PRODUCTION MANAGEMENT

WHAT IS PRODUCTION?
Production is the transformation of
organizational resources into products.
• Transformation is the set of steps Men, machine, tools
necessary to change these resources into and other inputs
products.
• Organizational resources — are all assets
available to a manager to generate
products. Finished
Raw
• Products — are various goods and/or materials
products
services awed at meeting human needs.

Production management, therefore, deals with

SERIES OF OPERATIONS ouput
the planning, controlling, and decision making inputs
necessary for carrying out the production process.
 The Production System Characteristics

• Material transformation Input

A
Flow Shop Model
process Output
B
• A degree of
repetitiveness C
OPERATIONS

• An information system Input

Output

superimposed on the A
1

physical system Job Shop (Intermittent) Model

B
2

3
• Material Flow Process C

Input
A

Projects Type Model

C
CAPACITY PLANNING

- encompasses many basic decisions with long-term consequences for the

organization

CAPACITY
- refers to an upper limit or ceiling on the load that an operating unit
can handle.
- The capacity of an operating unit is an important piece of information
for planning purposes: it enables managers to quantify production
capability in terms of inputs or outputs, and thereby make other
decisions or plans related to those quantities
DEFINING AND MEASURING CAPACITY

• Design Capacity - the maximum output that can possibly be

attained

• Effective Capacity - the maximum possible output given a product

mix, scheduling difficulties, machine maintenance, quality factors,
shortage of materials, as well as other factors that are outside the
control of the operation managers
 DETERMINANTS OF EFFECTIVE CAPACITY
Facilities Product/Service Process
 Design  Design  Quantity
 Location  Product/Service capabilities
 Layout mix  Quality capabilities
 Environment

Human Factors Operational External Factors

 Job content  Scheduling  Product standards
 Job design  Materials management  Safety regulations
 Training and experience  Quality assurance  Unions
 Motivation  Maintenance policies  Pollution control
 Compensation  Equipment breakdowns  Standards
 Learning rates
 Absenteeism and labor
turnover
 EVALUATING CAPACITY ALTERNATIVES

• Cost-Volume Analysis
• a tool that summarizes the various levels of profit or loss associated with
various levels of production. Its purpose is to estimate the income of an
organization under different operating conditions. It is particularly useful
as a tool for comparing capacity alternatives.
• The assumptions of cost-volume analysis are:
• One product is involved.
• Everything produced can be sold
• The variable cost per unit is the same regardless of the volume.
• Fixed costs do not change with volume changes.
• The unit selling price is the same regardless of volume.
• The required volume, Q, needed to generate a specified profit is:

The volume, QBEP, where revenue is equal to total cost is defined to be:
 Example 8.1
A small firm intends to increase the capacity of a bottleneck operation by adding a
new machine. Two alternatives, A and B, have been identified, and the associated
costs and revenues have been estimated. Annual fixed costs would be Php4O,OOO
for machine A and Php3O,OOO for machine B; variable costs per unit would be P10
for A and Php12 for B; and selling price per unit would be Php15 for A and Php16 for
B.
a. Determine each alternative’s break-even point n units.
b. At what volume of output would be the two alternatives yield the same profit?
c. If expected annual demand is 12,000 units, which alternative would yield
higher profit?
Answer/s:
a.QBEPA = 8000 units ; QBEPB = 7500 units
b.Q = 10,000 units
c.TPA = Php20,0000; TPB = Php18,000, choose alternative A.
• Financial Analysis
• A problem that is universally encountered by
managers is how to allocate scarce funds. A
common approach is to use financial analysis to
rank investment proposals.
• Cash flow refers to the difference between the
cash received from sales and other sources and
the cash outflow for labor, materials, overhead
and taxes.
• Present value expresses in current value the
sum of all future cash flows of an investment
proposal
 Example 8.2

• In the course of planning its future operations, the management of a corporate farm has
decided that a building to be used for storage purposes must be constructed. However,
it has yet to decide which of two plans is more economical. Plan E calls for constructing
a building whose storage capacity will be adequate for 15 years. The construction cost
would be Php240,000. Fifteen years from now, Php180,000 would have to be spent for
an addition to the building in order to increase the storage capacity to the level that
would be required for the next ten years. Annual maintenance costs and property taxes
would average Php24,000 during the first 15 years and Php42,000 thereafter. Plan F calls
for constructing a larger building now, thereby, eliminating the need for an addition in
15 years. Such a building would cost Php300,000. Its annual maintenance costs and
property taxes would average Php3O,000. It is likely that either building will be razed 25
years from now and with no salvage value. Which of the two plans is more economical,
given that the corporation’s cost of money is 30% per year. Use present worth (PW)
method in your analysis
Answer/s:
PWE = Php324,490.04 PWF = Php399,858.2842
 Example 8.3

