OPERATIONS MANAGEMENT

Operation management is a
systematic direction and control
of the process that transform
inputs into finished goods or
services.
Operation management
Inputs Transformation

processes
Manpower
Equipment/Machines
Money
Energy
Utilities
Raw materials
Outputs
Performance feedback.
Efficiency evaluation
Goods
Services
Fig.1 The production and operations Management system
OPERATIONS/PRODUCTION TYPES
OF ORGANIZATIONS
1.1 Manufacturing organizations
Manufacturing organization include all
chemical and process organization,
engineering, mining, etc
Transformation of inputs in terms of form,
shape, structures, etc., to obtain final product.
There are three major categories:
(a) Mass production organizations
(b) Job shop production organizations
(c) Batch manufacturing organizations
1.2 Service Organizations
Service organization change the
state/condition utility of a costumer. These
include training institutions, hospitals,
prison, hotels and accommodations, etc.

1.3 Supply Organizations
Here there is a change of ownership of
item. Supply organizations includes;
shops, fuel station, commercial banks, etc.
1.4 Transport organizations
There is a change in location utility
from location A to B
These includes land transportation,
air and sea transportation.
Summary:
It is possible to find all four features in one
organization, but the core feature is the one
which underpin the identity of that particular
organization.
2.0 LOCATION OF FACILITIES
2.1 Basis for choosing a Location
Availability/existence of infrastructure (road &
utilities)
Proximity to markets
Favorable labor climate
Proximity to raw materials
Security (availability)
Cost of land or site
2.2 Basis for choosing an equipment
Technical factors
Cost (economic) factors



2.2.1 Technical Factors
Competitive advantage;
Demand for product (specific against general
purpose equipment);
Risk of obsolescence;
Quality of the work produced;
Maintenance costs and reliability

2.2.2 Cost (economic) Factors
Direct labour
Direct materials
Other operating costs
Interest on capital invested



2.3 Two main categories of identifying
the site location
Quantitative or/and
Qualitative methods

Specific Techniques/Methods Used
Equal Weight method
Variable Weight method
Weight-cum-Rating method
Factor Point Rating method (poor, fair,
adequate, Good, Excellent)
Composite Measurement method (Multiple
criteria technique)
Consider an example Equal Weight Method
Factors Max.
Point
Site 1 Site 2 Site 3 Site 4
F1
10 3 6 8 2
F2 10 4 5 9 3
F3 10 7 2 6 3
Sum of site
ratings
30 14 13 23 8
Consider an example for Variable Weight
Method
Factors Max.
Point
Site 1 Site 2 Site 3 Site 4
F1
400 300 350 350 200
F2 300 150 200 150 100
F3 100 50 75 80 40
Sum of site
ratings
800 500 625 580 340
Consider an example for Weight-cum-
Rating Method
Factors Weight
to
factor
Site 1 Site 2 Site 3 Site 4
F1
2 4 6 8 3
F2 3 4 4 9 2
F3 5 5 3 7 2
Site rating
45 39 78 22
Multiple criteria/Composite Technique
Advantages
- ability to combine all types of criteria under
one denomination;
- It is a technique that consider qualitative and
quantitative factors
- it forms the basis for discussion.
Disadvantages
- it is too subjective for qualitative attributes;
- difficulty to perceive the problem in terms of
weight x score.
Consider example which has both qualitative and
quantitative Factors Composite Measure or Multiple Technique
Factors Location A Location B Location C
Cost of land including
building development
55m 49m 45m
Labour and raw
materials charges
40m 25m 32m
Power and water
10m 9m 10m
Freight for incoming
and outgoing
85m 85m 92m
Total
190m 168m 179m
Cost of living
Moderate Low Moderate
Housing Facilities
Excellent Poor Good
Community Attitude
Good
Encouraging
Indifferent
3. .0 FACILITY LAYOUT
There are 4 major kinds of Layout:
1. Process Layout
In process Layout all machines/ Facilities
Performing similar functions are placed in one
location.

Advantages of Process Layout.
It has high Flexibility i.e. can accommodate changes
in production volumes without suffering high costs.
Can be adapted to skilled Labour hence makes
supervision easy.
Cont FACILITY LAYOUT
Disadvantages
Occupies a lot of space
It requires people who are well trained.

