Course Content
SECTION A
Overview of Operation Management
Unit 1: Introduction to Operations Management
1. Scope of Operations Management
Operations management is about the management of the processes that produce or deliver
goods and services. Not every organisation will have a functional department called
‘operations’, but they will all undertake operations activities because every organisation
produces goods and/or delivers services.
The operations manager will have responsibility for managing the resources involved in this
process. Positions involved in operations have a variety of names, and may differ between the
manufacturing and service sectors. Examples of job titles involved in manufacturing include
logistics manager and industrial engineer. Examples in the service industry include operations
control manager (scheduling flights for an airline), quality manager, hotel manager and retail
manager.
People involved in operations participate in a wide variety of decision
areas in an organisation, examples of which are given below:
• Service Operations: How do we ensure customer receives a prompt service?
• Operations Strategy: What strategy should be followed?
• Operations Performance: How do we measure the objectives performance of our
operations processes?
• Process: Types How do we configure the process which will deliver our service to
customers?
• Layout Design: How do we organize the physical layout of our facilities and people?
• Long-term Capacity: How do we ensure we have Planning the correct amount of capacity
available when needed?
• Facility Location: What should be the location of our operations facilities?
• Process Technologies: What role should technology have in the transformation of materials
in the operations system?
• Designing Products: What products and services and Services should the organization
provide?
• Process Design: How do we design the service delivery process?
• Job Design: How do we motivate our employees?
• Planning and Control: How do we deploy our staff day-to-day?
• Capacity Management: How do we ensure that our service is reliably available to our
customers?
• Inventory Management: How can we keep track of our inventory?
• Lean Operations and JIT: How do we implement lean operations?
• Enterprise Resource: How do we organise the Planning movement of goods across the
supply chain?
• Supply Chain Management: What benefits could e-procurement bring to our operations?
• Project Management: How do we ensure our projects finish on time and within budget?
• Quality: How can we implement a TQM programme?
• Operations Improvement: How do we improve our operations performance over time?
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Operations management covers a very wide scope: Operation Management Elements
Operations management is important.
1.
It is concerned with creating the services and products upon which we all depend. All
organizations produce some mixture of services and products, whether that organization is
large or small, manufacturing or service, for profit or not for profit, public or private.
Thankfully, most companies have now come to understand the importance of operations. This
is because they have realized that effective operations management gives the potential to
improve both efficiency and customer service simultaneously. But more than this, operations
management is everywhere, it is not confined to the operations function. All managers,
whether they are called Operations or Marketing or Human Resources or Finance, or
whatever, manage processes and serve customers (internal or external). This makes at least
part of their activities ‘operations’.
Operations management is also exciting.
2.
It is at the center of so many of the changes affecting the business world – changes in
customer preference, changes in supply networks brought about by internet-based
technologies, changes in what we want to do at work, how we want to work, where we want
to work, and so on. There has rarely been a time when operations management was more
topical or more at the heart of business and cultural shifts.
Operations management is also challenging.
3.
Promoting the creativity which will allow organizations to respond to so many changes is
becoming the prime task of operations managers. It is they who must find the solutions to
technological and environmental challenges, the pressures to be socially responsible, the
increasing globalization of markets and the difficult-to-define areas of knowledge
management.
Major Functions For operations management
The operations function is central to the organization because it creates and delivers services
and products, which is its reason for existing. The operations function is one of the three core
functions of any organization.
These are:
The marketing (including sales) function – which is responsible for
●
communicating the organization’s services and products to its markets in order to
generate customer requests.
The product/service development function – which is responsible for
●
coming up with new and modified services and products in order to generate future
customer requests;
The operations function – which is responsible for the creation and delivery
●
of services and products based on customer requests.
Operations Management perspectives:
Operations Management can be viewed from three perspectives.
1. Organisational perspective
Operations Management can be understood from the organisational point of view by taking
into consideration factors that are under the control of the organisation and disregarding all
other factors that affect organisational performance.
2. Systems perspective
A systems view of Operations Management that is more comprehensive than the
organization’s view and it takes into consideration the fact that organizations do not operate
in a vacuum, hence are affected by the environment in which they operate. Therefore, an
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organisation has to coexist and interact with its environment in order to effectively achieve its
objectives.
3. Supply Chain perspective
Viewing Operations management in a supply chain perspective puts more emphasis on the
organisation’s supply side, but being cognisant of the complexities and importance of dealing
with suppliers in the manner that achieves value addition to the organisation.
It also emphasises on the transformational processes of the buying organisation to ensure
efficiency and effectiveness. Importantly also, it emphasises on the demand side of the
organisation by appreciating the complexity and importance of satisfying customer
requirements.
Need for Operations Management
In general, Operations management is a strategic capability which greatly impacts on
business performance and profits directly. It is therefore important to study and properly
manage Operations in order to achieve enhancement in the following:
1. Product/Service design
Proper Operations management will create opportunities by designing and bringing to the
market new or improved products or services that posses characteristics that are attractive to
the intended customers thereby increasing sales and revenue.
2. Process design
Due to proper Operations management, processes that are involved in creation of products
and services are analyzed and designed to provide convenience and time/cost savings for both
the producer and the customer, thereby increasing revenue.
3. Efficiency and effectiveness
People that have studied and apply Operations management skills in organizations will
become efficient and effective. For those in finance, making an audit of inventory turnover
and provide recommendations (the number of times inventory is sold and replaced) becomes
simple if one can asses the underlying operational reasons. For marketers, a promise to
customers on speed of delivery of a product or service can only be genuine after considering
the operational capabilities of the business.
In Human Resource, appropriate recruitment and staff management can only be effective if
skills needed for operational activities are analyzed.
4. Customer service
Well managed organization operations will lead to production of optimum quantities that
reduce holding costs, and at the same time meeting expected demand and agreed time of
delivery.
5. Adaptability for future survival.
Organisations have to stand a test of time even when they are operating in a fast changing
environment. Operations management will ensure flexibility of organisations in meeting
customer demands. For example, if capacity of a business’ facilities and machinery are
designed to accommodate future expansion, it is easy for such a business to cope with a
sudden rise in product or service demand, thereby leading to customer satisfaction.
Support Functions For operations management
In addition, there are the support functions which enable the core functions to operate
effectively. These include:
the accounting and finance function,
▪
the technical function,
▪
the human resources function,
▪
the information systems function.
▪
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Remember that different organizations will call their various functions by different names
and will have a different set of support functions. Almost all organizations, however, will
have the three core functions, because all organizations have a fundamental need to sell their
products and services, meet customer requests for services and products, and come up with
new services and products to satisfy customers in the future.
The relationship between major functions and support functions are illustrated below:
What Operations Management is involved in:
a. Forecasting and planning on:
i. Products and services: What should we be producing and what will be our
market?
ii. Make or buy: What will we be doing ourselves and what will we be
outsourcing form service providers. This decision has an impact on costs as
well as quality of products or services.
iii. Capacity: How much should we be producing and how much should be the
maximum production capability should our plant have. Capacity decisions
influence operating costs and the ability to respond to customer demand.
iv. Location: Where should we locate our office facilities, production plant,
distribution centers, etc. Location decisions among others, impact
transportation costs, labor availability, material costs, and access to markets.
b. Organising
Organisational structure: Which and how many departments are we going to have and which
and how many units will be in such departments. This determines the size of the organisation
(hence costs), organisation of actual work (who will be doing what) and chain of command. It
also affects career progression and employee motivation.
c. Staffing
This involves hiring and laying off decisions. Staffing determines what skills and
competencies to hire (temporarily or permanent) in an organisation and ensure proper
motivational initiatives that add value to the organisation. These decisions affect a business’
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labour attractiveness and staff turnover, which consequently affects consistency of quality
and services produced.
d. Directing
This relates to the chain of command laid down by the organisational structure. It involves
issuance of work orders and providing leadership to those responsible for assigned work to
perform accordingly.
e. Controlling
This ensures that everything pertaining to the organisation occurs in conformity with the
plans laid down. It ensures that at intervals, predetermined plans are compared with the actual
performance. This has a very direct impact on costs, as well as the quality of products and
services produced.
f. Budgeting
Operations management also involves financial planning so that costs of running the business
should not exceed the revenue earned from spending on organisational activities. This has a
direct bearing on profitability of the business.
2. Operations Management and decision making
Decision-making is the process of choosing a course of action from among alternatives to
achieve a desired goal. It is one of the important aspects in operations management.
Characteristics of decision making process:
1. Decision making is a selection process. The best alternative is selected out of many
available alternatives.
2. Decision-making is a goal-oriented process. Decisions are made to achieve some goal
or objective.
3. Decision making is the end process. It is preceded by detailed discussion and selection
of alternatives.
4. Decision making is a human and rational process involving the application or
intellectual abilities. It involves deep thinking and foreseeing things.
