)H or Q/2 Ci

TC=Total cost of inventory

D=annul/usual demand
Q=order of quantity
H=holding cost per annum, per unit
I=inventory carrying cost% per annum, per unit

Given the information below what are the reorder points

Example;
i. Annual demand = 10,000 units
Days per year considered = 365
Cost to place an order = 1,000
Holding cost per unit, per year = 250
Lead time = 7 days

TC=DC+D/Q S+Q/2 H

EOQ D/Q S=Q/2 H

Q=√(2DS/H)
√(2*10,000*1000/250)
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Q=√80000
=282.84
ii. Reorder point
Lead time = 7 days
Days per year = 365
Annual demand = 10,000 unit
D=10000/365 *7
RP= 192 units
Just In Time
This is the integrated set of activities designed to achieve high volume of production using
minimal use of materials, component parts and finished goods
It also involves elimination of waste in production efforts& timing of productive resources
so that parts may arrive at the next working station just in time
JIT uses demand pull logic
It works on two philosophies
i. Elimination of waste
ii. Respect of people

Elimination of wastes in production

 Waste on over production

 Waste of waiting time
 Transportation waste
 Inventory waste
 Processing waste
 Waste of motion
 Waste of product defect;
i. Internal failure costs
ii. External failure costs

In summary it’s a management philosophy that uses a whole system, attacks waste, exposes
problems and achieves steam line production. However it requires;

1. Employees participation
2. Requires continuous improvement
3. Total quality control influence
4. Small lot sizes
5. Industrial engineering/ basics: to be easy to stream line or upgrade bottleneck work
areas/stations
JIT assumes stable work environment. Characteristics
i. Very reliable transportation systems
ii. Good communication systems

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iii. Suppliers workforce working as required

Materials Requirement Planning (MRP)

Using the end item, product fee structure or assembly sequence is computable. It’s a
method of inventory management which makes sure that before the assembly of the final
item is started all the dependent demand items needed are either available or would be
made available as and when required during the assembly processes. After doing the
competition of MRP then compute net requirements on each item based on the conditions
given

ABC analysis

Example

Given the following information classify the items into A,B and C

ITEMS Quantity per (volume) Price per unit Value

A 1,000 100 100,000
B 500 20000 10000000
C 5000 50 250000
D 1800 500 900000
E 200 10000 2000000
F 6000 20 120000
G 4000 180 320000
H 2100 150 315000
14,005,000

10/14.005=71%

12/14.005=85%

0.47/14.005=3.35%

OPERATIVE DECISIONS

AGGREGATE PLANNING

Types of plans

1) Long range plans- Plans of greater than 1 year horizon and are usually performance on
increments. These include: a) Process planning

b) Capacity management

c) Facility location

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2) Intermediate range plans- Plans for 6-18 months usually done on monthly or quarterly
increments. In this range master production schedules are prepared using the aggregate
operations plan which is derived from sales plans.
3) Short-range plans- Plans for one day to less than 6 months usually done with weakly
increments. These are mostly order scheduling plants. The main purpose of aggregate
planning is to specify the optimal production rate, work force and the inventory in hand.
This plan is the totality of the item produced by an enterprise because several products
produced share resources.

Balancing Aggregate Demand with production Capacity

Y
1000
Forecast Demand

7000
6000
5500 5000
4500

April May June July August September 2010 X

9000

8000
Aggregate Demand

6000
4500
4000 4000

April May June July August September X

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Notes:
a) In the month of April, demand =capacity
b) In the month of May, forecast demand=5500 and capacity =4000 i.e. demand is
greater than capacity.
c) In June , demand =7000 and capacity =9000 i.e. capacity >demand
1. Explore opportunity of deferring demand
2. Subcontracting
3. Hire external capacity and meet demand

Scenario 1:

Scenario 2: If this was subcontracting or hiring all the demand of May will be met. In June
capacity is 9000, demand=7000 thus that’s more with 2000. In June capacity demanded by 2000
units. The plan in June is to maximize 9000 units and carry forward inventory of 2000 so as to
carry out the shortfall of provision of 2000 in July.

