(May 2012)

Master of Business Administration - MBA Semester 3

Operations Management Specialization
OM 0010 - Operations Management (4 credits)
(Book ID:B1232 )
ASSIGNMENT- Set 1
Marks 60
Note: Each Question carries 10 marks. Answer all the questions.
Q1. Describe the system perspective of operations management.
Answer : A System is a group of interrelated items in which no item studied in
isolation will act in the same way as it would in the system. A system is divided
into a series of parts or subsystems, and any system is a part of a larger system.
The systems boundary defines what is inside the system and what is outside. A
systems environment is everything outside the system boundary that may have
an impact on the behaviour of the system. A systems inputs are the physical
objects of information that enter it from the environment and its outputs are the
same which leave it for the environment.
Systems view of operations management states that activities in an operations
system can be classified as inputs, transformation process and output. Inputs are
classified into three general categories-external, market and primary resources.
Transformation resources are the elements that act on, or carry out, the
transformation process on other elements. These include such elements as
labour, equipment/plant and energy. The nature and mix of these resources will
differ between operations. The transformed resources are the elements which
give the operations system its purpose and goal. The operations system is
concerned with converting the transformed resources from inputs into outputs in
the form of goods and services. There are three main types of transformed
resource of materials which can be transformed either physically(e.g.
manufacturing),by location (e.g. transportation),by ownership(e.g. retail) or by
storage(e.g. Warehousing)
For our study of systems view of an organization we chose, Vedanta Resources
Pvt.Ltd.We concentrated on its Goa unit, which is called Vedanta Aluminium
ManufacturingUnit.The unit produces aluminium from aluminium oxide through
electrolytic reduction. We consider the factory as a systems compromising of
various subsystems. As we defined earlier, a system consists of these major
components:

Input- Input into an operation systems can be classified into these

categories.:

External- Legal inputs (the Companies Act etc), Economic, Social, Technological
(Electrolytic cells, power generation machinery etc )

Market Competition (HINDALCO, NALCO,BALCO etc), Customer Desires,

Product info

Department of Management Studies, IIT Rookie Page 3

Primary resources Material (Alumina, raw aluminium ore ), personnel, capital,

utilities Here the input is Al2 O3 or Alumina. This is the aluminium ore which is
extracted from earth

Conversion Subsystems

- The ore is transformed into pure aluminium. The transformation process is

carried out mainly through electrolytic reduction.

Output - The output consists of pure aluminium.

Direct

Products : Pure Aluminium

Services : Aluminium Manufacturing

Indirect

Waste

Pollution

Technological Advances

Carbon Section This section basically deals with the preparation and
maintenance of Carbon anode. The electrolytic process used for reducing
Alumina (Al 2 O3) to pure aluminium. For carrying out this process the
anode used is made up of carbon mainly graphite. This section deals with
the construction and maintenance of Carbon anodes.

Pot Room Cell This is the section where the process of electrolysis
actually takes place. Here the raw aluminium ore is reduced to aluminium
by electrolysis with the help of carbon anodes. This section deals with the
complete process. The electrolytic cells are called Pot and thus the
department is called Pot Room Cell

Cast House This section deals with processing of pure aluminium. Once
the aluminium has been extracted from the ore, it needs to be converted
into more suitable forms which can be further sold in the markets. The
extracted aluminium is casted into ingots and plates which are more
suitable for selling in the market.

Captive Power Plant This section of the plant deals with generation of
electricity for running the whole plant. The electricity generated here is
used by all the other departments.

Each section can be treated as a system in its own and can be divide into
following general parts :

Human Resource
Finance
Production and Operation
Logistics
Information Technology

These sub systems are present in all the 4 major sections. They are centrally
controlled by the Plant Management Office(PMO).

These sub systems are present in all the 4 major sections. They are centrally
controlled by the Plant Management Office(PMO).The PMO controls the central
decision making and is responsible for running all the departments in sync. The
PMO ensures that the decisions made by the departments do not contradict and
a healthy harmony is maintained so that all of them work together as a part of a
system.

Conclusion
Thus we see how systems view in operations can be put to a practical use. The
idea behind systems model is that the operations function can concentrate solely
on transforming input of raw material into goods and services without
considering the external environment. The systems view gives a very simplified
view of the company and thus helps us in understanding the basic processes in a
company. We can see what are the major areas of attention in accompany and
helps us in understanding the hierarchy and layout of an organization. However
the disadvantages of this model includes the slowness of response to change in
environment as they are transmitted through various connected functions and
the inability of operations to develop in response of the needs of the customers.
Systems view gives us an oversimplified view. In real life the processes are much
more complex and cannot be differentiated so easily

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Q2. Explain the operations strategy model.

Answer : In some ways the very term operation strategy sounds like a
contradiction in terms. Operations is, after all, about the day-to-day creation and
delivery of products and services. So how can it be strategic? In fact, the issue is
one of distinguishing between two words which are similar but have different
meanings. These are operations and operational. Operations refers to those parts
of the business which are concerned with producing products and services.
Operational is the opposite of strategic in the sense that it means short-term
and limited in its influence. Other functions of the business such as marketing
or finance have both strategic and operational activities. For example, marketing
strategy covers the overall long-term approach to how the organisation wants to
position itself in its markets. The operational side of marketing refers to the day
by day tactics of how to manage things like advertising, pricing, and so on. It is
just the same with operations. Operations strategy looks at the long-term issues
of how to manage the resources which produce products and services. The more
operational subject of operations management looks at the more detailed and
shop floor issues of designing, planning and controlling, and improving the
resources which produce products and services.

Your learning objectives

This is what you should be able to do after reading Chapter 3 and working
through this study guide.

Understand the difference between operations strategy content and

operations strategy process.
Understand the difference between a top-down and a bottom-up view of
operations strategy.
Understand the difference between a market requirements perspective
and an operations resources perspective of operations strategy.
Describe some of the more important steps in the process of operations
strategy formulation.

Content and process

The content of operations strategy is concerned with the specific decisions which
shape and develop the long-term direction of the operation. Think of content as
the building blocks of an operations strategy. The process of operations strategy
refers to the procedures which are used to formulate operations strategies. It is
the way we go about the activity of devising strategy. Think of operations
strategy content as what the organisation is deciding to do and process as how
the organisation has made that decision.

Obviously operations strategy is a huge subject. And although this textbook

takes a slightly more strategic view than most books in the area, Chapter 3 only
scratches the surface of the subject. The first part of the chapter (the larger

part) looks at the content of operations strategy by taking four, quite distinct
perspectives. The second part of the chapter looks at the process of operations
strategy, mainly by describing two relatively well-known processes for devising
an operations strategy.

Top-down versus bottom-up perspectives of operations strategy

One view of operations strategy (the more traditional one) is operations strategy
is one of several functional strategies which are governed by decisions taken at
the top of the organisational tree. According to this top-down approach, overall
business strategy sets the general direction of the organisation, this is then
interpreted by the different functional areas of the company (marketing, finance,
operations, etc.) in their functional strategies. By contrast, the bottom-up view
of operations strategy is to see strategic decision making as an accumulation of
practical experiences. After all, organisations would find it difficult to invent
strategies in a total vacuum. Their ideas are formed from their previous
experience of dealing with customers, suppliers and their own processes. This is
the idea behind emergent strategies. These are strategic ideas which emerge
over time as an organisation begins to understand the realities of their situation.

When thinking about top-down versus bottom-up perspectives of operations

strategy, remember that they are not rival ideas. In reality we can see both topdown and bottom-up influences on strategy making. What is important to
remember is that the pure top-down view of operations strategy is simplistic in
the sense that it does not recognise the importance of learning through
experience.

Market requirements versus operations resources

The chapter goes on to propose another apparent clash of perspectives that

between market requirements and operations resources. Again, it is a
comparison between what has been the orthodox view (market requirements
perspective) and what is a more recent view (the operations resource
perspective). Again also, it is not a real clash in the sense that neither
perspective is right or wrong.

The market requirements perspective starts from the commonsense notion that
any operations strategy should reflect what the organisation is trying to do in its
markets. Companies compete in different ways, some may compete primarily on
cost, others on the excellence of their products or services, others on high levels

of customer service, others on customising their products and services to

individual customer needs, and so on. The operations function therefore must
respond to this by providing the capabilities which allow it perform in an
appropriate manner to satisfy the requirements of its market. In some ways this
is a translation task because the techniques and language used by marketing
managers to understand the requirements of markets are different to the
language and techniques used by operations managers to manage their
productive resources. So, for example, Figure 3.6 shows how competitive factors
can be translated into performance objectives. Different ways of competing
imply different competitive factors and therefore different performance
objectives. Table 3.1 gives an example of how this translation process works in
the banking industry. See the figure below for another example. It describes and
instrument manufacturer with two product groups.

The first product group is a range of standard electronic medical equipment

which is sold off the shelf direct to hospitals and clinics. The second product
group is a wider range of electronic measuring devices which are sold to original
equipment manufacturers who incorporate them in their own products. These
electronic measuring devices often have to be customized to individual customer
requirements.

The analysis of the two product groups shows that they have very different
competitive factors. Therefore different performance objectives are required from
the manufacturing operation. Such very different competitive needs could
possibly require two separate operations one for each product group each
focused on its own objectives and devoted to providing the things which are
important in its particular markets.

The important issue to remember is that there must be a connection between

what the market wants (market requirements) and what the operation can do
well (operations resource capabilities). The box in Chapter 3 on Ryan air, one of
the most successful European low cost airlines, illustrates this well. The box also
makes reference to the original low cost airline in the USA Southwest Airlines.
Here is some more information about Southwest Airlines.

Southwest airlines undercuts its rivals

While most of the western worlds airlines are trying to outdo their competitors
by providing ever more sophisticated services, including excellent catering and
the latest entertainment technology, one company has chosen to return to its
core product (transportation), and cut out almost all the extras. Southwest

Airlines, based in Dallas, is one of the few airlines in the US which can boast of
having been consistently profitable throughout the last two turbulent decades.
Its strategy has been to compete on price, with cut-price advance booked fares
as much as 50 per cent below those of larger competitors. Indeed some of its
larger competitors have been forced to defend their markets by attempting to
copy Southwests formula and price.

The idea of providing air travel in the style of bus travel is certainly not unique,
and there have been many failures, particularly in the US. For Southwest,
however, the consistency and coherence of the operations strategy have played
a big part in its survival and growth to a business that now has a five per cent
share of the enormous US market. To compete on price over the long term,
operations costs must be the lowest in the market, and that is precisely what the
airlines flamboyant founder and owner, Herbier Kelleher, has achieved, often in
quite unique ways. Passengers notice the difference even before they enter the
plane, as Southwests numbered boarding passes are plastic and reusable.
Passengers are called forwards in groups, but once they are in the plane they are
free to sit where they wish. There is no attempt to provide the normal meals
service, so passengers are just offered a bag of peanuts, a glass of orange juice,
with a narrow choice of drinks available to those that wish to purchase them.
Passengers, and even crew, often bring their own food and drinks with them.

Despite the very obvious lack of conventional offerings such as in-flight films and
the personal attention of the cabin crew, passengers seem impressed with the
whole package, scoring the airline highly in most research surveys. The staff are
renowned for their informal yet personable approach, and this is reinforced by
their simple uniform of brightly coloured shorts and T-shirts. The companys
style and culture are reinforced by the owner, who has been seen on board some
flights, for example, wearing an Easter rabbit suit and entertaining the
passengers in his own particular way.

The simplicity of the entire service gives Southwest a particularly strong cost
advantage on short routes, where the turnaround time at airports becomes
critical. Because there are no meals, there is less mess to clear up, and so the
cabin is routinely cleaned by the crew. There is also less time needed to prepare
the galley, as no meals are carried, and the overhead costs of organizing meals
and entertainment is eliminated.

Southwest has shown that it is possible to challenge conventional ways of

operating an airline and has provided value to its customers at minimum cost. Its
service doesnt suit everyone, but those who do buy a ticket at least get what
they want and expect.

The operations resource perspective works the other way round from the market
requirements perspective. It starts from the view that the success of any
competitive strategy is not just a matter of selecting the current market
position and then adjusting the operations various resources and processes to
fall into line with it. Operations resources are often complex to manage and have
an inertia which cannot be overcome instantly in order to correspond to changes
in the market. But also, more positively, the resources and processes within an
operation can have a set of capabilities which can be harnessed and exploited
in the market place. The problem with just following the market in a slavish
manner is that other competitor organisations will be doing the same thing.
Maybe it would be better to identify the things which the company is particularly
good at (its core capabilities, or core competences) and select the parts of the
market in which those particular skills will be valued by customers. So, instead of
saying, There is an attractive part of the market, lets go and compete in it. Oh,
and tell the operations function it had better try and be good in the things that
those particular customers want, the company is saying, We really are
particularly good at doing certain things, lets try and find a part of the market
that needs us to be good at those particular things, because then it will be very
difficult for our competitors to copy us. According to this view, the decisions
taken within an operations strategy should primarily have the objective of
enhancing those core capabilities of the operation which competitors will find
difficult to imitate.

Again, of course these two perspectives need not necessarily clash. Ideally
organisations will attempt to find parts of the market which are attractive to it,
which at the same time allow it to exploit its core capabilities.

Air travel takes of

Air travel has grown substantially over the last 30 years. Although, like any
industry, it has had its ups and downs world politics, wars and economic cycles
all affect our tendency to travel growth in passenger miles travelled is forecast
to continue. Increasing volume prompted changes in airline operations process
technology, such as the introduction of wide-bodied aircraft. This reduced airline
costs even further and has been translated into lower prices. In addition,
changes in the industry, most especially deregulation of the market in some
parts of the world and the privatization of some airlines, have also kept costs
down.

The increasing importance of price-based competition is reflected in the figure

below which shows the growth in volume (and forecast volume) in the industry
and the fall in yields. Yield is the revenue which the airlines make for every mile
they carry a passenger. At around 22 cents per passenger mile in 1970, yield has
fallen to around 13 cents per passenger mile and is expected to continue to fall
away. Because costs have also been declining, this fall in yield reflects an even
more significant fall in real prices.

Increasing volumes and increasing price competition have also resulted in a

change in the way airlines organize their operations. Especially in the US, airlines
have moved to a hub-and-spoke arrangement of routes. This involves aircraft
flying between hub airports where passengers connect with flights to other
hubs. It is the same principle which is used in mail-sorting offices. Although the
system is not always convenient for some passengers, the airlines see it as the
only way to standardize their routes, and keep costs down.

Operations strategy influences performance objectives

To some extent all the decisions

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made in all strategy areas will exert some influence on all the performance
objectives of the operation. Some strategies, however, are particularly influential
on certain objectives. The table below highlights those objectives which will be
particularly influenced by each strategy (though remember that the important
links between strategies and objectives will to some extent depend on the type
of operation and the circumstances in which it finds itself).
Strategies with a particularly significant efect on particular
performance objectives

Quality

New product/service development strategy

Speed

Dependability

Facilities strategy

Cost

Vertical integration strategy

Technology strategy

Flexibility

Workforce and organization strategy

Capacity adjustment strategy

Supplier development strategy

Inventory strategy

Planning and control systems strategy

Improvement strategy

Failure prevention and recovery strategy

The process of operations strategy

The final part of the chapter illustrates two processes, the Hill methodology and
the Plats-Gregory procedure. Both have similarities but neither claims to be a
complete answer, or how to do it process. When reading about these two
processes bear in mind that they are both primarily market requirements
driven.

Q3. Explain the significance of various parameters /techniques used to

evaluate decisions relating to plant and equipment.

Answer : Property, Plant, and Equipment is a separate category on a classified

balance sheet. It typically follows Long-term Investments and is oftentimes
referred to as PP&E. Items appropriately included in this section are the

physical assets deployed in the productive operation of the business, like land,
buildings, and equipment. Note that idle facilities and land held for speculation
are more appropriately listed in some other category on the balance sheet, like
Long-term Investments. Within the PP&E section, items are customarily listed
according to expected life. Land comes first, followed by buildings, then
equipment. For some businesses, the amount of Property, Plant, and Equipment
can be substantial. This is the case for firms that have large investments in
manufacturing operations or significant real estate holdings. Other service or
intellectual-based businesses may actually have very little to show within this
balance sheet category.

Below is an example of a typical PP&E section on the balance sheet:

In the alternative, many companies relegate the preceding level of detail into a
note accompanying the financial statements, and instead just report a single
number for "property, plant, and equipment, net of accumulated depreciation"
on the face of the balance sheet.

COST ASSIGNMENT
The correct amount of cost to allocate to a productive asset is based on those
expenditures that are ordinary and necessary to get the item in place and in
condition for its intended use. Such amounts include the purchase price (less any
negotiated discounts), permits, freight, ordinary installation, initial
setup/calibration/programming, and other normal costs associated with getting
the item ready to use. These costs are termed capital expenditures and are
assigned to an asset account. In contrast, other expenditures may arise that are
not ordinary and necessary, or benefit only the immediate period. These costs
should be expensed as incurred. An example is repair of abnormal damage
caused during installation of equipment.

Assume that Peculate purchased a new lathe. The lathe had a list price of
$90,000, but Peculate negotiated a 10% discount. In addition, Peculate agreed to
pay freight and installation of $5,000. During installation, the lathes spindle was

bent and had to be replaced for $2,000. The journal entry to record this
transaction is:

INTEREST AND TRAINING COST

Interest paid to finance the purchase of property, plant, and equipment is
expensed. An exception is interest incurred on funds borrowed to finance
construction of plant and equipment. Such interest related to the period of time
during which active construction is ongoing is capitalized. Interest capitalization
rules are quite complex, and are typically covered in intermediate accounting
courses.

The acquisition of new machinery is oftentimes accompanied by employee

training regarding correct operating procedures. The normal rule is that training
costs are expensed. The logic is that the training attaches to the employee not
the machine, and the employee is not owned by the company. On rare occasion,
justification for capitalization of very specialized training costs (where the
training is company specific and benefits many periods) is made, but this is the
exception rather than the rule.

