MBA (OPERATIONS MANAGEMENT) SEMESTER 3 OM 0010 - OPERATIONS MANAGEMENT - 4 CREDITS (BOOK ID B1232) ASSIGNMENT 60 MARKS Note: Answer all

l questions. Kindly note that answers for 10 marks questions should be Approximately of 400 words. Each question is followed by evaluation scheme.

Q1 It is the job of operations managers to convince the stakeholders that the investment in plant and equipment is going to enhance the value of the investments already held by them in the organization. Explain some of the concepts that can be considered in analyzing the investment. (ROI; EBIT; ROA; cash flow; EVA- 5 X2 marks =10 marks) 10 marks Answer. Investment analyzing concepts: ROI- In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage. ROI is a measure of cash generated by or lost due to the investment EBIT- In accounting and finance, earnings before interest and taxes (EBIT), also called operating profit or operating income is a measure of a firm's profit that excludes interest and income tax expenses. It is the difference between operating revenues and operating expenses. When a firm does not have non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit. EBIT = Revenue Operating expenses (OPEX) + Non-operating income Operating income = Revenue Operating expenses ROA- The return on assets (ROA) percentage shows how profitable a company's assets are in generating revenue. ROA can be computed as:

This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Cash Flow- Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation. Cash flow notion is based loosely on cash flow statement accounting standards. It's flexible as it can refer to time intervals spanning over past-future. EVA- Economic Value Added or EVA is an estimate of a firm's economic profit being the value created in excess of the required return of the company's investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. EVA calculation: EVA = net operating profit after taxes a capital charge [the residual income method]

EVA = (r-c) capital [the spread method, or excess return method] Where, r = rate of return, and c = cost of capital, or the Weighted Average Cost of Capital (WACC). Q2 Explain the regional factors that affect location decision. (Location of raw materials; Location of markets; Labour factors; Climate and taxes - 4 X 2.5 marks= 10 marks) 10 marks Answer: Location of raw materials: Firms producing goods, and even firms producing services, need various materials to develop products that they can sell. Some firms need natural resources: a manufacturing sector like lumber needs trees. Or, farther down the line, firms may need intermediate materials: for example, dimensioned lumber. In manufacturing the location of the raw materials needed for production are a huge consideration, not only due to transportation costs, but also to insure timed deliveries as needed. If a shipment is missed this could take down the entire assembly line or cause a complete work stoppage. To insure this does not happen, often a manufacturing company must store the raw materials as they arrive until they are needed during the production cycles. Location of markets: Though part of infrastructure, transportation merits special attention. Firms need to move their product, either goods or services, to the market, and they rely on access to different modes of transportation to do this. While transportation has become relatively inexpensive compared to other inputs, and transportation costs have become a less important location factor, access to transportation is still critical. That long-run trend, however, could shift because of decreasing funds to highway construction, increasing congestion, and increasing energy prices. Labour factors; Labor is often and increasingly the most important factor of production. Other things equal, firms want productivity, in other words, labor output per dollar. Productivity can decrease if certain types of labor are in short supply, which increases the costs by requiring either more pay to acquire the labor that is available, the recruiting of labor from other areas, or the use of the less productive labor that is available locally. Climate and taxes: Firms tend to seek locations where they can optimize their after-tax profits. But tax rates are not a primary location factor; they matter only after corporations have made decisions on labor, transportation, raw materials and capital costs. Within a region, production factors are likely to be similar, so differences in tax levels across communities are more important in the location decision than are differences in tax levels between regions.

Q3 Explain the nine fundamental propositions about organisational effectiveness. (Explanation of 9 fundamental propositions 9 marks; conclusion 1 mark) 10 marks Answer: 9 fundamental propositions: 1. Organizational effectiveness is always a matter of comparison. When determining the effectiveness of an organization, to what are you comparing the organization to conclude whether it is effective or not? For example, are you comparing to a certain set of best practices or to another highly respected organization? 2. Organizational effectiveness is multi-dimensional. Organizational effectiveness cannot be measured by one indicator. For example, a budget surplus or a strong product outcome does not guarantee that the organization has achieved overall maximum organizational effectiveness. 3. Boards make a difference in organizational effectiveness, but how is not clear. There is a correlation between effective Boards and effective organizations. However, it is not clear that one necessarily causes the other. 4. Organizational effectiveness is a social construction.

