Operations Management Unit 2 Updated

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OPM UNIT 2

Capacity Planning – Long range, Types, Developing capacity alternatives,


tools for
capacity planning. Facility Location – Theories, Steps in Selection,
Location
Models. Sourcing and procurement - Strategic sourcing, make or buy
decision,
procurement process, managing vendors
UNIT 2
• CAPACITY PLANNING
Whenever we talk about facilities, we talk about production.
Whenever we talk about production , we talk about capacity
That is why we always say
Production capacity at the facility. We plan.
UNIT 2
• Capacity planning decision always involve the activities as below
1. Estimating the present capacity
2. Forecasting the long range future capacity needs
3. Identifying and analyzing sources of capacity to meet future
capacity
4. Selecting among alternate sources of capacity
UNIT 2
• Few capacity measures & Forecasting capacity demand

For firms produce a single product or multiple product , uses output rate
capacity as the measure .
In services output rate capacity is difficult , but still we use Input rate
capacity , like Hospitals use available beds per month , Airlines use s available
seat miles per month ,digital marketing services use- Number of hours of
creativity or strategy used .
Providing long range capacity means making production facilities available ,
land , building, tools , materials , personnel and others .
Planning , buying a building , starting up, training, required for a new
production facility could take 5 to 10 years , and such facility can remain
economically productive for 15 to 20 years after that it can be
technologically obsolete or product obsoleting can happen .
UNIT 2
• Economies of scale
• For a given production facility, there is an annual volume of outputs
that results in the least average unit cost . This level of output is called
the facility's Best operating level .
• Economies of scale exist when long run average total cost decreases
as output increases, diseconomies of scale occur when long run
average total cost increases as output increases, and constant returns
to scale occur when costs do not change as output increases.
UNIT 2
UNIT 2
• Capacity Alternatives:
• 1. Do nothing
• 2. Expand large now
• 3. Expand small now, with option to add later

• Evaluate Capacity Alternatives


• There are a number of tools that we can use to evaluate our capacity
alternatives. Recall that these tools are only decision-support aids.
Ultimately, managers have to use many different inputs, as well as
their judgment, in making the final decision. One of the most popular
of these tools is the decision tree. In the next section we look more
closely at how decision trees can be helpful to managers at this stage.
UNIT 2
• Once a company has identified its capacity requirements for the future, the
next step is to develop alternative ways to modify its capacity.

• One alternative is to do nothing and reevaluate the situation in the future.


With this alternative, the company would not be able to meet any
demands that exceed current capacity levels. Choosing this alternative and
the time to reevaluate the company's needs is a strategic decision.

• The other alternatives require deciding whether to purchase one large


facility now or add capacity incrementally.
UNIT 2

• A facility should ideally be located at a place where raw materials are


available. This is necessary for maintaining continuity in the
production process. factor is provided a weight between '0' to '1'
according to the level of importance, where '0' denotes least
important and '1' denotes most important.
Unit 2
• The optimal-location theory literature celebrates the selection of
single best locations.

• There are effectively three approaches to this locational decision


making: (1) cost minimization, (2) revenue or benefit maximization,
and, (3) profit or net benefit maximization.
Unit 2
• Facility location theory focus on enhancing operational efficiency,
promoting sustainability, and optimizing resource utilization to
achieve cost savings. This theory advocates for a comprehensive
approach to managing facilities throughout their entire lifespan, from
design and construction to decommissioning.
UNIT 2
• Facility location may be defined as a place where the facility will be
set up for producing goods or services.
• The need for location selection may arise under any of the following
conditions:
• a. When a business is newly started.
• b. When the existing business unit has outgrown its original facilities
and expansion is not possible; hence a new location has to be found.
• c. When the volume of business or the extent of market necessitates
the establishment of branches.
• d. When the lease expires and the landlord does not renew the lease.
• e. Other social or economic reasons
UNIT 2
• Need for Facility Location Planning
• Facility location planning is also required for providing a cost benefit
to the organization.
• The location planning should help in reducing the transportation cost
for the organization.
• This ultimately helps in decreasing the cost of production and
generating cost advantage for the organization.
• It is also needed to identify proximity to the sources of raw materials
and transportation facilities.
• A facility should ideally be located at a place where raw materials are
available.
• This is necessary for maintaining continuity in the production process
UNIT 2
• Factors Affecting Facility Location Decisions ,While selecting a facility
location, an organization should consider various factors that may
have significant impact on its performance.
• These factors are explained below:
• ➢ Availability of power ➢ Transportation ➢ Suitability of climate ➢
Government policy ➢ Competition between states ➢ Availability of
labour
UNIT 2
• Procedures and Techniques for Selecting Facility Location
• An organization follows certain steps to make a correct location
choice.
• These steps are: Decide on the criteria for evaluating location
alternatives
• Identify important factors
• Develop location alternatives
• Evaluate the alternatives
• Make a decision and select the location
UNIT 2
• Concept of Facility Location Procedures and Techniques for Selecting
Facility Location
• Following are some main techniques used in making location decisions:
• ➢ Location rating factor technique: In this technique, first of all an
organization needs to identify the factors that influence its location
decision. Next, each factor is provided a weight between ‘0’ to ‘1’
according to the level of importance, where ‘0’ denotes least important
and ‘1’ denotes most important.
• ➢ Centre-of-gravity technique: This technique emphasizes on
transportation cost in the determination of facility location. Transportation
cost mainly depends on distance, weight of merchandise and the time
required for transportation. Centre-of-gravity maps various supplier
locations on a Cartesian plane and suggests a central facility location with
respect to the locations of suppliers.
UNIT 2
• Concept of Facility Layout
• Facility layout may be defined as the arrangement of machinery,
equipment, and other amenities in a facility, which should ensure a
smooth movement of materials.

