Title Page

Introduction to Operations Management

Introduction to Operations
Management
Group 1
 Title Page Introduction

Operations Management

FUNCTIONAL AREAS OF
ORGANIZATIONS
OPERATIONS MANAGEMENT
is also about:
FIN MRKT OPR
Systems Design Systems Operations
Product and Service Design Quality
OPERATIONS Capacity Quality Control
Processes and activities related to producing goods Process Selection Supply Chain Management
and services. and consequently, the conversion of Layout Inventory Management
inputs to outputs Design of Work Systems Aggregate Planning
Location Materials Requirement Planning
Just-in-time and lean systems
OPERATIONS MANAGEMENT Scheduling
Management of systems or processes that create
Project Management
goods and or provide services
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Operations Management

PLANNER
THE OPERATIONS DECISION MAKER
MANAGER
MANAGERIAL IN NATURE

The operations manager exerts considerable influence over

the degree to which the goals and objectives of the organization
are realized. The operations manager has the ultimate
responsibility for the creation of goods or rendering of services.
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Operations Management

MODELS

QUANTITATIVE METHODS
GENERAL
ANALYSIS OF TRADE-OFFS
APPROACHES TO
DECISION MAKING ESTABLISHING OF PRIORITIES

ETHICS

SYSTEMS APPROACH
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Operations Management

A model is an abstraction of reality, a simplified

MODELS
representation of something

Physical Models
Physical Models look like their real-life counterparts. The advantage of this model is
their visual correspondence with reality.

Schematic Models
More abstract than physical models as they have less resemblance to the physical
reality. The advantage of schematic models is that they are often relatively simple to
construct and change.

Mathematical Models
Mathematical Models are the most abstract. They do not look at all like their real-life
counterparts. These models are usually the easiest to manipulate, and they are important
forms of inputs for computers and calculators.
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Operations Management

QUANTITATIVE METHODS
Quantitative Approach to problem solving often embodies an attempt to obtain
mathematically optimal solutions to managerial problems.

Examples of Quantitative Approaches:

Linear Programming - Used for optimum allocation of scarce resources
Queuing Techniques - Used for analyzing situations in which waiting lines form

ANALYSIS OF TRADE-OFFS

listing the advantages and disadvantages of a course of action to better

understand the consequences of the decisions they must make.
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Operations Management

ESTABLISHING OF PRIORITIES
This is recognizing that certain factors are more important. This enables the
managers to direct their efforts to where they will do the most good

ETHICS

In making decisions, managers should consider how their decisions will affect
the people involved with the organization, the community, at large, and the
environment.
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Operations Management

SYSTEM APPROACH

The system approach emphasizes interrelationships among subsystems, but its

main theme is that the whole is greater than the sum of its individual parts.
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Operations Management

GOOD-SERVICE CONTINUUM AND

DIFFERENCES
PRODUCT PACKAGES
CHARACTERISTIC G S
Customer Contact Low High
GOOD SERVICE Uniformity of input High Low
Labor content Low High
Output High Low
Measurement of Tangible Intangible
Productivity Easy Difficult
THE TRANSFORMATION PROCESS Opportunity to correct
quality problems before
INPUT CONVERSION OUTPUT delivery to customer High Low
Inventory Much Little
Evaluation Easier More Diff
Patentable Usually Not Usually
CONTROL
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Operations Management

History
Ancient Era

Industrial Era

a. Emergence of Technologies that streamlined the production process (steam engines,

spinning jenny, power loom, iron machines.)

b. Transition from craft production to standard gauging systems

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Operations Management

History
Scientific Management Era - Emerged due to the need of enlightened management
Human Relations Movement - Emerged due to the low regard to workers by the key
proponents of the Scientific Management era, Taylor and Ford. Emphasized human
element in job design. (1950s - 1970s)

Establishment of principles and methods concerning the “human factor” in production:

Lilian Gilbreth’s “Worker Fatigue”; Elton Mayo’s “Worker Motivation”; Abraham Maslows
and Frederick Hertzberg’s respective creation and improvement of motivational
theories; Douglas McGregor’s “Theory X and Theory Y”; William Ouchi’s “Theory Z”.
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Operations Management

History
Human Relations Movement - Emerged due to the low regard to workers emerging
from the principles established by the key proponents of the Scientific Management
era, Taylor and Ford. Emphasized human element in job design. (1950s - 1970s)

