Operations Management for the Construction of Sheikh Jaber Al-Ahmad Hospital - Term Paper Example

Operations Management for the Construction of Sheikh Jaber Al-Ahmad Hospital Operational activities and management has over the years continuously increased in importance and applicability particularly in developing construction. From a management point of view, the implementation of an effective operations management has become a great method in order to ensure quality and efficiency of output considering the fact that quality and productivity issues on the construction site are most likely factors causing lack of economic success for both the contractors of the construction project and more importantly for the client itself (Koch 1017). It has been found that this inefficiency can be attributable to the architects and contracting engineers who are responsible for the development of the construction plan including the type and quantity of materials to be used, the number of construction workers to be employed, and the duration of the project. Nevertheless, in many construction projects where quality has always been deliberately overlooked such that contractors make use of cheaper materials in order to earn more than to erect a high-quality facility, there is dire need to revamp the entire operations management in that the cause of this kind of unscrupulous approach may be detrimental to those who will use the facility at the end of the day. This paper will look at the case of the construction of the Sheikh Jaber Al-Ahmad Hospital and the kind of operations management needed to complete it economically while ensuring productivity and efficiency. In particular, this paper will talk about an important tool in operations management: Economics and Diseconomies of Scale”, which aims to contribute to solving problems involved in the construction phase of the Sheikh Jaber Al-Ahmad Hospital. Economies of Scale An economies of sale takes place when the cost advantage crops up because of the increased output of a product (citation needed). Seen this way, the economies of scale occur owing to the inverse relationship between fixed cost and quantity of products being produced. Economies of scale is an important topic in production and purchasing in that it cuts down the variable costs per unit of a particular material being purchased due to the operational efficiencies. Spreading the fixed costs, reducing construction cost, cutting cost of purchased materials, etc In the case of the construction of the Sheikh Jaber Al-Ahmad Hospital, economies of scale can be a great tool in order to spread the fixed costs (Dixit and Baldick 8). When purchasing materials for the construction, the contractors can take advantage of buying construction materials in bulk or in large quantities such that the fixed cost per one kind of construction material will be distributed to the number of it that has to be purchased; the higher the quantity, the lower the cost for each material would be because for suppliers, the initial set up capital would just be the same regardless of the quantity of the material they have to produce; what these suppliers will have is a marginal extra cost. This is one of many reasons for company mergers or takeovers. Implementing this concept in the construction of Sheikh Jaber Al-Ahmad Hospital, it would be just as certain that the construction cost will be reduced. Obviously, as contractors obtain a good deal in construction materials by taking more quantity at a significantly lower cost would bend the “extra” budget more on perhaps improvisation of the facility or for the operating cost of the hospital once it becomes operational. Also, when variable cost is cut down, it automatically reduces the entire construction cost considering that the costs of the purchased materials are also cut back. Diseconomies of Scale Purchasing in large quantities does not always entail efficiency. There are cases wherein economies of scale no longer work for a construction operation such that instead of a sustained decrease in fixed cost with the increase of the quantity purchased, there is actually an increase in the marginal cost when the quantity of the purchased materials is increased (Krugman 951). This is an important concept to look at in that not all large quantity purchases are favorable to a construction activity. Consider this: in the construction of Sheikh Jaber Al-Ahmad Hospital, several types of materials are required to be produced such as steel, cement, gravel, nails, etc. These materials come in different quantities and most significantly they are produced at varying rates. Diseconomies of scale may take place if, for example, the production of gravel is slower than the production of cement. But there is a more operational description that perfectly applies to the construction of Sheikh Jaber Al-Ahmad Hospital: increased quantity of purchased materials would also mean increased transportation costs. The more materials are needed to be transported, the more costs it would take to transfer the material from the supplier’s location to the client, and that is substantially inefficient (Krugman 953). Of course, one clear factor here is location. If the construction site is just a walking distance from the location of the supplier, increased purchasing quantity would not bring up any problem at all; however, this setting does not happen most of the time. The location of the supplier is oftentimes at miles length, requiring a long travel and a greater transportation cost (Gomory 411). Clearly, this is a case of economies of scale being counterbalanced by diseconomies of scale. Bidding Process and Pricing In Kuwait, there is a law which states that the project will go the lowest bid from all contractors, and this remains even with the changes in the BOQ. Corruption is one concern that has to be considered closely in the construction of Sheikh Jaber Al-Ahmad Hospital. The problem with always going for the lower bidder is that lowest bidders are oftentimes less experienced, incompetent, and inefficient contractors. Another thing is that prices in the BOQ are oftentimes misleading. For one, prices of materials are set at a certain cost that is significantly higher but are made to appear products of “high quality.” However, these materials have actually “gross margins” built in such that when prices in the BOQ are changed, even at slightest differences, contractors would earn much from them. Or sometimes, contractors would enlist materials at certain price for a certain brand (usually high quality), but in the production, materials produced are actually substandard and low cost. Solutions There are various solutions that Sheikh Jaber Al-Ahmad Hospital can consider: (1) do not always go for the lowest bidders. There is a reason behind their low numbers, which for one would be the inefficient track record that they have with their previous clients or they are new in the construction business and has not proven their company yet in smaller projects; (2) prices in the BOQ should be checked by certified accountants, engineers, and marketers who are proficient enough to justify the prices of the materials that has to be produced; (3) sizing the capacity cushion in order to prevent the price difference due to the length of time that forecasting takes. Works Cited Dixit, Krishnan and Ross Baldick (n.d.). An Empirical Study of the Economies of Scale in AC Transmission Line Construction Costs [PDF]. Web. 9 December 2013. Gomory, Ralph. “A Ricardo Model with Economies of Sale.” Journal of Economic Treasury 62.2 (1994): 394-419. Web. 9 December 2013. Koch, Christian. “Operations Management on the Construction Site: Developing a Human Resource and Knowledge Oriented Alternative to Lean Construction.” In: Khosrowshahi, F (Ed.), 20th Annual ARCOM Conference, 1-3 September 2004, Heriot Watt University. Association of Researchers in Construction Management, Vol. 2 (2004): 1017-27. Krugman, Paul. “Scale Economies, Product Differentiation, and the Pattern of Trade.” The American Economic Review 70.5 (1980): 950-959. Web. 9 December 2013. Read More