Operations Management Model Answers

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REVIEW QUESTIONS: OPERATIONS MANAGEMENT

UNIT I: Introduction to Operations Management
1. Identify the three major functional areas of business organisations and briefly
describe how they interrelate.
Finance is responsible for securing financial resources at favourable prices as well as
analysing investment proposal and providing funds for marketing and operations.
Marketing is responsible for assessing consumer needs or wants and selling and
promoting the organisations goods and services.
Operations is responsible for producing the goods or providing the services offered
by the organisation.
In order for the business organisation to achieve competitive advantage, all
functions must be related to each other. The operations function adds value by
using the resources effectively and by producing goods and services that satisfy the
needs and requirements of the customers.
2. Explain the term value-added.

Value added is the enhancement a company gives its product or service before
offering the product to customers. Computer retailers and computer technology
service companies typically offer a wide range of value-added products and services,
including extended warranties and service contracts, supplemental hardware,
installation, setup, training services, professional consulting services, customisation
and software programs.
3. List five important differences between goods production and service operations,
then list five important similarities.
1. The nature and consumption of output
2. Uniformity of input
3. Labour content of jobs
4. Uniformity of output
5. Measurement of productivity
4. Discuss the various impacts of outsourcing.
Effects of Outsourcing
The effects of outsourcing are subjective to the industry and the purpose for which the
same was undertaken. However across industries outsourcing is primarily undertaken to
enable companies to generate better revenue recognition and to provide them an added
competitive differentiator. While done with the best of intentions, outsourcing has a telling
effect on quality of products and services delivered as a consequence of this, either
enhancing or lowering quality.
Outsourcing is often undertaken to provide enterprises a competitive advantage by

delegating business process to external agencies and realising the benefits of low labour,
better quality and improved innovation. While this provides a good picture of the fair side
Review Questions & Model Answers OM2016/01
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of the coin, most managers however need to grope with the possible shortcoming of the
process and the corresponding impact on the company's core processes. To best analyse
the opportunities presented it is essential to reflect upon the advantages vis--vis the
disadvantages of outsourcing.
Benefits
The benefits of outsourcing often across industries include:
Achieve better revenue and returns on investment

Lower labour cost and increased realisation of economics of scale
Tapping into a knowledge base for better innovation
Frees management time, allowing companies to focus on core competencies
Increases speed delivery and the quality of delivery of outsourced activities
Reduces cash outflow issues and optimises resource utilisation
Limitations
The main limitations of outsourcing are as follows:
The risk of losing sensitive data and the loss of confidentiality. It is important,
therefore, to have checks in place to avoid data loss.
Losing management control of business functions mean that the company may no
longer be able to control operations and deliverables of activities that it outsources.
Problems with quality can arise if the outsourcing provider does not have proper
processes and/ or is inexperienced in working in an outsourcing relationship.
Since the outsourcing provider may work with other customers, they might not give
100% time and attention to a single company. This may result in delays and
inaccuracies in the work output.
Hidden costs and legal problems may arise if the outsourcing terms and conditions
are not clearly defined.
If important functions are being outsourced, an organisation is mightily dependent
on the outsourcing provider. Risks such as bankruptcy and financial loss cannot be
controlled.
Not understanding the culture of the outsourcing provider and the location where
the company outsources to may lead to poor communication and lower productivity.

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5. What are the various decisions Operations Managers are called upon to make in the
manufacturing and service industries for the various operational areas under his
responsibility. Give suitable examples in each area.
1. Product Design:
A narrow product strategy could be defined as lubricating automobiles that
allows the subsequent development of more focused and efficient operations
2. Quality Strategy:
Because of limited task variety, high repetition, good training, and good
manuals, quality should be relatively easy to maintain.
3. Process Strategy:
The process strategy allows employees and capital investment to focus on
doing this mission well, rather than trying to be a general purpose garage
or gas station.
4. Location Strategy:
Facilities are usually located near residential areas.
5. Layout Strategy:
The three bays are designed specifically for lubrication and vacuuming tasks
to minimize wasted movement on the part of the employees and to
contribute to the speedier service.
6. Supply Chain Strategy:

Purchasing is facilitated by negotiation of large purchases and custom
packaging.
7. Human Resources Strategy:

Human resources strategy focuses on hiring a few employees with limited
skills and training them in a limited number of tasks during the performance
of which they can be closely supervised.
8. Inventory:
Inventory investment should be relatively low, and they should expect a high
turnover.
9. Scheduling:
Scheduling is quite straightforward with similar times for most cars. Once
volume and fluctuation in volume are determined, scheduling should be very
directassisting both staffing and customer relations.
10. Maintenance:
There is relative little equipment to be maintained, therefore little preventive
maintenance required. With three bays and three systems, there is backup
available in the case of failure.

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6. Discuss how organisations can achieve competitive advantage through the operations
function. Support your answer by appropriate examples in the business context.
The major functions are operations, marketing, accounting and finance, and product
service development. The support functions may be human resource management,
purchasing, and technical function, etc. In order for the company to achieve
competitive advantage, all functions must be related to each other. The operations
function adds value by using our resources effectively and by producing goods and
services that satisfy the needs and requirements of the customers.
The term competitive advantage means the positioning a firm takes in relation to
other firms in its industry. The company needs to focus on the following three
aspects
Cost leadership
Product/Service differentiation
Response
Cost Leadership The Company needs to strive to be cost leaders and offer goods or
services at prices that cannot be matched by its competitors. The company must be
efficient and keep everyday operations costs as low as possible. This will allow the company
to be superior to other firms because we can serve our products and services at lower prices
than any other company. To attract more customers we need to give promotional offers to
make the competition severe.
Differentiation Competitive advantage results when enough buyers become strongly

