PE
S
)U
(C
Advisory Council
Chairman
Mr. Utpal Ghosh
Members
PE
S
Course Design
Dr. S J Chopra
Chancellor
Dr. Deependra Kumar Jha
Vice Chancellor
Dr D N Pandey
Dean-SoB
Dr Kamal Bansal
Dean-SoE
Mr Ashok Sahu
Head-CCE
SLM Development Team
Mr. Aindril De
Head-Operations
)U
Dr Raju Ganesh Sunder
Head-Academic Unit
Dr Tabrez Ahmad
Dean-SoL
Dr. Rajesh Gupta
Dr. Meenakshi Sharma
Dr. Rakhi Dawar
Mr. Rahul Sharma
Mr. Shantanu Trivedi
Ms. Aparna
Author
Dr. Rajesh Gupta
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
(C
other means, without permission in writing from University of Petroleum & Energy Studies.
Course Code: MBCQ722D
Course Name: Operations & Material Management
Version: January 2018
© University of Petroleum & Energy Studies
Block–I
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Contents
Introduction to Operations Management.......................................................................3
Unit 2:
Decision Making.............................................................................................................11
Unit 3:
Productivity....................................................................................................................17
Unit 4:
Forecasting: Techniques and Errors.............................................................................27
Unit 5:
Case Study......................................................................................................................41
UP
Unit 1:
Block–II
Unit 6:
Location Selection..........................................................................................................45
Unit 7:
Layout Planning.............................................................................................................51
Unit 8:
Capacity Planning..........................................................................................................57
Unit 9:
Process Selection............................................................................................................63
Unit 10:
Case Study......................................................................................................................69
Block–III
Product and Service Design...........................................................................................73
Unit 12:
Aggregate Planning........................................................................................................83
Unit 13:
Operations in Service Sectors........................................................................................89
Unit 14:
Inventory Control...........................................................................................................95
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Unit 11:
Unit 15:
Case Study....................................................................................................................101
Block–IV
Unit 16:
Supply chain Management..........................................................................................105
Unit 17:
Inspection......................................................................................................................115
Unit 18:
Statistical Quality Control...........................................................................................121
Unit 19:
Maintenance.................................................................................................................127
Unit 20:
Case Study....................................................................................................................131
Operations & Material Management
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Block–V
Materials Management................................................................................................137
Unit 22:
Management of Projects...............................................................................................143
Unit 23:
Stores Management.....................................................................................................165
Unit 24:
Sustaining and Improving Operations........................................................................171
Unit 25:
Case Study....................................................................................................................177
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Unit 21:
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BLOCK - I
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3
UNIT 1
Introduction to Operations
Management
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Notes
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Learning Objectives
Post completion of this unit, the students will be able to:
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Discuss operation management
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Explain the objectives of operation management
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Describe the scope of operations management
Discuss the importance of operation management in different functions
of the organization
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Discuss the responsibilities of operation manager
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Explain differences in manufacturing and services
Introduction:
Operations management is the function of an organization that creates a product or offers a service. This function uses resources like
manpower, material, and machine for producing goods. Operations
management can be defined as the combinations of tools and techniques to maximize operational efficiency and effectiveness through
optimum utilization of resources.
Goods
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Goods are tangible physical items that can be touched, seen and experienced. They include raw materials, work in progress material,
assemblies, sub-assemblies such as Central Processing Unit (CPU)
that gets assembled into computers and final products such as cell
phones and automobiles.
Services are activities that are experience based and provide various combinations of time, place, characteristics, or psychological value. Psychological value and experience are achieved from whatever
we do, eat, travel, rest and wear. It is possible to have a different
perspective regarding operations function in a nosiness. Company’s
ability to compete with competitors and boost the national economy
is dependent on the success and failure of its operations function.
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Operations & Material Management
Notes
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The optimum situation for any organization is to match supply and demand of goods or services. Having excess supply or excess capacity results in wastage and high costs, whereas, having too less means losing
the battle in the marketplace and possible opportunity that results in
customer dissatisfaction. In both the situations, the organization loses
the market. The key functions on the supply side are, operations and
supply chains and on the demand side, there are sales and marketing.
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4
Production is the use of raw material and other resources for producing goods, which may involve several stages of processes.
Services
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A service does not produce anything tangible but only provides a feel
or experience to the user. Customer must be physically present most
of the times and be a part of service delivery. It is completely experience based and the customer will remember the experience after
using that service. The operations in services are different than in
the manufacturing sector.
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Objectives of Operations Management
The objectives of operations management include performance objectives and cost objectives.
Performance objectives
● Efficiency: The measure of output versus capacity
● Effectiveness: To what extent operations are in alignment
with organization goals
● Quality: The output acceptability to the defined norms
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● Lead-time: The time taken in converting the input to output
● Capacity utilization: Extent of utilization of resources
● Flexibility: A measure of how responsive the operations are to
changing customer requirements
Cost objectives
(Visible cost or direct cost)
● Raw material
● Rework
UNIT 1: Introduction to Operations Management
5
● Labor cost
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Notes
● Maintenance cost
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(Invisible cost or indirect cost)
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● Inventory
● Non-availability of goods
● Late delivery
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● Material handling cost
● Appraisal cost
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● Machine stoppage time
The operations must work to achieve the above-mentioned objectives. Operations mainly affect management and its functions. Management is a science of decision making hence decision making is a
basic process of operations management.
These decisions are affected by operations. Decisions can be categorized into: ● Periodic / strategic
The decisions that are taken occasionally and cannot be reversed easily are called periodic/strategic decisions.
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● Continual / operational
The decisions that can be structured, are routine and can be
reversed are called continual or operational decisions.
Generally, strategic decisions are taken by top management
like location planning, layout decision, and capacity decisions.
The routine decisions are taken by functional managers like
inventory levels and production plans.
The scope of Operations Management
Different organizations have a different scope for operations management. Personnel engaged in Operations management handle
a vast array of tasks, which may sometimes overlap also, such as
quality control, inventory management, employee motivation, forecasting and planning, geographical location management and many
more. The scope of operations management can be better understood
with an example. Let’s take an example of a travel-based company
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Operations & Material Management
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1. Forecasting: about various important factors such as weather
conditions, a seasonal spike in demand for tickets and growth
prospects for road travel.
2. Capacity planning: it is imperative for a travel company to
have a smooth cash flow and decent profit margins because
having too many idle buses or selection of less busy routes will
ultimately have a bearing on profits
3. Facilities and layout: it is essential to ensure effective utilization of personnel and equipment.
4. Scheduling: various schedules need to be managed properly
to ensure optimum efficiency of operations. Routine maintenance; roster of drivers and co-drivers; and scheduling of maintenance staff, office staff, and counter staff.
5. Managing inventories: it is essential to ensure optimal inventory levels for food and beverage, newspapers and magazines, pillows and blankets, first aid equipment and other essentials.
6. Assuring quality: Delivering high quality service every time
and in every aspect is essential for smooth operations over
an extended period. Attention to quality should be paid in
those areas where the emphasis is on quality, such as the
behavior of Drivers and Conductor, dealing with customers,
telephone and online reservations in flying and maintenance
operations.
7. Motivating and training: all employees shall be properly
trained and highly motivated in various aspects of operations
management.
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running its own buses. Following activities come under the purview
of a travel company: -
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Notes
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8. Locating facilities involves taking decisions by managers on
the cities to serve, location for maintenance facilities, and major and minor hubs.
UNIT 1: Introduction to Operations Management
7
Notes
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Importance of operations management in different functions of
an organization
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Operations
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Finance
Marketing
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Figure 1.1 Overlapping functions of an organization
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Finance, Marketing, and Operations are three major functions of
any business organization, which overlap each other. All other functions—Public Relation, Legal, Information Technology, Purchasing,
and Human Resource and so on – support the main functions. Among
the service jobs that are closely related to operations are financial
services (e.g., stock market analyst, broker and investment banker),
marketing services (e.g., market analyst, marketing researcher, advertising manager, and product manager), accounting services (e.g.
corporate accountant, public accountant, and budget analyst), and information services.
Operations function is the backbone of every manufacturing and
services based business and is an intrinsic part of organizational
culture.
The study of operations management is necessary for all managers
because;
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● Operations are the backbone of the organization, which converts customers’ requirement into deliveries.
● The activities in all other areas of business organizations such
as finance, accounting, human resource, marketing and others
are all interrelated with operations management.
● The activities under operations are repetitive and non-repetitive. The main part is the flawless execution of the activities.
Responsibilities of an Operations Manager
Operations managers are responsible for:
● It helps in the identifying and categorizing the types of problems.
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Operations & Material Management
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● It helps in understanding the sequencing and prioritizing processes.
● It helps in inventory control and quality control. It ensures the
best use of resources and thereby effective capacity utilization.
● It plays a significant role in queuing management and absorbing the feedbacks in the processes.
For the purpose of fulfilling the responsibilities, the operations
manager has to be involved in different areas of decision making, which include:
● The decision about the use of resources
● Establishing rational for processes
● Deciding suitable location for the organization
● Establishing schedules for operations
● Deciding the quantity of production to match demand
● Establishing responsibilities for work
● Taking corrective actions
● Tightening control measures
Operations as a value-added process or transformation process
Operations can be understood as a value-adding process or transformation process. A process has an input, an output and a conversion
system, which converts the input into output. All processes consume
resources. It is important that processes add value. The formula has
been transformed from input to output.
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● It ensures more precise demand forecasting for the product or
services offered.
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Notes
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8
Input
Consumes Resources
Conversion System
Figure 1.2 Process of conversion
Output
UNIT 1: Introduction to Operations Management
Notes
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Manufacturing and Services Industries
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Operations can be broadly divided into two categories
● Manufacturing
9
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The processes must ensure the value addition, i.e. value of inputs
should be lower than the value of output.
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● Services
The difference between manufacturing and services has been classified below
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Production
Services
Output
Tangible
Intangible
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Can be stored
Immediate
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More equipment
More labor
Low
High
Low
High
Inventory
Work
Customer contact
Participation of customer
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System Characteristics
Performance measurement Complicated
Simple
Location
Location of users
Summary
Ease of manufacturing
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Operations Management is an important aspect of management
which involves optimum designing and management of production
processes and restructuring business functioning related to the production of goods and services. It influences a vast array of sectors
like banking, hospitality, travel, hospitals, etc. Operations Management is an essential function of every organization as it involves
management of long-term as well as the daily production of goods
and services.
Review Questions
1. Differentiate between manufacturing and services.
2. Discuss various objectives of operations management.
3. Describe the process of management.
4. What are the performance criteria for operations manager?
5. Explain the different areas in which an operation manager has
to be involved in decision making.
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UNIT 2
Decision Making
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Notes
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Learning Objectives
After completion of this unit, the students will be able to:
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Appreciate various decision environments
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Understand various decision-making techniques
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Practice rational decision making
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Operations Management and Decision Making
As a key decision maker and planner in an organization, the Operations Manager has a significant role to play in ensuring the achievement of company goals and objectives. Most of the decisions involve
selection of the optimum solution from many options that may have
an impact on costs, profits, and output. But it must be made sure
that decisions are made post due diligence.
The types of decisions that are taken by operations managers are as
below:
● What: What quantities of which resources are required?
● When: When to replenish inventory? When to schedule work?
When to take corrective actions? When are specific resources
required?
● Where: Where is the work to be done (place)?
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● How: How to do the work? How to design products and services?
How to allocate resources?
● Who: Who will complete the work?
Management is all about making right decisions at the right time.
Whether decision making is an art or science has been a debate since
long. Decision making is an art which is supported by the science of
decision making.
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Operations & Material Management
Notes
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Steps in decision-making process
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12
The process of decision making involves following steps
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1. Identify problem requiring a decision
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2. Define criteria for choosing an alternative
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3. Identify all alternatives
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5. Select the best alternative as per defined criteria
Decision Environments
The environments in which managers make the decision are as under:
● Certainty – A condition in which certainty of outcomes of all
alternatives is known
● Risk – A condition in which probability of all possible outcomes
is known
● Uncertainty – A condition in which the probability of outcomes is not known
Decision making under certainty
A condition is certain when the outcomes of all alternatives are certain in nature.
Decision making under risk
A condition where the probability of various outcomes of all alternatives is known.
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4. Analyze and compare alternatives on the basis of defined
­criteria
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Consider the example below for decision making under certainty
when the outcomes of three alternatives are not known.
Example 2.1
Following is the example of a payoff table. The values in brackets
indicate the probability of a future condition to happen.
Alternative /
Payoff
market
High (0.4)
Moderate (0.1)
Low (0.5)
1
50
40
10
UNIT 2: Decision Making
60
20
3
30
40
5
Expected payoff = ∑ px
13
Notes
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2
20
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Where p is probability and x is a payoff
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So expected payoff for alternative 1 = 0.4 × 50 + 0.1 × 40 + 0.5 × 10
= 29
Alternative 2 = 0.4 × 20 + 0.1 × 60 + 0.5 × 20 = 24
Alternative 3 = 0.4 × 30 + 0.1 × 40 + 0.5 × 5 = 18.5
So decision is in favor of alternative 1, which gives the highest payoff
that is expected.
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Decision making under uncertainty
Maximin – The substitute with the best out of the worst payoffs is
selected.
Maximax – The substitute with the maximum out of highest payoffs is selected.
Laplace – The substitute with the best average payoff out of any of
the Alternatives is selected.
Minimax regret – The substitute that has the smallest out of the
highest Regrets is selected.
The principle of insufficient reason – Equal probability is allocated to all conditions and the alternative with maximum expected
value is selected.
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Example 2.2
Check the payoff table below
Alternative /
Payoff
market
High
Moderate
Low
1
50
40
10
2
20
60
20
3
30
40
5
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Notes
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Maximin
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Operations & Material Management
Identify the minimum payoff for each alternative
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Alternative /
Payoff
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market
High
1
50
2
20
3
30
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Low
payoff
40
10
10
60
20
20
40
5
5
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Maximax
Identify the maximum payoff for each alternative
Alternative /
Payoff
market
High
Moderate
Low
Payoff
1
50
40
10
50
2
20
60
20
60
3
30
40
5
40
Maximum
Maximum out of maximum payoff is 60 for alternative 2. So, on the
basis of maximax principle, alternative 2 is preferable.
Laplace
Calculate average expected payoff for each alternative
Alternative /
Payoff
market
High
Moderate
Low
payoff
1
50
40
10
33.3
2
20
60
20
33.3
3
30
40
5
25
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Moderate
Identify the maximum out of minimum payoff, which is 20 for alternative 2. So on the basis of maximin principle, alternative 2 is preferable.
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Minimum
Average
Identify the maximum of average payoff which is 33.3 for alternative 1 and 2. So based on Laplace principle, alternative 1 and 2 are
equally preferable.
The principle of insufficient reason
Allot equal probability to each future state of nature and calculate
an expected value for each alternative. Since there are 3 possible
states of nature, so a probability of 1 / 3 is allotted to each
UNIT 2: Decision Making
Payoff
Expected
/ market
High 1/3
Moderate 1 / 3
Low 1 / 3
1
50
40
10
2
20
60
20
3
30
40
5
value
33.3
25
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In this method, the regret for each alternative for each future state
of nature is determined. Regret for each pair is equal to the difference of payoff of that combination and the combination with the
highest payoff or that state of nature
Payoff
market
High
1
50
2
20
3
30
Moderate
Low
40
10
60
20
40
5
The regret for alternative 1 will be
50 – 50 = 0 for high market
60 – 40 = 20 for moderate market
20 – 10 = 10 for low market
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Identify the maximum of expected value which is 33.3 for alternative 1 and 2. So based on principle of Insufficient Reason; alternative
1 and 2 are equally preferable.
Alternative /
Notes
33.3
Expected value for alternative 1 = 1 / 3 × 50 + 1 / 3 × 40 + 1 / 3 × 10 = 33.3
Expected value for alternative 2 = 1 / 3 × 20 + 1 / 3 × 60 + 1 / 3 × 20 = 33.3
Expected value for alternative 3 = 1 / 3 × 30 + 1 / 3 × 40 + 1 / 3 × 5 = 25
Minimax regret
15
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Alternative
The regret for alternative 2 will be
50 – 20 = 30 for high market
60 – 60 = 0 for moderate market
20 – 20 = 10 for low market
The regret for alternative 3 will be
50 – 30 = 20 for high market
60 – 40 = 20 for moderate market
20 – 5 = 15 for low market
The regret table is then created, and maximum regret for each alternative is identified.
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REGRET
market
High
1
0
2
30
3
20
Maximum
Moderate
Low
regret
20
10
20
0
10
30
20
15
20
The decision is made based on a minimum of maximum regret. So,
alternatives 1 and 3 are equally preferable as they have the lowest
regret of 20.
Summary
Decision-making is the process of identifying and choosing alternatives based on the values, preferences, and beliefs of the decision-maker. It is required in all phases of life and in all fields. Every
single action that we make is the result of a decision. Moreover,
decision-making plays an important role in various fields of management. It is a significant tool for all businesses as it helps make
efficient decisions during planning thereby reducing risks.
Review Questions
1. Consider the following payoff table:
Alternatives
Profit if future demand is
Low
Medium
High
X
10
50
70
Y
–10
44
120
Z
0
20
140
Which alternative would you choose based on
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Alternative /
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Notes
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a.
Maximin
b.
Maximax
c.
Minimax Regret
2. Consider the following payoff table:
Alternative
Future Conditions
Low
Moderate
High
Very high
A
100
100
100
100
B
90
130
150
140
C
(–100)
150
300
160
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UNIT 3
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Notes
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Productivity
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Learning Objectives
After completion of this unit, the students will be able to:
Appreciate the importance of productivity
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Calculate partial and multifactor productivity
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Identify scope of productivity improvement
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Understand the concept of competitiveness
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Describe the various aspects of operations strategy
UP
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Productivity can be described as the degree of efficient utilization of
resources and is normally described as an output to input ratio. It
measures output per unit of input in monetary terms. All the processes consume resources. The resources could be manpower, material, machine, energy, money or any other resources, which are
consumed for producing output.
Productivity collectively measures the trends in labor growth, technology improvement, and how effectively the resources are utilized.
Productivity = output / input
Example 3.1
Consider the following data:
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A manufacturing company produces 100 units of a product in 10
hours shift. The resources consumed are as under:
No of Labor
Machines
Raw material
Energy
10
5
100 kg
500 KW
Now, the productivity with respect to labour = output / labour hours
Labour hours = 10 × 10 = 100 (no of labour × no of hours in a shift)
So productivity = 100 / 100 = 1 unit per labour hour
The productivity with respect to machine = output / machine hours
Machine hours = 5 × 10 = 50
So productivity = 100 / 50 = 2 unit per machine hour
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Operations & Material Management
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The productivity with respect to energy = output / energy
So productivity = 100 / 500 = 0.2 unit per KW
You can see that only one input has been considered at a time for
calculating productivity. These are called partial measures of productivity. So partial measures of productivity are as under:
Partial measures
Output
labour
Output
machine
Multifactor measures
Output
capital
Output
energy
If more than one input is used for calculation of productivity, it is
called multifactor productivity.
For example,
Output
=
labour + machine
Output
labour + capital + energy
However, since the inputs have different units, so they have to be
converted into monetary value for calculating productivity. It is explained below with an example.
Example 3.2
A manufacturing company produces 100 units of a product in 10
hours shift. The resources consumed are as under:
Labour
10
Rs. 10 per labour hour
Machines
5
Operating cost Rs. 50 per machine hour
Raw material
100 kg @Rs. 20 per KG
Energy
500 KW @Rs. 20 per KW
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The productivity with respect to material = output / raw material
So productivity = 100 / 100 = 1 unit per KG of material
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Notes
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Labour hours = 10 × 10 =100
Labour cost = 100 × 10 = 1000
Machine hours = 5 × 10 = 50
So operating cost = 50 × 50 = 2500
UNIT 3: Productivity
The scope of Improvement in Productivity
There are the many areas, on the identification of which results in
the improvement of productivity. Few of the examples are:
● Identify measures of productivity for all processes
● Identify processes restricting the capacity of whole operations
system
UP
● Improves the productivity of the processes by using improvement tools
The main objective of any organization is to sell competitive products in the market. Competitiveness has an important role in determining whether an organization would grow, barely get-by or
would fail. Different business organizations compete on the basis
of a combination of key factors such as price, delivery time, quality,
differentiation points.
Competitiveness is affected by marketing in various ways such as
pricing, promotion, advertising and identification of customer wants.
1. Identification of consumer wants or needs: plays a vital
role in establishing competitiveness of business and plays a vital role in the decision-making process. Every company strives
to achieve the perfect balance between customer needs and
company offerings.
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Notes
ES
Material cost = 100 × 20 =
Energy cost = 500 × 20 = 10000
Total cost = 1000 + 2500 + 2000 + 10000 = 15500
Multifactor productivity = 100 / 15500 units per Rupee spent
2. Price and quality: it is essential to comprehend the trade-off
decisions made by the consumers amongst quality and price as
it plays a crucial role in the final purchase decision.
3. Promotions and advertising are used by companies to inform consumers about the features and benefits of their products and develop a special place in their minds.
Operations of a company are influenced by a host of co-related parameters such as cost, quality, inventory, supply chain, product/service, post-sales service, location, and various others.
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Operations & Material Management
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2. Cost: Efforts to reduce the cost of products and services, is an
ongoing process in every organization as it has a direct bearing
on pricing policies and profit margins. Firms who possess higher productivity rates have a distinct competitive advantage
over its competitors. To reduce costs and boost output, companies adopt the outsourcing strategy for some of its operations.
3. Location: having a strategically important location is half the
battle won for firms as it provides numerous benefits, for instance, location near raw material helps reduce transportation
costs and delivery lead times. Location is also important as
it is directly associated with customer convenience as well as
establish competitive superiority in terms of cost, visibility and
distribution costs. It assumes even greater importance in retail
sectors.
4. Quality has a very important role to play in a consumer purchase decision as consumers analyze any product or service
they buy based on the perception if it satisfies their requirement. If a product or service is able to establish superior quality competitiveness in the mind of the customers, customers are
willing to pay more for that.
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1. Product and service design- a key factor that consumers
consider while making a purchase decision is unique features
and characteristics of a product or service. In order to ensure
the presence of such unique characteristics, it is essential that
the various departments of the firm work together and establishes harmony between consumer wants, financial capabilities,
operations capability and supply chain capacities. Innovation
and time-to-market are two other critical factors affecting
consumer decision making.
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Notes
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20
5. Quick response: This parameter has very serious implications for a company and if handled correctly can establish competitive superiority. Companies should try and introduce new
products in the market quickly and also try to deliver the products and services to customers as quickly as possible. Another
important aspect is to quickly redress customer grievances.
6. Flexibility: Highly flexible companies enjoy a competitive advantage in a dynamic environment as they are able to incorporate changes in their products and services quickly and establish a unique place in the customers mind.
UNIT 3: Productivity
21
Notes
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7. Inventory management: if a company is able to ensure a
steady supply of goods without enhancing its dead stocks, it
has a distinct competitive advantage over its competitors.
