Operations Management - Essay Example

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Since all the relevant information about Return on sales is mentioned in the question, the data has been used to derive the relevant cost and income amount so that desired Return on Sales i.e. 10% and 15% can be calculated…
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Operations Management
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When profit calculation is being done, it is important to take account of fixed costs especially when using TOC based initiatives. The concept of TOC relies on three most important elements i.e. Inventory, Operating expenses and Throughput (Choe and Herman, 2004 and Herroelen and Leus, 2005); all these three aspects need to be carefully monitored so that the production processes are enhanced and the output level of the organization increases. Throughput is described as sales revenue minus total variable costs; Inventory is defined as the amount of total money invested in the business which can be or is to be sold; and Operating expense is the amount of all non-variable costs that are associated in converting inventory into throughput.
It is evident from the explanation of the three important elements of TOC based initiative that both types of costs are important when calculating the profit. The real profit amount is that one which is retained by the business after it covers its fixed and variable costs. From the table given in Question 1(a), it can be concluded that Fixed costs are important when calculating Net Income as it is the profit that is left when all the expenses are paid off by the company. The main fixed costs for any manufacturing concern like Hi-Fidelity Ltd. is the machinery that is used in the production processes and its cost needs to keep at a minimal level. Fixed cost constitute majority share of the cost and that is why it needs to be kept constant; if not constant, then it should not increase at an accelerating rate as well. Hence, in TOC based initiative, Fixed costs are the crucial part of profit calculation as they help in determining the Return on Sales so that the company can decide about the increase in sales required so that it is able to earn high Net Income in the long-run. Question 1 (c): It has been revealed by the studies of Bhardwaj, Gupta and Kanda (2010) and Godratt Institute (2009b) that the organizations that implement the concept of TOC require less time for initial improvement phase than that required in both lean management and six sigma methods. TOC concept allows the organizations to focus on one area in one time whereas the other continuous improvement processes require the professionals to keep on monitoring the systems to identify issues in other areas and they necessitate the need of continuous up gradation of the systems as well. The major benefit gained from the application of TOC based initiatives is that they manage the variations effectively rather than reduce them which differentiates TOC from lean and six sigma. TOC helps the organizations in saving time and managing the complete execution process properly. Since the main aim of the concept is to identify the constraint that is creating problem in the company’s production process, the next step is to resolve it so that the variation can be managed. The best aspect of TOC concept is that it follows a systematic approach which can be described as follows: 1. Identifying the starting conditions of the ...Download file to see next pagesRead More
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