Establishment of principles and methods concerning the “human factor” in production:

Lilian Gilbreth’s “Worker Fatigue”; Elton Mayo’s “Worker Motivation”; Abraham Maslows
and Frederick Hertzberg’s respective creation and improvement of motivational
theories; Douglas McGregor’s “Theory X and Theory Y”; William Ouchi’s “Theory Z”.
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Operations Management

History
Decision Models and Management Science - Development of several quantitative
techniques that accompanied the factory movement. (1915 - 1980s)

Establishment of quantitative models: F.W. Harris’ mathematical model for inventory

management; H.F Dodge, H.G. Romig; W. Shewhart’s statistical procedures for sampling
and quality control; L.H.C. Tippett’s groundwork for statistical-sampling theory.
Development of Decision Models for forecasting, inventory management, project
management, and other areas of operations management.
Rise, fall, and resurgence of management science techniques
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Operations Management

History
Influence of Japanese Manufacturers - Spawned “quality revolution”. Key
characteristics of this era include:

Emphasis on Quality, Continual Improvement, Worker Teams and Empowerment,

Customer Satisfaction
Spawning the “quality revolution”
Emphasis on time-based management, competition, and production; as well as lean
production
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Operations Management

Trends
Internet - The advent of which, altered the way companies compete in the
marketplace and which, as well, created new ways in which transactions are
conducted.

E-business - a product of the rise of the internet, refers to the use of the internet to
transact business. It has two components:
E-commerce - Consumer to business transactions conducted through the internet.
E-procurement - Business to business transactions conducted through the internet.
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Operations Management

Trends
Management of Technology - Refers to the management’s adaptation to and
integration of technology in their operations, this refers both to but primarily about 1.)
taking advantage of the benefits from technological innovation; and consequently,
mitigation and prevention of risks and burdens associated with it.

Operations management is concerned with three key kinds of technology to which the
management of technology is applied:
Product and service technology
Process technology
Information technology
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Operations Management

Trends

Management of Supply Chains - One of the modern trends in operations management

is the existence and management of supply chains. Supply chains are sequences of
activities and organizations involved in producing and delivering a good or service. In
relation to supply chains, the trend of outsourcing or the purchase of goods or services
instead of producing it poses a challenge to countries and economies.
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Operations Management

Trends

Globalization - In relation to outsourcing, globalization plays a key role in the growing

global scope of supply chain management. As opposed to localization of supply chains,
an increase in a global and interconnected network of facilities, functions, and activities
emerge as one of the major trends in operations management. This however, is
challenged by local restrictions and security systems that slow down the transfer of
goods and services all around the world.
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Competitiveness, Strategy, and Productivity

Competitiveness, Strategy, and

Productivity

Competitiveness relates to the effectiveness of an organization in the

marketplace relative to other organizations that offer similar products or
services. Operations and marketing have a major impact on
competitiveness.
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Competitiveness, Strategy, and Productivity

In MARKETING: In OPERATIONS:
Identifying consumer Supply chain coordinates
wants and needs Flexibility
Pricing Competence
Advertising and Inventory management
Promotion Location
Cost
Quality
Quick Response
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Competitiveness, Strategy, and Productivity

Why do Some Organizations fail?

1. Putting too much emphasis on short-term financial performance at the expense of research
and development.

2. Failing to take advantage of strengths and opportunities and/or failing to recognize

competitive threats.
3. Neglecting operations strategy.
4. Placing too much emphasis on product and service design and not enough on process design
and improvement.
5. Neglecting investments in capital and human resources.
6. Failing to establish good internal communication and cooperation among functional areas.
7. Failing to consider customer wants and needs.
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Competitiveness, Strategy, and Productivity

STRATEGY
Sustainability Strategy
Global Strategy
Operations strategy
Quality-based strategy
Time-based strategy
Planning and decision making are hierarchical in organizations
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Competitiveness, Strategy, and Productivity

Productivity
Productivity is an index that measures output (goods and services) relative to the
input (labor, materials, energy, and other sources) used to produce them.

A productivity ratio can be computed for a single operation, a department,

an organization, or an entire country.
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Competitiveness, Strategy, and Productivity

Productivity growth is the increase in productivity from one period to the

next relative to productivity in the preceding period.

