10/13/2014

OPERATIONS
MANAGEMENT

PPT 3201:
PRINCIPLES OF AGRIBUSINESS
MANAGEMENT

Introduction

Production Processes

The operations system is the portion of an organization that is directly

engaged in producing a physical good or a service.

Production processes determine the flow of products through the operations

system.

Operations management is the management of the processes involved in the

production of goods and services.

An agribusiness could be implementing

A unit process
A mass process
A continue process

Facility and Equipment Layout

With a unit or mass process, the workspace is allocated by the type of work
done, with each area being responsible for the performance of a specific
function.
General-propose machines
Scheduling

Plant Location and Design

Facilities

The first decision to be made by the

business
Analyzing how costs vary according to the
number of plants
One plant economies of scale
Several plants to locate nearer to suppliers
and customers

10/13/2014

Plant Location and Design

Plant Location and Design

Plant design
How to design the plant
Steps

Location
Where to locate the facilities
Choosing the best location for new facilities
Several factors need to be considered

Determine plant size

Map out the basic organizational structure
Design the layout of each department or work area

The source of inputs

The location of the firms customers
The transportation costs of inputs and the
finished product
The availability and cost of labor
Total production costs
Zoning laws
Special incentives offered by specific
communities

Production Planning and Control

The objective of production planning and control is the efficient production
of a specified product by a given time.
Production planning
Production control
Quality control

A process layout system unit or mass production systems

Advantage flexible in permitting the firm to handle a wide
variety of different task
Disadvantage the relative complexity and high costs of
material handling
A product layout system continuous production systems
Advantage materials handling problems and costs are
minimized in product layouts due to smooth flow of product
Disadvantage rigid and inflexible, they cannot be used for
producing different products or services

Production Planning
Ensures the efficient operation of the firm over a specified period of time.
Basic inputs of production plan:
1.

Customer orders

2.

Sales forecasts

The inputs determine the size of the workforce, inventories and material
purchases.
The basic for a master schedule that is used to produce purchase orders and
work orders.

Production Control
Steps in controlling operations

Quality Control
The ultimate measure of a firms production is quality products produced.

1.

to gather data concerning how efficiently operations are running

2.

to transform the data into useful information

Quality control

3.

to compare the data with standards of operation

Quality inspection

4.

to identify any discrepancies that may exist between the standard and the
actual performance

Hazard Analysis and Critical Control Point (HACCP)

5.

To analyze any differences to find out what has gone wrong

6.

To decide what corrective action should be taken to remedy the discrepancies

7.

To implement the corrective action

Should be part of the business culture of the company

10/13/2014

Inventory Management
Inventory management is primarily about specifying the size and placement of
stocked goods.
Inventories such as parts and materials, work in progress (WIP) - partly
completed, finished goods.

Inventory Management
Reasons to hold
inventory
1.
2.
3.

Inventory Control

Reasons not to hold

inventory

Matching supply with demand

Prevent stockouts
Lower purchasing costs

1. High maintenance cost

2. High protection cost
3. Depreciation and
obsolescence
4. Taxes

The Basic Inventory Management

Model
1.

Economic Order Quantity (EOQ): the number

of items to buy in each order that will
minimize total cost

2.

Reorder Point (ROP): when to reorder to

minimize the chances of stockouts

To ensure the production is running smoothly and to control costs.

System for controlling inventory is reorder point system

The total cost of inventory (TC) equals the sum

of ordering costs (OC) and carrying costs (CC)

TC = CC + OC

Definition
The amount of orders that minimizes total variable
costs required to order and hold inventory.
Assumptions
- Demand rate is constant
- No constraints on lot size
- Only relevant costs are holding and ordering/setup
- Decisions for items are independent from other
items
- No uncertainty in lead time or supply
Formula

Economic Order Quantity (EOQ)

Q
Place an
order

Inventory level

Economic Order Quantity (EOQ) Model

Inventory depletion (demand rate)

Average
inventory
Q/2

EOQ = 2CoD/Ch
Time
T = Q/D

10/13/2014

EOQ Costs

EOQ Example 1

Annual cost (dollars)

3000

A product that cost RM60/unit has expected weekly demand of 18 units. Order
processing costs are RM45/unit and the holding cost fraction is 25 percent of
purchase price.

