Lesson 4

OPERATIONS
MANAGEMENT
 What is operation management?
Operation Management is the management
of activities that create goods and services
through the transformation of inputs into
outputs

• Operations management is an area of

management concerned with overseeing,
designing, and controlling the process of
production and redesigning business
operations in the production of goods or
services
 Operation management
• Inputs Transformation
Outputs
•Manpower
•Equipment/Machines
•Money •Goods
processes
•Energy •Services
•Utilities
•Raw materials

Performance feedback.
Efficiency and effectiveness
evaluation

Fig.1 The production and operations Management system

• It involves the responsibility of ensuring that
business operations are efficient in terms of using
as few resources as needed and effective in terms
of meeting customer requirements.
• The operations management involves the delivery
of goods to customers. This includes ensuring
products are delivered within the agreed time
commitment.
• Operations management also typically follows up
with customers to ensure the products meet
quality and functionality needs.
 Operation Management
In the event of transforming inputs
into finished goods/services,
we need to undertake:
1. Efficiency evaluation:
are we doing things right?
2. Effectiveness evaluation:
are we doing the right
things?

Fig.2: A Person welding

 Operations Management in
Services
• The operations has the functional responsibility
for producing the services of an organization and
providing them directly to its customers

• The six types of decisions made by operations

managers in service organizations are: process,
quality, capacity, scheduling, inventory, service
supply chain, and information technology
 TYPES OF ORGANIZATIONS
Manufacturing organizations
Manufacturing organization include all chemical and
process organization, engineering, mining, etc
Transformation of inputs in terms of form, shape,
structures, etc., to obtain final product.
There are three major categories:
(a) Mass production organizations
(b) Job shop production organizations
(c) Batch manufacturing organizations
 Cont.. TYPES OF ORGANIZATIONS
Service Organizations
• Service organization change the state/condition
utility of a costumer. These include training
institutions, consultancy services hospitals,
prison, hotels and accommodations, etc.
Supply Organizations
• Here there is a change of ownership of item.
Supply organizations includes; shops fuel
station, commercial banks, etc.
Cont.. TYPES OF ORGANIZATIONS

Transport organizations
• There is a change in location utility from
location A to B
• These includes land transportation, air and
sea transportation.
Summary:
It is possible to find all four features in one organization, but the
core feature is the one which underpin the identity of that particular
organization.
4.2 LOCATION OF FACILITIES
Basis for choosing a Location
• Availability/existence of infrastructure (road &
utilities)
• Proximity to markets
• Favorable labor climate
• Proximity to raw materials
• Security (availability)
• Cost of land or site
3.2 Basis for choosing an equipment
➢ Technical factors
➢ Cost factors
Cont… LOCATION OF FACILITIES
Technical Factors
• Competitive advantage;
• Demand for product (specific against general purpose
equipment);
• Risk of obsolescence;
• Quality of the work produced;
• Maintenance costs and reliability
Cost Factors
➢ Costs of direct labour
➢ Cost of direct materials
➢ Other operating costs
➢ Interest on capital invested
 Cont.. LOCATION OF FACILITIES
Two main categories of identifying the site
location
• Quantitative or/and
• Quantitative methods

Specific Techniques/Methods Used

• Equal Weight method
• Variable Weight method
• Weight-cum-Rating method
• Factor Point Rating method (poor, fair, adequate,
Good, Excellent)
• Composite Measurement method (Multiple criteria
technique)
Consider an example Equal Weight Method

Factors Max. Site 1 Site 2 Site 3 Site 4

Point
F1 10 3 6 8 2
F2 10 4 5 9 3
F3 10 7 2 6 3
Sum of site
ratings
30 14 13 23 8
Consider an example for Variable Weight
Method
Factors Max. Site 1 Site 2 Site 3 Site 4
Point
F1 400 300 350 350 200
F2 300 150 200 150 100
F3 100 50 75 80 40
Sum of site
ratings
800 500 625 580 340
Consider an example for Weight-cum-
Rating Method
Factors Weight Site 1 Site 2 Site 3 Site 4
to
factor
F1 2 4 6 8 3
F2 3 4 4 9 2
F3 5 5 3 7 2
Site rating 45 39 78 22
 Cont.. LOCATION OF FACILITIES
i. Multiple criteria/Composite Technique
Advantages
- ability to combine all types of criteria under
one denomination
- it forms the basis for discussion
Disadvantages
- it is too subjective
- difficulty to perceive the problem in terms of
weight x score
 Cont.. LOCATION OF FACILITIES

