Operations Managment: Main Advantages and Disadvantages in Holding Inventory - Assignment Example

Question 3 a. What do you consider the main advantages/disadvantages in holding inventory' The main advantage of holding inventory is to act as a buffer between supply and demand. It allows for demands that are larger than expected. It also allows for deliveries that are delayed or too small. Holding inventory takes advantage of price discounts on large orders. It allows the purchase of items when the price is low and expected to rise as well as items that are going out of production or are difficult to find. Holding inventory make full loads and reduce transport costs. It also gives cover for emergencies and mistakes. Holding inventory can improve customer service while maintaining independence of the supply chain. The major disadvantage of holding inventory is that it is expensive. The average carrying cost of inventory across all manufacturing is 25-35% of its value. Higher carrying costs result in decreased profits for the firm. In other words, holding inventory is a non-value adding cost. Value of holding inventory is an opportunity cost for the firm where the money is stagnant and not invested. Above all, inventory deteriorates; it becomes obsolete, lost or stolen. Holding inventory increases the firm's risks. b. Draw a diagram of the basic EOQ model, explaining what assumptions you are making. The EOQ model minimizes the sum of holding and ordering costs. The model assumes that there is only one product involved. The annual demand is assumed as even and constant throughout the year and the demand requirements are known. Lead time is assumed as fixed and non-varying where each order is received in a single delivery. EOQ further assumes no quantity discounts. c. The inventory control manager of a car factory issues orders for tyres which cost '48 each. He has estimated that stock holding costs about 25% per year while the administration costs about '150 for each order. Given that demand for tyres is reasonable steady throughout the year at 20,000 per month, estimate the EOQ for these tyres. EOQ = ' [2 x (annual demand) x (order cost) / (holding cost)] = ' [2 x (20,000 x 12) x (150) / (0.25 x 48)] = 2450 units d. Discuss to what extent a modelling approach to inventory can be useful in business where assumptions may be unrealistic. Modelling approach to inventory has advantages in business such as being easy to understand and use, giving good guidelines for order size and easy to implement and automate. Models can find other values such as costs and cycle lengths, encourages stability and allows different circumstances/situations. Question 4 a. Discuss why the design of jobs is an important aspect of operations management. Job design describes the tasks, methods, responsibilities and environment used by individuals to do their work. It finds the best possible way of doing a job. The objectives of job design involves meeting the productivity, quality and other goals of the organisation as well as making the job safe, satisfying and rewarding for the individual. These objectives are extensions of the fundamental task of an operations manager who is responsible for all aspects of the organisation's products and the processes used to make them. Managing operations directly affects performance of an organisation; job design is one of the strategies that would improve performance. b. Chronologically, there has been a series of approaches to job design over the last 100 years. Select any two of the major approaches and discuss the important features of each approach, together with advantages and disadvantages. Job Rotation is an approach of job design where the job each person does is rotated in a certain period so that people do not get into a rut of doing the same specialised job all the time. The advantage of job rotation is that it can give people more varied work and a broader range of skills. The disadvantage of job rotation is that it only gives a temporary improvement as people soon feel they are being switched around a series of equally boring jobs. Job Enlargement is an approach of job design where several simple jobs are combined into a larger one. It is considered as a horizontal expansion where a range of similar jobs of the same type are combined. The advantage of job enlargement is that it gives broader jobs with more variety and interest. The disadvantage of job enlargement is that it gives only temporary improvement as it replaces a short boring job by a longer boring job. c. Critically evaluate how the two approaches selected in (b) above influence the way jobs are designed today. Today's job designs are focused on high performance teams. Although job rotation and enlargement has become insignificant, these approaches influence the creation of teams. Projects given to teams may vary in scope and different from one another in order to provide a broader scope and prevent routine activity. Continuous improvement programs that are created by teams enlarges the previous the objectives of the team. The composition of teams varies according to their functions and expertise in order to balance the capacity and capability of the team. Question 5 a. How can quality be defined' In a broader sense, quality can be defined as the ability to meet and preferably exceed customer expectations. An internal view of quality from the producer measures product quality in terms of how closely it comes to its designed specifications. This is termed designed quality where it sets the quality that a product is designed to have. An external view of the customer who judges quality by how well a product does the job it was bought