5. Decision making is a dynamic process. An individual takes a number of decisions
each day. Operations Management and decision making
Terry GR Lays’ decision making sequence:
 Determining the problem.
 Acquiring general background information and different viewpoints about the
problem.
 State what appears to be the best course of action.
 Investigate alternative solutions.
 Evaluate the alternative solutions.
 Select the best alternative and implement.
 Institute follow up and modify the decision the possible necessary.
In managing operations, it is vital to make sure that a proper decision-making process has
been followed in the pursuit of coming up with a good and right decision, whilst avoiding
wrong and bad decisions.
A wrong decision cannot be avoided because you make the best decision out of the wrong
information available (it is a mistake every manager is bound to make). A bad decision
however is made after knowing all the correct facts on the high chances of the decision not
bearing fruits (for example launching a product after experts have warned you of its faulty
characteristics).
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Types of decisions in Operations Management
Operations management make strategic as well operational decisions.
1. Strategic decisions
These are decisions that have a long-term effect as well as affecting the entire business.
Because they influence a larger part of the system, it is extremely undesirable and difficult to
undo them when implemented. They also require more resources, skills as well as judgement.
It is therefore important for operations managers to be very certain on the implementation of
these decisions. These decisions must be made by top level managers in collaboration with
each other for them to have a harmonizing effect across the entire organization.
Below are examples of strategic decisions that operations are supposed to make:
 Product selection and design-what product to offer. This has a long term effect
as well as greatly impact on the overall performance on the market against
competitors. In essence, this decision will define the business’ survival.
 Process selection and planning-choosing optimal process and detailing the
processes of resource conversion required.
 Facilities location-location of production systems or facilities (warehouses,
distribution centers, offices, etc.).
 Facilities layout and materials handling-this is the orderly and logical
designing of activity centers in order to facilitate materials flow, reduce
handling costs, and minimize delays.
 Capacity planning-acquisition of productive resources. (capacity: maximum
available amount of output of the conversion process over some specified time
span
2. Operational decisions
These decisions deal with short term planning and control of problems. Mostly, they are
routine decisions related with general functioning of the organisational operations. They do
not require much evaluation and analysis and can be carried quickly.
Ample powers to carry out these decisions should be delegated to middle and lower ranks.
 Production scheduling and control-determine optimal schedule and sequence of
operations, economic batch quantity, machine assignment, etc. Production control
is a follow up of the production plans laid down by top management.
 Inventory planning and control-determining optimal inventory levels at raw
material, WIP and finished goods.
 Quality control and assurance-ensuring that whatever product/ service that is
produced satisfies the quality requirements of the customer.
 Work design-design of work methods, systems and procedures (e.g. Job
enlargement), design of work incentives.
 Maintenance and replacement-optimal policies for repetitive, scheduled and
breakdown maintenance of machines, replacement decisions.
3. Importance of Studying Operations Management
Why study Operations Management
These are a total sum of efforts and processes that are carried out in order to create value for
the consumers in the form of products or services.
It can therefore be said that operations as a total some of processes, encompasses production,
hence for most authors, they emphasize their discussion on ‘operations management’.
Operations can also be viewed as a part of an organization, a function among other
organisational functions.
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Below are the generic/basic functions of organisations:
 Marketing- Generates demand (sales promotion, advertising, market research).
 Finance/accounting–Tracks how well the organization is doing, pays bills, collects the
money, investments.
 Human Resources–Provides labor, wage and salary administration and job evaluation,
recruitment.
 Operations–Creates the product/ services (facilities layout, product development and
design, capacity planning).
With this view, Operations is said to be one of very core functions of any organisation, that is
devoted to the production or delivery of goods and services.
In affirming the importance of Operations, Porter (1985) include the
Operations function among the primary activities of organisations.
Types of Operations:
 Physical: Farming, Mining, Construction, Manufacturing, Power generation, etc.
 Locational: Warehousing, Trucking, mail service, moving, taxis, airlines, etc.
 Exchange: Retailing, wholesaling, banking, renting or leasing, etc.
 Entertainment: Films, radio and television, plays, concerts, etc.
 Informational: Newspapers, radio and television, telephone, satellites, the internet,
etc.
 Physiological: Healthcare. Inputs (Doctors, Nurses, Medical supplies, Equipment,
Laboratories, etc.), Processing (Examination, Surgery, Monitoring, Medication,
Therapy, etc.), and Output (Healthy patients)
4. Historical evolution of Operations Management
Systems of production have been in existence since ancient times. This is evidenced by
historical features that we see for example the great wall of china built by Chinese emperors
(220-206 BC) that stretches to 21,196km, Egyptian pyramids (around 600 BC), ships built by
the Spanish and roman empires, roads and aqueducts, etc.
Although these ancient works are public works, they provide proof of the human ability to
organize themselves and materials for production. The production of goods for sale, in the
modern sense, and in the factory systems that are in existence can be traced from how it
began and how such systems of production keep on changing.
The Industrial Revolution
The Industrial Revolution was basically a transition on methods and systems of
manufacturing. It began in the 1770 sin England and spread to the rest of Europe and to the
United States during the 19thcentury.
Prior to the Industrial Revolution period, goods were produced in small shops by craftsmen
and their apprentices.
Under the craft production system, it was common for one person to be responsible for
making a product in its entirety, such as a horse-drawn wagon or a piece of furniture, from
start to finish.
It required high skills yet simple tools to produce and the products were usually unique each
time they are produced.
Craft production system had major shortcomings. Because products were made by skilled
craftsmen who custom fitted parts, production was slow and costly. And when parts failed,
the replacements also had to be custom made, which was also slow and costly.
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Another shortcoming was that production costs did not decrease as volume increased; there
were no economies of scale, which would have provided a major incentive for companies to
expand. Instead, many small companies emerged, each with its own set of standards.
Due to high demand of products, a number of innovations changed the methods of production
by substituting machine power for human power.
The most significant of these was the steam engine, made practical by James Watt around
1764, because it provided a source of power to operate machines in factories. The availability
of coal supplies and iron ore provided materials for generating power and making machinery.
The new machines, made of iron, were much stronger and more durable than the simple
wooden or rough iron machines that were being used in the craft production system.
Because of use of durable machines, volume of production increased, Costs were reduced
because of economies of scale, and also time of production was greatly reduced.
The Industrial Revolution era was further advanced with the invention of the gasoline engine
and electricity in the 1800s.
Scientific Management
This era started around 1880s and gained more popularity in the 1910s. The scientific
management era brought widespread changes to the management of operations in the
factories. The movement was spearheaded by the efficiency engineer and inventor Frederick
Winslow Taylor, who is often referred to as the father of scientific management.
Taylor believed in a "science of management" based on observation, measurement, analysis
and improvement of work methods, and economic incentives. He studied work methods in
great detail by conducting stopwatch studies in order to establish standard output per worker
on each task, as well as to identify the best method for doing each job.
1. Competitiveness, strategy and productivity
Competitiveness
In business, the name of the game is competition. Those who understand how to play the
game will succeed, those who don’t are doomed to failure.
It should be noted that this game is not just a company against other companies. In companies
that have multiple factories or divisions producing the same item or service, factories or
divisions sometimes find themselves competing with each other.
When a competitor (another company or sister factory or division) can turn out products
better, cheaper, and faster; that spells real trouble for the factory or division that is
performing at a lower level.
Consequences can be layoffs or shutdown if managers cannot turn things round. The bottom
line is better quality, higher productivity, lower costs, and the ability to quickly respond to
customer needs. It is therefore incumbent for businesses to develop solid strategies for
dealing with these important issues in business.
Competitiveness is a measure of how effectively an organization meets the needs of
customers relative to others that offer similar goods or services. It is an important factor in
determining whether a company prospers, barely gets by, or fails.
Quality refers to materials and workmanship, as well as design. Usually, it relates to a buyer's
perceptions of how well the product or service will serve its intended purpose. Other
businesses choose to compete by offering products that customers will eventually consider
having better characteristics than those of competitors.
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
Producer service differentiation refers to any special features (e.g., ease of use,
convenient location) that cause a product or service to be perceived by the buyer as
more suitable than a competitor's product or service.
 Flexibility is the ability to respond to changes. The better a company or department is
at responding to changes, the greater its competitive advantage over another company
that is not as responsive. The changes might relate to increases or decreases in volume
demanded, or to changes in the design of goods or services.
 Time refers to a number of different aspects of an organization's operations.
Another is how quickly new products or services are developed and brought to the market.
How quickly a product or service is delivered to a customer. This can be facilitated by faster
movement of information backward through the supply chain. Another is the rate at which
improvements in products or processes are made.
 Service might involve after-sale activities that are perceived by customers as value
added; such as setup, warranty work, technical support, or extra attention while work
is in progress, such as courtesy calls and keeping the customer informed.
Strategy
In developing strategies that are to achieve competitive advantage, a business needs to
identify which elements are order qualifiers and which ones are order winners.