Required input in production planning systems

Categories:
1. Internal input to the firm
2. External inputs to the firm

1. Internal input to the firm

Inputs which the firm has no control, but can prepare it to take advantage of them or minimize
impact of such external forces. In an organization this is the information needed:

a) Eternal capacity- Time of the capacity

Place of the capacity
Cost of the capacity
How is the capacity
Who has the capacity

b) Raw materials availability- Availability of the raw materials can affect the capacity
utilization and cost of the capacity.
c) Economic conditions- Economic cycles affect economic prices which affect the
purchasing power. During recession it’s not time of acquiring capacity. During economic
boom, it’s not advisable to use short term measures.
d) Market demand- this is seasonal thus increase the capacity with short-term.
e) Competitor’s behavior.

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2. Internal inputs to the firm

a) Current physical capacity- you can tell whether it’s adequate or inadequate for future.
Don’t acquire external capacity while internal capacity is not fully utilized.
b) Current workforce- Total manpower available to run more ships in times of high demand.
-Flexibility of manpower in terms of term and conditions of
service, employees we have and hours of work e.g. day and night.
c) Inventory levels- you need to know the current inventory level to meet future demand
when aggregate capacity is < than demand. Inventory levels will tell us more on
warehouse space for more inventories.
d) Other inventories- utilities like water, electricity and security.

Key strategies in production/service for meeting demand

1. Chase strategy
Increases in demand are met by hiring workers while decreases in demand are met by
firing part of work force. This is common in services and labour intensive operations. For
this strategy to work there must be a pool of well trained workers from which an
organization can recruit at will and at short notice.

Advantages
-Low payroll cost
-The organization can easily meet several demands in low cost and at short notice.

Disadvantages
-Quality can easily be compromised if refresher training is not adequately done or at the
end of their contract period they don’t care to give the organization quality.
-Morale can be so low because a number of the workers do not meet their basic needs
most of the times.
- The organization can face high cost of safety gear because of misuse.
-The organization can easily get into labour disputes especially if contract periods are not
monitored to be within labour laws.
-Compensations due to accidents and injuries in work place may be very high.

2. Stable workforce
In times of high demand, the organization doesn’t recruit additional workers but it makes
existing workers work for long hours or more shifts.
In times of low demand, the same workforce work producing at the demand level i.e.
workforce gets under listed because nobody is fired during the period. It’s always
important to pay overtime.

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Advantages
-Quality of output is high because the existing workforce better understand customer’s
expectations and requirements.
-Employees can be monitored by payment of overtime and honourism and else this may
reduce stuff turn over.

Disadvantages

-Fatigue because of overworking.

-Morale of the employees may be low because of lack of time to attend to personal
issues

-Social life of employees can be influenced because of being overworked.

-Level strategy where you continue to produce at the same output rate when demand is
low or high. Consequence is that during the time of low demand the organization creates
a lot of stock which increases inventory cost and during time of high demand, the extra demand
can easily be met using stocks but if there is no stock either not met or deferred in future when
demand will be low. Organizations which use these strategies are either monopolies or
government agencies.

Note; the above strategies are not mutually exclusive in use i.e. you can use a combination of the
two or more strategies for the same organization.

OPERATION SCHEDULING

Ordering the barriers in groups through the system so as to achieve a given an objective or
objectives. The only ordering sequence will depend on the workflow you want; job shop
workflow, flow shop, project shop or batch shop.

Work centre is an area in business in which productive resources are organized and work is
completed. May be a single machine, group of machines or an area where a particular type of
work is done e.g. job shop, flow shop (Product line) and assembly line. When you are scheduling
you can use forward or backward scheduling.

Forward scheduling- the due date of the customer is not the starting point of scheduling.

Backward scheduling- you start with the due date of the customer. The due date/ completion date
of a job is determined after the scheduling of work. You start with the due date of the customer
first then you decide when the job should be started so as to be able to deliver at the due date.
This is common in jobs having several deadlines which can’t be escaped. It’s possible to use
backward scheduling once you have excess capacity.

