Zanzibar University

Operations Management (MBGM 605)

Welcome !
INSTRUCTOR: Dr. Adilu M.Salim
OFFICE: ZU main campus Tunguu, Building 13, academic room 1
PHONE: 0773 246644
E-MAIL: [email protected]
• Operations Management
– Management of the conversion process which
transforms inputs such as raw material and labor
into outputs in the form of finished goods and
services.

Inputs Outputs
(customers (goods
Transformation Process
and/or and
(components)
materials) services)
It is all about: the design, management, and
improvement of the systems that create the
organization’s goods or services

Can you identify the main output of the

operation?:
- Bottlers company
-Publisher
-Hotel
-Insurance company
-Your organization
Decision making is a central role of all operations managers.
Decisions need to be made in:
 designing the operations system
 managing the operations system
 improving the operations system.
The five main kinds of decision in each of these relate to:
1. The processes by which goods and services are produced
2. The quality of goods or services
3. The quantity of goods or services (the capacity of
operations)
4.The stock of materials (inventory) needed to produce
goods or services
5. The management of human resources.
THE BASIC STEPS IN MAKING DECISION

(1) Recognize and clearly define the problem,

(2) Collect the information needed to analyze
possible alternatives, and
(3) Choose and implement the most feasible
alternative.
However, The four formal procedures:
-Break-even analysis
-The preference matrix
-Decision theory
-A decision tree
• Break-even analysis is used to evaluate an idea for
a new service or product. Eg.
Knowing that, all costs related to the production of a
specific service or product can be divided into two
categories: (i) Variable costs (c) and (ii) fixed costs.(f)
Suppose, Q equals the number of customers served
or units produced per year,
Total variable cost = cQ.
Thus, the total cost of producing a service or good
equals fixed costs plus variable costs multiplied by
volume, or
Total cost = f + cQ
• If we assume that all units produced are sold, total
annual revenues equal revenue per unit sold, p,
multiplied by the quantity sold, or Total revenue = pQ
If we set total revenue equal to total cost, we get the
break-even quantity point as
pQ = F + cQ
OR (p – c)Q = F AND Q = F/p – c
Where Q is the break even quantity
Break-even analysis cannot tell a manager whether to
pursue a new service or product idea or drop
an existing line. The technique can only show what is
likely to happen for various forecasts of costs
and sales volumes.
Example
• A hospital is considering a new procedure to be offered
at $200 per patient. The fixed cost per year would be
$100,000, with total variable costs of $100 per patient.
What is the break-even quantity for this service?
Solution:
• Q = F/p - c = 100,000/200 - 100 = 1,000 patients
The Decision Point
Management expects the number of patients needing the new
procedure will exceed the 1,000-patient break-even quantity but
first wants to learn how sensitive the decision is to demand levels
before making a final choice.
Preference Matrix
• This is a tabling that allows the manager to rate
an alternative according to several performance
criteria.
• The criteria can be scored on any scale, such as
from 1 (worst possible) to 10 (best possible) or
from 0 to 1, as long as the same scale is applied to
all the alternatives being compared. Each score is
weighted according to its perceived importance,
with the total of these weights typically equaling
100. The total score is the sum of the weighted
scores (weight x score) for all the criteria.
Example
• The following table shows the performance
criteria, weights, and scores (1 = worst, 10 = best)
for a new product: a thermal storage air
conditioner. If management wants to introduce
just one new product and the highest total score
of any of the other product ideas is 800, should
the firm pursue making the air conditioner?
Solution
• Because the sum of the weighted scores is 750, it
falls short of the score of 800 for another product.
Decision Point
Management should drop the thermal storage air-
conditioner idea. Another new product idea is
better, considering the multiple criteria, and
management only wanted to introduce one new
product at the time.
Decision Theory
This is a general approach to decision making when the
outcomes associated with alternatives are often in doubt.
It helps operations managers with decisions on process,
capacity, location, and inventory because such decisions
are about an uncertain future.(certainty, uncertainty, risk)
A decision tree is a schematic model of alternatives
available to the decision maker along with their possible
consequences.
For example, a company may expand a facility in 2015
only to discover in 2018 that demand is much higher than
forecasted. In that case, a second decision may be
necessary to determine whether to expand again or build
a second facility.
Key Decisions of Operations Managers
• Most operations decisions involve many alternatives
that can have quite different impacts on costs or profits
• Typical operations decisions include:
What: What resources are needed, and in what amounts?
When: When will each resource be needed? When
should the work be scheduled? When should materials
and other supplies be ordered?
Where: Where will the work be done?
How: How will he product or service be designed? How
will the work be done? How will resources be allocated?
Who: Who will do the work?
 Key Issues for Operations
Managers Today
• Economic conditions
• Innovating
• Quality problems
• Risk management
• Competing in a global economy
Role of the Operations Manager
The Operations Function consists of all activities directly related to
producing goods or providing services
What do you think a typical operations manager does?
 Human resource management
 Asset management
 Cost management

