SVKM’s NMIMS SOHM (NAVI MUMBAI CAMPUS)

Principles of Operations Management

Students Handout / Notes

Session 2 – 28/07/23

Operation Management and Decision Making

Operations management professionals make a number of key decisions that affect the
entire organization. These include the following:

What: What resources will be needed, and in what amounts?

When: When will each resource be needed? When should the work be scheduled? When
should materials and other supplies be ordered? When is corrective action needed?
Where: Where will the work be done?
How: How will the product or service be designed? How will the work be done (organization, methods,
equipment)? How will resources be allocated?
Who: Who will do the work?

An operations manager’s daily concerns include costs (budget), quality, and schedules (time). In this
class, we will talk about the general approaches to decision making, including the use of models,
quantitative methods, analysis of trade-offs, establishing priorities, ethics, and the systems approach.
Models are often a key tool used by all decision makers

Models
A model is an abstraction of reality, a simplified representation of something. For example, a child’s
toy car is a model of a real automobile. It has many of the same visual features (shape, relative
proportions, wheels) that make it suitable for the child’s learning and play ing. But the toy does not
have a real engine, it cannot transport people, and it does not weigh 2,000 pounds. Other examples
of models include automobile test tracks and crash tests; formulas, graphs and charts; balance sheets
and income statements; and financial ratios. Common statistical models include descriptive statistics
such as the mean, median, mode, range, and standard deviation, as well as random sampling, the
normal distribution, and regression equations.

Models are sometimes classified as physical, schematic, or mathematical:

Physical models look like their real-life counterparts. Examples include miniature cars, trucks,
airplanes, toy animals and trains, and scale-model buildings. The advantage of these models is their
visual correspondence with reality.

Schematic models are more abstract than their physical counterparts; that is, they have less
resemblance to the physical reality. Examples include graphs and charts, blueprints, pictures, and
drawings. The advantage of schematic models is that they are often relatively simple to construct and
change. Moreover, they have some degree of visual correspondence.

Mathematical models are the most abstract: They do not look at all like their real-life counterparts.
Examples include numbers, formulas, and symbols. These models are usually the easiest to
manipulate, and they are important forms of inputs for computers and calculators.
The variety of models in use is enormous. Nonetheless, all have certain common features: They are all
decision-making aids and simplifications of more complex real-life phenomena. Real life involves an
overwhelming amount of detail, much of which is irrelevant for any particular problem. Models omit
unimportant details so that attention can be concentrated on the most important aspects of a
situation.

Because models play a significant role in operations management decision making, they are heavily
integrated into the material of this text. For each model, try to learn (1) its purpose, (2) how it is used
to generate results, (3) how these results are interpreted and used, and (4) what assumptions and
limitations apply.

The last point is particularly important because virtually every model has an associated set of
assumptions or conditions under which the model is valid. Failure to satisfy all of the assumptions will
make the results suspect. Attempts to apply the results to a problem under such circumstances can
lead to disastrous consequences.

Managers use models in a variety of ways and for a variety of reasons. Models are beneficial because
they
1. Are generally easy to use and less expensive than dealing directly with the actual situation.
2. Require users to organize and sometimes quantify information and, in the process, often indicate
areas where additional information is needed.
3. Increase understanding of the problem.
4. Enable managers to analyze what-if questions.
5. Serve as a consistent tool for evaluation and provide a standardized format for analyzing a problem.
6. Enable users to bring the power of mathematics to bear on a problem.

This impressive list of benefits notwithstanding, models have certain limitations of which you should
be aware. The following are three of the more important limitations:
1. Quantitative information may be emphasized at the expense of qualitative information.
2. Models may be incorrectly applied and the results misinterpreted. The widespread use of
computerized models adds to this risk because highly sophisticated models may be placed in the hands
of users who are not sufficiently knowledgeable to appreciate the subtleties of a particular model;
thus, they are unable to fully comprehend the circumstances under which the model can be
successfully employed.
3. The use of models does not guarantee good decisions.