attached to the attributes of a differentiator's product offering. The approaches to
differentiating its product with other companies can take many forms: a different taste,
special features, superior service, etc. We need to provide uniqueness in a way that its
customer perceives as adding value. This will increase customer loyalty.
Quick Response Another important competitive advantage is the speedy delivery of its
products and services. In order to maintain this advantage over other companies, we must
make the processes of producing goods or providing services simple for all the employees.
It must be easy to learn and easy to execute with a low failure rate to ensure the quick
production and delivery of goods and services.
These competitive advantages described above should comply directly with the vision of the
company. Being the best means providing outstanding quality, service & customer care,
cleanliness, and product value, so that we give satisfaction to every customer in every
restaurant around the country. Just like any other firm, our competitive advantages are
what make it stand out when compared to its competitors. These aspects of will help us to
gain competitive edge over our main competitors.
We need to provide quick service, cheap products and quality satisfaction in order to
achieve advantage over our competitors. Innovation is an essential aspect wherein new
products line up to catch up with the new trends and tastes of the people.

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UNIT II: Competitiveness, Strategy and Productivity
7. List some factors that can affect productivity and some ways that productivity can be
improved.
Capital, Management, Quality, Methods and Processes, Technology, Product and

Service Design
Ways to improve productivity
1. Develop productivity measures for all operations (managing and controlling)

2. Determine critical (bottleneck) operations
3. Develop methods for productivity improvements (organisation, teamwork)
4. Establish reasonable goals
5. Make it clear that management supports and encourages productivity improvement
(give incentives/rewards to workers)
6. Measure and publicise improvements
Note that do not confuse productivity with efficiency
8. List 10 ways that commercial banks compete for customers.
1. Product and service design

2. Cost
3. Location
4. Quality
5. Quick response
6. Flexibility
7. Inventory management
8. Supply chain management
9. Service
10. Managers and workers
9. In order to stay competitive, organisations need to embrace the productivity challenge.

Comment on the factors that affect productivity.
1. CAPITAL: An existing machine or facility if it is not functioning up to full capacity or

turning out products which are not acceptable can lower productivity. A new
machine or repair of existing machine would require capital input.
2. QUALITY: Poor quality products would not meet customer requirements and would
need repairs and reworks on the product to meet the standards.
3. MANAGEMENT: With better scheduling, planning, coordinating and controlling
activities of management the machine operations can be carried to improve
productivity.
4. TECHNOLOGY: Technological improvements have increased productivity. A machine
of today would outperform machine of yesterday but may not withstand machines

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of tomorrow. But without careful planning technology can reduce productivity as it

often leads to increased costs, inflexibility or mismatched operations. All leads to
reduction in value
5. PROCESS & METHODS: Develop methods and process for achieving productivity
improvements.
6. PRODUCT & SERVICE DESIGN: Increase in productivity because of customer
satisfaction and customisation.
10. In any organisation the factors that define customer requirements are referred to as
competitive factors which are influenced by the operations function at the performance
objectives. Explain using examples, the different types of performance objectives in a
particular industry of your choice.
A company should be concerned to satisfy its customers requirements for fast and
dependable services at reasonable price, as well as helping its own suppliers to improve
services they offer. There are five basic performance objectives and they apply to all
types of operation
Five basic performance objectives: (can be added value)

Quality (doing things right by providing error free goods and services, which will
satisfy the customers, is known as quality. Because of the good quality Toyotas
success kept going, where in 1995, Toyota was the best car in the Middle East)
Speed (time between requesting and receiving or means by doing things fast, to
minimise the time between the order and the availability of the product or service
that gives the customer speed advantage)
Dependability (means doing things in time for customers to receive their goods or
services when they are promised like Just in Time production system applied by
Toyota improve efficiency and quality)
Flexibility (A clear result of responding to a dynamic environment is that organisation
change their products and services and changes the way they do business. Toyota
was able to achieve high level of flexibility, producing relatively small batches of
different models with little or no loss of productivity or quality)
Cost (advantage) Low price is a universal attractive objective to customers, which
can be achieved by producing goods at lower costs. In order to do things cheaply,
Toyota seek to influence the cost of goods and services, so for the future Toyota has
planned to shift their production of multipurpose vehicles and pick-up trucks on
different countries around the world. (Argentina, South Africa)
By using and improving quality, speed, dependability, flexibility and cost

operations performance, Toyota has seen a global growth and high percentage of customer
satisfaction. Because of the success of these operation performance objectives
Japanese style of manufacturing and product developments has come to be studied and
emulated around the world (Coursework). Toyota is world leader in supply chain
management, and to keep its production at the high quality, maximum speed, on time
delivery, flexibility and at the lowest cost Toyota works with its suppliers to make sure that

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they are also the best suppliers in the industry. Shifting its operation in different countries
searching for cheap inputs (raw material and labour) makes it easier to produce products
at a lower cost and good quality.
Operating continentally also gives dependability advantage to its customers by

making it easy to deliver its production in the market place. Using these operation
performance objectives Toyota has managed to keep its customers happy and compete
successfully with others companies in global market. By analysing these characteristics it is
safe to conclude that Toyota is a world-class company.
Quality is a major influence on customer satisfaction or dissatisfaction
Quality reduces costs

Quality increases dependability
Speed reduces inventories

Speeds reduces risks
Dependability saves time

Dependability saves money
Dependability gives stability
Agility: the ability to respond quickly and at low cost as market requirements change.
Flexibility speeds up response
Flexibility saves time
Flexibility maintains dependability
11. Critically discuss the following requirements from an operations perspective of

competing on
i. quality
ii. cost
iii. flexibility
iv. dependability
v. speed
Support your answer using relevant examples either from the manufacturing or
service firms.
Same as Question 10