Techniques that consider qualitative

and quantitative factors is Multiple
criteria/Composite Technique
- This criteria need to prepare the evaluation matrix
for all qualitative and quantitative factors
 Consider example which has both qualitative and
quantitative Factors – Composite Measure or Multiple Technique
Factors Location A Location B Location C
Cost of land including
building development
55m 49m 45m
Labour and raw
materials charges
40m 25m 32m
Power and water
10m 9m 10m
Freight for incoming
and outgoing
85m 85m 92m
Total 190m 168m 179m
Cost of living
Moderate Low Moderate
Housing Facilities
Excellent Poor Good
Community Attitude Encouraging Indifferent
Good
 Cont.. LOCATION OF FACILITIES
ii. Dimensional analysis
Let Oi1, Oi2, Oi3, ………. Oin = Costs, Scores, Rates,
etc associated with factors 1, 2, 3, ……….n for
location i.
Let also w1, w2, w3, ……… wn = weight attached to
factors 1, 2, 3, ……..n.
Score 1 = best, Score 10 = worst
Weight 1 = Least important
Weight 10 = Most important

19
 Cont.. LOCATION OF FACILITIES

Merit of location I = (Oi1) X (Oi2) …X (Oin)

w1 w2 wn

In case of two possible locations, the

merit might be compared as follows:
Merit of Location A (OA ) X (OA ) …X (OAn)
1
w1
2
w2 wn

=
Merit of Location B (OB ) (OB2)
1
w1
(OBn) w2 wn

Select Location B if >1

Select Location A if <1
However this method is applicable to single facility location only.

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 Example

Factors Location A Location B Weight

Cost
(Transportation)
10million 15million 1
Proximity to
Labour
6 2 2
Job Creation
3 7 3
Construction cost
1.5billion 1billion 4
Pollution
4 7 4
Proximity to water
5 km 5 km 3

21
 Example cont…
1 2 3 4 4 3
Merit of Location A (10) X (6) X (3) X (1.5) X (4) X (5)
= 1 2 3 4 4 3 = 1.78
Merit of Location B (15) (2) (7) (1) (7) (5)

Since factor is >1

Select Location B

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Quantitative Method for Facility Location

This approach considers the location of a

facility that minimizes total transportation
costs.
Two Kinds of Costs:
• Transportation Costs of inputs to the facility
(Raw Material, Semi – finished components or
Spare parts etc)
• Transportation Costs of Finished Products
from the facility to the Markets
23
Quantitative Method for Facility Location

 TiQiDi
i =1
Where :
L = Total transportation Costs to and from the facility.
Ti = Transport Costs per Unit distance per Unit quantity for one
movement between the facility and existing location i.
Q‫ = ﺄ‬quantity to be transported between the facility and existing location.‫ﺄ‬
D‫ = ﺄ‬Distance between facility and existing Location ‫ ﺄ‬for n Locations.

24
 CENTROID METHOD
• The centroid method is used for locating
single facilities that considers existing
facilities, the distances between them,
and the volumes of goods to be shipped
between them

• This methodology involves formulas

used to compute the coordinates of the
two-dimensional point that meets the
distance and volume criteria stated
above
25
Center-of-Gravity Method
∑dixQi
i
x - coordinate =
∑Qi
i

∑diyQi
i
y - coordinate =
∑Qi
i

where dix = x-coordinate of location i

diy = y-coordinate of location i
Qi = Quantity of goods moved to or from
location i

26
 Center-of-Gravity Method
West-North
Kigoma (130, 130)
Rukwa (30, 120)
120 –
Tabora (90, 110)
90 –

60 –

30 –
Mbeya (60, 40)

–
| | | | | |
West-south
30 60 90 120 150
Arbitrary
origin
27
 Center-of-Gravity Method
Number of Maize Containers
Store Location per Month

Rukwa (30, 120) 2,000

Tabora (90, 110) 1,000
Kigoma(130, 130) 1,000
Mbeya (60, 40) 2,000

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
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 Center-of-Gravity Method
West-North
Kigoma (130, 130)
Rukwa (30, 120)
120 –
Tabora (90, 110)
90 – + Center of gravity (66.7, 93.3)

60 –

30 –
Mbeya (60, 40)

–
| | | | | |
West-south
30 60 90 120 150
Arbitrary
origin
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 Location Based on
Break-Even Analysis
 Method of cost-volume analysis used for
industrial locations
 Three steps in the method
1. Determine fixed and variable costs for
each location
2. Plot the cost for each location
3. Select location with lowest total cost for
expected production volume
30
 Assumptions

• Fixed costs are constant for the range of

probable output
• Variable cost are linear for the range of
probable output
• The required level of output can be
closely estimated
• Only one products is involved