• According to Moore, facility layout is the plan of or the act of planning


an optimum arrangement of facilities, including personnel, operating
equipment, storage space, material handling equipment, and all other
supporting services along with the design of the best structure to
contain these facilities.
UNIT 2
Objectives of an Effective Facility Layout
• Minimum Material Handling
• Elimination of Bottlenecks
• Shorter Production Cycles
• Reduction in Production Delays
• Improved Quality Control
• Efficient Utilization of Labour
• Improved Employee Morale
UNIT 2
• Facility Layout
• After the site location decision has been made, the next focus in
production planning is the facility’s layout. The goal is to determine
the most efficient and effective design for the particular production
process. A manufacturer might opt for a U-shaped production line, for
example, rather than a long, straight one, to allow products and
workers to move more quickly from one area to another.
• Service organizations must also consider layout, but they are more
concerned with how it affects customer behavior. It may be more
convenient for a hospital to place its freight elevators in the center of
the building, for example, but doing so may block the flow of patients,
visitors, and medical personnel between floors and departments.
• There are four main types of facility layouts: process, product, fixed-
position, and cellular.
UNIT 2
• The process layout arranges workflow around the production
process.
• All workers performing similar tasks are grouped together. Products
pass from one workstation to another (but not necessarily to every
workstation).
• For example, all grinding would be done in one area, all assembling in
another, and all inspection in yet another.
• The process layout is best for firms that produce small numbers of a
wide variety of products, typically using general-purpose machines
that can be changed rapidly to new operations for different product
designs.
• For example, a manufacturer of custom machinery would use a
process layout.
UNIT 2
UNIT 2
• Products that require a continuous or repetitive production process
use the product (or assembly-line) layout. When large quantities of a
product must be processed on an ongoing basis, the workstations or
departments are arranged in a line with products moving along the
line. Automobile and appliance manufacturers, as well as food-
processing plants, usually use a product layout. Service companies
may also use a product layout for routine processing operations.
UNIT 2
UNIT 2
• Some products cannot be put on an assembly line or moved about in
a plant. A fixed-position layout lets the product stay in one place
while workers and machinery move to it as needed. Products that are
impossible to move—ships, airplanes, and construction projects—are
typically produced using a fixed-position layout. Limited space at the
project site often means that parts of the product must be assembled
at other sites, transported to the fixed site, and then assembled. The
fixed-position layout is also common for on-site services such as
housecleaning services, pest control, and landscaping.
UNIT 2
UNIT 2
• Cellular layouts combine some aspects of both product and fixed-
position layouts. Work cells are small, self-contained production units
that include several machines and workers arranged in a compact,
sequential order. Each work cell performs all or most of the tasks
necessary to complete a manufacturing order. There are usually five
to 10 workers in a cell, and they are trained to be able to do any of
the steps in the production process. The goal is to create a team
environment wherein team members are involved in production from
beginning to end.
Unit 2

• Strategic sourcing

• It is a procurement process that connects data


collection, spend analysis, market research,
negotiation, and contracting.
• Results in best suppliers, cost, quality and SCM profits
Unit 2
• The sourcing process can be a complicated one.
• Strategic sourcing is an enterprise-wide process.
• It needs inputs from all departments and teams across the
enterprise.
• Enterprises should form a strategic sourcing team aligned with the
business strategy.
• the fundamental priority could be cost, shipping efficiency and speed
to market.
• Based on the requirement, priorities, and goals of every enterprise
will have a slightly different sourcing process.
Unit 2
The below-mentioned are the main objectives of a best sourcing
process:
• Boosts efficiency
• Improving speed to market
• Minimizing risk
• Solving business problems
• Restricts purchasing costs
• Ensuring industry compliance
• Driving constructive competition
Unit 2
• 7 step process
• Step1 Spend category : An efficient sourcing process begins with
understanding the category and commodities that an enterprise
needs in order to achieve its goals and spend visibility is the key.
• Step2– Supply Market Research
• Research the price aspects that make up for the product or service
that your enterprise needs.
• Step3 – Create a sourcing strategy
• Choosing how and where to purchase the material while reducing risk
and price is a huge challenge for procurement managers.
Unit 2
• Step4 – Choose potential vendors
• One of the common ways to find a potential supplier is by using RFPs
(Request for Proposal) process for soliciting bids including, goods or
service-related specifications, cost breakdown and analysis, delivery
& service requirements, and financial terms and conditions.
• . Step5 – Selecting a vendor and negotiating terms
• The process of choosing a potential vendor involves talking to
different vendors and conducting multiple rounds of meetings with
short-listed vendors for negotiations
• Step6 – Execute & integrate
• Make sure that the vendor, internal end-customers, and everyone
who is affected by the process is involved in the design and execution
of the solution
Unit 2

