Master of Business Administration - MBA Semester III OM0010 Operations Management - 4 Credits (Book ID: B1232) Assignment - Set-

- 1 (60 Marks)
Note: Each Question carries 10 marks. Answer all the questions.

Q1. What are the emerging opportunities and challenges that confront Operations Management in India? List the important differences between Service and manufacturing. Q2. Explain Order Winner, Order Qualifier and Kano Model. List out the Universal Principles. Q3. What are Opportunity Costs and Ownership Costs, and how are they relevant to investment decisions? Q4. What is Economies of Scale? Illustrate with an example. How is it different from Economies of Scope? Q5. Explain the importance of location decisions and the decision-making process for making location decisions. Q6. Explain the terms: Operations Mission, Distinctive Competence, Operation Objectives and Operation Policies.

Q1. What are the emerging opportunities and challenges that confront Operations Management in India? List the important differences between Service and manufacturing. Ans:Ever since 1992, when the Celia committee put up its proposals in respect of import tariffs, the need for changing Operations Management practices in the country has been felt. The committee recommended: Reduction in tariff levels. Simplification in slab rates of tariffs. Removal of differences between rate and materials. Intermediates and finished goods. Efficient administration. Advantages and disadvantages of Indian Manufacturing Organizations Indian industry enjoyed undue advantages due to high import tariffs. Another advantage enjoyed by the Indian industry was Licenses determined the availability of products and services their quality, price, etc. in the market. One of the serious drawbacks of Indian manufacturing organizations operating in a controlled economy was the predominant domestic focus in their approach to business. In contrast, manufacturing organizations in small countries such as Japan and Korea developed good international focus, which helped them set tough targets and high standards for operations system performance.

Quality Management Issues Reports have brought to light Indias poor performance with respect to customer care and quality. Indian organizations have fared badly on the customer orientation and Total Quality Management (TQM) drive when compared to other countries. It is interesting to note that in the 1996 ratings, China was ranked 16th with respect to customer orientation while India was placed at 43rd rank. Lead Time Issues Reports also put India almost at the bottom of the list with respect to time to market. Long lead time forces organizations to either carry large inventories or produce some plan, which may more or less be different from what the market wants. Further, bringing in new variations of the

product to the market will also be delayed. All this will result in high cyst, large non-moving inventory, poor delivery reliability and eroded market share. Labor Productivity Issue The 1997 rating, points to several labor issues in India. While India is ranked 3rd on abundance of labor force, it occupies 46th position in employee training and 50th position in labor productivity. Several other studies have also indicated that low productivity levels largely offset the advantage of low labor cost. Therefore, improving productivity is a major concern.

Difference between services & manufacturing The following Table depicts the differences between the service and manufacturing organisations. Table :

Q2. Explain Order Winner, Order Qualifier and Kano Model. List out the Universal Principles.

Ans:-

Order Winner A useful way to examine a firm's ability to be succesful in the market is to identify the order winners. An order winner is a criterion that customers use to differentiate the services or products of one firm from those of another.

Order Qualifier Performance dimensions on which customers expect a minimum level of performance. Superior performance on an order qualifier will not, by itself, give a company a competitive advantage.

Kano Model The Kano model is a theory of product development and customer satisfaction developed in the 80s by Professor Noriaki Kano which classifies customer preferences into five categories:
y y y y y

