OPERATIONS MANAGEMENT

ME-420
BACHELORS OF ENGINEERING
MECHANICAL ENGINEERING DEPARTMENT NEDUET
IMPORTANCE OF OPERATIONS
MANAGEMENT
 SUCCESS STORIES
 HARD ROCK CAFÉ
 AMAZON
 KFC
INTRODUCTION

Operations management design, operate, and improve productive

systems—systems for getting things done.

Operation is defined as a function or system that transforms inputs

into outputs of greater value.

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INPUTS

3 M’s

Man Machine Material

OUTPUTS
 PRODUCTS – Goods or commodities that have tangible form
 Ex: Books, computers, Machines
 SERVICES - Intangible commodities that do not have a physical form
 Ex: Banking, Hospitalization, Insurance
SIGNIFICANT EVENTS IN OPERATIONS
MANAGEMENT
WHERE ARE THE OM JOBS
 PLANT MANAGER
 QUALITY MANAGER
 PROCESS IMPROVEMENT CONSULTANTS
 DIRECTOR OF PURCHASING
 SUPPLY CHAIN PLANNING MANAGER
EXCITING NEW TRENDS/CHALLENGES
FOR THE OPERATIONS MANAGER
EXCITING NEW TRENDS/CHALLENGES
FOR THE OPERATIONS MANAGER
OPERATIONS MANAGEMENT
THE CRITICAL DECISION AREAS
 Design of goods and services
 What good or service should we offer?
 How should we design these products and services?
 Managing quality
 How do we define quality?
 Who is responsible for quality?
 Process and capacity design
 What process and what capacity will these products require?
 What equipment and technology is necessary for these
processes?
 Location strategy
 Where should we put the facility?
 On what criteria should we base the location decision?
 Layout strategy
 How should we arrange the facility?
 How large must the facility be to meet our plan?
THE CRITICAL DECISION AREAS
 Human resources and job design
 How do we provide a reasonable work environment?
 How much can we expect our employees to produce?
 Supply chain management
 Should we make or buy this component?
 Who are our suppliers and who can integrate into our e-commerce program?
 Inventory, material requirements planning and JIT
 How much inventory of each item should we have?
 When do we re-order?
 Intermediate and short–term scheduling
 Are we better off keeping people on the payroll during slowdowns?
 Which jobs do we perform next?
 Maintenance
 Who is responsible for maintenance?
 When do we do maintenance?
PRODUCTIVITY
 Productivity is a relationship between the output
(product/services) and the input (resources consumed in
providing them) of a business system.
Productivity (P) = Output
Input

 •Input resources may be Labor Wages, Cost of

Equipment, cost of utilities and overhead costs etc.
Productivity Measures
 Single factor Productivity:
 A ratio of outputs to only one input (e.g. labor
productivity, machine utilization, energy efficiency)
 output/(single input)
Output or Output or Output or Output
Labor Capital Materials Energy
 Multifactor Productivity:
 A ratio of outputs to several, but not all, inputs
 output/(multiple inputs)
Output ________
Labor + Capital + Energy + Materials
Single Factor Productivity
 Example: 600 Insurance policies were
processed by 3 employees working 8 hours
per day, 5 days in a week
Productivity = Policies Processed
Employee Hours

= 600 policies
(3 Employees)(40 Hours/Employee)

= 5 policies/hour
Multifactor Productivity
 Convert all inputs & outputs to $ value

 Example: 400 units of a product were made by a team of workers

at a selling price of $10 each. The actual cost inputs were:$400
labour, $1,000 materials, and $300 overhead costs
 Productivity = Quantity at selling price
Labour + Material + O/H
= (400 units)($10/unit)
$400 + $1000 + $300
= $4,000/$1,700
= 2.35
 What is Forecasting?

 Process of
predicting a future
event
 Underlying basis of
??
all business
decisions
 Production
 Inventory
 Personnel
 Facilities

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Forecasting Time Horizons
 Short-range forecast
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce levels, job
assignments, production levels
 Medium-range forecast
 3 months to 3 years
 Sales and production planning, budgeting
 Long-range forecast
 3+ years
 New product planning, facility location, research
and development

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 Distinguishing Differences

 Medium/long range forecasts deal with more

comprehensive issues and support management
decisions regarding planning and products,
plants and processes.

 Short-term forecasting usually employs different

methodologies than longer-term forecasting.

 Short-term forecasts tend to be more accurate

than longer-term forecasts

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Types of Forecasts
 Economic forecasts
 Address business cycle – inflation rate, money
supply, housing starts, etc.