A primary function of the operations manager is to guide the system

by decision making.
– System Design Decisions
– System Operation Decisions
Systems Approach
• System - a set of interrelated parts that must work
together.
• Business organization is a system composed of
subsystems
• marketing subsystem
• operations subsystem
• finance subsystem
– Emphasizes interrelationships among subsystems
– Main theme is that the whole is greater than the sum of
its parts
– The output and objectives of the organization take
precedence over those of any one subsystem
Systems Approach
“The whole is greater than
the sum of the parts.”…..Principle of Sub optimization
Sub optimization
A situation in which a business is not as successful as it could
be because one part or Department works only on its own or
only for its own success……..common policy mistake
It is a term that has been adopted for a common policy
mistake.
It refers to the practice of focusing on one component of a
total and making changes intended to improve that one
component and ignoring the effects on the other
components.
 The well-being of an element is dependent on the well-
being of the system of which it is a part.
Examples
A plant manager moves her best employees to
the production department and maximizes its
efficiency, but the loss of good employees in the
shipping department results in so many
inefficiencies that the plant's overall output is less
than optimal.
A government agency that promotes a program
for its benefits but ignores its costs may make
society worse off rather than better off.
Maximization of benefits without taking into
account costs is not rational
If a firm focuses on minimization cost, a desirable
aim if all other factors remain equal, and takes
measures which not only reduce cost but also
reduce revenues even more the profit of the firm is
adversely affected.
An educational institution concerned about thefts
of equipment might take steps to minimize theft
which result in students not being able to use the
equipment at all. This is clearly not optimal because
it results in the same effect as if all the equipment
were stolen. The proper policy has to consider the
tradeoffs between security and access for
legitimate use.
Challenge
The problem of suboptimization underlies
most of the problems appearing in
evolutionary ethics. Indeed, ethics tries to
achieve the "greatest good for the greatest
number", but the greatest good (optimal
outcome) for an individual is in general
different from the greatest group for a system
(e.g. society) of individuals.
Production system
Is ‘that part of an organisation, which produces
products of an organisation.
• It is that activity whereby resources, flowing
within a defined system, are combined and
transformed in a controlled manner to add
value in accordance with the policies
communicated by management’.
Eg. A simplified production system
 The production system has the following
characteristics:
1. Production is an organised activity, so every
production system has an objective.
2. The system transforms the various inputs to
useful outputs.
3. It does not operate in isolation from the other
organisation system.
4. There exists a feedback about the activities,
which is essential to control and improve system
performance.
Type of production/operations
Craft production: ( customized process)
involves producing (high) variety of customized
goods, (low) volume output with skilled workers and
utilizing (simple, flexible) equipment. Eg tailoring,
machine shop, print shop, and landscaping.
The Main advantage is the flexibility to produce a
wide variety of output,
The main disadvantage is its incapability to
produce at low cost e.g: dressmaking,redesigning.
Mass production(Group process)
involves producing a few standardized goods at
high volume of output with low skilled workers.
e.g: automobiles, computers,appliances, paper,
soft drink bottling, etc.
Main advantage is low cost, efficient production,
The main disadvantage is that it does not allow
easy changes in volume of output or product
design
Lean production (continuous  never ending efforts to
eliminate/reduce waste)
it provides producing more variety of goods than most
production at moderate to high volume of output. It
requires high skilled workers, quality, employee
involvement, teamwork and sweet-talk organizational
structure with fewer level of management. It combine
both advantages high volume, low cost and variety,
flexibility.
Activity: Why might some workers prefer not to work in
a lean production environment?
Employee advancement,
Worker stress
etc.
Day to day jobs of OM
• Planning  Controlling
– Capacity, utilization – Inventory
– Location – Quality
– Choosing products or – Costs
services  Organization
– Make or buy – Degree of standardization
– Projects – Subcontracting
– Scheduling – Process selection
– Plan for risk reduction,  Staffing
plan B? – Hiring
– Forecasting – Use of overtime
– Incentive plans

The challenge is
“Matching the Supply with Demand”
SUPPLY SIDE DEMAND SIDE
Supply & Demand
Operations &
Sales & Marketing
Supply Chains

Wasteful
Supply
> Demand Costly

Opportunity
Loss
Supply
< Demand
Customer
Dissatisfaction

Ideal
Supply
= Demand
Costs of the demand/supply mismatch can be severe

Air travel Emergency room Retailing Iron ore plant

Supply Seats on specific Medical service Consumer Iron ore

flight electronics

Demand Travel for specific Urgent need for Consumers buying a Steel mills
time and destination medical service new video system

Supply Empty seat Doctors, nurses, and High inventory costs; Prices fall
exceeds infrastructure are
demand under-utilized

Demand Overbooking; Crowding and delays Inevitable profit Prices rise

exceeds customer has to take , potential opportunity;
supply different flight (profit diversion of consumer
loss) ambulances dissatisfaction

Actions to Dynamic pricing; Staffing to predicted Forecasting; quick If prices fall too low,
match supply booking policies demand; priorities response production facility is
and demand shut down

Managerial About 30% of all Delays in treatment or Per unit inventory Prices are so
importance seats fly empty; a 1- transfer have been costs for consumer competitive that the
2% increase in seat linked to death; electronics retailing primary emphasis is
utilization makes commonly exceed on reducing the
difference between net profits. cost of supply
profits and losses