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Infinite and finite scheduling

Infinite scheduling- work is sent to a centre based on what is needed over time, then continuous
use of huge volumes over a long period of time.

We can’t have optimizing techniques in preparing and especially for service organizations. Most
of the times an organization is only able to get a good solution of scheduling but not the best.
Rule of thumb in experience is widely used in preparing schedules or resigning scheduling
software.

Typical scheduling and control function:

-Allocating orders, equipment and personnel

-Determine the sequence of order performance

-Initiating performance of the scheduled work

-Shop flow control

-Reviewing status control and expecting rate and critical orders

Work centre scheduling objectives

- Meet due date of customers
- Minimize lead time- lead time is from ordering to receipt.
- Minimize set up time or cost
- Minimize work in progress inventory
- Maximize labour and machine utilization

Priority Rules in job sequence

- First come first served- It’s a common priority for service
- Shortest operating time
- Earliest due date first
- Earliest start date first
- Last come first served.
- Random model

Schedule Performance Measures

- Meeting due date of customers order-on stream operations.

- Minimizing the flow time (The time a job spends in the process)
- Minimize work in process inventory
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- Minimize idle type of machines and workers.

Principles of Work Centre Scheduling

- Direct equivalence between work flow and cash flow

- The effectiveness of any job shop should be measured by spread off flow through the
shop.
- Schedule jobs as a stream with process steps back to back.
- A job once started shouldn’t be interrupted.
- Speed of flow is most sufficient to be achieved by focusing on bottle networks centre and
jobs
- Reschedule everyday
- Obtain feedback each day on jobs which are not completed at each work centre.
- Match work centre into information on tasks on what the workers can actually do.
- When seeking for improvement look for the incompatibility between engineering design
and process execution
- Certainty of standards, rooting and so force is not possible in a job shop, always work
towards achieving it.

FACILITIES LOCATION

Facilities control is under design considerations

It’s an important decision to make because;

 It has long term impacts and decisions are difficult to change

 These decisions are becoming global in nature determining global competition.
 Location decisions are capital intensive and requires top management approval many
times and in directors.

FACTORS TO CONSINDER WHEN MAKING L.D

They include;

a) Macro-economics

b) Micro-economics.

MACRO Factors to consider

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RAW MATERIALS;

 Necessity-that is the only place where raw materials are found e.g. magadi soda
 Perishables-locate the firm near the source if highly perishable e.g. tea firms/dairy firms.
 Transportation cost-To minimize the transportation cost and where processining

Eliminates a lot of wastes e.g. sugar comp.

 Competition and cheap access –where there are less firms looking for that materials.

ACCESS TO MARKETS

Locate closer to markets so that you can achieve time based competition.

LABOUR COST

Wage rate per hour.

Trade Union activity which leads to decrease of salary frequency

Protective clothing provision cost-look at areas where people can work without using
protective clothing.

Terms of engagement - Where you can hire and fire workers

POLITICAL LEGAL ENVIRONMENT

Political stability of a country will enable growth of business but if it unstable then
development is likely to be affected negatively.

Legal frame work in terms of enforcement of law and order

Justice in legal framework

Constitution; Have affair hearing and which is fast incase of legal disputes.

COST OF COMPLIEING WITH ENVIRONMENTAL LOSS

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TAX SYSTEM FOR FOREING EXCHANGE FACILITATION

MICRO – FACTORS

The factors considered are site selection or the actual place on the ground where the firm will be
constructed.

They include;

LAND

Availability of current use and future expansion

The cost of the land

The soil structure for what you want to construct.

SERVICE UTILITIES

The utilities enable a smooth running of operations in an organization. They include;

 Water-it is needed in the industries as a cooling agent or for elimination of waste and also
as a raw material.
 Health care- the firm should have its own hospital/clinic for employees to receive
medical care at work.
 Public transport – Includes Roads net works, sea transportation, water transportation and
air.
 Maintenance services – they include; painting, renovating the buildings e.t.c.
 Entertainment.

