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Operations Management

Akanksha Trigun
Indian Institute of Management
Bangalore
June 17, 2014

What is Operations Management?


Finance
Operatio
ns

Marketin
g

HRM

Systematic approach to addressing issues in the


transformation process that converts inputs into
useful, revenue generating outputs.
Source: Operations Management, Second Edition, Prof. B Mahadevan

Bare minimum requirements (for the


test)
Decision Tree Approach
Littles law Application in queuing theory
Critical Path Method (CPM) & Programme
Evaluation and Review Technique (PERT) :
Project Management
Basic Mathematics Bell curve calculations,
Expected Values, Linear Programming, Et al.

ONE SITUATION
A manufacturer of air conditioner compressors in concerned that too much
money is tied up in its value chain.
Average raw material and work in process inventory is $ 50 million.
Sales are $20 million per week and finished goods inventory average $30
million.
The average outstanding accounts receivable is $ 60 million. Production
takes on average, 1 week to produce a compressor and the typical sales flow
time is 2 weeks. Assume 50 weeks in 1 year.

MOST BASIC QUEUING


THEORY

Arrival
Time

10

15

12

20

16

25

20

30

10

24

35

11

28

40

12

32
36

45
50

13
14

10

Customer Number

Departure Time in
System
Time

Customer
Number

10

What is the queue size?


What is the capacity utilization?

20

30
50
Time

40

Arrival
Time

Departure
Time

Time in
System

11

12

17

18

23

24

29

30

35

36

41

42

47

48

53

10

54

59

Customer Number

Customer
Number

10

20

is the queue size?


is the capacity utilization?

30
60
Time

40

50

Arrival
Time

10

20

22

32

33

14

36

15

43

16

52

12

10

54

Time in
System

20

30

40

Queue Fluctuation

50

60

70

Time

11

3
2

What is the queue size?


What is the capacity

10

Number

Processing
Time

Customer

Customer
Number

1
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64
Time

Customer
Number

Arrival
Time

Processing
Time

Time in
System

1
0

10

20

22

32

33

36

43

52

10

54

What is the queue size?


What is the cap

4
3
2
1
0

1
0

2
0

3
0

4
0

5
0

6
0

7
0

Multipleservers,

singl stag
e
e
No. of customers being
served

Proces Rat
s
e

Arriva Rat
l
e
Queue Length, Lq

Server
s

No. of customers in the


system,

Ls

Performance
Metrics
Server utilisation

In the case of single server:

In the case of multiple servers:

Waiting Time using Littles Law

Average time customer


spends in system

Ws

Average time customer


spends in queue

Wq =

Average number of
customers in system

Ls = L q +

(assuming < 1)

S
Ls

Lq

PRODUCTION PLANNING

Hierarchical approach to
planning
Long range

Marketing Plan

Business Plan
Financial Plan
Aggregate Production Planning
(rough cut capacity)

Medium range

Materials
Requirement

Master Production Schedule


Capacity
Requirement Plan

Plan
Detailed Scheduling
Short range

Shop Floor Control

Aggregate Product
planning
In level strategy, the emphasis is not to disturb the existing
production rate

In chase strategy, no inventory is carried from one period to

another; the supply demand mismatch is addressed during each


period by employing a variety of capacity related alternatives

APP Strategy
Level Strategy

APP alternatives applicable


Inventory based alternatives
(a) Build Inventory
(b) Backlog/Backorder/Shortage

Chase Strategy

Capacity adjustment alternatives


(a) Over Time/Under Time
(b) Vary no. of shifts
(c) Hire/Lay-off workers
Capacity augmentation alternatives
(a) Sub-contract/Outsource
(b) De-bottleneck

Key features
Inventory as the critical link between
the periods; Made-to-stock
environments; Products with low risks
of obsolescence
No inventory carried from one period
to another; Made-to-order and project
environments; Several service
systems

INVENTORY

Inventory Management

Types of inventories:
Seasonal: Consumer durables during festive
season
Decoupling:
Multi
processes
Production
Systemstage
without any
decoupling inventory
1

Decoupling Inventory

1
Stage 1

Stage 2

Stage 3

10

10

Inventory Management

Quantity

Contd.
Cyclic: Syringes at hospitals
Pipeline: Lead Time * Demand per
unit time
Safety Stock: Hedging against
uncertainties
Cyclic Stock
Pipeline inventory
L
Time

Safety stock

Inventory Associated Costs and EOQ

Total Cost
C
O
S
T

Holding
Costs

Ordering Costs

Order Quantity (Q)


EOQ

EOQ Formulae and Shortcomings


D Q
TC = S + H
Q 2

2SD
2(Order or Setup Cost)(Annual Outflow)
Q =
=
H
Annual Holding Cost
*

Problems lie in the assumptions made:


1.Demand is certain and continuous
over time
2.Instantaneous replenishment
3.No order quantity related issues exist
4.All inventory sourced externally

The concept of safety stock


Inventory on hand
Q

order

order

order

ROP
R

mean demand during


supply lead time
safety stock
Time t
L

Relating to Cycle Service Level

Desired cycle service level

Mean Demand
over Lead Time

1.0-(desired cycle service level)

Reorder Point (ROP)

Reorder Point = Mean Demand over Lead Time + Safety Stock

Continuous Review (Q) Model

Stochastic Demand (d),

INVENTORY

Constant Lead Time (LT)


Imax

Q
Q

Q
R

LT
Order
Placed

t1
Order
Received

Order
Placed

Imin

TIME

Periodic Review (P) Model

Stochastic Demand (d),

INVENTORY

Constant Lead Time (LT)

TI
Imax

Q1

Q2
Q3

Q1

Q2

Q3
Imin

LT
Order
Placed

T
Order
Received

LT
Order
Placed

T
Order
Received

LT
Order
Placed

Order
Received

TIME

Formulae
Q System

2 DS
EOQ
H
ROP SS LT
SS z r LT

P System

RP EOQ /
TIL SS ( RP LT )
SS z r RP LT

Please read up some bits on

Bull whip effect in Supply Chains


Michael Hammers paper on The
right supply chain and Business
Process Re-engineering
Single period inventory ordering
rules
Costs associated with overstocking and
under stocking, related probabilities

Thanks!