8. Supply chain management: efficient management of the
supply chain ensures timely and cost-effective distribution and
delivery services in co-ordination with buyers and suppliers.
9. After sale service: are value addition activities that enhance
the user experience such as delivery, warranty, repair and replacement and technical support. It also is effective during the
sales process which helps grab the customer attention such as
attention to detail, regular flow of information, etc.
UP
10. Service quality: a highly critical key differentiator, it ensures
that businesses which are more careful towards extending superior service quality to the customer are ensured more profits
and faster growth as compared to others who lack in it.
11. Most importantly the human resources that are managers, workers, and labors: highly skilled and knowledgeable
manpower greatly enhances the company products and provides a unique advantage over competitors with their skills.
Strategies and Tactics
(C
)
Strategies and tactics lay the roadmap for an organization to achieve
its goals through highly efficient decision making. Organizational
strategies encompass most of the activities of an organization but
vary from business to business. For, eg: - For a company like Tata,
its organizational strategies could be divided on the basis of its business verticals such as Auto, Software, IT, Power, etc. These organizational strategies are themselves developed from functional strategies that cover every possible functional area of the organization.
In a nutshell, functional strategies should complement the organizational strategies, and organizational strategies should support overall goals and missions of the company.
Business strategies can be divided into three categories: • Low cost: The organization may decide to penetrate the market by keeping the cost of their product or service lowest among
its competitive products in order to differentiate their products
or services
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
___________________
• Responsiveness: The organization responding quickly to
market demand and customer needs or complaints can have
a competitive advantage. A great responsive strategy should
include the following three actions: -
ES
22
–
Introducing new and improved products and services
quickly
___________________
–
Ensuring prompt deliveries of existing products
___________________
–
Responding quickly to customer complaints and grievances
___________________
___________________
___________________
___________________
Tactics can be defined as the actions and techniques used for successful implementation and execution of strategies. They are more
specific than strategies, and they provide guidance and direction for
carrying out actual operations, which need the most specific and detailed plans and decision making in an organization. For a process,
the tactics would include “how to” such as how to increase sales,
how to ensure customer satisfaction. In case of operations, tactics
include the actual doing part of the process.”
Strategies and Fundamental capabilities need to be in sync to ensure effective implementation. Table 2.1 enlists various instances
where organizations have successfully deployed strategic tactics.
Table 3.1 Organizations and applied Strategies
(C
)
___________________
• Differentiation from competitors: The organization at times
differentiates their product or service from competitors by price,
features, after sakes services, quality, or by its design. They may
offer the competitive products or service at a lower price with more
upgraded features, or they can provide free after sales service for
more period of time than by their competitors.
UP
___________________
Types of Strat-
Operations
egies
Strategy
Low price
Low cost
Responsiveness
Organizational Examples
U.S. first-class postage
Wal-Mart
Southwest Airlines
Short processing
time
McDonald’s restaurants
Express Mail, UPS, FedEx
One-hour photo
On-time delivery
Domino’s Pizza
FedEx
UNIT 3: Productivity
Performance
Differentiation:
High quality
High-performance
design
Sony TV
High-Quality Processing
Lexus
Disneyland
Consistent quality
Innovation
Newness
Wegmans
___________________
3M, Apple
Variety
Volume
Hospital emergency room
UP
Burger King (“Have it your
way”)
McDonald’s (“Buses welcome”)
Toyota
Supermarkets (additional
checkouts)
Disneyland
Amazon
IBM
Nordstrom
Differentiation:
Location
Convenience
___________________
___________________
Flexibility
Service
___________________
Coca-Cola, PepsiCo
Google
Superior customer
service
___________________
___________________
Differentiation:
Differentiation:
Notes
Five-star restaurants or hotels
Electrical power
Differentiation:
23
ES
Differentiation
Supermarkets, dry cleaners
Mall stores
Service stations
(C
)
Banks, ATMs
Operations Strategy
Organizational strategy has a broad scope and encompasses the
whole organization and provides the overall direction whereas Operations strategy is narrower in scope as it deals with the operational
aspects of the organization. It deals with key issues such as quality,
costs, processes, products, resources, lead times and scheduling, etc.
But in order to ensure the effectiveness of a operations strategy, it
is imperative to link it to Organizational strategies as they both go
hand in hand and complement each other.
___________________
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
While formulating organizational strategy, competitors strengths
and weaknesses should be taken into account to ensures that organizations strengths are capitalized, and weaknesses are addressed
to. Likewise, Operations strategy should be in sync with the functional units of the organization as well as with the organizational
strategy. It is required on the part of senior managers to work in coordination with the functional units to ensure that each individual
strategy complements the organizational strategy. This will foster
a feeling of co-operation amongst the various functional units of an
organization to ensure the benefits of synergy and co-operation.
ES
24
Table 3.1 provides a comparison of an organization’s mission, its
overall strategy, and its operations strategy, tactics, and operations.
___________________
UP
The
Mission
overall
organiza- Strategy
tion
Operations
ManageTime
ment
Scope
Horizon
Level
Level
of
Relates to
Detail
Top
Long
Broad
Low
Survival,
profitability
Senior
Long
Broad
Low
Growth rate,
market share
Low
Product design,
choice of location,
choice of technology, new facilities
Strategic Senior
Tactical
Operational
(C
)
___________________
Table 3.2 Comparison of an organization’s mission
Middle
Low
Moderate
Broad
to long
Moderate
Short
Moderate
Employment
levels, output
Moderlevels, equipment,
ate
selection, facility
layout
Narrow High
Scheduling personnel, adjusting
output, rates,
inventory management, purchasing
Summary
Productivity encompasses the various parameters to measure the
efficiency of an organization and plays a vital role in enhancing production performance of the company as well as the nation.
An increase in the national productivity ensures improvement in
the standard of living of the people and improves their purchasing
power to afford important products and services including better
UNIT 3: Productivity
25
Notes
ES
housing, good education, nutritious food, and leisure, etc. Growth in
productivity assists business in enhancing their profitability.
___________________
Review Questions
___________________
1. Define productivity.
___________________
2. Differentiate between partial and multifactor measures of productivity.
___________________
3. What are the various factors affecting productivity?
___________________
4. Explain measures of improving productivity.
___________________
5. Explain various competition strategies.
UP
6. If a plant produces 350 units in 700 man hours and consumes
500 kg steel, determine
a)
Labor productivity
b)
Material productivity
7. Differentiate between organizational strategies and operations
strategies.
8. Why is mission statement important and what is its contribution to the growth of any organization?
(C
)
9. List ten operational strategies that a bank requires to attract
customers.
___________________
___________________
___________________
___________________
(C
)
ES
UP
27
UNIT 4
ES
Notes
Forecasting: Techniques and
Errors
___________________
___________________
___________________
___________________
Learning Objectives
After completion of this unit, the students will be able to:
Discuss the importance of forecasting in operations management
\\
Select a suitable forecasting technique
\\
Apply forecasting technique
\\
Monitor and control various types of forecasting techniques
UP
\\
The success of an organization depends on its capability to anticipate
the future conditions and align the operations accordingly. Hence,
forecasting of future markets and demand becomes important to the
effectiveness of an organization. In this lesson, we will understand
the significance of forecasting and methods used for forecasting.
(C
)
Forecasts form a major component of every decision-making process
under operations management, and their importance is paramount
as they offer vital inputs regarding future demands. The anticipation
of demand is necessary for every organization to plan accordingly to
fulfill that demand and this is where Forecasting comes in handy as
it helps determine the future requirements. For instance, Operation
Department needs the forecasts about the expected demand to formulate budgets, purchase additional equipment, recruit necessary
personnel, prepare purchase requirements and share them with the
vendors and help supply chain partners with the planning process.
Forecast encompasses two important aspects – “expected demand
and relative degree of accuracy that could be assigned to the forecast (potential size of forecast error). Estimated demand levels can
be a function of some structural variations, such as seasonal variation and Forecast Accuracy is a function of forecasters which enables
them to correctly model various parameters such as demand, chance
variations in demand and unexpected situations that might impact
demand.”
Forecasting plays a critical role in the planning process as they enable the managers to predict future trends and plan accordingly.
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
___________________
Forecasts are regularly used while handling various essential functions of an organization such as sales, production, budgeting, inventory, purchase and capacity planning. The unique aspect about
forecasts is that they are made according to time horizons, i.e.: -
ES
28
___________________
– Short Term Forecasts (hourly, daily, weekly or monthly)
___________________
– Long-Term Forecasts (half-yearly, yearly or five yearly)
___________________
___________________
___________________
___________________
We come across two terms in this context:
Prediction anticipating a future event
Projection anticipating variables
Forward projection of variables is called forecasting.
Types of Forecasting
Forecasting could be categorized on various criteria as under
● Economic
has economic relevance like demand
● Noneconomic has no economic relevance, e.g., political and
weather.
● Macro
industry or economy level forecasting
● Micro
firm level forecasting
● Active
forecast for planned actions
● Passive
extrapolation of previous year’s data
(C
)
___________________
Short-term forecasts relate to ongoing operations whereas longterm forecasts are essential tools for strategic planning. Long-term
forecasts are useful in the development of new products, equipment,
facilities and services which will take a long time to develop and
implement.
UP
___________________
● Conditionalimpact of the change in independent variable upon dependent variable. The change
in an independent variable may bring
changes in the dependent variable.
● Non conditionalestimation of change in independent variable
● Long run
strategic
● Short run
operational
UNIT 4: Forecasting: Techniques and Errors
29
● They are not perfect.
Notes
ES
All forecasts have some common characteristics
● It assumes that the conditions that prevailed in the past will
continue to prevail.
● Forecast accuracy for shorter time periods is less accurate as
compared to forecast of longer.
● Forecasts will be more accurate if made for groups of items,
rather than a single item.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Forecasting in Operations
Planning
UP
Forecasting is important during all phases of operations. The need
of forecasting at various phases of operations is as under:
Demand forecasting to decide
●
The degree of automation
● Product design
● Capacity decisions
Organising
Demand forecasting to decide
● Workforce required
● Production volumes
(C
)
Controlling
Demand forecasting to decide
● Inventory levels
● Production volumes
● Work force
Steps in demand forecasting
The steps involved in forecasting are as under
1. Identifying the nature of the product
2. Deciding the nature of the forecast
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
3. Enlisting the factors affecting demand
ES
30
4. Analysing the factors affecting demand
___________________
5. Selecting the forecasting technique
___________________
6. Verifying the accuracy of forecasting
___________________
Components of demand
___________________
There are 5 components of demand
___________________
___________________
___________________
● Trend – a continuous increase or decrease in demand over time
● Seasonal influence – an increase or decrease in demand
during different identifiable phases of time
● Cyclical movements – change in demand pattern over a long
span of time
● Random error – chance variations in demand
It is necessary to understand the types of demand because the demands of certain products are dependent on the demand for its
complementary product. Consider an example of razors and blades.
Both are complementary products to each other. So, to be able to
predict the demand for razors it has become imperative to predict
the requirements for blades.
Now, we will discuss the types of demand for which forecasting
is done.
Dependent and independent demand
● If demand for a product depends on some other variables, it is
called dependent demand.
(C
)
___________________
● Average – The average of all past demands
UP
___________________
● If demand for a product does not depend on other variables, it
is termed as independent demand.
Techniques of Forecasting
The techniques of forecasting can be broadly divided into three categories:
● Based on judgments
● Based on time series
● Associative forecast
UNIT 4: Forecasting: Techniques and Errors
31
Executive opinion
A group of senior-level managers meets and develop a forecast. It is
used for long-term planning and new product development.
Advantage
Risk
● No individual is responsible for the forecast.
UP
Direct consumer contact composites
Forecasting based on views of direct sales staff or customer service
staff.
● Failure to differentiate amid what consumers want to do and
what they would actually do
● Influenced by recent experience
● Salesmen have an advantage in providing low sales estimates
Advantages
● Direct information
___________________
___________________
___________________
___________________
● The opinion of one person may dominate.
Consumer surveys
___________________
___________________
● Knowledge sharing among various managers
Drawback
Notes
ES
Techniques based on the judgment
(C
)
● Drawback
● Expensive and time-consuming
● Low response rate
Delphi
Delphi involves forecasting based on questionnaires to a group of
managers and experts. The questionnaires are modified, and responses sought till the consensus arrives.
Drawbacks
● It is a time taking process.
___________________
___________________
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
● The poorly designed questionnaire may result in false conclusions.
Nominal group
It involves sharing of ideas by the experts. The ideas are ranked by
the experts and rankings are subject to mathematical derivations.
Techniques based on time series
Naïve forecast
The actual demand for any period is considered as a forecast of succeeding period.
Example 4.1
Consider the following data, which is available for the past 6 periods
for a manufacturing firm.
Period
1
2
3
4
5
6
Actual demand D
55
37
62
31
33
48
The forecast for period 7 on the basis of the naïve forecast would be
48 as it is the actual demand for the last period.
Simple average
“A simple average is the average of demands / prices incurring in all
given periods.
(C
)
___________________
● Evidence of high degree of accuracy does not exist.
ES
Notes
UP
32
SA =
sum of demands for all time periods
Number of periods”
The major benefit that simple average extends is in the form of a reduction in chances of being swayed by gross fluctuation which may
take place in a fixed period. The disadvantage is that in case, the
defined pattern changes over time, the simple average method will
not be able to find out this change.
UNIT 4: Forecasting: Techniques and Errors
33
Example 4.2
Actual demand D
100
120
80
90
110
70
ES
Period
1
2
3
4
5
6
Notes
___________________
___________________
___________________
___________________
___________________
___________________
Simple moving average
___________________
UP
The forecast for period 7 based on simple average will be
100 + 120 + 80 + 90 + 110 + 70 / 6
= 570 / 6 = 95
A simple moving average is a basic type of moving average. It is
derived by considering a series of prices or demands, then adding
these prices or demands and then dividing the total by the total data
points
MA =
sum of demands for periods
The chosen number of periods
Example 4.3
Period
Actual demand D
1
50
2
3
4
60
40
45
55
6
50
(C
)
5
The forecast for period 7 based on 5 period simple moving averages
will be
60 + 40 + 45 + 55 + 50 / 5
= 250 / 5 = 50
The forecast for period 7 based on 3 periods simple moving average
will be
45 + 55 + 50 / 3
= 150 / 3 = 50
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
Weighted moving average
ES
34
A moving average forecast makes use of a set of most current and
real data figures for generation of a forecast while the recent forecasts are allotted the weights
Example 4.4
___________________
___________________
Period
1
___________________
100
2
___________________
120
3
80
4
___________________
90
5
___________________
110
70
UP
6
Calculate the 3-period weighted moving average if weights are 0.3,
0.2 and 0.5 (0.3 being the weight of most recent period).
Weighted moving average will be:
0.3 × 70 + 0.2 × 110 + 0.5 × 90
= 21 + 22 + 45 = 88
Exponential smoothing
Exponential smoothing uses a part of past period demand and a part
of the past period forecast to predict demand for succeeding period.
Next forecast = previous forecast + α (actual demand – previous
forecast)
Ft = F t-1 + α (Dt-1 − Ft-1)
Or Ft = α Dt-1 + (1− α) Ft-1
α = smoothing constant that represents a percentage of forecast error
0 <α< 1
(C
)
___________________
Actual demand D
Example 4.5
Period
Actual demand D
Forecast
2
120
100
1
3
4
5
6
100
80
120
95
90
100
70
80
110
135
UNIT 4: Forecasting: Techniques and Errors
Selecting the value of smoothing coefficient
Smoothing coefficient is
High
for new products for which demand is shifting
Low
if the demand is stable
Moderate
if the demand is moderately unstable
UP
The trend is the effect of long-term factors in the series.
“Y = a + bt”
“t = specified number of periods
Y = forecast for period t
a = value of Y at t =0
b = slope of line”
b=
n ∑ ty − ∑ t ∑ y
n ∑ t2 – (∑ t)2
a=
y–b∑t
n
Example 4.6
Consider the following data
Demand D
5
8
9
12
16
(C
)
Period t
1
2
3
4
5
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Incorporating trend
Trend equation
35
ES
Calculate demand for period 7 if smoothing coefficient = 0.2.
Forecast for period 7
= α Dt-1 + (1 − α) Ft-1
= 0.2 × 70 + 0.8 × 80
= 14 + 64 = 78
As we can see the demand is an increasing trend,trend equation will
be used to forecast for period 6.
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Demand D
5
8
9
12
16
ty
5
16
27
48
80
∑ t = 15
∑ y = 50
∑ ty = 176
∑ t2 = 55
N=5
n ∑ ty − ∑ t ∑ y
b=
n ∑ t2 – (∑ t)2
= 880 – 750 / 275 – 225
= 130 / 50 = 2.6
∑y – b ∑ t
a=
n
= 50 – 39 / 5 = 11 / 5
= 2.2
So D = a + bt
D = 2.2 + 2.6 t
For t = 6,
D = 2.2 + 2.6 × 6
= 2.2 + 15.6 = 17.8
= 18 (approx.)
Forecasting Error
MAD =
forecast error
(C
)
___________________
Period t
1
2
3
4
5
=
BIAS =
n
forecasted demand – actual demand
n
forecast error
n
= (forecast demand – actual demand)
MSE =
T2
1
4
9
16
25
ES
Notes
UP
36
n
(actual demand – forecast)2
n
Sources of forecast errors
UNIT 4: Forecasting: Techniques and Errors
37
● The omission of an important variable
ES
Notes
● Irregular variations due to unpredictable circumstances
● Incorrect use of forecasting technique
___________________
___________________
● Misinterpretation of results
___________________
___________________
Tracking signal (TS)
___________________
Tracking signals are used to monitor forecast accuracy.
___________________
(actual demand – forecast)
TS =
MAD
___________________
UP
When the specified characteristics of demand vary from the original
one but the forecasting model doesn’t do the tracking, the signal
goes out of control.
Normally tracking signal should be within ± 4
If the forecasting model is working accurately, the tracking signal
will be close to zero.
Example 4.7
Following is the data of actual and forecasted demand:
Period
1
2
3
4
5
6
Forecast
170
140
165
170
180
155
Actual demand
155
160
130
185
170
125
Comment on the suitability of the forecasting technique being used.
Actual
od
Demand
Forecast
A−
RSFE
Bias
(C
)
Peri-
F
∑ (A−F) ∑ (A−F)
IA−
MAD
TS
FI
IA−FI
RSFE /
/n
MAD
/n
1
170
155
15
15
15
15
15
1
2
140
160
−20
−5
−5 / 2 =
20
10
−2
2.5
3
165
130
35
30
10
35
11.7
2.56
4
170
185
−15
15
3.75
15
3.75
4
5
180
170
10
25
5
10
2
12.5
6
155
125
30
55
9.1
30
5
11
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Since the value of TS exceeds 4 in period 5 and 6, the forecasting
technique is no more suitable.
Summary
ES
38
Forecasting is the technique of giving estimates regarding the future based on analysis of past and present data along with analyzing various trends. With markets becoming highly competitive
Forecasting has found a wide range of applications in multiple fields
which are highly competitive. Forecasting comes handy in various
situations where analysis of future data is essential: – Product Forecasting
___________________
– Political Forecasting
– Credit Score Forecasting
– Weather Forecasting
– Economic Forecasting
– Outcome Forecasting and
– Supply Chain Management
But it should be remembered that not everything can be forecasted
reliably if the factors that relate to what is being forecast are known
and well understood and there is a significant amount of data that
can be used very reliable forecasts can often be obtained.
Review Questions
1. What are the mutual features shared by all types of forecasts?
2. What is the relevance of forecasting in operations management?
(C
)
___________________
UP
___________________
3. Differentiate between Delphi and nominal group.
4. What is forecasting error? What are the measures of forecasting error?
5. Explain the use of tracking signal in forecasting.
6. Forecast demand for April was recorded as 350 units, but actual demand happened to be only 290. If the firm is using a single
exponential smoothing technique, with α = 0.3, what would be
the forecast for the month of May?
UNIT 4: Forecasting: Techniques and Errors
39
n = 20
Σ XY = 5000
Notes
ES
7. Given the following
Σ X =80
Σ Y = 1200
Σ X = 340
Σ Y = 74800
Calculate the value of Y, for X equal to 50, using linear regression.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
(C
)
UP
___________________
___________________
(C
)
ES
UP
41
Unit 5
ES
Notes
___________________
Case Study
___________________
Why does Productivity Matter?
It is important to emphasize the significance of productivity for an
economy. There are declared as well as reported figures of every nation in terms of GDP, income, and Balance of Payments. They may
give a different opinion; sometimes good, sometimes negative, but
they cannot be always taken into consideration. Do these key economic indicators affect anyone?
UP
High levels of productivity and high living standard go parallel together.
As is the case with a few of the developed nations, some of the
high-productivity manufacturing sector jobs are replaced by lower-productivity service sector jobs, due to the economy of the said
countries becoming more service oriented. Due to this shift, it becomes difficult to support higher living standards as consistently
high productivity levels are essential for the industrial sector. In
most of the sectors in an economy higher productivity gives them a
distinct competitive advantage in the market.
(C
)
Advanced levels of productivity allow the companies the flexibility
to realize higher profits by charging the market price and also challenge the competitors pricing strategy to increase their own market
share. High levels of comparative productivity put the industry in a
strong position where it becomes difficult for any MNC to displace it.
Review Questions
1. Explain the importance of high productivity for a nation?
2. Comment on the general notion that manufacturing jobs have
higher productivity and service jobs have lower productivity.
3. By having higher productivity than competitors how can an organization gain a competitive advantage?
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
(C
)
ES
UP
ES
UP
(C
)
BLOCK -II
(C
)
ES
UP
45
Unit 6
Location Selection
Learning Objectives
After completion of this unit, the students will be able to:
ES
Notes
\\
Explain strategic importance of location decision
\\
Discuss the factors affecting the location
\\
Explain various sites for understanding location selection models
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UP
Location planning is one of the strategic decisions, which an operations manager makes. Deciding location is important because this
decision is very difficult to reverse. The main factors that affect location decisions are geographic factors, regional factors, different
group considerations, and site-related factors. Group factors are related to the community that consists of quality of life, services, and
perceptions, various types of taxes, environmental regulations and
development support system.
Location decisions are taken under following circumstances:
● The new facility is established
● Growing volume of business
● Expansion of existing facility
● Dispersal of industry
(C
)
● Economic, political, legal or social change
● Change in the geography of demand
Factors Affecting Location
Following is a list of factors that affect decisions related to territory and site selection. The territory is the broad geographical area
whereas site is a specific piece of land in a given geographical area.
Territory selection
● Markets
● Raw materials & supplies
___________________
___________________
Operations & Material Management
Notes
___________________
● Transportation facility
● Manpower supply
ES
46
___________________
● Infrastructure
___________________
● Legislation and taxation
___________________
● Climate
___________________
● Political and social landscape
___________________
___________________
Site selection
● Community facilities
___________________
● Community attitude
● Waste disposal
● Ecology and pollution
● Size of site
● Topography
● Transportation facilities
● Supporting industries and services
● Cost of land
Selection Decision Based on Subjective Factors
Some decisions are based on subjective factors. These factors are
discussed below.
