Principles of Operations Management

Prepared by

Prof Dr
Ali Ahmed Abdelkader
Professor and Head of Business Administration
department, faculty of commerce Kafrelsheikh University.
Economic advisor to Kafrelsheikh governorate

2024
 Contents:

Chapter 1: Introduction to Operations

Management

Chapter 2: Linear Programming.

Chapter 3: Transportation Model.

Chapter 4: Assignment Model.

Chapter 5: Forecasting.

Chapter 6: Economic Order Quantity.

Chapter 7: Reorder Point.

Chapter8: Break-Even Point .

Introduction
 Operations management (OM) is a field of
study that deals with the planning,
organizing, and controlling of the processes
that convert resources into products and
services. OM is a critical function in any
organization, as it is responsible for ensuring
that the organization can produce the
products or services that its customers
demand.

This book provides an introduction to OM,

covering the following topics:

 Chapter 1: Operations Management provides

an overview of OM, including its scope,
importance, and challenges.
 Chapter 2: Linear Programming introduces
linear programming, a mathematical
optimization technique that can be used to
solve a variety of OM problems.
 Chapter 3: Transportation Model presents the
transportation model, a linear programming
model that can be used to allocate resources
between multiple locations.
 Chapter 4: Assignment Model introduces the
assignment model, a linear programming
 model that can be used to assign tasks to
workers or resources to locations.
 Chapter 5: BERT discusses the BERT model,
a natural language processing model that can
be used for a variety of OM tasks, such as
forecasting and customer service.
 Chapter 6: Forecasting introduces
forecasting, the process of predicting future
demand for products or services.
 Chapter 7: Economic Order
Quantity discusses the economic order
quantity (EOQ) model, a model that can be
used to determine the optimal order quantity
for a product.
 Chapter 8: Reorder Point presents the reorder
point model, a model that can be used to
determine when to place a new order for a
product.
 Chapter 9: Break-Even Point discusses the
break-even point, the point at which a
company's revenue equals its costs.
Prof Dr Ali ABDELKADER
 Chapter 1
Introduction to Operations Management

Learning Outcomes

After finishing this chapter you have to recognize:

You should be able to:

LO 1.1Define the terms operations management

and supply chain

LO 1.2Identify differences between goods and

service

LO 1.3Identify the three major functional areas of

organizations and explain how they interrelate
 Operations, Operations Management, and
Supply Chain Management

Operations

The part of a business organization that is

responsible for producing goods or services.

Operations are the activities that an organization

undertakes to create and deliver its products or
services. They include a wide range of activities, such
as manufacturing, assembly, packaging, distribution,
and customer service.

Operations Management

The management of systems or processes that

create goods and/or provide services

Operations management is the process of planning,

organizing, and controlling the resources and activities
involved in operations. It is responsible for ensuring
that operations are efficient, effective, and meet the
needs of customers and stakeholders.

Supply Chain
A sequence of activities and organizations
involved in producing and delivering a good or service

Supply chain management is the management of

the flow of goods and services from the suppliers of
raw materials to the end customers. It includes all the
activities involved in getting products from where they
are made to where they are consumed.

Relationship between Operations, Operations

Management, and Supply Chain Management

Operations, operations management, and supply

chain management are all closely related. Operations
are the activities that make up supply chains, and
operations management is responsible for the efficient
and effective management of operations.
 Operations and Supply Chain Management

Operations and supply chain management are often

used interchangeably, but there are some key
differences between the two. Operations focus on the
activities that take place within an organization, while
supply chain management focuses on the activities
that take place across multiple organizations.

Operations management encompasses a wide

range of activities, including:
 Production planning and
scheduling: This involves determining
how much to produce, when to produce it,
and where to produce it.
 Inventory management: This involves
managing the flow of materials and
products through a company's supply
chain.
  Quality control: This involves ensuring
that products meet or exceed customer
expectations.
 Maintenance: This involves keeping
equipment and facilities in good working
order.
 Logistics: This involves the transportation
and storage of products.
Supply Chain Management
Supply chain management is concerned with the
efficient and effective flow of goods and services from
suppliers to customers. The goal of supply chain
management is to minimize costs and improve
customer satisfaction.

Supply chain management encompasses a wide

range of activities, including:
 Sourcing: This involves identifying and
selecting suppliers.
 Procurement: This involves the purchase
of goods and services from suppliers.
  Inventory management: This involves
managing the flow of materials and
products through a company's supply
chain.
 Transportation: This involves the
movement of goods from one point to
another.
 Warehousing: This involves the storage
of goods.
 Customer service: This involves
providing support to customers.