Quantitative Approaches
Quantitative approaches to problem solving often embody an attempt to obtain mathematically
optimal solutions to managerial problems. Linear programming and related mathematical techniques
are widely used for optimum allocation of scarce resources. Queuing techniques are useful for
analyzing situations in which waiting lines form. Inventory models are widely used to control
inventories. Project models such as PERT (program evaluation and review technique) and CPM (critical
path method) are useful for planning, coordinating, and controlling large-scale projects. Forecasting
techniques are widely used in planning and scheduling. Statistical models are currently used in many
areas of decision making.

In large measure, quantitative approaches to decision making in operations management (and in other
functional business areas) have been accepted because of calculators and computers capable of
handling the required calculations. Computers have had a major impact on operations management.
Moreover, the growing availability of software packages for quantitative techniques has greatly
increased management’s use of those techniques.
Although quantitative approaches are widely used in operations management decision making, it is
important to note that managers typically use a combination of qualitative and quantitative
approaches, and many important decisions are based on qualitative approaches.

Performance Metrics
All managers use metrics to manage and control operations. There are many metrics in use, including
those related to profits, costs, quality, productivity, flexibility, assets, inventories, schedules, and
forecast accuracy. As you read each chapter, note the metrics being used and how they are applied to
manage operations.

Analysis of Trade-Offs
Operations personnel frequently encounter decisions that can be described as trade-off decisions. For
example, in deciding on the amount of inventory to stock, the decision maker must take into account
the trade-off between the increased level of customer service that the additional inventory would
yield and the increased costs required to stock that inventory.

Decision makers sometimes deal with these decisions by listing the advantages and disadvantages—
the pros and cons—of a course of action to better understand the consequences of the decisions they
must make. In some instances, decision makers add weights to the items on their list that reflect the
relative importance of various factors. This can help them “net out” the potential impacts of the trade-
offs on their decision.

Degree of Customization
A major influence on the entire organization is the degree of customization of products or services
being offered to its customers. Providing highly customized products or services such as home
remodeling, plastic surgery, and legal counseling tends to be more labor intensive than providing
standardized products such as those you would buy “off the shelf” at a mall store or a supermarket or
standardized services such as public utilities and Internet services. Furthermore, production of
customized products or provision of customized services is generally more time consuming, requires
more highly skilled people, and involves more flexible equipment than what is needed for
standardized products or services. Customized processes tend to have a much lower volume of output
than standardized processes, and customized output carries a higher price tag. The degree of
customization has important implications for process selection and job requirements. The impact goes
beyond operations and supply chains. It affects marketing, sales, accounting, finance, and information
systems.

Systems Approach
The systems approach to decision making is a method that considers the entire organization or system
as a whole, taking into account the interrelationships and dependencies between its various
components. It emphasizes understanding how different parts of the organization interact and
influence each other, rather than focusing solely on individual components in isolation.

Key principles of the systems approach to decision making:

1. Holistic View: Instead of analyzing decisions in isolation, the systems approach considers the
broader context and impact of a decision on the entire organization. It recognizes that changes
in one area can have ripple effects on other areas.
2. Interconnectedness: The approach recognizes that the organization is made up of
interconnected parts (departments, functions, processes, etc.), and the behavior of one part
can affect the performance of others.
3. Emergent Properties: The systems approach acknowledges that the organization may exhibit
 emergent properties - characteristics or behaviors that arise from the interactions of its
components and cannot be attributed solely to any single part.
4. Hierarchy of Systems: Organizations can be viewed as nested systems, with subsystems (e.g.,
departments) forming part of larger systems (e.g., the entire organization). Decisions made at
one level can impact other levels within the hierarchy.
5. Feedback Loops: The systems approach incorporates feedback loops, which allow the
organization to learn and adapt based on the outcomes of decisions and actions. Positive
feedback reinforces actions, while negative feedback helps correct deviations.
6. Non-Linearity: The behavior of a system may not be proportional to the magnitude of its
inputs. Small changes can sometimes lead to significant effects, and the relationship between
cause and effect may not always be linear.
7. Consideration of Constraints: The systems approach recognizes the constraints, limitations,
and resources available to the organization. Decisions must be made within these boundaries
to achieve desired outcomes effectively.