This concept was developed by Terry Hills (1993).
Hills states that order qualifiers are those characteristics that the company must comply with
to be considered as a possible supplier.
Having a good performance in these characteristics, however, is not enough to win the orders,
and exceeding the threshold limit for these factors influences nothing or very little in the
customer final decision. These characteristics are considered by potential customers as
minimum standards of acceptability to be considered as a potential for purchase.
On the other hand, order winners are characteristics of an organization's goods or services
that cause them to be perceived as better than the competition.
These characteristics are those that make up the company differentiation in comparison to the
competitors and allow businesses that hold them to win business. The higher a business
scores in these factors, the higher the chances of winning the order.
Both groups of criteria are essential to the business success.
Therefore, suppliers must guarantee meeting the qualifying criteria in order to get into and
stay in a market place, while performance in the order winning criteria is the key to win the
battle for customers’ preference. Whilst in the drive to achieve competitive advantage over
others in the industry, it is important that ethical behaviour on the part of the organisation as
well as its employees is always regarded.
Managers have to be vigilant and ensure that all rules and regulations that govern the industry
are being followed. Also, it is important that focus is not only emphasised on the internal
organisational activities. Focus has to be broadened by considering the entire supply chain
and environment in which the business is operating.
Organizations fail, or perform poorly, for a variety of reasons. Being aware of those reasons
can help managers avoid making similar mistakes. Among the chief reasons for failure are
the following:
 Putting too much emphasis on short-term financial performance at the expense of long
term goals through research and development.
 Failing to take advantage of strengths and opportunities, and/or failing to recognize
competitive threats.
 Neglecting operations.
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
Placing too much emphasis on product and service design and not enough on process
design and improvement.
 Neglecting investments in capital and human resources.
 Failing to establish good internal communications and cooperation among different
functional areas.
 Failing to consider customer wants and needs.
Productivity
This is a measure of the effective and efficient use of resources; hence it is an objective
measure of efficiency on resource utilization usually expressed as a ratio of output to
input(output/input). It is a quantitative relationship between what we produce and what we
have spent to produce. Since it is a measure of efficiency, higher productivity means lower
costs of production as well as higher profitability and better competitive advantage.
Higher or improved productivity means that more is produced with the same expenditure of
resources, or even with lesser expenditure on factors of production e.g. land, materials,
machine, time or labor.
 Total-factor productivity (TFP)
Total factor productivity is measured by combining the contribution of all the resources used
in the production of goods and services and dividing it into the output.It gives an aggregateof
how efficient a process has been of producing goods and services, without looking at specific
contribution of each factor of production. TFP does not show the interaction between each
input and output separately and is thus too broad to be used as a tool for improving specific
areas. It requires that total output must be expressed in the same unit of measure and total
input must be expressed in the same unit of measure.
 Productivity growth
Productivity ratio is nothing but a number. It becomes useful when the measure is used in
comparison with previous measurement or in comparison with a competitor, or comparing
with a common and expected standard.
In operations, productivity measurement is important because it defines the level of
individual, machine, team, department, as well as an entire organization's performance,
thereby making it easy to improve.
Productivity measurement also relates to competitiveness.
If two firms both have the same level of output but one requires less input because of higher
productivity, that one will be able to charge a lower price and consequently increase its share
of the market.
Operations Performance Objectives
In order to ensure that resources are allocated appropriately in operations it is necessary to
record, monitor and review aspects of operations performance. A key task in this process is
the identification of appropriate measures of performance that relate to the internal and
external factors that are relevant to organisational competitiveness.
The five basic operations performance objectives which allow the organisation to measure its
operations performance. The performance objectives are quality, speed, dependability,
flexibility and cost. Each one of these objectives will be discussed in
terms of how they are measured and their significance to organisational
competitiveness.
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FIVE BASIC OPERATIONS PERFORMANCE OBJECTIVES
1. Quality
From customer perspective quality characteristics include reliability, performance and
aesthetics. From an operations viewpoint quality is related to how closely the product or
service meets the specification required by the design, termed the ‘quality of conformance’.
The advantages of good quality on competitiveness include:
• Increased dependability: less problems due to poor quality mean a more reliable delivery
process.
• Reduced costs: if things are done right first-time expenditure is saved on
scrap and correcting mistakes.
• Improved customer service: a consistently high-quality product or ser vice will
lead to high customer satisfaction.
2. Speed
Speed is the time delay between a customer request for a product or service and the receiving
of that product or service. Although the use of a make-to-stock system may reduce the
delivery time as seen by the customer, it cannot be used for services and has disadvantages
associated with producing for future demand in manufacturing.
These include the risk of the products becoming obsolete, inaccurate forecasting of demand
leading to stock-out or unwanted stock, the cost of any stock in terms of working capital and
the decreased ability to react quickly to changes in customer requirements.
Thus the advantage of speed is that it can be used to reduce both costs (by eliminating the
costs associated with make-to-stock systems) and delivery time, leading to better customer
service.
3. Dependability
Dependability refers to consistently meeting a promised delivery time for a product or service
to a customer. Thus an increase in delivery speed
may not lead to customer satisfaction if it is not produced in a consistent manner.
Dependability can be measured by the percentage of customers that
receive a product or service within the delivery time promised.
Dependability leads to better customer service when the customer can
trust that the product or service will be delivered when expected.
Dependability can also lead to lower cost, in that progress checking
and other activities designed to ensure things happen on time can be
reduced within the organisation.
Unit 2: Product and Service Design
1. New products and services development
Sources for new or redesigned products and services
Product and service design
It is the detailed specification of a manufactured item’s parts (or detailed specification of
components of a service) and their relationship to the whole.
Product and service design deals with conversion of ideas into consumable reality.
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Process design
Process design is a macroscopic decision-making of an overall process route for converting
the raw material into finished goods. These decisions encompass the selection of a process,
choice of technology, process flow analysis and layout of the facilities. Hence, the important
decisions in process design are to analyze the workflow for converting raw materials into
finished products.
Both these processes are integral aspects in operations as they define how a product or
service will come out to be, thereby affecting demand on the market as well as cost of
production. Product and service as well as process design touch every aspect of a business
organization, from operations and supply chains to finance, marketing, accounting, and
information systems, hence design decisions have far-reaching implications for the
organization and its success in the market place.
It is important therefore that design decisions should be closely tied to an organisation’s
overall strategy and that the processes should be a product of co-ordinated efforts involving
the entire business. Sources for new or redesigned products and services
Considerations in Product and Service design
1. Customer satisfaction
This is the main or primary focus of product and service design. The process aims at
satisfying the customer while making a reasonable profit. A business has to make sure
that a product or service being offered to the customer is a translation of customer needs,
such that the features embedded and components of the product and service will provide
functionality as required by the customer.
2. Cost/Profit: This include cost of production, the price at which the customer will be
paying for the product or service, as well as the profitability towards the business.
3. Quality: Fit for purpose.
4. Appearance: Attractiveness, ergonometric (ease of use and enhancement of
comfortability when in use) and aesthetics.
5. Ease of maintenance/service: Possibility of providing a service at an acceptable cost
or profit. Sources for new or redesigned products and services.
Reasons for redesigning products and services
A business may at one point in time decide to amend product or service design for various
reasons.
 Economic (e.g., low demand, excessive warranty claims, the need to reduce costs).
 Social and demographic (e.g., changes in customer tastes and population shifts).
 Political, liability, or legal (e.g., government policy changes, safety issues-A
manufacturer is liable for any injuries or damages caused by a faulty product, new
laws and regulations).
 Competition (e.g., new or changed products or services by competitors, new
advertising/promotions).
 Cost or availability (e.g., of raw materials, components, labor).
 Technological (e.g., in product components, processes). Sources for new or
redesigned products and services.
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Sources of product and services design
There are internal and external sources of design ideas of products and services.
Internal/Primary sources:
1. Employees
Employees are the ones who have the expertise of producing the products and
services (those in production), as well as the ones who meet the customers (marketing
and sales). It is imperative therefore that employees have to be motivated and
encouraged to be innovative in order to achieve business winning product and
services designs.
2. Sources for new or redesigned products and services
Creative thinking techniques that encourage employee innovation
3. Brain storming
This is a technique of generating a large number of ideas from a group of people in a
short time. Usually, a group of 8 to 12 people take a problem and come up with ideas
randomly in a free atmosphere. Judgement and analysis of the ideas is suspended until
all ideas are generated. In this technique, wild and unorthodox ideas are encouraged.
Ideas are displayed on sheets of paper and are produced very quickly, such that a one
hour session may even produce over 200 ideas.
The disadvantage of this technique is that all ideas generated have to be evaluated
including those that are obviously foolish and irrelevant.
Sources for new or redesigned products and services
4. Forced relationships
This technique takes objects or ideas and asks the question, “in how many ways can
these be combined to give a new object or idea?” This brings about a hybrid idea or
object which did not exist before.
