Introduction to Operations Management

1. Briefly describe the terms operations management.

Ans:

Operations management is the business function that is responsible for managing and
coordinating the resources needed to produce a company’s products and services. Without
operations management there would be no products or services to sell. Operations
management is responsible for a wide range of decisions, ranging from strategic decisions, such
as designing the unique features of a product and process, to tactical decisions, such as
planning worker schedules.

Management of the conversion process which transforms inputs such as raw

material and labor into outputs in the form of finished goods and services.

The role of operations management is to transform organizational inputs—human resources,

facilities, materials, technology, and information—into a company’s finished goods or services.

2. Difference between goods and services.

Ans:

BASIS FOR
GOODS SERVICES
COMPARISON

Meaning Goods are the material items that can be Services are amenities, facilities,
seen, touched or felt and are ready for sale benefits or help provided by other
to the customers. people.

Nature Tangible Intangible

Transfer of Yes No
ownership

Evaluation Very simple and easy Complicated

Return Goods can be returned. Services cannot be returned back

once they are provided.

Separable Yes, goods can be separated from the No, services cannot be separated
seller. from the service provider.
 BASIS FOR
GOODS SERVICES
COMPARISON

Variability Identical Diversified

Storage Goods can be stored for use in future or Services cannot be stored.
multiple use.

Production and There is a time lag between production and Production and Consumption of
Consumption consumption of goods. services occurs simultaneously.

3. Identify the three major functional areas of Business organizations and briefly
describe how they interrelate.

Ans:

Every business is managed through three major functions: finance, marketing, and operations
management.

Marketing –
The marketing department is responsible for satisfying customer needs, creating value, and
maintaining long-term relationships. That way, they are satisfied with the company’s offerings
and loyal, willing to continue buying products. As a result, they will continue to pour money into
the company.
The marketing department must work with other business functions such as finance,
operations, and human resources to be successful, including to:

 Ensure to have competent people to support and implement marketing programs and
strategies.
 Recruit new staff to support new programs being implemented, such as research and
development.
 Ensure adequate inventory when needed by consumers and will be marketed.
 Maintain customer loyalty by ensuring products meet specifications and are not defective.
 Set the right selling price, which requires information such as production costs.
 Have an adequate budget to run marketing programs such as promotions and developing
distribution channels.
 Design a discount program for customers who pay on time, encouraging them to remain loyal
to the company.
 Finance –

The finance department deals with corporate money, including managing cash inflows and
outflows, reporting and analyzing them. Adequate finance is essential because other business
functions require financial support to operate effectively. It’s like the blood in our bodies.

The finance department needs the support of other business functions to:

 Have staff with adequate accounting, finance, and related skills.

 Ensure budget allocation according to plans, such as training and development budget,
promotion, and daily expenses.
 Monitor the progress of budget absorption in each department.
 Determine the financing strategy when the operations department plans to purchase capital
goods or launch an investment project.
 Ensure the company is making a profit, which requires information such as sales targets by the
marketing department.

Operation –

The operations department is responsible for ensuring adequate inventory is available for
production, production processes work efficiently, and output quality is within specifications.
The operations department needs support from other departments in planning and carrying out
day-to-day activities, including:

 Sales forecast to prepare production schedules, determine how much output to produce, and
ensure the supply chain runs effectively.
 New products to be produced and their specifications to determine the appropriate production
methods and quality control.
 Budget for running day-to-day operations and for business expansion, for example, buying new
machines.
 Staff, for example, when they need new people to support increased production.
 Termination programs, for example, when switching to new technology with a smaller
workforce, to remain compliant with relevant labor laws.
 Break-even information to set production targets.

4. Describe the operations function and the nature of the Operations manager’s
job?

Ans: Some of the key functions of operations management include:

 Operational planning
 Finance
 Product design
 Quality control
 Forecasting
 Strategy
 Supply chain management

Operational planning: Operational planning is the foundational function of operations

management. Your duties within this function may include:

 Monitoring daily production of goods

 Managing and controlling your inventory
 Keeping tabs on team member performance and well being
 Production planning

Finance: Finance is an essential—and universal—function of operations management because

every company strives to reduce costs and increase profits. As an operations manager, you’ll
ensure company leaders keep the budget in consideration when they make important decisions.
Some of your tasks may include:

 Creating budgets to meet production goals

 Finding investment opportunities
 Allocating budgets and managing resources

Product design: Product designers may be the creatives of the team, but the operations team
is the eyes and ears that gathers information from the market. Once you identify customer
needs and marketing trends, you'll relay what you've learned back to the designers so they can
make a strong product.

Specific tasks your team may handle in this function include:

 Consolidating market research into digestible results

 Communicating results to a product design team
 Offering design direction to help designers devise a product
 Quality Control: Quality control goes hand in hand with product design. After the production
team creates a product, the operations team will ensure it meets quality standards. You’ll need
to test the product to guarantee there are no defects before releasing it to the public. Your
tasks for quality control may include:

 Performing risk analysis to identify potential problems

 Inspecting products to make sure they meet quality standards
 Creating tests to control your product quality
 Documenting any defects or deficiencies of products

Forecasting: Forecasting isn't just a term for the weather—operations teams also use
forecasting to predict the demand for a product. Your team can master forecasting by trying to
answer hypothetical questions like:

 What will the demand for this product be in the future?

