OPERATIONS MANAGEMENT layout of facilities, equipment, and

notes and reviewer (1st sem design of work system.

finals)
Process selection occurs when
L5: Process Selection and new products or services are
Facility Layout being planned. However, it also
occurs periodically due to
Overview technological changes in products
Product and service choices, or requirement as well as
capacity planning, process competitive pressures.
selection, and layout facilities are
among the most basic decisions
managers make because they
have long-term consequences for
business organizations, and they
impact a wide range of activities
and capabilities.

Desired Learning Outcomes

Process selection and capacity
1. Explain the strategic
planning influence system design
importance of process selection
and the influence it has on the The figure above shows an
organization. overview of where process
selection and capacity planning fit
2. Identify and discuss the factors
into system design. Forecasts,
that influence process selection.
product and service design, and
3. Describe the need for technological considerations all
management of technology influence capacity planning and
process selection. Moreover,
4. List and analyze some reasons capacity and process selection
for redesign of layouts. are interrelated. They, in turn,
affect facility and equipment
5. Distinguish product layouts choices, layout, and work design.
from process layouts and their
main advantages and Factors that Influence Process
disadvantages. Selection
Importance of Process Process types:
Selection
1. Job shop usually operates on
Process selection refers to relatively small scale. It is used
deciding on the way production of when a low volume of high-variety
goods or services will be of goods or services will be
organized. It has major needed. Processing is
implications for capacity planning, intermittent, work includes small
jobs, each with different Need for management of
processing requirements. Skilled technology
workers are important
characteristics of a job shop. Technology and technological
innovation have a major influence
A service example is a on business processes.
veterinarian’s office, which is able
to process a variety of animals Technological innovation refers
and a variety of injuries and to the discovery and development
diseases. of new or improved products,
services, or processes for
2. Batch processing is used producing or providing them.
when a moderate volume of
goods or services is desired, and Technology refers to applications
it can handle a moderate variety of scientific knowledge to the
in products or services. The development and improvement of
equipment need not be as flexible goods and services.
as in a job shop, as well as the
skill level of workers doesn’t need Technological innovation in
to be as high as in a job shop processing technology can
because there is less variety in produce benefits for organizations
the jobs being processed. by increasing quality, lowering
costs, increasing productivity, and
Examples include bakeries, which
expanding processing
make bread, cakes, or cookies in
capabilities.
batches.
Among the examples are:
3. Repetitive processing is
sometimes referred to as 1. Laser technology used in
assembly. When higher volumes surgery
of more standardized goods or
services are needed, repetitive 2. Advances in diagnostic
processing is used. equipment

Familiar products made by these 3. High-speed Internet

systems include automobiles, connections
television sets, and computers.
4. High-definition television
4. Continuous system have
almost no variety in output, and 5. Online banking
no need for equipment flexibility. While process technology can
When standardized output is have enormous benefits, it also
desired, continuous system is carries substantial risk unless a
used. Examples of this system significant effort is made to fully
are petroleum products, steel, understand both the downside
sugar, flour, and salt. and the upside of a particular
technology. It is essential to
understand what the technology 4. Introduction of new products or
will and won’t do. Also, there are services
economic considerations (initial
cost, space, cash flow, 5. Changes in the volume of
maintenance, consultants), output
integration considerations (cost, 6. Changes in methods or
time, resources), and human equipment
considerations (training, safety,
job loss). 7. Changes in environmental or
other legal requirements
Facilities Layout
8. Morale problems (e.g., lack of
Layout refers to the configuration face-to-face contact).
of departments, work centers,
and equipment, with particular Basic objectives of layout design:
emphasis on the movement of
work through in the system. 1. To facilitate attainment of
product or service quality.
Layout decision are important for
three basic reasons: 2. To use workers and space
efficiently.
1. They require substantial
investments of money 3. To avoid bottlenecks
and effort. 4. To minimize material handling
2. They involve long-term costs.
commitments, which
makes mistakes difficult 5. To eliminate unnecessary
to overcome. movements of workers/materials.
3. They have a significant
impact on the cost and 6. To minimize production time or
efficiency of operations. customer service time.