5. Attribute listing
This technique lists down the main attributes of an idea or object, and examines each
one to see how it can be changed. Mostly, it is applied on tangible rather than
intangible things. Each attribute is questioned and changes on improvements are
suggested.
Sources for new or redesigned products and services. It has to be noted that no matter which
technique can be chosen in creative thinking in the action planning stage, the following
guidelines have to be applied:
1. Suspended judgement: Rule out premature criticism of any idea.
2. Free-wheel: The wilder or unorthodox the ideas, the better results.
3. Quantity: The more ideas, the better.
4. Cross-fertilize: Combine and improve on the ideas of others. Sources for new or
redesigned products and services.
5. Marketing department-The marketing department generates enormous information
about customers that can productively be used in designing products and services.
Marketing is typically aware of problems with products or services (those by the
business as well as by competitors) on the market. They assess current needs of
customers, buying patterns, and familiarity with demographics. Importantly also,
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6.
7.
8.
9.
marketing can help craft a vision of what customers are likely to want in the future.
All this information can be a source of product and service design.
Customers- They are the ones who directly use the products and services hence have a
true experience of performance. A business should therefore devise ways of extracting
information and use it to incorporate and better the design of its products and services.
Customers may submit suggestions for new products or improvements, or they may
be queried through the use of surveysor focus groups. Customer complaints can also
provide valuable insight into areas that need improvement hence they should be
regarded as an input to design ideas. Similarly, product failures and warranty claims
indicate where improvements are needed.
Competitors- Competitor products and services can be a very important source of
designs. A business can develop a new design or improve on an existing design by
studying a competitor's products or services and how the competitor operates (pricing
policies, return policies, warranties, location strategies, etc.). A business can use
reverse engineering in order to understand a competitor’s product or service’s
components. Reverse engineering involves dismantling and inspecting a competitor's
product for the purpose of finding ways to improve their own product or service.
Suppliers- Because of improved supply chain practices, suppliers have a huge
influence on businesses as they are regarded as partners. They are the ones who
supply the business with materials and components, hence they are much
knowledgeable on improved raw materials and components which ultimately have an
impact on product or service design.
Businesses should therefore strive to utilise the expertise that suppliers have in order
to improve product and service design.
Businesses can use the Japanese concept of kyoryokukai, that encourages suppliers
that are important to a business to form an association that eventually becomes a
platform for improvement suggestions.
Research and Development
Apart from the marketing department, other organizations have Research and
Development department responsible for organized efforts to increase scientific
knowledge or product innovation, usually without near-term expectations of
commercial applications and benefits.
The cost of R&D could be high but the benefits are enormous. R&D can achieve
patents with possibilities of earning royalties due to licensing of use of the patents.
Also, being the first to introduce a product or service achieves more profits due to a
temporary monopoly on the market as other producers will take time to catch up.
Phases in product/service development process
1. Idea generation
Sources of ideas have to be reliable and comprehensive. This phase result in
conceptualization of how a product or service should be like.
2. Product/Service screening
This is a feasibility multi-disciplinary phase hence all departments in a business have
to be involved. The screening is done based on three dimensions; market analysis,
economic analysis and technical analysis. Sources for new or redesigned products and
services
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3. Market analysis
This consist of evaluating the product concept with potential customers through
interviews, focus groups, and other data collection methods. The purpose of market
analysis is to ascertain whether the product is viable, and to be sure whether sufficient
demand exists. In market analysis, top managers at a strategic level have to project the
life cycle of the product and draw beforehand strategies at each phase of the cycle.
The product cycle describes the product sales volume over time. Ordinarily, in the
early introduction stage, production costs are higher due to low production. Also,
changes in design must be anticipated. A proper strategy could be to charge a
premium price, as there would be no competitors if the product is new, and that the
product might be attracting innovative and fashionable customers.
At the growth stage, it is anticipated that production costs will be reducing due to high
production and perfection of production methods.
There is also a high chance of competitors as new entrants.
It is therefore important to increase promotion sin order to firmly establish the product
on the market. At the mature stage, competition is usually high, thereby requiring
more advertising to keep customers interested, product rebranding, among other
strategies, in order to achieve differentiation. Sources for new or redesigned products
and services
4. Economic analysis
This aims at ascertaining that rolling out the product will make economic sense that
total cost of production will eventually be recouped by breaking even (selling costs =
production costs) and also have a profit margin. In order to carry out this analysis,
there is need to have accurate estimates of demand derived from statistical forecasts
of industry sales and estimates of market share in which the product will be
competing. Techniques of conducting this analysis could be:
Cost/benefit analysis, Decision theory, Net Present Value, Internal Rate of Return.
Sources for new or redesigned products and services.
5. Technical analysis
This consists of determining whether the business has the capability and capacity to
manufacture the product as required in terms of quality and volume. This also
includes whether the business has the required skills and that sources of raw materials
are available.
6. Preliminary Design
Product concepts that pass the feasibility stage enter this stage. This stage involves
mapping how components that will make up the product or service will be arranges in
coherence. This can be done by use of drawing sketches.
7. Final Design
This final stage involves the use of a prototype for the purpose of testing the outcome
of the preliminary design until a final design is chosen. Computer Aided Design
(CAD) can be used at this stage. The advantage of using CAD is that the process is
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made fast, simple and cheaper. Also, because it is computer aided, it is easy to
document the best process (steps) in coming up with the prototype.
2. Legal, ethical and environmental issues
Legal, ethical and environmental issues
Legal issues
As stated earlier, a manufacturer is liable for any injuries or suffering due to the customer’s
use or consumption of their product or service. Legal suits and potential suits leads to
increased legal and insurance costs, expensive settlements with injured parties, and costly
product recalls.
It is extremely important to design products that are reasonably free of hazards.
In case hazards do exist, it is necessary to install safety guards or other devices for reducing
accident potential, and to provide adequate warning notices of risks as well as what to do in
the event of injuries.
Consumer groups, business firms, and various government agencies often work together to
develop industrywide standards that help avoid some of the hazards.
In designing and manufacturing of products, this important factor has to be considered, such
that all the legal obligations that regulators set regarding quality and standards of a product
has to be met. This reduces claims of damages that have both financial and reputational
effects on the business.
Ethical issues
In most of the times, manufacturers tend to ignore universal ethics in manufacturing and
service provision due to the reason that mostly, they don’t attract legal penalties. Most of the
unethical issues rampant in the manufacturing industry are exploitation of labour by offering
low wages to vulnerable groups such as women, children, and displaced people.
Tax avoidance and evasion is also a common unethical issue that manufacturers are
susceptible.
Acting unethical reduces brand image as well as business reputation, thereby leading to lower
demand and sales. Legal, ethical and environmental issues.
Environmental issues
Manufacturers have to always avoid producing products and services that have the potential
to harm the environment.
Ways on how manufacturers can protect the environment:
1. Make the product reusable for its intended purpose by reselling (if the products are
unsold merchandise), repairing, refurbishing or remanufacturing.
2. Cannibalization, the process of retrieving reusable parts from old or broken products.
3. Recycling so that parts of products are reused for different purposes.
4. Disposing of the products by putting them to the landfill, incineration or composting.
Considering environment issues have benefits not only to the environment, but
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importantly to the organization. It boosts corporate image as well as reducing
manufacturing costs through reuse of materials.
3. Designing for manufacturing, designing for services
Designing for manufacturing, designing for services
Before products can flow into a market, someone must design and invest in the facilities and
organisation to produce them. Capacity planning for manufacturing and service systems are
different. Both must be designed with capacity limitations in mind. The approaches for longterm and short-term capacity planning will help the managers to make best use of resources.
MANUFACTURING AND SERVICE SYSTEMS
Manufacturing and service systems are arrangements of facilities, equipment, and people to
produce goods and services under controlled conditions.
Manufacturing systems produce standardized products in large volumes. This plant and
machinery have a finite capacity and contribute fixed costs that must be borne by the
products produced.
Variable costs are added as labour is employed to combine or process the raw materials and
other components. Value addition will takes place during the production process for the
product. The cost of output relative to the cost of input can be measured, as the actual cost is
known i.e. productivity is measurable quantity.
Service systems present more uncertainty with respect to both capacity and costs. Services
areproduced and consumed in the presence of the customer and there is little or no
opportunity to store value, as in a finished goods inventory. As a result capacity of service
systems like hospitals, restaurants and many other services must be sufficiently flexible to
accommodate a highly variable demand. In addition, many services such as legal and medical
involves professional or intellectual services judgments that are not easily standardized. This
makes more difficult to accumulate costs and measure the productivity of the services.
There are fundamental differences between services and products, which have to be taken
into consideration when designing.
Differences:



Products are generally tangible; services are generally intangible. Consequently,
service design often focuses more on intangible factors (e.g., peace of mind, ambiance
or atmosphere) than does product design.