for. This is the achieved quality that shows how closely the product conforms to its designed quality. b. What impact can operations managers have on quality' It is the function of operations manager to be responsible for all aspects of a product's quality. Manufacturing quality products is one of the decisions that face an operations manager. They should design products that satisfy customers and other requirements. Then they should ensure that products actually meet these specifications. On the other hand, operations managers can decide to produce low cost low quality products to be cost effective. However, operations managers can reduce their overall costs by making products with high quality which brings benefits both to customers and the organisation. c. Define how Statistical Process Control can help quality planning and critically assess this approach. Statistical Process Control (SPC) tests the performance of the process. It takes a sample to see if the process is working within the acceptable limits or if it needs adjusting. SPC checks samples of units to make sure that the process continues to work as planned. It makes sure that the random variation in a process stays within the acceptable limits. If the proportion of defects moves outside the limits, the process is considered as out of control. The goal of SPC is to make decisions about the actions affecting the process and help the quality planning. SPC can help quality planning through analysis and investigation of process trends, several consecutive readings, erratic observations and sudden changes in readings. Hogsmeadow Garden Centre - Case Study Operations Overview by Functions Retail - The input process includes purchases of seedlings and plants as well as customer's information queries. The transformation process involves the tending of plants and dissemination of information to customers. The output process is the sale of quality plants to well-informed customers. Design Studio - The input process is the development of design idea and acquisition of materials needed such as stone ornaments. The transformation process is the implementation of the design. The output process is the beautiful gardens and grounds which can draw sales of items. Personnel Management - the input process is the recruitment of staffs needed. The transformation process is the training, orientation and development of personnel. The output process is the formation of qualified personnel who would provide excellent service. SWOT Analysis Strengths Strong reputation for product quality and excellent service - The garden centre boasts of their complete range of plants, shrubs, trees and outdoor stone ornaments. The staffs are qualified professionals who tend the plants and provide gardening information to customers. The company also offers a diverse range of non-plant products and services. It is open seven days a week all year round. With this, the company creates a competitive advantage and commands a premium price for its products. Convenient location - The centre is conveniently located in a popular tourist area in UK. It is served with a good network of main roads, although it has no public transport access. The parking space of the centre is large with a 350- cars capacity. The location enables the company to penetrate the market more effectively and serve a wide range of customers. Strong marketing capabilities - Hogsmeadow Garden Centre has strong marketing capabilities. The company utilises a mini theme park layout with special gardens, beautiful grounds, special events and an on-site restaurant which are attractive to customers from different ages and sectors. Personality gardeners from television media make special appearances which boosts customer confidence on the centre. The marketing capabilities offer value and service to its customer, largely adding to the company's competitive position in the industry. Weaknesses High operating expenses impact profits - The growth of the garden centre's profitability and sales revenues are slow. The company has ineffective inventory management which causes high wastage costs, holding costs and administration costs. Unreliable sales forecast also contributed to the poor inventory control which resulted to either stock surpluses or stock-outs depending on the season. Surpluses force the company to discount sales or throw away stocks. Stock-outs create opportunity losses and may damage customer perceptions. The garden centre is also heavily staffed with 85 employees that contributed to high operating expenses. These cost drivers affects the growth of the company's profitability and sales revenues. Opportunities Expanding market for garden related leisure products and services - The market for garden-related products continues to grow. Attracting more customers would be the priority for the company. The expanding market will mean more customers that would provide opportunities for growth and profitability. Expanding product portfolio - The garden centre offers a diverse range of products and services. The company plans to further expand its product portfolio in the future. As a result, the company will lower its operating costs, increase demand and sales revenue. With a premium price, it will gain higher profit margins. Threats Customer behaviour adversely affected by weather conditions - Weather conditions are unpredictable which affects the spending behaviour of customers. The time of year also produces seasonality of customer's product preference. As a retailer, the company is highly dependent upon customer discretionary spending. A change in customer preference and decrease in customer spending would result in lower customer traffic