Benefits of the systems approach to decision making:

• Comprehensive Understanding: It provides a more comprehensive understanding of the

organization, helping decision-makers identify potential challenges and opportunities that
might have been overlooked in a narrow, isolated view.
• Improved Problem-Solving: By considering the interdependencies between components, the
systems approach can lead to more effective problem-solving and better solutions.
• Anticipating Unintended Consequences: Decision-makers can anticipate potential
unintended consequences of their actions, making it easier to avoid negative impacts.
• Long-Term Perspective: The approach encourages a long-term perspective, as decisions are
evaluated in terms of their impact over time rather than immediate results.
Overall, the systems approach to decision making is a valuable tool for managers and leaders in
understanding complex organizations and making decisions that consider the interconnectedness and
broader implications of their actions.

While the systems approach to decision making offers several advantages, it also has some
disadvantages that decision-makers should be aware of:
1. Complexity: The systems approach can be highly complex, especially in large organizations
with numerous interrelated components. Analyzing and understanding all the intricate
connections can be time-consuming and resource-intensive.
2. Data Requirements: Implementing the systems approach often demands extensive data
collection and analysis to understand the relationships between different parts of the
organization. This can be challenging and may require significant resources.
3. Difficulty in Identifying Cause and Effect: In complex systems, it can be difficult to identify
direct cause-and-effect relationships. Events may have multiple causes and can be influenced
by numerous factors, making it challenging to pinpoint the exact cause of a problem or
success.
4. Time-Consuming Decision-Making Process: The systems approach may require additional
time for decision-making due to the need to consider various interconnections and potential
consequences. In situations where quick decisions are necessary, this can be a drawback.
5. Overemphasis on Analysis: The focus on understanding the intricacies of the system can lead
to analysis paralysis, where decision-makers become overly engrossed in gathering data and
analyzing relationships, delaying the actual decision-making process.
6. Difficulty in Predicting Outcomes: Complex systems can exhibit emergent properties, making
it challenging to predict the exact outcomes of decisions. Unforeseen consequences may
arise, even with careful analysis.
 7. Resistance to Change: Implementing changes based on a systems approach may face
resistance from stakeholders accustomed to traditional, compartmentalized decision-making
processes.
8. Subjectivity: Decision-making within the systems approach involves a certain level of
subjectivity, as interpretations of interrelationships and feedback loops can vary among
decision-makers.
9. Cost and Resource Allocation: Conducting comprehensive analyses and adopting a systems
approach may require substantial financial and human resources, which could be a barrier for
some organizations.
10. Lack of Precision: The systems approach tends to be more qualitative than quantitative, which
might lead to a lack of precision in decision-making when dealing with complex and uncertain
situations.

To mitigate these disadvantages, decision-makers should strike a balance between adopting a systems
approach and considering the practicality and urgency of decisions. It may not be necessary to apply
the systems approach to every decision, especially in situations where simplicity and rapid responses
are more appropriate. A pragmatic approach that integrates the systems perspective with other
decision-making methodologies can yield better outcomes.

A systems approach is essential whenever something is being designed, redesigned, implemented,

improved, or otherwise changed. It is important to take into account the impact on all parts of the
system. For example, if the upcoming model of an automobile will add antilock brakes, a designer
must take into account how customers will view the change, instructions for using the brakes, chances
for misuse, the cost of producing the new brakes, installation procedures, recycling worn-out brakes,
and repair procedures. In addition, workers will need training to make and/or assemble the brakes,
production scheduling may change, inventory procedures may have to change, quality standards will
have to be established, advertising must be informed of the new features, and parts suppliers must
be selected.

