Reviewer in OPERMGT In economics, capital typically refers to money. But money is 2.

ADMINISTRATIVE MANAGEMENT THEORY

not a factor of production because it is not directly involved in
DEFINITION OF OPERATIONS MANAGEMENT producing a good or service. Instead, it facilitates the Henri Fayol, at about the same time as Taylor, developed 14
principles.
PRODUCTION - is the method of turning raw materials or processes used in production by enabling entrepreneurs and
inputs into finished goods or products in a manufacturing company owners to purchase capital goods or land or pay He argued that management did not interact well with their
process. wages. For modern mainstream (neoclassical) economists, employees. Instead of focusing on science, Fayol looked at
capital is the primary driver of value. how to create an efficient company structure hence the 14
PRODUCTIONMANAGEMENT - The set of interrelated principles.
management activities, which are involved in manufacturing ENTREPRENEURSHIP is the secret sauce that combines all the
certain products other factors of production into a product or service for the 3. HUMAN RELATIONS MANAGEMENT THEORY
consumer market.
OPERATIONS MANAGEMENT - if the same concept of Previous concepts, though important, did not account for
production management is extended to services An example of entrepreneurship is the evolution of social people.
management, then the corresponding set of management media behemoth Facebook Inc. (FB). Mark Zuckerberg
assumed the risk for the success or failure of his social media Elton Mayo studied employees at Western Electric
activities is called as operations management.
network when he began allocating time from his daily Hawthorne Works. He focused on workplace conditions and
When resource utilization and customer service are now schedule towards that activity. At the time that he coded the how it affected productivity.
added to production… minimum viable product himself, Zuckerberg’s labor was the He found out that relationships worked as key motivators for
only factor of production. employees. When working as a team, people became more
PRODUCTION & OPERATIONS MANAGEMENT - is the process
which combines and transforms various resources used in the EVOLUTION OF productive.
production / operations subsystem of the organization into INDUSTRIAL REVOLUTION The improvement was so relevant that it became known as
value added products/ services in a controlled manner (as per
the “Hawthorne Effect”.
the policies of the organization) The Industrial Revolution allowed companies to grow far
larger than ever before. Massive corporations with thousands 4. GENERAL SYSTEM THEORY
FACTORS OF PRODUCTION
of employees sprouted from this era.
A biologist, Ludwig Van Bertalanffy’s general theory is more
LAND - has a broad definition as a factor of production and
The Industrial Revolution led to the creation of several related to biology than to management. Even so, his work in
can take on various forms, from agricultural land to
different concepts of management: the 1940’s proved instrumental in management history.
commercial real estate to the resources available from a
particular piece of land. 1. SCIENTIFIC MANAGEMENT THEORY He argued that all systems are the sums of their parts. Just
like our biological body, most organizations contain several
While the land is an essential component of most ventures, its Fredrick Winslow Taylor, a mechanical engineer, was one of departments with distinct functions.
importance can diminish or increase based on industry. For the proponents of scientific management theory.
example, a technology company can easily begin operations If one department does not carry its work, the whole
with zero investment in land. On the other hand, the land is He proposed for the simplification of jobs through these 4 organization suffers.
the most significant investment for a real estate venture. principles:

LABOR - refers to the effort expended by an individual to 1. Use scientific methods to determine most efficient way
bring a product or service to the market. 2. Monitor employees to determine performance
3. Assign employees to work that suits their skills
CAPITAL - as a factor of production, capital refers to the 4. Managers must focus on planning
purchase of goods made with money in production.
 PRODUCTION SYSTEMS The items are made to flow through the sequence of R = TC
operations through material handling devices such as Where:
CLASSIFICATION OF PRODUCTION SYSTEMS conveyors, transfer devices, etc. R = Revenues
1. JOB SHOP PRODUCTION SYSTEM TC = Total Costs
Examples: Automobile manufacturing, appliances, snack So
Characterized by manufacturing one or few quantity of foods (e.g. Frito Lay) R – TC = 0
products designed and produced as per customer's (Break Even)
MODULE 2: PROCESS DESIGN
specification within prefixed time and cost.
The growing recognition of the importance of the service THEREFORE, TO EARN PROFIT:
Another term for this is MADE-TO-ORDER function in manufacturing has broadened the situations to
LOW VOLUME / HIGH VARIETY which the term operations is applied INPUT/OUTPUT PROFIT MODEL
Manufacturing have become more comfortable with the Revenues should be more than the total costs incurred in the
Examples: Machine Shop, Commercial Printing,
notion that they must cater to the customer’s service production transformation process.
Couturier/Designer clothes
requirements
2. BATCH PRODUCTION SYSTEM REVENUE FORMULA:
INFORMATION SYSTEMS R = p (V)
Defined by the American Production and Inventory Control R = Revenue
Society (APICS) as a form of manufacturing in which the job Provide customer data for operations management to supply
p = Price per unit
passes through the functional departments in lots or batches required services
V = Volume in Production units
and each lot may have a different routing. TRANSFORMATION
LIMITED PRODUCTS PRODUCED AT REGULAR INTERVALS TOTAL COSTS FORMULA:
-All operations management and production systems involve TC = FC + vc(V)
Examples: Bakery, Pharmaceutical ingredients, Wine/Liquor transformation. Where
-Transformation is the added-value alteration of materials and TC = Total Costs
3. MASS PRODUCTION SYSTEM
components into desired goods FC = Fixed Costs
Manufacture of discrete parts or assemblies using continuous vc = Variable cost per unit
process. INPUT-OUTPUT TRANSFORMATION MODEL V = Volume in Production units