In many instances, services are created and delivered at the same time (e.g. driving,
laundry). In such instances there is less latitude in finding and correcting errors before
the customer discovers them. Consequently, training, process design, and customer
relations are particularly important. Designing for manufacturing, designing for
services.
Services cannot be inventoried or stored. This poses restrictions on flexibility and
makes capacity design very important such that a business has to have extra capacity
to cater for eventuality of excess demand.
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


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Location is often important to service design, with convenience as a major factor.
Hence, design of services and choice of location are often closely linked. Service
design general guidelines:
Have a single, unifying theme, such as convenience or speed. This will help personnel
to work together as they will have a uniform focus when offering the service.
Always be certain that your system has the capability to handle any expected
variability in service requirements.
Include design features and checks to ensure that services rendered will be reliable
and will provide consistently high quality. For example, if the focus is on time, set
measurable parameters on how long does it take to provide the service?
Design the system to be user-friendly. This is especially true for self-service systems,
such that it is easy for customers to operate by themselves.
SECTION B
FORECASTING AND PROCESS IN PRODUCTION AND OPERATIONS
MANAGEMENT
Unit 3: Forecasting and Capacity Planning
1. Forecasting
Forecasts are essential for the smooth operations of business organizations. They provide
information that can assist managers in guiding future activities toward organizational goals.
FORECASTING OBJECTIVES AND USES
Forecasts are estimates of the occurrence, timing, or magnitude of uncertain future events.
Forecasts are essential for the smooth operations of business organizations. They provide
information that can assist managers in guiding future activities toward organizational goals.
Operations managers are primarily concerned with forecasts of demand—which are often
made by marketing. However, managers also use forecasts to estimate raw material prices,
plan for appropriate levels of personnel, help decide how much inventory to carry, and a host
of other activities. This results in better use of capacity, more responsive service to
customers, and improved profitability.
FORECASTING DECISION VARIABLES
Forecasting activities are a function of
(1) the type of forecast (e.g., demand, technological),
(2) the time horizon (short, medium, or long range),
(3) the database available, and
(4) the methodology employed (qualitative or quantitative). Forecasts of demand are based
primarily on non-random trends and relationships, with an allowance for random
components. Forecasts for groups of products tend to be more accurate than those for single
products, and short-term forecasts are more accurate than long-term forecasts (greater than
five years). Quantification also enhances the objectivity and precision of a forecast.
2. Forecasts methods
a. Judgment and opinion (Delphi)
b. Time series data
FORECASTING METHODS
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There are numerous methods to forecasting depending on the need of the decision-maker.
These can be categorized in two ways:
1. Opinion and Judgmental Methods or Qualitative Methods.
2. Time Series or Quantitative Forecasting Methods.
Opinion and Judgmental Methods
Some opinion and judgment forecasts are largely intuitive, whereas others integrate data and
perhaps even mathematical or statistical techniques. Judgmental forecasts often consist of
(1) forecasts by individual sales people,
(2) Forecasts by division or product-line managers, and
(3) combined estimates of the two. Historical analogy relies on comparisons; Delphi relies
on the best method from a group of forecasts. All these methods can incorporate experiences
and personal insights. However, results may differ from one individual to the next and they
are not all amenable to analysis. So there may be little basis for improvement over time.
Time Series Methods
A time series is a set of observations of a variable at regular intervals over time. In
decomposition analysis, the components of a time series are generally classified as trend T,
cyclical C, seasonal S , and random or irregular R. (Note: Autocorrelation effects are
sometimes included as an additional factor.)
Time series are tabulated or graphed to show the nature of the time dependence. The forecast
value (Ye) is commonly expressed as a multiplicative or additive function of its components;
examples here will be based upon the commonly used multiplicative model.
Y= T. S. C. R multiplicative model
Y= T + S + C + R additive model where T is Trend, S is Seasonal, C is Cyclical, and R
is Random components of a series.
Trend is a gradual long-term directional movement in the data (growth or decline).
Seasonal effects are similar variations occurring during corresponding periods, e.g.,
December retail sales. Seasonal can be quarterly, monthly, weekly, daily, or even hourly
indexes.
Cyclical factors are the long-term swings about the trend line. They are often associated with
business cycles and may extend out to several years in length.
Random component are sporadic (unpredictable) effects due to chance and unusual
occurrences. They are the residual after the trend, cyclical, and seasonal variations are
removed.
3. Choosing forecasting technique and using forecast information
Choosing forecasting technique and using forecast information
Forecasting is used in almost every area of business today. It is an essential tool for managing
an organization of any size. In business meetings and conferences executives often hear about
forecasts for the next quarter or year from their company CEOs or directors. Data analysts
spend a considerable amount of time to make a forecast based on the historical data.
Prediction of sales volume, stock prices, demand, and trends is the backbone of decisionP a g e 19 | 1
making in most of the organizations. It is a business necessity which pays off if analyzed and
optimized effectively.
Data collected over time is complex in nature and include components related to seasonality,
irregularity, and cyclicality. As a result, it is important to select the right forecasting method
to handle the increasing variety and complexity of data to forecast correctly. However, before
selecting the forecasting model, a forecaster needs to have answers to the following
questions.
What is the purpose of the forecast.
Are there any relationships between variables?
Is your historical data sufficient to make forecasts?
These questions will help forecasters direct themselves to the right forecasting model and
build an accurate set of growth projections for their businesses.
What are forecasting models?
In statistics, there are two types of methods by which a business forecast can be made. These
are categorized broadly into qualitative and quantitative models.
Qualitative Models
Qualitative models are used to make short-term forecasts. These models depend on the
information available in different sources which have been quoted by thought leaders. The
qualitative model is used when the availability of data is low. These models are frequently
used in predicting numbers based on:
Market Research: It incorporates procedures for testing hypothesis from the available
numbers for real markets.
Delphi Method: This method involves taking opinions from experts through questionnaires
and then using it into a forecast.
The objective of qualitative models is to forecast numbers based on logical and unbiased
opinions. A lot of organizations use a combination of these methods to forecast sales and
revenues. However, there are a few limitations to this method. The first one is that it depends
solely on opinions which may be wrong. Secondly, the accuracy of this method is not high
and mostly depends on human judgements.
Quantitative Models
Quantitative models are used when the data is available for several years and we can build
relationship among variables. Further, quantitative models can be categorized as:
Regression Model: The model uses the least square technique to form an equation based on
a dependent and one or more independent variables.
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Econometric Model: The econometric model tests the relationships between variables such
as GDP, inflation, and exchange rates over time. The model forms interdependent regression
equations.
Time-Series Model: The objective of a time-series model is to discover patterns in historical
data and extrapolate it into forecasts. It uses exponential smoothing, ARIMA,and trend
analysis to forecast data for the next time period.
Leading Indicator: This model uses the relationship between different macroeconomic
activities to identify leading indicators and estimate the performance of the lagging
indicators.
Both qualitative and quantitative models provide decision-makers with numbers which are
useful in production planning, financing, and business optimization. A successful forecaster
removes irregularity and non-stationary components in data. However, there are a few factors
which might lead to wrong forecasts. This happens when:
1) The data is inaccurate.
2) The data is produced with a lag and requires revision.
3) The data is a proxy for the decision-making criteria.
Forecasting plays a pivotal role in long-term business planning. An accurate analysis of
trends is vital in managing the growth of organization, and ultimately in ensuring its success.
However, necessary steps should be taken to review the forecasts before making the blueprint
of sales and marketing plans. A right forecast will make your business more profitable and
pave the way to a successful organization. In a nutshell, forecasting is like a magical crystal
ball that can see the future when asked the rights questions and used the right techniques for
all your business problems.
4. Importance of capacity decisions
IMPORTANCE OF CAPACITY DECISIONS
1. Capacity decisions have a real impact on the ability of the organization to meet future
demands for products and services; capacity essentially limits the rate of output possible.
Having capacity to satisfy demand can allow a company to take advantage of tremendous
opportunities.
2. Capacity decisions affect operating costs. Ideally, capacity and demand requirements will
be matched, which will tend to minimize operating costs. In practice, this is not always
achieved because actual demand either differs from expected demand or tends to vary
(e.g., cyclically). In such cases, a decision might be made to attempt to balance the costs of
over and under capacity.
3. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity
of a productive unit, the greater its cost. This does not necessarily imply a one for-one
relationship; larger units tend to cost proportionately less than smaller units.
4. Capacity decisions often involve long-term commitment of resources and the fact that,
once they are implemented, it may be difficult or impossible to modify those decisions
without incurring major costs.
5. Capacity decisions can affect competitiveness. If a firm has excess capacity, or can quickly
add capacity, that fact may serve as a barrier to entry by other firms. Then too, capacity can
affect delivery speed, which can be a competitive advantage.
