REVIEWER IN OPMAN produced.

2. Operators will become more skilled and

PPT #1 competent, as each job gives them learning
opportunities.
Production/ Operations Management 3. Full potential of operators can be utilized.
-combines and transforms various resources 4. Opportunity exists for creative methods and
-transformation of a range of inputs innovative ideas.
-management of an org’s production system
Limitations
Production Management 1. Higher cost due to frequent set up changes.
-set of interrelated management activities 2. Higher level of inventory at all levels and hence
higher inventory cost.
Operations Management 3. Production planning is complicated.
-if the same concept is extended to services 4. Larger space requirements.
management, the corresponding set of
management 2. BATCH PRODUCTION
-is defined by American Production and
Production system Inventory Control Society (APICS) “as a form of
-produces products of the organization manufacturing in which the job passes through
-takes inputs and convert them to outputs the functional departments in lots or batches and
each lot may have a different routing.”
Conversion Process - It is characterized by the manufacture of limited
-predominant act of production system number of products produced at regular intervals
and stocked awaiting sales.

Characteristics of Production System Characteristics of Batch Production

1. When there is shorter production runs.
1. Production is an organized activity, so every 2. When plant and machinery are flexible.
production system has an 3. When plant and machinery set up is used for
objective. the production of item in a batch and change of
set up is required for processing the next batch.
2. The system transforms the various inputs to 4. When manufacturing lead time and cost are
useful outputs. lower as compared to job
order production.
3. It does not operate in isolation from the other
organization system. Batch Production Examples
 Baked goods
4. There exists a feedback about the activities,  Clothing
which is essential to control  Computer chips
and improve system performance.  Computer software
 Die- or mold-making
Production Mass can be classified as:  Electrical goods
 Flat-pack furniture
1. JOB-SHOP PRODUCTION  Jet engine production
-are characterized by manufacturing of one or few  Jig and fixture production
quantity of products designed and produced as  Machine tool manufacturing
per the specification of  Material coating
customers within prefixed time and cost.  Newspapers/magazines
-low volume and high variety of products
Advantages
Job production 1. Better utilization of plant and machinery.
- production of one item at a time. It is associated 2. Promotes functional specialization.
with high quality of goods, customized orders 3. Cost per unit is lower as compared to job
and unique items. order production.
4. Lower investment in plant and machinery.
Characteristics of Job-Shop Production System 5. Flexibility to accommodate and process
1. High variety of products and low volume. number of products.
2.Use of general purpose machines and facilities. 6. Job satisfaction exists for operators.
3. Highly skilled operators who can take up each
job as a challenge because of
uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing
the requirements of each Limitations
product, capacities for each work centre and 1. Material handling is complex because of
order priorities. irregular and longer flows.
2. Production planning and control is complex.
Advantages: 3. Work in process inventory is higher compared
1. Because of general purpose machines and to continuous production.
facilities variety of products can be
4. Higher set up costs due to frequent changes in
set up. Advantages

3. MASS PRODUCTION 1. Standardization of product and process

- Manufacture of discrete parts or assemblies sequence.
using a continuous process. 2. Higher rate of production with reduced cycle
-is justified by very large volume of production. time.
The machines are arranged in a line or product 3. Higher capacity utilization due to line balancing.
layout. Product and process standardization exists 4. Manpower is not required for material handling
and all outputs follow the same path. as it is completely automatic.
5. Person with limited skills can be used on the
Characteristics production line.
1. Standardization of product and process 6. Unit cost is lower due to high volume of
sequence. production.
2. Dedicated special purpose machines having
higher production capacities and Limitations
output rates. 1. Flexibility to accommodate and process number
3. Large volume of products. of products does not exist.
4. Shorter cycle time of production. 2. Very high investment for setting flow lines.
5. Lower in process inventory. 3. Product differentiation is limited.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is Production/ Operations as an Organizational
continuous and without any back tracking. Function
8. Production planning and control is easy.
9. Material handling can be completely automatic. Operations Management
-is the business function responsible for managing
Examples the process of creation of goods and services. It
● canned goods. involves planning, organizing, coordinating, and
● over-the-counter drugs. controlling all the resources needed to produce a
● household appliances. company’s goods and services.

Advantages Operations Management and the Transformation

1. Higher rate of production with reduced cycle Process
time. -Operations management transforms inputs
2. Higher capacity utilization due to line balancing. (labor, capital, equipment, land, buildings,
3. Less skilled operators are required. materials and information) into outputs (goods
4. Low process inventory. and services) that provide added value to
5. Manufacturing cost per unit is low customers.

Limitations Production
1. Breakdown of one machine will stop an entire -defined as the process of adding to the value of
production line. outputs or the process of creating utility in
2. Line layout needs major change with the outputs.
changes in the product design.
3. High investment in production facilities. Utility
4. The cycle time is determined by the slowest -is the power of satisfying human needs. During
operation. the process of converting the raw materials into
finished goods, various types
4.CONTINUOUS PRODUCTION of utilities are created while adding value to the
- Production facilities are arranged as per the outputs
sequence of production operations from the first
operations to the finished product. TYPES OF UTILITY
-involves a continuous or almost continuous 1. Form Utility
physical flow of materials. It makes use of special -created by changing the size, shape, form,
purpose machines and produces standardized weight, colour, smell of inputs in order to make
items in large quantities. the outputs more useful to the customers.
-examples are petrochemical, cement, steel, sugar Ex: iron ore is changed to steel, wood is changed
and fertilizer industries, etc. tofurniture, etc

2. Place Utility
-created by changing the places of inputs or
Characteristics transporting the inputs from the source of their
1. Dedicated plant and equipment with zero availability to the place of their use to be
flexibility. converted into outputs. For example the iron ore
2. Material handling is fully automated. and coal are transported from the mines to the
3. Process follows a predetermined sequence of steel plant to be used in the conversion process.
operations.
4. Component materials cannot be readily 3. Time Utility
identified with final product.
5. Planning and scheduling is a routine action.
-created by storage or preservation of raw -basic objective of production management is to
materials or finished goods which are in provide the right quality goods in the right
abundance sometime, so that the same quantity at right time and best price.
can be used at a later time when they become
scarce due to higher demand exceeding the Operations Management
quantity available. -one can find operations management in every
organization, i.e. manufacturing concerns,service-
4. Possession Utility oriented firms, banks, hospitals,agencies, etc.
-created by transferring the possession or -aims at making the best possible use of
ownership of an item from one person to another organization’s resources, in order to fulfill the
person. customer’s wants.

EX:when a firm purchases materials from a Some of the key functions of production
supplier, the possession utility of the materials management are:
will increase when they are delivered to the
buying firm. Production control: The production manager
needs to make sure that the correct production
5. Service Utility plan is being followed while goods are being
-created by rendering some service to the produced.
customer.
Scheduling: This process regulates the start and
6. Knowledge Utility end of the production process.
-created by imparting knowledge to a person.
Cost and Quality control: The production
PPT #2 manager is responsible for ensuring that high
E.S BUFFA quality products are provided to customers, and
-defines production management as ‘Production at the lowest price.
management deals with decision-making related
to production processes so that the resulting Machinery maintenance: This function ensures
goods or services are produced according to that the machinery and equipment used for the
specifications, in the amount and by the production process are in good condition and are
schedule demanded and out of minimum cost’. not facing any damage or
defects.
Joseph G. Monks
-defines Operations Management as the Operations management involves the following
process whereby resources, flowing with in a functions:
defined system, are combined and transformed
by a controlled manner to add value in Strategic plans: Developing strategies that enable
accordance with policies communicated by companies to achieve maximal
management. use of resources and allow them to gain a
competitive advantages in the market in
Key Differences between Production and which they are operating.
Operations Management
Finance: Ensuring that the company uses its
Production Management resources efficiently while producing goods.
-can be defined as the administration of the set of
activities concerning the creation of goods or Product design: create a product design that
transformation of raw material into finished fulfills the requirements of customers in the
goods. market and is consistent with the current market
trends.
Operation Management
-is used to mean that branch of management Forecasting: predict how the product or services
which deals with the administration both will perform in the future, and
production of goods and provision of services to how customer requirements would change as
the customers. time progressed.

Production Management
Manager- has to make decisions regarding the GOODS
designs -refer to the tangible consumable products,
articles, commodities that are offered by the
Operations Management companies to the customers in exchange for
Operations Manager- looks after the product money.
design -are the products which are traded on the market.

Production Management
-can only be found in the firms where production SERVICES
of goods is undertaken. -are the intangible economic product that is
provided by a person on the other person’s
demand. It is an activity carried out for someone -technological advancements gave rise to the use
else. of interchangeable parts.
-cannot be owned but only be utilized
Eli Whitney and Marc Isambard Brunel
PPT #3 - used interchangeable parts to develop
highly efficient production systems in which
workers could simply build components that
RESPONSIBILITIES OF OPERATIONS would be assembled at the end of the process.
MANAGER
20TH CENTURY
Operations managers' responsibilities include:
Henry Ford
Human resource management – the people -took the division of labor and the use of
employed by an organization either work directly interchangeable parts one step further,
to create a good or service or provide support to creating the assembly line method of
those who do. People and the way they are manufacturing.
managed are a key resource of all organizations. -This method revolutionized operation and
production management, allowing Ford to
Asset management – an organization's buildings, produce a high volume of cars at affordable
facilities, equipment and stock are directly prices. This method of production has been
involved in or support the operations function. adopted by many other producers, allowing for
the mass production of cheap consumer goods.
Cost management – most of the costs of
producing goods or services are directly related to CONTEMPORARY PERIOD
the costs of acquiring resources, transforming
them or delivering them to customers. For many -focus of most of these systems is on
organizations in the private sector, driving down creating even greater efficiency in the production
costs through efficient operations management process. Some of the more popular systems have
gives them a critical competitive edge. For included Six Sigma, which was developed by
organizations in the not-for-profit sector, the Motorola; lean manufacturing, which was
ability to manage costs is no less important. developed by Toyota; and ISO 9000, which was
developed by the International Organization for
Decision making is a central role of all Standardization.
operations managers. Decisions need to
be made in: PRE-INDUSTRIAL REVOLUTION
 designing the operations system
 managing the operations system
 improving the operations system. Adam Smith
-Scottish philosopher and father of
The five main kinds of decision in each of these modern economics
relate to: -In 1776 Smith wrote "The Wealth of Nations," in
1. the processes by which goods and services which he described the division of labor.
are produced - According to Smith, if workers divided their
2. the quality of goods or services tasks, then they could produce their
3. the quantity of goods or services (the products more efficiently than if the same
capacity of operations) number of workers each built products from
4. the stock of materials (inventory) needed to start to finish. This concept would later be
produce goods or services used by Henry Ford with the introduction of
5. the management of human resources. the assembly line
POST-INDUSTRIAL REVOLUTION
Operations Manager
-are responsible for managing activities that are -During the industrial revolution, machinery
part of the production of goods and services. allowed factories to grow in capacity and greatl
THE HISTORY OF OPERATION AND PRODUCTION increased their output. Despite this
MANAGEMENT growth, there was considerable inefficiency in
-started way back 18th century - 21ST century. production.

18TH CENTURY Frederick Winslow Taylor and Ford

-helped overcome inefficiencies in the early 2oth
Adam Smith century
-"An Inquiry into the Nature and Causes of the -Taylor developed a scientific approach for
Wealth of Nations," published in 1776. operations management, collecting
-Smith explains how the division of labor allows data about production, analyzing
for more efficient production. According to Smith, this data and using it to make
people are more efficient producers if each improvements to operations. Ford
person works on a single component, rather than increased efficiency in production
building the product from start to finish. by introducing assembly line
production and improved the
19TH CENTURY supply chain through just-in-time
delivery.
 POST-WORLD WAR II  Employees
-Employees in a job shop are typically highly
-Technological developments during the skilled craft employees who can operate several
second world war created new possibilities different classes of machinery.
for managers looking to improve their
operations. Specifically, the development of  Information
computational technology allowed for a -is the most critical aspect of a job shop.
greater degree of data to be analyzed by Information is needed to quote a price, bid on a
firms. job, route an order through the shop, and specify
the exact work to be done.
-The abilities of computers have continued
to increase exponentially, allowing for a  Scheduling
high degree of data analysis and -is a key issue in deciding how and when to
communication. Modern producers are now schedule jobs.
able to track their inventory from raw
materials, through production and delivery.  Capacity
-is difficult to measure in the job shop
MODERN DAY and depends on lot sizes, the complexity of jobs,
the mix of jobs already scheduled, the ability to
-Quality management systems are popular in schedule work well, the number of machines and
today's operations management. Quality their condition, the quantity and quality of labor
management is a system for mapping, improving input, and any process improvements.
and monitoring operations
processes. BATCH PRODUCTION
-A variety of quality management systems are in -is a method used to produce similar items in
use among top firms, the most notable systems groups, stage by stage.
being the ISO systems and Six Sigma. These - the product goes through each stage
systems aim to increase of the process together before moving on to the
the efficiency of business processes. next stage. The degree to which workers are
-Although operationsmanagement has typically involved in this
dealt with the manufacturing process, the growth type of production depends on the type of
of the service industry has created a field of product.
service operations management. - It is common for machinery to be used for the
actual production and workers participate only at
PPT #4 the beginning and end of the process.

