C24: Operation Management MBA Sem - II

1. C24: Operation ManagementMBA Sem - II A Theoretical & Practical Perspective by Prof. Rajkamal. +91-9765900862 padmakars21@gmail.com

2. Syllabus Unit –I : Introduction • Nature, Scope, Importance and Functions Evolution from manufacturing to operations management • Evolution of the factory system - manufacturing systems –quality – mass customization. • Contribution of Henry Ford, Deming, Crossby, Taguchi • Break even analysis - Break even analysis in terms of physical units, sales value, and percentage of full capacity. Break even for Multi Product situations, Capacity expansion decisions, Product add or drop decisions, Make or Buy decisions, Equipment Selection decisions, Production process selection decisions, Managerial uses of break even analysis, Limitations of Breakeven analysis Padmakar S.- GWCET

3. Mark Distribution: RTM, Nagpur University • Written examination (University) : 70M • Internal assessment (College) : 30M • Attendance • Presentation • Classroom Participation • Activities Participation • Assignment • Sessional Examination Padmakar S.- GWCET

4. University Paper pattern : All Subjects for 70Marks • Maximum Marks – 70 • Time – Three Hours • Question No. 1 is compulsory • Attempt any TEN questions from Que. No. 1. writeeach answer in 30 words approximately. All questions carry 2 marks • Que. No. 2 to 10: Attempt any 5 questions from question no 2 to question no. 10. writeeach answer in 300 words approximately. All questions carry 10 marks Padmakar S.- GWCET

5. Introduction: Production Process INPUTS OUTPUTS Products or Services Resources Padmakar S.- GWCET

6. Definition- Production management • It is concerned with those processes which convert the input into output. The input are various resources like raw materials, men, machines, methods, etc. & the outputs are goods and services – H.A. Harding • Deals with the decision-making related to production process so that resulting goods and services is produced according to specifications, in the amount and schedule demanded at minimum cost – E. S. Buffa • It is decision making managerial function • Decision regarding the production processes required to converting raw materials into finished product • Minimum cost Padmakar S.- GWCET

7. Input-Output by Transformation Padmakar S.- GWCET

8. Produce a product Pre-established cost, manufacturing cost Product quality within time scheduled Optimum utilization of resources Machinery and equipment Material Manpower Manufacturing services Objective of Operation Management Padmakar S.- GWCET

9. Product selection and design Process selection and planning Location facilities Layout and material handling facilities capacity planning Types of Production System Mass production or flow line production system Batch production system Job shop Projects (unit manufacturing) Scope of Operation Management Padmakar S.- GWCET

10. Today’s OM Environment • Customers demand better quality, greater speed, and lower costs • Companies implementing lean system concepts – a total systems approach to efficient operations • Recognized need to better manage information using ERP and CRM systems • Increased cross-functional decision making • OM has the most diverse organizational function • Manages the transformation process • OM has many faces and names such as; • V. P. operations, Director of supply chains, Manufacturing manager • Plant manger, Quality specialists, etc. • All business functions need information from OM in order to perform their tasks Padmakar S.- GWCET

11. Recent Trends in Production/Operations Management • Global market place • Production / Operations strategy • Total quality management (TQM) • Flexibility • Time reduction • Technology • Worker involvement • Re-engineering • Environmental issues • Supply chain management • Lean production Padmakar S.- GWCET

12. New Idea Mortality Curve Idea Generation Screening Business Analysis 40 Product Development 30 Design & Testing Test Marketing No. of Candidates 20 Commercialization National Launch 10 0 1 2 4 5 6 3 Years 7 Padmakar S.- GWCET

13. Operation Management: Historical Background Padmakar S.- GWCET

14. Henry Ford (US:1913): Attempted mass production & arranged work station into assembly line with belt Henry Gantt – production scheduling (Gantt chart) Deming’s 14 point of Management, Chain reaction in TQM Taguchi Ohno – seven WASTES Black & Mouton’s Managerial grid, Maslow’s Need hierarchy theory , McGregor’s X & Y theory Kaizen, Kanban – just-in-time Kepner Tregoe- problem analysis (KTPA) Juran – TQM Pareto – 80-20 Principle Crossby- ??? Contributions... Principle of Scientific Management (1911) Padmakar S.- GWCET

15. Break Even Analysis: breakeven point is where the income and costs are equal Padmakar S.- GWCET Break even point-the point at which a company makes neither a profit or a loss

16. Presentation of Break-even- Analysis Total Sales 600,000 PROFIT Profit Break-Even Point Total expenses 500,000 400,000 VC Revenue / Cost LOSS 300,000 200,000 Fixed expenses 100,000 100 200 300 400 500 600 700 Padmakar S.- GWCET Quantity