• Step7 – Benchmark and track results


• This step is essential to shape the success of any strategic sourcing
project. Cutting-edge technological solutions applied to the tracking
of cost savings can help in finding when and where the vendor is
adding value. Automated reporting offers faster and precise feedback
and optimizes vendor relation management
UNIT 2

• Sourcing & Procurement


Unit 2

• Sourcing is the process of locating products or services outside of


your company.
• Procurement is negotiating contracts and getting the best price for
what you need. Together, these two processes can help your business
save money and improve efficiency.
Unit 2
Unit 2
• A procurement process flow chart is a diagram that helps
professionals visualize and understand the steps in the procurement
cycle.
1. Identification of business needs. ...
2. Purchase Requisitions & Approvals. ...
3. RFX creation and execution. ...
4. Choose a vendor & negotiate contract terms. ...
5. Implement & integrate vendor collaboration. ...
6. Review Supplier Performance. ...
7. Keep records of vendor invoices.
UNIT-2
• A make-or-buy decision refers to an act of using cost-benefit to make
a strategic choice between manufacturing a product in-house or
purchasing from an external supplier.
• It arises when a producing company faces a diminishing capacity,
experiences problems with the current suppliers, or sees changing
demand.
• The make-or-buy decision compares the costs and benefits that
accrue by producing a good or service internally against the costs and
benefits that result from subcontracting. For an accurate comparison
of costs and benefits, managers need to evaluate the benefits of
purchasing expertise against the benefits of developing and nurturing
the same expertise within the company.
UNIT-2
UNIT-2
• Vendor management is a term that describes the processes
organizations use to manage their suppliers, who are also known as
vendors. Vendor management includes activities such as selecting
vendors, negotiating contracts, controlling costs, reducing vendor-
related risks and ensuring service delivery.
• Vendor management is the process of coordinating with vendors to
ensure excellent service to your customers. It involves onboarding
vendors, training them to use your platform, and engaging with
vendors for improved profitability for both—your vendors and you.
Vendor management also involves measures to control costs, mitigate
risks, and improve vendor performance.
UNIT-2
Steps in vendor management
• 1. Assess the vendor Before onboarding any merchant, assess them
for the quality of their product, time to supply, pricing, network, and
reliability.
• You’ll be surprised to know that 87% of organizations have
encountered a disruptive incident with a vendor in last three years.
• 2. Establish goals
• To meet your sales goals, set up clear objectives for your vendors as
well. More importantly, comprehend your business process in the
utmost detail. It will help you structure and define clear performance
metrics.
UNIT-2
• 3. Negotiate a contract
• To cultivate a relationship with your vendors, recognize and
acknowledge their business objectives. For this, author a legitimate
contract that is beneficial for both parties.
• Negotiating too much for prices and restricting the profit margin of
your vendor can hamper the quality of the product.
• 4. Onboard the vendor
• When your organization and the vendor land at mutually beneficial
grounds, Sign the contract and onboard the vendor.
• The onboarding process involves guiding the vendor into your
company’s network. A good vendor onboarding process guarantees
the commencement of a smooth relationship.
UNIT-2
• 5. Monitor your vendor’s performance
• After conveying your expectations, you expect your vendors to work
as per the indicated standards of contract. But most of the time, the
situation is far from ideal.
• You need to constantly monitor your merchants and ensure that they
are working at their highest potential.
• 6. Communicate regularly with your vendors
• On average, U.S. retail operations have a supply chain accuracy of
only 63%. This can result in significant delays and re-stocking issues.
For example, 34% of businesses have shipped an order late due to
selling a product that wasn’t in stock.
• It is possible to avoid such instances through regular communications
with vendors about their stock, supply-network, and more.
UNIT-2
• 7. Reward your vendors
• Vendors see themselves as a part of the organization when you
reward them for their performance. Organizing reward campaigns
motivates your vendors and establishes a healthy competition among
them.
• Organization success depends on your vendors’ success.
End of unit 2

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