LAND
When acquiring land, certain costs are ordinary and necessary and should be
assigned to Land. These costs include the cost of the land, title fees, legal fees,
survey costs, and zoning fees. Also included are site preparation costs like
grading and draining, or the cost to raze an old structure. All of these costs may
be considered ordinary and necessary to get the land ready for its intended use.
Some costs are land improvements. This asset category includes the cost of
parking lots, sidewalks, landscaping, irrigation systems, and similar
expenditures. Why separate land and land improvement costs? The answer to
this question will become clear when depreciation is considered. Land is
considered to have an indefinite life and is not depreciated. Alternatively, parking
lots, irrigation systems, and so forth do wear out and must be depreciated.

LUMP-SUM ACQUISITION
A company may buy an existing facility consisting of land, buildings, and
equipment. The negotiated price is usually a turnkey deal for all the

components. While the lump-sum purchase price for the package of assets is
readily determinable, assigning costs to the individual components can become
problematic. Yet, for accounting purposes, it is necessary to allocate the total
purchase price to the individual assets acquired. This may require a proportional
allocation of the purchase price to the individual components.

To illustrate, assume Dibitanzl acquired a manufacturing facility from Malloy for

$2,000,000. Assume that the facility consisted of land, building, and equipment.
If Dibitanzl had acquired the land separately, its estimated value would be
$500,000. The estimated value of the building is $750,000. Finally, the
equipment would cost $1,250,000 if purchased independent of the package.
The sum of the values of the components comes to $2,500,000 ($500,000 +
$750,000 + $1,250,000). Yet, the actual purchase price was only 80% of this
amount ($2,500,000 X 80% = $2,000,000). The accounting task is to allocate the
actual cost of $2,000,000 to the three separate pieces, as shown by the
following:

The preceding allocation process proportionately assigns cost based on value, as

shown by this illustration:

The above calculations form the basis for the following entry:
It is important to note that the preceding allocation approach would not be used
if the asset package constituted a business. Those procedures were briefly
addressed in the previous chapter.

JUDGMENT
Accounting may seem to be mechanical. However, there is a need for the
exercise of judgment. Professional judgment was required to estimate the value
of the components for purposes of making the preceding entry. Such judgments
are oftentimes an inescapable part of the accounting process. Note that different
estimates of value would have caused a different proportion of the $2,000,000 to
be assigned to each item.

Does the allocation really matter? It is actually very important because the
amount assigned to land will not be depreciated. Amounts assigned to building
and equipment will be depreciated at different rates. Thus, the future pattern of
depreciation expense (and therefore income) will be altered by this initial
allocation. Investors pay close attention to income and proper judgment
becomes an important element of the accounting process.

MATERIALITY
Many expenditures are for long-lived assets of relatively minor value. Examples
include trash cans, telephones, and so forth. Should those expenditures be
capitalized and depreciated over their useful life? Or, does the cost of record
keeping exceed the benefit? Many businesses simply choose to expense small
costs as incurred. The reason is materiality; no matter which way one accounts
for the cost, it is not apt to bear on anyones decision-making process about the
company. This again highlights the degree to which professional judgment comes
into play in the accounting process.

SOME IMPORTANT TERMINOLOGY

In any discipline, precision is enhanced by adopting terminology that has very
specific meaning. Accounting for Property, Plant, and Equipment is no exception.
An exact understanding of the following terms is paramount:

Cost: The dollar amount assigned to a particular asset, usually the ordinary and
necessary amount expended to get an asset in place and in condition for its
intended use.
Service life: The useful life of an asset to an enterprise, usually relating to the
anticipated period of productive use of the item.
Salvage value: Also called residual value. This is the amount expected to be
realized at the end of an assets service life; for example, the anticipated future
sales proceeds for used equipment.
Depreciable base: The cost minus the salvage value. Depreciable base is the
amount of cost that will be allocated to the service life.
Book value: Also called net book value. This refers to the balance sheet amount
at a point in time that reveals the cost minus the amount of accumulated
depreciation (book value has other meanings when used in other contexts, so
this definition is limited to its use in the context of PP&E).
Below is an illustration relating these terms to the financial statement
presentation for a building

In the preceding illustration, assuming straight-line depreciation, what is the

assets age? The $2,000,0000 depreciable base ($2,300,000 - $300,000) is
evenly spread over 20 years. This produces annual depreciation of $100,000. As
a result, the accumulated depreciation of $1,500,000 suggests an age of 15
years (15 X $100,000).

Depreciation Methods
There are many possible depreciation methods, but straight-line and doubledeclining balance are the most popular. In addition, the units-of-output method is

uniquely suited to certain types of assets. The following discussion covers each
of these methods. Intermediate accounting courses typically introduce additional
techniques that are sometimes appropriate.

THE STRAIGHT-LINE METHOD

Under the straight-line approach the annual depreciation is calculated by dividing
the depreciable base by the service life. To illustrate assume that an asset has a
$100,000 cost, $10,000 salvage value, and a four-year life. The following
schedule reveals the annual depreciation expense, the resulting accumulated
depreciation at the end of each year, and the related calculations.

For each of the above years, the journal entry to record depreciation is as
follows:

The applicable depreciation expense would be included in each years income

statement (except in a manufacturing environment where some depreciation
may be assigned to the manufactured inventory, as explained in managerial
accounting courses). The appropriate balance sheet presentation would appear
as follows (end of year 3 in this case):

THE UNITS-OF-OUTPUT METHOD

The units-of-output method involves calculations that are quite similar to the
straight-line method, but it allocates the depreciable base over the units of

output rather than years of use. It is logical to use this approach in those
situations where the life is best measured by identifiable units of machine
consumption. For example, perhaps the engine of a corporate jet has an
estimated life of 50,000 hours. Or, a printing machine may produce an expected
4,000,000 copies. In cases like these, the accountant may opt for the units-ofoutput method.