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6. Capacity affects the ease of management; having appropriate capacity makes management
easier than when capacity is mismatched.
Capacity Planning
A definition of capacity should take into account both the volume and the time over which
capacity is available. Thus capacity can be taken as a measure of an organisation’s ability to
provide customers with services or goods in the amount requested at the time requested.
Capacity decisions should be taken by firstly identifying capacity requirements and then
evaluating the alternative capacity plans generated.
Identifying Capacity Requirements
This stage consists of both estimating future customer demand but also determining current
capacity levels to meet that demand.
Measuring Demand In a capacity planning context the business planning process is driven
by two elements; the company strategy and forecasts of demand for the product/service the
organisation is offering to the market. Demand forecasts will usually be developed by the
marketing department and their accuracy will form an important element in the success of
any capacity management plans implemented by operations. The demand forecast should
express demand requirements in terms of the capacity constraints applicable to the
organisation. This could be machine hours or worker hours as appropriate. The demand
forecast should permit the operations manager to ensure that enough capacity is available to
meet demand at a particular point in time, whilst minimising the cost of employing too much
capacity for demand needs. The amount of capacity supplied should take into account the
negative effects of losing an order due to too little capacity and the increase in costs on the
competitiveness of the product in its market. Organisations must develop forecasts of the
level of demand they should be prepared to meet.
The forecast provides a basis for co-ordination of plans for activities in various parts of the
organisation. For example personnel employ the right amount of people, purchasing order the
right amount of material and finance can estimate the capital required for the business.
Forecasts can either be developed through a qualitative approach or a quantitative approach.
Measuring Capacity When measuring capacity it must be considered that capacity is not
fixed but is a variable that is dependent on a number of factors such as the product mix
processed by the operation and machine setup requirements. When the product mix can
change then it can be more useful to measure capacity in terms of input measures, which
provides some indication of the potential output. Also for planning purposes when demand is
stated in output terms it is necessary to convert input measures to an estimated output
measure. For example in hospitals which undertake a range of activities, capacity is often
measured in terms of beds available (an input) measure. An output measure such as number
of patients treated per week will be highly dependent on the mix of activities the hospital
performs.
The theoretical design capacity of an operation is rarely met due to such factors as
maintenance and machine setup time between different products so the effective capacity is a
more realistic measure. However this will also be above the level of capacity which is
available due to unplanned occurrences such as a machine breakdown.
Evaluating Capacity Plans
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The organization’s ability to reconcile capacity with demand will be dependent on the
amount of flexibility it possesses. Flexible facilities allow organisations to adapt to changing
customer needs in terms of product range and varying demand and to cope with capacity
shortfalls due to equipment breakdown or component failure. The amount of flexibility
should be determined in the context of the organizations’ competitive strategy. Methods for
reconciling capacity and demand can be classified into three ‘pure’ strategies of level
capacity, chase demand and demand management although in practice a mix of these three
strategies will be implemented.
Level Capacity This approach fixes capacity at a constant level throughout the planning
period regardless of fluctuations in forecast demand. This means production is set at a fixed
rate, usually to meet average demand and inventory is used to absorb variations in demand.
During periods of low demand any overproduction can be transferred to finished goods
inventory in anticipation of sales at a later time period. The disadvantage of this strategy is
the cost of holding inventory and the cost of perishable items that may have to be discarded.
To avoid producing obsolete items firms will try to create inventory for products which are
relatively certain to be sold. This strategy has limited value for perishable goods. For a
service organisation output cannot be stored as inventory so a level capacity plan involves
running at a uniformly high level of capacity. The drawback of this approach is the cost of
maintaining this high level of capacity although it could be relevant when the cost of lost
sales is particularly high, for example in a high value retail outlet such as a luxury car outlet
where every sale is very profitable.
Chase Demand This strategy seeks to change production capacity to match the demand
pattern over time. Capacity can be altered by various policies such as changing the amount of
part-time staff, changing the amount of staff availability through overtime working, changing
equipment levels and subcontracting. The chase demand strategy is costly in terms of the
costs of changing staffing levels and overtime payments. The costs may be particularly high
in industries in which skills are scarce. Disadvantages of subcontracting include reduced
profit margin lost to the subcontractor, loss of control, potentially longer lead times and the
risk that the subcontractor may decide to enter the same market. For these reasons a pure
chase demand strategy is more usually adopted by service operations which cannot store their
output and so make a level capacity plan less feasible. 23
Demand Management While the level capacity and chase demand strategies aim to adjust
capacity to match demand, the demand management strategy attempts to adjust demand to
meet available capacity. There are many ways this can be done, but most will involve altering
the marketing mix and will require co-ordination with the marketing function. Demand
Management strategies include: Varying the Price - During periods of low demand price
discounts can be used to stimulate the demand level. Conversely when demand is higher than
the capacity limit, price could be increased.Provide increased marketing effort to product
lines with excess capacity.
Use advertising to increase sales during low demand periods.
Use the existing process to develop alternative product during low demand periods.
Offer instant delivery of product during low demand periods.
Use an appointment system to level out demand.
5. Measuring and determining capacity requirements
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Determining capacity requirements
Capacity requirements can be evaluated from two perspectives—long-term capacity
strategies and short-term capacity strategies.
1. Long-term capacity strategies: Long-term capacity requirements are more difficult to
determine because the future demand and technology are uncertain. Forecasting for five or
ten years into the future is more risky and difficult. Even sometimes company’s today’s
products may not be existing in the future. Long-range capacity requirements are dependent
on marketing plans, product development and life-cycle of the product. Long-term capacity
planning is concerned with accommodating major changes that affect overall level of the
output in long-term. Marketing environmental assessment and implementing the long-term
capacity plans in a systematic manner are the major responsibilities of management.
Following parameters will affect long-range capacity decisions.
Multiple products: Company’s produce more than one product using the same facilitiesin
order to increase the profit. The manufacturing of multiple products will reduce the risk of
failure. Having more than on product helps the capacity planners to do a better job.
Because products are in different stages of their life cycles, it is easy to schedule them to get
maximum capacity utilisation.
Phasing in capacity: In high technology industries, and in industries where technology
developments are very fast, the rate of obsolescence is high. The products should be brought
into the market quickly. The time to construct the facilities will be long and there is no much
time, as the products should be introduced into the market quickly. Here the solution is phase
in capacity on modular basis. Some commitment is made for building funds and men towards
facilities over a period of 3-5 years. This is an effective way of capitalizing on technological
breakthrough.
Phasing out capacity: The outdated manufacturing facilities cause excessive plant closures
and down time. The impact of closures is not limited to only fixed costs of plant and
machinery. Thus, the phasing out here is done with humanistic way without affecting the
community. The phasing out options makes alternative arrangements for men like shifting
them to other jobs or to other locations, compensating the employees, etc.
2. Short-term capacity strategies: Managers often use forecasts of product demand to
estimate the short-term workload the facility must handle. Managers looking ahead up to 12
months, anticipate output requirements for different products, and services. Managers then
compare requirements with existing capacity and then take decisions as to when the capacity
adjustments are needed.
For short-term periods of up to one year, fundamental capacity is fixed. Major facilities will
not be changed. Many short-term adjustments for increasing or decreasing capacity are
possible. The adjustments to be required depend upon the conversion process like whether it
is capital intensive or
labour intensive or whether product can be stored as inventory.
Capital-intensive processes depend on physical facilities, plant and equipment. Short-term
capacity can be modified by operating these facilities more or less intensively than normal. In
labour intensive processes short-term capacity can be changed by laying off or hiring people
or by giving overtime to workers. The strategies for changing capacity also depend upon how
long the product can be stored as inventory.
The short-term capacity strategies are:
1. Inventories: Stock finished goods during slack periods to meet the demand during
peak period.
2. Backlog: During peak periods, the willing customers are requested to wait and their
orders are fulfilled after a peak demand period.
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3. Employment level (hiring or firing): Hire additional employees during peak demand
period and lay-off employees as demand decreases.
4. Employee training: Develop multi skilled employees through training so that they can
be rotated among different jobs. The multi skilling helps as an alternative to hiring
employees.
5. Subcontracting: During peak periods, hire the capacity of other firms temporarily to
make the component parts or products.
6. Process design: Change job contents by redesigning the job.
Unit 4: Process Selection and Facility Layout
1. Basic process strategies
Basic Process Strategies
A process (or transformation) strategy is an organization’s approach to transforming
resources into goods and services.
The objective of a process strategy is to build a production process that meets customer
requirements and product specification within cost and other managerial constraints.
The process selected will have a long term effect on efficiency and flexibility of production
as well as on cost and quality of the goods produced. Therefore the limitations of a process
strategy are at the time of the process decision.
A process or transformation strategy is an organization's approach to transform resources into
goods and services. These goods or services are organized around a specific activity or
process.
