Revision of Operation Management - Case Study Example

Revision of Operation Management Introduction: In this case study, it is seen that there has been some constraints in the purchasing system and theinventory control system. Therefore the main bottlenecks in operations management would be in terms of creating plans, procedures and processes by which the lacuna in the purchasing and inventory controls could be effectively monitored and controlled and audit trails need to be maintained to ensure that constant measurement of the actual movements of goods/ services occur that could effectively deal with this problem. When seen in terms of Table 1 (Pictures I and II ) seen below, it is seen that it could be seen in terms of taking customers’ order (Picture I) and receiving goods.(Picture II) The operations strategy needs to address to the problems that beset the company in these areas and how well it could be solved. In this connection, it is often seen that Operations Management Strategy often seeks the assistance of professional experts in the field who could provide a wealth of ideas and innovative solutions to the problems before the Company. They could also internally audit the present procedures and practices, matching it against the templates of best practices in the area, identify variances and suggest remedial measures for the future. In the context of this Company, the analysis would be in terms of providing analysis that could provide adequate management solutions for the problems in deficient areas and how it could be solved. The operations management is also concerned with matters concerned with creating best management techniques in order to deal effectively with business and its various ramifications, including planning, organizing, strategizing and implementation of techniques. It is also concerned with making the best available usage of men, materials, money and management systems. In this case, it is believed that the nature of the problem being a complex one, it would need the help of expert consultants and practitioners who could get to the root of the matter and offer their professionalized solutions, to seek a permanent solution for these matters. It could also be seen in terms of creating the right infrastructure and internal management systems for business activities and the constant measurement of standard management practices with the desired ones. In the table 2 below, it is seen that the main aspects of the management process is OPIC- operations, planning, implementation and control. Therefore, it could be seen in terms of Creating the right environment for business growth through the implementation of sound policies. In the case of Plummer, it is seen that there are multiple discord in the systems especially with relation to vendor management and building of a strategic supply chain management system, with major focus on reducing costs, generating economies of large scale production through scientific and updated vendoring procedures like JIT, ABC analysis and other modern inventory tools and techniques. “The Just-in-time framework regards inventories as a poor excuse for bad planning, inflexibility, wrong machinery, quality problems, etc. The target of JIT is to speed up customer response while minimizing inventories at the same time. Inventories help to response quickly to changing customer demands, but inevitably cost money and increase the needed working capital.” (Just-in-time. 2008). In addition to scientific professes it is also necessary for business strategy to give rise to operations strategy which unites the various operating decisions. In other words, it is necessary that the aspects of operations management including operational strategy could also invoke the use of JIT in this case that could provide the company with a scientific and useful Managerial system. It could also be seen in terms of creating avenues by which operational strategies could be devised and controlled that could aid in management decision making for the benefit of the organization. Thus, the main objectives of the organization in terms of profit planning, cost savings and better management could be achieved. Inventory Management is a significant aspect of organisation management (OM) and has implications in terms of stock cost planning, especially in the long run perception of the company’s activities. Since IM is a critical area, it needs management tools, which could possibly address these critical areas of business endeavours. One of the tools, inventory managers use is called the Economic Ordering Quantity (EOQ). It connotes the optimal ordering quantity that would result in lowest total of ordering and carrying costs .In effect, EOQ is constructive, in determining the ordering size that would reduce inventory carrying costs to the minimum. It is seen that total inventory costs consists of two aspects, ordering costs + carrying costs. Ordering costs = Number of order x servicing costs Or, ordering costs = number of orders x servicing costs/order Or Ordering costs = U/Q x F. U = Annual Usage Q= Quantity ordered F= Fixed Costs/order Therefore, total carrying costs = Average level of inventory x price (per unit) x carrying costs (%) The formulae for EOQ = √ 2 (annual Usage) (order cost) (Annual carrying cost per unit) (Economic order quantity (EOQ). 