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UNIT III: Forecasting
12. Two different forecasting techniques (F1 and F2) were used to forecast demand for
cases of bottled water. Actual demand and the two sets of forecasts are as follows:
PREDICTED DEMAND
Period Demand F1 F2
1 68 66 66
2 75 68 68
3 70 72 70
4 74 71 72
5 69 72 74
6 72 70 76
7 80 71 78
8 78 74 80
a. Compute MAD for each set of forecasts. Given your results, which forecast
appears to be more accurate? Explain.
b. Compute the MSE for each set of forecasts. Given your results, which
forecast appears to be more accurate?
c. In practice, either MAD or MSE would be employed to compute forecast
errors. What factors might lead a manager to choose one rather than the
other?
d. Compute MAPE for each data set. Which forecast appears to be more
accurate?
Computation: F1
Period Demand F1 e e e2 ( e /actual)*100
1 68 66 2 2 4 3
2 75 68 7 7 49 9.3
3 70 72 -2 2 4 2.8
4 74 71 3 3 9 4
5 69 72 -3 3 9 4.3
6 72 70 2 2 4 2.7
7 80 71 9 9 81 11.2
8 78 74 4 4 16 5.1
586 32 176 42.4

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Computation F2:
( e /actual)*100
2
Period Demand F2 e e e
1 68 66 2 2 4 3
2 75 68 7 7 49 10.2
3 70 70 0 0 0 0
4 74 72 2 2 4 2.7
5 69 74 -5 5 25 6.7
6 72 76 -4 4 16 5.2
7 80 78 2 2 4 2.5
8 78 80 -2 2 4 2.5
586 24 106 32.9
a. MAD= Actual-Forecast/ n
MADF1= 32/8 = 4
MADF2= 24/8 = 3
F2 = 3 forecast results appears to be more accurate because MAD model gives less error
than F1 = 4.
b. MSE= Actual-Forecast2/ (n 1)
MSEF1= 176/7 = 25.14
MSEF2= 106/7 = 15.14
F2 = 15.14 forecast results appears to be more accurate because MSE model gives less
error than F1 = 25.14.
c. Either one might already be in use, familiar to users, and have past values for
comparison. If control charts are employed, MSE would be accepted; if tracking signals
are used, MAD would be more natural.
d. MAPE = ( (Actual - Forecast/ Actual)*100)/ n
Try it!!!

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13. Discuss the problems which can be caused by poor forecasting of demand.
Forecasting is an integrated exercise in which all levels of the supply chain are involved
and are willing to share information which helps in increasing demand visibility within
organisations as well increase the performance of forecast.
Poor forecasting can create excess inventory and involve high internal administrative
costs. Inventory is the most direct casualty of poor forecasting efforts. Because
forecasting is typically a result of the sales teams estimates, and their incentives offer
differ from those in supply or demand planning, over-estimating sales can often cause
high resulting levels of inventory (working capital), and therefore, reduce the
companys profit in the end.
Out-of-stock situations create unnecessary costs

Companies, when faced with out-of-stock situations because of poor demand
forecasting, have to deal with unplanned production changeovers in order to keep up,
lose manufacturing capacity, and might incur supply issues for other products as a side-
effect.
Overstock impacts warehousing operations

Having extra product in our warehouse is not an effective way to manage our supply
either. While that may mean we can handle unplanned surges in demand, that
inventory is costing our company money as it sits. Accurate forecasts actually allow
companies to unlock capital and free cash that is otherwise tied in inventory.
Poor forecasting is not exclusively an internal issue, as relationships with suppliers can
be significantly deteriorated by poor forecasting.
In short, it can be said that with poor forecasts we might not order enough raw
materials or sub-components. This leads to a shortage of product, which leads to unmet
demand, lost sales and reduced market share. On the other hand, we might order
excessive amounts of materials, thus ensuring large inventories, increasing costs and
reducing profits. In either case, our competitors are sure to capitalise on our poor
decision making.
14. Explain briefly the various forecasting techniques used in management highlighting
their advantages and disadvantages.
Qualitative
These approaches are based on judgments and opinions. Here are four examples.
1. Ask the guy in contact with the customers. Compile the results level by level.
1. Ask a panel of people from a variety of positions. Derive the forecasts and submit
again.
2. Perform a customer survey (questionnaire or phone calls).
3. Look how similar products were sold. For example, the demand for DVDs and for
DVD players is correlated. Washing machine and dryers are also related.

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Time Series Analysis

What we will analyse in details. The idea is that the evolution in the past will continue into
the future.
Time series:
Stationary
Trend-based
Seasonal
Different time series will be considered: stationary, trend-based and seasonal. They differ
by the shape of the line which best fits the observed data.
Methods:
Moving Average
Regression Analysis
Exponential Smoothing
The methods which can be used are (linear) regressions, moving averages and exponential
smoothing. They differ by the importance they give to the data and by their complexity.
Causal Relationship
Here one tries to verify whether there is some causal relationship between some variables
and the demand. If this is the case and if the variable is known in advance, it can be used to
make some forecast. For example, there is a correlation between the number of building
permits which are delivered and the demand for wall paper.
Simulation
Here a dynamic model which incorporates all the relevant variables is designed and
programmed. This model is supposed to incorporate all the internal and external important
variables. The model is then used to test different alternatives such as what happens: if the
price is reduced by so much or if an advertisement campaign is started?
15. Explain the meaning of forecasting. Support your answer by means of appropriate
examples in the business context.
The business forecasting considers the long term. It focuses on product lines. The
aggregate forecasting considers the aggregated (in terms of products) demand for each
of the 12 - 24 coming months. The item forecasting is an estimation of the demand for
each item in the coming weeks.
The independent demand is driven by the market. We do not know exactly how many
cars will be sold in the next period. Here we need some forecasting. The dependent
demand is driven by the demand of another product. We do not know how many
wheels you need, but it is always 5 times the number of cars.