Justified by a VERY LARGE VOLUME OF PRODUCTION The input – transformation process – output model is the
FIXED COSTS
basic Operations Management model.
Machines are arranged in a line or product layout -business costs, such as rent, that are constant whatever the
The manufacturing services transformation of raw materials quantity of goods or services produced
Products and process standardization exists and all outputs into finished goods is successful if customers are willing to pay -No matter how much volume is produced, fixed costs remain
follow the same path. more for goods and services than it costs to make them constant.
Examples: Cost of rent, Land amortization, equipment
Examples: Electronic components, Garment (RTW) BUT amortization…..
manufacturing
If revenue should equal costs, it will only result to a Break-
4. CONTINUOUS PRODUCTION SYSTEM even condition. VARIABLE COSTS

Production facilities are arranged as per the sequence of This condition is when Profits equals Zero. A cost that varies with the level of output.
production. The more the output, the greater the variable costs.
Example: Raw materials, Cost of Labor….
Substituting the Revenue and Total Single Factor Productivity ALL FACTORS / MULTI FACTOR
Costs formulas to P = R – TC If we produce only one product, the numerator can be either All-factors Goods or Services produced
P = p(V) – FC – vc(V) or P = (p – vc)V – FC the total units of the product or the total $ value of the Measure All inputs used to produce them
Where: product. If we produce several products, the numerator is the
P = Profit total $ value of all products. If we produce only one product, the numerator can be either
p = price per unit the total units of product or total $ value of the product.
vc = Variable Costs The denominator can be the units of input or the total $ value
V = Volume of input. If we produce several products, the numerator is the total
FC = Fixed Costs
EXAMPLE: Single Factor Productivity $ value of all products.
SAMPLE PROBLEM 1: -10,000 Units Produced
A manufacturing plant and equipment cost 120 million dollars -Sold for $10/unit Usually, the numerator is the total $ value of all outputs.
and are estimated to have a lifetime of twenty years. Straight- -500 labor hours
line depreciation is to be used. Variable costs are $2.50 and -Labor rate: $9/hr The denominator is total $ value of all inputs.
price is set at $3.50. What will annual profit be if the annual
volume is 10 million units? What is the labor productivity? EXAMPLE: ALL FACTOR (AFP)/ MULTI-FACT OR (MFP)
10,000 units / 500hrs = 20 units/hr
FIXED COSTS (FC) = $120m / 20 years = $6m / year 10,000 Units Produced
VARIABLE COSTS (VC) = $2.50 / unit (10,000 units * $10/unit) / 500hrs = $200/hr Sold for $10/unit
PRICE (p) = $3.50 / unit 500 labor hours
VOLUME (V) = 10m units 10,000 units / (500hrs * $9/hr) = 2.2 unit/$ Labor rate: $9/hr
Cost of raw material: $30,000
P = (p – vc)V – FC (10,000 units * $10/unit) / (500hrs * $9/hr) = 22.22 Overhead: $15,500
Annual P = [($3.50-$2.50) x 10m units] - $6.0m
Annual P = $4.0 million The last one is unit-less SOLUTION:
AFP = OUTPUT / LABOR +MATERIALS +OVERHEAD
MODULE 3: PRODUCTIVITY SOME SINGLE FACTOR MEASUREMENTS
PRODUCTIVITY Labor Productivity AFP = (10,000 units) x ($10) / (500)x($9) + ($30,000) +
The effectiveness of productive effort, especially in industry, -Quantity (or value) of output / labor hrs ($15,500)
as measured in terms of the rate of output per unit of input. -Quantity (or value) of output / shift
AFP = 2.0
What are the factors that affect productivity? Machine Productivity
PRODUCTIVITY -Quantity (or value) of output / machine hrs
Single-factor measures - Output / (Single Input) MODULE 4: DECISION THEORIES
All-factors measure - Output / (Total Inputs) Energy Productivity
-Quantity (or value of output) / kwh DIFFERENT ENVIRONMENTS IN WHICH DECISIONS ARE MADE
MEASURES OF PRODUCTIVITY -To help us understand how to make the decision, we must
Single factor measures Capital Productivity first understand the environments in which our decisions are
All Factors Measure - OUTPUT/ ALL INPUTS -Quantity (or value) of output / value of input made
DECISION MAKING:
UNDER CERTAINTY - Only one state of nature exists that there In any business decision, our objective is either to
is complete certainty about the future. Maximize profit or minimize costs
UNDER UNCERTAINTY - more than one state of nature exists
but decision maker has no knowledge about various states, MAX – abbreviation for Maximum
not even sufficient knowledge to permit the assignment of MIN – abbreviation for Minimum
probabilities to the states of nature. SO:
UNDER RISK - more than one state of nature but has MAXIMAX – Maximum of the Maximum
information which will support the assignment of probability MINIMIN – Minimum of the Minimum
values MAXIMIN – Maximum of the Minimum
MINIMAX – Minimum of the Maximum.
DECISION MAKING:
STEP 1: List all variable alternatives.
ALTERNATIVES – these are decision options that you have
control of.
STEP 2: Identify future events that may occur otherwise called
as STATES OF NATURE.
States of Nature – events that you don’t have any control
over.
STEP 3: Construct a payoff table
PAYOFF TABLE – plotting the decision options vs the states of
nature in the same table.