Differences between goods and services

In economics, goods and services are two main
types of economic output. Goods are tangible products
that can be purchased and owned, while services are
intangible experiences that are provided by a company
or individual.

There are several key differences between goods

and services.
Tangibility
One of the most obvious differences between goods
and services is their tangibility. Goods are physical
objects that can be seen, touched, and felt. Services,
on the other hand, are intangible experiences that
cannot be physically possessed.

Inventories
Goods can be inventoried, meaning that they can be
stored for later sale. This is because goods are physical
objects that can be easily counted and tracked.
Services, on the other hand, cannot be inventoried.
This is because services are intangible experiences
that cannot be stored for later sale.

Customer contact
 The amount of customer contact required to
provide a good or service can also vary. Goods
typically require less customer contact than services.
This is because goods are typically self-service,
meaning that customers can purchase and use them
without the assistance of a salesperson or service
provider. Services, on the other hand, often require a
high level of customer contact. This is because
services are typically provided by a company or
individual who interacts with the customer in order to
deliver the service.

Response time
The response time for goods and services can also
vary. Goods typically have a longer response time
than services. This is because goods need to be
manufactured or produced before they can be
delivered to the customer. Services, on the other hand,
can often be provided immediately.
 Capital intensity
The capital intensity of goods and services can also
vary. Goods are typically more capital-intensive than
services. This is because goods require the use of
machinery and equipment in order to be produced.
Services, on the other hand, often require less capital-
intensive inputs, such as labor and knowledge.

Examples
Some examples of goods include:
Cars
Clothes
Food
Electronics
Some examples of services include:

Healthcare
Education
Entertainment
Transportation
Conclusion

The differences between goods and services can

be summarized as follows:

Characteristic Goods Services

Tangibility Tangible Intangible
Can be Cannot be
Inventories inventoried inventoried
Customer
contact Low High
Response time Long Short
Capital
intensity High Low

The operations function includes many

interrelated activities such as:
 Forecasting
 Facilities and layout
 Managing inventories
  Assuring quality
 Deciding where to locate facilities
 And more . .
References
 Chase, R. B., Jacobs, F. R., & Aquilano,
N. J. (2017). Operations management for
competitive advantage (14th ed.). Boston,
MA: McGraw-Hill Education.
 Heizer, J., Render, B., & Munson, C.
(2023). Principles of operations
management (13th ed.). Boston, MA:
Pearson.
 Lambert, D. M., Cooper, M. C., & Pagh, J.
D. (2020). Supply chain management:
Processes, partnerships, and performance
(6th ed.). Boston, MA: McGraw-Hill
Education.
Chapter 2: Linear Programming
Linear Programming
Linear programming (LP) is a mathematical
technique for optimizing a linear objective
function under linear constraints.
It is a special case of mathematical
programming.
Key Components of Linear Programming
 Decision variables: The variables that can
be controlled to optimize the objective
function.
 Objective function: The function to be
maximized or minimized. It is typically a
linear function of the decision variables.
 Constraints: The limitations on the
decision variables. They are typically
linear inequalities.
 Feasible region: The set of all points that
satisfy the constraints.
 Optimal solution: The point in the
feasible region that maximizes or
minimizes the objective function.
Graphical Solution of Linear Programming
The graphical method is a simple way to solve
linear programming problems with two
decision variables.
The following steps are involved:
1. Formulate the problem
2. Graph the constraints: Each constraint is
represented by a line.
3. Identify the feasible region: The feasible
region is the area that satisfies all the
constraints.
4. Graph the objective function: The
objective function is represented by a line.
5. Find the optimal solution: The optimal
solution is the point in the feasible region
that maximizes or minimizes the objective
function.
Simplex method
The simplex method is a more efficient method
for solving linear programming problems. It is
an iterative algorithm that starts at a feasible
point and moves to a better feasible point until
the optimal solution is reached.
Applications of Linear Programming
Linear programming has a wide range of
applications in various fields, including:
 Business: Linear programming can be
used to optimize
production, transportation, and other
business operations.
 Economics: Linear programming can be
used to model economic problems such as
resource allocation and pricing.
 Engineering: Linear programming can be
used to design structures, machines, and
other systems.
 Finance: Linear programming can be used
to optimize investment portfolios and
manage risk.
Graphical method is a technique for solving
linear programming problems graphically. It is a
simple and intuitive method that can be used to
solve small problems.
Steps involved in the graphical method:
1. Formulate the linear programming
problem.
2. Graph the constraints.
3. Identify the feasible region.
4. Find the corner points of the feasible
region.
5. Evaluate the objective function at each
corner point.
6. The corner point with the best objective
function value is the optimal solution.