 Technological forecasts
 Predict rate of technological progress
 Impacts development of new products

 Demand forecasts
 Predict sales of existing products and services

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Strategic Importance of Forecasting

 Human Resources – Hiring, training, laying off

workers.

 Capacity – Capacity shortages can result in

undependable delivery, loss of customers, loss
of market share.

 Supply Chain Management – Good supplier

relations and price advantages.

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 Seven Steps in Forecasting

 Determine the use of the forecast

 Select the items to be forecasted

 Determine the time horizon of the forecast

 Select the forecasting model(s)

 Gather the data

 Make the forecast

 Validate and implement results

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 Forecasting Approaches

Qualitative Methods
 Used when situation is vague and little
data exist
 New products
 New technology

 Involves intuition, experience

 e.g., forecasting sales on Internet

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 Forecasting Approaches

Quantitative Methods

 Used when situation is ‘stable’ and historical

data exist
 Existing products
 Current technology

 Involves mathematical techniques

 e.g., forecasting sales of color televisions

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Overview of Qualitative Methods

 Jury of executive opinion

 Pool opinions of high-level experts, sometimes
enhanced by statistical models.

 Delphi method
 Panel of experts, questioned iteratively.

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Overview of Qualitative Methods

 Sales force composite

 Estimates from individual salespersons are
reviewed for reasonableness, then aggregated.

 Consumer Market Survey

 Ask the customer

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Jury of Executive Opinion

 Involves small group of high-level experts and

managers
 Group estimates demand by working together
 Combines managerial experience with
statistical models
 Relatively quick
 ‘Group-think’
disadvantage

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Delphi Method
 Iterative group process, Decision Makers
continues until (Evaluate responses
and make decisions)
consensus is reached.

3 types of participants
 Decision makers Staff
 Staff (Administering
 Respondents survey)

Respondents
(People who can make
valuable judgments)

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Overview of Quantitative Approaches

1. Naive approach

2. Moving averages
Time-Series
3. Exponential smoothing Models

4. Trend projection

5. Linear regression Associative

Model

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 Time Series Forecasting

 Set of evenly spaced numerical data

 Obtained by observing response variable at
regular time periods

 Forecast based only on past values, no other

variables important
 Assumes that factors influencing past and
present will continue influence in future.

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Time Series Components

Trend Cyclical

Seasonal Random

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Components of Demand
Demand for product or service

Trend
component
Seasonal peaks

Actual
demand

Average
demand over
Random four years
variation
| | | |
1 2 3 4
Year

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 Seasonal Component

 Regular pattern of up and down

fluctuations
 Due to weather, customs, etc.
 Occurs within a single year

Number of
Period Length Seasons
Week Day 7
Month Week 4-4.5
Month Day 28-31
Year Quarter 4
Year Month 12
Year Week 52

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Cyclical Component

 Repeating up and down movements

 Affected by business cycle, political, and
economic factors
 Multiple years duration
 Often causal or
associative
relationships

0 5 10 15 20
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 Random Component

 Erratic,unsystematic, ‘residual’ fluctuations

 Due to random variation or unforeseen events
 Short duration and
nonrepeating

M T W T F
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 Naive Approach

 Assumes demand in next

period is the same as
demand in most recent period
 e.g., If January sales were 68, then
February sales will be 68.

 Sometimes cost effective and efficient

 Can be good starting point

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 Moving Average Method

 MA is a series of arithmetic means

 Used if little or no trend
 Used often for smoothing
 Provides overall impression of data over
time.

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Moving Average Example

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Graph of Moving Average
Weighted Moving Average

 Used when trend is present

 Older data usually less important
 Weights based on experience and intuition

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Weighted Moving Average
Weights Applied Period
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights

Actual 3-Month Weighted

Month Shed Sales Moving Average

January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2
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Moving Average and Weighted Moving Average

Weighted
30 – moving
average
25 –
Sales demand

20 – Actual
sales
15 –
Moving
10 – average

5 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Figure 4.2
Exponential Smoothing
 Form of weighted moving average
 Weights decline exponentially
 Most recent data weighted most

 Requires smoothing constant (α)

 Ranges from 0 to 1
 Subjectively chosen

 Involves little record keeping of past data

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Exponential Smoothing

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Exponential Smoothing Example
Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153

Smoothing constant a = .20

New forecast = 142 + .2(153 – 142)

Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153

Smoothing constant a = .20

Effect of Smoothing Constants
 Impact of Different 

225 –

Actual α = .5
demand
200 –
Demand

175 –

α = .1

150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
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 Impact of Different 
 Chose high values of  when
underlying average is likely to
225 – change

 Choose low valuesActual

of  when  = .5
demand
underlying average is stable
200 –
Demand

175 –

 = .1

150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
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