17. Algebraic representation of BEP • Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost . This concept is further explained by the following equation: • [Break even sales = fixed cost + variable cost] • Total Cost=Fixed cost + Total variable cost • Total Revenue = volume * price • Profit = Total revenue – total cost Padmakar S.- GWCET

18. Breakeven occurs when Total Costs = Total Revenues • Total Costs = Fixed Costs + Variable Costs • If TC are greater than TR than loss is incurred. • If TR are greater than TC than profit is incurred. • Typically TR are less than TC at beginning stages of production • Raising prices will reduce BEP. • Lowering prices will increase BEP. Padmakar S.- GWCET

19. Algebraic representation of BEA • The Break-even Analysis depends on three key assumptions: • Average per-unit sales price (per-unit revenue) • Average per-unit cost • Monthly fixed costs Padmakar S.- GWCET

20. The importance of break even analysis to use in decision making • Managers use this analysis to answer different questions like: • How will incomes and costs be affected if we still sell (xxxx) units? • But if you expand or reduce selling prices? If we expand our business in foreign markets ? • The cost-volume-profit is a necessary tool for forecasting also for management control. Cost volume profit analysis (CVP analysis) is one of the most powerful tools that managers have at their command Padmakar S.- GWCET

21. Formulae: Sales – Sales at BEP Sales The Margin of safety = * 100 Operating profit gross contribution margin OR * 100 Operating Profit = Total Revenue – Total Cost =Total Revenue – Variable Cost – Fixed Cost = Gross Contribution margin – Fixed Cost Gross contribution margin - FC Gross Contribution margin Therefore The Margin = of safety Padmakar S.- GWCET

22. Formulae: Contribution (PU) Sales (PU) P / V Ratio= * 100 Equation Technique Sales = Variable overheads + Fixed overheads + Profit Contribution Margin Technique Unit Contribution = Unit Sales Price – Unit Variable overheads Fixed Overheads Per unit contribution BEP (units)= Padmakar S.- GWCET

23. Limitations of Break-Even Analysis: • In practice, all the means of costs are not always fixed cost or variable cost. There are some semi-variable overheads. In the long run all cost are variable. So the break even analysis holds true only for short-run requirements • There is always quantity deal, specially for bulk order. Straight revenue line shows quantity can be sold at that one price. • Firm with many products with different contribution (P/V) ratios can not avail of the application of break even analysis • Break even analysis is based upon accounting area, it may suffer from various limitations of such data • Break-even analysis assumes that profits are a function of output ignoring the pattern that they are also caused by other factors such as technological change, improved management, change in the scale of fixed factor of production and so on Padmakar S.- GWCET

24. Assumptions of Break-Even Analysis • Total cost can be divided into two components – fixed cost and variable cost • Fixed costs remain constant for a specified level of activity • Variable costs always vary directly & proportionately with the volume of production, thus double the level of activity, VC would be twice that before • Selling prices does not change with the change in volume of sales i.e. Constant • The firm deal in only one product or in case of multiple product, all the product have the same contribution margin, or sales mix remains unchanged • There is perfectly synchronization between production and sales. This assumes that everything produced is sold and so there is no change in the inventory of finished goods Padmakar S.- GWCET

25. TR BEP Q1 Break-Even Chart The Break-even point occurs where total revenue equals total costs – the firm, in this example would have to sell Q1 to generate sufficient revenue (income) to cover its total costs. Costs/Revenue TC VC FC Output/Sales Padmakar S.- GWCET

26. TR (p = £1) BEP Q3 Break-Even Chart Costs/Revenue If the firm chose to set prices lower (say £1) it would need to sell more units before covering its costs TR (p = £2) TC VC BEP FC Q1 Output/Sales Padmakar S.- GWCET

27. Profit Loss Break-Even Chart TR (p = £2) TC Costs/Revenue If you sell fewer units than the Break Even Point, a loss is incurred Any units sold above Break Even Point represents a Profit VC BEP FC Q1 Output/Sales Padmakar S.- GWCET

28. Profit Loss Break-Even Chart TR (p = £2) TC Costs/Revenue If you sell fewer units than the Break Even Point, a loss is incurred Any units sold above Break Even Point represents a Profit VC BEP FC Q1 Output/Sales Padmakar S.- GWCET

29. TR (p = £3) Margin of Safety Q3 Q2 Break-Even Chart Margin of safety shows how far sales can fall before losses are made. If Q1 = 1000 units sold and Q2 = 1800, sales could fall by 800 units before a loss would be made If we sell more than Break Even Point ie Q2 we start to make a Profit A higher price would lower the break even point and the margin of safety would widen TC TR (p = £2) Break Even Point is Q1 Costs/Revenue VC BEP FC Q1 Output/Sales Padmakar S.- GWCET

30. Thank you for paying attention “The only thing standing between you and your Goal is the bullshit story you keep telling yourself as to why you can’t achieve it” Padmakar S. Padmakar S.- GWCET