System Engineering 3(3+0)

LESSON 3. Systems Concept : Methodology and Models

1.1. Complete Certainty Methods

A condition of certainty does not necessarily imply that decision making is easy, for a problem may be ill-defined, decision criteria unclear, or there may be too many variables to accommodate economically, even though the model is theoretically feasible.  For many situations, however, the following methods are useful.

Algebra: This basic mathematical logic is useful in both certainty and uncertainty analysis. Given valid assumptions, algebra provides a deter­ministic solution in situations such as break-even and benefit-cost analysis.

Calculus: This branch of mathematics provides a useful tool for determining optimal values (limits) where functions are to be maximized or minimized, such as inventory costs.

Mathematical programming: Programming techniques have found extensive applications in product-mix decisions, minimizing transportation costs, planning and scheduling production, and numerous other areas.

1.2. Partial Information Methods

Statistical analysis:  Classical estimation and testing techniques methods have proven increasingly valuable as means of better using operating information for decisions. Some of the widespread applica­tions include the setting of labor standards, forecasting, inventory and production control and quality control.

Queuing theory: Analysis of queues in terms of waiting-line length and mean waiting time is particularly useful in analyzing maintenance activities.

Simulation: Simulations duplicate the essence of an activity or system with­out actually achieving reality. Computer simulations are valuable tools for analysis of investment outcomes, production processes, scheduling, and maintenance activities.

Heuristic methods: Heuristic methods are sets of rules which, though per­haps not optimal, do facilitate solutions of scheduling, layout, and distribu­tion problems when applied in a consistent manner.

Network analysis techniques: Network approaches include decision trees, CPM, and PERT methods. They are particularly helpful in identifying alternative courses of action and controlling research, investment, and a multitude of project activities.

Utility: theory Utility or preference theory allows decision makers to in­corporate their own experience and values into a relatively formalized decision structure.

Fig.1.   Decision certainty

1.3. Extreme Uncertainty Methods

Game theory:  Game theory helps decision makers to choose courses of action when there is absolutely no information about what state of the environment will occur.

Flip coin: In spite of the "unscientific" nature of nipping a coin, random measures such as this are widely used in situations where the decision makers are wholly indifferent.

2. MODELS FOR OPERATIONS ANALYSIS

Some decision-making aids are illustrated by reviewing three models useful for operations analysis: (1) economic break-even analysis, (2) utility-based decisions, and (3) a production system schematic.

2.1. Economic Break-Even Analysis

This economic model has facilitated industrial development by providing organizations with a simplified profit-oriented goal structure that favours innovation, efficiency and growth.

Profits, of course, arise from the excess of total revenues (TR) over total costs (TC). Recognizing that total costs are composed of both fixed costs (FC) and total variable costs (TVC), the profit function can be expressed as:

Profit = TR - TC

Profit = TR - (FC + TVC)

Major cost categories often include direct labour, direct material, and overhead (or indirect production expenses). The direct labor and direct material, plus some other items such as factory supplies, are usually classified as variable costs because they typically change with the volume of production. Supervision, taxes, office salaries, building depreciation, etc., are usually of a more fixed or semi-variable nature. Fixed costs are essentially constant over a given range of output, but admittedly do change over the long run as plant expansions are made, taxes change, and the like.

A break-even chart is a convenient way of graphically describing the relationship between costs and revenues for different volumes of output. Fig.2. depicts this relationship over a range of volume where total revenue increases linearly with each unit sold, and total cost reflects both an unavoidable fixed cost plus a per unit variable cost. The break-even point (BEP) is that volume of output where the fixed and variablecosts are just covered, but no profit exists. Thus at the BEP, the total revenues equal the total costs (TR = TC). Recognizing that revenues reflect the price P charged per item times the volume V sold, we can restate the TR = TC expression as:

 P(V) = FC + VC(V)

 and derive an expression for the break-even volume as:

 Fig.2. Break-even chart

Break-even analysis is simple and easy to visualize, and it condenses decision information into a form that is readily understandable by almost anyone. Also, it is concerned with a vital aspect of free enterprise of organizations—profitability. How­ever, it is a technique based wholly upon economic factors. It assumes one has complete knowledge about all the economic parameters, for the price, cost, and demand data must eitlier be known for certain or assumed. Furthermore, the relationship between these variables is as­sumed to follow a simple linear function which may be acceptable over short ranges but often is really not satisfactory for longer-range decisions. Extrapolation to high outputs involves an increasing amount of risk, for the model fails to account for any effects of decreasing returns to scale as facilities become overloaded or markets become saturated.