Attractive One-Dimensional Must-Be Indifferent Reverse

These categories have been translated into English using various different names (delighters/exciters, satisfiers, dissatisfies, etc.), but all refer to the original articles written by Kano. Attractive Quality These attributes provide satisfaction when achieved fully, but do not cause dissatisfaction when not fulfilled. These are attributes that are not normally expected, For example, a thermometer on a package of milk showing the temperature of the milk. Since these types of attributes of quality unexpectedly delight customers, they are often unspoken. One-dimensional Quality These attributes result in satisfaction when fulfilled and dissatisfaction when not fulfilled. These are attributes that are spoken of and ones which companies compete for. An example of this would be a milk package that is said to have ten percent more milk for the same price will result in customer satisfaction, but if it only contains six percent then the customer will feel misled and it will lead to dissatisfaction. Must-be Quality These attributes are taken for granted when fulfilled but result in dissatisfaction when not fulfilled. An example of this would be package of milk that leaks. Customers are dissatisfied when the package leaks, but when it does not leak the result is not increased customer satisfaction. Since customers expect these attributes and view them as basic, then it is unlikely that they are going to tell the company about them when asked about quality attributes. Indifferent Quality These attributes refer to aspects that are neither good nor bad, and they do not result in either customer satisfaction or customer dissatisfaction. Reverse Quality These attributes refer to a high degree of achievement resulting in dissatisfaction and to the fact that not all customers are alike. For example, some customers prefer high-tech products, while others prefer the basic model of a product and will be dissatisfied if a product has too many extra features.

The Kano model offers some insight into the product attributes which are perceived to be important to customers. The purpose of the tool is to support product specification and discussion through better development team understanding. Kano's model focuses on differentiating product features, as opposed to focusing initially on customer needs. Kano also produced a methodology for mapping consumer responses to questionnaires onto his model.

Universal Principles

We have seen the variations in processes, automation and scheduling in the volume variety and product process matrix. You could ask if there are principles of operations management that apply across the entire product process matrix. Schonberg and Knod (1994) present one of the most useful lists of principles, applicable both to service and manufacturing operations. They challenged that these principles can make a massive difference to any operations-based organisation. They compiled a list of principles. According to them, organisations involved in the service and manufacturing sector should:  Get to understand and team up with the next and last customer  Become committed to repeated, quick improvement in quality, cost, lead time, flexibility, inconsistency, and service  Accomplish unfilled purpose via shared information and team participation in forecasting and implementation of change  Get to understand the competition and the world-class leaders  Cut the number of product or service components or operations and number of suppliers to a few good ones  Arrange resources into multiple chains of customers, each focused on a product, service or customer family; create cells, flow lines and plants-in-a-plant  Constantly invest in human resources through cross training, education, job and career path rotation, and improved health, safety and security  Preserve and improve present equipment and human work before thinking about new equipment; mechanize incrementally when process inconsistency cannot otherwise be reduced  Look for simple, flexible, movable, low-cost equipment that can be acquired in multiple copies, each assignable to focused cells, flow lines and plants-in-a-plant  Make it easier to make/provide goods or services without error or process variation  Cut flow time (waiting time), distance and inventory all along the chain of customers  Cut set-up, changeover, get-ready and start-up times  Function at the customers rate of use, reduce cycle interval and lot size  Trace and own quality, process and problem data at the workplace

 Make sure that front line improvement teams get first chance at problem solving before staff experts  Cut transactions and reporting

Q3. What are Opportunity Costs and Ownership Costs, and how are they relevant to investment decisions?

Ans:-

Opportunity Costs

In economic terms, the opportunities forgone in the choice of one expenditure over others. For a consumer with a fixed income, the opportunity cost of buying a new dishwasher might be the value of a vacation trip never taken or several suits of clothes unbought. The concept of opportunity cost allows economists to examine the relative monetary values of various goods and services.

Example:-

Let us understand this concept through a more individual-based example of a person owning a motor car whose value in the market is Rs. 2 lakhs, which becomes the economic value of the car. The person can either sell the car for its value or retain the car. In case he sells the car, the Rs. 2 lakhs can earn interest over a period of one year. By retaining the car, the person foregoes the interest, which is the opportunity cost of ownership. Besides, by retaining the car for one year, the sale value of the car gets diminished. This loss in the resale value is the second opportunity cost. So, the total opportunity cost is the loss of interest earnings plus the loss in sale value.

Ownership Costs

Estimate of all direct and indirect costs associated with an asset or acquisition over its entire life cycle.

Example:-

In the above example, in order to keep the car running for one more year, some capital/maintenance expenses would need to be incurred on the car. So the cost of continued ownership is the opportunity cost, plus the capital additions or renewals to keep the car running. The above logic applies to any asset whether belonging to an individual or an organisation.