Mass production - A large number of the product

CONCEPTS OF PRODUCTION is made on a production line
MANAGEMENT AND OPERATIONS
MANAGEMENT Continuous production - Many thousands of the
product are made.
Production System
1. Job Shop The difference between this and mass
2. Batch manufacturing is that continuous
3. Mass production is on 24 hours a day.
4. Continuous
MASS PRODUCTION
-is the manufacturing of large quantities of
Job Shop standardized products, often using assembly lines
-is a type of manufacturing process in which small or automation technology. Mass production
batches of a variety of custom products are made. facilitates the efficient production of a large
In the job shop process flow, most of the products number of similar products.
produced require a unique set-up and sequencing
of process steps. -involves the product going through many
-Job shops are usually businesses that stages of a production line. There are workers and
perform custom parts manufacturing for other machines at certain stages along the line that are
businesses. responsible for making certain parts of the
product. This means the product is often made
CHARACTERISTICS over days or even weeks depending how
complicated it is.
 Layout
-is designed to minimize material handling, cost, -This product is often quite reasonably priced due
and work in process inventories. to the large scale production techniques used.
However if a problem
 Routing occurs it will stop the whole line of production. A
-When an order arrives in the job shop, the part classic product could be a car.
being worked on travels throughout the various
areas according to a sequence of -The technique was first implemented
operations.
by US automobile pioneer Henry Ford in 1908, for processes it involves.
the manufacture of the Model T Ford automobile.
-can be categorized into manufacturing
CONTINUOUS PRODUCTION operations and service operations.
-is a type of production system in which materials Manufacturing operations is a conversion
being processed are continuously in motion. process that includes manufacturing yields a
Continuous production, like mass production, is a tangible output: a product, whereas, a
flow production method. conversion process that includes service yields
an intangible output: a deed, a performance, an
-a product is continuously produced over
effort.
a period of hours, days, weeks or even years. This
kind of production means the product will often
be quite reasonably priced. A classic product
TWO BROAD CATEGORIES OF ORGANIZATIONS
could be screws,
bricks, food products, etc. 1. Manufacturing Organizations
-produce physical, tangible goods that
can be stored in inventory before they are
PPT #5 needed.

THE PRODUCTION FUNCTION -most customers have no direct contact with

the operation. Customer contact occurs
-relates the maximum amount of output that through distributors and retailers. For example,
can be obtained from a given number of inputs. a customer buying a car at a car dealership
-ECONOMICS- relates physical output of a never comes into contact with the automobile
production process to physical inputs orfactors factory.
of production.
2. Service Organizations
-It is a mathematical function that -produce intangible products that cannot be
relates the maximum amount of output that produced ahead of time.
can be obtained from a given number of inputs
– generally capital and labor. -the customers are typically present during the
creation of the service. Hospitals, colleges,
- The production function, therefore, theaters, and barber shops are examples of
describes a boundary or frontier representing service organizations in which the customer is
the limit of output obtainable from each present during the creation of the service.
feasible combination of
inputs.