• A manufacturer of equipment is   Method R Method S

evaluating a proposal that he produce a First Cost Php 100,000 Php200,000
new product. Two alternative methods
are available for the production of the Useful Life 10 years 20 years
item. These can be described, in part, Salvage Value Php15,000 Php10,000
as follows (see the attached table): Annual Revenues Php90,000 Php90,000

Total annual disbursements with method R will be Php7O,000 a year for the first four years
and Php80,000 a year for the last six years of its life. Total annual disbursements with
method S will be a uniform Php65,000 per year throughout its life. The company’s minimum
rate of return requirement is 12%. Should the new product be manufactured? If so, by
which method?
Answer/s:
AWR = - Php1468.0266 AWS = - Php1636.9682…. Since both values are negative the
 Example 8.4

• Suppose that the estimates given in the previous problem remain

unchanged. However, it is further estimated that if method R is
selected, it will be succeeded at the end of its 10-year life by a
method which will have a first cost of Php15O,000, and Php2O,000
salvage value, uniform annual revenues of Php9O,000 and uniform
annual disbursements of Php50,000. Determine the effect this will
have on your decision. Use AW method in your analysis
 ADJUSTMENTS FOR DEFECTIVE OUTPUT

• Goods or services can be considered defective if it fails to meet established

specifications. There are two types of defective output; (1) those that can be
reworked to eliminate the deficiency or (2) those that the deficiency cannot be
eliminated.
• Fairly good estimates can be made of the proportion of total output which will
have to be scrapped. It is possible to calculate what additional factors of
production will be necessary because of scrap
 Example

• Two thousand good copies of an instruction manual are needed. The

printing process requires three successive operations. The output at the
end of each processing stage is inspected and any unsatisfactory work
discarded. It is expected that 8% of the output will be scrapped after the
first operation, that 5% of the remainder will be scrapped after the
second operation and that 3% of the balance will be scrapped after the
third operation. In the determination of the factors of production
required for the first operation, consideration will have to be given to the
number of copies of the report that will undergo that operation. What
should that number be?
Answer/s: 2360 pcs.
 ADJUSTMENTS FOR EFFICIENCY

• Actual time reflects the efficiency at which an operator works and also takes
into account that time will be spent on such necessary personal activities
• Standard time is like the actual time but it contains an allowance for the
occurrence of necessary personal activities and unavoidable delays, but it is
based on the assumption that operators will work at 100°/o efficiency
 Example 8.5

• A furniture manufacturer is going to produce a certain type of

cabinet. The operation sheet states that the standard time for a
required planning operation is 0.247 hour per cabinet. In the past,
the average efficiency of the operators assigned to this work has
been 115%. If the total output during some future one-week period
is to be 410 cabinets, determine the number of operators and
planers needed for this operation. Assume that each operator is
scheduled to work 40 hours per week and that each planer is
scheduled to be operated two shifts per week
 Example 8.6

• A proposed production schedule stipulates that 625 good units of a

specific part are to be manufactured each day. The route sheet
for that part indicates that one of the operation calls for a power
hacksaw and the standard time for the operation is 0.072 hour per
unit. Calculate the number of machine of this type that will be
required to process this part if 4% of the output will be scrapped,
labor efficiency will be 110%, and each saw will be scheduled to
operate 9 hours per day
SCHEDULING
Scheduling
- pertains to establishing the timing of the use of equipment,
facilities and human activities in an organization

Loading
- refers to the assignment of jobs to processing (work) centers. It
involves assigning specific jobs to work centers and to various machines in
the work centers. When making assignments, managers often seek
arrangement that will minimize processing and set-up costs, minimize idle
time among work centers, or minimize job completion time, depending on
the situation.
 Assignment Model (Hungarian Method)

• Assignment model is a special-purpose linear programming model that is

useful in situations that call for assigning tasks or other work requirements to
resources. Typical examples include assigning jobs to machines or workers,
territories to sales people, and telephone linear repair jobs to repair crews.
The idea is to obtain an optimum matching of tasks and resources. Commonly
used criteria include costs, profits, efficiency, and performance.

• Hungarian Method is a method used of assigning jobs by a one-for-one

matching to identify the lowest-cost solution. Each job, for example, must be
assigned to only one machine. It is also assumed that every machine is capable
of handling every job, and that the costs or values associated with each
assignment combination are known and fixed (not subject to variation)
 Example 8.7

• Determine the optimum assignment of jobs to machines for the

following data that represents the cost of assigning each job to
each machine.
 Example 8.8

• The following table contains information on the cost to run three

jobs on four available machines. Determine an assignment plan
that Will minimize costs