For Decision Making under Certainty you are now able to

decide since there is only one State of Nature and you have
control over the alternatives.

STEP 4: Determine the criteria for the decision

FOR UNCERTAINTY:
MAXIMAX / MINIMIN
MAXIMIN / MINIMAX
MINIMAX REGRET
 Sol: 50,000 x $20 = $1,000,000.00 With 75,000 units of production, how much is the total annual
Variable Costs?
PROBLEM SOLVING A service center has installed a new computer costing 1.6
Module 2: Profitability million dollars. The system is expected to serve for 8 years Formula: Variable Cost x Units of Production
and straight-line depreciation is acceptable. There are Sol: $20 (75,000) = $1,500,000.00
A service center has installed a new computer costing 1.6 additional fixed costs of $300,000 per year. The service repair
million dollars. The system is expected to serve for 8 years charges a flat fee of $30 per customer. Variable costs are $20. A service center has installed a new computer costing 1.6
and straight-line depreciation is acceptable. There are What will total annual sales be if annual volume is 50,000 million dollars. The system is expected to serve for 8 years
additional fixed costs of $300,000 per year. The service repair units? and straight-line depreciation is acceptable. There are
charges a flat fee of $30 per customer. Variable costs are $20. additional fixed costs of $300,000 per year. The service repair
What will profit be if annual volume is 50,000 units? Formula: Variable Cost x Price or Charges = Annual Sales charges a flat fee of $30 per customer. Variable costs are $20.
Sol: 50,000 x $30 = $1,500,000.00 With 25,000 units of production, how much is the total annual
Given: Variable Costs?
Fixed Cost = $1,600,000/8 years + Additional Fixed Cost A service center has installed a new computer costing 1.6
$300,000 = $500,000 million dollars. The system is expected to serve for 8 years Formula: Variable Cost = Variable cost x Units of production
and straight-line depreciation is acceptable. There are Sol: $20 (25,000) = $500,000.00
Formula: (Price – Variable Cost) - Fixed Cost additional fixed costs of $300,000 per year. The service repair
Sol: ($30-$20) (50,000) - $500,000 = (Break Even) Profit = 0 charges a flat fee of $30 per customer. Variable costs are $20. A service center has installed a new computer costing 1.6
What will profit be if annual volume is 25,000 units? million dollars. The system is expected to serve for 8 years
A service center has installed a new computer costing 1.6 and straight-line depreciation is acceptable. There are
million dollars. The system is expected to serve for 8 years Formula: Profit = (price –variable cost) Volume – Fixed Cost additional fixed costs of $300,000 per year. The service repair
and straight-line depreciation is acceptable. There are Sol: (30-20) 25,000 – 500,000 = ($250,000.00) charges a flat fee of $30 per customer. Variable costs are $20.
additional fixed costs of $300,000 per year. The service repair With 25,000 units of production, how much is the total annual
charges a flat fee of $30 per customer. Variable costs are $20. A service center has installed a new computer costing 1.6 Revenue?
If production volume is 50,000.00, how much is the annual million dollars. The system is expected to serve for 8 years
Fixed Costs? and straight-line depreciation is acceptable. There are Formula: Revenue = price (volume)
additional fixed costs of $300,000 per year. The service repair Sol: 30 (25,000) = $750,000.00
Formula: Fixed Cost = Cost / depreciation + Additional Fixed charges a flat fee of $30 per customer. Variable costs are $20.
cost What will profit be if annual volume is 75,000 units? A service center has installed a new computer costing 1.6