To illustrate, assume Data Nguyen Painting Corporation purchased an air

filtration system that has a life of 8,000 hours. The filter cost $100,000 and has a
$10,000 salvage value. Nguyen anticipates that the filter will be used 1,000
hours during the first year, 3,000 hours during the second, 2,000 during the
third, and 2,000 during the fourth. Accordingly, the anticipated depreciation
schedule would appear as follows (if actual usage varies, the schedule would be
adjusted for the changing estimates using principles that are discussed later in
this chapter):

The form of journal entry and balance sheet account presentation are just like
the straight-line illustration, but with the revised amounts from this table.

THE DOUBLE-DECLINING BALANCE METHOD

As one of several accelerated depreciation methods, double-declining balance
(DDB) results in relatively large amounts of depreciation in early years of asset
life and smaller amounts in later years. This method can be justified if the quality
of service produced by an asset declines over time, or if repair and maintenance
costs will rise over time to offset the declining depreciation amount.

With this method, 200% of the straight-line rate is multiplied times the remaining
book value of an asset (as of the beginning of a particular year) to determine
depreciation for a particular year. As time passes, book value and annual
depreciation decrease. To illustrate, again utilize the example of the $100,000
asset, with a four-year life, and $10,000 salvage value. Depreciation for each of
the four years would appear as follows:

The amounts in the above table deserve additional commentary. Year 1 expense
equals the cost times twice the straight-line rate (four-year life = 25% straightline rate; 25% X 2 = 50% rate). Year 2 is the 50% rate applied to the beginning of
year book value. Year 3 is calculated in a similar fashion.

Note that salvage value was ignored in the preliminary years calculations. For
Year 4, however, the calculated amount (($100,000 - $87,500) X 50% = $6,250)
would cause the lifetime depreciation to exceed the $90,000 depreciable base.
Thus, in Year 4, only $2,500 is taken as expense. This gives rise to an important
general rule for DDB: salvage value is initially ignored, but once accumulated
depreciation reaches the amount of the depreciable base, then depreciation
ceases. In the example, only $2,500 was needed in Year 4 to bring the aggregate
depreciation up to the $90,000 level.

An asset may have no salvage value. The mathematics of DDB will never fully
depreciate such assets (since one is only depreciating a percentage of the
remaining balance, the remaining balance would never go to zero). In these
cases, accountants typically change to the straight-line method near the end of
an assets useful life to finish off the depreciation of the assets cost.
Equipment Leases
Many businesses acquire needed assets via a lease arrangement. With a lease
arrangement, the lessee pays money to the lesser for the right to use an asset
for a stated period of time. In a strict legal context, the lesser remains the owner
of the property. However, the accounting for such transactions looks through the
legal form, and is instead based upon the economic substance of the agreement.

If a lease effectively transfers the risks and rewards of ownership to the lessee,
then the applicable accounting rules dictate that the lessee account for the
leased asset as though it has been purchased. The lessee records the leased
asset as an item of property, plant, and equipment, which is then depreciated
over its useful life to the lessee. The lessee must also record a liability reflecting
the obligation to make continuing payments under the lease agreement, similar

to the accounting for a note payable. Such transactions are termed capital
leases. Note that the basic accounting outcome is as though the lease
agreement represents the purchase of an asset, with a corresponding obligation
to pay it off over time (the same basic approach as if the asset were purchased
on credit).

Of course, not all leases effectively transfer the risks and rewards of ownership to
the lessee. In the USA, the determination of risk/reward transfer is based upon
evaluation of very specific criteria: (1) ownership transfer of the asset by the end
of the lease term, (2) minimum lease payments with a discounted present value
that is 90% or more of the fair value of the asset, (3) a lease term that is at least
75% of the life of the asset, or (4) some bargain purchase element that kicks in
before the end of the lease. If a lease does not include at least one of the
preceding conditions, it is not a capital lease. Instead, it is an operating lease.
Rent is simply recorded as rent expense as incurred and the underlying asset is
not reported on the books of the lessee. Under international accounting
standards, lease accounting rules are not as specific in guidance, but are
substantively similar in intent and outcome.

Why all the trouble over lease accounting? Think about an industry that relies
heavily on capital lease agreements, like the commercial airlines. One can see
the importance of reporting the airplanes and the fixed commitment to pay for
them. To exclude them would render the financial statements not representative
of the true nature of the business operation.

Q4. Briefly explain the important techniques based on which planning

and execution of operational process is conducted.
Answer : 1. Purpose

a. This publication sets forth planning policies and procedures to govern the joint
activities and performance of the Armed Forces of the United States. It provides
military guidance for the exercise of authority by combatant commanders and
other joint force commanders and prescribes doctrine and selected joint tactics,

techniques, and procedures for joint operations and training. It provides military
guidance for use by the Armed Forces in preparing their appropriate plans.

b. Specifically this publication describes the Joint Operation Planning and

Execution System (JOPES) functions and the environments in which planning for
and executing conventional and nuclear joint military operations are conducted.
JOPES applies to the development and implementation of operation plans and
operation orders prepared in response to National Command Authorities (NCA) or
the Chairman of the Joint Chiefs of Staff (CJCS) requirements. It specifies the
policies, procedures, and formats to be used across the spectrum of planning,
mobilization, deployment, employment, mobilization, sustainment,
redeployment, and demobilization as applied to the members of the Joint
Planning and Execution Community (JPEC). JOPES is applicable across the
operational continuum of peace and war.

ENCLOSURE B

JOINT PLANNING PROCESS

1. Purpose. This chapter describes the interrelationships of the associated

national-level systems for national security policy, military strategy, force and
sustainment requirements, and plans and their impact on the joint planning
process.

2. The National Security Council (NSC) System. The NSC is the principal forum for
deliberation of national security policy issues requiring Presidential decision. The
NSC system provides the framework for establishing national strategy and policy
objectives. The NSC develops policy options, considers implications, coordinates
operational problems that require interdepartmental consideration, develops
recommendations for the President, and monitors policy implementation. The
Chairman discharges a substantial part of the statutory responsibilities as the
principal military adviser to the President, the NSC, and the Secretary of Defence
through the institutional channels of the NSC. The Chairman regularly attends
NSC meetings and presents the views of the Joint Chiefs of Staff and the
combatant commanders. The NSC prepares National Security Directives (NSDs)

that, with Presidential approval, implement national security policy. These policy
decisions provide the basis for both military planning and programming.