Diminishing Returns to Scale

-increasing the quantity of inputs creates a less-
than-proportional increase in the quantity of FIVE DIFFERENCES BETWEEN SERVICE AND
output. MANUFACTURING ORGANIZATIONS

Operating System 1. TANGIBILITY OF OUTPUT

-converts inputs in order to provide outputs -The key difference between service firms and
which are required by a customer. It converts manufacturers is the tangibility of their output.
physical resources into outputs, the function of
which is to satisfy customer wants i.e., to -The output of a service firm, such as
provide some utility for the customer. consultancy, training or maintenance, for
example, is intangible.
Everett E. Adam & Ronald J. Ebert
-“An operating system (function) of -Manufacturers produce physical goods that
an organization is the part of an organization customers can see and touch.
that produces the organization’s physical goods
and 2. Customer Specific Production
services.” -Service firms do not produce a service unless a
customer requires it, although they design and
Ray Wild develop the scope and content of services in
-“An operating system is a configuration of advance of any orders.
resources combined for the provision of goods
or services.” -Service firms generally produce a service
tailored to customers’ needs, such as 12 hours
CONCEPTS OF OPERATION of consultancy, plus 14 hours of design and 10
hours of installation.
Operation
-is defined in terms of the mission it serves for -Manufacturers can produce goods without a
the organization, technology it employs and the customer order or forecast of customer
human and managerial
demand. However, producing goods that do not geographically static factors that affect a
meet market needs is a poor strategy. business organization.
-important strategic level decision making
3. Production on Demand -a key-decision as large investment is made in
Service firms, unlike manufacturers, do not hold building plant and machinery. An
inventory; they create a service when a client improper location of plant may lead to waste of
requires it. all the investments made in plant and
machinery equipment.
-Manufacturers produce goods for stock, with
inventory levels aligned to forecasts of market Plant Layout and Material Handling
demand. Some manufacturers maintain -refers to the physical arrangement of facilities.
minimum stock levels, relying on the accuracy It is the configuration of departments, work
of demand forecasts and their production centres and equipment in the conversion
capacity to meet demand on a just-in-time process. The overall objective of the plant
basis. Inventory also represents a cost for a layout is to design a physical arrangement that
manufacturing organization. meets the required output quality and quantity
most economically.
4. Labor Requirements and Automated
Processes James Moore
-A service firm recruits people with specific -“Plant layout is a plan of an optimum
knowledge and skills in the service disciplines arrangement of facilities including personnel,
that it offers. Service delivery is labor intensive operating equipment, storage space, material
and cannot be easily automated, although handling equipments and all other supporting
knowledge management systems enable a services along with the design of best structure
degree of to contain all these facilities”
knowledge capture and sharing.
Material Handling
-Manufacturers can automate many of their -refers to the ‘moving of materials from the
production processes to reduce their labor store room to the machine and from one
requirements, although some machine to the next during the process of
manufacturing organizations are labor manufacture’. It is also defined as the ‘art and
intensive, particularly in countries where labor science of moving, packing and storing of
costs are low. products in any form’.
-prime consideration in the designing new plant
and several existing plants.

5. Physical Production Location Product Design

-Service firms do not require a physical -deals with conversion of ideas into reality.
production site. The people creating and Every business organization have to design,
delivering the service can be located develop and introduce new products as a
anywhere. For example, global firms such as survival and growth strategy. Developing the
consultants Deloitte use communication new products and launching them in the
networks to access the most appropriate market is the biggest challenge faced by the
service skills and knowledge from offices organizations
around the world.
Product Development
-Manufacturers must have a physical location -translates the needs of customers given by
for their production and stock holding marketing into technical specifications and
operations. Production does not necessarily designing the various features into the product
take place on the manufacturer's own site; it to these specifications. Manufacturing has the
can take place at any point in the supply chain. responsibility of selecting the processes by
which the product can be manufactured.
Scope of Production and Operations Product design and development provides link
Management between marketing, customer needs and
 Location of Facilities expectations and the activities required to
 Plant Layout and Material Handling manufacture the product.
 Product Design
 Process Design Process Design
 Production Planning and Control -is a macroscopic decision-making of an overall
 Quality Control process route for converting the raw material
 Material Management into finished goods. These decisions encompass
 Maintenance Management the selection of a process, choice of technology,
process flow analysis and layout of the facilities.
Location of Facilities
-is a long-term capacity decision which involves -Hence, the important decisions in process
a long term commitment about the design are to analyse the workflow for
converting raw material into finished product
and to select the workstation for each included activities which ensures that the operation will
in the produce the optimum quality products at
workflow. minimum cost.