Factor point rating
(C
)
___________________
UP
___________________
● The factors affecting location are identified
● A common scale is established for comparison
● Factor points are allocated to each site for each factor
● The total points are determined
● Site with the highest total is selected
UNIT 6: Location Selection
47
Example 6.1
Poor
Fair
Ade-
Good
quate
F1
Supply of
Water
−15
−12
0
6
F2
Facility
provided to
community
−3
−1
0
1
Attitude of a
community
−6
F3
ES
Notes
Excel-
___________________
lent
___________________
10
2
___________________
___________________
___________________
−3
0
3
6
___________________
___________________
___________________
F2
F3
Rating of sites
S2
Fair
−12
Poor
−3
Adequate
0
−15
S3
Good
6
Excellent
3
Adequate
0
9
S4
Adequate
0
Fair
1
Adequate
0
−1
UP
F1
S1
Adequate
0
Adequate
0
Adequate
0
0
Site S 3 is selected as it has the maximum total rating
Equal weight method
● All factors affecting location are evaluated as being equally important
Example 6.2
S1
2
3
6
11
S2
5
3
2
10
(C
)
F1
F2
F3
Rating of sites
S3
9
8
7
24
S4
2
3
3
8
Hence, Site S 3 is selected as it has the maximum total rating.
Variable weight method
● Each factor is allocated a weight as per its importance
● The scale is established as per weight
● Total of weights are calculated
___________________
___________________
Operations & Material Management
Notes
Example 6.3
ES
48
___________________
Maximum
___________________
points
___________________
___________________
___________________
___________________
___________________
___________________
S3
S4
F1
300
200
250
250
50
F2
100
50
70
80
100
F3
150
5
50
10
40
255
370
340
190
Rating of sites
Hence, Site S 2 is selected as it has the maximum total rating.
Weight cum rating method
● Weight is allocated as per importance of factors
● A common scale is established for comparison
● Weighted total is calculated for factor point ratings
Example 6.4
Weights
S1
S2
S3
S4
F1
5
2
5
9
2
F2
3
3
3
8
3
F3
2
6
2
7
3
31
38
83
25
Site rating
Hence, Site S 3 is selected as it has the maximum total rating.
Selection Decision Based on Cost
Cost Volume Profit (breakeven) analysis
F = fixed cost
V = variable cost per piece
R = revenue per piece
Total cost = fixed cost + variable cost
= F + VQ
Where Q = quantity produced
Total revenue = RQ
(C
)
___________________
S2
UP
___________________
S1
Break-even is the point where total cost equals total revenue.
RQ = F + VQ
Or
UNIT 6: Location Selection
49
F
Q=
R−V
ES
Notes
___________________
Example 6.5
The fixed and variable costs for various plants of a manufacturing
company are shown below:
Fixed Cost per Year
Karnataka
1,25,000
6
75,000
5
1,00,000
4
50,000
12
Andhra Pradesh
Tamil Nadu
Kerala
Sale price
For Karnataka,
BEQ = 125000 / 20 – 6
= 125000 / 14 = 8928
Variable Cost per Unit
20
UP
Site
For Andhra Pradesh, 75000 / 15 = 5000
For Tamil Nadu, 100000 / 16 = 6250
For Kerala, 50000 / 8 = 6250
So, Andhra Pradesh is a preferable location as it has the lowest
break-even quantity of 5000.
Summary
(C
)
Whether it be the government or businesses, site selection involves
carrying out of new location facilities and is in extensive use nowadays. Post completion of internal site selection procedures, the Indian Government needs development of new facilities. Though the
practice is not widespread, most of the state governments and their
agencies have published their personalized site selection guides.
Services of independent advisors or in-house staff can be employed
for the purpose by the businesses as well as the Government. Most
of the big corporations take services of internal site selection teams
for ongoing new facility needs.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Review Questions
ES
50
1. Explain the importance of location in operations management.
2. Explain multiple factors that have a bearing on location decisions?
3. What important parameters are considered before selecting a
site?
4. Which method, according to you, is the best method facilitating
decision making for location in a business?
___________________
(C
)
___________________
UP
___________________
51
UNIT 7
Layout Planning
Learning Objectives
ES
Notes
After completion of this unit, the students will be able to understand and
explain:
Meaning of layout planning
\\
Objectives of layout planning
\\
Different types of layouts
\\
How to select a suitable process layout
\\
Compare between process and product layout
\\
Importance of layout decisions
\\
Criteria for a good layout
\\
Reliability (REL) charts
Introduction
UP
\\
Layout refers to the arrangement of equipment, departments and
work centers to ensure smooth movement of customers and materials within the system.
(C
)
It describes the main types of layout selections and the models used
to evaluate selection alternatives. Plant layout is the selection of
a production or service facility, which includes an arrangement of
various machines, storage space, etc. However, only knowing the
concept of layout planning is not sufficient. You also need to know
the objectives of layout planning. The primary objectives of layout
planning are discussed further.
Objectives of Layout Planning
The primary objectives of layout planning are listed below:
● Highest equipment utilization
● Delay is minimized
● Low manufacturing time
● Minimum material handling the cost
● Effective space utilization
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
● Fewer inventories in process
ES
52
● Effective supervision and control
___________________
● Worker convenience and satisfaction
___________________
● Safety
___________________
● Minimum waste
___________________
___________________
___________________
___________________
Types of Layout
The different types of layout are product layout, process layout, hybrid layout, cellular layouts, and fixed position layout. Indeed, all
types of process layout are important for an organization. However,
as an Operations Manager, you mostly need to deal with Process
layout and Product layout.
Product layout
● One type of product in one area
● Work centers in sequence of operations
● High production volume
● Standardization
● Stable product demand
Raw material
(C
)
___________________
The layout can be of different types depending on various factors.
Some of these types are discussed below.
UP
___________________
Station 1
Storage
Station 1
Storage
Station 1
Storage
Station 1
Finished product
Figure 7.1 Product layout
UNIT 7: Layout Planning
53
Figure 7.1 shows raw material delivered to Station 1 for storage,
which is then delivered to Station 2 for storage. It is further delivered to Station 3 for storage and then, finally to Station 4 where the
finished product is produced.
ES
Process Layout
Notes
___________________
___________________
___________________
● Layout defined by functions of the departments
● Similar equipment’s are kept in each area
___________________
___________________
___________________
● Low volume of production
___________________
Non-standardized products, which the organization produces without standard specifications.
___________________
___________________
UP
Selecting Process Layout
___________________
The process layout selection is a process in which the information
is acquired, and layout is formed. The following information is required for process layout.
● Requirement of space – There must be adequate information
regarding the amount of space required to construct the layout.
● Space availability – Information on the space that is available
for layout should also be taken into consideration.
● Closeness factors – Information on all the activities among all
sets of groups or departments.
● Other restraints –Other restraints such as a specific department must be located at a specific suitable place. For example,
reception must be near the entry.
(C
)
Comparison between Product and Process Layout:
The comparison between product and process layout can be understood with the help of the flowchart given below: Process Layout
(functional)
Used for Intermittent Processing
Job Shop and Batch Processes
Dept. A
Dept. C
Product Layout
(sequential)
Used for Repetitive Processing
Repetitive and Continuous Processes
Dept. E
Workstation 1
Dept. B
Dept. D
Workstation 2
Workstation 3
Dept. F
Figure 7.2 Comparison between product and process layout
54
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Hybrid layout
ES
Operations & Material Management
● Combination of product and process layouts
Cellular layouts
● Facilities clubbed together in cells
● High flexibility
● Each cell performs similar types of functions for a group of
products
Fixed position layout
___________________
● Project like systems
● Major components kept fixed
Now that you understand the basic concept, objectives, and types of
layout, it’s time to understand the necessity of layout decisions for
an organization.
Importance of Layout Decisions
The layout decisions are important for three basic reasons:
(1) Significant amount of money and efforts are to be invested.
(2) They involve long-term commitments; hence mistakes are difficult to reverse.
(3) They have a significant impact on the cost and efficiency of operations.
The need for layout planning arises both in the process of selecting
the new facilities and in resectioning the existing facilities. Following are some of the major causes of reselection of layouts: -
(C
)
___________________
UP
___________________
– Operational Inefficiency
– Introduction of new products and services
– Modification of output volumes
– Changes in methods and equipment
– Environmental and Legal Changes
– Accidental hazards
– Changes in product and service selection
UNIT 7: Layout Planning
Criteria for A Good Layout
The list below provides the various criteria that make a good layout.
It is important for you to consider each factor as an important requisite while forming a layout.
● Maximum coordination
● Maximum accessibility
UP
● Minimum handling
● Minimum discomfort
● Maximum visibility
● Inherent safety
● Efficient process flow
The REL chart or the Reliability chart is an important tool in the
process of layout planning.
REL chart
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
● Maximum flexibility
● Minimum distance
55
ES
However, only taking the right decisions for the formation of a layout does not make it a good one. There are many other factors, which
affect a layout. The other criteria that make a good layout are discussed below.
(C
)
The REL indicates the relation between pairs of departments in
terms of closeness depending upon the activities of the department
as:
An
absolutely necessary
E
essential
I
important
O
ordinary
U
unimportant
X
undesirable
___________________
Operations & Material Management
56
___________________
___________________
___________________
___________________
___________________
___________________
Figure 7.3 Rel chart
___________________
___________________
Layout planning is planning on the most efficient physical arrangement of resources consuming space in a facility. Layout planning is
a critical part of overall organizational planning as it helps enhance
the effectiveness of production process and meeting the employee
needs. The importance of a layout would be better appreciated if one
understands the influence of an efficient layout on the manufacturing function: it makes it smooth and efficient.
Review Questions
1. What are the objectives of plant layout?
2. Explain the layout that will be suitable for an FMCG product
(Chips) manufacturing plant.
3. Differentiate between product layout and process layout.
4. Explain the importance of process selection in system selection.
5. Explain the types of layout suitable for offices.
(C
)
___________________
Summary
UP
___________________
ES
REL CHART
Notes
57
Unit 8
Capacity Planning
Learning Objectives
ES
Notes
Upon completion of this chapter, the students will be able to understand and
explain:
Meaning of capacity utilization
\\
Efficiency and utilization
\\
The concept of utilization capacity
\\
Determine utilization capacity
\\
Factors affecting capacity planning
\\
Classify capacity planning
\\
Steps in capacity planning
\\
Strategies for capacity planning
Introduction
UP
\\
The quantity that a plant can produce at a specified time is called its
capacity. The two most important functions of capacity planning are
selection capacity and effective capacity.
– Selection capacity – an organization’s maximum service capacity or output rate
– Effective capacity – an organization’s selection capacity minus personal and other allowances.
(C
)
– These two functions of capacity can be used to find the efficiency and utilization. The formulae for calculating these are given
below:
Efficiency =
Utilisation =
Actual Output
× 100%
Effective Capacity
Actual Output
× 100%
Design Capacity
Selection
With the following information, calculate the efficiency and utilization of vehicle maintenance department:
Selection capacity is 50 trucks per day.
Effective capacity is 40 trucks per day.
Actual output is 36 trucks per day.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
In the above example, the actual output of 36 units per day looks
efficient in comparison with the effective capacity of 40 units per
day. But when actual output of 36 units is compared with the selection capacity of 50 units per day, it might look less impressive but is
more meaningful.
The real key to improve capacity utilization, with effective capacity
acting as a ceiling on actual output, is through: – Maintaining equipment in good condition
– Training Employees
– Correction of quality problems
– Using redundant equipment
It is necessary to understand what factors are constraining effective
capacity to improve the effective capacity as maximization of utilization depends on it.
The purpose of studying about capacity is fruitful, only when the
capacity of utilization is clear to you. So, first, let us know what capacity utilization is.
Capacity Utilization (CU)
As the name suggests, capacity utilization is the degree to which
resources are being used. The formula used to find the capacity utilization is given below.
Capacity Utilisation =
(C
)
___________________
Using the above formulae, the efficiency and utilization can be computed. The efficiency is 90%, and the utilization is 72%.
ES
Notes
UP
58
Average Output Rate
× 100%
Maximum Capacity
Capacity Planning
As an Operations Manager, it is important for you to know that an
operation may have different levels of capacity. However, when an
operation has the lowest capacity, it’s worth analyzing. When an
operation has the lowest capacity, it is called a bottleneck operation.
An operation that has the lowest capacity of any sequence of operations or the operation that takes the maximum time in a facility and
limits the system’s output is called bottleneck operation. To consider
that an operation has the highest and efficient capacity, it is important to fulfill the necessary steps in the process of capacity planning.
Let us quickly study the steps in capacity planning.
UNIT 8: Capacity Planningv
59
The factors that affect capacity planning decisions are as follows:
1. Product/service market demand
2. Capital to be invested
3. Desired levels of automation
4. Level of integration (i.e., vertical integration)
5. Type of technology selected
UP
6. Dynamic nature of all factors affecting the determination
of plant capacity, such as changes in the product selection, process technology, market conditions and product life cycle, etc.
Capacity Planning Classification
Based on the timeline, capacity planning can be categorized into
three major divisions : Long-Term Capacity: production capacity, sustainable capacity, and effective
capacity determine the long-term capacity of an organization : -
● Selection capacity defines the maximum possible output under ideal working conditions as described by the manufacturer
of the equipment.
● Production capacity defines the maximum possible output
from the equipment in a day under normal working conditions.
● Sustainable capacity defines the maximum possible output
achievable in realistic work conditions after making provision
for normal hiccups.
(C
)
Notes
ES
Factors affecting capacity planning decision
● Effective capacity defines the optimal output levels under
pre-defined work-schedules and making provisions for machinery breakdown, maintenance schedules, etc.
Medium Term Capacity: strategic capacity planning with a time
frame of two to three years is covered under medium-term capacity
planning.
Short-Term Capacity: strategic capacity planning with a short
time frame such as hours, days or weeks falls under the purview of
short-term capacity planning.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
The steps in capacity planning are listed below:
1. Selection of a suitable process owner for capacity planning: Selection of an adequately suitable individual is the initial
step towards the development of a strong capacity planning process. This person would act as the process and owner and would be
responsible for selection, implementation, and maintenance of the
process. His powers also include carrying out negotiations with developers and relevant support groups.
2. Identify the key resources to be measured: After the selection, the process owner’s primary task is the identification of infrastructural resources whose performance needs to be measured.
This decision is based on the knowledge of which resources are most
critical for meeting future capacity requirements.
3. Measure the utilization or performance of the resources:
Performance of resources which have been previously identified
would now be measured. Two important bits of information are derived from this information: - Utilization Capacity -is used a baseline for analysis and prediction of future trends.
- Excess Capacity – available for every component
4. Compare utilizations to maximum capacities: this step is
used to determine the available excess capacity for selected components. The performance of every component has to be compared
with the maximum practical capacity of that component. It should
be remembered that maximum usable capacity is always going to be
less than maximum possible.
(C
)
___________________
Steps in capacity planning
ES
Notes
UP
60
5. Collect workload forecasts from developers and users:
This is one of the most critical steps in the entire capacity planning
process, and it is the one over which you have the least control.
6. Update forecasts and utilization: capacity planning is an ongoing process, and in order to derive its maximum benefits there is
always a need to update, at least once a year, continuously to keep
it up to date.
The complexity of market forces and technology, makes capacity
planning a difficult task as it involves both short-term and long-
UNIT 8: Capacity Planningv
61
Notes
ES
term deliberations. Long-term deliberations affect the whole capacity levels of the organization, such as facility size; Short-term deliberations relate to possible disparities in capacity requirements caused
by seasonal, irregular or random fluctuations in demand. Due to the
difference in nature of various industries, time interval covered by
these considerations can vary significantly as such it would be not
wise to put time on intervals.
Strategies for Capacity Planning:
Capacity planning can be classified into the following major categories: -
UP
● The lead strategy it is an aggressive approach wherein the
capacity is enhanced in anticipation of an increase in demand.
This is done to attract customers from competitors through improved service and reduced lead times as it eliminates situations of stock out. The excess capacity thus generated can be
rented out to other organizations.
● The lag strategy it is an exact opposite of lead strategy and
is highly conservative in approach and includes the addition
of capacity only after the existing capacity has been fully utilized due to increase in demand. Though it reduces the risk of
wastage, it presents a far greater risk in the form of stock-out
situations and losing out on customers.
● Match strategy is a moderate strategy wherein capacity is
changed in response to the present demand in the market.
(C
)
● Adjustment strategy under this strategy capacity is adjusted
in small or large amounts due to consumer demand or major
changes in product or organizational changes.
Summary
Capacity planning involves planning for the optimum quantity at
optimal time as per business requirements for lower is the capacity,
poorer would be the response time and severe would be issues with
performance. On the other hand, higher is the capacity, higher is
the cost of production and wastage of resources. Therefore, optimal
capacity is quintessential for optimum usage of resources. Capacity
planning is an integral part of planning related to development of
infrastructure.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
● All functions can be perfectly performed by infrastructure components and can be accommodated.
● Growth forecast is nether exaggerated nor uneconomical.
● Efficient functioning of components.
Review Questions
1. Define capacity. How can you measure the capacity? Give formula also.
2. Why is capacity planning important for any organization?
3. Differentiate between selection capacity and effective capacity.
4. What are various steps involved in capacity planning?
5. What are different strategies involved in capacity planning?
(C
)
___________________
To conclude, Capacity planning must ensure that:
ES
Notes
UP
62
63
Unit 9
Process Selection
ES
Notes
___________________
___________________
___________________
Learning Objectives
At the completion of this unit, the students will be able to understand and
explain:
The concept of process selection
\\
Factors affecting process selection
\\
Considerations in process selection
\\
Different types of processes
\\
Different characteristics of different types of processes
\\
Tools used in process analysis
Introduction
___________________
___________________
___________________
Process Selection is a method through which goods and services
that have been produced are delivered affecting various organizational aspects such as capacity planning, facilities layout, equipment
selection, work system selection and capacity layout. Process selection is used for planning of new products or services that is related
to technological advancements and competition. Process selection is
dependent on the strategies in process, which has two main components: capital intensity and process flexibility.
Inputs
Outputs
Facilities and
equipment
Forecasting
(C
)
Capacity
Planning
Product and
service design
Layout
Process
Selection
Technological
change
___________________
___________________
UP
\\
___________________
Work
design
Figure 9.1 Process selection and capacity planning
Figure 9.1 shows the process of capacity planning and process selection as interrelated to each other. The inputs of an organization that
affect them are forecasting, product and service selection and tech-
___________________
Operations & Material Management
Notes
___________________
___________________
nological changes. The outputs of an organization that affect them
are facilities and equipment, layout and work selection.
ES
64
However, there are certain factors that affect the process of selection.
___________________
Factors affecting process selection
___________________
The factors that affect process selection are listed below:
___________________
___________________
___________________
___________________
● The degree of vertical integration
● Flexibility needs in the process
● level of automation required
● Level of quality required
Not only these, but there are also certain other considerations involved in process selection.
Considerations in process selection
The considerations in process selections are as follows:
● Volume and variety: It involves considering the volume of stock
available in hand and the volume of stock required.
● Produce to stock or produce to order: It is important to consider
whether goods are to be produced for fulfilling customer needs
or for own use.
● Resource flexibility: It considers how flexible the process of selection of resources is.
● Capital intensity: The amount of capital required for successfully accomplishing the selection process is also considered.
(C
)
___________________
● Customer requirements
UP
___________________
Process selection is further classified into different types. They are
listed below.
Types of Processes
● Continuous process: A process for production of a standard
product. Examples: Petroleum products, steel, sugar flour etc.
● Batch process: A process for producing a variety of standard products. Examples: Bakeries, dairy, paints, ice creams, magazines,
etc.
UNIT 9: Process Selection
65
Notes
ES
● Assembly line related process: A process for a small range
of standard products in high volume, which are produced by
assembly of components. Examples: Automobiles, household
appliances, electronic goods, etc.
● Job shop related process: A process for a variety of products
customized for specific customers in small volume. It operates
on a relatively small scale and is used when a low volume is
needed. It involves a high variety of goods and services. Examples: Dress designing, medical services by doctors, etc.
Moderate
High
Low or very
low volume
UP
● Project related process: A process suitable for producing a
unique product. Example: Construction of a building, roads,
hospital, etc.
Job Shop
repair shop
emergency room
Low
Very low
Batch
commercial bakery
classroom lecture
Moderate
volume
Repetitive
assembly line
automatic car wash
High volume
Continuous Flow
petroleum refining
water treatment
Very high
volume
Figure 9.2 Product or service flexibility variety and equipment flexibility
Characteristics of different types of processes
(C
)
The characteristics of different types of processes are mentioned below on the basis of different parameters. Consider the chart given
below.
Table 9.1 Characteristics of different types of processes
Project
Size
Variable
Job shop Batch
Small
Process No pattern Several
flow
Speed
Variable
Slow
Assembly Continuous
line
Moderate Large
Large
Few
Rigid
Rigid
Moderate Fast
Fast
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Short
Short
Moderate Long
Long
Rate of
change
Slow
Slow
Moderate High
High
Labor
High
High
Variable
Low
Low
Skill
High
High
Mixed
Low
Variable
While studying the process of selection, having an idea about the
terms process re-engineering and process improvement is quite important.
Process re-engineering and process improvement
Reengineering refers to creating new systems and methods in the
process and bringing a dramatic change in performance.
Process improvement refers to the use of tools and techniques for
enhancing the current level of quality.
Now let us study the tools of process analysis.
Tools of Process Analysis:
The tools used for process analysis are as follows:
Flow diagrams: “A diagrammatic representation of the sequential
flow of processes showing the flow of material and information.”
Flow charts: “A pictorial representation of separate steps of a
process in sequential order, including inputs and outputs, key decisions, involved people, time involved and process measurements.”
Process charts: A systematic method of recording activities undertaken by workers for carrying out the operations.
(C
)
___________________
Run
length
ES
Notes
UP
66
There are few symbols used in making a flow chart. These symbols
are shown below:
Operation
Transportation
Inspection
Delay
Storage
UNIT 9: Process Selection
67
Summary
ES
Notes
Operations management can be described as tactical overlooking of
production methods and human resources to ensure maximization
of output, minimization of errors and continuous enhancement in
product quality.
___________________
___________________
___________________
Facility layout covers the aspects as to how organizations work
equipment such as machinery, workstations, machinery, etc. and
human resources are positioned at the work facility.
___________________
Process selection encompasses tactical choice of work processes to be
included in the production process.
___________________
UP
Process selection and facility layout form a critical part of operations
management.
A thorough understanding of each of them, as well as their inter-relation, helps ensure improved efficiency of production processes.