3. Role of the Joint Strategic Planning System (JSPS)

a. The JSPS (CJCSI 3100.01) is the primary formal means by which the Chairman,
in consultation with the other members of the Joint Staff and the CINCs, carries
out planning and policy responsibilities detailed in Title 10, USC. The
responsibilities include:

(1) Providing advice and assistance to the President and Secretary of Defence on
the strategic direction of the Armed Forces and the preparation of policy
guidance.

(2) Preparing military strategy, strategic plans, and strategic assessments.

(3) Providing advice to the Secretary of Defence on the effect that critical force
capability deficiencies and strengths will have on accomplishing national security
objectives, implementing policy, and executing strategic plans.

(4) Providing advice on program recommendations and budget proposals to

conform with priorities established for the CINCs and in strategic plans.

b. The JSPS is a flexible system that forms the basis for interaction with other
DOD systems; provides supporting military advice to the DOD Planning,
Programming, and Budgeting Systems (PPBS); and provides strategic guidance
for use in JOPES. Figure B-1 shows the relationships between various programs
and planning documents.

c. The JSPS provides the means for the Chairman, in consultation with the other
members of the Joint Chiefs of Staff and the CINCs, to systematically review the
national security environment and US national security objectives; evaluate risks
and threats; assess current strategy and existing or proposed programs and
budgets; and propose military strategy, forces, and programs necessary to
achieve national security objectives in a resource-limited environment.

d. JSPS provides for the continuous study of the strategic environment to identify
conditions or trends that may warrant a change in the strategic direction of the
Armed Forces. The principal mechanism for this study is the Joint Strategy
Review (JSR). A decision to modify the strategic direction of the Armed Forces
based on this review would be reflected in the National Military Strategy (NMS) or
the Joint Vision.

(1) The NMS articulates how the United States will employ the military element of
power to support the national security objectives found in the Presidents
National Security Strategy (NSS).

(2) The Chairmans vision, referred to as Joint Vision 2010, describes the
operational concepts and capabilities required of future joint forces. It provides a
conceptual template for the conduct of future military operations and establishes
a common azimuth for the Services, combatant commands, Defence agencies,
and Joint Staff as they develop plans and programs to evolve the joint force to
meet future operations requirements.

e. The JSPS products, particularly the NMS, assist the Chairman in providing for
the preparation of contingency plans and development of the Joint Strategic
Capabilities Plan (JSCP). The JSCP provides strategic guidance, establishes
requirements, and apportions resources to the CINCs and Service Chiefs to
accomplish tasks and missions based on near-term military capabilities.

DELIBERATE PLANNING PROCESS

1. Purpose.
This enclosure describes the applicability of JOPES to deliberate planning,
describes the deliberate planning process for operation plans, outlines
responsibilities and recommended time requirements for the planning cycle, and
provides guidance for resolving conflicts.

2. Applicability.
With the exception of the Single Integrated Operational Plan (SIOP), JOPES
applies to operation plans prepared by CINCs in response to CJCS requirements.
Operation plans are prepared in complete format (OPLANs) or in concept format
(CONPLANs) as described below. Figure C-1 shows the relationship of the various
terms used in JOPES and the planning process in general.

Q5. Explain the various criteria in selecting a suitable location

Answer : OBJECTIVE:
A poor location or a poorly negotiated lease can cripple a wonderful business.
Every business has its own location criteria. In this session you will define your
criteria, learn how to select the right location, create a site model, and recognize
the important aspects of a lease agreement.

You can create your own "Site Model" in order to maintain objectivity when
evaluating locations for your business. This can be done by assigning different
values to the factors that are most important for your particular business. Then
each location can be evaluated against these measurements.

Real estate dealmakers concerned with buying, selling or leasing all require
possession of expert negotiating skills. Since it has been determined that
negotiating is a learned skill and not a natural one, our session "Develop
Negotiating Skills" in Building My Own Business is recommended.

Some things to keep in mind in site selection:

There's no such thing as the "last good location."

Copycatting your most successful competitor's site criteria can help you avoid
making mistakes.
If you are building a chain of stores, never sign a lease on your second location
until your first location is profitable and proven.
It is better to pay fair rent on a great location than pay great rent on a fair
location.
Don't rely on leasing agents to make your site decisions.
Driving streets and walking neighbourhoods is a good way to scout for locations.
The following form will give you a methodical approach for evaluating the
strengths and weaknesses of each potential location.

First, evaluate your site location for each factor on a scale of 1 to 10, Number 10
being the highest.

Second, decide the importance of each factor to your particular business on a

scale of 1 to 5, Number 5 being the most important.

Multiply the grade by the weight to determine the points for each factor. Add up
the points to get a total score. Repeat this process for each site to gain an
objective, comparative analysis.

Site Criteria Table

Factors

Grade 1-10

Weight 1-5

Points

Traffic count: Cars or pedestrians

Visibility access
Proximity to competition
Zoning
Parking (include off-street parking)
Condition of premises
Proximity to customer generators
Income level of neighbourhood
Population density
Ethnic makeup of neighbourhood
Age factor
Directional growth of area
Area improving or deteriorating
Crime/shoplifting rates
Availability of qualified employees
Labour rates of pay
Supplier proximity
Terms and rental rates
Adequacy of utilities, gas, & water
Transportation accessibility
Total Points

Q6. The table on the below presents the data regarding actual demand
and forecasts for two products, X and Y, in the six months from January
2012 to June 2012. Using moving average (6 months), make demand
estimates for products X and Y for the months July 2012, August 2012
and September 2012.