Computing Productivity
The choice of productivity measure depends primarily onthe purpose of
the measurement.
It can be based on a single input (partial productivity), on more than
one input (multifactor productivity), or on all inputs (total productivity).
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Competitiveness, Strategy, and Productivity

Productivity
Productivity Measures

Output÷Labor Output÷Machine
Partial productivity
Output ÷ Capital Output ÷ Energy

Labor + Machine ÷ Output

Multifactor
Labor + Capital+ Energy ÷ Output
productivity

some examples of partial Productivity measures.

All inputs used to produce ÷ Goods or
Total Productivity
Services produced
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Competitiveness, Strategy, and Productivity

Productivity in Service Sector

Productivity in Service Sectors are the most difficult to measure
because it involves intellectual activities (such as surgery, medical
diagnosis, etc..) and high degree of variability.

A useful measure closely related to productivity is process yield. In

service entity, process yield measurement is often dependent on
the particular process. For example, in a car rental agency, a
measure of yield is the ratio of cars rented to cars available for a
given day
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Competitiveness, Strategy, and Productivity

Factors affecting Productivity

Generally, Others:
methods Standardizing processes Safety
Quality differences Generation Gap
Capital Use of the internet layoffs
quality Computer viruses labor turnover
Scrap rates Design
technology Incentive plans
management Equipment breakdown
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Competitiveness, Strategy, and Productivity

To improve Productivity
Develop productive measures for all operations.
Look at the system as a whole in deciding which operations are
most critical.
Develop methods for achieving productivity improvements.
Establish reasonable goal for improvement.
Making it clear that management supports & encourages
productivity improvements.
Measure improvements and publicize them.
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Competitiveness, Strategy, and Productivity

Productivity
Productivity Ratio P= O/I ( Productivity = Output / Input ).

Productivity
PG= CP-PP/PP×100 (Productivity Growth = Current Productivity - Previous Productivity/Previous Productivity ×100).
Growth

Productivity Measures To improve productivity:

Output÷Labor Output÷Machine Develop productive measures for all operations.
Partial productivity
Output ÷ Capital Output ÷ Energy Look at the system as a whole in deciding which
operations are most critical.
Labor + Machine ÷ Output Develop methods for achieving productivity
Multifactor improvements.
Labor + Capital+ Energy ÷ Output
productivity Establish reasonable goal for improvement.
Making it clear that management supports &
encourages productivity improvements.
All inputs used to produce ÷ Goods or
Total Productivity Measure improvements and publicize them.
Services produced
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Forecasting

FOREC STING
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Forecasting

Forecasting for business Elements of a Good Forecast

- Used as basis for budgeting, planning capacity, 1. Timely
sales, production and inventory, personnel, 2. Accurate
purchasing, and more. 3. Reliable
4. Meaningful units
Uses of forecasts in 5. In writing
business organizations 6. Simple to understand and use
Accounting 7. Cost- effective
Finance
Human resources
Forecasting Techniques
Marketing
Judgmental forecasts
Operations
Time-series forecasts
Product/service design.
Associative models
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Forecasting

FORECASTS BASED ON JUDGMENT AND OPINION

Executive Opinions

A small group of upper-level managers may meet

and collectively develop a forecast.

Salesforce Opinions Consumer Surveys

Because it is the consumers who ultimately
Members of the sales staff are often good
determine demand, it seems natural to solicit
sources of information because of their direct
input from them.
contact with consumers.
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Forecasting

FORECASTS BASED ON TIME-SERIES DATA

A time series is a time-ordered sequence of observations taken at regular intervals. Forecasting

techniques based on time-series data are made on the assumption that future values of the
series can be estimated from past values.

Analysis of time-series data requires the analyst to identify the underlying behavior of the series.
This can often be accomplished by merely plotting the data and visually examining the plot. One
or more patterns might appear: trends, seasonal variations, cycles, or variations around an
average. In addition, there will be random and perhaps irregular variations. These behaviors can
be described as follows:
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1. Trend - Long-term upward or downward

movement in the data.
2. Seasonality - Short-term, fairly regular
variations generally related to factors.
3. Cycles - Wavelike variations of more than
one year's duration.
4. Irregular variations - Are due to unusual
circumstances such as severe weather
conditions, strikes, or a major change in a
product or service.
5. Random variations are residual variations
that remain after all other behaviors have
been accounted for.
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Forecasting

Naive Methods Techniques for Averaging

a forecast for any period that equals the smooth fluctuations in a time series because
previous period's actual value. the individual highs and lows in the data offset
Uses a single previous value of a time series each other when they are combined into an
as the basis of a forecast. average.
can be used with a stable series, with
seasonal variations, or with trend. A forecast based on an average thus tends to
exhibit less variability than the original data.

Averaging techniques generate forecasts that

reflect recent values of a time series
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TECHNIQUES FOR AVERAGING

1. Moving Average - A moving average forecast uses a number of the most recent actual data
values in generating a forecast. It is a technique that averages a number of recent actual
values, updated as new values become available.
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TECHNIQUES FOR AVERAGING

2. Weighted Moving Average - A weighted average is similar to a moving average, except that it
assigns more weight to the most recent values in a time series.

3. Exponential Smoothing - Each new forecast is based on the previous forecast plus a
percentage of the difference between that forecast and the actual value of the series at that
point. That is:
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Techniques for Trend

Analysis of trend involves developing an equation that will suitably describe trend.
There are two important techniques that can be used to develop forecasts when
trend is present. One involves use of a trend technique, the other is an extension of
exponential smoothing.

Trend Equation. A linear trend equation has the form

where
Ft = Forecast for period t
a = Value of Ft at t=0
b = Slope of the line
t = Specified number of time periods from t=0
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Example:

Week (t) y ty

1 700 700

2 724 1448

3 720 2160

4 728 2912

5 740 3700 Values of n ∑t ∑^2

∑=15
∑ t and
3,612 10,920 ∑ ^2 5 15 55
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Trend-Adjusted Exponential Smoothing

It is used when a time series exhibits a linear trend. It is sometimes called double
smoothing. If the data are increasing, each forecast will be too low; if decreasing,
each forecast will be too high. It is composed of two elements: a smoothed error
and a trend factor.

where
St = Previous forecast plus smoothed error
Tt = Current trend estimate
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Techniques for Seasonality

Seasonal variations in time-series data are regularly upward or downward
movements in the series values that can be tied to recurring events. Seasonality
may refer to regular annual variations.

Additive model of seasonality - seasonality is expressed as a quantity (20 units).

Multiplicative model of seasonality - seasonality is expressed as a percentage of
the average (1.10). Also referred as seasonal relatives or seasonal indexes.
Knowledge of seasonal variations is important in:
1. Retail planning and scheduling
2. Capacity planning (public transportation, electric power plants)
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Uses of Seasonal Relatives

Deseasonalize Data. The removal of the seasonal component from the data in order
to get a clearer picture of the nonseasonal (trend) components.

Period Quarter Sales Quarter Relative Deseasonalized Sales

1 1 132 1.20 110

2 2 140 1.10 ?
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Incorporating Seasonality. Is useful when demand has both trend (or average) and
seasonal components.
F1 = 124 + 7.5t Period Quarter Sales
Quarter Deseasonalized
Relative Sales

t=5
1 1 132 1.20 110

F15 = 124 + 7.5(5)

2 2 140 1.10 127.27

F15 = 161.5

t=6 Multiplying the trend value by Forecast for period 5 & 6:

F16 = 124 + 7.5(6) the appropriate quarter relative
Period 5: 161.5(1.20) = 193.8
yields a forecast that includes
F16 = 169
both trend and seasonality. Period 6: 169(1.10) = 185.9
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Computing Seasonal Variables

Central moving average. A moving average positioned at the center of the data that
were used to compute it.

Period Demand 3 Period Centered Average

1 40

2 46 40 + 46 + 42 / 3 = 42.67

3 42
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Techniques for Cycles

Cycles. Are up-and-down movements similar to seasonal variations but of longer
duration - say, two to six years between peaks.

The most commonly used approach is explanatory: Search for another variable that
relates to, and leads the variable of interest. For example the number of housing
starts (permit to build houses) in a given month often is an indicator of demand a few
months later for products and services directly ties to construction of new homes
(landscaping; furniture; transportation; etc.). Thus, if an organization is able to
establish a high correlation with such a leading variable, it can develop an equation
that describes the relation. The higher the correlation, the better the chances that
the forecast will be on target.
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Associative Forecasting Techniques

Rely on identification of related variables that can be used to predict values of the
variable of interest.
Predictor Variables. Variables that can be used to predict values of the variable of
interest.

Regression. Technique for fitting a line to a set of points.