Review Questions
1. What do you mean by process selection?
2. What are the factors affecting process selection?
3. Differentiate between job shop and batch process.
4. Explain the relationship between capacity planning and process selection.
5. What is the difference between process re-engineering and process improvement?
(C
)
6. What are the tools of process analysis?
___________________
___________________
___________________
___________________
___________________
(C
)
ES
UP
69
Unit 10
ES
Notes
___________________
Case Study
___________________
___________________
Capacity in Restaurants
UP
The restaurant business is a kind of business where the inventory
and capacity have its own role. They are able to cater to different
varieties of customers with varied demands. Do these restaurants
have big stocking area to store perishable goods and keep them fresh
and hygienic? The business needs prompt service with minimum
preparation time. Are the chefs quick enough to do it? Do they prepare these stuff beforehand and store it in a condition where it will
not perish? One option is that some dishes are partially cooked and
kept ready for use. The other option is to get frozen food from other
suppliers and serve the dishes according to the requirements. The
big giants like Oberoi, Taj, and KFC food chains are some of the
followers.
They need to take care of the ordering, handling, and other cost and
maintain equilibrium in pricing.
Review Questions
1. What advantages of outsourcing in a restaurant?
2. List out major limitations of outsourcing for a restaurant.
3. Can outsourcing in a restaurant deemed unethical? Explain.
(C
)
4. Elaborate the importance of capacity for any restaurant business.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
(C
)
ES
UP
ES
UP
(C
)
BLOCK -III
(C
)
ES
UP
73
UNIT 11
Product and Service Design
Learning Objectives
After completion of this unit, the students will be able to:
Elaborate on the meaning of service and product design
\\
Discuss the reason for product and service design
\\
Describe product lifecycle
\\
Explain product reliability
\\
Discuss how to measure product reliability
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Discuss standardization and mass customization
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Explain product design and development
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Elaborate the difference between product and service
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Notes
Product and Service designs are the beginning points of customer
satisfaction process. The product or service produced in the market
should have added value for the consumer from a market point of
view. Product and service selection is a long-term decision that decides strategic formulation and implementation in any organization.
Every functional area of an organization is involved in it, but marketing and operations play a significant role in product and service
design development.
It is pertinent to understand the meaning of product design and service design while if a deeper understanding is required.
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Meaning of Product and Service Design
Product Design
Analytical processes are used to create effective product designs to
be sold to a customer. Various techniques and methods are utilized
by organizations to create product and service designs to have a
competitive advantage in the market. They may opt to follow strategies like standardization, mass customization, robust or modular
design, delayed differentiation, etc. The selection of strategy and
method plays a very crucial role in target market because opting
the right method results in higher productivity and efficient ways of
operations.
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Service design is an effort of organizing or planning of people, material, and their communication to serve the customer with better
service quality. It involves the interaction of service provider, customer, and the customers’ experience. The service design is greatly
affected by the degree of variations in requirements and customer
contacts, which determines the extent of standardization of the service. The selling opportunity remains high until the degree of customer contact is also high.
Reason for Product and Service Design
Implementation of strategies involves a significant role of service
and product design because there are direct consequences for progress and success of a company.
The product and service designing decisions are not only fundamental but also create an impact on the future activities. Market Opportunities and threats are the chief forces that initiate a designing
process.
The following are the factors that give rise to market opportunities
and threats:
● Economic factor: It includes the factors like low demand, excessive warranty claims, reduction in cost, etc.
● Social and Demographic factor: It includes the factors like
change in preferences, population shift, etc.
● Political or legal factors: It includes the factors like new regulations, government changes, safety issues, etc.
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Service design
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Operations & Material Management
● Competitive factors: It includes the factors like new products
or services, a new advertisement, new promotion methods, etc.
● Cost factors; It includes the factors like availability of raw
materials, components or labor, etc.
● Technological factor: It includes the factors like availability
of better technology for manufacturing, product’s components
processing, etc.
Each of these factors seems obvious and has strategic implications
for the success of products and services during their different stages
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Notes
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of life cycle. Since the demand does not remain the same in all the
stages of a product’s lifecycle; different strategies should be taken
into consideration to attain optimum performance of products and
services during their useful life.
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Product lifecycle
A product lifecycle encompasses various stages in a product or service’s life. It explains various stages that a product goes through
from the initial introduction in the market till it completely disappears from the market. Understanding the stage of a product in its
life cycle is vital for a manager to make rational decisions, as each
stage requires a unique and specific strategy.
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Product Life Cycle
Introduction
Growth
Maturity
Decline
Revenue
Profit
Time
Exhibit 11.1 Product Life Cycle
The product life cycle comprises of four stages that are discussed
below.
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1. Product Introduction/Development Stage
It is the first stage of the product lifecycle. It includes idea generation, new product designing, re-engineering and the entire manufacturing process. In this stage, the product is given a name and a
complete brand identity that differentiates it from competitors.
2. Product Growth Stage
In this stage, rapid growth in sales and revenue is observed. Growth
is attained when number of consumers appreciate the worth and advantages offered by a product. It takes several years to attain growth.
Sometimes, the product might even vanish from the ­market without
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3. Product Maturity and Saturation Stage
At this stage, the product attains full market potential, and the
business becomes highly profitable. It is observed that growth slows
down in the middle phases of this stage and new competitors enter
to control the market. Many businesses focus on marketing activities and lose huge amounts of money in this stage since they lose
loyal customers to their competitors.
4. Product Decline Stage
The product decline stage is the last stage of the product lifecycle.
This phase occurs when companies do not take necessary preventive
measures in the late-maturity stage. Once this phase is reached,
the product would never recover again or grow and would slowly
be obsolete. Sometimes, the decline of a product is inevitable, especially in consumer technology goods. In such industries, the companies need to be very responsive and prompt in foreseeing changes or
shifts. Staying relevant, launching innovative products and being
at the forefront of change is more important for the leaders than
smaller players as they have made much bigger investments. CD
player makers have continued to launch innovative products like
Blue Ray players and UHD players to stay relevant, but more and
more people watch movies on their phones and tablets. TV industry
is in the maturity stage, and innovations like curved TV do not see
huge adoption.
Product Reliability
Product Reliability can be defined as the chances of a product performing the desired functions during its useful life as described by
the manufacturers. In case of repairable products it can be quantified as Mean Time Between Failures (MTBF), and if the products
are non-repairable, then it can be quantified as Mean Time To Failure (MTTF).
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a rise in its demand. Therefore, it becomes essential to establish demand at the introductory stages with good marketing plans.
ES
Notes
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Now that you have learned the meaning of product reliability, we
will understand how it can be measured, or how it can be predicted.
UNIT 11: Product and Service Design
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How to Measure Product Reliability
ES
Notes
Figure 11.2 uses “The Bathtub Curve” to demonstrate the product
reliability through immediate failure rates vs. time from inception
till the end, which shall be observed if waiting period is long and a
record for given a set of items.
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PRODUCT RELIABILITY
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Initial Failure
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Failure
Rate
Useful Life
Wearout Failure
Exhibit 11.2 The Famous Bathtub Curve
Initial Failure
This is the first period, which is depicted by flatting out of the slope of
the curve on the left side. It marks decreasing failure rate in the first
period. It shows that during early stages of in a product or service’s life
it is more likely to fail against well-established products and services.
Useful Life
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The second period of the graph is used to depict the “useful life” of
a product through the flat bottom curve which shows the random
occurrence of products and services over a period. Here it is a little
hard to predict which failure mode will occur, though the chances of
failure remain predictable.
Wear out Failure
The third period, “wear out” is depicted by the rising slope of the
curve which is a result of product or service becoming outdated and
chances of failure are high.
So, these are the different periods that help in understanding the
failure rate of a product and service. The organization may opt to
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Standardization
Standardization is one of the important strategies for an organization, which helps in creating products. It is so because the manufacturers are not available with many options to make them unique
and lowering the price. Standardization offers many significant advantages along with a few disadvantages.
Advantages
● The parts and components of products are standard.
● It keeps the cost of production low.
● It results in high productivity.
● Cost and Time taken for employee training are reduced
Disadvantages
● It provides less variety.
● There will be chances that the designs may be frozen with imperfections.
● If the design needs to be changed or modified, it will be an expensive task.
● It has low consumer appeal.
Mass Customization
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follow any of the strategies like standardization, mass customization, robust or modular design, delayed differentiation, etc.; while
keeping in mind the characteristics discussed in the curve.
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Notes
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Mass customization is a strategy widely used by companies to establish a harmony between standardization and customization, which
helps in cost reduction and at the same time adding to the variety.
Mass customization is realized through differentiation and modular designing. In case customer preferences are ambiguous and unknown, the company can opt for delayed differentiation in order to
finish off the product later on. In order to enable convenient replacement or interchangeability, components are grouped into modular
designs, which is another form of standardization.
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Product or services are customized to individual preferences and
may not have long lives. The life of a non-customized service may be
very small. Alternatively, a customized product may last for longer
time. Thus, the different phases of product development also play a
very important role in the designing of a product and service.
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Product Design and Development
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Notes
Product design and development generally follows a series of phases:
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Feasibility Analysis
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Product Speicification
Process Specification
Prototype Development
Design Review
Market Test
Product Introduction
Follow-up
Exhibit 11.3 Stages in product design and development
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● Feasibility analysis – warrants co-operation between various
organizational functions such as marketing, finance, operations,
accounting, etc. It includes demand analysis, cost analysis, and
technical analysis. It is also imperative to have knowledge of
company’s missions and requirements.
● Product specifications – it specifies in-depth analysis to find
out about customer expectations from a product, and it warrants
collaboration between various organizational departments.
● Process specifications – after setting up product specifications, it is entirely up to the operations managers to suggest
the processes which will be required for the production of the
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● Prototype development – in order to find out any flaws in
the product a few units are prepared as samples so that any
shortcomings may be addressed.
● Design review – at this stage any required changes are incorporated into the product, or if that is not possible, then the
product is abandoned entirely. This decision is taken in consultation with marketing, finance, operations, engineering, and
design
● Market test – a market test is used to gauge customer preferences and get the required feedback. Once the feedback is
received, the product is re-sent to design review phase where
another session of brainstorming starts.
● Product introduction – marketing department introduces
the product into the market and conducts necessary promotion
activities.
● Follow-up evaluation – on the basis of feedback received
from customers, necessary changes are made, and forecasts are
adjusted.
Differences between Service Design and Product Design
Though a product and service perform the same function of satisfaction of consumer needs, there are multiple differences between
them. So, it becomes quite essential for operations managers to understand the differences between them and then deals with the issues related to products and services separately. Following are the
certain differences between a product and a service: -
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product. All possible alternatives should be listed and analyzed
in terms of cost, resource availability, quality, and profitability.
Close interaction between operations and accounting departments is required.
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Notes
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1. Services are intangible and focus on factors such as ambiance
and experience whereas products are tangible and focus on factor such as packaging and appearance of the product.
2. Services are generally created and delivered simultaneously
for, eg – a car wash, a haircut, etc. Whereas in case of products
prior planning and inventory management are required to ensure timely delivery to the consumers.
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3. It is not possible to prepare an inventory of services. As a result, the flexibility and capacity are restricted whereas in case
of products a proper inventory can be easily managed.
4. Services should be developed with a consideration that they are
highly visible to the customers, which adds an additional dimension to the design process, which is generally not the case
with the product design.
5. As services have low entry and exit barriers which required innovation and cost-effectiveness for the service design to retain
competitive advantage.
UP
6. Choice of location is highly relevant to service design, and Service design and Location are intricately related to ensuring convenience for the customers.
7. Product designs do not have significant customer contact
whereas in case of service design there is little to the very high
degree of customer contact. Service systems range from those
with little or no customer contact to those that have a very high
degree of customer contact. For, eg: - Insulated technical core,
Little customer contact (software development), Personalized
service (haircut, medical service), Consumer participation (diet
programs, dance classes), self-service (supermarkets). If there
is no customer contact than service design is almost similar to
product design.
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8. Variability in demand can lead to extreme situations – either
waiting for lines or idle resources. If variability in demand is a
critical factor, process designers can take either of the following
approaches: –
Cost and Efficiency (it is basically a product design approach)
–
Customer Service (it is basically a service design approach)
Designers try to limit customer participation during process designing as it can lead to unpredictability in demand process.
Summary
Product and service design are the most important factors to be
­considered during the introduction of a new product or service. It
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Notes
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is imperative to satisfy basic principles to accomplish a successful
design, which includes: -
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– Identification of needs and wants of customers
– Refining existing Products and Services
– Development of new products and services
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– Establish Quality Parameters
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– Manage production and delivery costs
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– Development of samples
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– Formulation of Product Specification
As the designing process has a critical impact on an organization it
is necessary that it is in line with organizational strategy and goals
(long term and short term). There are multiple levels in the designing process including: – Motivation
– Improvement Scope
– Organizational capabilities and
– Forecasting
Review Questions
1. What are the various phases of the life cycle of a product?
2. Explain the necessity of R&D (research and development). List
its components.
3. Explain the term product reliability through an illustration.
(C
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4. Differentiate between standardization and customization.
5. What is mass customization?
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Unit 12
Aggregate Planning
Learning Objectives
ES
Notes
After completion of this unit, the students will be understood and explain
the concepts of:
Aggregate planning and its types
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Dimensions of aggregate planning
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Objectives and significance of aggregate planning
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Strategies involved in aggregate planning
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The cost involved in aggregate planning
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Factors affecting aggregate planning
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Capacity decisions of an organization are made on three levels –
– Long Term: - these decisions are closely associated with product and service selection and include determination of product
and service offering, Location and Layout of the facility, and
Equipment decisions. They determine the capacity constraints
within which intermediate planning functions.
– Intermediate Term: - these decisions are related to medium
term objectives such employment levels, Output levels and Inventory levels. These decisions layout the boundaries within
which short-term planning is to be done.
(C
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– Short Term: - these decisions are done within the constraints
specified by intermediate and long-term decisions and are concerned with the best method to achieve desired results through
job scheduling, arranging for requisite equipment and workers.
Aggregate Planning
Aggregate planning can be defined as the process of developing, analyzing and maintaining the desired levels of organizational operations. It involves minimization of costs and balancing of capacity. As
the name suggests, it involves all the resources of an organization
such as raw material, personnel, machine hours, etc. It is essentially a medium-term planning process ranging from a period of three
months to twelve months.
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Planning is the process of deciding and organizing organizational
activities to achieve the desired results. Certain dimensions are to
be taken into consideration while planning, such as: ● Quantity and timing of production: Optimum capacity utilization
● Capacity balancing with production volumes
Objectives of Aggregate Planning
The goals of aggregate planning involve the production in line with
business plan, optimum utilization of capacity and consistency with
company’s policy regarding employees. These goals are made on an
aggregate level, and the planning of aggregate is done by summing
up all the above-mentioned dimensions.
The significance of aggregate planning
● It helps in the minimization of production cost. It results in
better and maximized customer service experience.
● It helps in accomplishing financial objectives by diminishing
variable cost.
● It helps in the maximization of the available production facility.
Strategies for Aggregate Planning
● Vary a number of employees: The employees are hired and
laid off as per requirement in this strategy.
● Vary workforce utilization: The utilization of regular workforce is done on overtime in this strategy.
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Dimensions of Planning
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Notes
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● Vary the size of inventory: A constant production rate is adopted so that inventory is accumulated when demand is less
and is consumed when demand is high.
The cost involved in Aggregate Planning
● Regular time cost: The cost of wages to regular workers on
rolls.
● Overtime cost: The additional cost of utilizing regular employees on overtime.
UNIT 12: Aggregate Planning
● Inventory holding cost: The cost involved in storing and
maintenance of products in warehouses.
● Backorder and stockout cost: The cost incurred when an
organization is unable to fill an order and not being able to
meet an internal or external demand from the current inventory.
Types of Aggregate Planning
UP
Level output – A stable rate of output is sought throughout the
planning period which means ensuring stability in output rate while
handling variations in demand.
OUTPUT PLANNING
Cumulative demand
Figure 12.1 Level of output planning
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● Hiring and layoff cost: The cost of hiring and laying off workers as per requirement.
The figure 12.1 shows the relationship between the cumulative
demand and cumulative days. It shows the level output planning
changes with respect to change in cumulative demand and cumulative days.
Chase Plan – under this plan monthly demand is expected to be
met by the management of monthly output. In order to match the capacity with demand, the planned output is set at expected demand
levels for a specific period.
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Cumulative demand
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CHASE PLANNING
Notes
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Figure 12.2 Level of chase planning
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Intermediate Plan – This type of aggregate planning focuses
changing output rates only as and when required, instead of changing the output rate every month.
Business Plan: A business plan involves analyzing data related to
the profit of a business. It considers forecast sale, product costs, and
labor costs. A business plan helps a business to be profitable in the
long run.
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The figure 12.2 shows the relationship between cumulative demand
and cumulative days for chase planning.
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(Source: Operations management by Adam and Ebert)
Factors Affecting Aggregate Planning
Aggregate planning aims to balance long-term strategic planning
with short-term production success and as such is a crucial operational activity for an organization.
UNIT 12: Aggregate Planning
● Comprehensive knowledge of production facilities and raw material availability
● Accurate Medium range demand forecasts
● Financial planning for production costs including labor, raw
materials, and inventory
● Organization policies for management of labour, quality assurance, etc.
Following inputs are essential for successful aggregate planning: -
UP
● Forecasts about the aggregate demand for the specific period.
● Evaluating all resources for capacity planning (sub-contracting, outsourcing, etc.)
● The operational status of the workforce, inventory levels, and
production efficiency
Aggregate planning ensures that organizational goals and objectives
can be fulfilled with the management of workforce levels, production
rates, and inventory levels.
Summary
Aggregate planning is a medium-term planning process for production capacity and spans over a maximum period of twelve months
with an objective to keep the costs of operations low. Organisations
do aggregate planning to make decisions on their capacity because
the demands for seasonal variations are difficult to forecast precisely.
The primary objective of the organizations is to complete utilization
of available resources to meet the expected demand. This objective
can be accomplished by considering the factors such as employment
levels, inventory levels, decisions on output rates, overtime, back
orders, and subcontracting work.
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Notes
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Before beginning with the aggregate planning process following factors should be considered: -
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Notes
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Review Questions
ES
Operations & Material Management
1. What is aggregate planning? Discuss with the help of an example.
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2. Explain the production planning hierarchy.
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3. What is aggregation?
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4. What are the costs involved in aggregate planning?
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5. Differentiate between level outputs and chase plan.
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(C
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UP
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UNIT 13
ES
Notes
Operations in Service Sectors
Learning Objectives
At the end of this chapter, students will be able to understand and explain:
Role of operations in service sectors
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Meaning of service with the help of examples
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Characteristics of services
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Different types of services
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Service dimensions
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Importance of service quality
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UP
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Useful models in the Service sector: GAP analysis and the augmented
service offering model
Introduction
Operations Management for Services
(C
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Operation Management under services perform the essential duty of
developing the services for an organization and thereafter delivering
them to the customers directly. It handles those decisions which an
operation manager needs in order to ensure side-by-side production
and consumption of the service. These decisions are affected by the
people, information, process and systems responsible for production
and delivery of a service. It is specifically differentiated from general operations management due to the fact that processes under a
service organization are vastly different from those under manufacturing organization.
What is Service?
A service can be defined as an intangible economic activity that cannot be stored or measured and its ownership can’t be established as
it is produced right at the time of consumption. Some examples of
services include postal service, beauty salon, doctor, etc.
Characteristics of A Service
● Intangibility: it is the key characteristic of a service that differentiates it from a product. As services do not have a physical
existence, they cannot be held, touched or smelled.
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● Perishability: once a service is delivered to a customer, it is
completely consumed and cannot be delivered to any other customer. As a result, it is not possible to store, save or resell services post-consumption. For, eg, A patient can not ask a doctor
to refund the fees if his ailment has not been treated.
● Inseparability/Simultaneity of production and consumption: a service cannot be generated earlier and stored, it must
be produced right at the time of consumption. For instance, a
barber delivering a haircut and a consumer getting one, all is
done at the same time.
In order to complete the service process, it is necessary to consider
and accomplish some requirements which will establish the provision of a service to a consumer. Based on the client’s expectations
and specifications, an assessment is done to deliver service in a desired manner defining the quality of service. It involves quick identification of business problems, customer satisfaction, and continuous
improvement in the services provided. Service quality is important
because the chance of a customer being dissatisfied is more with
services compared to production. The criteria on the basis of which
customer evaluate service quality are the reliability of the service,
Credibility, competence, assured guarantee and safe to use.
Services can broadly be classified into different types.
Types of Services
Services are broadly classified into two types, core services, and supplementary services.
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● Heterogeneity/Variability: unlike products, it is not possible to mass produce homogenized services because services are
unique and can not be reproduced even by the same provider.
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Notes
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Core Services: wherein a particular service forms the crux of the
transaction. For, eg, a barber delivering a haircut.
Supplementary Services: wherein the service is provided as a
valuable addition to the sale of a product. For, eg, Free home delivery options extended by a restaurant.
As the Operations Manager of an organization in the service sector,
you would often have to measure the measures of quality of services.
Service quality has five dimensions: - tangibility, reliability, responsiveness, assurance, and empathy.
UNIT 13: Operations in Service Sectors
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Service dimensions
ES
Notes
● Tangibility: As services are intangible, in order to measure
the service quality, consumers compare the quality of the tangibles associated with them. Such as appearance of the personnel, equipment used for the service and communication material shared.
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● Reliability: reliability implies that the service provider can deliver on the promises they make, whether it be about the time
or quality or cost, it is necessary to walk the talk. Customers
want to avail services of only such providers who can keep their
core promises regarding the service attributes and their outcomes.
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UP
● Responsiveness: this dimension of a service quality emphasizes on promptness and attentiveness while dealing with requests, complaints, questions or problems specified by the customer. Customers judge responsiveness on the basis of time
taken to answer questions or resolution of problems.
● Assurance: it is defined as the ability of the service provider or
their employees to infuse confidence and trust in the consumer
through prompt service, knowledge of the work and courtesy.
This parameter comes in handy especially when the service involved is expensive or carries high risk.
(C
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● Empathy: it involves providing personalized attention to the
customer because it infuses trust and confidence in consumer
and helps foster loyalty. In many countries, it is considered necessary to show individual attention to a customer to show that
they hold extreme value to the customers.
Importance of Service Quality
In order to deliver superior service quality, it is necessary for the service
provider to first understand what does quality mean to their customers.
In the service industry, quality of service is established by how well the
customer expectations are met with the delivery of service.
Service quality can be divided in the following ways: – Technical Quality: - focuses on what the consumer got from the
service
– Functional Quality: - focuses on the method through which service was delivered
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Service quality in terms of customers can be explained as the difference between what the customer expected and what was delivered
to them. The only way to ensure good service quality is exceeding
the customer expectations. When, where and how the service is delivered also has a bearing on the service quality perceived by the
customer.
There are two models that make the process of operations in the
service sector possible thereby giving great results. These models
are termed as “GAP Analysis” and “The augmented service offering
model.”
GAP analysis is based on the evaluation of real performance with
anticipated performance. A company will fall behind its potential
in case it fails to make optimum use of resources or overlooks investment in capital or technology. This concept is very similar to
the situation where an economy’s level of productivity is under the
possible production levels.
Therefore, while studying the importance of operations in the
service sector, it is essential to appreciate the concept of GAP
Analysis.