Advantages of the graphical method:

 It is a simple method.
 It can be used to solve small problems
quickly.
 It provides a visual representation of the
problem.
Disadvantages of the graphical method:
 It can only be used to solve small
problems.
 It can be difficult to graph the constraints
and identify the feasible region.
 It can be difficult to find the corner points
of the feasible region.
 Example"1"

Linear programming"
A firm that assembles computers and computer
equipment is about to start production of two
new types of microcomputers. Each type will
require assembly time, inspection time, and
storage space. The amount of each of these
resources that can devote to the production of
the microcomputer is limited; the manager of the
firm would like to determine the quantity of each
microcomputer to produce in order to maximize
the profit generated by sales of these
microcomputers, after meeting with design and
production personnel, the manager has obtained
the following information:

Computer type Type Type Daily amount of

1 2 available resources
Profit per 60 50
unit(LE/Unit)
Assembly time 4 10 100
per unit(hr/unit)
Inspection time 2 1 22
per unit(hr/unit)
Storage space per 3 3 39
unit(m2/unit)
Solution:
1. Decision variables:
X1(Type 1 of computer).
X2(Type 2 of computer).
2. Objective function:
Max (profit) 60X1+50X2
3. Constraints:

 Assembly time 4X1+10X2≤100

 Inspection time 2X1+X2≤22

 Storage Space 3X1+3X2≤39

Plotting all constraints need to replace the
inequality mark to equality mark in order to
draw straight line for each constraint as the
following:
Constraint"1" 4X1+10X2=100
If X1=0 →X2=10 → (0, 10)
If X2=0 →X1=25 → (25, 0)
Constraint"2" 2X1+X2=22
If X1=0 →X2=22 → (0, 22)
If X2=0 →X1=11→ (11, 0)
Constraint"3" 3X1+3X2=39
If X1=0 →X2=13 → (0, 13)
If X2=0 →X1=13 → (13, 0)
4. Non-negativity constraint:
X1, X2≥0
 Example"2"

The operations manager for the blue moon

brewing company produces two beers: Lite (L)
and Dark (D). Two of his resources are
constrained production time, which is limited to
8 hours (480 minutes) per day; and malt extract
(one of his ingredients) of which he can get only
675 gallons each day, to produce a keg of Lite
beer requires 2 minutes of time and 5 gallons of
malt extract, while each keg of Dark beer needs
4 minutes of time and 3 gallons of malt extract.
Profit for Lite beer is $3 per keg. And profit for
Dark beer is $2 per keg.
Solution:

Lite beer Dark beer Resources

(L) (D) are limited
to
Production time 2 4 480
Malt extract 5 3 675
profit 3$ 2$
 1. Decision variables:
L (stands for lite beer).
D (stands for Dark beer).
2. Objective function:
Max (profit) 3L+2D

3. Constraints:

 production time 2L+4D≤480

 malt extract 5L+3D≤675

Plotting all constraints need to replace the
inequality mark to equality mark in order to
draw straight line for each constraint as the
following:
Constraint"1" 2L+4D=480
If L=0 →D=120→ (0,120)
If D=0 →L=240 → (240, 0)
Constraint"2" 5L+3D=675
If L=0 →D=225 → (0,225)
If D=0 →L=135→ (135, 0)
4. Non-negativity constraint:
L, D≥0
Chapter 3: Transportation Model.
A transportation model is a linear programming
model that is used to minimize the cost of
transporting goods from sources to destinations.
It is a widely used model in operations research
and logistics.
Key Components of a Transportation Model
 Sources: The locations where the goods
are available.
 Destinations: The locations where the
goods are needed.
 Transportation costs: The cost of
transporting goods from each source to
each destination.
 Supply: The amount of goods available at
each source.
 Demand: The amount of goods needed at
each destination.

So;
 Information requirements
1. Supply of the sources
 2. demand of the destinations
3. unit shipping costs

Decision Variables
The decision variables in a transportation model
are the amounts of goods to be transported from
each source to each destination.
Objective Function
The objective function of a transportation model
is to minimize the total transportation cost.
Constraints
The constraints in a transportation model
are:
 Supply constraints: The total amount of
goods transported from each source must
be less than or equal to the supply at that
source.
 Demand constraints: The total amount of
goods transported to each destination must
 be greater than or equal to the demand at
that destination.
 Non-negativity constraints: The amount
of goods transported from each source to
each destination must be non-negative.