2. Product Layout
Machines/facilities are placed according to
the production requirement. It is used in
continuous production systems such as
soft drink manufacturing


Cont FACILITY LAYOUT
Advantages
High production efficiency.
Possible to employ semi skilled Labour.
Disadvantages
Lack of Flexibility in terms of ability of cope with
changes in production volume and product
variety.
One needs inventory between work stations to
de-couple station interdependence
Cont. FACILITY LAYOUT
3. Hybrid Layout
This is a mixture of product and process
Layout.
The hybrid layout combines the advantages of
the two Layouts. An example is organization
which fabricates components before
assembling them into finished products.
The former can be done through process
Layout and the latter by a product Layout
Cont. FACILITY LAYOUT
4. Fixed Position Layout
This is possible when the product is so
large such that cannot move around work
situations, for instance in ship building and
dam construction.
Organization and
Management
(O&M)
O&M
The Organization and Management
(O&M) study aims at drawing up an
effective organisation and management
plan to achieve the entrepreneurs
objectives. It distinguishes the
organisation and management activities
for the pre-operating period from that for
the project operation
Organization and Management
The O&M study generally encompasses the
following aspects:
Form of organization
Organogram (organizational structure)
Staffing pattern
Pre-operating activities
Pre-operating costs
Schedule of pre-operating activities via
Gantt Chart
Form of Organizations
Single (sole) proprietorship
Partnership
Private Limited Company or
close corporation or Public
Limited Company
Legal Personality
Sole
Proprietorship
Partnership Limited Liability
Advantages
Low start-up costs
Owner has direct
control and makes
all decisions
All profits go to the
owner
Advantages
Divided start-up costs
Shared managerial
and leadership
responsibilities
between partners
Easier access to
capital
Advantages
Liability is limited to the
business
Easier to raise capital
Management is more
accountable
Has a board of directors
Disadvantages
Owner is
personally liable
for all losses
Difficult to raise
additional capital
Management is
limited
Disadvantages
Partners are
personally liable for
losses
Profits are divided
Confusion in
managerial roles
Partners disputes
Disadvantages
Closely regulated by
Government
Extensive record-
keeping
Most expensive to start
Taxes are charged twice
Single (sole) proprietorship is
characterised by:
One person is sole owner;
Less government control;
Generally, no income tax on business, only
on owner;
Unlimited personal liability for business
debts;
Termination upon death of owner;
Owner is mostly the entrepreneur and
general manager.
Partnership characterised by:
Two or more persons as owners;
Some owners may be active in
management, others only as financiers;
Partners rights and duties defined by
partnership agreement;
Unlimited personal liability for business
debts;
Termination upon death of any one of the
partners;
Company or close corporation (cc)
characterised by:
Corporation has separate and legal
personality distinct from owners
(stockholders or shareholders);
Continuity unaffected by debt or transfer of
ownership;
Subject to more government control than a
sole proprietorship or partnership;
Income tax on profits and dividends;
Cont Company or close
corporation (cc) characterised by:
Corporation mostly managed by
professional managers as distinct from the
shareholders;
Close corporations have mostly family
members and/or friends as stockholders;
A corporation which issues stocks to the
public is also called a public company.
The choice of organization
depends on:
The objectives of the entrepreneur;
Capabilities of the entrepreneur, such as his
managerial and technical expertise, size of
investment, desire for financial and
management control, ability to attract
financing, protection of confidential
information;
Entrepreneurs view of the liabilities
associated with each type of organisation.
How will the business be managed
and operated?
Some structure of authority and
responsibility (chain of command),
Division of labour (job distribution), and
Definition of what each one must do in
the business (job description).
And therefore, the business needs an
organisational structure. This is mostly
depicted through an organisation chart.
Organizational Structure (Organogram)
An organogram shows:
The chain of command;
Relationship; and
Positions
Designing an organization structure
Requires an understanding of the following elements:
Identification of the major and key activities to be
done to meet business (project) objectives;
Grouping of these activities into related functions;
Assigning of various functions to specific
positions;
Determination of relationships of the various
activities to achieve co-ordination and unity of
effort;
Fixing of responsibility and authority for each task.
Organizational Structure (Organogram)