Community receptivity to business

Competition in the area-

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Availability of supporting business

Availability of security

Availability of street lights

The major of any location decision making is to maximize the profitability of an enterprise.

Manufacturing considers cost issues because items can be shifted to the consumers and hence
by minimizing cost, profitability of the enterprise will be enhanced.

To make the best location choice, organizations make use of economic analysis methods

 Break even analysis method

 The factor rate method
 The center of gravity method
 The transportation method

STEPS IN MAKING LOCATION DECISION

 Determine the criteria that will be used to evaluate attractive location

 Identify factors that are important in your location e. g Market, raw materials, labour.
 Develop location alternatives.
 Evaluate the alternative and make a selection.

COST- PROFIT– VOLUME – ANALYSIS METHOD

Determine the fixed and variable costs

Plot total costs

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Determine lowest cost

Example;

Fixed and variable cost for four potential locations

LOCATION FIXED COST VARIABLE

COST

A 250,000 11

B 100,000 30

C 150,000 20

D 200,000 35

Y=a + b x y- cost

A - Fixed cost

X - Variable cost
550
500

B
450

A
400
350
300

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Advantages

Very objective at arriving at the best location

You can easily use information on software packages to locate, plot the lines and arrive at a
solution.

Disadvantages

Not easy to get accurate cost and revenue data on costs and revenues for the various allocated
values.

Only quantifiable factors are considered

It is not an easy method for people with weak qualitative background

FACTOR RATING METHOD

It is a popular method because a wide factors are considered for both qualitative and quantitative.
It s not a method for people who are bias to quantitative.

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PROSEDURE TO FOLLOW

 Develop a list of relevant factors /critical e.g. Exchange rate fluctuations.

 Assign a weight to each factor (according to your relative importance of the factors) sum
of all weights should be equal to one(1).
 Develop a scale for each factor or use one scale for each factor to allocate the scores
.Score each location for each factor.
 Multiply scores by weights for each factor and for each location.
 Recommend the locations in the highest composite score to be the best location .

Example

Ministry of health wants to locate a new referral hospital in any one of the following locations;
Kasarani , Athi River, Karen .

 Factors to consider
 Accessibility by the public
 Land cost and availability
 Customer drawing areas
 Security
 Construction cost

Factors Weight Kasarani Kiserian Athi River

SC Score Wt(x) Score(x) Wt(x)

Wt
Accessibility by 0.50 90 45 70 35 50 25
public
Land cost 0.15 40 6 80 12 70 10.5
availability

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Security 0.1. 60 6 80 8 70 7

Market 0.20 95 19 70 14 50 10

Construction cost 0.05 70 3.5 90 4.5 60 3

∑fx 79.5 ∑fx 73.5 ∑ fx

55.5

Advantages

i. Considers all factors both qualitative and non quantifiable

ii. It factors in the experience of the decision maker
iii. It is an easy method for people with weak qualitative background.

Disadvantages

Highly subjective – different individuals may arrive at different solutions

It is not easy to allocate relative weights in situations where many factors are involved.

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CAPACITY MANAGEMENT

CAPACITY ; Definition

Amount of resource input available relative to output requirement at a particular time .

It can also be defined as the output a system can deliver in a unit of time.

Dimensions of capacity

Quality - Whether the capacity satisfies customer requirements?

Quantity – Volume of the capacity to total out put
Location – where is the capacity required e.g. Limuru
Time the capacity is required –e.g. During the day, at night, early

BEST OPERATING LEVEL

Average Unit Cost of output

Overutilization
Underutilization

Best operating Level

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Volume

Causes for under utilization

Lack of demand
Lack of raw materials
Poor production, planning and control (Management)
Lack of utilities e.g. water, Electricity, Security

Causes for over utilization

Overwhelming demand
Failure to upgrade capacity with time.

CAPACITY UTILIZATION

Utilization = Capacity used

Best operations level

Utilization; capacity put into productive use

Capacity can only be used if it’s available
Capacity available; refers to the capacity being in good working conditions to be used to
produce a good or 0ffer a service. It is a function of maintenance.