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16. The table below shows the temperature (degrees C), at 11 p.m, over the last ten days:
Day 1 2 3 4 5 6 7 8 9 10
Temperature 1.5 2.3 3.7 3.0 1.4 -1.3 -2.4 -3.5 -0.5 1.3
a. Calculate a three- day moving average for each day.

b. What would be your forecast for the temperature at 11 p.m on day 11?
c. Apply exponential smoothing with a smoothing constant of 0.8 to derive a
forecast for the temperature at 11 p.m on day 11.
d. Which of the two forecasts for the temperature at 11 p.m on day 11 do you
prefer and why?
a. Now we cannot calculate a 3 day moving average until we have at least 3 observations
i.e. we can only calculate such an average from month 3 onward. Hence we have:
m3 = (1.5 + 2.3 + 3.7)/3 = 2.50
m4 = (2.3 + 3.7 + 3.0)/3 = 3.00
m5 = (3.7 + 3.0 + 1.4)/3 = 2.70
m6 = (3.0 + 1.4 - 1.3)/3 = 1.03
m7 = (1.4 - 1.3 - 2.4)/3 = -0.77
m8 = (-1.3 - 2.4 - 3.5)/3 = -2.40
m9 = (-2.4 - 3.5 - 0.5)/3 = -2.13
m10 = (-3.5 - 0.5 + 1.3)/3 = -0.90
b. Hence the forecast for the temperature at 11 p.m. on day 11 is just m 10 = 0.90.
Day Temperature = 0.8 MA(4)

1 1.5 - -
2 2.3 1.5 -
3 3.7 2.14 -
4 3 3.39 2.50
5 1.4 3.08 3.00
6 -1.3 1.74 2.70
7 -2.4 -0.69 1.03
8 -3.5 -2.06 -0.77
9 -0.5 -3.21 -2.40
10 1.3 -1.04 -2.13
11 0.83 -0.90

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c. Applying exponential smoothing with a smoothing constant of 0.8 we get:
Ft = Ft-1 + (At-1 - Ft-1)
Day Temperature = 0.8

1 1.5 - -
2 2.3 1.5 1.5+0.8(1.5-1.5) = 1.5
3 3.7 2.14 1.5 +0.8(2.3-1.5) = 2.14
4 3 3.39 2.14+0.8(3.7-2.14) = 3.39
5 1.4 3.08 3.39+0.8(3.0-3.39) =3.08
6 -1.3 1.74 3.08+0.8(1.4-3.08) = 1.736
7 -2.4 -0.69 1.736+0.8(-1.3-1.736) =-0.69
8 -3.5 -2.06
9 -0.5 -3.21
10 1.3 -1.04
11 0.83
Hence the forecast for the temperature at 11 p.m. on day 11 is just M 10 = 0.83.
d. To compare the two forecasts we calculate the Mean Squared Error (MSE). If we do this
we find that for the moving average MSE = 8.30 and for the exponentially smoothed
average with a smoothing constant of 0.8 MSE = 3.93.
Hence overall prefer the exponentially smoothed forecast as that seems to give the best
one day ahead forecasts as it has a smaller MSE.
Day Temperature = 0.8 e |e| |e|2 Day Temperature MA(4) e |e| |e|2
1 1.5 0.00 1.50 1.50 2.25 1 1.5 0.00 1.50 1.50 2.25
2 2.3 1.50 0.80 0.80 0.64 2 2.3 0.00 2.30 2.30 5.29
3 3.7 2.14 1.56 1.56 2.43 3 3.7 0.00 3.70 3.70 13.69
4 3 3.39 -0.39 0.39 0.15 4 3 2.50 0.50 0.50 0.25
5 1.4 3.08 -1.68 1.68 2.81 5 1.4 3.00 -1.60 1.60 2.56
6 -1.3 1.74 -3.04 3.04 9.21 6 -1.3 2.70 -4.00 4.00 16.00
7 -2.4 -0.69 -1.71 1.71 2.91 7 -2.4 1.03 -3.43 3.43 11.79
8 -3.5 -2.06 -1.44 1.44 2.08 8 -3.5 -0.77 -2.73 2.73 7.47
9 -0.5 -3.21 2.71 2.71 7.35 9 -0.5 -2.40 1.90 1.90 3.61
10 1.3 -1.04 2.34 2.34 5.49 10 1.3 -2.13 3.43 3.43 11.79
5.50 4.84 0.66 17.16 35.33 5.50 3.93 1.57 25.10 74.70
MAD 1.72 MAD 2.51

MSE 3.93 MSE 8.30

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17. Two independent methods of forecasting based on judgment and experience have
been prepared each month for the past 10 months. The forecasts and actual sales are
as follows:
Month Sales Forecast 1 Forecast 2
1 770 771 769
2 789 785 787
3 794 790 792
4 780 784 798
5 768 770 774
6 772 768 770
7 760 761 759
8 775 771 775
9 786 784 788
10 790 788 788
Compute the MSE, MAD and MAPE for each forecast.

