Q1 it is the job of operations managers to convince the stakeholders that the investment in plant and equipment is going to enhance

the value of the investments already held by them in the organisation. Explain some of the concepts that can be considered in analysing the investment. (ROI; EBIT; ROA; cash flow; EVA) Return on Investment (ROI)? The ROI is a fundamental measure of efficiency with which a firm manages its assets. It answers the question: How much profit is the firm generating from the use of its assets? Return on investment is a very popular unit of measurement because it is simple and versatile. Another advantage of ROI is that it can be modified to suit the situation according to what you have included as costs and returns. The return on investment formula: ROI = Gain from Investment - Cost of Investment / Cost of Investment Earnings before Interest and Tax (E.B.I.T) 2 The EBIT is the revenue earned by the company without regard to how it is financed. If it is the rate of corporate tax, then EBIT (1 t) gives the Income after Tax deduction. ROI is defined as the ratio of Income after tax to the value of assets, indicated as a percentage. That is. ROI = EBIT (1-t) / Assets X 100 Where, t = Tax rate on ordinary income Return on Assets (ROA) 3 The RAO indicates profitability of a company relative to its own total assets. It tells how efficiently a management is using its assets to generate earnings. It is the ration of any company's annual incomes by its total assets; ROA can be displayed as a percentage. Sometimes this is also called as "return on investment". The formula for return on assets is: ROA = Assets Total Income Net Cash Flow The Operating Cash Flow (cash flow provided by the operations) is a central and crucial concept for financial management. It measures the ability of the company to generate a flow of cash, through its day-to-day operations and thus evaluates its capacity for survival and for long-term growth. The Operating Cash Flow (OCF) is the basic and fundamental source of cash for the investment and financing policies of the company. It is better if it is higher as it gives more flexibility to a company to build a long-term strategy without constraint and interference from economy. OCF = Profit after Taxes, Interest, Dividend payments + Depreciation Economic Value Added (EVA) According to the concept of EVA, a company or division creates value for owners only when its operating income exceeds the cost of capital employed. EVA is generally calculated as the net operating after taxes profit minus a charge for the opportunity cost of the capital invested. EVA can be calculated as: EVA = NOAT COCC Where, NOAT = the net operating after taxes profit COCC = A charge for the opportunity cost of the capital invested.
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It is an estimate of the amount through which earnings exceed or fall short of the required minimum rate of return for shareholders or lenders at comparable risk. EVA measures the difference between the pre-investment and post-investment value for the business. 2 Explain the regional factors that affect location decision. (Location of raw materials; Location of markets; Labour factors; Climate and taxes - 4 X 2.5 marks= 10 marks) Regional Factors that Affect Location Decisions There are several regional factors that affect Location Decision. Some of them are: Market location The location of Raw Materials Labor issues like (wage rates in that particular area, labor productivity and commitment towards work) Taxes and climate also affect the Location Decision in any particular region.

Location of raw materials The logic for locating a facility near the source of raw materials may be either necessity or perish ability or transportation costs. For example, mining operations, has to be located near the mines. Facilities for food processing or canning of fruits may warrant proximity to raw material because of perish ability. In case of certain products such as finished steel, there is a considerable reduction in the weight / volume during the process of conversion from raw material to finished goods, making transportation of raw materials a key element in production costs, and hence the facility location may be closer to the supply of iron ore due to transportation costs. Location of markets Location of markets influence location decisions since in many cases, profit-oriented companies tend to locate their facilities near the market as a part of their competitive strategy. Retail sales and service organizations, typically, are found in the centre of the markets they serve; example fast-food restaurants, supermarkets, dry-cleaners, etc. Since in most cases, the products of different competitors are not much differentiated, convenience to the customer becomes a key attribute. This is so even in case of banks, drugstores, etc. Some firms need to locate their facilities near their markets in view of the perish ability of their products such as bakery products, flowers, fresh food stores. For some other firms, physical distribution costs may become the key criterion. In some other cases, proximity to customers is sought because of the need for close customer contacts. Labour factors In arriving at a decision on the location of a facility, labor factors also play a key part. This is particularly so for labor-intensive organizations. Some of the factors considered are labor cost, labor productivity, tendency to form unions and generally, workers attitude towards work. Climate and taxes In some cases, extreme climatic conditions may be avoided by some companies since it may affect worker attendance or create road blocks thus hampering delivery schedules. Taxes are

also a major consideration, especially if different states / regions have a totally different tax regime. 3 Explain the nine fundamental propositions about organisational effectiveness. (Explanation of 9 fundamental propositions) Exploring Organisational Effectiveness The phrase, Organisational effectiveness, is commonly referred when; discussing organisations have achieved maximum performance. Probably one of the best overviews of the concept of organisational effectiveness is provided by Herman and Renz (2002). The authors identified nine fundamental propositions about organisational effectiveness. Their propositions were written about non-profit organisations. However, they also apply to organisations in general. In general, to apply to any organisations the description of the nine fundamental propositions are modified as follows: 1. Organisational effectiveness is always a matter of comparison When determining the effectiveness of an organisation, one has to analyse to what are you comparing the Organisation, to conclude whether it is effective or not? For example, are you comparing to a certain set of best practices or to another highly respected Organisation? 2. Organisational effectiveness is multi-dimensional Organisational effectiveness cannot be measured by one indicator. For example, a budget surplus or a strong product outcome does not guarantee that, the organisation has achieved overall maximum organisational effectiveness. 3. Boards make a difference in Organisational effectiveness, but how is not clear There is a correlation between effective boards and effective organisations. However, it is not clear that one necessarily causes the other. 4. Organisational effectiveness is a social construction This concept lies in the eyes of the beholder. One person might have a completely different interpretation than another person. 5. More effective Organisations are more likely to use correct Management practices The authors are very keen to point out that the reverse is not necessarily true. That is, those Organisations that use correct management practices will be judged as being effective. 6. Claims about best practices warrant critical evaluation The authors explained the results of their study, which did not agree with the wide assertion that certain practices, for example, automatically produce the best Boards. 7. Measures of responsiveness offer solutions to differing judgments This proposition reframes the concept of effectiveness for an Organisation to how well that organisation is doing in responding to whatever is currently important. 8. It can be important to distinguish different types of Organisations This is true to progress in understanding the practices and strategies that lead to organisational effectiveness. 9. Network effectiveness is as important to study as Organisational effectiveness This proposition recognises that, the effectiveness of an organisation might depend to a great extent on the effectiveness of the wide network of organisations in which it operates.

4 Describe the seven forms of waste. Explain how 5Ss are used to eliminate them. (Seven forms of waste 7.5 marks; 5 S 2.5 marks) The Seven Forms of Waste Toyota has recognized seven types of waste, which have been found to be applicable in many different types of operations both service and production and which form the core of lean philosophy. Over-production: According to Toyota, producing more than what is immediately needed by the next process in the operation is the greatest cause of waste. Waiting time: Waiting time is the pause between two inter-related processes (i.e. waiting for the inputs from the previous process to get started with the next process). Equipment effectiveness and labour effectiveness are two popular measures which are widely used to measure equipment and labour waiting time, respectively. Transport: Moving items around the operation does not add value. Layout changes which bring processes closer together such as improvements in transport methods and workplace organization can all reduce waste. Process: The process itself may be a source of waste. Several operations may exist only because of poor component design or poor maintenance. As such, these processes can be eliminated. Inventory: All inventories should become an objective for elimination. However, it can be reduced only by tackling the causes of inventory. Motion: Simplification of work is a rich source of reduction in the waste of motion. An operator may look busy but sometimes no value is being added by the work. Defectives: Quality waste is often very significant in operations. Total costs of quality are much greater than that has traditionally been considered. It is, therefore, more important to address the causes of such costs.

The 5Ss The 5-S terminology originated in Japan and even though the translation into English is approximate, they are generally taken to represent the following: 1. Sort: Remove what is not needed and keep what is needed 2. Straighten: Position things in such a way that they can be easily reached whenever they are needed 3. Shine: Keep things clean and tidy; no refuse or dirt in the work area 4. Standardize: Maintain cleanliness and order. Ensure perpetual neatness 5. Sustain: Develop a commitment and pride in keeping to standards

5 Discuss the Independent demand item techniques. (Reorder point (or Perpetual) Model 5 marks; Periodic review models - 5marks) Reorder Point (or Perpetual) Model The Reorder Point (ROP) or Perpetual model formula allows determining the Safety Stock (SS) required to achieve a certain cycle service level. In general, the longer the lead times and greater the variability of demand and lead times, more is the need for safety stock. Assume that an inventory holding is continually depleted. The ROP is that level of inventory which is just sufficient to help during the period that it takes for your supplier to deliver. More precisely, it is the forecasted demand expected during the lead time. Of course the demand during the lead time may not materialise as we expect, if: delivered. -out before the shipment is delivered. To allow this possibility, SS is maintained. As a result, the formula for the reorder point is: ROP = DLT+SS Where, DLT = forecast demand during the lead time = expected average demand per period x number of periods for lead time SS = Safety Stock A well-used variation of the ROP inventory model is called the two bin system. Here each inventory item is literally kept in two bins, side by side. Inventory is drawn out from the first bin until it is empty. This is the ROP. There is sufficient inventory in the second bin to cover expected demand during the delivery lead time. It is a simple, visual system that is commonly used for low-cost C type items. Figure 1 illustrates the sawtooth pattern.

Figure 1: ROP Inventory Model

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Periodic Review Model In many cases, it is more practical to order several items at the same time, in case if there is a common supplier. So it makes sense to review all items from the common supplier periodically and order just what is needed. Normally inventory is topped to a target level, and for this reason this model is also known as the mm/max model. This inventory model is still widely used because of the following common situations: Where individual transactions are difficult to record Where shelf life is a problem Where joint orders are placed with a supplier The first of these situations is rapidly disappearing in supermarkets, where there is increased use of point of sale terminals. The question with a periodic system is how often we must make the review. Usually, this is a practical consideration, perhaps coinciding with a scheduled order delivery cycle. Figure 2 graphically depicts the situation where L is the lead time, R is the review period and Q is the order quantity. Note that an order quantity determined at A must be sufficient to last through the review period and the next lead time. And also note that the quantities are different for each review period.

Figure 2: The Periodic Review Model The relevant formulas are: M = DL+DR+SS Where, M = Target inventory level DL = Forecast demand during the lead time DR= Forecast demand during the review period SS = Safety stock
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6 Explain the types of failures that occur in operations. (Design failures; Facilities failures; Staff failures; Supplier failures) Types of failures that occur in operations are: Design failures Facilities failures Staff failures Supplier failures Design failures The overall design of an operation can be the root cause of failure. In its design stage an operation might look fine on paper, only when it has to cope with real circumstances does inadequacies become evident. Some design failures occur because a characteristic of demand was overlooked or miscalculated. A production line might have been installed in a factory which in practice cannot cope with the demands placed upon it or a theatre front-of-house layout might cause confused and jumbled customer flow at peak times. In both the examples, there is no unexpected demand placed on the operations. It is just the straightforward errors in translating the requirements of demand into an adequate design that causes the problems. Other design-related failures occur because the circumstances under which an operation has to work are not as expected. Consider the following examples, a biscuit production line might have been installed assuming a certain pack size but then the market demands a larger pack size which causes the machine to jam occasionally. A theatres lighting controls might have been designed for simple lighting sequences, but because it now takes bookings for shows with complex lighting needs, the control system overloads and fails. In both cases the demands placed on the operation were unexpected at the point of design and this led to some kind of failure. But they are still considered as design failures. Adequate design includes identifying the range of circumstances under which the operation has to work and designing accordingly. Facilities failures All the facilities (i.e., the machines, equipment, buildings and fittings) of an operation are liable o break down. The breakdown may only be partial, for example a worn or marked carpet in a hotel or a machine that can only work at half its normal rate. Alternatively, this can be regarded as a failure- a total and sudden cessation of operation. Either way, it is the effects of a breakdown that should be considered. Some breakdowns can cause a large part of the operation to halt. For example, a computer failure in a chain of supermarket could paralyse several large stores until it is repaired. Other failures might have a significant impact only if they occur at the same time as other failures. Staff failures Staff failures occur due to errors and violations. Errors are mistakes in judgment with hindsight. A person must have done something different that might result in significant deviation from normal operation.
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For example, if the manager of a sports shop fails to anticipate an increased demand for footballs during the World Cup, the shop runs out of stock and fail to supply its potential customers. This is an error of judgment. Violations are acts that are clearly contrary to defined operating procedure. For example, if a machine operator fails to clean and lubricate the machine in the prescribed manner, it is eventually likely to fail. This indicates that the operator has violated a set procedure. Supplier failures Any failure in the delivery or quality of goods and services into an operation can cause failure within the operation. The failure of the band to turn up at a concert causes the whole event to fail. Similarly, if the band does show up but proves to be of dubious talent, the concert could also be regarded as a failure. The more an operation relies on suppliers of materials or services, the more it is liable to failure, which is caused by missing or sub-standard inputs. Customer failures Not all failures are (directly) caused by the operation or its suppliers. Customers can misuse the products and services which the operation has created. For example, a washing machine might have been manufactured in an efficient and fail-free manner, yet the customer who buys it could overload it or misuse it in some way which causes it to fail. The customer is not always right. Customers inattention, incompetence or lack of common sense can be the cause of failure. However, merely complaining about customers is unlikely to reduce the chances of this type of failure. Most organisations accept that they have a responsibility to educate and train their customers and to design their products and services, so as to minimise the chances of failure. For example, the sequence of questions at automatic teller machines (ATM) is designed by banks to make their operation as fail-free as much as possible.