Month
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Actual Demand
Product X
Demand
2680
2600
2350
2630
2400
2620
Product Y
Demand
1260
1220
1200
1290
1220
1280
(May 2012)
Master of Business Administration - MBA Semester 3
Operations Management Specialization
OM 0010 - Operations Management (4 credits)

(Book ID:B1232 )
Marks 60
Note: Each Question carries 10 marks
Q1. Explain the diferent types of methods study used to observe
workers/operators and develop a new process for performing a task in a
better way?
Answer : Observation techniques

Direct observation produces more reliable information than interviews on actual

behaviour. The researcher can see which medicines are being sold, prescribed or
used, or are available in medicine cabinets; what information on their use the
seller or doctor provides; whether drugs are purchased on prescription, etc. The
most common observational techniques to study drug use are:

simulated client visits

inventories of community drug outlets and medicine cabinets.

How to conduct simulated client visits

Observational research is often done to describe drug distribution patterns in

informal drug outlets and pharmacies. However it is difficult to carry out because
drug sellers may not want to have an onlooker present. They may feel that it will
disrupt or even endanger their business, particularly if some transactions are
illegal. If they have a researcher present, they may do business in a more
correct way than they normally would, and they may feel that their professional
competence is being tested.

This problem can be solved by conducting simulated client visits. A researcher or

an assistant can pose as a patient or client. The advantage is obvious; it gives an
unbiased picture of normal procedures. Simulated client methods are often used
to measure the quality of prescribing and dispensing drugs in health facilities,
pharmacies and drug shops. It involves a researcher posing as a client and going
to a health centre or pharmacy with a complaint. The objective is to determine
how a sample of providers react to the complaint; what treatments they
recommend, and what information they give.

Posing as a patient or client, however, reduces the amount of information that

can be gathered. The researcher can only observe his or her own visit, and in
pharmacies at most a few drug purchases while waiting in turn. Furthermore it is
difficult to pose many questions and make notes, without revealing ones true
identity. To counter this restriction, researchers can combine unobtrusive
observation with interviewing. This approach was used by Woofers (1987), who
had assistants visit 28 pharmacies to buy tetracycline over the counter, and then
let other assistants interview the pharmacy personnel about tetracycline a few
days later. You may also consider using different kinds of clients, representing
the diversity in wealth, gender, age and ethnicity of people visiting the facility.

The method is somewhat controversial. One can question how ethical it is to

conduct such visits without asking health workers and/or drug sellers for
informed consent. The ethical issue can be resolved by asking the respondents
or their professional organization for consent before conducting the visits and
without giving details on when the visit will take place, to avoid bias. In the
fieldwork it is recommended to use the simulated client visit to observe what
information and advice drug sellers give. If a drug is bought during a visit,
funding and accountability measures are needed.

An advantage of the simulated client visit is that it is a rapid method. A typical

transaction does not last more than five minutes. It can also be used to evaluate
the effects of rational drug use interventions, such as to measure information
provided on drugs before and after an intervention. Ross-Dogman and colleagues
(1996) tested the effects of a face-to-face education outreach intervention in
Kenyan and Indonesian pharmacies.

Using trained surrogate patients posing as mothers of a child under five with
diarrhoea, they measured sales of oral rehydration salts; sales of ant diarrhoeal
drugs; and history taking and advice to continue fluids and foods. Sales of oral
rehydration salts in intervention pharmacies increased by an average of 30% in
Kenya, and 21% in Indonesia, compared to controls. Discussion of dehydration
during pharmacy visits increased significantly in Kenya.

When planning to use simulated client visits as a method, you need to take
decisions on how to sample the drug outlets and how many observations to do
per outlet (see 6.2). It is important to consider the usual opening hours and the
volume of transactions each day. For example, on market day pharmacies may
be very busy and minimal advice given.

The guidelines provided in box 7 will help you to conduct effective simulated
client visits.
BOX 7. GROUND RULES FOR CONDUCTING GOOD SIMULATED CLIENT
VISITS

Simulating a client requires insight into how clients usually behave. This can be
obtained by conducting unobtrusive observations in pharmacies; or by asking
informants during semi-structured interviews how they would ask for medicines
and present a complaint at a pharmacy.

Dont step out of your role.

Consider also the details of the transactions: will the advice be followed and a
medication bought? What if the medicine is very expensive? Does the client then
ask for a cheaper alternative?

Make a realistic script.

Make sure the client looks like a real client. What will the client wear?

On recording:

You cannot record what happens during the visit, as that would be unnatural,
but this should be done immediately afterwards. Design a form for this purpose
to make sure that all relevant information is covered.

Record the results of the simulated client visits systematically. It is helpful to

make a simple form to be filled in immediately after the visit. However, as with
non-formal interviewing, the researcher has to be alert for the unexpected. The
analysis and interpretation of the data depends on the extent to which the
observations are structured. In some cases the analysis is quantitative, for
example, when reporting in how many cases prescription drugs were sold over-

the-counter. In other cases the observation is less structured, for example,

focusing on the communication during the drug transaction. The researcher then
has to categorize and analyse the findings in much the same way as with semistructured interviews (see Chapter 6 for more information on analysis).

Strengths and weaknesses of simulated client visits

The strengths of simulated client visits are:

they can provide more reliable information than interviews

drug use and distribution in its natural context can be observed
if done well, this method gives information on what drug sellers really do
a representative sample of pharmacies/health centres can be observed.
results can be generalized
results can be quantified
they can be used to evaluate effects of training of pharmacy sellers and health
workers
they can be used as a participatory method. You can ask people living in the
communities that you are studying to act as surrogate clients, and collect data.

The weaknesses of simulated client visits are:

data are sometimes hard to interpret

it is difficult to do a lifelike simulation, especially if you are playing a type of

client you are not so familiar with (female students acting as mothers, for
example)

the observation period is short (the time needed to buy the drug, or consult a
health worker)

 it is difficult to probe on why advice is given

the depth of information collected is limited

the findings need to be complemented by interviews.

The accuracy of data about the method study problem is important for the
development of improved method. The following techniques are used for the
collection of information / data about the task under consideration. These are not
exclusive of each other, and for any particular method study problem, some or
all the techniques may be employed.

Observation. It is a common technique used for collecting information about

the present method or the existing problem. The method study person visits the
site where the work is currently being done and observes various steps in the
method being followed. There are many instances where all the data needed is
obtained by only observing the work or work site.