Owner-Director
Operations Administration Marketing Finance
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Staffing Pattern
Staffing pattern indicates the personnel
requirement by function (marketing,
production, administration, finance) and an
estimate of compensation for work input.
Personnel requirement include:
Position titles;
Necessary qualification, and
Number of personnel for each
position
Lending institutions normally require:
Bio-data of the entrepreneur and
his key staff;
Managements experience,
character and capability are crucial
factors in loan approval, even in
determining collateral requirements
and other loan conditions.
What pre-operating activities must be
undertaken before the business can operate?
Attendance at a training programme
(whether skill-related, management or
entrepreneurship),
Preparing a business plan, doing a market
survey, making trips to machinery and raw
materials suppliers,
Registering the business,
Hiring a consultant,
Trial operation, etc.
Usefulness of a Gantt chart
Helps an entrepreneur to list and document
all pre-operating activities and decides:
When each activity will take place and
How long it will be, and
Who does it,
How much it will cost (determines pre-
operating expenses)
O&M Costs
Pre-operating investments (POI);
Costs of fixed assets such a typewriter,
furniture and fixtures, cabinets, electric fans,
calculator, computer, vehicle, etc.
Administrative costs (other operation costs
or indirect costs) include the salary of the
office secretary, directors, managers,
bookkeeper, driver, security guard,
depreciation of fixed assets, furniture and
fixtures used in the office, communications,
and office supplies, etc.
Finance
Finance provides:
the needed funds under the most
favourable terms, and
sees to it that the funds are
effectively used
Relationship of Finance with
other Business Functions

Marketing Operations O&M
Foundation
Finance
Operations Firms May Need Capital for:
Land
Building
Machinery and Equipment
Furniture and Fixtures
Accounts Receivable
Supplies
Finished Goods
Work-in-Process
Raw Materials
Cash
Pre-Operating Costs
Patents
Goodwill
Fixed Assets
Current Assets
Deferred Charges
like Fixed Assets
(non-tangible)
Sources of Finance
Bank Credit/Overdrafts
Trade Credit
Instalment Credit
Customer advances
Lease/venture capital
Issue of share/debentures
Loans from banks/institutions
other financial institutions
Ploughing back of profits
Issue of shares
Issue of debentures
Loans from banks and other financial
institutions
Ploughing back of profits
Short-term financing
Medium-term financing
Long-term financing
AN OVERVIEW ON FINANCE

CUSTOMERS
Final Finished
Production and/or
Services
MARKET
FIXED INVESTMENT
Land
Buildings
Machines & Equipment
Furniture, etc.
Depreciation
PRE-OPERATING EXPENSES
Registration & Licenses
Business Plan Preparation
Trial Production & Skills Training
WORKING CAPITAL
Raw Materials
Direct Labour (Wages)
Utilities (Factory Overheads)
Selling & Administrative Expenses
Interest loan repayment, and Tax etc.
PROFIT OR LOSS
CASH
SALES
OWNER

Retained
EQUITY
Financial Statement
Investment Plan
Profit & Loss Statement
Cash Flow Statement
Balance Sheet Statement
Financial Analysis
LOAN
Withdrawn
Amortization
INVESTMENT PLAN
INVESTMENT PLAN
(in Tshs)
ITEMS
A. FIXED INVESTMENT
1. Land
2. Building
3. Machinery & Equipment
4. Office Equipment
6. Others
5. Transport Equipment
Total Fixed Investment
1. Business Plan Preparation
B. PRE-OPERATING INVESTMENT
Total Loan Equity
2. Licenses and Registration
Total Pre-Operating Investment (POI)
5. Others
3. Skills and management Training
4. Trial Production
C. TOTAL INVESTMENTS (A + B)
INVESTMENT PLAN
DIRECT OPERATING COST
1. Raw Materials
3. Salary for Production Staff
2. Salary for Marketing Staff
INDIRECT OPERATING COSTS
Total Direct Operating Costs
2. Direct Labour Costs
1. Owners Salary
3. Factory Overhead
6. Office Supplies
7. Rentals
8. Other Expenses
4. Salary for Admin. & Finance Staff
5. Selling & Marketing Costs
Total Indirect Operating Costs (1)
TOTAL ANNUAL OPERATING COSTS
WORKING CAPITAL REQUIRED
TOTAL PROJECT COST (C + D)