Production Planning and Control Main Objectives

-can be defined as the process of planning the
production in advance, setting the exact route  To improve the companies income by
of each item, fixing the starting and finishing making the production more acceptable to
dates for the customers i.e., by providing long life,
each item, to give production orders to shops greater usefulness, maintainability, etc.
and to follow up the progress of products
according to orders.  To reduce companies cost through
Principle - ‘First Plan Your Work and then Work reduction of losses due to defects.
on Your Plan’.
 To achieve interchangeability of
Production Planning and Control cont… manufacture in large scale production.

Planning is deciding in advance what to do,  To produce optimal quality at reduced

how to do it, when to do it and who is to do it. price.
Planning bridges the gap from where we are, to
where we want to go. It makes it possible for  To ensure satisfaction of customers with
things to occur which would not otherwise productions or services or high quality
happen. level, to build customer goodwill,
confidence and reputation of
Routing may be defined as the selection of path manufacturer.
which each part of the product will follow,
which being transformed from raw material to  To make inspection prompt to ensure
finished products. Routing quality control.
determines the most advantageous path to be
followed from department to department and  To check the variation during
machine to machine till raw material gets its manufacturing
final shape.
Material Management
Scheduling determines the programme for the -is that aspect of management function which is
operations. Scheduling may be primarily concerned with the acquisition,
defined as ‘the fixation of time and date for control and use of materials needed and flow of
each operation’ as well as it determines the goods and services connected with the
sequence of operations to be followed. production process having some predetermined
objectives in view.
Dispatching is concerned with the starting the
processes. It gives necessary authority so as to Main objectives
start a particular work, which has already been  To minimize material cost.
planned under ‘Routing’ and ‘Scheduling’.
Therefore, dispatching is ‘release of orders and  To purchase, receive, transport and store
instruction for the starting of production for materials efficiently and to reduce the
any item in acceptance with the route sheet related cost.
and schedule charts’.
 To cut down costs through simplification,
The function of follow-up is to report daily the standardization, value analysis, import
progress of work in each shop in a prescribed substitution, etc.
proforma and to investigate the causes of
deviations from the planned performance.  To trace new sources of supply and to
develop cordial relations with them in
Quality Control order to ensure continuous supply at
-may be defined as ‘a system that is used to reasonable rates.
maintain a desired level of quality in a product
or service’. It is a systematic control of various  To reduce investment tied in the
factors that affect the quality of the product. inventories for use in other productive
purposes and to develop high inventory
-aims at prevention of defects at the source, turnover ratios.
relies on effective feed back
system and corrective action procedure. Maintenance Management
-In modern industry, equipment and machinery
- can also be defined as ‘that industrial are a very important part of the total
management technique by means of which productive effort. Therefore, their idleness or
product of uniform acceptable quality is downtime becomes are very expensive. Hence,
manufactured’. It is the entire collection of
it is very important that the plant machinery Variable costs increase or decrease depending on
should be properly maintained. a company's production volume; they rise as
production increases and fall as production
Main Objectives decreases.
1. To achieve minimum breakdown and to keep
the plant in good working condition at the -Examples of variable costs include the
lowest possible cost. costs of raw materials and packaging. A variable
cost can be contrasted with a fixed cost
2. To keep the machines and other facilities in
Examples
such a condition that permits them to be used
at their optimal capacity without interruption.
Direct Material
-are the inventory of raw materials purchased by
3.To ensure the availability of the machines, a manufacturing or retail company to create
buildings and services required by other finished goods or
sections of the factory for the performance of merchandise.
their functions at optimal return on investment.
Piece-rate Labor
-This is the amount that employees earn for
every unit they complete or sell. Employeeinput
typically determines the cost of piece-rate labor.
This cost also increases or decreases along with
the rate of production.