Solution
Period Sales F1 e |e| e2 |e| / Actual * 100 Period Sales F2 e |e| e2 |e| / Actual * 100
1 770 771 -1 1 1 0.130 1 770 769 1 1 1 0.130

2 789 785 4 4 16 0.507 2 789 787 2 2 4 0.253
3 794 790 4 4 16 0.504 3 794 792 2 2 4 0.252
4 780 784 -4 4 16 0.513 4 780 798 -18 18 324 2.308
5 768 770 -2 2 4 0.260 5 768 774 -6 6 36 0.781
6 772 768 4 4 16 0.518 6 772 770 2 2 4 0.259
7 760 761 -1 1 1 0.132 7 760 759 1 1 1 0.132
8 775 771 4 4 16 0.516 8 775 775 0 0 0 0.000
9 786 784 2 2 4 0.254 9 786 788 -2 2 4 0.254
10 790 788 2 2 4 0.253 10 790 788 2 2 4 0.253
7784 28 94 3.587 7784 36 382 4.62
MAD= Actual - Forecast/ n
MADF1= 28/10 = 2.8
MADF2= 36/10 = 3.6
F1 = 2.8 forecast results appears to be more accurate because MAD model gives less

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MSE = Actual - Forecast2/ (n 1)
MSEF1= 94/9 = 10.4
MSEF2= 382/9 = 42.4
F1 = 10.4 forecast results appears to be more accurate because MSE model gives less
MAPE = ( (Actual - Forecast/ Actual)*100)/ n
MAPE F1 = 3.59/10 = 0.359
MAPE F2 = 4.62/10 = 0.462
F1 forecast results appears to be more accurate because MAPE model gives less error
than F2.

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18. An electrical contractors records during the last five weeks indicate the number of
job requests:
Week: 1 2 3 4 5
Requests: 20 22 18 21 22
Predict the number of requests for week 6 using each of these methods:
i. A four-period moving average
ii. Exponential smoothing with a smoothing constant of 0.30 and 0.60 respectively.
Use 20 for week 2 forecast.
Solution
i.
Week Requests
1 20
2 22
3 18
4 21
5 22
6 20.75 (22+21+18+22)/4
ii.
Ft = Ft-1 + (At-1 - Ft-1)
Ft = forecast for period t

Ft-1 = forecast for the previous period
= smoothing constant
At-1 = actual data for the previous period
= 0.3, given that Week 2 = 20
Week 3 = 20 + 0.3 (22 20) = 20 + 0.6 = 20.6
Week 4 = 20.6 + 0.3 (18 20.6) = 20.6 0.78 = 19.82
Week 5 = 19.82 + 0.3 (21 19.82) = 19.82 + 0.354 = 20.17
Week 6 = 20.17 + 0.3 (22 20.17) = 20.17 + 0.549 = 20.72
= 0.6, given that Week 2 = 20
Try it!!!

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19. The following data were collected in 2015 during a study based on the impact of
advertising expenditure on turnover for Pac Store:
Advertising Expense ($) Sales ($)
x y
100 1,500
150 1,560
180 1,610
220 1,655
270 1,685
(i) Plot the data. Comment on the relationship of the two variables.
(ii) Obtain a linear regression line for the data.
(iii) Compute the correlation coefficient and coefficient of
determination. Comment on the results.
(iv) Predict the sales of Pac Store when the advertising expense is $155
and $360. Comment on its reliability.
Scatter Plot
1,750
y = 1.1235x + 1395.3
1,700
R = 0.9739
1,650
1,600
1,550
1,500
1,450
0 50 100 150 200 250 300
Correlation Coefficient = 0.987 (strong positive relationship between advertising expense

and sales)
Coefficient of determination = 0.9739 (it means that 97.4% of the variability in Sales can be
explained in advertising and 2.6% as other factors)
Regression line Y = 1395 + 1.1235X
X = 155, Y =
X = 360, Y =
The first estimate is more reliable than the second one, because the x = 155 is found within
the range values of x.

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20. The following data were collected during a study of consumer buying patterns.
Observations x y Observations x y

1..15 74 8..18 78
2..25 80 9..14 70
3..40 84 1015 72
4..32 81 11.22 85
5...51 96 12.24 88
6...47 95 13.33 90
7...30 83
a. Plot the data.
b. Obtain a linear regression line for the data.
c. What percentage of the variation is explained by the regression line?
d. Use the equation determined in part b to predict the value of y for x = 41
and x = 52. Comment on its reliability.
Scatter Plot
120
100
80
60
y = 0.5838x + 66.333
R = 0.7553
40
20
0
0 10 20 30 40 50 60
Correlation Coefficient = 0.87 (strong positive relationship between advertising expense and
sales)
Coefficient of determination = 0.755 (it means that 75.5% of the variability in y can be
explained in x and 24.5% as other factors)
Regression line Y = 66.3 + 0.584X
X = 41, Y =
X = 52, Y =
The first estimate is more reliable than the second one, because the x = 41 is found within
the range values of x.