Total Cost (Ct) = ChQ + CoD

2
Q

2000

Holding costs = Holding costs /unit X

average inventory
= Ch X Q/2

Determine the order quantity to minimize the total annual cost.

1000
Ordering costs = ordering costs X no. of
orders per period
= Co X D/Q

|
50

|
100

|
150

|
200

|
250

|
300

|
350

|
400

Lot Size (Q)

EOQ Calculation

EOQ Example 2

D = (18 units/week)(52 weeks)

= 936 units/year
Ch = 0.25 (RM60/unit) = RM15/unit/year
Co = RM45/order

Qo = EOQ = 2CoD/Ch = 2 x 45 x 936/15

= 75
TC

= ChQ/2 + CoD/Q
= (15 x 75)/2 + (45 x 936)/75
= RM1,124

22

The Basic Inventory Model

EOQ Calculation

EOQ =

A building materials supplier obtains its bagged cement

from a single supplier. Demand is reasonably constant
throughout the year, and last year the company sold
2000 tonnes of this product. It estimates the costs of
placing an order at around RM25 each time an order is
placed, and calculates that the annual cost of holding
inventory is 20 per cent of purchase cost. The company
purchases the cement at RM60 per tonne. How much
should the company order at a time?

2CoD/Ch

= 2 x 25 x 2000
0.2 x 60
= 100,000
12
= 91.287 tonnes

23

10/13/2014

Reorder Point System

Optimal Inventory Level

Determining the right inventory level and the right quantity to purchase
impacts the successful operation and profitability of a firm

Purchasing
"The process by which a company (or other organization)
contracts with third parties to obtain the goods and services
required to fulfil its business objectives in the most timely and
cost-effective manner.
Determining the right time at which to make purchases and the
right quantity to buy can have a major impact on a firms
success.
The purchasing activities must be coordinated with those of
inventory control and production management.
Major considerations in making purchasing decisions:

Procurement
Definitions
The process of deciding what, when, and how much to purchase, the act of
purchasing it, and the process of ensuring that what is required is received on time
in the quantity and quality specified.
The acquisition of appropriate goods and/or services at the best possible total
cost of ownership to meet the needs of the purchaser in terms of quality and
quantity, time, and location.

quality
quantity
suppliers dependability
price

Procurement Systems

To speed up the procurement activities or

processes.
Examples:
1.
2.
3.

Material Requirements Planning (MRP)

Electronic Data Interchange (EDI)
Just-in-Time (JIT)

MRP
The program for production scheduling, inventory control, the scheduling of
purchase orders.
To ensure the materials are available when required, to reduce the firms
inventory and to assist in scheduling purchasing and manufacturing
operations.
Benefits of MRP
1.

Reduced inventory investment

2.

Reduced administrative effort

3.

Reduced obsolescence of materials

10/13/2014

EDI

Just-In-Time

EDI MRP links the manufacturer with its suppliers through a computerized
information transfer system
The system improves purchasing and inventory management by cutting
paperwork, lead times and input errors and inventory accounting

An inventory strategy that reduces in-process inventory

Computer systems operate by waiting until the materials are needed before a
purchase order is placed
The process relies on signals (Kanban) between different points in the
process, which tell production when to make the next part
JIT can improve a manufacturing organization's return on investment, quality,
and efficiency

Purchasing vs. Procurement

Procurement
Refers to the overall process of acquiring a product or service.
It includes identifying a need, specifying the requirements to
fulfill the need, identifying potential suppliers, soliciting bids
and proposals, evaluating bids and proposals, awarding contracts
or purchase orders, tracking progress and ensuring compliance,
taking delivery, inspecting and inventorying the deliverable, and
paying the supplier.

Purchasing
It is a single part of procurement.
It is the act of buying (from a administrative / financial
perspective) the service or good to be procured.
It refers to get something in exchange for money.