Contribution Margin
PPT #6 -is a product's price minus all associated variable
costs, resulting in the incremental profit earned
BREAK-EVEN ANALYSIS
for each unit sold. The total contribution margin
generated by an entity represents the total
-entails the calculation and examination
earnings available to pay for fixed expenses and to
of the margin of safety (Margin of safety is an
generate a profit.
investing principle that involves only procuring a
security when its market price is substantially less
Contribution Margin Ratio
than its intrinsic value. ) for an entity based on the
-is the difference between a company’s sales and
revenues collected and associated costs.
variable costs, expressed as a percentage. This
ratio shows the amount of money available to
-implies that at some point in the operations, total
cover fixed costs. It is
revenue equals total cost. Break even analysis is
good to have a high contribution margin ratio, as
concerned with finding the point at which
the higher the ratio, the more money per product
revenues
sold is available to cover all the other expenses
and costs agree exactly.
Formula
Components of Break-even Analysis
Break even point
2.1. Fixed Cost

2.2. Variable Cost

2.3. Contribution Margin

2.4. Contribution Margin Ratio

Fixed Cost Fixed costs are costs that do not change with
-a cost that does not change with an increase or varying output (e.g., salary, rent,
decrease in the amount of goods or services building machinery).
produced or sold.
Sales price per unit is the selling price (unit selling
-are expenses that have to be paid by a company, price) per unit.
independent of any specific business activities. In
general, companies can have two types of costs, Variable cost per unit is the variable costs
fixed costs or variable costs, which together result incurred to create a unit.
in their total costs. Shutdown points tend to be
applied to reduce fixed costs.
Concept of Break Even Point
Examples Profit when Revenue > Total Variable cost + Total
1. Insurance Fixed cost
2. Salaries
Break-even point when Revenue = Total Variable
Variable Cost cost + Total
-is a corporate expense that Fixed cost
changes in proportion to production output.
Loss when Revenue < Total Variable cost + Total Forecasting is conducted by what are referred
Fixed cost to as time horizons.

1. Short range forecast. While it can be up to

PPT #7 one year, this forecast is usually used for three
months or less. It is
used for planning purchases, hiring, job
Productivity
assignments, production levels, and the like.
-is a measure of economic performance that
compares the amount of goods and services
2. Medium range forecast. This is generally
produced (output) with the amount of (inputs)
three months to three years. Medium range
used to produce those goods and services.
forecasts are used for sales and production
planning, budgeting, and analysis of different
FORMULA:
operating plans.

3. Long range forecast. Generally three years or

more in time span, it is used for new products,
capital expenditures,facility expansion,
At what levels can
relocation, and research and development.
productivity be
measured?
Medium and long range forecasts differ from
short range forecasts
 Individual worker’s productivity
by other characteristics as well.
 Company’s productivity
 Industry or sector productivity
1. Medium and long range forecasts are more
 Business sector productivity
comprehensive in nature. They support and
 National productivity
guide management decisions in planning
products, processes, and plants. A new plant
How is Productivity Calculated?
can take seven or eight years from the time it is
-measures the efficiency of
thought of, until it is ready to move into and
a company's production process. It is
become functional.
calculated by dividing the outputs
produced by a company by the inputs
2. Short term forecasts use different
used in its production process.
methodologies than the others. Most short
term forecasts are quantitative in nature and
-can be calculated by measuring the number of
use existing data in mathematical formulas to
units produced relative to employee labor
anticipate immediate future needs and impacts.
hours or by measuring a company's net sales
relative to employee labor hours.
3. Short term forecasts are more accurate than
medium or long range forecasts. A lot can
Common inputs are:
change in three months, a year, three years,
labor hours,
and longer. Factors that could influence those
capital, and
forecasts change every day. Short term
natural resources,
forecasts need to be updated regularly to
maintain their effectiveness.
Productivity in the Service Sector
Types of Forecasts
-Productivity is the ratio between the output of
goods and services and the inputs of resources
There are three major types of forecasting,
used to produce them. On the national level,
regardless of time horizon, that are used by
productivity is an important indicator of the
organizations.
economic strength of a nation.
1. Economic forecasts address the business
cycle. They predict housing starts, inflation
PPT #8 rates, money supplies, and other indicators.

