# Operations Management

Business I · Business Administration · https://tryals.app/learn/business-i/operations-management

## The Engine Room

Operations management runs the transformation at the heart of every firm: inputs to outputs. Its craft is balancing **quality, speed, dependability, flexibility, and cost**—five forces that pull against each other.

**Process types** trade volume against variety. Moving right buys unit cost but loses flexibility; choosing a process type _is_ choosing a strategy.

| Type | Example | Volume | Variety |
|---|---|---|---|
| Project | A dam | One | Total |
| Job shop | Custom furniture | Low | High |
| Batch | Bakery runs | Medium | Medium |
| Line | Car assembly | High | Low |
| Continuous | Refinery | Massive | None |

**Capacity** sets the ceiling. **Utilization** = actual output / design capacity. Running near 100% looks efficient but behaves badly: queues explode nonlinearly as utilization approaches capacity, which is why emergency rooms and highways jam at 95% efficiency.

## Inventory and Lean

**Inventory** buffers supply rhythm against demand rhythm. Ordering often brings setup fees; ordering rarely brings holding fees. The **Economic Order Quantity (EOQ)** minimizes their sum:

$$EOQ = \sqrt{\frac{2DS}{H}}$$

Where $D$ is annual demand, $S$ is cost per order, and $H$ is holding cost per unit-year. The cost curve is flat near the optimum, so being roughly right is cheap.

**Lean** (Toyota) wages war on **waste**: overproduction, waiting, transport, over-processing, inventory, motion, and defects. Its tools include **just-in-time** flow, **kanban** signals, and **kaizen** (continuous improvement).

> **Pitfall:** Inventory removed is also _buffer_ removed. Efficiency and fragility are always bought together.

## Practice questions

5 of this lesson's 14 practice questions, with answers. The full set is in the app.

### 1. A hospital plans its emergency department at 98% average utilisation and waiting times explode. Why does the last few percent cost so much?

A. Because average utilisation is the wrong statistic and peak utilisation is what matters
B. Because staff work more slowly when the department is busy
C. Because 98% utilisation means 2% of patients cannot be treated at all
D. Because queue length grows without bound as utilisation nears 1

**Answer:** D. Because queue length grows without bound as utilisation nears 1

**Why:** Waiting time rises roughly as 1/(1−ρ), so it is nearly flat until it turns vertical, variability needs slack to absorb it and 98% leaves none. High utilisation looks efficient on a spreadsheet and is the reason motorways jam at exactly the moment they are being used best.

Page: https://tryals.app/practice/business-i/operations-management/a-hospital-plans-its-emergency-department-at-98-average-utilisation

### 2. Which statements about EOQ’s logic are correct?

A. At the optimum, ordering and holding costs are equal
B. Larger order quantities increase annual holding costs
C. Total cost rises steeply for any small deviation from EOQ
D. Larger order quantities reduce annual ordering costs

**Answer:** A. At the optimum, ordering and holding costs are equal; B. Larger order quantities increase annual holding costs; D. Larger order quantities reduce annual ordering costs

**Why:** The U-curve’s two arms and their crossing at the bottom. Option 4 is the useful falsehood to unlearn: the valley is famously flat, so rounding EOQ to convenient pack sizes costs pennies.

Page: https://tryals.app/practice/business-i/operations-management/which-statements-about-eoqs-logic-are-correct

### 3. In quality economics, detecting a defect is generally cheaper than preventing it.

**Answer:** False

**Why:** False. The order runs prevention < detection < failure, usually by an order of magnitude at each step: a design review costs less than an inspection, which costs far less than a recall. That escalation is the whole argument for building quality in rather than testing it in at the end.

Page: https://tryals.app/practice/business-i/operations-management/in-quality-economics-detecting-a-defect-is-generally-cheaper-than

### 4. Match each lean instrument to its function.

**Answer:**

- Just-in-time → Produce only what is pulled, when pulled
- Kanban → The visual signal authorizing production
- Kaizen → Continuous small improvements by the doers
- Six Sigma → Statistical war on process variation

**Why:** Pull, signal, improve, and measure, the operational grammar that turned a Japanese car plant into every business school’s favorite chapter.

Page: https://tryals.app/practice/business-i/operations-management/match-each-lean-instrument-to-its-function

### 5. A hospital plans its emergency department to run at 98% average utilization "for efficiency." Queueing theory predicts…

A. Shorter queues than at 80% utilization
B. Waiting times exploding near full capacity
C. Utilization has no relation to waiting time
D. Maximum efficiency with no side effects

**Answer:** B. Waiting times exploding near full capacity

**Why:** With variable arrivals, waiting time scales roughly with $\rho/(1-\rho)$: at 98% the denominator is 0.02 and any surge stacks patients for hours. Slack capacity is not waste in variable-demand systems, it is the product.

Page: https://tryals.app/practice/business-i/operations-management/a-hospital-plans-its-emergency-department-to-run-at-98-average