DEBT TO EQUITY SHARE (%)
(1) NOTE that this Indirect Operating
Costs Still needs depreciation and POI
amortization

INVESTMENT PLAN (Example of Filling/Service Station)
(in Tshs)
ITEMS
A. FIXED INVESTMENT
1. Land
2. Building
3. Machinery & Equipment
4. Office Equipment
5. Transport Equipment
Total Loan Equity
0 0
Total Fixed Investments
B. PRE-OPERATING INVESTMENT
6. Others
180,000,000 15,789,474
0
164,210,526
105,000,000 95,789,474 9,210,526
0 0
0 0
0
0
0
0 0
285,000,000 260,000,000 25,000,000
1. Business Plan Preparation
C. TOTAL INVESTMENTS (A + B)
5. Others (grills/plastering/etc.)
Total Pre-Operating Investment (POI)
2. Licences and Registration
4. Trial Production Costs
3. Skills and Management Training
D. WORKING CAPITAL
DIRECT OPERATING COSTS
1. Raw Materials Costs
2. Direct Labour Costs
3. Factory Overheads
Total Direct Operating Costs
INDIRECT OPERATING COSTS
1,699,800,000
51,000,000
17,412,600
1,768,212,600
1. Owners Salary
2. Salary for Marketing Staff
Total Indirect Operating Costs
4. Salary for Adm.& Finance Staff
3. Salary for Production Staff
5. Business Promotion & entertain
6. Office Supplies
7. Rent for Land Lease
WORKING CAPTIAL REQUIRED
TOTAL ANNUAL OPERATING C
TOTAL PROJECT COST (C + D)
8. Other Expenses
EQUITY SHARE (%)
4,800,000
0
0
19,140,000
0
0
2,340,000
1,787,352,600
0
12,000,000
9,372,165
50,000,000
25,000,000 34,372,165
335,152,165 285,152,165
15 85
0
0
0
O
O
O
O
O
25,000,000 275,780,000
0
0
15,780,000
15,780,000
300,780,000
PROJECTED PROFIT & LOSS
(In Tshs)
ITEMS
Year1 Year2 Year3 Year4 Year5
Planned Operations(in Units)
A.Sales
B.Direct Operating Cost
1.Raw Materials Costs
2.Direct Labour Costs
3.Factory Overhead
Total Direct Operating Costs
C. GROSS PROFIT (A-B)
contd Projected Profit &
Loss
ITEMS
Year1 Year2 Year3 Year4 Year5
D.INDIRECT OPERATING COSTS
1.Owners Salary
2.Salary of Marketing Staff
3.Salary of Production Staff
4.Salary of Admin.&Finance Staff
5.Selling & Marketing Costs
6.Office Supplies
7.Rentals
8.Other Expenses
Total Ind.Ope.Cost Bef.Dep.&POI
Contd Projected Profit & Loss
(In Tshs)
ITEMS
Year1 Year2 Year3 Year4 Year5
9.Depreciation
10.POI Amortization
E.Total Ind.Operating Costs
F.Operating Profit (C-E)
G.Interest
H.Profit Before Tax (F-G)
I.Tax
K.Profit (H-I)
L.Breakeven point (E/C) 100%
Depreciation
Is derived from the Latin word do
meaning down and pretium meaning
price;

In common use it means putting down the
value of an asset due to wear, tear,
passage of time, obsolescence, etc.,
Characteristic of Depreciation
Is always a fall in the value of asset
This fall is always gradual
The fall is of permanent character and it cannot be
recouped afterwards
It is a continuous process and it does not matter
whether the asset was put to use during the period
or not
Is always on fixed assets and not on current or
floating assets
The fall is always in the book value of the asset and
not in market or exchange value
Is a result of the use of assets, passage of time and
obsolescence.
Need for Providing Depreciation
To know the true profit and loss;

To show true and fair view of financial
position; and

To provide funds for replacement of assets
Depreciation has Became
Important in Production for:
Fixation of prices;

Calculation of profit or loss analysis;

Computation of taxable income;