(C
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One of the major challenges faced by hospitality industry is delivery
of high quality services as it is a vital necessity for success in highly
competitive international hospitality markets. Quality is a dynamic
state associated with services, products, people, and environment
which meets or exceeds expectations. It is very essential to achieve
customer satisfaction. Quality defines how an organization is perceived by the customers and determines its chances of success in the
highly competitive industries.
ES
Notes
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Gap analysis model
Gap analysis model attempts to identify the aspects of service quality and the areas where service quality can be hampered. The gap
analysis model presents 5 gaps that affect and reduce the perceived
quality of service.
Gap 1: Between the customer’s expectation and management’s perception
Gap 2: Between management’s perception and service quality specifications
Gap 3: Between the specified quality of service and deliverable services
UNIT 13: Operations in Service Sectors
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Past Experience
Felt Need
Notes
ES
Word of Mouth
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Expected Service
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GAP 5
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Perceived Service
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GAP 1
Service Delivery
GAP 4
GAP 3
UP
Service Design
Service
Communication
GAP 2
Management Perception of
Expected Service
Figure 13.1 Gap analysis model
Gap 4: Between delivery of service and external communication to
customers
Gap 5: Between estimated service based on expectations and service
based on various perceptions.
The augmented service offering model
The concept of an augmented service offering integrates three elements of the service process.
1. Accessibility
(C
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The accessibility of a service depends on the following factors
1. Quality of service staff
2. The quantity of service staff
3. Opening and closing hours, schedules and efficiency of performance
4. Tangible aspects of service outlets and premises
5. Equipment and stationary documents
2. Interaction with the service organization
This includes communication between the customer and service
provider, contact between the service environment and customers
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Operations & Material Management
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3. Customer participation
Customer participation takes into account the customer as a factor
that contributes service process in a qualitative manner and outcome and thus the perception of customers towards the quality of
the service.
Just like benchmarking, a GAP analysis can be used to compare processes performed at other places. For the analysis, each process is
compared step by step, and the differences are noted down, then each
deviation is analyzed carefully to determine if any change of process
is required. The result can lead to three possible conclusions: – Continuance of the current process
– Completely changing to another process
– Fusion of best aspects of each process
Summary
Operations managers in the service sector make many decisions
that are similar to those made by manufacturers: they decide which
services to offer, how to provide these services, where to locate their
businesses, what their facilities will look like, and what the demand
will be for their services.
Service providers that produce goods can adopt either a make-to-order approach (in which products are made to customer satisfaction)
or make-to-stock approach (in which products are made for inventory) for manufacturing them.
(C
)
___________________
and physical resources, interactions between the customer and the
systems involved in proving the service and interactions between
customers. These interactions may take place before, during or after
the service process.
ES
Notes
UP
94
Review Questions
1. Explain the term Services.
2. What are the characteristics of services?
3. Enlist various types of services
4. Explain the service dimensions.
5. Explain the service gap analysis model.
95
Unit 14
Inventory Control
Learning Outcomes
ES
Notes
At the end of this chapter, students will be able to demonstrate knowledge
of the following:
The concept of inventory control
\\
Characteristics of inventory
\\
Benefits of holding inventory
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Risks of holding inventories
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Objectives of inventory management
\\
Factors that affect the process of inventory control
\\
Application of Economic Order Quantity in inventory control
Introduction
Inventory Control
UP
\\
(C
)
Inventory serves a link to fill the gap between production and distribution process and as such ensures smooth functioning of organizational activities. There is a time lag involved in the realization of
want, and its accomplishment, the greater is this time lag, higher is
the need for inventory. It is very crucial to have control over the level
of inventories as a large part of an organization’s working capital is
invested in inventories. The main purpose of inventory control is to
ensure enough stocks to meet periodic fluctuations in demand and if
required clear out the inventory levels. Generally, Inventory implies
stock of finished products only, but in certain cases, it may also include raw materials, work in process and store materials.
Characteristics of Inventory
1. Raw Material: Raw material is essential to carry out the production activities and constitute a major input for the organization. The quantity of raw material required depends on two
factors- the rate of consumption and time for replenishment.
2. Work in Progress: work in process is that stage of production
wherein the raw materials have been consumed in the process
of production but have not yet taken the shape of finished goods.
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Operations & Material Management
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4. Finished goods: when the production process is completed,
finished goods are obtained. It is necessary for companies to
have adequate stock of finished goods to cater to the market
requirements smoothly.
5. Spares: Spares are also an important part of inventory and
ensure smooth functioning of machines and equipment necessary for production. Stocking policies for spares vary between
industries.
There are certain benefits of holding inventories. Let us discuss
these benefits in detail.
Purpose/Benefits of Holding Inventors
There are three chief objectives of holding inventories, namely: (i) Transaction Motive – to assist with non-stop production and
timely completion of orders.
(ii) Precautionary Motive – holding adequate inventory levels
to meet seasonal variation in demand and avoid stockout problems.
(iii) Speculative Motive – encourages managing inventory levels
to take advantage of price fluctuations, quantity discounts and
save on re-ordering costs.
Risk and Costs of Holding Inventors
The holding of inventories involves blocking of a firm’s funds and
incurrence of capital and other costs and exposure to certain risks.
Different costs and risks involved in holding inventories have been
mentioned below: -
(C
)
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3. Consumables: these are supplementary material or catalysts,
which are not required in the production as a raw material, but
they are essential for smoothening of the production process.
ES
Notes
UP
96
● Capital costs: To maintain adequate inventory levels, it is
necessary for the firm to invest a significant portion of their financial resources. This can lead to cash crunch for daily operations, and the firm must resort to arrange for additional funds,
either from own sources or from external sources.
● Cost of Ordering: Every time an order is placed with the suppliers, a certain cost is involved, it could be in the form of paper-
UNIT 14: Inventory Control
97
Notes
ES
work or communication with the supplier. It is a necessary cost
of maintaining inventory levels. Total annual cost of ordering
can be obtained by cost per order multiplied with a number of
orders placed.
● Cost of Stock-outs: Stock-out is a situation which occurs
when the firm does not have enough inventory for a product,
but there is a demand for it from the customers. There is a significant cost of stock-outs because it results in loss of orders or
loss of customers.
UP
● Risk of Price Decline: In uncertain market situations there
is an inherent risk of reduction in prices of inventories. This
reduction may be due to market conditions, stiff competition or
increased supplies in the market.
● Risk of Obsolescence: there are certain risks involved in case
of technology related items such as obsolescence due to technological changes, changes in consumer tastes, etc.
● Risk of deterioration in Quality: Storing materials for longer periods can result in deterioration in the quality of inventories.
Objectives of Inventory Management
Following are the major objectives of inventory management:
● Ensure smooth flow of goods into the market, so that customer
requirements are met, and there is no loss of sales.
● Control of inventory levels and short-term and long-term planning.
(C
)
● Perpetual inventory control to ensure that material is reflected
in the stock registers tally with the actual material present in
the stores.
● Avoid overstocking and stock-out costs.
● Minimize losses through wastage, pilferage, and damages.
● Ensure optimum investment in inventories as per sales and operational activities
● To keep control material cost so that overall reduction in costs
of production can be achieved.
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Operations & Material Management
Notes
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● Make sure that optimum quality goods at optimum prices.
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98
When inventory processes are being managed a wide variety of factors are to be considered including both internal as well as external
factors. It is very important to keep control of these factors as they
can have a huge impact on inventory management. Let’s have a look
at the major factors that affect inventory processes: -
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Factors Affecting Inventory
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Financial Factors: these are factors such as the cost of borrowing
money or cost of maintaining inventories that have a significant impact on inventory management.
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Lead Time: it is the time taken for material to arrive after orders
have been placed. Lead time varies according to industries as well
as nature of the product. Any changes in lead times require immediate changes in inventory management.
Product Type: Due consideration must be given to types of products that are required for production. Some products have a short
shelf life and should be ordered in limited quantities only.
Economic order quantity holds a lot of importance in inventory management as it defines that quantity at which holding and ordering
costs are minimized.
Economic order quantity
In order to get better control of inventory, a model has been developed
to find out the desired or optimum quantity or levels of materials to
be maintained and purchased at the time of every purchase. The
model determines the required working stock level to be maintained.
Every time an order is placed, the company incurs several costs. In
order to minimize the costs of purchasing or ordering cost, the company can buy in bulk quantity to meet the complete need for the due
course year at one time, resulting into only the cost of one order.
(C
)
___________________
Suppliers: trustworthy suppliers are required for planning to spend
on materials and managing inventories efficiently.
UP
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● D is constant
● L is constant
● C is constant
● No stock out is allowed, Q is the quantity
UNIT 14: Inventory Control
99
D/Q
Notes
Average inventory Q + 0
2
Total Cost = SD / Q + IC Q / 2
Where SD = set up cost * Demand
IC =carrying cost
d TC / D Q
=
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–SD / Q 2 + IC / 2
TC is minimum when dTC / dQ
2
=0
–SD / Q + IC / 2 = 0
2DS / IC
If lead time is L
R=0
R = buffer stock + lead time demand
= 0 + Dl
= L dl
Hence, EOQ can be considered as an important tool for management
to minimize the cost of inventory and the amount of cash tied up in
the inventory balance.
Example 14.1
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UP
OR Q* =
ES
Number of orders Calculate Economic Order Quantity (EOQ) and Reorder point
for the following data
(C
)
Annual total demand = 10,000 units
Ordering cost = 500 per order
Holding cost = 10%
Unit cost = 200
Lead time = 3 days
Working days in a year = 250
EOQ = √2SD/iC
= √2 × 500 × 10000 / 0.1 × 200
= 707
Daily demand = 10000 / 250 = 40
ROP = L dl = 3 × 40 = 120
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100
Notes
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Summary
ES
Operations & Material Management
Inventory control is an important aspect of the growth of the company as it ensures smooth functioning of company operations. Inventory control is necessary to ensure that the stocks of all the products are maintained at optimum levels. In operations management,
logistics and supply chain management, software programmes are
necessary for inventory management. Inventory control also helps
in reduction of overall costs without hurting sales.
Review Questions
1. Define inventory. What are the objectives of inventory?
___________________
2. What are the characteristics of inventory?
3. Inventory is a necessary evil. Comment.
4. What are the pros and cons of holding inventory?
5. What are the few factors that affect the process of inventory
control?
6. What is economic order quantity?
7. Following is data for an inventory item.
Monthly demand:
1,000 units
Ordering cost:
Rs. 4,000 per order
Cost of unit:
Rs. 500
Holding cost
20%
a.
Calculate EOQ.
b.
If the EOQ has to be reduced to 200, how much the ordering cost per order has to be reduced?
(C
)
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UP
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8. An online boutique store sells 1,000 branded kurtas and pants
per month and maintains the inventory turnover rate at 15
per year. Once a customer places an order, the shopped Kurta/
Pants will be shipped directly from a warehouse to customer.
Each warehouse worker can ship 2 Kurtas/Pants per hour, and
works 8 hours / day, 250days / year.
a) What is the average time a Kurta / Pants spends at the
warehouse?
b) How many workers are required for shipping?
101
Unit 15
ES
Notes
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Case Studies
___________________
1. Azibuck is a manufacturing firm that uses approximately 4,500
pounds of the coloring material in a year. Presently the firm
purchases 250 pounds per order and pays $2 per pound. The
supplier has just announced that orders of 1,200 pounds or
more will be filled at a price of $2 per pound. The manufacturing firm incurs a cost of $100 each time it submits an order and
assigns an annual holding cost of 17 percent of the purchase
price per pound.
Determine the order size that will minimize the total cost.
b.
If the supplier had offered the discount at 1,500 pounds
instead of 1,200 pounds, what order size would minimize
the total cost?
UP
a.
2. A lab orders a variety of chemicals from the same supplier in
every 60 days. Lead time is six days. The manager of the lab
must determine how much of these chemicals to order. A check
of stock revealed that twelve 25-milliliter (ml) jars are on hand.
Daily usage of the chemical is approximately normal with a
mean of 15.2 ml per day and a standard deviation of 1.8 ml per
day. The desired service level for this chemical is 95 percent.
a.
How many jars of the chemicals should be ordered?
b. What is the average amount of safety stock of the chemical?
(C
)
3. The manager of an automobile repair shop hopes to achieve
a better allocation of inventory control efforts by adopting an
A-B-C approach to inventory control. Given the monthly usages
in the following table, classify the items in A, B, and C categories according to dollar usage. After reviewing your classification scheme, suppose the manager decides to place item P05
into the A category. What are some possible explanations for
this decision?
Item
K34
K35
K36
Usage
90
500
30
Unit
$1,400
12
700
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Operations & Material Management
Notes
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M10
M20
Z45
F14
F95
F65
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(C
)
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UP
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100
10
80
1,500
300
4,800
20
1,020
140
10
20
5
ES
102
ES
UP
(C
)
BLOCK - IV
(C
)
ES
UP
105
Unit 16
Supply Chain Management
Learning Outcomes
At the end of this chapter, students will be able to:
ES
Notes
Understand the concept of supply chain management
\\
Identify the objectives of supply chain management
\\
Explain the concept of purchasing cycle
\\
Understand the role of logistics in supply chain management
\\
Evaluate the performance of a supply chain management
\\
Identify the challenges in supply chain management
Introduction
UP
\\
Supply Chains have been brought to attention because of stiff competition in the global markets, the introduction of products with
short life cycles and increased customer expectation. This has forced
businesses to invest in supply chain management. This investment
from businesses, when combined with upgradation of communication and transportation technologies, has led to a continuous evolution of supply chain and techniques for its efficient management.
A typical supply chain involves the following steps –
– Procurement of raw materials
– Production of Goods
(C
)
– Goods sent to Warehouses for storage
– Goods shipped to retailers and customers
Interactions going on at various levels of the supply chain must be
taken into account while formulating supply chain management
strategies to help with reduction of costs and improvement of service levels.
Definition
“A supply chain consists of all parties involved, directly or indirectly, in fulfilling the customer request. The supply chain includes not
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Operations & Material Management
Notes
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only the manufacturer and suppliers, but also transporters, warehouses, retailers, and even customers themselves. Within each organization, such as a manufacturer, the supply chain includes all
functions involved in receiving and filling a customer request. These
functions include, but are not limited to, new product development,
marketing, operations, distribution, finance, and customer service.”
Chopra and Meindl (2012).
ES
106
Refer to Exhibit 16.1, a mini case that describes the role of supply
chain in the business.
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Exhibit 16.1 Role of Supply Chain
Objectives of Supply Chain Management
It is the primary objective of supply chain management to control
the total cost of the supply chain to meet given demands. This total
cost may be comprised of a number of terms including:
● Raw material and other acquisition costs
● In-bound transportation costs
● Facility investment costs
(C
)
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UP
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● Direct and indirect manufacturing costs
● Direct and indirect distribution center costs
● Inventory holding costs
● Inter-facility transportation costs
● Outbound transportation costs
These objectives can be attained only when a supply chain constitutes the major elements in it. There are five elements in a supply
chain.
UNIT 16: Supply Chain Management
107
Elements of Supply Chain
ES
Notes
The elements of a supply chain are a supplier, manufacturer, distributor, retailer, and customer. The flow of goods in a supply chain occurs
when a manufacturer sells his goods to the distributors who further
sell the goods to the retailers and customers. The distributor distributes the goods to various retailers. Retailers directly connect with customers and provide the goods to them for a cost. The flow of information
and the flow of funds occur inversely from the customer to the supplier.
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UP
___________________
Figure 16.1 Elements of Supply Chain
In the process of the supply chain, the purchasing cycle plays an
important role. It involves the purchase of raw materials for an organization.
The Purchasing Cycle
(C
)
The purchasing cycle starts with a request from within the organization to purchase material, machines, equipment, suppliers, or
other items from outside the organization, and the cycle ends when
the purchasing department is notified that a shipment has been received in satisfactory condition.
Figure 16.2 explains the purchasing cycle steps.
Receive
acquistion
Select
supplier
Place order
Monitor
order
Figure 16.2 The Purchasing Cycle
Receive
order
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Operations & Material Management
Notes
1. Receiving the requisition: The requisition includes
ES
108
●
A description of the item or material required
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●
The quantity and quality needed
___________________
●
The desired delivery schedules
___________________
●
The team/department(name) requesting the purchase
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3. Placing the order: If the order value is high, like in case of capital equipment, vendors may be asked to join a bidding process
in which personnel from operations and designs will also join in
for the negotiation process.
Large Volume items which are required on a continuous basis shall be procured through blanket purchase orders, which
involves annual negotiations of prices and deliveries scheduled
throughout the year periodically.
Moderate Volume items can either be covered through blanket purchase orders or small orders on an individual basis, as
suitable to the enterprise.
Small Volume items are handled directly between the unit requiring it and the supplier. But there should be some controlling
mechanism in place to avoid any unnecessary purchases.
(C
)
___________________
2. Selecting a supplier: It is the duty of purchase department to
shortlist those suppliers who can supply the required goods at
minimum costs. In case no existing supplier meets the criteria,
it is advisable to look out for new ones. Vendor ratings may be
referred with respect to selecting vendors, or perhaps rating
information can be relayed to the vendor for upgrading future
performance.
UP
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4. Monitoring orders: It is necessary to ensure regular follow-up
of orders especially in case of orders requiring longer lead times
so that planning could be done for potential delays and information can be passed on to operating units in time. It is necessary for purchase department to relay the messages regarding
any changes in quantities or delivery guidelines to suppliers to
give them enough time to manage their schedules.
5. Receiving orders: Team responsible for receipt of orders
should thoroughly check incoming shipments regarding quality and quantity. If the goods received are in order proper
UNIT 16: Supply Chain Management
However, the elements in a supply chain and the purchase cycle are all possible due to a common aspect of managing them
smoothly. Logistics is such an aspect of the supply chain that
manages the flow of materials in a production area and layout.
Logistics in Supply Chain Management
UP
Logistics is the aspect of managing the flow of materials within a
production area and layout including monitoring, facilitating, tracking and managing all aspects of movement of incoming and outgoing
consignments of various goods, raw material, and other things.
● Movement within a facility
1.
From incoming vehicles to receiving
2.
From the last operation to the final storage
3.
From storage to the point of use
4.
From shipping to outgoing vehicles
5.
From one work center to the next, or to temporary storage
6.
From receiving to storage
7.
From storage to packaging / shipping
(C
)
Coordination of movement of materials must take place to
arrive at the appropriate destinations in desired or required
times. Care must be taken to ensure that the items are not lost,
stolen or damaged during transportation.
● Incoming and outgoing shipments traffic management
refers to supervising the shipments and inspecting and managing the inflow and outflow of various goods.
The traffic management handles
1.
Schedules
2.
Shipping methods
3.
Shipping times
109
Notes
ES
­ otification should be sent to purchase, accounts and operations
n
department. In case the goods are not as per specifications they
shall be returned to the suppliers.
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Operations & Material Management
Notes
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Factors affecting the choice of shipping methods
ES
110
1. Costs of various alternatives
2. Government regulations
3. The need of organization relative to the quantity to be shipped
and time to market targets
4. Potential shipping delays / disruptions
Evaluating shipping alternatives
___________________
This decision compares the cost saving by using the slower alternatives for movement with the cost incurred as a result of slow alternatives.
Incremental holding cost = H (demand / D)
Where H = Annual holding cost for a product
D = Time in days
___________________
___________________
Bar Coding
Bar Codes are the patterns of alternating wide and narrow black
lines and white spaces, and numbers and symbols that provide specific information about the product carrying the Bar Code.
Use in distribution
1. To track items in warehouses and en route to customers
2. To determine the location of any item in the system and its status
Use in manufacturing
1. Tracking the progress of jobs as they move through the production process
(C
)
___________________
UP
___________________
2. Providing processing instructions to operators
3. Updating inventory records
4. Monitoring quality losses
5. Monitoring productivity
6. Enabling automatic sorting and packing
Electronic Data Exchange
Electronic data exchange is a computer-based system for sharing of
data within various functions of the firm automatically on the basis
of pre-decided data flow and data processing.
UNIT 16: Supply Chain Management
111
● Increased productivity
● Elimination of paperwork
● Reduced lead-time through profit
● Facilitation of just in time systems
● Electronic transfer of funds done by departments
● Improved control of operations
● Reduced nonskilled labor
● Increased accuracy
___________________
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___________________
___________________
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___________________
___________________
UP
___________________
Problems in Just in Time Deliveries
Just in time or JIT is a methodology aimed primarily at reducing
flow times within production system as well as response times from
suppliers and to customers.
● Frequent deliveries of small shipments
● Increased traffic
Notes
ES
The benefits of such systems include:
● Increase in transportation cost
● Unexpected disruption in transportation
Evaluation of Supply Chain Performance
(C
)
● Storage Space Utilization: it refers to the average amount of
storage capacity used over a period of time. It helps the managers with an assessment of the fact if there is any need to change
the layout of the storage area and identify obsolete products
that should be junked.
● Order Fill Rate describes the orders that can be filled on the
basis of inventory at hand in terms of percentage. It helps in
determining the balance of the inventory and forecasting the
sales figures that could be achieved with the present inventory.
● On time delivery/shipments: On time delivery and on time
shipments are very important for every business as they ensure
that the material is being received on time and are being delivered as per schedule.
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
___________________
● Perfect order metric: it is a higher-level performance measure that is formed by a combination of performance markers
and is essential to this list.
ES
112
Challenges in Supply Chain Management
The challenges in supply chain management are as follows:
Globalization:
___________________
One of the greatest difficulties in the supply chain is the manner
by which to limit the cost of inventory network. To fulfill the expectations of customers, firms have restored their assembling to minimal effort countries over the globe in order to diminish the immediate and backhanded expenses and to cut duties. However, having
worldwide providers contributes altogether to the many-sided quality that originates from extended delivery lead times. Customers not
only want low priced goods, but they also want that those goods are
delivered on time.
___________________
___________________
___________________
Customer Preferences:
By now we already know that global supply chains are very complex. This includes product characteristics that are rapidly changing, where the challenge is even more. As soon as a new product is
announced, customers start pressing the companies to up the ante
and come up with the next big thing. This where Innovation comes
into the picture as it helps the companies retain competitive advantage. But it also poses a serious challenge because, in order to
improve upon a product, companies need to redesign their supply
network and fulfill market demand in a customer friendly way.
Market Growth:
(C
)
___________________
UP
___________________
The ever-going pursuit to acquire new customers poses a serious
challenge to the supply chain. It is important to keep the cost of
development of a product low, so the companies look to expand into
new markets to grow their market share and expand their revenue.
Nowadays, companies all around the world are expected to expand
their network in the home as well as overseas market.
Summary
Importance of product design has assumed great importance in present times due to globalization and ease of access to alternative prod-
UNIT 16: Supply Chain Management
113
Notes
ES
ucts. As a result, the markets are limited, but the expansion plans of
companies are on the rise. In such a situation pricing decisions take
a back seat, and product design plays the role of a differentiator by
adding attractive features to push the demand further.