2.2. Utility-Based Decisions

Utility is the measure of preference that individuals have for various choices available to them. The utility value of a given alternative is unique to individual decision makers and unlike a simple monetary amount, can incorporate intangible factors or subjective standards from their own value systems. Utility functions typically describe the relative preference value (in utils) that individuals have for a given amount of the criterion (such as money, goods).

2.3. Production System Schematic

Operations management is the activity whereby resources, flowing within a defined system, are combined and transformed in a con­trolled manner to add value in accordance with policies communicated by manage­ment. Having discussed the key concepts of resources, systems, transformation activities, and managerial policy, as well as the concept of models, let us now visualize this definition in terms of a schematic model.

Fig.3. presents a schematic representation of an operating production system. As shown, operations management is directly responsible for the trans­formation activities whereby inputs are combined and converted into outputs. It also exercises an influence over the human, material and equipment, and capital inputs by virtue of functioning within a total system where the personnel, engineering and purchasing, and finance activities exist but are under the direct responsibility of others. Similarly, the outputs are not only tangible goods and services which are managed by the marketing group. Production operations also exert an impact upon the social, political, ecological, and technological environment of the firm. The economic results which flow to the public are another direct reflection of the production ac­tivities. In essence, the model depicts flows of human, material, and capital resources from the environment, through the transformation activities, and back to the en­vironment. All flows are accompanied by data and information which is used in­ternally for control purposes and externally for describing and modifying the role of the firm in its environment.

Fig3. Schematic Model of a Production System

3. CLASSIFICATION OF OPERATIONS MANAGEMENT DECISION AREAS

It is convenient to classify the material and equipment, human, and capital resource decisions primarily as planning and organization deci­sions. They relate largely to the design or modification of the design of the produc­tion system. The process analysis, forecasting, inventory control, production control, quality control, maintenance and cost control decisions all relate to the operation of the production system. These decisions have been broadly classified as direction and control decisions. Finally, an increasingly important decision area pertains to environmental factors.  In most cases, a discussion of theory is followed by solved problems which illustrate applications of the management decision-making methodology that is suitable for given problem situations.

 Table 1.   Major Operations Management Decision Areas

Planning and Organizing Decisions
1. Operations modeling	2.  Materials and equipment		3.   Human resources	4. Capital
Systems definition Objectives Modeling methodology Alternative generation Choice activities	Plant capacity Plant location Plant layout Product standards Process methods Material handling Make vs. buy		Job design Work methods Motion economy Labor standards Labor relations Employee safety Employee incentives	Sources and uses of funds Cost of funds Depreciation method Tax effects Evaluation technique Handling uncertainties in cash flow
Direction and Control Decisions
5.   Production and process analysis	6. Forecasting  Aggregate planning		7. Inventory control	8.  Aggregate planning
R & D effort Product design Product mix Process planning Process selection Line balancing	Uses of forecasts Objectives and criteria Response to demand Variables to control  Forecasting methodology Learning curve effect Validity and control Planning methodology		Uses of inventories Quantity to order Quantity to produce  Handling uncertainties in Demand and lead time     Deriving stock-out costs Control system to use	Objectives and criteria       Variables to learning curve effect Planning methodology
9.  Scheduling and control	10.  Quality control		11.    Maintenance and cost  control
Scheduling philosophy Scheduling methodology Control methodology	Quality objectives Acceptance sampling Control charts to use		Maintenance objectives Reliability required Service rates Budget type and use Cost standards Cost variances
Environmental Interface Decisions
Goods and services   Economic impacts Non economic impacts Social responsibilities

 

 4. SUMMARY

Operations managers are decision makers responsible for using human, material, and capital resources to create valuable goods and services. Their work can be greatly facilitated by adopting a decision-making-systems approach to managerial activities. This approach requires (1) a clear definition of the system, (2) the establishment of criteria, (3) a formulation of relationships, (4) the generation of alternatives, and (5) the choosing of a course of action based upon the criteria.

The key element of a decision-making activity often involves formulation of a model so that the alternative courses of action can best be analyzed and evaluated. The actual structure of the model, of course, depends upon the kind of information available and the prevailing level of certainty in the real world. Techniques for making decisions under the various certainty-uncertainty conditions will be used as relevant topics arise within the text. Three analytical aids for operations analysis were discussed in this module. Break-even analysis assumes certainty and is generally limited in scope to economic factors, but it is widely used. Utility theory is a newer and promising technique for uncertain situations, but it is not yet widely accepted. It is one of the more formalized methods of incorporating human values into the decision process. The production system model described in this chapter is essentially a schematic "visualization" of the definition of operations management.