2007). Illustration of use of EOQ in operations management: Let us assume that chemicals used in manufacturing process = 10 gallons /day @ $5 /gallon. This is consumed in the manufacturing process for 350 days/year. Given this situation, it is seen that the annual consumption is 3500 gallons per year (350x10) It also incurs holding costs of $3 per gallon /year and it’s ordering costs =$15/order. Therefore, in this case, U= Annual usage= 3500 gallons/year Q= Ordering cost = $ 15/order F= Fixed Costs/year = $ 3/year A= Annual carrying costs /year =$3 Applying the formula for EOQ, it is seen that EOQ = √ 2 (annual Usage) (order cost) (Annual carrying cost per unit) Or, EOQ = √ 2 (3500) (15) (3) Or, EOQ = 105000/561 = 187 Therefore, it is determined that 187 gallons of this chemical needs to be replenished around 19times per year = 187 X 19 = around 3500 gallons. (Economic order quantity (EOQ). 2007). Thus, it is seen that EOQ is an important aspect of Operations Management (OM) and offers an operation strategy and tool that could be used for controlling material ordering and consumption. If such EOQ could be established for all major raw materials, consumable stores and spare parts, the manufacturing cost would be significantly monitored. This could be used along with maximum ordering quantity, minimum ordering quantity and Re-ordering levels that could render substantial savings over costs and consumption patterns and eliminate wasteful practices in manufacturing industries. However, it is seen that EOQ works under certain pre-assumptions that may not always be present: 1. The Annual demand for the consumable is constant and predictable, like in this illustration, it is 3500 gallons. But sometimes the annual demand consumption may fluctuate and high variances may arise, which could significantly impact EOQ determination. 2. Lead time- the time between placing the orders, and receiving the items is not taken into account; however, this is a significant aspect, since this may even lead to stoppage, or disrupted production. 3. The ordering costs are considered to be constant which may not be always feasible. Thus, this aspect of operation management relating to manufacturing is significant, depending upon many factors, extraneous and internal which may or may not contribute to the bottom line and yet have to be considered in deciding the strategy for IM. The aspect of attaining corporate objectives is important since strategies may not be always designed for achieving objectives, and even if it has, some firms may not have the necessary infra-structure to achieve them. The operational management (OM) strategies must be so designed, so that, in the long run, it may be possible to achieve goals and long term targets. Again, in other cases, being neutral, they seek equality with competing firms and may not be aligned for direct confrontation with them. Still others may be more successful, and may be able to compete, in the long term; whether they are successful or not is another matter that needs to be analyzed with greater depth and insight. Therefore, it is seen that in this case study, Plummer Company must be focused on developing relevant strategies. “Operations managements attention must increasingly be toward strategy. The balance and direction of its activity should reflect its impact on the firms performance toward achieving its goals through its strategy, and on the performance of operations itself, recognizing that both need to be done well.” (Operations Strategy. 2007). The designing of Plummer Co needs to take into account the order positioning strategy also. This is seen in the context of build- to- order strategies, which are designed to afford flexibility and versatility to products and services. Under BTO, the customers order are quickly processed and manufactured, preferably using modern techniques and processes. Under BTO, there is a simultaneous verdict of versatile changes in areas of raw material acquisition, inventories and the total logistics involved in getting the products ready to be shipped to the end customer. “Build-to-Order is the capability to quickly build standard or mass-customized products upon receipt of spontaneous orders without forecasts, inventory, or purchasing delays.” (Anderson 2007). Table I Table 2: Operations Strategy Implementations: Max Zornada (2008) Part 2: Operation management in business setting: There needs to be paradigm shifts in the way the manufacturing process is being carried out in this company. For better usage of scare resources the company first needs to produce only smaller batches of fast moving goods. The aspects of low volume , high volume and expedited orders ensures diversification of product liens, but at the same time it is perceived to be adding to costs, and for the present the Company needs to concentrate mainly on its core competencies and innate manufacturing strengths. This policy of seeking to serve regular smaller orders, rather than expensive big orders has dual advantages in that it would keep the machines busy and also the marketing team need not have to canvass for fresh orders or seek other ways and means of bringing in business. These regular orders would be sufficient to mop up additional resources for working capital needs. Again, it would also obviate the need for locking up capital in inventories, and also reduce material and labour costs due to lowered incidence of wastages, damages and idle time for workers and increased delay in conversion of Work in Progress (WIP) into finished goods. The next directive would be in terms of producing both the small volume and large volume product lines in different independent machines. This would entail purchase of new machine but in the long run it would bring about large savings in cost and generation of revenue through use of maximum capacity utilization. In the present scenario it is seen that both large volume and small orders are being performed in the