Sol: $1,600,000/8 years + Additional $300,000 = $500,000 million dollars. The system is expected to serve for 8 years
Formula: (Price – Variable Cost) Annual Volume – Fixed Cost = and straight-line depreciation is acceptable. There are
A service center has installed a new computer costing 1.6 ANSWER - Fixed Cost additional fixed costs of $300,000 per year. The service repair
million dollars. The system is expected to serve for 8 years Sol: ($30-$20) 75,000 – 500,000 = 750,000 – 500,000 = charges a flat fee of $30 per customer. Variable costs are $20.
and straight-line depreciation is acceptable. There are $250,000 With 75,000 units of production, how much is the total annual
additional fixed costs of $300,000 per year. The service repair Revenue?
charges a flat fee of $30 per customer. Variable costs are $20. A service center has installed a new computer costing 1.6
With 50,000 units of production, how much is the total annual million dollars. The system is expected to serve for 8 years Formula: Revenue = price (volume)
Variable Costs? and straight-line depreciation is acceptable. There are Sol: 30 (75,000) = $2,250,000.00
additional fixed costs of $300,000 per year. The service repair
Formula: Units of Production x Variable cost = Annual charges a flat fee of $30 per customer. Variable costs are $20.
Variable Cost
 Milk Output/hour 1,000 gallons 1,400 gallons SALES
Wage Rate/hour $12 $12 200 300 400
Filtration $120 $170 Buy 200 $0 $25 $50
Cost/hour Buy 300 $25 $0 $25
Buy 400 $50 $25 $0
A company that makes shopping carts for supermarkets
recently purchased new equipment, which reduced the labor Labor productivity for the existing system HURWICZ –
content needed to produce the carts. Information concerning Labor Productivity = 1000/12 = 83.33 gallons per worker
the old system (before adding the new equipment) and the OPTIMISM (pinakamataas na value)
new system (after adding the new machines) includes: Labor productivity for the proposed system
PESSIMISM (pinakamababa na value)
Labor Productivity = 1400/ [(9) (12)] = 12.96 gallons per
Module 3: Productivity dollar Buy 200 – 0.6(50) = 30
Problem 1:
A company that makes shopping carts for supermarkets Module 4: Decision Criteria Buy 300 – 0.6(75) = 45
recently purchased new equipment, which reduced the labor Problem1:
Buy 400 – 0.6(100) = 60
content needed to produce the carts. Information concerning Yogurt Hut Ltd., sells natural yogurt in a college community.
the old system (before adding the new equipment) and the The manager is filling out orders for next week's supply of
new system (after adding the new machines) includes: yogurt. He is uncertain as to what sales will be. He has a table
below as a historical representation of profits given certain
Old System New System sales and buying level considerations. What is to be
Output/hr 80 84 considered as the state of nature?
Workers 5 4
Wage $/hr 10 10 WEEKLYSALES
ACTIONS
Machine $/hr 40 50 (alternative) (state of nature)
(a) Compute labor productivity 200 300 400
Old System: 80/5 = 16 units/worker Buy 200 $50 $50 $50
New System: 84/4 = 21 units/worker
Buy 300 $25 $75 $75
(b) Compute all factor productivity
Buy 400 $0 $50 $100
Old System: 80 / (5×10 + 40) = 0 .89 units/$
New System: 84 / (4×10 + 50) = 0.93 units/$
STATE OF NATURE – WEEKLY SALES
Problem 2: ALTERNATIVE DECISIONS – ACTIONS
A milk factory seeks advice from an external consulting
company concerning its business and production processes. MAXIMAX – buy 400, $100
The final consulting report describes several steps to increase
MINIMIN – buy 400, $0
productivity including implementation of cutting-edge
processing techniques through more powerful filtering MAXIMIN – buy 200, $50
systems.
MINIMAX REGRET – buy 300, $25
Existing System Proposed System
ACTIONS WEEKLY
Workers 12 9