31
• For cost analysis, computer the total cost
for each location
• Total cost = Fc + (V x Q)
• Where
• Fc – fixed cost
• V- Variable cost per unit
• Q- Quantity or volume of output

32
Location Based on Break-Even Analysis
Three locations:

Fixed Variable Total

City Cost Cost Cost

Mwanza $30,000 $75 $180,000

Dar es Salaam $60,000 $45 $150,000
Mbeya $110,000 $25 $160,000
Selling price = $120
Expected volume = 2,000 units

Total Cost = Fixed Cost + Variable Cost x Volume

33
Locational Break-Even Analysis

–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
Annual cost

$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
Mwanza Mbeya
$30,000 – lowest
Dar es salaam
lowest cost
– cost
lowest cost
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000
Volume 34
 EXERCISE
LOCATION F.C PER YEAR V.C PER YEAR
A …………….. $250,000 $11
B …………….. 100,000 30
C …………….. 150,000 20
D ……………… 200,000 35

1. Pot the total-cost lines for these locations on a single

graph
2. Identify the range of output for which each alternative
is superior (i.e. has the lowest total cost).
3. If expected output at the selected location is to be
8,000 units per year, which location would provide
the lowest total cost

35
 How Services Chains Select Sites
 Location is a strategically important decision in
the hospitality industry
 Mlimani City started with number of
independent variables and worked to refine a
regression model to predict profitability
 The final model had only four variables
 Price of the inn r2 = .51
51% of the profitability
 Median income levels is predicted by just
these four variables!
 State population per inn
 Location of nearby colleges

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 4.3 FACILITY LAYOUT
There are 4 major kinds of Layout:
1. Process Layout
In process Layout all machines/ Facilities
Performing similar functions are placed in one
location.
Advantages of Process Layout.
• It has high Flexibility i.e. can accommodate
changes in production volumes without
suffering high costs.
• Can be adapted to skilled Labour hence
makes supervision easy.
 FACILITY LAYOUT
Disadvantages
• Occupies a lot of space
• It requires people who are well trained.
2. Product Layout
Machines/facilities are placed according to
the production requirement. It is used in
continuous production systems such as
soft drink manufacturing
 FACILITY LAYOUT
Advantages
• High production efficiency.
• Possible to employ semi skilled Labour.
Disadvantages
• Lack of Flexibility in terms of ability of cope with
changes in production volume and product
variety.
• One needs inventory between work stations to
de-couple station interdependence
 FACILITY LAYOUT
3. Hybrid Layout
• This is a mixture of product and process Layout
• The hybrid layout combines the advantages of
the two Layouts. An example is organization
which fabricates components before
assembling them into finished products.
• The former can be done through process
Layout and the latter by a product Layout
 FACILITY LAYOUT
4. Fixed Position Layout
This is possible when the product is so
large such that cannot move around work
situations, for instance in shop building
dam construction.
 QUESTION 1
• Based on the company and business which
you want to establish: Develop checklist
indicating requirements of information for
feasibility study (technical and economical
viability of business). Hint: consider the
following issues: operations, Location,
technological, marketing, financial and
organization structure of the
plant/service/company
 QUESTION 2
A hospital is considering a new procedure to be
` The cost involved per
offered at $200 per patient.
year are: patient meal $10, electricity bill for
operating air-condition in theatre room $25, surgical
equipment $52,000 consultation fee for Doctor $20,
ambulance $30,000, cleaning bed sheet for patient
$10, salary of ambulance driver $1000, capital for
medicine $15,000, taxes and municipal levy $2,000,
and patient admission fee $35. What is the break-
even quantity for this service? If the most
pessimistic sales forecast for the proposed service
were 1,500 patients, what would be the procedure’s
total contribution to profit and overhead per year?
 QUESTION 2
The manager of restaurant at CoET is adding salads to the
menu. For each of the two new options, the price to the
students will be the same. The make option is to install a salad
cage stocked with vegetables, fruits, and toppings and let the
students assemble the salad. The salad bar would have to be
leased and a part-time employee hired. The manager
estimates the cost of hired staff is $0.5 per salad, cost of
equipment is $4000, cost of vegetables and fruit is $1.0 per
salad, cost of cages $3500, renting fee $1500, salary of
manager, $2000, and fuel cost for manager’ car $1000. The
buy option is to have preassembled salads available for sale.
They would be purchased from a local supplier at $2.00 per
salad. Offering preassembled salads would require installation
and operation of additional refrigeration, with an annual fixed
cost of $2,400. The manager expects to sell 25,000 salads per
year. What is the make-or-buy quantity?
THANK YOU