___________________
___________________
___________________
Review Questions
1. Explain the term “supply chain management.”
2. What is logistics?
___________________
___________________
___________________
3. What are the factors affecting the choice of shipping methods?
4. What is bar-coding? What is its application in distribution and
manufacturing?
(C
)
UP
5. What are the factors for evaluation of supply chain performance?
___________________
___________________
___________________
___________________
(C
)
ES
UP
115
Unit 17
ES
Notes
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Inspection
___________________
Learning Outcomes
At the end of this chapter, students will be able to understand and explain:
The concept of sample inspection
\\
Aspects of sampling inspection
\\
The process of sample inspection
\\
Importance of sampling inspection
\\
Sample size and frequency of inspection
\\
Advantages of sampling inspection
\\
The concept of acceptance sampling and sample plan
Introduction
UP
\\
Sampling inspection is a tool to analyze if a part of the sample size
(Lot) should be accepted or rejected depending on the number of defective parts found in a sample drawn from that lot. In case the defective part is below the specified limit, the lot is accepted otherwise
rejected.
In Industrial usage, a random sample is drawn from a big lot of finished goods or work in process. If the defects in the sample are above
the specified limit, then the entire lot is rejected.
(C
)
Inspection establishes the level to which the product meets quality specifications. The method of sampling involves certain aspects
which make the process of inspecting easy and effective.
The aspects of inspection are as follows:
● Sample size and frequency of inspection
● Stages of inspection
● Self-inspection by operators or a separate quality function
● Whether to inspect for visual aspects or measure the characteristics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
Notes
___________________
Process of Sample Inspection
In a production process, products are inspected at three stages
___________________
● Raw material
___________________
● In process
___________________
● Finished product
___________________
___________________
___________________
___________________
As an Operations Manager, it is very important to know the importance of inspecting samples. Sample inspection plays an important
role in the production process. The importance of sample inspection
is discussed further.
Importance of Sample Inspection
● It involves inspection of lesser quantity to derive at a decision
about the quality of a product.
● Economical in terms of time and cost
● As all units of a lot are to be checked before dispatch, the quality inspectors can be fatigued by the repetitive work and might
end up passing some defective pieces, but with sample selection, those errors could be identified as there is a thorough inspection.
(C
)
___________________
The purpose of inspecting raw materials before production is to make
sure that inputs are of acceptable quality. The reason for inspection
during production is to check if the process of converting inputs to
outputs conforms to the estimations made earlier. The purpose of
inspecting conformance of finished product is to make a final verification of product quality before delivering products to customers.
UP
___________________
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116
● As only a few samples are checked, there is no harm caused to
rest of the units of the lot.
● In a few cases, checking the quality of the product involves destroying the product during tests or in case of certain products
chemical analysis is required, it is not possible to employ 100%
inspection.
Sample size and frequency of inspection
It depends on the inspection cost and the cost of any flaws processed
further. The sample size is an important feature of any empirical study in which the goal is to make inferences about a popula-
UNIT 17: Inspection
In manufacturing, inspection is usually carried out at the following
stages
● In the processing of products
● Finished products
UP
● Spares and consumables
Self-inspection and a quality function
● Workers are responsible for producing a quality product
● Lower cost
Quality function
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● Raw materials
● Decisions are faster
Notes
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Stages of inspection
Self-inspection
117
ES
tion from a sample. In practice, the sample size used in a study is
determined based on the expense of data collection, and the need to
have sufficient statistical power.
● Separate specialized function
● More systematic inspection
● Better quality and fewer defects
● Incurs additional costs
(C
)
Now let us look at the advantages of sampling inspection.
Advantages of Sampling Inspection:
1. Sampling is the inspection of a relatively smaller quantity that
requires less effort to ensure quality for a required degree of
certainty.
2. This method is relatively less expensive and consumes less
time.
3. Since only a sample is being inspected, all the remaining units
of the lot are untouched and are not affected in any way.
4. Rejection of a complete lot based on a sample creates positive
pressure for betterment in quality and control processes.
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Operations & Material Management
Notes
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Acceptance Sampling
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118
Acceptance sampling is a form of inspection which involves the decision if a lot is to accepted or rejected on the basis of a sample drawn
from the lot. The purpose of this technique is to evaluate the quality
compliance of the entire lot. Lots that meet quality standards are
passed or accepted, and those that do not meet the quality standards are rejected.
Acceptance sampling becomes necessary when
● Large volumes of products need to be inspected.
● The cost of inspection is high.
___________________
● Destructive testing is involved.
While studying acceptance sampling, it is also important to study
about sampling plan.
Sampling plan
A sampling plan is the basis of sampling inspection. Sampling plans
specify the lot size (N), the sample size (n), and the acceptance / rejection criteria. For example: If there are 1 lakh customers, it is not
possible to conduct an interview with 1 lakh customers. Instead, it
will be required to take a sample population of 1000 customers (1 %
of your total population). This sample gives primary data, and this
is assumed to suit 99% of the customers. Naturally, the 1% of the
people interviewed need to be important to the company. And hence
the need for a sampling plan arises.
Acceptable quality level (AQL)
AQL defines the difference between a good and a bad lot. An AQL
of 2% means that the probability of a lot, with more than 2% defectives, is being accepted and a lot with up to 2% defectives getting
rejected is very low.
(C
)
___________________
UP
___________________
Lot tolerance percent defective (LTPD)
LTPD is the highest limit of the defective percentage that the consumer is willing to accept.
Although customers want a quality equal to AQL but are willing to
accept up to LTPD sometimes.
UNIT 17: Inspection
119
Summary
ES
Notes
An inspection is, most generally, an organized examination or formal evaluation exercise. It is applicable in various fields, such as
the process of manufacturing, business, government administration,
road vehicles, engineering and mechanics, medical sciences, military, railroad, real estate, software engineering and so on.
___________________
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Review Questions
___________________
1. Explain the stages in production where inspection is required.
___________________
2. Explain the process of sample inspection?
___________________
UP
3. What are the various advantages of sampling inspection?
4. What is the importance of sample inspection?
5. What do you understand by sampling plan?
(C
)
6. Explain the concept of OC Curve.
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(C
)
ES
UP
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Unit 18
Statistical Quality Control
ES
Notes
___________________
___________________
___________________
___________________
Learning Outcomes
At the end of this chapter, students will be able to:
Understand the concept of statistical control
\\
Identifying the steps in the control process
\\
Identify the tools of statistical quality control
\\
Identify the objectives of the statistical quality control
\\
Identify the applications of statistical quality control
\\
Understanding the use of statistics in process control
\\
Applying variable and attribute control charts
Introduction
UP
\\
Statistical Quality Control (SQC) is used for analysis of quality related problems and their solution through a set of statistical tools by
professionals for monitoring and maintaining the quality of products
and services. Quality control is checking the product at any stage to
decide its conformance to acceptable standards and segregating the
good from bad. Quality assurance is ensuring that defectives are not
produced by controlling the process. It involves process control in
place of quality control
(C
)
Steps in The Control Process
The steps in the control process are as follows:
1. Setting Performance Standards: Performance standards
are required to be set up to start the controlling process as the
actual performance is measured against these standards. Example: Revenues to be earned, Costs to be incurred.
2. Measurement of Actual Performance: after setting the
standards, the next step involves the use of various techniques,
such as sample checking and personal observation, for measuring the actual performance. For e.g., Appraisal reports.
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Operations & Material Management
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4. Analyzing Deviations: This step involves analysis of any deviations present. In order to ensure the longevity of the business, it is important to address any deviations in key areas.
5. Taking Corrective Action: This is the last but also the most
important steps. If deviations are within the prescribed limits,
no corrective actions are required but if they are beyond the
prescribed limits, they should be brought to the notice of management and immediate corrective action should be taken.
Tools of Statistical Process Control
All SQC tools are really helpful in evaluating the service quality,
and it uses diverse tools for analysis of the quality problem.
1. Descriptive Statistics: are used to explain quality characteristics and relationships and includes statistics such as the
mean, standard deviation, range, etc.
2. Statistical Process Control (SPC): it answers the question
if a process is functioning properly or not. It involves checking a
random sample of output and decide if the process is producing
products with all the required specifications that fall within a
specified range.
3. Acceptance Sampling: this process involves random inspection of a small lot of goods and taking a decision if the lot is
acceptable or not based on the results.
Now let us look at the objectives of statistical quality control.
(C
)
___________________
3. Comparing Actual Performance with Standards: this
step involves comparison of actual performance with the specified standards.
ES
Notes
UP
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Objective of Statistical Quality Control
Quality Control is a significant tool for every company, comprising
of the following parameters: – Service Quality
– Employee Participation
– Management leadership,
– Continuous improvement
UNIT 18: Statistical Quality Control
123
– Prompt response
ES
Notes
– Fact-based actions
___________________
– Management Commitment and
– Quality driven culture.
The primary objectives of the quality control module are to control:
___________________
● Customers
___________________
● Claims
UP
___________________
The development and use of performance pointers are associated either directly or indirectly, to buyer requirements and gratification,
as well as to the management.
Application of SPC
___________________
___________________
● Rejecting Materials
● Evaluations
___________________
___________________
● Receiving Materials
● Providers
___________________
There are three main phases of activity for the application of SPC: 1. Knowledge of the process and the specified limits
2. Removing the desired sources of variations so that the process
can be smooth and stable
(C
)
3. Checking and observing the current production process (using
control charts) to find out significant changes of mean or variation
Control Charts
Statistical Process Control commonly makes use of control charts, to
measure any characteristic of a product such as weigh of a packet of
chips, number of cigarettes in a pack. The characteristics that can
be measured using control charts can be divided into two groups,
Variables, and Attributes. Control chart for variables monitors measurable characteristics with a continuum of values such as weight,
height, or volume, etc.
A control chart is a graphical technique that records process variation and gives a signal when the variation exceeds natural limits.
___________________
Operations & Material Management
Notes
The general layout of a control chart
ES
124
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Upper Control limit
___________________
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Control limit L
___________________
___________________
Lower control limit
___________________
___________________
___________________
Variables: A product property that can be measured and possesses
a continuum of values. Example: area, volume, density, etc.
Attributes: A product characteristic with a distinct value and
non-countable. Example: Colour, weight.
Control chart for attributes
P chart
P-charts help with measurement of defective proportion from a sample. The calculation of centerline along with the upper and lower
control limits is like computation in other types of control charts.
Centre line is obtained by taking random observation samples and
computing the value of p across all samples, and it reflects the average defective proportion of the population.
C chart
C-charts are employed for calculating a number of defects per unit
such as meals returned in a restaurant, bacteria per ml of water,
etc.
(C
)
___________________
There are certain attributes and variables for which control charts
are prepared.
UP
___________________
Summary
Using statistical methods for monitoring and controlling a process ,
Statistical Process Control (SPC) is an efficient method for quality
control. It lowers wastage percentage by ensuring efficient operation of a process and more specification compliant products being
manufactured. SPC can be applied to any process where specification compliant products can be measured. SPC makes use of certain
UNIT 18: Statistical Quality Control
125
Notes
ES
tools such as control charts, run charts, focus on improvement and
design of experiments.
___________________
Review Questions
___________________
___________________
2. What is a control chart? What are the types of control charts?
___________________
3. Differentiate between random variation and assignable variation.
___________________
4. Explain the characteristics of the normal distribution.
___________________
5. Explain the method of determining control limits for p chart
and c chart.
___________________
(C
)
UP
1. Differentiate between quality control and quality assurance.
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___________________
(C
)
ES
UP
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Unit 19
Maintenance
Learning Outcomes
At the end of this chapter, students will be able to:
\\
Understand the importance of maintenance
\\
Identify the results of breakdowns
\\
Understand the types and importance of maintenance
\\
Explain the approaches used to deal with breakdowns
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___________________
UP
Introduction
ES
Notes
Maintenance is the set of those activities that keep facilities and
equipment in normal order of working and making necessary repairs when breakdowns occur so that the process can run without
any hindrance or disruptions.
Let us now look at the importance of maintenance.
Importance of Maintenance
● Effective maintenance can improve profits and decrease cost.
● Efficient maintenance adds value through better utilization of
resources.
● Maintenance should be considered as an organizational function that functions in parallel with production.
(C
)
● Maintenance significantly affects multiple aspects of production costs.
● Implementing effective maintenance into production is an investment, not a limiting constraint.
Results of Breakdowns
The breakdowns in the production process lead to the following:
● Reduced production and delayed deliveries
● The increased cost of production
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Operations & Material Management
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● Adverse impact on product quality
● Safety threats for workers
Types of Maintenance
The different types of maintenance are as follows:
Breakdown maintenance
It is the repair of equipment in the event of a failure while in operation.
Preventive maintenance
It is the periodic check of the equipment as per a predetermined
schedule. The preventive maintenance reduces the chances of failures of equipment in the plant.
Preventive maintenance makes use of
● Routine inspection of equipment to identify the status
● Scheduled checks of the machines and equipment
● Replacing parts and consumables after a specified number of
hours
Predictive maintenance
Predictive maintenance identifies the need for machine repair on
the basis of signals before the damage gets bigger. It uses historical
information and technical data analysis to predict when equipment
or part is about to fail. If failures are estimated in a predictive model, there will be more effective preventive maintenance.
(C
)
___________________
● There are quality issues; product may be defective
ES
Notes
UP
128
Approaches used to deal with breakdowns
● Spare equipment to ensure continued production in the event
of equipment failure
● Inventories of spare parts
● Operators skilled in minor repairs of the equipment
Some organizations have workers perform preventive maintenance
on the machines they work on, rather than use separate m
­ aintenance
personnel for that task. This is called total productive maintenance;
UNIT 19: Maintenance
129
Notes
ES
this approach is consistent with Just in Time (JIT) systems and
lean operations, where employees are given greater responsibility
for quality, productivity, and the general functioning of the system.
JIT is a concept that believes the work to be done just before the due
time to avoid any undue gap between tasks. There are a variety of
derived concepts like JIT purchasing, JIT assembling and execution
are associated to remove the gaps between a variety of tasks within
one function and between various functions.
UP
The risk of a breakdown can be reduced by an effective preventive
maintenance program. But sometimes breakdowns still occur. Organizations with good preventive practices have a lesser need for
breakdown programs. However, organizations that rely less on preventive maintenance have a greater need for effective ways of dealing with breakdowns.
In preventive maintenance, management cannot schedule breakdowns but must deal with them on an irregular basis, whenever
they occur.
The main approaches used to deal with breakdowns are the
following:
1. Standby or backup equipment that can be quickly pressed into
service
2. Inventories of spare parts that can be installed as needed,
thereby avoiding lead times involved in ordering parts, and
buffer inventories, so that other equipment will be less likely
to be affected by short-term downtime of a particular piece of
equipment
(C
)
3. Operators who are able to perform at least minor repairs on
their equipment
4. Repair people who are well trained and readily available to diagnose and correct problems with equipment
The degree to which an organization pursues any or all of these approaches depends on how important a particular piece of equipment
is to the overall operations system. At one extreme, it could be equipment that is the focal point of a system (e.g., printing presses for a
newspaper, or vital operating parts of a car, such as brakes, steering, transmission, ignition, and engine). At the other extreme, it
could be equipment that is seldom used, because it does not perform
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Operations & Material Management
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Summary
Maintenance is a system of maintaining and improving the integrity of production and quality systems through the machines,
equipment, processes, and employees that add business value to an
organization. It focuses on keeping all equipment in top working
condition to avoid breakdowns and delays in manufacturing processes. It is an important factor that is required in several fields,
such as maintenance of an organism, aircraft maintenance, car
maintenance, railroad track maintenance, software maintenance
and property maintenance.
Review Questions
1. What is maintenance? What are the reasons for maintenance?
2. What are the adverse impacts of machine breakdowns?
3. Differentiate between predictive and preventive maintenance.
4. What are the different strategies to deal with breakdowns?
5. What are the considerations in deciding preventive maintenance schedule?
(C
)
___________________
an important function in the system and also equipment for which
substitutes are readily available.
ES
Notes
UP
130
131
Unit 20
ES
Notes
___________________
Case Study
___________________
___________________
___________________
10 guidelines were offered by William E. Mitchell, President, and
CEO of Arrow Electronics regarding the reduction of product quality
issues and associated risks in an offshore supply chain. Although
the guidelines were aimed at electronics suppliers, they did offer a
great beginning point for a lot of companies striving for reduction of
risk and probable quality problems.
___________________
UP
Case Study 1 – Arrow Electronics – Qualitative
Assessment
1. Electronics should be sourced from companies with a well-established reputation and having robust internal controls.
2. Before getting into business with any potential supply chain
partners, carry out a comprehensive background check including trade references and business history.
3. In order to check quality control systems installed by supply
chain partners, site inspections should be conducted.
4. Communications with the supply chain partners shall be continually engaged with along with ongoing performance reviews,
to check performance against pre-set goals and find out the
scope for improvement.
(C
)
5. Sourcing should only be done from companies willing to provide
a written guarantee for their products.
6. To avoid the risk of counterfeit products caution should be exercised while buying from companies not having franchised relationships.
7. Unusually low prices are a red flag.
8. Always seek supply chain partners with ISO or other globally
recognized quality certifications.
9. Relationships shall be established with third-party organizations.
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Operations & Material Management
___________________
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Review Questions
Q1. What are the challenges before Mr. Mitchell for maintaining
the qualitative parameters?
Q2. What would be your suggestion to Mr. Mitchell?
Case Study 2 –
Alpha Chemicals is in the business of manufacturing welding accessories since 1992. The company is quite cautious about the quality of
its products and views any quality problem very seriously.
In August 2015, a major client of alpha chemicals called the representative of the company for discussing a serious quality issue. The
client was a major client for welding electrodes manufactured by
the company. The electrodes apart from physical defects also have
weight as an important parameter.
Mr. Rohit Pant, the quality manager, was assigned the task of meeting the customer and resolving the issue. During the meeting, the
client’s management informed Mr. Rohit of the high variation in
the weight of units. This variation was causing a lot of trouble in
production at the client’s plant. Mr. Rohit assured to look into the
matter and get back soon with the solution. As a first step, the data
of weights of products for the last 15 days (1st July to 15th July) was
compiled as follows:
(C
)
___________________
10. Convert quality into measurable and well-defined targets.
Communicate them clearly with the supply chain partners as
well as with company employees. As the Supply Chain Digest
notes “to do this right will involve greater costs, reducing the
relative price advantage of offshore strategies to a degree, and
certainly requiring companies to build a substantial infrastructure to develop and maintain these monitoring programs.”
ES
Notes
UP
132
Date
1
2
3
4
5
6
1
2.4
2.3
2.1
2.3
2.4
2.2
2
2.2
2.1
2.3
2.2
2.5
2.2
Weight
3
2.2
2.1
2.1
2.1
2.3
2.1
4
2.1
2.2
2.3
2.4
2.2
2.2
5
2.2
2.1
2.4
2.4
2.4
2.5
UNIT 20: Case Study
2.3
2.4
2.4
2.1
2.5
2.2
2.1
2.3
2.3
2.1
2.3
2.4
2.2
2.4
2.2
2.1
2.3
2.4
2.4
2.4
2.2
2.5
2.1
2.2
2.3
2.5
2.2
2.5
2.3
2.1
2.3
2.2
2.4
2.4
2.3
2.2
2.2
2.3
2.5
2.3
2.1
2.2
2.4
2.5
2.1
133
Notes
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7
8
9
10
11
12
13
14
15
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Review Questions
1. What is your analysis of the weight problem?
UP
2. Construct a suitable control chart.
(C
)
3. What procedures would you recommend to maintain proper
quality control?
___________________
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___________________
(C
)
ES
UP
ES
UP
(C
)
BLOCK - V
(C
)
ES
UP
137
Unit 21
Materials Management
Learning Outcomes
ES
Notes
At the end of this chapter students will be able to understand and explain:
The concept of materials management
\\
Materials management cycle
\\
Objectives of materials management
\\
Tasks of materials management
\\
Concept of outsourcing
\\
Vendor rating and evaluation
\\
Concept of vendor management
Introduction
UP
\\
The material can be defined as a tangible object that goes into the
making of a physical object.
Materials management deals with: -
– Planning for the company campus.
– Developing building designs for smooth movement of materials
– Logistics handling material movement
(C
)
– Acquisition of spare parts and replacements, their quality control and managing orders, shipping and warehousing standards
of such parts.
Materials management is responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner to efficiently provide a service to the
consumers at lowest possible cost.
Materials management process involves short-range decisions about
supplies, inventories production levels, schedules, and distribution.
Let us have a look at the materials management cycle in Figure 21.1.
Materials management cycle
The materials management cycle involves purchasing raw materials, storing them for future, converting them finished goods and
then distributing the finished goods to the end users.
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Operations & Material Management
138
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Distribution
Storage
Storage
Conversion
___________________
___________________
___________________
___________________
Figure 21.1 Material management cycle
___________________
● Storage: Once the raw materials are purchased they need to be
stored in a manner that it does not get damaged until the time
of production, Example: An ice-cream manufacturer would buy
fruits in advance. So, it will be important for him to store and
refrigerate them such that they do not get destroyed.
● Conversion: This involves the actual process of production
wherein goods are transformed from raw materials to finished
products.
● Storage: Once the finished goods are manufactured, it is important that the manufacturer stores and packs them properly
until they are delivered to the end user.
● Distributor: The manufacturer is ought to find distributors
who would deliver the goods to the retailers who in turn would
deliver the finished goods to end users or customers.
(C
)
___________________
Acquisition of raw materials: This involves acquiring or buying
raw materials to be used for the manufacturing of finished products.
Example: A cloth manufacturer would acquire raw materials such
as fabric, threads, dye, etc.
UP
___________________
ES
Acquisition of raw materials
Notes
Objectives of Materials Management
The main objectives of material management are:
1. Minimising material costs
2. Reducing the cost of purchasing, receiving, logistics and storage of materials in an efficient way
UNIT 21: Materials Management
4. Maintaining continuous supply at reasonable and durable rates
(by identifying new sources of supply and establishing an amicable relation with the suppliers)
5. Developing and maintaining high inventory turnover ratios by
reducing more investments into inventories
Tasks of Materials Management
The various tasks in materials management are listed below:
● Supplier selection
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UP
● Issuing purchase releases
● Inbound transportation
● Initiating purchase request
● Inventory control on sight
● Assigning priorities to work
● Outbound transportation
● Inventory control at distribution centers
Outsourcing
139
ES
3. Using simplification, standardization, value analysis, import
substitution and related aspects to cut down the costs
Outsourcing refers to acquiring the products or services from external sources rather than producing in-house.
(C
)
Importance of outsourcing
● External suppliers provide materials better, cheaper and more
efficiently because of their expertise and economy of scale
● Expertise and knowledge of vendor becomes available to the
organization
● Production of the part may be restricted by a patent
● Outsourcing offers added flexibility
● The organization can focus on the core activity
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
● The control on production and quality is lost
● Greater dependency on suppliers may lead to production plan
disruptions
Vendor Rating and Evaluation
It is necessary that supplies are obtained from the vendor after deep
evaluation and recognizing their overall capabilities.
There are two different scenarios in front of a buyer.