 What marketing and promotions should we plan for this product?
 What sales initiatives should we plan for this product?
 Can we estimate the storage costs we’ll need for inventory?
 Can we determine the cost of sourcing and raw materials?

Strategy: Strategy is a broad function of operations management that can involve operational
planning, monitoring, and analysis. The goal of strategic management is to make sure
production decisions align with business goals. Your company’s business objectives may
include:
 Prioritizing customer satisfaction
 Improving the production system
 Controlling costs while maintaining a competitive edge

Supply chain management: If your company produces products or services, your company will
need supply chain management for sourcing, producing, and shipping. You may have a
separate department for the supply chain, but supply chain issues related to internal production
will be yours to handle. The supply chain should flow in a cyclical fashion as follows:

1. Raw materials
2. Supplier
3. Production/manufacturer
4. Distributer
5. Retailer
6. Consumer

 Plant manager.
 Branch manager.
 Department store manager.
 Logistics manager.
 Warehouse/distribution manager.
 Business process improvement analyst.
 Quality control manager
 Lean improvement manager.
 Project manager.
 Production control analyst.
 Facilities manager.
 Chapter-3
Forecasting

ELEMENTS OF A GOOD FORECAST:

• The forecast should be timely.

• The forecast should be accurate and the degree of accuracy should be stated.
• The forecast should be reliable; it should work consistently.
• The forecast should be expressed in meaningful units.
• The forecast should be in writing.
• The forecasting technique should be simple to understand and use.
• The forecast should be cost effective.

STEPS IN THE FORECASTING PROCESS

1. Identify the 2. Collect historical 3. Plot data and

purpose of forecast data identify patterns

6. Check forecast 5. Develop/compute 4. Select a forecast

accuracy with one or forecast for period of model that seems
more measures historical data appropriate for data

7.
Is accuracy of 8b. Select new
forecast forecast model or
acceptable? adjust parameters of
existing model

9. Adjust forecast based 10. Monitor results

8a. Forecast over
on additional and measure forecast
planning horizon
qualitative information accuracy
and insight
Formula:
Moving Average:

Ex: Determine the forecast for period six by using Three Period Moving Average Method

Period Demand Forecast

1 42

2 40

3 43

4 40

5 41

6 ?
Weighted Moving Average:

Ex: Determine the forecast for period six by using Weighted Moving Average Method
where the Weights are 0.3, 0.4, 0.1 and 0.2.
 Period Demand Forecast

1 42

2 40

3 43

4 40

5 41

6 ?

Answer:
𝐹6 = 0.4(41) + 0.3(40) + 0.2(43) + 0.1(40) = 𝟒𝟏

EXPONENTIAL SMOOTING:
A weighted averaging method based on previous forecast plus a percentage of the
forecast error.

Ex: Determine the forecast from Period three to period six by using Exponential Method where
the value of smoothing Constant is 0.10.
Period Demand Forecast

1 42

2 40

3 43 ?

4 40 ?

5 41 ?

6 ?
Linear Trend Equation

𝑛 ∑ 𝑡𝑦 − ∑ 𝑡 ∑ 𝑦
𝑏=
𝑛 ∑ 𝑡 2 − (∑ 𝑡)2
∑𝑦 − 𝑏∑𝑡
𝑎=
𝑛
Here n= Number of data
Forecast Accuracy:
∑|𝑨𝒄𝒕𝒖𝒂𝒍−𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕|
Mean Absolute Deviation (MAD): MAD = (Average Absolute
𝒏
Error)
∑(𝑨𝒄𝒕𝒖𝒂𝒍−𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕)𝟐
Mean Squared Error (MSE): MSE = (Average of Squared Error)
𝒏−𝟏
𝑨𝒄𝒕𝒖𝒂𝒍−𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕
∑{| |×𝟏𝟎𝟎}
Mean Absolute Percent Error (MAPE): MAPE = 𝑨𝒄𝒕𝒖𝒂𝒍
(Average
𝒏
absolute percent error)

Example: Compute MAD, MSE and MAPE for the given following data:
Formula:
1. Naive Ft-1 =At
∑ 𝐴𝑡−1
2. Moving Average 𝐹𝑡 = F=Forecast for time period t,
𝑛
A= Actual value in Period
n= Number of periods in moving average
3. Weighted Moving Average 𝐹𝑡 = ∑ 𝑊𝑡 (𝐴𝑡 )
4. Exponential Smoothing 𝐹𝑡 = 𝐹𝑡−1 + 𝛼(𝐴𝑡−1 − 𝐹𝑡−1 ) 𝛼= Smoothing constant
∑|𝑨𝒄𝒕𝒖𝒂𝒍−𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕|
5. Mean Absolute Deviation (MAD): MAD = (Average Absolute
𝒏
Error)
∑(𝑨𝒄𝒕𝒖𝒂𝒍−𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕)𝟐
6. Mean Squared Error (MSE): MSE = (Average of Squared Error)
𝒏−𝟏
𝑨𝒄𝒕𝒖𝒂𝒍−𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕
∑{| |×𝟏𝟎𝟎}
7. Mean Absolute Percent Error (MAPE): MAPE = 𝑨𝒄𝒕𝒖𝒂𝒍
(Average
𝒏
absolute percent error)
Technique 1 is superior in this comparison because its MAD is smaller, although six
observations would generally be too few on which to base a realistic comparison.