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UNIT IV: Product and Service Design

21. Suppose you wish to see on the Mauritian market a new or revised product or service
or from the company where you currently work. Discuss the implications of producing
that product or service relative to legal, ethical, environmental, profitability,
competitive, design, and production issues.
Legal
Competition Commission of Mauritius/ Consumer Protection (Product
Advertisement and Promotion) Regulations 2012
Product liability (Responsibility for a product defect that causes injury lies with all
producers/sellers of the product who are in the distribution chain) or a manufacturer
is liable for any injuries or damages caused by a faulty product or management is
liable for injuries/damages caused by faulty product.
Uniform commercial code (Products carry an implication of merchantability and
fitness.)
Ethical
Releasing products with defects
Environmental
EPA (Environment Protection (Amendment) Act 2008)
Taking into account the capabilities of the organisation in designing goods and
services. (to reduce costs, increase productivity and enhance profitability)
Social and demographic
Changing tastes, ageing population
Political or legal
Safety issues, new regulations, government changes
Competitive
New products and services in the market, promotions
Sales of the company increase with promotions.
The profit margins rise and create lot of room for promotions
22. What are six factors that cause organisations to redesign their products or services?
1. Economic
Low demand, excessive warranty claims (guarantee)
The need to reduce costs
2. Social and demographic
Changing tastes, ageing population
3. Political or legal
Safety issues, new regulations, government changes
4. Competitive
New products and services in the market, promotions
Sales of the company increase with promotions.
The profit margins rise
5. Cost or availability
Raw materials, components, labour
6. Technological
In product components, production processes

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23. What is the main objective of value analysis?
Examination of the function of parts and materials in an effort to reduce the cost
and/or improve the performance of a product
Reasons for value analysis
i. Is the item necessary; does it have value; could it be eliminated?
ii. Are there alternative sources for the item?
iii. Could another material, part, or service be used instead?
iv. Can two or more parts be combined?
v. Can specifications be less stringent (strict/complex) to save time or money?
vi. Do suppliers/providers have suggestions for improvements?
vii. Can packaging be improved or made less costly?
24. How has technology had an impact on product and service design?
Automation and computer operated machinery have revolutionized the manufacturing

and service industries. However, these machines and equipment are very expensive.
Therefore, the consequences of making a mistake (buying the machinery when we
should not have) could be very costly for the firm. On the other hand, these machines
tend to be powerful and produce large number of quantities of a given product.
Therefore, if we do not purchase the machinery and the demand turns out to be high,
then our losses due to lost sales or backorders would be larger than usual.
Many of todays innovations are the result of new technology. Using technology to
serve, support and advise customers can create a positive customer experience.
However, to understand how, when and where to apply technology for the better
customer experiences can be challenging for the company.
New technology does not necessarily serve customers' needs
Technological innovations are the foundation of new products and services being
developed today. Interestingly, many of these products and services do not meet
customers expectations, or fail when they are (too) technology driven. Successful
products and services address real-life issues, or offer convenience that makes sense to
customers.
Evolving technologies lead to complexity - customers seek simplicity
As a result of ever evolving technology, business more often develop new products and
services that customers experience as complex. Customers prefer simple. They get
frustrated when technology stands in the way of a smooth experience. The speed of

21
technical innovations frequently exceeds the speed at which businesses can adopt new
technologies. IT and engineering professionals have to deliver and maintain ever more
complex and interdependent systems and platforms.
There is a rising number of inter related systems and complex technical platforms
behind many simple services.
Do customers use all features they 'demand'?
Customers want/demand a long list of features and capabilities when deciding on

purchasing products or services. Remarkably, research suggests that customers are not
willing to pay for all features they desire.
In reality, customers only use a fraction of the technical solutions they purchase.
Understanding the core features of your offer from a customer point-of-view
enables businesses to streamline their products. More importantly, it helps
organisations to offer more relevant services to customers.
Is your business ready for handle new technologies?
Introducing more powerful and often more complex systems in a business can stretch
the internal resources and capabilities of the organisation. It is important to recognise
the ability, readiness and willingness of an organisation to adopt and use new
technologies.
Customer needs against use
Customers of feature rich technical products such as smartphones, technical household

goods and PC software can be very demanding before they buy the product. There is a
gap between customers expected use of features against their actual use.
In most cases customers willingness to pay for (extra) individual features is much lower
than the features that are mentioned as required.
Technology can simplify customers experiences
Businesses tend to make the technology and engineering departments responsible for
technical solutions in a business or customer domain. By defaulting into technical
solutions the business loses sight of the core features customers are after.
Positioning new technology as part of a broader set of tools, including processes and
policies, enables organisations to respond better and faster to customer demand.
Applied in the right way, technology can reduce complexity of products and services
that otherwise gets in the way of enjoying core features of a product or service.

22
Move from potential to capability
Most new technologies and technical innovations hold great promise for businesses and
their customers. The challenge is converting the potential into actual capability by
delivering working products and services into the market.
Most organisations have a strong launch and then fix mentality which can result in
expensive failures. Trials and pilots in real-world settings will provide insights into the
customer experience and most importantly, understand the impact on the internal
organisation.
Services powered by technology
Technology should be designed for optimal use, not for exploiting its full technical
capabilities. Designing a service around a technology has proven ineffective and
expensive. Instead, deploy new technologies around your services. Ultimately
customers choose services, not the underlying technology.
Computer-aided design (CAD) and Computer-aided manufacturing (CAM) are important

tools in the design process because they can anticipate what the design will look like, as
well as allow for better manufacturing. Businesses also must take in account
environmental and legal concerns when designing a new product. Most importantly,
the manufacturing process must ensure the product's safety.