1. The performance of the vendor has to be evaluated before the
delivery. This concept is known as vendor evaluation.
2. The performance should be evaluated after the delivery of the
products. This is known as vendor rating.
Factors for vendor evaluation
● Reliability
● Technical capabilities
● Availability
● Sales assistance
● After sales service
● Convenience
Vendor Development
Vendor development is one of the popular techniques of strategic
sourcing, which improves the value we receive from suppliers. Vendor Development can be defined as any activity that a Buying Firm
undertakes to improve a Supplier’s performance and capabilities to
meet the Buying Firms’ supply needs.
(C
)
___________________
Risks in outsourcing
ES
Notes
UP
140
The main features of vendor management are mentioned below:
● Communication of essential and helpful information like design, specifications, standards, practices, etc.
● Communication of engineering changes
● Developing methods for detecting deviations from standard
promptly
UNIT 21: Materials Management
● Rendering necessary technical assistance
● Providing quality data in lieu of incoming inspection
● Review vendor’s performance periodically and providing feedback
Summary
Notes
___________________
___________________
___________________
___________________
___________________
UP
Materials management involves planning and designing for delivery, distribution, storage, collection, and removal of materials and
services. It is usually an additional service that is offered as part of
a campus planning process or a building design project. It is highly
useful for educational, healthcare, and corporate environments. Materials management takes care of the planning and designing considerations required to support effective delivery and movement of
goods and services that support occupant activity.
Review Questions
141
ES
● Helping the vendors in resolving quality problems
1. Explain materials management cycle with the help of an example.
2. What are the tasks of materials management?
3. Explain acquisition process.
4. What is outsourcing? What are the reasons for outsourcing?
(C
)
5. What are the factors affecting supplier selection?
___________________
___________________
___________________
___________________
___________________
(C
)
ES
UP
143
Unit 22
Management of Projects
Learning Outcomes
ES
Notes
At the end of this chapter students will be able to understand and explain:
Importance and characteristics of projects in an organization
\\
Project life cycle concept in various organizations
\\
Network analysis and Critical Path Method
\\
Program Evaluation and Review Technique
\\
Various intricacies related to project management
UP
\\
Consider the following activities
● An underpass is constructed in a city
● Metro rail is built in Hyderabad
● A plane is built for Airforce
● A new hospital is being constructed
Do you see anything common in all these activities?
Now consider some more activities
● A company launches a new product development program
● A manufacturing organization launches a survey for assessing
customer satisfaction with its products
(C
)
● A manufacturing organization constructs a new warehouse
● A new machine is procured and installed
Do you see anything common in all these activities? Do you see anything common in first set and second set of activities?
You can observe that although these activities are entirely different
from each other, they are temporary in nature, that is, they have a
start and a finished timeline, unlike the mass manufacturing operations, which are perpetual.
All the activities described above fall in the category of projects.
___________________
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Operations & Material Management
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___________________
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___________________
___________________
___________________
___________________
Projects in contemporary organizations
Initially, the projects were considered different to the conventional
manufacturing systems. The word project was associated with large
projects like infrastructure, shipbuilding, construction, etc. But in
due course of time, it was realized that if conventional manufacturing systems could adopt project methodology, it would result in
higher efficiency for the organization.
So the project method comprises of three major entities
Parentt Organization
Proj
o ect Team
Customer
Figure 22.1 Projects in contemporary organizations
The parent organization selects the team leader and the team members from its different divisions as per requirement of skills and
qualifications for the project. The project team is responsible for interacting with customer and ensure that the outcome must meet the
requirements of the customer for that project.
Note that the customer for the product may be the parent organization itself; for example, development of IT system for a company’s
operations or construction of a new warehouse or installation of new
technology.
Characteristics of projects
The projects differ from traditional forms of production and are
characterized by some unique features as follows
(C
)
___________________
A project can be defined as a temporary endeavor to achieve a specific well-defined objective.
ES
Notes
UP
144
The projects have a purpose: Each project has a well-defined purpose or objective. For example, the project of new product development may have the objective of achieving a competitive edge. The
construction of a flyover on the road may have a purpose of reducing
traffic congestion. The purpose of constructing an underpass on the
road may be to provide a safe road for the pedestrians to cross.
The projects have a life cycle: The projects, as already discussed,
are temporary endeavors. While the projects are in progress, they
pass through some well-defined stages of life cycle.
Each project produces a unique product: The projects are
not repetitive manufacturing activities. The product of a project is
UNIT 22: Management of Projects
Interdependence: Each project is comprised of a number of tasks.
All the tasks involved in a project are independent, unique entities,
but they depend on each other for their performance. For example, a
specific task might not start unless some of the preceding tasks have
been completed.
Project life cycle
UP
X
Planning Scheduling
Monitoring & Control
(C
)
Conception
Selection
Notes
___________________
___________________
___________________
___________________
___________________
___________________
One of the characteristics of projects that we discussed in the last
section is that the projects are temporary endeavors and characterized by a life cycle. Although the projects differ in size, nature,
product, and requirements, the life cycle of all projects is typically
similar. The phases in the life cycle of projects are shown in the form
of a graph below. The X-axis of the graph indicates the time and the
Y-axis indicates the level of effort required during various stages.
Y
145
ES
unique. The same specifications of a product will never be created by
future projects.
Evaluation and
Termination
Figure 22.3 Stages in the life cycle of a project
Conception: During this stage, the management of the parent organization comes across various ideas of projects, each project having its own necessity and significance. The project ideas are generally the outcome of brainstorming or other means of idea generation.
The ideas so generated are subjected to the screening on the basis
of management’s priorities, organizational needs, and importance of
the project to achieve organizational goals.
___________________
___________________
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Planning: The selection phase is followed by planning for the
project. During this phase, various aspects relating to the project
are planned, which include scope definition, resource requirement
planning, skills required for the project, manpower requirement,
procurement requirement, financial planning, and specification
definition. The outcome of this process is a project plan, which is
a roadmap to the project. The project plan is also used as a tool for
project control. Another important aspect of this phase is identifying
the risks involved during the project life and planning to counter
these risks in the event of them becoming a reality.
Scheduling: The project time schedules are developed during this
phase. The project is broken into smaller tasks and work packages
and time required for the individual task is assessed. The breaking
of the project into smaller tasks and work packages is called work
breakdown structure (WBS). The interdependence of the tasks is
also established during this phase. The time required to complete
the project is then assessed using the compiled information of tasks
interdependence and task time requirements.
Monitoring and control: Once the project is in the process, it
is essential to ensure that the various activities are completed in
scheduled time and within decided budget. Exceeding time or cost
will lead to schedule overrun or cost overrun. Since the projects are
also characterized by scarcity of resources and the simultaneous demand for resources by different tasks and work packages, it becomes
essential to apply techniques for rational and optimum utilization
and allocation of the resources in such a manner that the impact on
project objectives is minimum. The process of comparing the project
progress with plans refers to monitoring. Control refers to identifying deviations and acting to minimize the impact of deviations.
(C
)
___________________
Selection: The scarcity of resources may prohibit the management
to launch all screened projects simultaneously. The projects to be
undertaken are then selected by the management on various criteria
like management priorities, competitive necessity, the significance
of the project, etc. For example, the management may consider a
project for new product development more significant than the construction of a new warehouse. A number of numeric and non-numeric techniques are used by the management for the purpose of project
selection. The numeric techniques include the financial assessment
of projects and also the comparative scoring.
ES
Notes
UP
146
UNIT 22: Management of Projects
147
Notes
ES
Evaluation: Evaluation refers to Analyzing the project performance
and making sure that the objectives are fulfilled for the project. Evaluation involves schedule performance, cost performance, specifications achievement, actions taken to respond to risks, resource use
and allocation and management of outsourcing and contracting. The
evaluation is carried out after completion of the project and during
different stages of project progress.
The during project progress evaluation provides the basis for taking
corrective actions if needed and the end of project evaluation is carried out to learn from the completed project so as to perform the future projects in a more efficient and effective manner. The technique
generally used for evaluation is called project audit.
UP
Termination: The project comes to the finishing part at this stage.
This phase identifies the need of terminating a project. Please note
that termination does not always mean successful completion of the
project. Termination of the project may be a result of project failure
or changed management priorities or lack of funds and resources.
A final accounting of project is carried out in this phase and project
is closed. The project assets are distributed among different divisions, and the project team members are returned to their parent
divisions. If the termination is due to successful completion of the
project, the product is handed over to the customer.
(C
)
It is also important to understand the life cycle of the project with
reference to the speed of the project. Typically the projects have a
slow beginning followed by quick momentum and finally a slow finish. It can be explained by the graph given in the Figure 22.4.
100
Quick
momentum
Slow finish
% Project
Completion
Slow start
Time
0
Beginning
Middle
Figure 22.4 Project life cycle
End
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Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Slow Beginning: The projects typically begin slowly. The specifications are under development and negotiations, and changes are
being incorporated at this time. The project is a new one, the requirement of resources is being assessed. Since the team members
are drawn from different divisions of the organization, there is a
lot of confusion and conflict regarding the authority and reporting
hierarchy.
Quick Momentum: As the aspects related to project become clear,
and direction is established, and the project gains speed. This is the
phase of quick momentum. The speed increases fast and reaches a
peak. This is the phase when monitoring and control of the project
are in existence.
Slow Finish: As the project approaches the finish, the various parts
of project output now need integration. The integration may require
careful analysis and inspection of each part before it is integrated.
This phase may also require minor changes to the parts of the project outcomes.
Project Objectives
A project will be called successful if it is able to achieve the project
objectives. There are three criteria for defining and evaluating the
success of a project.
● Performance
● Cost
(C
)
___________________
(Source Meredith and Mantel – Project Management – A managerial approach)
ES
Notes
UP
148
● Time
The planned measures of the three criteria make the target for the
project.
Performance: The product of project must perform what it was
intended for. The specifications of project output must meet the
planned and agreed specifications. Performance is generally one
of the aspects leading to conflict between client and project team
leader. It is essential to clearly define the project objectives in the
planning phase leaving no scope of the dispute. Performance is the
essential criteria for the successful completion of a project.
UNIT 22: Management of Projects
149
Notes
ES
Performance
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Time
Cost
___________________
UP
___________________
Figure 22.5 Project success criteria
Cost: No project can be provided with unlimited resources. Each
project is associated with a budget in totality and a budget for each
part of the project. For a project to be termed as successful, it is essential that the project is completed within defined budget. The reasons causing cost overrun need to be identified at the planning stage
and controls need to be applied to avoid such circumstances to arise.
(C
)
Time: Finishing in scheduled time is an important aspect of projects. Schedule overruns not only cause intangible losses like loss
of reputation and trust and customer dissatisfaction but also leads
to cost overrun. Many times the schedule overruns lead to financial compensations to the customer apart from additional expense
in resources. A project for being termed as successful needs to be
completed in scheduled time.
So a project is successful if it is able to achieve its performance
objectives within scheduled time and allotted budget or cost.
Let us now have a look at the network analysis which also plays an
important role in project management.
Network analysis
Network analysis is the most widely used technique for project
scheduling. The technique involves identifying the precedence relation between various activities of the project and drawing a network
___________________
Operations & Material Management
150
___________________
Two notations are used for drawing of the network
ES
___________________
of the activities in accordance with their precedence relationship.
An Activity A is the predecessor to another Activity B if Activity B
cannot be started unless A is complete.
Notes
___________________
A circle denotes an event
___________________
___________________
___________________
___________________
___________________
An event is a specific moment in time when something has been accomplished. Completion of each activity leads to an event. The project network starts with an event denoting that nothingng has been
accomplished so far. The network ends with a single event denoting
that all activities involved in the project have been finished and the
project is completed.
Let us understand the use of circle and arrow for drawing the network of the project.
We need to follow some basic rules for developing the network.
● The network typically flows from left to right.
● An activity cannot begin unless all immediately preceding activities are completed.
● It’s not allowed to loop in.
● Conditional activities are not allowed.
● An activity is represented by a single arrow.
● A pair of events cannot be connected by more than one activity.
● There must be a single start and single end to the project network.
(C
)
___________________
An arrow denotes an activity
UP
___________________
The length of the arrow is NOT proportional to activity time.
Activity A is the predecessor to Activity B
A
1
BB
2
This is a simple event that does not involve multiple steps.
A
UNIT 22: Management of Projects
BB
A
BB
A
1
151
Notes
ES
1
2
Activity A is the predecessor to Activity B and Activity C
___________________
___________________
2
___________________
___________________
This is a burst event.
___________________
A
C
1
Activity A and B
3 are the predecessor to Activity C
2 B
2 B
This is a merge event that leads to result C by merging of two
other activities, A and B.
Activity A and B are the predecessor to Activity C and Activity
D
A
C
B
___________________
___________________
___________________
C
3
UP
1
A
___________________
D
(C
)
This is a hybrid event that leads to two results C and D by the
merging of two activities, A and B.
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Following is the information related to a software development project.
S.
No.
1
2
3
4
5
6
7
8
9
10
Task
Specification development
Process mapping
Developing software for process components
Testing of software
Developing hardware specifications
Procurement of hardware
Integration of software components
Installation of software on hardware
Pilot test
Training of users
Task
code
A
B
C
D
E
F
G
H
I
J
Predecessors
A, B
C
B
E
C
F, G
H
I
Develop a network for the project.
Solution
Example 22.2
Following is the information related to a construction project.
S.
Task
Task code
Predecessors
No.
(C
)
___________________
Example 22.1
ES
Notes
UP
152
1
Design development
A
-
2
Design approval
B
A
3
Vendor identification
C
A
4
Procurement of construction
material
D
B, C
5
Laying foundation
E
D
6
Raising pillars
F
E
7
Structure development
G
F
8
Finishing
H
G
9
Electrical work
I
G
10
Inspection
J
I
UNIT 22: Management of Projects
153
Develop a network for the project.
ES
Notes
___________________
___________________
___________________
___________________
Critical Path Method (CPM)
___________________
___________________
UP
After the development of the network, the interrelation of the various
activities involved in the project is established. The next process is
establishing a time for the activities. The time estimation has already
been discussed in previous sections. The establishment of time taken
by activities becomes the basis of the further analysis, which involves
determination time for competing for project and lack of activities.
Critical path method is the technique of analyzing and determining
the project work and its completion time.
CPM involves the following steps
● Making a drawing of the project network
● Identifying the paths leading from the first stage to finish
● Calculating the total time elapsed along each path
● The path with maximum total took time is called as the critical
path
(C
)
● The activities those are done during this path are known as
critical activities
Example 22.3
Apply CPM to identify the project completion time for the following data:
Activity
Predecessor
Activity time
A
–
3
B
–
5
C
–
7
D
C
3
E
A, B
7
F
E, D
3
G
D
2
H
F, G
2
___________________
___________________
___________________
___________________
Operations & Material Management
Notes
Let us see a network development in a project:-
___________________
___________________
___________________
A3
B5
C7
___________________
D3
___________________
___________________
___________________
___________________
H2
G2
Let us try to identify all paths on the network for reaching the finish
from the start. The direction of arrows should be taken care of.
We can identify four paths along this network.
A–E–F–H
B–E–F–H
C–D–G–H
C – D – F – H
Calculate the time taken by each path by adding the time taken by
an activity.
A–E–F–H
15
B–E–F–H
17
C–D–G–H
14
C–D–F–H
15
The critical path is the longest path in the network.
BEFH with a time requirement of 17 days is the critical path as it
has taken the maximum time. The time required by critical path
is called as project completion time and is equal to 17 days for this
project.
However, the method requires physically identifying all paths and
calculating the time required by each path. If the number of activities is more, the network gets complicated, and it becomes almost
impractical to identify each path by observation. So a more scientific
technique is required to identify a critical path on the network.
(C
)
___________________
F3
UP
___________________
E7
ES
154
The technique involves identifying 4 values for each activity:
Early start: The earliest time to start an activity. It depends upon
earliest accomplishment time of all predecessor activities.
Early finish: The earliest time for finishing the activity is obtained
by adding the activity time to the earliest start. For example, if the
UNIT 22: Management of Projects
155
Notes
ES
earliest start of activity is 32, and time required by activity is 4, the
early finish will be 32 + 4 = 36.
Late start: The latest time by which an activity must start to complete the project in time. To calculate it, the activity time is subtracted from the late finish time of the activity.
Late finish: The latest time by which an activity must finish. It
depends on the late start of all succeeding activities. Each activity
must finish latest by the time of late start of the succeeding activities to ensure that project is completed in time.
Let us try to determine early start (ES), early finish (EF), late start
(LS) and late finish (LF) for the activities in above network.
UP
Activities A, B and C have no predecessor, so they can start at time
zero. The activity time is 3, 5 and 7 respectively, so early finish for
these activities is 3, 5 and 7.
D can start after C is completed, so D cannot start before 7, that is
ES of D is 7 and its activity time being 3, its EF is 7 + 3 = 10.
Activity
ES
EF
A
0
3
B
0
LS
LF
5
C
0
D
7
7
E
5
F
12
15
G
10
12
H
15
17
10
12
(C
)
Activity E can start after both activities A and B are completed. So
E can start earliest at 5 and its activity time being 7, its EF is 5 +
7 = 12
F can start after completion of D and E, so it starts at 12 (ES) and
finishes at 12 + 3 = 15
G can start after completion of D, so it’s ES is 10 and EF is 12
The last activity H can start after F and G that is at 15 (ES) and
finishes at 17.
As the time of last activity for the early finish is 17, the project cannot be completed in less than 17 time periods. Hence, 17 is the project completion time.
___________________
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Operations & Material Management
___________________
___________________
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___________________
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___________________
___________________
___________________
Since we would like to finish the project at the earliest, the LF of last
activity is equal to its EF. So LF for H is 17. Since H has to finish at
17, it must start at 17 – 2 = 15 (LS).
F and G must be completed before H starts, so both F and G must
finish at 15. LS of succeeding activity is equal to LF of all earlier
activities. The LS of F and G is therefore 12 and 13 respectively.
The LF of E is equal to LS of F that is 12, and therefore its LS is
12 – 7 = 5.
Activity
A
B
ES
EF
LS
LF
0
3
2
5
0
5
0
5
C
0
7
2
9
D
7
10
9
12
E
5
12
5
12
F
12
15
12
15
G
10
12
13
15
H
15
17
15
17
Now consider Activity D. the start of Activity F and G depends on
completion of Activity D. LS of F and G is 12 and 13 respectively. To
allow both F and G to start at their LS, D must finish by 12 and so
must start by 9.
The LF of Activities A and B are equal to LS of E that is 5. So their
LS are 2 and 0 respectively. Similarly, LF of C is 9 (LF of D), and its
LS is 9 – 7 = 2.
Observe the ES and LS of all activities. The Activities B, E, F, and G
have equal LS and ES. They are critical activities, and so BEFH
is the critical path. LS and ES of Activities A, C, D, and G are not
equal, so they are non-critical activities. The non-critical activities
can be deferred to some extent so that they should not affect the
accomplishment time of the project but the delay in any critical activities leads to project delay.
(C
)
___________________
Let us now find out the LS and LF for all activities.
ES
Notes
UP
156
UNIT 22: Management of Projects
157
The time required for completion of activities for the Example 5.1 is
as under.
S. No. Task
Time (in
code
sors
days)
___________________
20
___________________
A
-
2
Process mapping
B
-
3
Developing software for
process components
C
A, B
4
Testing of software
D
C
5
Developing hardware specifications
E
B
6
Procurement of hardware
F
E
7
Integration of software components
G
C
8
Installation of software on
hardware
H
F, G
10
9
Pilot test
I
H
10
10
Training of users
J
I
30
15
90
5
5
UP
J
H
(C
)
___________________
___________________
G 30
Y5
___________________
30
D5
I
___________________
___________________
Let us start with developing the project network.
B 15
___________________
25
Determine the project completion time.
A 20
___________________
Predeces-
Specification development
C 90
___________________
Task
1
Solution
Notes
ES
Example 22.4
Z 25
Let us now determine ES, EF, LS, and LF for all activities.
S. No.
Task code
ES
EF
LS
LF
1
A
0
20
0
20
2
B
0
15
5
20
3
C
20
110
20
110
4
D
110
115
165
170
5
E
15
20
110
115
6
F
20
45
115
140
7
G
110
140
110
140
8
H
140
150
140
150
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Task code
9
I
10
J
ES
EF
LS
LF
150
160
150
160
160
170
160
170
So the critical path is ACGHIJ and project completion time is 170
days.
Project evaluation and review technique (PERT)
The estimate of time used in CPM is deterministic. However, in real
time projects, deterministic time for all activities is least expected.
There are various factors which affect the time taken by each activity. The time of activities is dependent on several uncertainties,
which cannot be ascertained precisely. For example, a construction
project may have uncertainties related to weather, transport time,
manpower availability, etc. A software development project may
need redesigning because of unacceptable test results, leading to
increasing in time. On the contrary, if the situations governing the
activity time are highly favorable, the activity may even take less
time than expected.
So the time estimates of various activities in a project are in general
probabilistic rather than deterministic. The technique used for network analysis when activity time is probabilistic is called PERT.
Three different time estimates are determined for each activity of
the project viz. pessimistic time (PT), optimistic time (OT) and most
likely time (MLT).
● PT: The time activity will take under adverse conditions
● OT: The time activity will take if conditions are favorable
● MLT: The time activity will take with the highest probability
(C
)
___________________
S. No.
ES
Notes
UP
158
The probable time and standard deviation of the events are calculated, which is then used to derive the completion time, which is
expected of the project and standard deviation of the project. This
information helps in anticipating probability of the project being
completed in a specific time.
(PT + 4 MLT + OT)
6
Standard Deviation= (PT – OT)
6
(PT – OT) 2
Variance =
6
Expected time =
(
)
UNIT 22: Management of Projects
159
The time estimates and precedence requirements of activities involved in a project are as under.
S.
No.
Task
code
Immediate
predecessors
1
A
2
Notes
ES
Example 22.5
___________________
___________________
Time estimate (days)
___________________
Optimistic
Most like-
Pessimistic
time
ly time
time
___________________
-
1
3
5
___________________
B
-
1
3
11
___________________
3
C
A, B
2
5
4
D
C
3
4
5
E
C
4
7
6
F
D
1
2
7
G
E
4
6
8
H
F, G
1
1
8
___________________
11
16
___________________
3
___________________
UP
14
1
Determine the expected completion time, standard deviation and
variance for all activities.
S.
No.
Task
code
Time estimate (days)
Optimistic
time
ET
Most Pessilikely mistic (PT + 4 MLT + OT)
6
time
time
1
A
1
3
2
B
1
3
3
C
2
5
4
D
3
4
5
E
4
7
6
F
1
2
7
G
4
8
H
1
Standard
Deviation
(PT – OT)
6
Variance
(
(PT – OT) 2
)
6
5
3
4/6=1/3
1/9
11
4
10 / 6 = 5 / 3
25 / 9
8
5
6/6=1
1
11
5
8/6=4/3
16 / 9
16
8
12 / 6 = 2
4
3
2
2 / 6 =1 / 3
1/9
6
14
7
10 / 6 = 5 / 3
25 / 9
1
1
1
0/6=0
0
(C
)
The expected time estimates can now be used to estimate the expected completion time of the project on the same lines as in case of
CPM. With the above-mentioned data, the standard deviation can
also be calculated for the completion time of the project. The standard deviation of the project completion will depend upon the standard deviation of critical activities.