The need for layout planning 7. To design for safety.

arises both in the process of
Repetitive Processing: Product
designing new facilities and in
Layouts
redesigning existing facilities.
Products layouts are used to
The most common reasons for
achieve a smooth and rapid flow
redesign of layouts include the
of large volumes of goods or
following:
customers through a system. This
1. Inefficient operations (e.g., high is made possible by highly
cost, bottlenecks) standardized goods or services
that allow highly standardized,
2. Accidents or safety hazards repetitive processing. The work is
divided into a series of
3. Changes in the design of standardized task, permitting
products or services
specialization of equipment and 5. A high utilization of labor and
division of labor. Because only equipment
one or a few similar items are
involved, it is feasible to arrange 6. Fairy routine accounting,
an entire layout to correspond to purchasing, and inventory control
the technological requirements of Disadvantages of product layouts:
the product or service.
1. Division of labor creates
Without high standardization, repetitive jobs, that provide little
many of the benefits of repetitive opportunity for advancement.
processing are lost. For instance,
an automatic car wash provides 2. Poorly skilled workers may
equal treatment to all cars-the exhibit little interest in maintaining
same amount of soap, water, and equipment.
scrubbing-even though cars may
differ considerably in cleaning 3. The system is fairly inflexible in
needs. response to changes.

Product layouts achieve a high 4. The system is highly

degree of labor and equipment susceptible to shutdowns caused
utilization, which tends to offset by equipment breakdowns.
their high equipment cost. 5. Preventive maintenance, quick
Because items move quickly from repairs, spare- parts inventories
operation to operation, the are necessary expenses.
amount of work-in-process is
often minimal. Repetitive Non-repetitive processing:
processing can be machine Process Layouts
paced (e.g., automatic car wash,
automatic assembly), worker Process layouts (functional
paced (e.g., fast-food restaurants layouts) are designed to process
such as McDonald’s, Burger items or provide services that
King), or even customer paced involve a variety of processing
(e.g., cafeteria line). requirements. The variety of jobs
that are processed requires
Main advantages of product frequent adjustments to
layouts: equipment. This causes a
discontinuous work flow, which is
1. A high rate of output referred to as intermittent
2. Low unit cost due to high processing.
volume The layout features departments
3. Labor specialization, which or other functional groupings in
reduces training costs and time which similar kinds of activities
are performed.
4. Low material-handling cost per
unit Process layouts are common in
service environment. Examples supervision and result in
include hospitals, colleges and higher supervisory costs.
universities, banks, auto repair 6. Accounting, inventory
shops, airlines, and public control, and purchasing
libraries. For instance, hospitals are much more involved
have departments that specifically than with product
handle surgery, maternity, layouts.
pediatrics, psychiatric, and
emergency. Universities have
separate schools or departments
that concentrate on one area of
study such as business, L6: Inventory Management
engineering, science, or math.
Desired Learning Outcomes
Advantages of process layouts:
1. Discuss the nature and
1. The system can handle a importance of inventories in an
variety of processing organization.
requirements.
2. The systems are not 2. Identify the functions of
particularly vulnerable to inventory and explain why firms
equipment failures. have inventories at all.
3. General-purpose
3. Describe the requirements for
equipment is often less
effective inventory management.
costly than the
specialized equipment. 4. Articulate the A-B-C approach
4. It is possible to use and explain how it is useful.
individual incentive
systems. 5. Solve typical problems
involving basic EOQ model.
Disadvantages of process
layouts: The Nature and Importance of
Inventories
1. In-process inventory
costs can be high if batch • Inventories are a vital part of
processing is used in business. Not only they are
manufacturing systems. necessary for operations, but they
2. Routing and scheduling also contribute to customer
pose continual satisfaction. Because inventories
challenges. may represent a significant
3. Equipment utilization portion of total assets, a reduction
rates are low. of inventories can result in a
4. Material handling is slow significant increase in Return of
and inefficient. Investment.
5. Job complexities often
reduce the span of
• Inventory decisions in service inventory storage capability,
organizations can be especially thereby adding another
critical. dimension to the inventory
decisions.
For example, hospitals carry an
array of drugs and blood supplies Functions of Inventory
that might be needed on short
notice, being out of stock on 1. To meet anticipated customer
some of these could imperil the demand.
well-being of a patient. However, The inventories that customers
many of these items have a may demand are referred to as
limited shelf life, so carrying large anticipation stocks because they
quantities would mean having to are held to satisfy expected
dispose of unused, costly demand.
supplies.
2. To smooth production
On-site repair services for requirements
computers, printers, copiers, and
fax machines also have to Firms that experience seasonal
carefully consider which parts to patterns in demand often build up
bring to the site to avoid having to inventories during preseason
make an extra trip to obtain parts. periods to meet overly high
requirements during seasonal
Different Kinds of Inventories period, these inventories are
include the following: named seasonal inventories.
1. Raw materials and 3. To decouple operations
purchased parts
2. Partially completed Historically, manufacturing firms
goods, called work-in- have used inventories as buffers
process (WIP) between successive operations to
3. Finished-goods maintain continuity of production
inventories or that would otherwise be disrupted
merchandise by events such as breakdowns of
4. Tools and supplies equipment and accidents that
5. Maintenance and repairs cause a portion of operation to
inventory shut down temporarily. The
6. Goods-in-transit to buffers permit other operations to
warehouses, distributors, continue temporarily while the
or customers. problem is resolved.