Every organization will have one of the four process strategies:
a. Process focus in a factory; these processes might be departments devoted to
welding, grinding, and painting. In an office the processes might be accounts
payable, sales, and payroll. In a restaurant, they might be bar, grill, and
bakery. The process focuses on low volume, high variety products are also
called job shop. These facilities are process focus in terms of equipment,
layout, and supervision.
b. Repetitive focus; falls between the product and process focus. The repetitive
process is a product-oriented production process that uses modules. Modules
are parts or components of a product previously manufactured or prepared,
often in a continuous process. Fast-food firms are an example of repetitive
process using modules.
c. Product focus, are high volume, low variety processes; also called continuous
processes. Products such as light bulbs, rolls of paper, beer, and bolts are
examples of product process. This type of facility requires a high fixed cost,
but low costs. The reward is high facility utilization.
d. Mass customizations focus; is rapid, low-cost production that caters to
constantly changing unique customer desires. This process is not only about
variety; it is about making precisely what the customer wants when the
customer wants it economically. Achieving mass customization is a challenge
that requires sophisticated operational capabilities.
In understanding Process strategy there are three principles that are particularly important:
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
The key to successful process decisions is to make choices that fit the situation. They
should not work at cross-purposes, with one process optimized at the expense of other
processes. A more effective process is one that matches key process characteristics
and has a close strategic fit.
 Individual processes are the building blocks that eventually create the firm’s whole
supply chain.
 Management must pay close attention to all interfaces between processes in the
supply chain, whether they are performed internally or externally.
It can be utilized to guide a variety of process decisions, operations strategy, and your
business’ ability to obtain the resources necessary to support them.
A process involves the use of an organization’s resources to provide something of value.
Major process decisions include:
Process Structure determines how processes are designed relative to the kinds of resources
needed, how resources are partitioned between them, and their key characteristics.
Customer Involvement refers to the ways in which customers become part of the process
and the extent of their participation.
It is Manager’s job to assess whether the advantages outweigh disadvantages, judging them in
terms of the competitive priorities and customer satisfaction. Customer involvement is not
always the best option as there are disadvantages commonly associated with it. For example,
allowing customers to play an active role in a service process can be disruptive thereby
making the process less efficient.
Quality measurement also becomes more difficult to manage.
Additionally, customer involvement in processes can also mean greater expenses for your
business as you will require employees with greater interpersonal skills and possibly consider
revising your facility layout. However, despite these possible disadvantages, the advantages
of a more customer-focused Customer involvement process might increase the net value to
your customer. Some customers seek active participation in and control over the service
process, particularly if they will enjoy savings in both price and time. More customer
involvement can mean better quality, faster delivery, greater flexibility, and even lower cost.
Resource flexibility is the ease with which employees and equipment can handle a wide
variety of products, output levels, duties, and functions.
We consider resource flexibility mainly at two levels:
Workforce
One of the decisions and operations manager has to make is whether or not to have a flexible
workforce, that is, employees that are capable of doing many tasks.
The type of workforce you require is also dependent on the need for volume flexibility. For
example, when conditions allow for a smooth, stead rate of output, the likely choice is a
permanent workforce that expects regular full-time employment.
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Alternatively, if the process is subject to hourly, daily, or seasonal peaks and valleys in
demand, the use of part-time or temporary employees to supplement a smaller core of fulltime employees may be the best solution
Equipment
When a firm’s product or service has a short life cycle and a high degree of customization,
low production volumes mean that a firm should select flexible, inexpensive, general-purpose
equipment. When volumes are low, the low fixed cost more than offsets the higher variable
unit cost associated with this type of equipment. Conversely, specialized, higher-cost
equipment is the best choice when volumes are high and customization is low. Its advantage
is low variable unit cost
Capital intensity is the mix of equipment and human skills in a process.
It is calculated: total assets of a company/sales of the company.
A higher capital intensity ratio for a company means that the company needs more assets than
a company with lower ratio to generate equal amount of sales. A high capital intensity ratio
may due to lower utilization of the company’s assets or it may be because the company’s
business is more capital intensive and less labor intensive (for example, because it is
automated). However, for companies in the same industry and following similar business
model and production processes, the company with lower capital intensity is better because it
generates more revenue using less assets.
2. Facility layout planning
FACILITY LAYOUT PLANNING
Facility layout refers to the arrangement of machines, departments, workstations, storage
areas, aisles, and common areas within an existing or proposed facility. Layouts have
farreaching implications for the quality, productivity, and competitiveness of a firm. Layout
decisions significantly affect how efficiently workers can do their jobs, how fast goods can be
produced, how difficult it is to automate a system, and how responsive the system can be to
changes in product or service design, product mix, and demand volume.
The basic objective of the layout decision is to ensure a smooth flow of work, material,
people, and information through the system. Effective layouts also:
• Minimize material handling costs;
• Utilize space efficiently;
• Utilize labor efficiently;
• Eliminate bottlenecks;
• Facilitate communication and interaction between workers, between workers and their
supervisors, or between workers and customers;
• Reduce manufacturing cycle time and customer service time;
• Eliminate wasted or redundant movement;
• Facilitate the entry, exit, and placement of material, products, and people;
• Incorporate safety and security measures;
• Promote product and service quality;
• Encourage proper maintenance activities;
• Provide a visual control of operations or activities;
• Provide flexibility to adapt to changing conditions.
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3. Types of facility layout
Special cases of process layout
Basic Layouts
There are three basic types of layouts:
 process,
 product, and
 fixed-position; and
three hybrid layouts: cellular layouts, flexible manufacturing systems, and
mixed-model assembly lines.
We discuss basic layouts in this section and hybrid layouts later in the chapter.
Process Layouts
Process layouts, also known as functional layouts, group similar activities together in
departments or work centers according to the process or function they perform. For
example, in a machine shop, all drills would be located in one work center, lathes in
another work center, and milling machines in still another work center. In a
department store, women's clothes, men's clothes, children's clothes, cosmetics, and
shoes are located in separate departments. A process layout is characteristic of
intermittent operations, service shops, job shops, or batch production, which serve
different customers with different needs. The volume of each customer's order is low,
and the sequence of operations required to complete a customer's order can vary
considerably.
The equipment in a process layout is general purpose, and the workers are skilled at
operating the equipment in their particular department. The advantage of this layout is
flexibility. The disadvantage is inefficiency. Jobs or customers do not flow through
the system in an orderly manner, backtracking is common, movement from
department to department can take a considerable amount of time, and queues tend to
develop. In addition, each new arrival may require that an operation be set up
differently for its particular processing requirements.
Although workers can operate a number of machines or perform a number of different
tasks in a single department, their workload often fluctuates--from queues of jobs or
customerswaiting to be processed to idle time between jobs or customers. Figure
below
Material storage and movement are directly affected by the type of layout. Storage
space in a process layout is large to accommodate the large amount of in-process
inventory. The factory may look like a warehouse, with work centers strewn between
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storage aisles. In-process inventory is high because material moves from work center
to work center in batches waiting to be processed. Finished goods inventory, on the
other hand, is low because the goods are being made for a particular customer and are
shipped out to that customer upon completion.
Process layouts in manufacturing firms require flexible material handling equipment
(such as forklifts) that can follow multiple paths, move in any direction, and carry
large loads of in process goods. A forklift moving pallets of material from work
center to work center needs wide aisles to accommodate heavy loads and two-way
movement. Scheduling of forklifts is typically controlled by radio dispatch and varies
from day to day and hour to hour. Routes have to be determined and priorities given
to different loads competing for pickup.
Process layouts in service firms require large aisles for customers to move back and
forth and ample display space to accommodate different customer preferences.
The major layout concern for a process layout is where to locate the departments or
machine centers in relation to each other. Although each job or customer potentially
has a different route through the facility, some paths will be more common than
others. Past information on customer orders and projections of customer orders can be
used to develop patterns of flow through the shop.
Product Layouts
Product layouts, better known as assembly lines, arrange activities in a line according
to the sequence of operations that need to be performed to assemble a particular
product. Each product or has its own "line" specifically designed to meet its
requirements. The flow of work is orderly and efficient, moving from one workstation
to another down the assembly line until a finished product comes off the end of the
line. Since the line is set up for one type of product or service, special machines can
be purchased to match a product's specific processing requirements. Product layouts
are suitable for mass production or repetitive operations in which demand is stable
and volume is high. The product or service is a standard one made for a general
market, not for a particular customer. Because of the high level of demand, product
layouts are more automated than process layouts, and the role of the worker is
different. Workers perform narrowly defined assembly tasks that do not demand as
high a wage rate as those of the more versatile workers in a process layout.
The advantage of the product layout is its efficiency and ease of use. The
disadvantage is its inflexibility. Significant changes in product design may require
that a new assembly line be built and new equipment be purchased. This is what
happened to U.S. automakers when demand shifted to smaller cars. The factories that
could efficiently produce six-cylinder engines could not be adapted to produce fourcylinder engines. A similar inflexibility occurs when demand volume slows. The
fixed cost of a product layout (mostly for equipment) allocated over fewer units can
send the price of a product soaring.