Thus, an asset may indicate reducing opportunity cost over the years, but the cost of running and maintenance will progressively increase. Opportunity Costs and Ownership Costs are relevant to investment decisions We have seen that one of the major decisions in business which especially concerns operations is pertaining to investments in plant and equipment. While making such decisions, the costs of such investments have to be calculated precisely, so that decisions are made on sound and rational basis. The cost of an investment is not merely the cost of acquiring the assets, which could be equated to the landed price of the assets plus the installation and running in costs. The cost of an investment forms one of the elements of the overall ownership costs. The concept of ownership cost adequately addresses the need to look at the costs more comprehensively.

Q4. What is Economies of Scale? Illustrate with an example. How is it different from Economies of Scope?

Ans:-

Defination The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. There are two types of economies of scale:

-External economies - the cost per unit depends on the size of the industry, not the firm. -Internal economies - the cost per unit depends on size of the individual firm.

Illustration

It should be appreciated that even before the first unit is produced, the company is incurring certain costs such as rent for the premises, the fixed portion of salaries, usage of electricity and power for general lighting, air-conditioning and running of equipments such as compressors, filters, etc. These generate the fixed costs of operations. Let us say that such an expenditure of fixed nature is Rs. F per day. Now, consider the situation when the plant reaches a stage of producing 10 units of product per day. If the variable cost (cost of material + cost of direct labour + cost of power + others) per unit of production is v, then the total cost of producing 10 units (on any particular day) works out to be: Total Cost = (F + 10 x v) / 10 = F/10 + v

If after some time, the plant manufactures 40 units of product in a day, then the total cost of producing those 40 units would be: Total Cost = F/40 + v Thus, we see that as the production level increases during a particular time period, the Unit Cost of producing a product reduces. In other words, if the scale of operations increases, then the unit cost of manufacture comes down. This aspect is referred to as the Economies of Scale. This phenomenon is contributed by more than one factor: The Fixed Costs get distributed over a larger number of products produced, thus bringing down the unit cost of production. With higher scale of operations, the workmen would become more adept at manufacturing thus increasing productivity, which in turn, reduces the unit cost further. In view of high level of operations, the volumes of purchases of both products and services will be high, and consequently procurement costs will come down. Economies of Scale different from Economies of Scope
Generally speaking, economies of scale is about the benefits gained by the production of large volume of a product, while economies of scope is linked to benefits gained by producing a wide variety of products by efficiently utilising the same Operations. Each of these business strategies, their strengths and weaknesses, will be discussed in details in this paper. "Economies of scale" has been known for long time as a major factor in increasing profitability and contributing to a firm's other financial and operational ratios. Mass production of a mature, standardized product can apply the most efficient line-flow process and standard inputs for reducing the manufacturing cost (per unit). Mass manufacturing is also associated with a significant market-share, and a tight supplychain management (up to vertical integration with suppliers and retailers). To maintain the market-share, the market leader should come with continuous product improvements, so to sustain demand and avoid its dropping, following the product's maturity in the Product Life-Cycle (PLC). "Economies of scope" is relatively a new approach to business strategy, and is heavily based on the development of high technology. Economies of scope, as defined by using same processes for producing similar products, can fit the batch-flow or group-technology processes; nevertheless, for best results the flexible-manufacturing should be adopted. Computer Integrated Manufacturing (CIM) allows lowering the setup-time and required tuning between products, so to be economically efficient for small batches of non-standardised products. In other words, companies can compete on product customisation and short lead-time. A case study at GM shows that new competition can reduce firm's market share and its benefits from economies of scale (Howell, 2003). The author argues that the main problem was the neglect of innovation, as a side-effect of GM's strategy (until the Japanese cars entered the US market, in the late 1970s). Cachon and Harker (2002) found that scale economies are so powerful that to provide a strong