Assumptions of the Transportation Model

The transportation model makes the
following assumptions:
 The transportation costs are linear (is the
same regardless of the number of units
shipped).
 The supply and demand are known and
constant.
 The items to be shipped are homogeneous
 There is only one route or mode of
transportation being used between each
source and destination
 Shipping (supply) points
 Any place from which good are sent
 Factories
  Warehouses
 Departments

 Destinations
 Any point that receives goods
 Factories
 Warehouses
 Departments

Linear Programming Formulation of the

Transportation Model
The transportation model can be formulated as a
linear programming problem as follows:
Minimize:
Total transportation cost = Σ Σ c_ij x_ij
Subject to:
Σ_j x_ij = s_i for all i
Σ_i x_ij = d_j for all j
x_ij ≥ 0 for all i and j
where:
 c_ij is the transportation cost from source i
to destination j
 x_ij is the amount of goods transported
from source i to destination j
 s_i is the supply at source i
 d_j is the demand at destination j

Example:
Special Cases of the Transportation Model
The transportation model can be extended to
handle a variety of special cases, including:
 Unbalanced transportation model: This
occurs when the total supply of goods is
not equal to the total demand.
 Transportation model with
transshipments: This occurs when goods
 can be shipped from one source to another
before being shipped to their final
destination.
 Transportation model with multiple
objectives: This occurs when there are
multiple objectives to be considered, such
as minimizing cost and minimizing time.
Applications of the Transportation Model
The transportation model has a wide range of
applications in production and operations
management, including:
 Transportation of raw materials from
suppliers to manufacturing plants.
 Transportation of finished goods from
manufacturing plants to warehouses.
 Transportation of goods from warehouses
to customers.
Chapter 4: Assignment Model.
An assignment model is a linear
programming model that is used to assign
tasks to workers or resources to jobs. The
goal is to minimize the total cost or time
required to complete all the tasks.
How to assign every worker or job with every
machine with minimizing (costs, time) or
maximizing (profit, efficiency...).
Components of an Assignment Model
 Tasks: The tasks that need to be
completed.
 Workers or Resources: The workers or
resources that can be assigned to the tasks.
  Costs or Times: The costs or times
associated with assigning each worker or
resource to each task.
Conditions of an Assignment Model
 Each task must be assigned to exactly one
worker or resource.
 Each worker or resource can be assigned
to at most one task.
 The total cost or time required to complete
all the tasks must be minimized.
 Each worker or job must be assigned to
only one machine.
 Every machine is capable of handling
every job
 The costs or values associated with each
assignment combination are known and
fixed