The concept of organizational effectiveness is in the eye of the beholder. One person might have a completely different interpretation than another person. 5. More effective organizations are more likely to use correct management practices. The authors are careful to point out that the reverse is not necessarily true that organizations that use correct management practices will be judged as being effective. (The correct practices were identified during focus groups in various studies.) 6. Claims about best practices warrant critical evaluation. The authors explain that the results of their study do not agree with the wide assertion that certain practices, for example, automatically produce the best Boards. 7. Measures of responsiveness may offer solutions to differing judgments. This proposition reframes the concept of effectiveness for an organization to be about how well that organization is doing in responding to whatever is currently important. 8. It can be important to distinguish different types of organizations. This is true to make progress in understanding the practices, tactics and strategies that may lead to organizational effectiveness. 9. Network effectiveness is as important to study as organizational effectiveness. This proposition recognizes that the effectiveness of an organization might depend to a great extent on the effectiveness of the wide network of organizations in which the particular organization operates. Conclusion: Any organization can review the effectiveness of its communications and consultation policies and practices and can itself take action to improve its system. It may also benefit from calling in a third party to: assess its current communication and consultation arrangements discuss the organizations needs work with the organization to identify improvements. Q4 Describe the seven forms of waste. Explain how 5Ss are used to elimin ate them. (Seven forms of waste 7.5 marks; 5 S 2.5 marks) 10 marks Answer: Seven forms of waste: 1. over Production To produce sooner, faster or in greater quantities than the absolute customer demand Manufacturing too much, too early or Just in Case Overproduction discourages a smooth flow of goods or services Takes the focus away from what the customer really wants Leads to excessive inventory Caused by: MRP push rather than kanban pull Large batch sizes Looks better to be busy! Poor people utilization Lack of customer focus Why one of the 7 wastes?: Costs money Consumes resource ahead of plan Creates inventory Hides inventory/defect problems Space utilization

2. Inventory Any raw material, work in progress (WIP) or finished goods which are not having value added to them Caused by: Production schedule not level Inaccurate forecasting Excessive downtime/set up Push instead of pull Large batching Unreliable suppliers Why one of the 7 Wastes?: Ads cost Extra storage space required Extra resource to manage Hides shortages & defects Can become damaged Shelf life expires 3. Motion Ads cost Motion is the movement of man Waste motion occurs when individuals move more than is necessary for the process to be completed Caused by: No standard operating procedure Poor housekeeping Badly designed cell Inadequate training Why one of the 7 Wastes?: It interrupts production flow Increases production time Can cause injury 4. Waiting People or parts that wait for a work cycle to be completed Where are the bottlenecks? What are the major causes of lost machine availability? What are we doing to improve machine availability? Do people wait on machinery? Caused by: Shortages & unreliable supply chain Lack of multi-skilling/flexibility Downtime/Breakdown Why one of the 7 Wastes?: Stop/start production Poor workflow continuity Causes bottlenecks Long lead times Failed delivery dates 5. Transportation

Unnecessary movement of parts between processes Complex material flow paths Poor close coupling Wasted floor space Caused by: Badly designed process/cell Poor value stream flow Complex material flows Sharing of equipment Why one of the Seven Wastes?: Increases production time It consumes resource & floor space Poor communication Increases work in progress Potential damage to products 6. Over-Processing Processing beyond the standard required by the customer By improving processing efficiency we ultimately use less resource to achieve the same customer satisfaction Caused by: Out of date standards Attitude - Always done it like this Not understanding the process Why one of the Seven Wastes? It consumes resource It increases production time Its work above and beyond specification Can reduce life of component 7. Non-Right First Time (Scrap, Rework and Defects) A defect is a component which the customer would deem unacceptable to pass the quality standard Defects reduce or discourage customer satisfaction Defects have to be rectified Rectification costs money with regard to time effort and materials Caused by: Out of control/Incapable processes Lack of skill, training & on the job support Inaccurate design & engineering Why one of the 7 Wastes? Adds costs It interrupts the scheduled It consumes resources How 5Ss are used to eliminate wastes. Although the 5S system is a very important for waste elimination, its also useful for instilling the discipline that is needed for the workplace to remain well-organized as well as for encouraging process thinking. The 5S is used in referenced to five Japanese words which enumerate Toyota Production System for workplace organization and cleanliness. Here is a brief outline of the Five S implementation process:

First, you will start with Seiri which means to sort everything. During this phase, you would remove anything that is outdated, broken, never used or is not needed from your organization. Seiton refers to the second stage of the process and this word means to set in order. At this point, you would put away and organize everything to make the work space more efficient. For instance, all the frequently used tools or equipment must be kept close to the area where they will be used. Once everything is in the right place, it will be easier for workers to get whatever they need without much effort. Next, you have Seiso which means shine. This means that you should carry out a thorough cleaning of the work environment to make it as spotless as you possibly can. Seiketsu is the fourth step and it means to standardize. You must develop procedures that will help to maintain the orderly and clean environment. To do this, you can create visuals such as paint outlines or labels so that everyone will know where to put the different work tools and equipment. This way, it will be easier to see when items are missing or misplaced. Shitsuke is the fifth stage and this word means to sustain. To achieve success after implementing the 5S system, it must become a regular habit. You have to monitor the improvement closely to prevent disorder and clutter from ruining your 5S efforts. Even though this is just a brief outline of the Five S implementation process, its first and most important step to take if you want to increase the efficiency of all business functions. Many believe that this 5S system is very unique because of how the activities are approached in a systematic way. Q5 Discuss the Independent demand item techniques. (Reorder point (or Perpetual) Model 5 marks; Periodic review models 5 marks) 10 marks Answer: The two types of demand are Independent Demand and Dependant Demand for inventories. Independent Demand An inventory of an item is said to be falling into the category of independent demand when the demand for such an item is not dependent upon the demand for another item. Finished goods Items, which are ordered by External Customers or manufactured for stock and sale, are called independent demand items. Independent demands for inventories are based on confirmed Customer orders, forecasts, estimates and past historical data. (Reorder point (or Perpetual) Model The two classic systems for managing independent demand inventory are periodic review and perpetual review systems. This section focuses on the Perpetual System. Inventory level is constantly monitored and a new order place when a pre-established reorder point R is met

Q and Average Inventory Level As the order quantity doubles so does average inventory (= Q/2)

The Best Order Size Q?

Inventory related costs Order preparation costs / setup costs Inventory carrying costs Shortage & customer service costs Other considerations

Out of pocket or opportunity cost? Fixed, variable, or some mix of the two?

Periodic Review System Inventory Models A periodic inventory review system is one where inventory is checked and reordered at a set time interval (e.g. weekly). In this case the quantity ordered varies based on the amount of inventory on hand following the review. The danger of this system is that inventory is not being checked until the review system. The benefit is that since inventory levels are only checked periodically, the administrative cost of the system can sometimes be less than with a fixed order quantity (EOQ) model. The Order Quantity with Demand Uncertainty The formula for calculating the quantity to order is: Fixed Order Quantity = Q = d(T+L) + zT+L I, where q = Quantity to be ordered T = the number of days between reviews L = the lead time in days (the time between placing an order and receiving it) d = Average daily demand z = the z-score of the normal distribution given a desired service level z = NORMSINV(z), using Microsoft Excel T+L = Standard deviation of demand over review and lead time T+L = SqRoot*(T+L) * (^2) * D+ I = Current inventory level (includes items on order) Q6 Explain the types of failures that occur in operations. (Design failures; Facilities failures; Staff failures; Supplier failures - 4 X 2.5 marks = 10 marks) 10 marks

Answer: At its simplest failure is when something does not work as it should do. If the shop assistant who sells you an item of clothing fails to inform you of the fact that it should be dry cleaned, it is technically a failure. Different types of failures ocuures in operation as: design failures, facilities failures, staff failures, supplier failures. 1. Design failures The overall design of an operation can prove to be the root cause of failure. In its design stage an operation might look fine on paper; only when it has to cope with real circumstances might inadequacies become evident. Some design failures occur because 21 characteristic of demand was over looked or miscalculated. A production line might have been installed in a factory which in practice cannot cope with the demands placed upon it. 2. Facilities failures All the facilities (that is, the machines, equipment. buildings and fittings) of an operation are liable to break down. The breakdown may only be partial. for example a worn or marked carpet in a hotel, or a machine which can only work at half its normal rate. Alternatively, it can be what we normally regard as a failure - a total and sudden cessation of operation. Either way, it is the effects of a breakdown which are important. Some breakdowns can bring a large part of the operation to a halt. For example, a computer failure in a supermarket chain could paralyze several large stores until it is repaired. Other failures might only have a significant impact if they occur at the same time as other failures. For example, see box on air crashes.

3. Staff Failures Staff involvement in the resolution of operational failures is desirable because staff often possess tacit knowledge required for problem solving (t there remains little understanding about how staff work to resolve operational failures reported in incident reporting systems frontline. The workers are more likely to engage in problem solving when operational failures pose financial or liability risk. Responding to such operational failures might enable workers to mitigate or even avoid then in the future. Research on management practices designed to involve workers in problem solving has examined practices employed by incident report analysts, but not by line managers 4. Supplier Failures An organization would have had many opportunities to identify, evaluate and react to what would have been an isolated situation, either by providing short-term assistance to the supplier or implementing a contingency plan. But during the recent economic downturn, business conditions were far from typical and some suppliers suffered failure in a matter of weeks or even days. This presented a challenge in supplier risk management for organizations across various sectors. IT is forced to balance the need for cost savings with ensuring the health of suppliers. They also learned they could not always rely on traditional indicators to predict supplier failure.