Operations Concept and Its Application to a Business Situation - Assignment Example

Question 1 You are to write an essay about your research into an operations concept and its application to a business situation. The aim of the essay is to explain to an intelligent person, with no specialised knowledge of operations management, the concept on which your research was based and the extent of its application to the operations tasks in a manufacturing or service organisation. Your essay should: State the operations concept and explain its meaning and relevance. State two (2) important areas of knowledge about the concept, preferably from recent research. Briefly explain a real business situation where your concept can be applied. Explain the most important management tasks in this business situation and the effect that the operations concept has on those tasks. The operations concept has been in existence from the beginning of history. In world war II , operation concept were used in assisting the Military in the process of war. In the present world many organization search the service of personnel who have specialty in operations concept (Operation researchers) so that they can solve some management problems (Lowe, 1983) According to Arowolo, (2011) the process of solving business problems may take several approaches in interpretation, analysis and the solution. i. Conventional approach which involve following of past techniques and solutions so as to obtain solutions problem. This method offers very little in advancing management. ii. Observations approach: This is a method of observing and learning from other experienced managers who may be in similar situations. iii. Scientific/Systematic approach: This is where the concept of theoretical systems are utilized. When there is proper application of the operation techniques there will be a solution which is timely, accurate, flexible, economical, and reliable and one that is easy to understand and put into use (Schwarz,1972). The operation concept is the analysis of operations that the following Scientific approach In explicit formulation Involve more than one discipline No partisan attitude. In one of the definition operation concept is given as involving modern science in complex problems which arise when directing and managing large manpower, business, machinery, Government and defense, materials and also in money industry. Operation concept is the adaptation of scientific approach in the analysis of problems that involve carrying out operations. The steps involved are: problem definition, model construction, data collection, solution development, testing the model and its solution, interpretation of results and establishment of controls and the implementation of the model. The operation concept will help in the determination of the information required that will enable an optimum decision to be made putting into consideration the constraints and also depending on rule formulation in making the decisions. It also brings about efficiency in the day to day running of a company (Zheng, 1992). The operation concept always make use of models. This is a way of formulating the behaviour of a situation under analysis so as to enable one to make the best deductions about the system. Simply put, models are tools that represent a situation in easily understandable manner and in away it can be reasoned with. A good example is where the relationship between demand for a particular item and time can be represented by a pattern with seasonal behavior. In such a situation a representation can be used so as to find out the best time a trade in can be made(Lowe, 1983). The model one comes up with need to be based on facts pegged on the situation under analysis, only being represented conveniently so as it can be best comprehended or for convenience of reasoning with or communication. Usually the facts are in terms of what the under acting entities are and the interrelations of entities for example the seasonal relationship that exist between the item and time as observed in this example. Question 2 How realistic are the assumptions of the Economic Order Quantity (EOQ) model? Discuss how the issues of safety stock can be incorporated in EOQ and re-order point (RP) while ordering inventory. Do you think the model is still used in practice? If not, what model is mostly used while ordering inventory? In the Economic Order Quantity (EOQ) one of the assumptions made is that there is a constant rate for a demand of items and which is known in advance by the decision maker. The other assumption is that the lead time necessary in acquiring an item is also constant and is also well known in advance (Arowolo, 2011). Assuming that the order size is Q. in the process of ordering goods and physically receiving them, there is anticipation that the goods will be depleted by the time the next order is being received. The quantity of goods ordered will normally be used in the operations and is referred to as the ACTIVE STOCK. The inventory manager can adjust the active stock to suite the organizations need. The is usually a variation of the ACTIVE STOCK with the initial quantity being that received when an order is made to zero when the next order is just about to be received. This is represented in the figure below. Q Four orders per month When calculating the cost associated with inventory the following variables are used Q= Economic order quantity C= The cost per unit I= Inventory carrying costs, expressed as a percentage of the value of the average inventory R= Total number of units required annually. S= ordering costs per order. The total inventory carrying cost can be calculated by relating these variables as follows Total Inventory carrying cost = I Total ordering costs Total ordering cost =  Q is usually calculated by equating the two quantities i.e I =   Q =  In calculating the Economic Order Quantity it assumed that there is a constant consumption of goods throughout the year. This is not true as in most cases the production may vary considerably because of various reasons. Breakage of material that may cause reduction in production is one of the reasons that may change the rate of consumption of the goods. Absence of workers is may also reduce productions and hence the consumption of materials. In the equation discounts are not factored in and this makes the model to deviate from real life situation. In real life it cist common for the cost of goods to vary all round the year and this is not acknowledged in this model. Because of this shortcoming this model may not find application in real life situations. However, a decision maker who has a full understanding of the model will most likely make wise decisions in comparison with one who does not understand the model. Due to its limitations EOQ model is modified so as to make it more realistic to real life situations. In incorporating quantity discount a cost comparison approach may be used. In this approach there is a comparison of costs associated with EOQ and those associated with quantity of the buyer would qualify for the quantity discount. Incase the total annual inventory costs for the current EOQ situation is found to be less than the proposed condition when there is an offer of quantity discount, then it would be advisable to reject the offer , otherwise the offer be accepted. As observed earlier the constant demand rarely exist in real life satiations. Normally there will be fluctuations in lead time and usage which can be described as unpredictable. As a result the demand for inventory will be probabilistic. Question 3 Christie Levine is the manager of the Instant Paper Clip Office Supply Company. The company attempts to gain an advantage over its competitors by providing quality customer service, which includes prompt delivery of orders by truck or van and always being able to meet customer demand from its stock. In order to achieve this degree of customer service, it must stock a large volume of items on a daily basis at a central warehouse and at three retail stores in the city and suburbs. Christie maintains these inventory levels by borrowing cash on a regular basis from the bank. She estimates that for the coming fiscal year the company’s demand for cash to pay for inventory will be $17,000 per day for 305 working days. Any money she borrows during the year must be repaid with interest by the end of the year. The annual interest rate currently charged by the bank is 9%. Any time Christie takes out a loan to purchase inventory, the bank charges the company a loan origination fee of $1,200 plus 2.25% annually of the amount borrowed. Christie often uses EOQ analysis to determine optimal amounts of inventory to order for different office supplies. Now she is wondering if she can use the same type of analysis to determine an optimal borrowing policy. This requires careful interpretation of the information given above to correctly identify ordering costs, holding costs and total costs. Determine the amount of the loan Christie should borrow from the bank, the total annual cost of the company’s borrowing policy, and the number of loans the company should obtain during the year. Also determine the level of cash on hand at which the company should apply for a new loan given that it takes 15 days for a loan to be processed by the bank. Using Excel, include graphs in your answer that illustrate the relationships between ‘ordering cost’, ‘holding cost’, and ‘total cost’. Remember to show all working in your answer. The total number of units (R) can be taken to be the total amount of cash required throughout the year. R = 17 000 X 305 = $5 185 000 Total inventory carrying cost = I Total ordering cost = +0.0225R 0.02R = 0.0225 X5 185 000 = 116662 C is the cost per unit and in this context is $1 I is 9% (0.09) Thus CI = 0.09 Equating total inventory carrying cost to total ordering cost  = +116662  = 6222000000 + 116662Q 0.045Q2 - 116662Q- 6222000000 Solving for Q using quadratic equation Q =  = $2644768 (amount to be borrow in bank) Total cost = Inventory carrying cost + ordering cost =  + +116662 = 119014 +119014 = $238029 Number of borrowings to be made = = = 1.96 = 2 times per year If the bank takes 15 days to process the loan then the amount to be available at ordering point = 15 x 17000 = $255 000 Suppose the bank offers Christie a discount as follows. On any loan amount equal to or greater than $500,000, the bank will lower the origination fee from 2.25% to 2.00%. What would be the company’s optimal amount borrowed? If the origination fee is lowered the from 2.25 to 2.2 Total ordering cost = +0.02R 0.02R = 0.02 X5 185 000 = 103700 Equating total inventory carrying cost to total ordering cost  = +103700  = 6222000000 + 103700Q 0.045Q2 - 103700Q- 6222000000 Solving for Q using quadratic equation Q =  = $1672826 (amount to borrow in bank) This is an indication that when there is a discount the amount to be borrowed (EOQ) will be reduced and this will result in the number of borrowing to be made to increase. References Arowolo O. (2011). Operations Research. Erlenkotter, D. (1989) “An Early Classic Misplaced: Ford W. Harris’s Economic Order Quantity Model of 1915,” Management Science 35:7, pp. 898–900. Lowe, T. J. and L. B. Schwarz. (1983) “Parameter Estimation for the EOQ Lot-Size Model: Minimax and Expected-Value Choices,” Naval Research Logistics Quarterly, 30, 367–376. Schwarz, L. B. (1972) “Economic Order Quantities for Products with Finite Demand Horizons,” AIIE Transactions 4:3, 234–237. Zheng, Y. S. (1992) “On Properties of Stochastic Inventory Systems,” Management Science 38:1,87–103. Zipkin, P. (2000) Foundations of Inventory Management, McGraw-Hill Higher Education, New York, New York . Read More