Example
Solving the Assignment Model
The assignment model can be solved using the
Hungarian algorithm. The Hungarian algorithm
is a polynomial-time algorithm that finds the
optimal solution to the assignment problem.
Applications of Assignment Models
Assignment models have a wide range of
applications in including:
 Assigning workers to jobs: Assignment
models can be used to assign workers to
jobs in a way that minimizes the total cost
or time required to complete all the jobs.
 Assigning resources to
projects: Assignment models can be used
to assign resources to projects in a way
that minimizes the total cost or time
required to complete all the projects.
 Scheduling machines: Assignment models
can be used to schedule machines to tasks
in a way that minimizes the total cost or
time required to complete all the tasks.
Chapter 5: Forecasting.
Forecasting is the process of predicting future
demand for products or services. It is an
essential part of production and operations
management, as it allows businesses to plan
for future production and inventory levels.
Types of Forecasting
There are two main types of forecasting:
 Qualitative forecasting: This type of
forecasting uses subjective methods, such
as expert judgment, to predict future
demand.
 Quantitative forecasting: This type of
forecasting uses historical data to predict
future demand.
Quantitative Forecasting Methods
There are many different quantitative forecasting
methods, including:
 Time series analysis: This method uses
historical data to identify trends and
patterns in demand.
  Causal forecasting: This method uses
factors that are known to influence
demand, such as price and advertising, to
predict future demand.
Forecasting in Production and Operations
Management
Forecasting is used in production and
operations management to:
 Plan production levels: Businesses use
forecasts to determine how much product
they need to produce in order to meet
future demand.
 Manage inventory levels: Businesses use
forecasts to determine how much
inventory they need to hold in order to
meet future demand without stockouts or
overstocks.
 Set prices: Businesses use forecasts to set
prices that will maximize profits.
 Make marketing decisions: Businesses
use forecasts to make decisions about
 marketing campaigns, such as how much
to spend and where to advertise
Example
Chapter 6: Economic Order Quantity.
Economic order quantity (EOQ) is a formula
used in inventory management to determine the
optimal order quantity for a product.
The goal of EOQ is to minimize the total cost of
inventory, which includes the cost of ordering
and the cost of holding inventory.
EOQ Formula
The EOQ formula is as follows:
EOQ = √(2DS / K)
Where:
 EOQ is the economic order quantity
 D is the annual demand for the product
 S is the cost of placing an order
 K is the cost of holding one unit of
inventory for one year
EOQ Assumptions
The EOQ formula makes the following
assumptions:
 Demand is constant.
  The cost of placing an order is constant.
 The cost of holding inventory is constant.
 Lead time is constant.
EOQ Applications
EOQ is used in a variety of industries, including
manufacturing, retail, and healthcare. It can be
used to determine the optimal order quantity for
any product that has a constant demand and a
known cost of ordering and holding inventory.
EOQ Benefits
EOQ can help businesses to:
 Reduce inventory costs
 Improve cash flow
 Increase profits
EOQ Limitations
EOQ is a simple formula that can be used to
estimate the optimal order quantity. However, it
is important to note that EOQ is just an estimate
and the actual optimal order quantity may vary
depending on the specific circumstances.
EOQ is a valuable tool for inventory
management. It can help businesses to reduce
inventory costs, improve cash flow, and increase
profits. However, it is important to note that
EOQ is just an estimate and the actual optimal
order quantity may vary depending on the
specific circumstances.
EOQ models
Economic order quantity (EOQ) models identify
the optimal order quantity by minimizing the
sum of annual costs.
1 The basic economic order quantity model
2 The economic production quantity model
3 The quantity discount model
Example:
Chapter 7: Reorder Point.
Reorder point (ROP) is a level of inventory at
which a new order is placed for a product.
The goal of ROP is to ensure that there is
enough inventory to meet demand until the next
order arrives.

Calculating Reorder Point (ROP)

The reorder point can be calculated using the
following formula:
ROP = D * L + S
Where:
 ROP: Reorder point
 D: Daily demand
 L: Lead time
 S: Safety stock

Factors Affecting Reorder Point (ROP)

Several factors affect the reorder point,
including:
  Demand: The higher the demand for a
product, the higher the reorder point will
be.
 Lead time: The longer the lead time, the
higher the reorder point will be.
 Safety stock: The amount of extra
inventory kept to avoid stockouts.
 Cost: The cost of placing an order and the
cost of holding inventory.

Advantages of Reorder Point (ROP)

 Simple to use: The reorder point can be
easily calculated using the formula
mentioned above.
 Straightforward: ROP is a relatively
simple concept that can be easily
understood by all levels of management.
 Effective: ROP can help ensure that there
is enough inventory to meet demand
without having to keep high levels of
inventory.
Disadvantages of Reorder Point (ROP)
  Inaccuracy: The reorder point relies on
several estimates, such as demand and lead
time, which can lead to inaccurate results.
 Variability: Fluctuations in demand can
lead to stockouts or inventory buildup.
 Inflexibility: ROP may not be suitable for
products with seasonal or unpredictable
demand.
Example
Chapter 8: Break-Even Point .
The break-even point (BEP) is the level of
production or sales at which a company's total
costs equal its total revenue. In other words, it is
the point at which the company is neither
making a profit nor a loss.
Calculating Break-Even Point (BEP)
The BEP can be calculated using the
following formula:
BEP = Fixed Costs / (Sales Price - Variable Cost
per Unit)
Where:
 BEP: Break-even point
 Fixed Costs: Costs that do not change with
the level of production or sales
 Sales Price: The price at which the product
is sold
 Variable Cost per Unit: The cost of
producing or selling one unit of the
product
Applications of Break-Even Point (BEP)
The BEP can be used in a variety of ways,
including:
 Pricing products: The BEP can be used to
help determine the minimum price at
which a product can be sold without
making a loss.
 Making production decisions: The BEP
can be used to help determine the optimal
level of production.
 Evaluating new projects: The BEP can be
used to evaluate the potential profitability
of new projects.
Limitations of Break-Even Point (BEP)
The BEP is a useful tool, but it has some
limitations. These limitations include:
 Assumes linear costs: The BEP formula
assumes that costs are linear. This is not
always the case.
 Assumes constant sales price: The BEP
formula assumes that the sales price is
constant. This is not always the case.
 Ignores time value of money: The BEP
formula ignores the time value of
money. This can lead to inaccurate results.