Operations Management - Previous Year
Operations Management - Previous Year
1. Overproduction
2. Waiting
3. Transportation
4. Overprocessing
5. Excess Inventory
6. Unnecessary Motion
7. Defects
These wastes increase costs and reduce productivity.
1. EOQ = √(2DS/H)
Where D = Demand, S = Ordering Cost, H = Holding Cost
2. Total Cost = Purchase Cost + Ordering Cost + Holding Cost
3. Reorder Point = Lead Time × Demand Rate
2) 5-MARKS ANSWERS
3) 10-MARK QUESTION
1. Uninterrupted Production:
Inventory ensures a continuous flow of raw materials and components to
the production line. Without sufficient inventory, production could halt,
leading to costly downtime and delivery delays.
2. Buffer Against Uncertainty:
Manufacturing is often exposed to demand and supply fluctuations.
Inventory acts as a cushion against such uncertainties by absorbing
demand spikes and supply chain disruptions.
3. Bulk Purchasing & Cost Savings:
Maintaining inventory allows companies to purchase raw materials in bulk,
often at discounted rates, reducing overall procurement costs and
transport expenses.
4. Lead Time Management:
Inventory helps bridge the time gap between ordering and receiving
materials. This is especially important when suppliers have long lead times
or are located far away.
5. Customer Service & Satisfaction:
Finished goods inventory enables faster order fulfillment, improving
customer service levels. Delays due to stock-outs can lead to loss of sales
and damaged brand reputation.
6. Decoupling Production Processes:
Inventory allows different production stages to operate independently.
For example, if one stage faces a breakdown, the next can still continue
using available stock.
7. Support for Seasonal Demand:
Businesses facing seasonal or festival-based spikes can produce in
advance and stock finished goods to meet future demand efficiently.
8. Avoiding Price Fluctuations:
Firms may stock up when prices are low to hedge against expected price
increases, thus maintaining cost stability.
OR
1. Ordering Cost:
This includes all costs incurred in placing an order, such as communication,
invoice processing, inspection, and delivery charges. Frequent small orders
lead to higher cumulative ordering costs.
2. Carrying or Holding Cost:
These are the costs of keeping inventory in storage. They include:
o Storage Cost (warehousing, utilities)
o Insurance and Security
o Depreciation and Obsolescence
o Opportunity Cost of Capital tied up in stock
Holding costs are usually expressed as a percentage of inventory
value, typically 20–30% annually.
3. Stock-out or Shortage Cost:
This arises when demand cannot be met due to insufficient inventory. It
results in:
o Lost Sales
o Customer Dissatisfaction
o Urgent Expediting Costs
o Loss of Market Share
4. Setup Cost (in manufacturing):
This includes the cost to prepare equipment or changeover production
lines for different products. Frequent setups for smaller batches
increase setup costs.
5. Obsolescence Cost:
For products with short life cycles (e.g., electronics, fashion), unsold
inventory may become obsolete and lose market value. This leads to
markdowns or scrapping.
6. Spoilage and Shrinkage Cost:
Spoilage refers to inventory that becomes unusable due to damage,
contamination, or expiry. Shrinkage involves inventory loss due to theft,
pilferage, or administrative errors.
7. Capital Cost:
The money invested in inventory could have been used elsewhere. This
cost, known as opportunity cost, is the return foregone on that
investment.
4) 10-MARK QUESTION
2. Resource Allocation:
With a clear projection of future needs, companies can allocate raw materials,
labor, equipment, and finances efficiently. For example, workforce planning
relies heavily on seasonal or trend-based forecasts.
3. Capacity Planning:
Forecasting helps determine whether current production capacity can meet
future demand. Based on forecast data, businesses can decide whether to
expand facilities, upgrade equipment, or outsource production.
4. Financial Planning:
Sales forecasts directly impact budgeting, cash flow management, and
investment planning. Accurate financial forecasting supports capital expenditure
decisions and loan requirements.
7. Strategic Planning:
At a macro level, forecasting is crucial for expansion planning, entering new
markets, mergers and acquisitions, and long-term sustainability strategies.
1. Project Process:
o Used for one-off, highly customized products (e.g., construction,
shipbuilding)
o High flexibility, low volume
o Skilled labor and unique resources required
2. Job Shop:
o Produces small batches of customized products (e.g., specialized
tools, furniture)
o High variety, low volume
o Flexible equipment and skilled workers
3. Batch Process:
o Produces products in batches (e.g., baked goods, clothing)
o Moderate volume and variety
o Equipment can handle variety but is more standardized
4. Assembly Line (Mass Production):
o High-volume, standardized products (e.g., automobiles)
o Low variety
Efficient, linear workflows and specialized machines
o
5. Continuous Flow:
o Very high-volume, non-discrete products (e.g., oil, chemicals)
o Low flexibility, no variation
o High capital investment and automation
Strategic Implications:
• Firms aligned with the matrix (e.g., using batch process for medium-
volume, medium-variety products) operate efficiently.
• Firms that are misaligned (e.g., using job shop process for high-volume
production) may face cost inefficiencies and quality issues.
5) 10-MARK QUESTION
a) EOQ
b) If the company gets 5% discount if it places a single order, should they
accept the discount offer?
Given:
a) EOQ Formula:
EOQ=2DSH=2×14400×500.12=1,440,0000.12=12,000,000=3464.1 unitsEOQ =
\sqrt{\frac{2DS}{H}} = \sqrt{\frac{2 × 14400 × 50}{0.12}} =
\sqrt{\frac{1,440,000}{0.12}} = \sqrt{12,000,000} = \mathbf{3464.1} \text{
units}
b) Discount Analysis
Decision:
Conclusion:
Since accepting the discount reduces the total cost, the company should
accept the 5% discount offer even though it means buying in bulk and holding
more inventory.
OR
1. Bumper – 4,50,000
2. Tyre – 2,50,000
3. Clutch Plates – 1,50,000
4. Axles – 60,000
5. Brake Liners – 48,000
6. Head Lamps – 30,000
7. Flanges – 20,000
8. Oil – 17,500
9. Coolant – 12,500
10. Speedometer Gear – 12,000
Step 3: Cumulative % of Total Value
ABC Classification:
Category
Bumper, Tyre
A
Category B Clutch Plates, Axles
Brake Liners, Head Lamps, Flanges, Oil, Coolant, Speedometer
Category C
Gear
Conclusion: