Chapter 1
Creative operations management
A Decision- Making Approach
What is Operations Management?
• Operations management is concerned with managing the
resources that directly produce the organisations service or
product.
• The resources will usually consist of people, materials,
technology and information, but they may go wider than
this.
• These resources are brought together by a series of
processes so that they are utilized to deliver the primary
service or product.
What is Operations Management?
Operations management is an area of business that is
concerned with the production of goods and services, and
involves the responsibility of ensuring that business
operations are efficient and effective. It is also the
management of resources, and the distribution of goods and
services to customers.
What is Operations Management?
Operations management is also defined as a system. In such a
system, material, machines, labor, management, and capital, are
transformed into outputs, like products, goods, and services.
Requirements and feedback from customers are used to adjust
factors in the transformation process, which may also alter the
inputs.
OPERATIONS MANAGEMENT
Then, Operation Management has the following
objectives to be achieved:
• Improving efficiency and quality
• Solving business problems using model-based
approaches
• Increasing profitability by managing the operations
of a firm - producing and delivering products and
services
When the operations are managed well then:
•
•
•
•
Productivity is high
Quality is high
Costs are low
Profitability is high
Managerial Decision Making
The work of operations managers consists largely
in making decisions and solving problems that arise
in the production of goods and services. It involves:
• Choosing issues that require attention.
• Setting goals.
• Finding or designing suitable course of action.
• Evaluating and choosing among alternative
actions.
Creativity Tools for Operations Management
• The problems and processes of operations
management require creative solutions,
which involve qualitative and quantitative
analysis of the business operations.
• So proactive quantitative and qualitative
techniques are needed to provide a dynamic
analysis not a static analysis
• The aim of this course is to use one of the
powerful computational tool, MS Excel to analyze
operations management problems in order to
improve and facilitate managerial decision
making.
• Excel is not just a powerful computational tool, it
is a creative technique to develop better and more
competitive Operational Management Systems.
Managerial Decision Making
Definition
A multi-step process through which
problems are recognized (identified),
diagnosed, and defined;
Managerial Decision Making
Types
• Programmed Decision:
– A highly routine decision made according to preestablished organizational policies and
procedures.
• Non-Programmed Decision:
– A decision made about a highly novel problem for
which there is no pre-specified course of action.
Managerial Decision Making
Process
Systematic Decision Making Process (Nobel laureate
Herbert A. Simon, 1997) classified decision making into
three phases that reflect and idealized notion of the flow of
decision making:
• Intelligence
• Design
• Choice
Intelligence Phase
(primarily qualitative process)
Cluster chart
Problem identification
Model flowchart
Design Phase
(primarily quantitative process)
Model – mathematical or worksheet
Option generator
Optimizer
Choice Phase
Decision
In general Intelligence Phase consists
of four steps
1.
Problem Detection
(Identification)
2.
Problem Definition
3.
Problem Classification
4.
Structural Modeling
The Three Phases of Decision Making
The Intelligence Phase
• Data are raw material (facts)
• Data need to be filtered/refined and then treated in some
way (i.e.;sorting, classifying and aggregating and
averaging) to become useful information.
• Information is data that are or may be useful to manager
in their job. It is the processed data or the meaning that
human beings assign or extract from data.
• Intelligence
does not refer to raw data or plain,
unanalyzed information, but includes both evaluations and
conclusions. It is the outcome of the meshing and
reconciliation of a set of information. Information is the
raw material for intelligence.
The Three Phases of Decision Making
The Intelligence Phase
• Problem occurs because of dissatisfaction
with organization system. Dissatisfaction is
the result of difference between what it
expected and what it has been occurred.
The Three Phases of Decision Making
The Intelligence Phase
• The intelligence phase begins with extensive searching and
gathering of information.
• The mangers need to spend a significant part of their time
in intelligence- related activities because they need to have
some knowledge to solve a problem or make a decision.
These includes knowledge of the relevant facts of situation
and the problem, managerial preferences, priorities, goals,
and the alternatives available to management.
The Three Phases of Decision Making
The Intelligence Phase
Systems and Environments
The world in which managers operate can be divided into
two main parts - their system and its environment.
The distinction between the system and the environment is
clear
- The system consists of those things over which the
manager has control
- The environment being all else of relevance. The
environment can be further subdivided into local and
remote environments.
System
Local Environment
Remote Environment
Local Environment
That part of the environment where the manager can exert a
significant influence or exercise indirect. Moreover, the performance
of the managers and organizational performance and productivity has
a significant effect on this environment.
Example: retailer, competition, size of car park, supplier’s delivery
schedules, warehousing
Remote Environment
That part of the environment over which the managers have no
influence or control. However, this environment has a significant
impact on the managers and their system and the whole organization.
Example of direct effect: monetary exchange rates and government
legislation, Legal opening hours, health regulation, VAT, Bank
lending rules, Import Duty
Some useful qualitative techniques for
identifying problem and creating or
finding alternatives
•Managerial scenario
•Brainstorming
Scenario Management
Scenario in general is a statement of assumptions
about the operating environment of a particular
system at a given time. It describes decision
variable, uncontrollable (output) variables, and
parameters for specific modeling situation. It may
also provides the procedures and constraints for
the modeling itself.
Scenario Management
Managerial Scenario : is a managerial view of the world.
It’s an outline of the world in which the managers are currently
operating and in which they think they will be operating in the future.
Local scenario is the portion of the managerial scenario brought into
focus under pressure from an altering stimulus. It is the portion of the
scenario used to define the issue (problem or opportunity) once it has
been detected.
A local scenario is likely to be wider than an initial consideration of
the single in-focus issue might suggest, but narrower than the whole
scenario.
Brainstorming Techniques
Is designed to help people generate alternatives for problem
solving without prematurely evaluating. The purpose of
brainstorming is to enhance creativity through team discussion.
Certain procedural rules are enforced to permit all team
members to express their ideas and to reduce critical
evaluations that might inhibit creativity.
Mind Map: A mind map is a diagram used to represent
words, ideas, tasks or other items linked to and arranged
around a central key word or idea.
It is used to generate, visualize, structure and clarify ideas,
and as an aid in study, organization, problem solving,
decision making and writing.
Structural Modeling
There are three main steps to structural
modeling:
1- Identification of the managerial variables in the local
scenario
2- Identification of the constraints on the values that
variables can take
3- Formalization of the local scenario by expressing the
broad relationships between managerial variables,
including the associated constraints
1- Identification of the managerial
variables
Decision variables (independent) : are factors whose values the
manager can change and control.
Output variables (dependent): are the dimensions along which
managers would measure themselves and be measured by others. So
they reflect the level of effectiveness of the system. They indicate
how well the system attains its goals.
Output variable may be quantitative and reasonably defined
variables such as turnover and profit or more qualitative one such as
morale and flexibility.
Environmental variables (local or remote): its an important
variables in the system environment which has a significant impact
on it.
2- Identification of the constraints on the
values that variables can take
Constraints are limitations on the values that variables can take.
Constraints can be :
1- Self-imposed: a constraint arising within the system. this
type of constraint can be either direct(limits on the decision
variables) or indirect (limits on the output variables)
2- Environmental-imposed: an environmental imposition on
the system from outside. It might be physical (tangible) or it
might be more behavioral (intangible)
The Three Phases of Decision Making
The Intelligence Phase
At the end of this phase, the objectives, facts, data,
variables and parameters of the situation are identified,
classified and often than organized in a cluster chart or
text-based cluster chart.
The Three Phases of Decision Making
The Design Phase
• The focus of the design phase is the development of the decision
model describing the problem.
• Decision models selectively describe the managerial situation
• Decision models identify decision variables
• Decision models identify performance measure that reflect
objective
• The decision models should be constructed, tested and validated
for feasibility which means compared with and tested against
objectives and goals.
The Three Phases of Decision Making
The Design Phase
• A major output of the design phase is a list of scenarios to
evaluate. These scenarios are combinations of values for
each parameter in the model or various options to evaluate.
• Option Generation : is the process of generating number of
scenarios for certain model in the design phase.
• The option generation process is accomplished by
reviewing the results of scenarios so that the manager can
answer such question as “ What happens if prices go up?” or
“ What happens if volume goes down?”
The Three Phases of Decision Making
The Choice Phase
• The option and scenario generating systems developed in
the design phase allow the managers to survey many
alternative scenarios and thus facilitate the choice.
• Reality Checks: decision makers must perform a reality
check to check if the model or system can generate
solutions that conform to the actual situation. If the model
is not adequate to make the choice, the design phase, and
possibly the intelligence phase, must be repeated.
The Three Phases of Decision Making
The Choice Phase
Optimization:
•Finding the best or optimal solution. For example finding the highest
profit or sale or stock price. Or the minimum environmental damage.
•Optimal solutions is a feasible solution that gives the largest value of
the objective function (in maximizing situation) or smallest value of the
objective function (in a minimizing situation).
•Optimum solutions can be found using a mathematical optimization
techniques of operations research and management science.
Spreadsheet Modeling For Business
Decision Making Analysis
36
Framework for IT support for Decision Making
Type of
Decision
Structured
Operational
Control
Accounts
receivable,
entry
order
Managerial
Control
Strategic
Planning
Budget
analysis,
short-term
forecasting,
personal
reports,
make-or-buy
Financial
management,
warehouse
location,
distribution system
Management
information
system, operations
research
models,
transaction
processing
Semistructured
Production
scheduling,
inventory control
Credit
evaluation,
budget preparation,
plant layout, project
scheduling, reward
system design
Building new plant,
mergers
and
acquisitions,
new
product
planning,
quality
assurance
planning
DSS, KMS
Unstructured
Selecting a cover
for
magazine,
buying software,
approving loans
Negotiating,
recruiting
an
executive, buying
hardware
New
technology
development, social
responsibility
planning
IDSS, ES, Neural
network
Technology
Support Needs
Management
information
system,
management
science
Management
science, DSS, ES,
EIS,SCM
EIS, ES, neural
networks, KMS
Why Spreadsheet ?
• Spreadsheet packages are one of the MSS. They are used
specially as DSS or MIS. Some example of available
spreadsheet packages are Excel, Lotus 123, and SPSS.
• The spreadsheet packages provide a rapid, ad-hoc access
to a set of pre-structured data to support a regular
operational task.
• It also provides straightforward analysis, reports and
graphical output for predefined situations.
Spreadsheet Components
A spreadsheet model consists of logic model, data model and
human-computer interface.
• The logic model is composed of the selected factors and the
relationships (rules of calculation) according to which the data
are used to derive results.
• The data model consists of the data needed to start the model off.
• Human-computer interface: the display of results- in tables or
graphs- is through a ‘results interface’
The building blocks of logic models
1- Input Factors and Calculated Variables
1- Revenue
=
Calculated variable
Output variable
2- Revenue
sales
sales x price
Input value
) model factors
Decision variables } managerial variable
=
sales x price
Environmental variable
is the price of the single
competitor’s product
= 50 x ( competitors price/price)^2 x adv. spend
Input factor : their values would be input to the logic model
(values derived outside the model)
Calculated variables: its value would be calculated within the
model
The building blocks of logic models
2- Parameters
In logic modelling a parameter is a factor whose value is
held constant over a given period of time or during the
exploration of given relationships.
Revenue
=
Sales x Price
Sales = 50 x ( Competitors price/Price)^2 x Adv price
Fixed
changed
(Parameter)
Explore the influence of these changes on the
calculated variable (Revenue)
The building blocks of logic models
3- Constants and Coefficients
There are two types of Constants:
1- Constant whose values are fixed by definition
Ex: 7 days in a week, 24 hours in a day
The building blocks of logic models
3- Constants and Coefficients (continued)
2- Constant whose values are known to vary, but
where this variability is relatively trivial to the issue of
concern and thus when it is appropriate to treat their
values as unchanging.
Example:
cost of product1 = X1, cost of product 2 = 20 times of
product1
X1
20*X1
Constant
The building blocks of logic models
3- Constants and Coefficients (continued)
Coefficients : represent a relationship between two or more
factors and are thus ratios.
Their values may have been defined externally. An example is
a govt decree on the minimum floor space per employee in
commercial buildings
Another example is used in universities to relate one part-time
student to one-third of a full-time student.
The building blocks of logic models
4- Intermediate Variables
Intermediate variables: are variables needed in order to
simplify the development and maintenance of the model.
Revenue = Sales x Price
Price ratio = competitors price/ price
Sales = 50 x price ratio ^2 x Adv Spend
Intermediate
variable
Summary of the building blocks used in
logic models
• Variable: A factor whose values are frequently changing.
• Parameter: a factor whose value is held constant over a
period of spreadsheet exploration
• Constant:
a) a factor whose value is unchanging and has been defined
to be what it is.
b) A factor where the variability in its value is insignificant or
extremely small.
• Coefficient: a factor representing a relationship between two
or more factors.
Managerial Variables and Modeling Factors
Managerial variables and modeling factors are often the
same. However, sometimes they are different and its very
difficult to find a direct link between them.
The managerial variables are the decision, environmental
and output variables.
The model factors are the input factors, calculated factors,
and any intermediate variables that model requires.
Managerial Variables and Modeling Factors
What value will an output variable (Revenue) take if a specific
value is given to a decision variable (Price)?
Revenue = Sales * Price
Output variable = Calculated variable
Decision variable = Input factors
What value should price (decision variable) take in order that
Revenue (Output variable) has a specific value?
Price = Revenue / Sale
Decision variable = Calculated variable
Output variable = Input factors
Modeling require the model factors ( input factor,
calculated and intermediate variables) to be viewed in a
way that different from that in scenarios ( managerial
decision and output variable) and this may affect the
way in which a model is constructed.
Types and relationships between the
building blocks
A relationship is a link between variables, parameters,
coefficients and constants.
It can be in three different forms:
• Equality, (Equation) Revenue = sales * price
• Inequality
No of emp req.<> > < crew members * no of machines
• Conditional relationship
If profit > 0 then Tax = 40% of Profit
else Tax = 30% of Profit
Linearity
One special form of relationship in logic models is the linear
relationship.
For a relationship to be linear, it must satisfy two requirements: the
effects must be in constant proportion to the causes and the
effects of more than one factor acting at the same time must be
additive.
First requirement : effects must be in constant proportion to
the causes
Linear
sales = 6 x price,
relationship
sales = price ^2
Not a linear
sales = 30 / price +5
relationship
Second requirement : the effects of different variables are
additive
variable cost = packaging cost +5 x content cost
variable cost = 6 x content cost x tax
variable cost = 6 x tax +5 x contents cost x tax
Not a linear
relationship
Linear
relationship
Stages in Logic modeling
1.
2.
Conceptualization
Verbalization
3.
Formalization.
Stages in Logic modeling
1- Conceptualization
It is the first step in logic modeling. It is the vital link
between the managerial issues placed in the context
of the local scenario and the spreadsheet
formulation of it. It involves:
- Issue redefinition
- Managerial variables redefinition
- Modeling goal defining (defining the scope of the
model)
• While the modeler and the manager may be the same
person, the type of thinking needed in the modeling
world will be very different than that in the managerial
world but the form should remain the same.
• Thus the modeler thinking will be moved from the
softer, fuzzier, much richer managerial (decision) model;
into a hard, and more precise, world of spreadsheet
(logical) model.
Stages in Logic modeling
2- Verbalization
Verbalization stage is the verbal specification of relationships
between the model factors. Thus, setting an accurate and
precise statement to link the model factors in a form that
can readily be converted into spreadsheet form.
Revenue = sales * price
• Equations such as :
Quarterly cost = Connection Charge + Cost of Units Used
• Inequalities
Number of Employees > 6 * Number of machines
Quarterly cost
= Connection charge + Cost of units used
Cost of units used = Units used x Cost/unit
Quarterly cost
a) ordinary
b) small user
Connection charge
Unit used
Cost of units used
Cost/unit
Quarterly cost = Connection charge + Cost of units used
Cost of units used = Units used x Cost/unit
Stages in Logic modeling
3- Formalization
In this stage, the modeler is moving form the set of verbal
relationships developed in the verbalization stage to the final
spreadsheet form.
A
1
B
Electricity Tariff
C
D
Verbalization relationships
Spreadsheet
Relationships
= units used * cost/unit
+B3 * B4
= connection charge + cost
of units used
+B5 + B6
2
3
Cost/unit
3
4
Units used
3000
5
Cost of units used
9000
6
Connection charge
100
7
Quarterly cost
9100
Mini Case
An electricity board offers electricity to its commercial customers under three
tariffs; a ‘small user tariff and a special ‘night-saver’ tariff. Whatever the tariff
the electricity bill is made up of two parts. Customers opting for the ordinary
tariff must pay a quarterly connection charge of $100 and pay at the rate of 3
pence per unit consumed. Customers choosing the small-user tariff are required
to pay a lower quarterly connection charge of $50 but with the enhanced rate of
5 pence per unit consumed.
The ABC Company only works during the day and so has little interest in the
night-saver tariff. The company is consuming around 3000 units/quarter under
the small-user tariff.
Since output is rising – and with it the use of electricity – the manager
responsible for electricity purchase is wondering whether to change to the
ordinary tariff.