motivation for outsourcing, too; even though the outsourcing contractors are not allowed reaching the same scale as the outsourcer. Dobson and Yano's (2002) article is an in-dept scholarly analysis of the factors associated with economies (and diseconomies) of scale and economies (and diseconomies) of scope. The authors argue that mass-customisation, which means broader product lines, "may help to increase market share and may allow higher prices to be charged, but they also cause challenges associated with diseconomies of scope" such as setup time. Ang and Lin (2001) bring a case study from the financial industry, and the ways economies of scope and economies of scale work for mutual fund offerings. At Fidelity, an example of economies of scope at work, investors had the option for high diversified portfolio at the same institution. But aiming at cost reduction (which is of interest to clients and investors), the economies of scope did not provide the desired objectives, while economies of scale did, in the case of mutual funds. Trying to find the ideal conditions for economies of scale and economies of scope, the authors say that a single-product firm should pursue the economies of scale. However, economies of scope for a two-product firm is said to exist "if the cost of producing the two products jointly is less than producing the same products separately". When it comes to three or more products, the number of production combinations increases, so evaluation of the economies of scope becomes more complicated and requires more data to analyse. Advocating for a different view of the economies of scope and scale, Peppers and Rogers (1995) put the customers under the spotlight. They argue that market share can be seen as share of customer, pursuing customer differentiation rather than product differentiation, managing customers and not only products and more emphasis on economies of scope at the expense of scale.

As expected, between these two approaches there is a "grey area", in which firms found a way to enjoy both worlds of economies of scale and scope. Mass-customisation, I believe, provides few similar customised products (the concept behind economies of scope) along with operating mass-production and controlling large market-share for each of these products.

Q5 .Explain the importance of location decisions and the decision-making process for making location decisions

Ans:-

Location Decisions Location decisions are also strategically important due to many reasons. They generally involve long-term commitment and are difficult or expensive to change. Location decisions also tend to have significant impact on subsequent investment requirements, operating costs and revenues and on operations themselves. A poor choice of location may add to transportation costs or result in difficulty in obtaining required skilled levels in people, or they may make access to raw materials more difficult. In short, for both manufacturing and services operations, the decision on location is bound to have impact on the companys competitive advantage. Objectives of Location Decisions Profit-based organisations make most of their decisions on the resultant profit potential, while non-profit organisations generally tend to seek a balance between their ability to serve their customers and the costs they incur. However, it can be said that there is no ideal location for any company. There may be many acceptable locations for a company. Sometimes, the options may be so many as to make it very difficult to make a choice. Thus, practically, most companies identify only the acceptable locations from which to make the final choice. Choice of a location can often depend on the position of a company in its supply chain. Considering the extreme ends of a typical chain, a retailer may focus on accessibility to a customer and seek to locate the business nearer the market, while at the beginning of a supplychain; a supplier of raw materials may attempt to locate the main facility near the source of raw material. Four possible options exist in case of decision on location. They are: To expand an existing facility: This pre-supposes that there is scope for expansion in the existing facility. Such an option is considered if there are sufficient advantages in the existing location that are not available in other options. This option generally entails less cost than other options. Add more locations to existing ones: Generally, this happens in retail operations. The basic concept would be to weigh the resultant impact of the total system in other words, the company should examine whether addition of locations would result in a net improvement in business, which would also be cost-beneficial. Sometimes, this option is resorted to pre-empt

competitors from entering the market. Move from existing location to a new one: In this option also, a cost-benefit analysis of moving to a new location should be assessed carefully before taking a decision. Shift in the market, running out of raw material supplies or required manpower, etc. are some of the typical reasons for considering this alternative. Status Quo: This option may be forced on a company if the latter is unable to identify any better potential location.

General Procedure for Location Decision The approach to location decisions by different companies depends on the companys size and geographical scope of its operations. Small companies adopt an informal approach. New and small firms may locate their facility at a certain place just because the owner lives there or closeby, and look for only local alternatives in case of expansion or adding new facilities. Large companies, on the other hand, use a more formal approach, considering a wider range of options, and subjecting the process to a detailed and rational analysis. The procedure of making a decision on location in case of a formal approach may be described as follows: 1. Decide on the criteria to be used for evaluating different location alternatives. For example, increased revenue, or cost saving, or community service. 2. Identify important factors that influence the calculations for example location of markets or of raw materials. 3. Develop location alternatives: a. Identify a general location. b. Identify a small number of area alternatives. c. Identify site alternatives within the area chosen. d. Evaluate the alternatives and make the selection. Step a, is a matter of managerial decision. Step b, factors affecting Location decisions. Amongst the many factors that may influence the location decision, a few may be more significant. For example, for a nuclear power plant, proximity to abundant water supply for

cooling is very important, while for a steel plant, proximity to iron ore mines and to coal pits would be top priority. A company would need to identify such important factors and narrow the search for suitable options in a particular geographical area. 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 Labour issues like ( wage rates in that particular area, labour 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 organisations, 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. Labor factors