Discussion. Discussion with those who do or who supervise the work can
frequently provide information not obtainable by observation. The discussion
technique is commonly used where irregular work is involved or where one is
trying to analyze past work in order to improve efficiency of work to be done in
future.

Even where observation by itself may accomplish the data collection task,
discussion may be used for developing good human relations.

Records. Valuable information can be obtained from past records concerning

production, cost, time, inventory and sub-contracts. For certain type of
information concerning the past practice, sometimes this is the only way to
obtain authentic data.

 Motion Pictures or video Films. Accurate and most detailed information can be
obtained by taking motion pictures or video film. Information obtained by this
procedure can easily be transmitted / forwarded to all levels in the organization
and if needed, can be used directly for training purposes. The film can be used to
focus attention at particular point or motion in an operation. For obtaining
information concerning those types of work that involve large crew size, it is
probably the only procedure.

Information Recording Techniques:

There are three main types of information recording techniques. These are

Process Charts

Diagrams

Templates

A Process Chart is a graphic means of representing the activities that occur

during a manufacturing or servicing job.

There are several types of process charts. These can be divided into two groups.

(I) Those which are used to record a process sequence (i.e. series of events in the
order in which they occur) but do not depict the events to time scale.

Charts falling in this group are

Operation process chart

 Flow process chart (man / material / equipment type)

Operator chart (also called Two Handed Process Chart)

(ii) Those which record events in the sequence in which they occur on a time
scale so that the interaction of related events can be more easily studied. Charts
falling in this group are

Multiple activity chart

Simon chart

Diagrams. A diagram gives pictorial view of the layout of workplace or floor on

which locations of different equipment, machines, etc. are indicated. The
movement of subject (man or material) is then indicated on the diagram by a
line or a string. The diagrams are valuable in highlighting the movement so that
analyst can take steps to simplify or reduce it and thus effect saving in time or
reduction in collisions / accidents.

Two types of diagrams are common: Flow diagram and string diagram.

Templates and 3-D models:

Two-dimensional cut outs made from thin card sheet representing machinery,
furniture, etc. can be used for developing new layouts and methods. The
templates may have pieces of permanent magnet attached to them, so that
when used on iron board; they remain glued on the board whenever placed.

A scaled 3-D model of a working area helps easy understanding of lighting,

ventilation, maintenance and safety aspects that may be important in a method.
Such models are often of great value in demonstrating the advantages of the
proposed changes to all concerned. However, their use is limited because of
higher cost involved. Some computer softwares are available which help in
constructing the layout and possibility of visualizing the working of process in a
systematic way.

Before taking up descriptions of these charts or diagrams, it is necessary to know

the various elements of work.

Elements of Work:

There are five basic elements of work: Operation, Inspection, Transportation,

Delay, and storage. Table gives the definitions and symbols by which these
elements are represented. Also given in the Table are examples of each element.

Sometimes, more than one element occur simultaneously. It is shown as

combined element with combined symbol. Examples are Operation in
combination will inspection, and Inspection in combination with
Transportation.

Operation Process Chart:

An operation process chart provides the chronological sequence of all operations

and inspections that occur in a manufacturing or business process. It also shows
materials used and the time taken by operator for different elements of work.
Generally a process chart is made for full assembly, that is, it shows all the
operations and inspections that occur from the arrival of raw material to the
packaging of the finished product.

Flow Process Chart:

A flow process chart is used for recording greater detail than is possible in an
operation process chart. It is made for each component of an assembly rather
than for the whole assembly.

A flow process chart shows a complete process in terms of all the elements of
work. There are two main types of flow charts: product or material type , and the
operator type . The product type records the details of the events that occur to a
product or material, while the operator flow chart details how a person performs
an operational sequence.

An important and valuable feature of this chart is its recording of non-productive

hidden costs, such as delays, temporary storages, unnecessary inspections, and
unnecessary long distances travelled. When the time spent on these non
productive activities is highlighted, analyst can take steps to minimize it and thus
reduce costs.

Operator Process Chart :

It is also called Left Hand Right Hand chart and shows the activities of hands of
the operator while performing a task. It uses four elements of hand work:
Operation, Delay (Wait), Move and Hold. Its main advantage lies in highlighting
un-productive elements such as unnecessary delay and hold so that analyst can
take measures to eliminate or shorten them.

Multiple Activity Chart:

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Worker-Machine process chart and gang process chart fall in the category of
multiple activity charts. A worker-machine chart is used for recording and
analyzing the working relationship between operator and machine on which he
works. It is drawn to time scale. Analysis of the chart can help in better utilization
of both worker and machine time. The possibility of one worker attending more
than one machine is also sought from the use of this chart.

A gang process chart is similar to worker-machine chart, and is used when

several workers operate one machine. The chart helps in exploring the possibility
of reducing both the operator time and idle machine time.

Simon Chart:

A Simon chart is another Left-Hand Right-Hand chart with the difference that it is
drawn to time scale and in terms of basic motions called therbligs. It is used
when the work cycle is highly repetitive and of very short duration.

Q2. Describe the various algorithms for balancing material flow.

Q3. a. Diferentiate between EDI, EPOS and Bar Coding
Answer :

Electronic Point of Sale (EPOS) System Introduction

Point of Sale Systems Buyers' Guide
If you work in retail or hospitality, one of the most important business tools you
can have is an effective electronic point of sale system (EPOS or POS). At its
most basic level, an EPOS system is a

b. Explain in brief the four way classification in generic operations

strategies
Answer : Porter (1980) classifies three generic enterprise strategies: overall
cost leadership, differentiation, and focus. We will substitute the term
segmentation for focus, since focus is used to

Q4. Discuss the various approaches used to determine the quality of

the product/services
Answer :

Quality Improvement

Q5. What is EOQ? Explain EOQ model of inventory and state its
assumptions
Answer : E.O.Q

. is a deterministic type of inventory model. The object of inventory control is to avoid the
situation of over as well as under investment. The level of inventories should be maintained
at the optimum
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Q6.a. What are the various descriptive statistics measures of central

tendency

Answer : Descriptive Statistics - 1: Measures of Central Tendency

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