same machines. This leads to lot of confusion and delays, due to problems arising due to delivery dates, time frameworks and quality aspects. This, in turn is also affecting the morale of workers and levels of job satisfaction. Also added costs in terms of storage, idle time and waiting for machines to be charged, shut down etc are also incurred. In order to circumvent this problem in later years, it is recommended to set up another machine unit which would cater only to small orders. Thus the load on the present machines and labour would be substantially reduced. Also the following advantages are envisaged: 1. Continuous flow of work would be ensured since both plants would be working full steam 2. There would be effective deployment of labourers and no idle time would occur waiting for orders, shifting material, etc. 3. Production process would have a high degree of clarity, purpose and be streamlined in that workmen would know exactly what needs to be done. 4. Material losses and wastages would be greatly reduced and minimized as would idle time and rest periods since both the machines would be operationalised. 5. Use of spare capability ensures that full capacity is used in the production process. 6. Revenues and profits would also increase which could be used for future development works. In the event of urgent orders, there would be provisos of meeting it from the new machines. Thus turnover increases are also envisaged. Deployment of organisation strategy: Next, it is necessary to take up the matter of instituting changes in the organisational framework in order to affect large economies in scale and improve productivity and profitability in coming years. It is seen that the company is run on product basis rather than process basis. There are several product categories A, B, C, and D, and the rationale has been in terms of correct booking for cost control and audit requirements. However, the business is mainly a line process one, and thus the impact of processes needs to be assessed in the determination of profits of the company. Since the accounting is done product wise, the accounting of common expense or pooled expenses, is not evidenced in the financial and accounting statements of the Company. In this absence, it would not be wrong to infer that the accounting system does not reflect a true and fair view of the state of affairs of the company due to these lacunae. Under process costing it could be said that all the expenses, directly or indirectly incurred for the process, could be booked under it. Expenses that need to be shared among the various processes could be done on the basis of ratio of production units, or some other acceptable means. This would ensure that all costs and expenses incurred under each process is correctly and well estimated and would reflect the profit or loss sustained by the process, after taking into account the incidence of shared costs also. The aspects of knowing profit generation of say Product A could also be gathered from the process records. Thus, it could be said that knowledge of process incomes and expenditures could help in the following: Correct determination of profit figures for each process Identification of loss areas in terms of wastages, evaporation losses , spillages, etc Establishing strong controls and audit trails in areas of weaknesses and lowered standards of accountability in order to standardize all processes Constant comparisons between figures of various processes over products and time in order to find out any major embarrassments. Finding ways and means by which the records could be made more accurate and reliable and also ensuring that physical stocks are booked and regularly monitored in terms of inputs, outputs, etc. The operation strategy needs to consider the impact of misleading facts relating to production, overhead recoveries and turnover details pertaining to the processes. Over a period of time, deployed operation strategy needs to be reviewed in that it is in commensuration with stated aims and objectives of the company and , if any deviations are present , the correct reporting of such variances need to be made, and actions taken for remedial measures to be imposed. Conclusion: It needs to be emphasised that an operational strategy would first of all need to consider the ground realities in the company, the favourable milieu and the ways and means by which such deployment of operational strategy could possibly resolve current issues . The deficiencies in the current system need to be correctly recognised and fresh strategies evolved to tackle these issues, keeping the interests of the company in mind. A new operational strategy should serve to complement the exiting policies and not replace it unless absolutely necessary to do so. A lot would depend upon the circumstances and characteristics of the situation and how best this could be addressed by enforcing new operation strategies after giving it careful thought and thoughtful consideration.   Harvard ANDERSON, David M. (2007). Build-To-Order. [online]. Cost Reduction Strategy. Last accessed 18 August 2008 at: http://www.halfcostproducts.com/sbto.htm Economic order quantity (EOQ). (2007). [online]. Avdvameg Inc. Last accessed 19 August 2008 at: http://www.referenceforbusiness.com/small/Di-Eq/Economic-Order-Quantity-EOQ.html Just-in-time. (2008). [online]. Value Based Management.net. Last accessed 18 August 2008 at: http://www.valuebasedmanagement.net/methods_jit.html Operations Strategy. (2007). [online]. Advameg Inc. Last accessed 18 August 2008 at: http://www.referenceforbusiness.com/management/Ob-Or/Operations-Strategy.html Read More