and lower margins. The garden centre is highly sensitive to customer traffic. Intense competition - The main competitors for the company are market stores and smaller garden centres in the area. The pricing of products in the competition is lower. Competition will appeal to the interests of price-sensitive customers. Increased competition could lead to pricing pressures, which could reduce the company's profits. Identified Problem: High operating expense impacts profitability and revenue growth Solutions: The company needs to develop inventory modelling system for products which addresses cyclic demands. They should benchmark other organisations that excel in inventory management. In order to address the inventory problems, the company should consider implementing ABC analysis of stock supply and demand. ABC analysis is a very useful tool for understanding inventory management situations. It helps suggests where the real problems or opportunities lie and what steps to be taken. It is based on the Pareto principle or 80/20 rule. With a wide range of products, the company should look at the data on cost and usage to identify the large part of the inventory budget that is accounted by the relatively few items. If the 80/20 relationship is found, the company can channel the energies and resources to gain maximum profit the items. Category A items will be the high value stocks. Category B will be medium valued stocks. Category C will be for the remaining stocks. Creating teams in the garden centre can address the staffing problems. Training and development of high performance teams can greatly improve the service and staffing allocations because these teams require less supervision and control. High performance teams will be composed of motivated and empowered staffs that are self-directed and self-managed. It will also address the lack of personnel management skills and knowledge of the owner. High performance teams can be trained to create continuous improvement programs and to implement work flexibility and responsiveness. Honeydukes Restaurant - Case Study Operations Overview Customer Service Function - the input process involves queuing of customers who are waiting to be served in the restaurant. The transformation process includes the service of customer through self-service method or assisted service approach. The output process is meeting customer expectations and satisfaction. Kitchen - the input process involves the purchase of ingredients and materials needed in the kitchen. The transformation process includes the cooking and preparation of meals. The output process is serving the needs of the customers. SWOT Analysis Strengths Strong service blueprint - The restaurant is conveniently located inside the Hogsmeadow Garden Centre. They monopolise the food service in the centre. They practice a fast food service with meals available on the spot. A self-service method is utilised to encourage customers to choose meals on the spot. This method also benefits the restaurant because of its low service staff need. Popular products - The restaurant is popular mostly to older people and mothers with small children. The lunchboxes are well-liked and in demand to children. The popularity of the products to customers generates sales revenues for the restaurant. Weaknesses Long waiting lines - The queuing time for serving the customers is long. Lengthy waiting lines can damage the customer's perception and incur opportunity losses for the restaurant. Weak reputations will impact the revenues because it will prevent customers to return to the restaurant. Time consuming preparation of lunchboxes - Although lunchboxes are popular, the preparation is time consuming which contributes to the long waiting lines. Time and effort utilised in preparing the lunchboxes will prevent the kitchen staff to prepare other meal requirements. Opportunities Increasing customer growth in the garden centre - Growth in the garden centre means more potential customers to be served. This is an opportunity for the restaurant to increase its sales. Threats Dependence on the performance of Hogsmeadow Garden Centre - The restaurant is highly dependent on the business performance of the centre. It is reliant on the allocation of resources and would be affected by the centre's problems. This dependence constraint the restaurant's growth. Indentified Problem: Time consuming preparation of lunchboxes increases queuing time Solutions: Process and product standardization - The preparation of lunchboxes can be standardized in accordance to the preference of children. The restaurant can create few kinds of lunchboxes that are highly preferred. In this way, customisation of products which is time consuming will be eliminated. This would also be aligned to the self-service strategy of the restaurant. During peak times, the kitchen can allocate dedicated staffs for the preparation of lunchboxes in order implement fast service. Point of sale performance - The restaurant should invest on additional point of sale counters and cashiers. This would prevent bottlenecks on the queue lines. Several counters similar to popular fast food restaurants will increase the number of lines serving the customers which would result to minimising the length of waiting as well as provide choices for customers. A dedicated counter for lunchbox orders should also be considered in order to isolate them and increase the service performance of regular orders. References Rowbotham, F., Galloway, L., & Azhashemi, M. (2007). Operations Management in Context (2nd ed.). Oxford: Elsevier Ltd. Waters, D. (2002). Operations Management: Producing Goods and Services. New Jersey: Prentice Hall. Read More