• Both manufacturing and service 4. To reduce the risk of stock-outs

organizations have to take into
consideration the space Delayed deliveries and
requirements of inventory. In unexpected increases in demand
some cases, space limitations increase the risk of shortages.
may pose restrictions on Delays can occur because of
weather conditions, supplier functions concerning inventory.
stock-outs, deliveries of wrong One is to establish a system to
materials, quality problems, and keep track of items in inventory,
so on. The risk of shortages can and the other is to make
be reduced by holding safety decisions about how much and
stocks, which are stocks in when to order. To be effective,
excess of expected demand to management must have the
compensate for variability in following:
demand and lead time.
1. A system to keep track of the
5. To take advantage of order inventory on hand and on order.
cycles
2. A reliable forecast of demand
To minimize purchasing and that includes an indication of
inventory costs, a firm often buys possible forecast error.
in quantities that exceed
immediate requirements. This 3. Knowledge of lead times and
necessitates storing some or all lead time variability
of the purchased amount for later 4. Reasonable estimates of
use. inventory holding costs, ordering
6. To hedge against price costs, and shortage costs.
increases 5. A classification system for
Occasionally a firm will suspect inventory items.
that a substantial price increase is • Inventory counting system can
about to occur and purchase be periodic or perpetual. Under a
larger than normal amounts to periodic system, a physical count
beat the increase. of items in inventory is made at
7. To permit operations periodic, fixed intervals (e.g.
weekly, monthly) in order to
The fact that production decide how much to order of each
operations take a certain amount item. On the other hand, a
of time means that there will perpetual inventory system (also
generally be some work-in- known as continuous review
process inventory. system) keeps tract of removals
from inventory on a continuous
8. To take advantage of quantity basis, so the system can provide
discounts information on the current level of
Suppliers may give discounts on inventory for each item.
large quantities • Demand Forecasts and Lead-
Requirements for Effective time information
Inventory Management Inventories are used to satisfy
• Management has two basic demand requirements, so it is
essential to have reliable
estimates of the amount and Typically, three classes of items
timing of demand. Similarly, it is are used:
essential to know how long it will
take for orders to be delivered A-very important
(lead time), time interval between B-moderately important
ordering and receiving the order.
C-least important
• Basic costs associated with
inventories: • To conduct an A-B-C analysis,
follow these steps:
a. Purchase cost is the amount
paid to a vendor or supplier to 1. For each item, multiply annual
buy the inventory. It is typically volume by unit price to get the
the largest of all inventory costs. annual dollar value.

b. Holding or carrying costs relate 2. Arrange annual dollar values in

to physically having items in descending order.
storage. Costs include interest,
taxes, depreciation, 3. The few (10 to15 percent) with
obsolescence, deterioration, the highest annual dollar value
spoilage, breakage, warehousing, are A items. The most (about 50
and tracking. percent) with the lowest annual
dollar value are C items. Those in
c. Ordering costs are the cost of between (about 35 percent) are B
ordering and receiving inventory. items.
They are the costs that occur
with the actual placement of
an order.

d. Shortage costs results

when demand exceeds the
supply of inventory on hand.
These costs can include late
charges, back order costs,
loss of customer good will.

Classification System

• An important aspect of
inventory management is that
items held in inventory are not
of equal importance in terms of
profit potentials, sales or usage
volume, or stock-out penalties.
The A-B-C approach classifies
inventory items according to
some measure of importance.
Economic Order Quantity
(EOQ) Model

• The question of how much to

order can be determined by using
economic order quantity model. It
is used to identify a fixed order
size that will minimize the sum of
the annual costs of holding
inventory and ordering inventory.
The basic model involves a
number of assumptions:

1. Only one product is involved.

2. Annual demand requirements

are known.

3. Demand is spread evenly

throughout the year

4. Lead time is known and

constant.

5. Each other is received in a

single delivery

6. There are no quantity discounts