Maintenance people; those in charge of capacity utilization

Capacity availability is affected by:

Preventive maintenance time – The longer the system is put down for maintenance, the
Longer it will be unavailable.

Break downs - The longer the systems break down and spend before repair the longer

The longer it will be unavailable.

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To be able to maximize availability the maintenance people use

Opportunity based maintenance.

Opportunity based maintenance – Taking advantage of shut down caused by other

Reasons e.g. lack of demand, Public holydays

for

Maintenance.

CAPACITY UTILIZATION IS AFFECTED BY;

 Lack of demand;
there is no demand for goods and services you will not be able to utilize the capacity .

 Poor production planning and control;

Taking more production time on one item than others

 Lack of utilities ; Water, Electricity a lot of time is lost and production goes down
 NOTE; It is the role of operations managers to coordinate material availability
scheduling systems and issues to do with utilities available to maximize capacity .

ECONOMICS AND DISECONOMIES OF SCALE

Economies of scale ; benefits enjoyed by affirm because of a large scale of production or

a huge volume of output.

Diseconomies of scale ; the disadvantages a firm faces because of large scale production
or because of producing huge volume of output.

G 700m
A

100m
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F 600m
B
Unit of output (production)

200m

E 500m
C
300m

D 400m

Volume

Implications of economies and diseconomies of scale to operation management

Makes sure the organization increases capacity over time by acquiring bigger capacity so as to
operate as at lower cost of production par unit.

However, care should be taken on large capacities which may only be organizations specific
because such capacities lead to diseconomies of scale.

CAPACITY FLEXIBILITY

Ability to change capacity to produce more quality or less more variety or less, cost effectively
and reasonable time.(The changes are usually caused by changes in demand)

Flexibility of capacity is enabled by;

I. Flexible plants: Have ability to rapidly increase and decrease volume and to change
from one product to another. E. g .a lecture which has no seat permanently fixed is not
flexible like one with temporally placed.

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II. Flexible process: Processes which permit first switching from one product/service to
another. I.e. give the organizations economies of scope e.g. banking software offers –
deposit, withdraw through western union.

III. Flexible workers : Workers who are multi-skilled and able to perform different tasks at
different times. Multi-skilled workers require broad based training.

CAPACITY FOCUS

It can be focused on ;

1. COST – Organizations go for volume attract huge numbers charging cheap and still
maximizing profits.
2. QUALITY –The focus will be small numbers premium charge and the concern will be on
the customarisation of services /products.
3. Flexibility – changing capacity in light of changes in customer demands
More working hours
More operating hours
Providing services at remote sites
Sites that you have not previously addressed
4. Liability- giving it at the time you has promised without delays.

CAPACITY PLANNING
DEF;
Making sure you have right capacity in terms of quantity and quality to meet demand in
the future.
BY; maintaining system balance.

Sequential production process

Effective out put

It is determined by the lowest output
To balance output;
Hire capacity from another source

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Acquire more capacity (buy)

Run more shifts by and create inter mediate storage

Frequency of capacity addition

It can be short term or in long term .
Service firms add capacity frequently because of dynamic demands.
Service capacity does not require huge capital outlet
Capacity which finds them in highly competitive market will be forced to add capacity
frequency.

Capacity frequency cost

Cost of the plant.

Training employees /consumers on new products

Infrequency capacity cost

Huge acquisition cost on the new capacity.
Lost market shares during the waiting period.

Ways of acquiring new capacity

Capacity lease- long term demand

Outstanding – Long term demand.
Sub contracting – short term demand.
Capacity hire – short term demand

Outsourcing;

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Allowing a third party to acquire and serve you from other firms or organizations. It is
usually a long term demand.

Drivers to outsourcing
Cost – it is cheaper
More competitive – delivery time can be met.
You can take advantage of technical skills or expertise.

Capacity sharing
Allowing another entry to use your capacity when you are still using

Optimal service capacity utilization

Depends on the kind of service you are providing

It is not expected to utilize capacity at 100% but at around 70%.

This is to make the capacity ready for emergency.

When you utilize capacity up to 100% its quality decline.

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