Calculation of managerial remuneration;
etc.,
Factors to be Considered when
Determining Depreciation
Cost of the asset;
Useful life of the asset;
Salvage value;
Method of depreciation
Methods of Depreciation
In this business plan will use:

Fixed installment or straight line method;
Fixed Installment or Straight Line
Method


Cost of the asset - Scrap value at the end
Depreciation = ------------------------------------------
Life of the asset (number of years)
Contd Projected Profit & Loss
ITEMS
Depreciation Calculator
Value (Tsh) Period (yrs) Annual
Depn
1.BUILDING
2.Machinery & Equipment
3.Office Equipment
4.Vehicles
5.Others
Total
Amortization Calculator
Value (Tsh) Period (yrs) Amort/yr
1.Pre-Operating Investment
PROJECTED CASH FLOW
(In Tshs)
ITEMS
Year0 Year1 Year2 Year3 Year4 Year5
Sales
A.Cash In Flow
1.Cash Sales
2.Receivable
3.Equity
4.Fixed Investment Loan
5.Working Capital Loan
6. Beginning Cash Balance
Total Cash In Flow
Contd. Projected Cash Flow
ITEMS Year0 Year1 Year
2
Year3 Year4 Year5
Sales
B. Cash Out Flow
1.Total Investment
2.Direct Operating
Costs
3. Total Ind. Oper. Costs
bef. Depn and POI
4.Interest
5. Tax
Total Cash Out-Flow
Contd. Projected Cash Flow
ITEMS Year0 Year1 Year
2
Year3 Year4 Year5
Sales
C. Net Cash (A-B)
D. Loan Payments
1. Principal for Fixed
Investment Loan
2. Principal for Working
Cap. Loan
Total Loan Payments
E. Ending Cash
Balance (C-D)
BALANCE SHEET


Total Asset = Equity + Liabilities
PROJECTED BALANCE SHEET
(In Tshs)
ITEMS
Year0 Year1 Year2 Year3 Year4 Year5
1. ASSETS
1.1 CURRENT ASSETS
1.Cash
2.Receivable
3.Inventories
Total Current Assets(A)
Contd.. Projected Balance Sheet
ITEMS
Year0 Year1 Year2 Year3 Year4 Year5
1.2 Fixed Assets
1.Land
2.Building
3.Machinery &
Equipment
4.Office Equipment
5.Vehicles
6.Others
Total Fixed Assets
Contd. Projected Balance Sheet
ITEMS
Year0 Year1 Year2 Year
3
Year
4
Year5
Accumulated
Depreciation
Book Value of Fixed
Assets (B)
POI
Accumulated POI
Book Value of POI (C )
Total Assets (A+B+C)
2. Liabilities & Equity
2.1 Current Liabilities
1. Account Payable
2. Working Capital Loan
Total Current
Liabilities(D)
Projected Balance Sheet
Contd.
ITEMS
Year
0
Year
1
Year
2
Year
3
Year
4
Year
5
2.2 Long Term Liabilities(E)
1. FIXED Investment Loan
Total Long Term Liabilities (E)
3. Equity
1.Owners Equity
2.Profit of Previous Period
3.Current Profit
Total Equity (F)
Total Liabilities & Equity
(D+E+F)
ROI(Profit/Total Assets)x100%
Financial Analysis
Potential entrepreneurs raise the
following issues:
Will the proposed business earn
adequate profits?
Can the future business meet its
obligations promptly?
Will an investment in the proposed
business be safe?
Cont Financial Analysis
Three sets of ratios are normally
measured and examined. These are:
Profitability,
Liquidity, and
Solvency
Profitability
The instruments used to measure
profitability are:
Net Profit Ratio,
Assets Turnover, and
Return on Investment (ROI)
Net Profit Ratio
measures the percentage ratio of net profit
after taxes to net sales:

Net Profit After Taxes
___________________ = Net Profit Ratio
Net Sales
Assets Turnover
is the ratio of annual net sales to the total
assets used in the business. It
measures the volume of sales derived
from each unit of money invested in
assets:
Net Sales
________________= Assets Turnover Ratio
Total Assets
Return on Investment (ROI)
ROI is the combination of the two ratios above,
i.e., net profit and assets turnover ratios. It
should be noted that neither the net profit ratio
nor the assets turnover ratio by themselves
provide an adequate analysis of the operating
efficiency of the proposed business. The net
profit ratio ignores the utilisation of assets, while
the assets turnover ratio ignores profitability on
sales. The use of the ROI ratio resolves these
deficiencies by reflecting both factors in a single
ratio.
Cont Return on Investment (ROI)
ROI is given by:

Net Profit Ratio: x Assets Turnover Ratio: =

Net Profit After Taxes x Net Sales =
Net Sales Total Assets

Net Profit After Taxes = ROI
Total Assets
Liquidity
Examines the proposed business whether
it can meet all its future obligations
promptly? The set consists of the
following ratios:
Current Ratio,
Acid Test (or Quick Ratio),
Average Collection, and
Inventory Turnover.
Current Ratio
Measures the ability of the proposed business to meet
all its short-term debts by relating current assets
and current liabilities. A 2:1 ratio seems the most
desirable one, but may not necessarily be valid in
all cases. Current Ratios are sensitive to the
practices within the industry in the country.
Current Assets
_______________ = Current Ratio
Current Liabilities
Solvency
This ratio assesses the financial strength of a
proposed business regarding its ability to meet
its long-term financial obligations .

Total Debt
____________ = Debt-Equity Ratio
Total Equity
Solvency
For bankers, a low debt-equity ratio will
be favourable since it indicates that
there are enough assets to protect their
principal lending.
For stakeholders, a high debt-equity
ratio may indicate increases in fixed
charges against earnings and can
consequently lead to decreases in
future dividends
Profit & Loss Statement Using Transactions
Cards of Company X in Dar es Salaam
No Item Tshs.
1 Office rent 50,000
2 Interest expenses 25,000
3 Sales 1,000,00
0
4 Selling & Marketing Costs 20,000
5 Tax Payable 10%
6 Depreciation of Office
Equipment
50,000
Profit & Loss Statement Using Transactions
Cars of Company X in Dar es Salaam
No Item Tshs.
7 Staff Salaries, etc. 130,000
8 Direct Labour 200,000
9 Raw Materials Purchased (in
a period)
200,000
10 Raw Materials Beginning 100,000
11 Ending Stock of Materials 50,000
12 Factory Overhead 50,000
P & L Statement for X Company Using
Transactions Cards of Company X in Dsm.
Item Tshs 000
Sales: 1,000
Less: Cost of goods sold 500
Gross Profit 500
Less:Operating Expenses
Office rent 50
Selling & administration 150
Depreciation of office
equp.
50
Total Operating expenses 250
P & L Statement for X Company
Contd.
Item Tshs Tshs
Operating Profit 250
Less: Interest expenses 25
Net Profit before tax 225
Less: Tax (10%) 22.5
Net Profit after tax 202.5
Balance Sheet (Transaction Cards of
Juakali Co. as of 31
st
August 2002)
Items
Tshs.
1. Cash 450
2. Accounts Receivable 2,000
3. Inventories 6,500
4. Land 1,050
5. Buildings & Improvements (net) 950
Balance Sheet (Transaction Cards Contd.)
Items
Tshs.
6. Machinery (net) 1,000
7. Delivery Equipment (net) 500
8. Accounts Payable 450
9. Notes Payable 5,000
10.Capital 6,000
11. Retained Earnings 1,000
Balance Sheet as of 31
st
August
2002 for Juakali Company
ASSETS
Current Assets Tshs.
Cash 450
Accounts receivable 2,000
Inventories 6,500
Sub-Total 8,950
Balance Sheet as of 31
st
August
2002 for Juakali Company Contd.
Fixed Assets
Land 1,050
Building & Improvement (net) 950
Machinery (net) 1,000
Delivery Equipment (net) 500
Sub-Total 12,450
Balance Sheet Juakali Company
Contd.
Liabilities & Owners Equity
Liabilities
Accounts Payable 450
Long-Term Liabilities
Notes Payable 5,000
Sub-Total 5,450
Balance Sheet Juakali Company
Contd.
Owners Equity
Capital 6,000
Retained Earnings 1,000
Total Liabilities and Equity 12,450
Finance Overview
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