Establishing Priorities

In virtually every situation, managers discover that certain issues or items are more important
than others. Recognizing this enables the managers to direct their efforts to where they will
do the most good.

Typically, a relatively few issues or items are very important, so that dealing with those factors will
generally have a disproportionately large impact on the results achieved. This well-known effect is
referred to as the Pareto phenomenon. This is one of the most important and pervasive concepts in
operations management. In fact, this concept can be applied at all levels of management and to every
aspect of decision making, both professional and personal.
Case Study Assignment : Decision Making and Operations Research in the Hospitality Industry

Introduction: The hospitality industry is known for its dynamic and customer-centric nature, where
efficient decision-making plays a crucial role in maintaining high levels of service and profitability. In
this case study, we will explore how a luxury hotel, "Grand Horizon Hotel," utilized operations research
and decision-making tools to enhance its operations and guest experience.

Scenario: Grand Horizon Hotel, a prestigious five-star property, was facing challenges in optimizing its
room inventory management and staff allocation. The hotel experienced fluctuations in demand due
to seasonal trends, special events, and changing customer preferences. Management realized that
their current manual approach to decision-making was inadequate in efficiently handling these
fluctuations, leading to suboptimal room utilization and workforce inefficiencies.

Objective: The hotel's management aimed to improve overall operational efficiency, maximize
revenue, and enhance guest satisfaction. They sought to identify the most effective methods to
optimize room inventory management and staff allocation, taking into account the varying demand
patterns throughout the year.

Approach: Grand Horizon Hotel decided to employ a combination of decision-making techniques and
operations research to address their challenges.

1. Demand Forecasting: The hotel implemented historical data analysis and statistical
forecasting techniques to predict room demand patterns accurately. This helped them
anticipate peak seasons, low occupancy periods, and other trends.
2. Linear Programming (LP): To optimize room inventory management, the hotel used LP to
determine the optimal room allocation strategy that maximized revenue while adhering to
specific constraints, such as minimum room availability and guest preferences.
3. Queuing Theory: To improve staff allocation, the hotel applied queuing theory to analyze
guest flow patterns, check-in/check-out times, and service durations. This allowed them to
minimize guest waiting times and allocate staff resources effectively.
4. Simulation: The hotel utilized simulation modeling to create virtual scenarios and test various
operational strategies. This enabled them to assess the impact of different decision
alternatives without implementing them in real-time.

Implementation: The hotel collaborated with a team of operations researchers and decision analysts
to implement the proposed solutions. They integrated historical data into the forecasting models,
collected real-time guest flow data, and set up simulations to test different staff allocation scenarios.
Results: The adoption of operations research and decision-making techniques led to significant
improvements in Grand Horizon Hotel's operations and guest experience.

1. Optimized Room Inventory: With the help of LP, the hotel achieved optimal room allocation,
reducing the number of vacant rooms during peak periods and ensuring higher revenue
generation.
2. Efficient Staff Allocation: By applying queuing theory, the hotel optimized staff allocation
based on guest demand, reducing waiting times, and improving guest satisfaction.
3. Enhanced Revenue: The overall increase in room occupancy and efficient staff deployment
resulted in improved revenue and profitability for the hotel.
4. Adaptability to Market Changes: Armed with demand forecasting and simulation models, the
hotel became better equipped to handle market changes and adapt its operations accordingly.

Conclusion: The case of Grand Horizon Hotel demonstrates the value of incorporating decision-making
and operations research techniques in the hospitality industry. By leveraging these tools, the hotel
was able to optimize room inventory, enhance staff allocation, and ultimately deliver a superior guest
experience while maximizing revenue. Embracing data-driven decision-making and adopting
operations research methodologies can undoubtedly provide a competitive advantage to hotels in the
highly dynamic and customer-centric hospitality industry.