To estimate project completion standard deviation:
● Draw a network for the project
● Identify critical activities
● Calculate variance for all the critical activities
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
___________________
___________________
___________________
● Calculate the summation of it
● Calculate the standard deviation of the completion time of the
project
Example 22.6
Determine the approximate time for project completion and standard deviation for example 22.5
Solution:
___________________
___________________
Standard
Deviation
(PT + 4 MLT + OT)
6
(PT – OT)
6
Immediate
Predecessors
1
A
-
3
4/6=1/3
1/9
2
B
-
4
10 / 6 = 5 / 3
25 / 9
3
C
A, B
5
6/6=1
1
4
D
C
5
8/6=4/3
16 / 9
5
E
C
8
12 / 6 = 2
4
6
F
D
2
2 / 6 =1 / 3
1/9
S. No.
Variance
(
(PT – OT) 2
)
6
7
G
E
7
10 / 6 = 5/3
25 / 9
8
H
F, G
1
0/6=0
0
Let us draw the network for the project. The time indicated for each
activity is the Expected time for the activity.
A3
D5
B4
F2
C5
E8
H1
G7
The paths from start to finish in the network and the time required
on each path can be identified as
(C
)
___________________
ET
Task
code
UP
___________________
ES
160
● A–C–D–F–H
(3 + 5 + 5 + 2 + 1 = 16)
● A–C–E–G–H
(3 + 5 + 8 + 2 + 1 = 19)
● B–C–D–F–H
(4 + 5 + 5 + 2 + 1 = 17)
● B–C–E–G–H
(4 + 5 + 8 + 2 + 1 = 20)
BCEGH being the longest path, becomes the critical path for the
above network and activities are critical activities for this path. The
project completion time is equal to the time required by longest path
that is 20 days.
UNIT 22: Management of Projects
161
Sum of variances of the critical activities
ES
Notes
= 25 / 9 + 1 + 4 + 25 / 9 + 0
___________________
= 95 / 9 = 10.56
___________________
Standard deviation is equal to square root of the variance of
project completion time
Standard deviation =√10.56 = 3.25
UP
Now let’s look at the calculation of probability for the project completion time. The variation in the project completion time is expected
to follow a normal distribution. For determining the probability of
project completion in a specific time T, normal variant Z needs to be
calculated
T – Te
σ
Where T is the time period
This the approximate completion time of the project
σ is the SD (Standard Deviation) of completion time of the project
To find out the relevant area under the curve for the probable completion time of a project.
The area indicates the probability of project completion in a specific
time period.
(C
)
___________________
___________________
The project completion time determined in the above example is Expected Time and actual time taken by the project may vary. The
extent of variation will be determined after finding the standard deviation. If the standard deviation is high for the project time, the
variation can be high as well in the actual project completion time.
Z=
___________________
Probability of project
Completion in time T
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___________________
___________________
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
Example 22.7
What is the probability of completing the project in 17 days considering the information is given in Example 22.5?
Solution:
___________________
___________________
___________________
Probability of project
completion in 17 days
___________________
___________________
Te = 20 days
T = 17 days
T
Te
Standard deviation = 3.25 days
T – Te
σ
17 – 20
Z=
= 0.92
3.25
The value of the area under the curve for Z = 0.92 (From normal
distribution table) is 0.3212. This is the area between Teand T. The
area on the left side of Te is 0.5 (The normal curve being the symmetrical and total area under the curve is 1.0)
Z=
So the total shaded area = 0.5 – 0.3907 = 0.1093
The probability of the project being completed in 24 days is thus
0.1093.
(C
)
___________________
UP
___________________
ES
162
Example 22.9
Calculate the probability of completion of the project in 19 days to
22 days considering the information is given in Example 22.5?
UNIT 22: Management of Projects
163
Solution:
ES
Notes
___________________
___________________
___________________
___________________
Probability of project
Completion between times
T1 and T2
___________________
___________________
___________________
Te= 20 days
T1 = 19 days
T2 = 22 days
Te
T2
Standard deviation = 3.25 days
T – Te
σ
22 – 20
Z1=
= 0.62
3.25
19 – 20
Z2=
= 0.31
3.25
The value of area under the curve for Z = 0.62 (From normal distribution table) is 0.2324 and for Z = 0.31, the value is 0.1217. So area
between 20 and 22 is 0.2324 and area between 19 and 20 is 0.1217.
The total shaded area is 0.2324 + 0.1217 = 0.3541
Z=
___________________
___________________
UP
T1
(C
)
The probability of project being completed in 19 days to 22 days is
thus 0.3541.
Summary
Project management involves planning and organization of a company’s resources to move a specific task, event or duty toward completion. It typically involves a one-time project rather than an ongoing
activity, and resources managed include personnel, finances, technology and intellectual property. A project manager helps to define
the goals and objectives of the project and determines when the various project components are to be completed and by whom; he also
___________________
Operations & Material Management
___________________
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___________________
___________________
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Review Questions
1. Define a project. How is a project different from conventional
forms of manufacturing?
2. “The project approach leads to higher efficiency and effectiveness.” Comment
3. “The tasks involved in a project are independent entities but
interdependent.” Elaborate.
4. Explain the stages involved in a project’s lifecycle with the help
of a diagram.
5. What are the criteria for assessing the success of a project?
(C
)
___________________
creates quality control checks to ensure completed components meet
a certain standard.
ES
Notes
UP
164
165
Unit 23
Stores Management
Learning Outcomes
ES
Notes
At the end of this chapter, students will be able to understand and explain:
The concept of stores management
\\
The objectives of store management
\\
The functions of store management
\\
The types of stores
\\
The layout and design of stores
\\
Storage systems
\\
Stores accounting systems
Introduction
UP
\\
The store is a crucial component for management of materials as it
is the place where materials are maintained safely, properly inventoried and readily available for usage. Storage form a crucial part of
the economic cycle. Being a specialized function, store management
lends a high degree of efficiency and effectiveness to material functions.
Objectives of store management
Effective store management has the following key objectives.
(C
)
● Ensure a smooth supply of required materials to various organizational users on time
● To prevent instances of overstocking and understocking
● Handle materials safely and save them from damage
● Save material against theft, fire or pilferage
● To reduce storage costs to a minimum level
● Maintain proper control over materials
● Effective utilization of space available
● Enhance efficiency of store personnel
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___________________
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Operations & Material Management
Notes
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Functions of a store
ES
166
Store personnel is responsible for carrying out the following functions.
● Receiving inward material
● Supervise unloading of material and tally with the list
___________________
● Preparing reports for any damaged goods or short receipts
___________________
● Preparing ‘goods rejection memo.’
___________________
● Distribution of received supplies to the respective units
___________________
● Dispatching relevant documents to the respective departments
● Ensuring cleanliness and orderliness in the storage space
● Making sure all inward and outward documentation is done
properly
● Safe and suitable management of supplies to save from damage
● Proper record keeping and accurate accounting of materials
Types of Stores
Closed store system
In this system, the supplies are stored in a closed area. Physical
control is exercised by locking of stores. Only authorized personnel
can enter the store’s area. Authorizing documents are required for
entry and exit of the material from the area.
Open stores system
In this system, material is stored near users to ensure easy accessibility. No closed storeroom exists. The material is stored close to the
point of use. The storage is done at each workplace as per requirement and availability of space. The storage facilities are open, and
workers have open access to it.
(C
)
___________________
UP
___________________
Random access stores system
This is a kind of closed stores in which no part has a defined location. Location is allocated on a random basis. Care is taken to keep
the parts in the same family as near as possible. Whenever a new
part arrives, location is allocated randomly on the basis of available slots. Example: A salon where hairbrushes, scissors, and other
UNIT 23: Stores Management
167
Notes
ES
beauty and facial products are stored on a random basis. However,
they try to keep similar products together, such as shampoos, facial
packs, combs, etc.
___________________
Let us now have a look at the methods by which we can keep records
for controlling stores.
___________________
Records for Controlling Store
___________________
___________________
___________________
● Bin card
Bin card is attached to the individual bin, and it keeps track
of the quantity of material coming in the bin and going out of
the bin. It also keeps indicating the balance available. It also
sometimes specifies the desired inventory levels. One card is
attached to each bin on the shelf containing the material and
record remains with the storekeeper for reference. The following is a format of a bin card.
___________________
(C
)
UP
Two types of records are generally maintained for all materials received, issued or transferred.
● Stores ledger
Store ledger along with the quantities incoming and outgoing
also records the financial value of the parts. While bin card is
one for each bin, the ledger contains information about many
items. The following is a format of a stores ledger.
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___________________
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Operations & Material Management
168
ES
Notes
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While planning the layout and design of stores, the following factors
should be considered:
● The space for receipt and inspection should be provided adjacent to the main stores.
● Different storage facilities should be situated in clearly defined
lanes so that items are quickly stored and located.
● Main lanes should usually be 1.5 – 3 meters wide, depending
upon the type of material and the amount of traffic involved.
● Clear markings should be made at storage space to facilitate
location and identification.
● The fast-moving items should be stored near the dispensing
window.
● The layout should permit the use of modern material handling
equipment.
(C
)
___________________
Layout and Design of Stores
UP
___________________
● Stores layout should encourage FIFO.
● Due space should be left for expansion purposes.
● A pleasing and hygienic environment must be provided within
storeroom.
● Adequate lighting arrangement should be provided.
● Adequate safety arrangement should be provided.
UNIT 23: Stores Management
169
Summary
ES
Notes
A professionally managed store has a clearly defined process
and space, for receiving incoming materials (Receiving Bay),
storing them safely until they are required (Custody) and send
them out to relevant departments as and when required (Issue).
In case of a manufacturing unit, this is a continuous process and
forms a cycle which is essential for smooth functioning of daily operations. The elementary task of the stores is to act as overseer and
supervisory manager for parts, supplies, and materials, and to assist the departments with their requirements.
Review Questions
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UP
___________________
1. What are the functions of stores?
2. Differentiate between closed and open stores system.
3. Explain random access stores system.
4. Explain different stores accounting systems.
(C
)
5. What factors should be considered for design and layout of
stores?
___________________
(C
)
ES
UP
171
UNIT 24
Sustaining and Improving
Operations
ES
Notes
___________________
___________________
___________________
___________________
Learning Objectives
After completion of this unit, the students will be able to:
\\
Explain the objectives of process improvement
\\
Discuss the importance of:
___________________
___________________
___________________
PDCA Cycle
o
Fishbone Diagram
o
Value Analysis
o
Kaizen
o
Business Process Reengineering (BPR)
o
Six Sigma
UP
o
Improvement
___________________
Improvement is an effort towards making the processes better in
terms of performance. An improvement process involves studying
the current process, measuring its performance and analyzing improvement opportunities.
Objectives of Process Improvement
● Achievement of higher quality
(C
)
● Faster process
● Cost reduction
● Higher productivity
● Less waste
● Increased customer satisfaction
The objective of improving the various operational activities can be
achieved by several methods, which are discussed as follows.
PDCA cycle
PDCA implies “Plan Do Check Act”. It is one of the most straightforward and unassuming techniques for process control and ongoing
___________________
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
___________________
improvement. It helps in improving the process and performance of
operational activities in a staged and steady manner. It is primarily
used in manufacturing and service industries for development of
latest products and is used in software development lifecycle.
ES
172
Add 1-2 sentences to explain what PDCA cycle is or what it
stands for. Explain why this cycle is used.
___________________
___________________
___________________
___________________
Check
Do
Figure 24.1 PDCA cycle
There are four steps in the cycle
Plan – Identify need for improvement and establish the improvement plan specifying objectives.
Do – Carry out the improvement plan. Collect data to analyze the
extent of improvement.
Check – Carry out an evaluation of data and verify that the improvement results are as per the plan.
Act – If results are not achieved, analyze the plan and make the
necessary changes
Fishbone Diagram (Cause and Effect Diagram)
(C
)
___________________
Plan
UP
___________________
Act
A cause and effect diagram offers a pictorial technique of identifying
the root cause of a problem. Because of its shape, it is also called
fishbone diagram. It was developed by Ishikawa, so it is also called
as Ishikawa diagram. It systematically categorizes the reasons of
problems and investigates deeper into all reasons that cause the
problem, till it reaches the root cause.
The figure 24.2 shows the Fishbone diagram with all the possible
reasons marked on different branches, collectively proceeding towards the root cause. The diagram investigates the causes of the
UNIT 24: Sustaining and Improving Operations
173
Notes
ES
reason for material, method, machine, manpower, measurement,
and environment.
___________________
Cause
Effect
___________________
___________________
Material
Method
Machine
___________________
___________________
Problem
___________________
___________________
Manpower
Measurement
Environment
___________________
UP
___________________
Figure 24.2 Fishbone diagram
Value Analysis
Value analysis refers to the critical investigation of the function of
components and materials of a product with an objective to reduce
the cost and enhance the performance of the product.
Steps for value analysis
● Identify a product whose cost is high and needs to be reduced.
● Identify all parts and components of the product.
● The question each part and component.
Does the component add value or can it be eliminated?
2.
Can the component be replaced by some other cheaper
alternative?
3.
Can the part be manufactured instead of purchasing the
same?
4.
Can specifications be changed to save cost or time?
5.
Is a combination of two parts possible?
6.
Seek suggestions from employees to reduce cost.
(C
)
1.
● Analyse the answers to the above questions and plan for improvement change.
___________________
Operations & Material Management
Notes
___________________
___________________
___________________
___________________
___________________
___________________
Kaizen
ES
174
Kaizen is a philosophy of continuous improvement.
It is reiterates the fact that “Improvement is always possible and
work can always be done in a better manner tomorrow than it is
being done today.” It involves all personnel of the organization to
strive for small changes in the process without going for large investments and make the process better and more efficient with present resources.
___________________
If it is not broken, do not fix it
___________________
Changes to
There are 5 S of Kaizen
1. SEIRI – SEIRI means Sort Out. It is the sorting out and discarding of unnecessary items in the workplace.
2. SEITION – Seition means to organize. After sorting, they
should organize.
3. SEISO – The word “SEISO” means to shine the workplace.
Keep your belongings neat and clean.
4. SEIKETSU-SEIKETSU – refers to Standardization. There
should be standard rules and regulations related to the usage
of the things.
5. SHITSUKE or Self Discipline – Self-discipline is the most
crucial factor to achieve success. Individual self-discipline can
create wonders.
(C
)
___________________
Just because it is not broken does not mean it cannot be
fixed...
UP
___________________
Business Process Reengineering (BPR)
Dramatic improvement in performance by fundamental rethinking
and radical redesign of business processes is termed as BPR. BPR
is based on innovative thinking and creation rather than small improvement.
A process subjected to re-engineering should be a core business process of the firm. Reengineering focuses on the complete process in
totality rather than focusing on the part of the process.
UNIT 24: Sustaining and Improving Operations
175
Notes
ES
Some aspects of BPR are as under:
● Cross-functional teams – BPR is a team work, which requires
personnel from various cross-functional departments.
___________________
● Critical processes – The focus should be on improving the
core and critical processes in totality.
___________________
● Information technology – Use of IT plays a vital role in BPR
efforts.
● Strong leadership – Strong leadership and motivation are
necessary for BPR effort.
___________________
___________________
___________________
___________________
___________________
___________________
Six Sigma
___________________
UP
Six Sigma is a business process that aims to improve quality, reduce
costs and enhance customer satisfaction. Statistically, six sigma
means reducing the number of defects during any process, product,
or service per million opportunities to less 3.4 .
Conceptually, the term is much broader; it aims to reduce the instances of defects so that lower costing is achieved and customer
satisfaction is improved, through a well-developed program based
on usage of specific tools and techniques, to accomplish key business
objectives with specific projects. In the business world, six-sigma
programmes have become a key way to improve quality, save time,
cut costs, and improve customer satisfaction.
Six-sigma programmes can be employed in design, production, service, inventory management, and delivery. It is important for six-sigma projects to be aligned with organizational strategy.
(C
)
It includes the following points:
● Designing the processes and strategies related to it.
● Measuring the parameters that are important for quality.
● Analysing and developing substitute of superior quality.
● Designing the processes and its complete detailing.
● Verifying the process and implementing the same.
● Controlling the process at the same time so that they should not
surpass the limitations.
___________________
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
The success of the business will become more efficient if they can
improve their operations management. If any organization wants
to achieve success in modern day highly competitive environment,
it has to pursue Operational Improvement. In addition, it plays an
enormous role in driving growth and profitability. The organization
always tends to decrease waste, reduce costs, and set up maintainable programs for achievement of reliable results. For this, Overall
equipment effectiveness (OEE) is used by organizations as it is a
key performance indicator, for analyzing operational efficiency.
Review Questions
1. What is productivity?
2. What is the significance of measuring productivity?
3. What are the various objectives of process improvement?
4. Explain the term “kaizen.” What are the important aspects of
Six Sigma?
5. Write a short note:
o
PDCA Cycle
o
BPR
o
Value Analysis
(C
)
___________________
Summary
UP
176
ES
Operations & Material Management
177
Unit 25
ES
Notes
___________________
Case Study
___________________
Initiatives in an Industry and
Sustainability
___________________
___________________
___________________
___________________
Case 1
UP
There is a retail company that has released their international responsibility report. The report continues to evolve from major sustainability efforts to aggressive, full-blown Corporate Social Responsibility under current leadership.
For example, here is a phrase from the chief whose opening letter
says: “What was once largely about our own operations has expanded and shifted into helping rewire whole social and environmental
systems.” Wow.
(C
)
Many of the company’s initiatives involve working with salespersons to make sustainability and other improvements. A summary of
___________________
___________________
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
That is a lot of activity but hardly tells the whole story. From a more
overall perspective, for instance in early months of 2017 “Project
Gigaton” was declared by the company wherein it would work with
its vendors to reduce 1 Gigaton of emission between 2015-2030.
Initially announced in 2009, the Sustainability Index for Suppliers
has witnessed significant progress.
The company also cites progress with its Sustainability Index for
suppliers, first announced in 2009. In FY2017, the categories which
are covered in the index, company achieved the goal of buying 70%
of goods sourced from US from suppliers participating in the index.
Last year, 60% growth was registered in the number of suppliers
who completed the data survey with around 2,000 suppliers completing 5,300 surveys. It also says that more than 300 of its clients
now have the scorecards for their suppliers.
The bottom line: if you are part of its supply chain, you will be part
of its Social Responsibility efforts – big time.
Review Questions
1. What is your take away from the case?
2. Do you think any area that the company has left for achieving
sustainability?
Case 2
New Delhi Laboratories Private limited [NDL] is a company engaged infiltration of transformers oil, transformer troubleshooting
and testing of transformer oil for different performance characteristics. The company is based in Delhi with its laboratory at Bahadurgarh. The laboratory of the company is accredited for its quality
management system by National Accreditation Board for Laboratories. NDL was founded in the year 1988 and since then has come
to known as one point service center for all transformer related requirements.
(C
)
___________________
some of those by product category from the report is provided below,
as the Supply Chain Graphic of the Week.
ES
Notes
UP
178
Recently, managing director of the company, Mr. Anil Kohli has been
in a dilemma, not sure whether to continue with a new product in
which already a lot of money has been invested or not. The ­product
UNIT 25: Case Study
179
Notes
ES
has not found acceptance in the market to the level, anticipated by
Mr. Kohli in the beginning. Mr. Kohli has to decide urgently, whether to renew the contract or not.
Mr. Anil Kohli, Managing Director of the company recently came to
know about a new sensor developed by electronic research and development association [ERDA], Vadodara. The new sensor was able
to detect a fault in the transformer at its origin and as such was
able to save high transformer repair costs later on. Mr. Kohli saw
a bright business prospect in the sensor. But the actual conditions
were much different than anticipated.
UP
When Mr.Kohli first came to know about the fault sensor developed
by ERDA, Vadodara, the concept immediately fascinated him. His
company NDL, which was already in the field of transformer service, enjoyed a reputation of one point service center for transformer troubleshooting in the industry. He had realized how the minor
problems in the transformers could become giant and lead to high
costs of repair, apart from disrupting the production operation in
the industry. The new sensor was supposed to detect faults at the
initiation of the problem and thereby offered a preventive measure
rather than costly corrective measures.
He returned to ERDA with his technical manager and a lot of technical discussions followed. A number of meetings with ERDA and with
own staff followed. A month later, it was decided to proceed ahead
with the project. But Mr. Kohli decided to carry out some market
survey before initiating the project. A vigorous market study followed, and sale projections were made for the next 5 years.
(C
)
The market survey indicated an encouraging response from the market and Mr. Kohli decided to launch the project. Discussions with
ERDA personal were held, and a technology transfer fee of Rs. 1,
50,000 was decided, along with Rs. 3,000 per piece sold, like royalty.
He also realized that ERDA only had a laboratory prototype, which
will have to be converted into commercial product.
Mr. Anil Kohli had further discussions with his technical personnel
and assessment was done for the preliminary expenses which included technology transfer fee, product development, infrastructure,
and consultancy, etc. The total preliminary expenses were anticipated as Rs. 10,53,000
In August 2012, the technology transfer deal was finalized. Although
the agreement was for a period of 2 years, Anil Kohli expected to
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Operations & Material Management
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
The commercialization of Sensofast began soon, and product development was initiated to make it suitable for industries. Side by side,
vigorous marketing also was initiated. It took 3 months to convert
the laboratory prototype into product prototype. The sales personnel
were very enthusiastic about the response from industry.
The financial estimates were made with respect to annual fixed expenses and variable expenses per product, which were Rs. 5,75,000
and Rs. 1,11,000 respectively.
The final commercial prototype was ready in December 2013. Anil
Kohli decided to launch the product in a seminar. A seminar was organized, and invitations were sent to senior personnel of the industry. The attendance at the seminar was encouraging. The technical
experts from ERDA explained the fundamentals of Sensofast and a
practical demonstration was also arranged. The product was priced
at Rs. 1,35,000.
The marketing team started enthusiastically on the new product,
with Managing Director leading and monitoring the programme
daily. However, as the time passed, he realized that the potential
was not as high as he had anticipated. During the years 2014 and
2015, against an anticipated sale of 100 pieces, he was able to mature sales of 10 pieces only. Although a lot of enquires were flowing
in, they did not seem to materialize into sales.
The sales force started getting frustrated because even after their
best efforts, they were not able to generate sales. Anil Kohli also
started reviewing his decision. While he was still in a dilemma, a
letter was received from ERDA, extending the contract for another
3 years as initially requested by NDL.
(C
)
___________________
r­ enew it at least for the 3 more years later on. NDL witch was in the
service sector, entered into product manufacturing. The trade name
of the product was proudly decided as Sensofast.
ES
Notes
UP
180
Review Questions
1. Was NDL right in venturing into Sensofast?
2. What decision should the managing director of the company
take now?
S
PE
)U
(C