FORECASTING AND FORECAST ACCURACY 2. Technological forecasts monitor rates of

technological progress. This
Forecasting keeps organizations abreast of trends and can
-is the art and science of predicting what will result in exciting new products.
happen in the future. Sometimes that is New products may require new facilities and
determined by a mathematical method; equipment, which must be planned for in the
sometimes it is based on the intuition oF the appropriate time frame.
operations manager. Most forecasts and end
decisions are a combination of both. 3. Demand forecasts deal with the company's
products and estimate
consumer demand. These are also referred to factors.
as sales forecasts, which have
multiple purposes. In addition to driving FORECASTING APPROACHES
scheduling, production, and capacity, 1. Qualitative Approach - uses factors such as
they are also inputs to financial, personnel, and experience, instinct and emotion.
marketing future plans 2. Quantitative Approach - relies
heavily on mathematics, historical data and
casual variables.
Qualitative Methods
1. Jury of executive opinion. This is based on
the inputs and decisions of high-level experts or
management.
STRATEGIC IMPORTANCE OF FORECASTS
2. Delphi method. Decision makers, staff, and
-Operations managers have two tools at their respondents all meet to develop the forecast.
disposal by which to make decisions: actual Every shareholder in the process provides
data and forecasts. The importance of input.
forecasting cannot be underestimated. Take a
product forecast and the functions of human 3. Sales force composite. Each sales person
resources, provides an individual estimate which is
capacity, and supply chain management. reviewed for realism by management, and then
combined for a big picture view.
-The workforce is based on demand. This
includes hiring, training, and lay-off of workers. 4. Consumer market survey. This is surveying
If a large demand is suddenly the prospective customer base to determine
thrust upon the organization, training declines demand for existing products and can also be
and the quality of the product could suffer. used for new products.

When the capacity cannot keep up to the As these methods are based mostly on instinct,
demand, the result is undependable delivery, experience and human input, be cautious of
loss of customers, and maybe loss of market excessive optimism.
share. Yet, excess capacity can skyrocket costs.
Quantitative Methods are in two
Last minute shipping means high cost. Asking categories.
for parts last minute can raise the cost. Most
profit margins are slim, which Time-series models
means either of those scenarios can wipe out a - predict by assuming the future is a function of
profit margin and have an organization the past.
operating at cost -- or at a loss.
Associative models
These scenarios are why forecasting is - uses similar historical data inputs and then
important to an organization. Good operations includes other external variables such as
managers learn how to forecast, to trust the advertising budget, housing, competitor's prices
numbers, and to trust their instincts to make and more.
the
right decisions for their firm. Four common types of
forecasting models
FORECASTING SYSTEM
These seven steps can generate forecasts While there are numerous ways to forecast
business outcomes, there are four main types
1. Determine what the forecast is for. of models or methods that companies use to
predict actions in the future:
2. Select the items for the forecast.
1. Time series model
3. Select the time horizon. -This type of model uses historical data as the
key to reliable forecasting. You'll be able to
4. Select the forecast model type. visualize patterns of data better when you know
how the variables interact in terms of hours,
5. Gather data to be input into the model. weeks, months or years.

6. Make the forecast. 2. Econometric model

-Those employed in the field of economics
7. Verify and implement the results. often use an econometric model to forecast
changes in supply and demand, as well as
Routinely repeat these steps, regardless of the prices.
time horizon, to stay abreast of changes in
regard to internal and external
-These models incorporate complex data and
knowledge throughout the process of creation.
Like the name infers, this type of statistical
model proves valuable when predicting future
developments in the economy.
3. Judgmental forecasting model
-Various forecasting models of the judgmental
kind utilize subjective and intuitive information
to make predictions. For instance, there are
times when there is no data available for
reference. Launching a new product or facing
unpredictable market conditions also creates
situations in which judgmental forecasting
models prove beneficial.

4. The Delphi method

-This method is commonly used to forecast
trends based on information given by a panel of
experts. This series of steps is based on the
Delphi method, which is in reference to the
Oracle of Delphi. It assumes that a group's
answers are more useful and unbiased than
answers provided by one individual.

The total number of rounds involved may differ

depending on the goal of the company or
group's researchers. These experts answer a
series of questions in
continuous rounds that ultimately lead to the
"correct answer" a company is
looking for. The quality of information improves
with each round as the experts
revise their previous assumptions following
additional insight from other members in the
panel. The method ends upon completion of a
predetermined metric.