Simple Linear Regression. The simplest and most widely used form of regression
which involves a linear relationship between two variables.
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y = a + bx
where,

y = Predicted (dependent) variable

x = Predicted (independent) variable
b = Slope of the line
a = value of y when x = 0 (i.e., the height
of the line at the y intercept)

The coefficients a and b of the line

are based on the following 2
equations:
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Three conditions are required for an indicator to be valid:

1. The relationship between movements of an indicator and movements of the variable should
have a logical explanation.
2. Movements of the indicator must precede movements of the dependent variable by enough
time so that the forecast isn't outdated before it can be acted upon.
3. A fairly high correlation should exist between the two variables.

Correlation. Measures the strength and direction of relationship between two variables.

r value Interpretation

+1 direct relationship

-1 indirect relationship

close to 0 little linear relationship

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Observation x y Observation x y

1 15 74 8 18 78

2 25 80 9 14 70

3 40 84 10 15 72

4 32 81 11 22 85

5 51 96 12 24 88

6 47 95 13 33 90

7 30 83 ∑ 366 1076
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Comments on the Use of Linear Regression

CERTAIN ASSUMPTIONS THAT SHOULD BE SATISFIED
1. Variations around the line should be random.
2. Deviations around the line should be normally distributed.
3. Predictions are made only within the range of observed values.

To obtain best result in regression analysis, the following should be observe

1. Plot the data to verify that a linear relationship is appropriate.
2. The data maybe time dependent
3. Small correlation may imply that other variables are important.

Weaknesses of Regression Analysis

1. Simple linear regression applies only to linear relationships with one variable
2. Needs 20 or more observations
3. All observations are weighted equally.
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Curvilinear Regression Multiple Regression

Analysis Analysis
Applies to non-linear relationships Applies to models that involve
more than one predictor
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Accuracy And Control of Forecasts

Accuracy and control are vital aspect of forecasting, so forecasters
want to minimize forecast errors.

Forecast error is the difference between the value that occurs and the value that
was predicted for a given period of time. Hence, Error = Actual - Forecast or

Positive errors when the forecast is too low, negative errors when the forecast is
too high.
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Forecasting

EXAMPLE
If actual demand for a week is 100 units, and the forecast demand is 90
units.

100 - 90 = 10
The error is positive 10, therefore, the forecast was too low.

Forecast errors influence decisions in making a choice between

various forecasting alternatives, and in evaluating success or failure of
a technique in use.
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Summarizing Forecast Accuracy

Forecast accuracy is a significant factor when
deciding among forecasting alternatives. Accuracy
is based on the historical error performance of the
forecast.

Three commonly used measures for summarizing

historical errors are the mean absolute deviation
(MAD), the mean squared error (MSE), and the mean
absolute percent error (MAPE). MAD is the average
absolute error, MSE is the average of squared
errors, and MAPE is the average absolute percent
error.
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Controlling the Forecast

Because forecast errors are the rule rather than the exception, there will be a succession of
forecast errors. Tracking the forecast errors and analyzing them can provide useful insight on
whether or not forecasts perform satisfactorily.

Control Chart
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Tracking Signal

Values can be positive or negative. A value of zero would be ideal; limits of +4 or +5 are often
used for a range of acceptable values of the tracking signal. If a value outside the acceptable
range occurs, that would be taken as a signal that there is bias in the forecast, and that corrective
action is needed.
After initial value of MAD had been determined, MAD can be updated using exponential
smoothing:
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Choosing a Forecasting Technique

When selecting a technique, the manager or analyst must take a number of number of
factors into consideration. The two most important factors are cost and accuracy. Other
factors that to consider include the availability of historical data; availability of software;
and the time needed to gather and analyze data and to prepare the forecast.
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Guide to selecting appropriate forecasting method

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Using Forecast Information

A manager can take proactive or reactive approach to a forecast.

Reactive Approach views forecasts as probable future demand, and a manager

reacts to meet that demand.
Proactive Approach seeks to actively influence demand.

Computers in Forecasting
It allows managers to develop and revise forecasts quickly, and without the burden of
manual computations.
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Forecasting

Forecasts are vital inputs for the design and the operation of the productive system
All forecasts tend to be inaccurate
In selecting a forecasting technique, a manager must choose a technique that will
serve the intended purpose at an acceptable level cost and accuracy
Forecasting Approches:
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Forecasting Reference

Source

Source
01 Operations Management Second Edition by William J.
Stevenson and Sum Chee Chuong
ASSESSMENT