In arriving at a decision on the location of a facility, labour factors also play a key part. This is particularly so for labour-intensive organisations. Some of the factors considered are labour cost, labour 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. Community Considerations Communities tend to attract businesses due to creation of employment, or because tax collections can be better. However, certain communities may be sensitive to disturbance of ecology, and may go out of the way to discourage certain types of businesses from setting shop in their area. In some cases, while the community as a whole may hold a favourable view about location of a business, individual families or residents may have serious objections to certain businesses locating or expanding their facility in the sites next to theirs, due to objection to possible increase in noise levels, traffic or pollution. Examples of such businesses are: airports, nuclear facilities, high-way construction, etc. From a companys view-point, a community can be attractive as a place for its workers and managers to live in view of superior facilities of education, health-care, shopping, transportation and religious worship. Site-Related Factors The other important factor which has to be considered in Location Decision is Site-Related Factors. These are important because only if the site and soil condition is good, the construction will be strong enough. Even the cost of the land and its future accessibility also matters a lot. The main considerations in case of site-related factors are: Land Transportation

 Access and zoning or other restrictions In certain cases, sites may need to be evaluated with the help of engineers or technical experts in case of heavy manufacturing units, erection of large buildings or facilities with special requirements. Soil conditions, load bearing capacity and drainage rates can be critical and may need careful and expert evaluation. In view of the fact that decisions on site are long-term, factors such as scope for future expansions, current utility such as sewer connections, sufficient parking space, access to main roads, etc. have predominance over land cost. From this point of view, Industrial Parks could be ideal locations, but on the flip side would be restrictions on certain types of industries inside an industrial park.

Q6. Explain the terms: Operations Mission, Distinctive Competence, Operation Objectives and Operation Policies.

Ans:-

Operations mission Every business operations should have an articulated Mission along with other functional strategies that is connected to the business strategy as well. For example, if the business strategy is product leadership, the operations mission should focus on new product introduction and develop the needed flexibility to adapt product to the changing needs of the market. If the company chooses to follow other strategies such as market or price leadership the corresponding operations missions would be different.

Thus, the operations mission is derived from the business strategy adopted. Distinctive competence Distinctive competence refers to the companys ability to carry out a (business) process better than the competitors. The competence could be derived either from unique resources (capital or human) or from unique capabilities (sometimes leading to a patent). The distinctive competence of the company should be commensurate with the mission of operations. Developing the distinctive competence refers to developing a business process in an area (for example, in quality assurance) which is different from the mission of the operations (say, excelling in new-product innovation). Similarly, the distinctive competence must be valued by other functional areas such as marketing, finance, etc., so that it gets all-round support from the entire cross-section of the business, as a basis for obtaining competitive advantage. Sometimes, a business strategy may be derived from a companys distinctive competence (existing or planned) and the company may work towards matching the market to it. A company, in order to compete effectively would need not only a suitable market segment but also a unique capability to service the market segment. Thus, it is seen that distinctive competence is an essential pre-requisite for working on a successful business strategy.

Operations objectives The third element of Operations Strategy is operations objectives. There are four common objectives, they are: Cost Quality Delivery Flexibility The companys Mission is logically converted into objectives in the above mentioned areas. To be strategic in nature, these objectives should be long-term (5 to 10 years). Operations policies
This relates is the fourth element of the Operations Strategy. Policies are normally broad guidelines that

the company develops in keeping with their strategies and value systems. These policies assist decisionmakers (including the senior most management levels) in arriving at decisions. Operations policies should generally be developed for each decision categories (process, quality systems, capacity, and inventory), and should be integrated with other functional decisions and policies.