23
UNIT V: Strategic Capacity Planning
25. The data in the following table represents the demand forecast for the 12 months of
2015. Axis Co. Ltd currently employs 50 employees. Each employee produces 100
units a month. The cost of hiring an additional employee is $500 and the cost of making
an employee redundant is $200. A storage charge of $10 per unit is made for inventory
on hand at the end of each month.
Prepare a production plan using chase capacity strategy.
Month Demand forecast

Jan 5400
Feb 4800
Mar 6000
Apr 5000
May 4800
Jun 5400
Jul 6400
Aug 5000
Sep 6200
Oct 5400
Nov 4400
Dec 5600
Month Demand Production Opening Closing No. of New Redundant

Forecast inventory inventory employees Staff staff
Jan 5400 5400 0 0 54 4 -
Feb 4800 4800 0 0 48 - 6
Mar 6000 6000 0 0 60 12 -
Apr 5000 5000 0 0 50 - 10
May 4800 4800 0 0 48 - 2
Jun 5400 5400 0 0 54 2 -
Jul 6400 6400 0 0 64 14 -
Aug 5000 5000 0 0 50 - 14
Sep 6200 6200 0 0 62 12 -
Oct 5400 5400 0 0 54 - 8
Nov 4400 4400 0 0 44 - 10
Dec 5600 5600 0 0 56 12 -
Total 64,400 64,400 0 0 56 50
Inventory storage cost = 0
Cost of employing additional employee = 56 x 500 = Rs28,000/-
Cost of terminating/redundant staff = 50 x 200 = Rs10,000/-
Total cost = Rs38,000/-

24
26. An entrepreneur producing different types of vegetable pickle is now considering the
addition of a new plant. The primary location being considered will have fixed costs of
$9,200 per month and variable costs of 70 cents per unit produced. Each item is sold to
retailers at a price that averages 90 cents.
a) What volume per month is required in order to break even?
b) What profit would be realised on a monthly volume of 61,000 units?
c) What volume is needed to obtain a profit of $16,000 per month?
a) QBEP = Fixed Cost

Revenue Variable Cost
Fixed Cost = $9,200/month
Variable Cost = $0.70/unit
Price (Revenue) = $0.90/unit
= $ 9,200/ (0.90 0.70) = 46,000 units per month
b) Profit = Quantity (Revenue Variable Cost) Fixed cost
P = 61, 000 (0.90 0.70) 9,200
P = 61,000(.20) 9,200
Profit = 12,200 9,200 = $3,000
c) Quantity = (Profit + Fixed Cost)/Revenue Variable Cost
Q = (16,000 + 9,200)/ (0.90 0.70)
Q = 25,200/0.20 = 126, 000 units

25
27. The Ironblast Co. Ltd intends to increase the capacity of a bottleneck operation by
adding a new machine. Two alternatives A and B have been identified and the
associated costs and revenues have been estimated. The cost of the new machine
including its installation for alternative A is $40,000 whereas for alternative B the cost
amounted to $30,000; variable costs per unit would be $ 10 for A and $11 for B; and
revenue per unit would be $15.
(i) Determine each alternatives breakeven point in units and $?

(ii) At what volume of output would the two alternatives yield the same profit?
Find the value of this profit?
(iii) If expected annual demand is 12,000 units, which alternative would yield the
higher profit?
(i)
Alternative A
Annual fixed cost $40,000

Variable cost per unit $10.00
Revenue $15.00 per unit
FC = Fixed Cost = $40,000.00; VC = Variable Cost = $10.00; R = Revenue per unit = $15.00
Break Even Point (in Units) = $40,000/ ($15.00 $10.00) = 8,000 units
Break Even Point (in $) = 8,000 units x $15.00 = $120,000
Alternative B
Annual fixed cost $30,000

Variable cost per unit $11.00
Revenue $15.00 per unit
FC = Fixed Cost = $30,000.00; VC = Variable Cost = $11.00; R = Revenue per unit = $15.00
Break Even Point (in Units) = $30,000/ ($15.00 $11.00) = 7,500 units
Break Even Point (in $) = 7,500 units x $15.00 = $112,500

26
(ii)
Profit = Quantity (Revenue Variable) Fixed Cost
Profit A = Profit B
Q (R -V) - FC = Q (R -V) - FC
Q (15 - 10) - 40,000 = Q (15 - 11) - 30,000
Q (5) - 40,000 = Q (4) - 30,000
Q = 10,000 units
(iii)
Profit A
Profit A = Q(R - V) - FC
Profit A = 12, 000 (15 -10) - 40,000
Profit A = 12,000 (5) - 40,000
Profit A = $20,000
Profit B
Profit B = Q (R - V) - FC
Profit B = 12,000 (15 - 11) - 30,000
Profit B = 12,000 (4) - 30,000
Profit B = $18,000
28. How do capacity decisions influence productivity?
Capacity designs establish constraints within which operations must function. They offer an
opportunity to achieve productivity improvements if done carefully. However, mistakes
here can hamper future productivity improvements because poor design can be very
difficult to overcome.
Capacity decisions have a direct influence on performance of a production system in respect

of both resource productivity and customer service (i.e. delivery performance). Excess
capacity results in low resource productivity while inadequate capacity leads to poor
customer service. Capacity planning decisions can be long or short-term decisions. Long-
term capacity planning decisions concern expansion/contraction of major facilities required
in the conversion process, economics of multiple shift operation, and selection of vendors

27
for major components. Short-term capacity planning decisions concern issues like planning
overtime work and sub-contracting, adjusting work shifts. Break-even analysis is a useful
tool for capacity planning.
29. Why is it important to adopt a big-picture approach to capacity planning?
The different parts of the system are interrelated, so unless the entire system is considered,
it is likely that the overall system capacity will suffer. One example of this is expansion of a
motel without regard to the resulting need to consider expansion of parking, eating, and
recreational facilities. Similar examples include increased air flights into a city, housing
construction (impact on roads, sewers, schools, shopping, etc.), and increasing the capacity
of one machine in a series of machines.
30. HT Computer Repair Service Company Ltd has a design capacity of 80 repairs per day.
Its effective capacity, however, is 64 repairs per day (80% of its design capacity). Its
actual capacity is 62 repairs per day (78% of its design capacity). The operations
manager intends to increase the numbers of repairs per day. Which of the following
factors would you recommend that the manager investigate: quality problems,
absenteeism, or scheduling and balancing? Justify your reasoning.
HT Company Ltd has a Design Capacity of 80 repairs per day. Its Effective Capacity is
64 repairs per day but Actual Output is only 62 repairs per day.
Efficiency = 62/64 x 100% = 96.875%
Utilisation = 62/80 x 100% = 77.5%
We note that there is significant difference between these two rates.
If we rely on Efficiency rate as an indicator of performance when Effective Capacity is

low relative to Design Capacity, it can be wrong decision for HT Company Ltd.
Therefore, the manager of HT Company should work to increase Utilisation. In order to

increase capacity utilisation, the company needs to ensure the following
correcting quality problems,

maintaining equipment in good operating condition,
fully training employees, and
eliminating bottlenecks.
We need to decide what to use as a benchmark is extremely important as well. In
selecting a measure of capacity, it is necessary to select one that does not need to be
adjusted for inflation or updated constantly. The rupee value of output, for example, is
often a poor indicator of capacity due to inflation or price fluctuations. Also, no single
measure of capacity will be appropriate for every situation. Rather the measure of

28
capacity selected must be specific to the business benchmarking is an important step

towards improving efficiency.
Productivity (Output/Input) is closely linked to the concept of Efficiency and Utilisation.

Productivity can be calculated for a single input such as labour or energy, or it may be
calculated for several inputs.
Sometimes this measure of Productivity is referred to as Process Efficiency and is

related to how well a given process achieves organisational strategy. When
Productivity is calculated for several inputs it is called Multifactor Productivity
(Output / (Labour + Materials + Overhead)) and indicates how well our company is
making use of all its resources.
Productivity will be benefit for the company in many ways. It helps us to track
performance over time for an individual worker or department and enables us to
continually monitor a process and decide if any improvements are necessary. It can
also be used to assess the overall performance of our business activity.
HT Company must improve its effective capacity which is the maximum capacity that it
can repair given its product mix, scheduling difficulties, and other possible situations.
There is a wide gap between the design capacity (80) and effective capacity (64).
Design capacity which is the maximum attainable output is 80. The company could
have produced more if scheduling and balancing have been improved. Hence, there is a
need to investigate these aspects.
Absenteeism may also be investigated because considering the company's resources, it

should have repaired 64 computers but the actual output was only 62. This may mean
that some of the company's resources (staff) may not have been fully utilised.

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1

REVIEW QUESTIONS: OPERATIONS MANAGEMENT

2. Explain the term value-added.

4. Discuss the various impacts of outsourcing.

Outsourcing is often undertaken to provide enterprises a competitive advantage by

The benefits of outsourcing often across industries include:

Achieve better revenue and returns on investment

The main limitations of outsourcing are as follows:

Review Questions & Model Answers OM2016/01

6. Supply Chain Strategy:

7. Human Resources Strategy:

Review Questions & Model Answers OM2016/01

Differentiation Competitive advantage results when enough buyers become strongly

Review Questions & Model Answers OM2016/01

UNIT II: Competitiveness, Strategy and Productivity

Capital, Management, Quality, Methods and Processes, Technology, Product and

Ways to improve productivity

1. Develop productivity measures for all operations (managing and controlling)

Note that do not confuse productivity with efficiency

8. List 10 ways that commercial banks compete for customers.

1. Product and service design

9. In order to stay competitive, organisations need to embrace the productivity challenge.

1. CAPITAL: An existing machine or facility if it is not functioning up to full capacity or

Review Questions & Model Answers OM2016/01

of tomorrow. But without careful planning technology can reduce productivity as it

Five basic performance objectives: (can be added value)

By using and improving quality, speed, dependability, flexibility and cost

Review Questions & Model Answers OM2016/01

Operating continentally also gives dependability advantage to its customers by

Quality is a major influence on customer satisfaction or dissatisfaction

Quality reduces costs

Speed reduces inventories

Dependability saves time

11. Critically discuss the following requirements from an operations perspective of

Review Questions & Model Answers OM2016/01

UNIT III: Forecasting

Period Demand F1 e e e2 ( e /actual)*100

586 32 176 42.4

Review Questions & Model Answers OM2016/01

MSEF1= 176/7 = 25.14

MSEF2= 106/7 = 15.14

d. MAPE = ( (Actual - Forecast/ Actual)*100)/ n

Review Questions & Model Answers OM2016/01

Out-of-stock situations create unnecessary costs

Overstock impacts warehousing operations

Review Questions & Model Answers OM2016/01

Time Series Analysis

Review Questions & Model Answers OM2016/01

a. Calculate a three- day moving average for each day.

m3 = (1.5 + 2.3 + 3.7)/3 = 2.50

m4 = (2.3 + 3.7 + 3.0)/3 = 3.00

m5 = (3.7 + 3.0 + 1.4)/3 = 2.70

m6 = (3.0 + 1.4 - 1.3)/3 = 1.03

m7 = (1.4 - 1.3 - 2.4)/3 = -0.77

m8 = (-1.3 - 2.4 - 3.5)/3 = -2.40

m9 = (-2.4 - 3.5 - 0.5)/3 = -2.13

m10 = (-3.5 - 0.5 + 1.3)/3 = -0.90

Day Temperature = 0.8 MA(4)

Review Questions & Model Answers OM2016/01

c. Applying exponential smoothing with a smoothing constant of 0.8 we get:

Ft = Ft-1 + (At-1 - Ft-1)

Day Temperature = 0.8

MAD 1.72 MAD 2.51