The major concern in a product layout is balancing the assembly line so that no one
workstation becomes a bottleneck and holds up the flow of work through the line.
Figure below shows the product flow in a product layout.
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A product layout needs material moved in one direction along the assembly line and
always in the same pattern. Conveyors are the most common material handling
equipment for product layouts. Conveyors can be paced (automatically set to control
the speed of work) or unpaced (stopped and started by the workers according to their
pace). Assembly work can be performed online (i.e., on the conveyor) or offline (at a
workstation serviced by the conveyor).
Aisles are narrow because material is moved only one way, it is not moved very far,
and the conveyor is an integral part of the assembly process, usually with
workstations on either side.
Scheduling of the conveyors, once they are installed, is simple--the only variable is
how fast they should operate.
Storage space along an assembly line is quite small because in-process inventory is
consumed in the assembly of the product as it moves down the assembly line.
Finished goods, however, may require a separate warehouse for storage before they
are shipped to dealers or stores.
Fixed-Position Layouts
Fixed-position layouts are typical of projects in which the product produced is too
fragile, bulky, or heavy to move. Ships, houses, and aircraft are examples. In this
layout, the product remains stationary for the entire manufacturing cycle. Equipment,
workers, materials, and other resources are brought to the production site. Equipment
utilization is low because it is often less costly to leave equipment idle at a location
where it will be needed again in a few days, than to move it back and forth.
Frequently, the equipment is leased or subcontracted, because it is used for limited
periods of time. The workers called to the work site are highly skilled at performing
the special tasks they are requested to do. For instance, pipefitters may be needed at
one stage of production, and electricians or plumbers at another. The wage rate for
these workers is much higher than minimum wage. Thus, if we were to look at the
cost breakdown for fixed-position layouts, the fixed cost would be relatively low
(equipment may not be owned by the company), whereas the variable costs would be
high (due to high labor rates and the cost of leasing and moving equipment).
Because the fixed-position layout is specialized, we concentrate on the product and
process layouts and their variations for the remainder of this chapter. In the sections
that follow, we examine some quantitative approaches for designing product and
process layouts.
Unit 5: Location Planning and Analysis
1. The nature of location decision
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Location decisions represent an integral part of the strategic planning process of every
organization. Although it might appear that location decisions are one-time problems
pertaining to new organizations, existing organizations often have a bigger stake in these
kinds of decisions than new organizations.
Location decisions are critical at several levels. At the national level, retail analysts screen
and select metropolitan and regional market for new store entry.
The location of the non-manufacturing operation helps determine how conveniently
customers can conduct business with the company.
Importance of location decision
 Location decisions are closely tied to an organization’s strategy.
 Location choices can impact capacity and flexibility.
 Transportation costs: high costs can occur due to poor infrastructure or having to ship
over great distance.
 Security costs: increased security risks and theft can increase cost, and slow shipment
to other countries.
Before getting into location decisions, it will be helpful for you to understand the terms
related to plant location decisions. Plant means any set-up, for the purpose of business, which
is engaged in any kind of production operation and yields semi-finished or finished goods as
end results. Location, on the other hand, means any place or region of any set-up or concern
in which the set-up or concern is situated.
Thus plant location decisions are those, made by managers, which are aimed to the selection
of a location for the settlement of any intended plant of the concern business. Plant Location
decisions are usually based on factors as labour supply condition, raw materials supply
condition, distance with the market place, and a lot of others of this type.
The location of these facilities can involve a long term commitment of resources, so known
risks and benefits should be considered carefully.
2. General procedure for making location decisions
Procedure for Making Location Decisions
As with capacity planning, managers need to follow a three-step procedure when making
facility location decisions. These steps are as follows:
Step 1 Identify Dominant Location Factors. In this step managers identify the location
factors that are dominant for the business. This requires managerial judgment and knowledge.
Step 2 Develop Location Alternatives. Once managers know what factors are dominant,
they can identify location alternatives that satisfy the selected factors.
Step 3 Evaluate Location Alternatives. After a set of location alternatives have been
identified, managers evaluate them and make a final selection. This is not easy because one
location may be preferred based on one set of factors, whereas another may be better based
on a second set of factors.
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Procedures for Evaluating Location Alternatives
A number of procedures can help in evaluating location alternatives. These are decision
support tools that help structure the decision-making process. Some of them help with
qualitative factors that are subjective, such as quality of life. Others help with quantitative
factors that can be measured, such as distance.
A manager may choose to use multiple procedures to evaluate alternatives and come up with
a final decision. Remember that the location decision is one that a company will have to live
with for a long time.
It is highly important that managers make the right decision.
The three factors of location alternatives.
 Identify Dominant Location factor.
 Develop Location Alternatives.
 Evaluate Location alternative.
3. Factors that affect location decisions
Factors Affecting the Location Decisions
The selection of location is influenced by a number of factors. These factors can be broadly
classified as market related factors such as proximity to market, tangible or cost factors such
as transportation availability, and intangible or qualitative factors such as environmental
aspects. Some of the factors that influence the location decision are discussed below.
Market Proximity
Locating facilities close to the market helps firms not only reduce transportation costs, but
also serve their customers better. The firms can provide just-in-time delivery, respond to
changes in demand and react quickly to field or service problems. Market proximity is a
prime consideration for pure service organizations such as hotels, hospitals, retail stores and
theatres. Therefore, they should always be located close to the market.
Integration with Other Parts of the Organization
An organization/group that already has some plants and wants to start or establish a new plant
would like to locate it near to the existing plants so that its work can be integrated with that of
other plants. This helps firms view the entire group as a single entity rather than as a number
of independent units.
Availability of Labor and Skills
The availability of labor and skills is one of the important factors in production. Labor may
be readily available in some areas than in other areas. Availability of skilled as well as
unskilled labor in the required proportion in one area is usually not possible. Firms that
emphasize more on technology require skilled people and so prefer a location where the
skilled people are available. On the other hand, firms with more labor intensive processes
prefer the area where the cost of labor is cheap and the labor is available plenty in number.
Site Cost
The management of the firm should ensure that the cost of the site is reasonable for the
benefits that it is going to provide.
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Availability of Amenities
Locations with good external amenities such as housing, shops, community services,
communications systems, etc. are more attractive than those located in the remote areas. For
instance, personal transport system like bus and train service is considered very important by
many companies.
Availability of Transportation Facilities
The five basic modes of physical transportation are air, road, rail, water and pipeline. Firms
consider the relative costs, convenience and suitability of each mode and then select the
transportation method. For instance, firms that produce goods that are to be exported may
choose a location near a seaport or a large airport.
Availability of Inputs
Though goods transportation helps in obtaining and delivering goods and services readily, a
location near to the suppliers helps the firms reduce costs. It also enables the management of
the firm to meet the suppliers easily and discuss aspects like quality, technical or delivery
problems.
Availability of Services
Electricity, water, gas, drainage, and disposal of waste are some of the important services that
need to be considered while selecting a location. For example, the food and textile units
require considerable quantities of water and power. Rapid communication network is
required for financial services, and effective drainage and disposal system is required for
process industry as it produces lot of waste.
Suitability of Land and Climate
Climatic conditions such as humidity, temperature and atmosphere, and the geology of the
area should be considered while selecting a location. If geographic conditions are not
favorable, firms have to use modern building techniques (and incur high costs) to overcome
these disadvantages. For instance, a hilly, rough and rocky terrain is not suitable for a plant
location, since leveling the area needs a lot of expenditure.
Regional Regulations
Firms should ascertain that the proposed location does not violate any local regulation and
laws. The laws and regulations concerning the recruitment of employees have to be carefully
studied while selecting the location.
Room for Expansion
While selecting a location, firms should ensure that there is adequate room for expansion of
the firm's operations in the future.
Safety Requirements
Some units such as nuclear power stations and other chemical and explosive factories may
present potential threat to the surrounding neighborhood. So firms should ensure that such
units are located in remote areas where the damage will be minimal in case of an accident.
Political, Cultural and Economic Situation
Firms should be aware of the political, cultural and economic environment of the proposed
location as these factors might affect the smooth running of the plant. For instance, firms
suffer losses if their plants are located in politically and socially sensitive places.
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Regional Taxes, Special Grants and Import / Export Barriers
For developing production facilities in locations such as export promotion zones, technology
parks and industrial estates, governments offer some special grants like tax holidays,
infrastructure support, low-interest loans, etc. Firms can prefer to locate their units in these
places.
4. Transport model
Transportation Model
The Transportation model uses the principle of transplanting something from one place and
inserting it on another without change.
First it assumes that to disturb or change the idea being transported in any way will damage
and reduce it somehow. It also assumes that it is possible to take an idea from one person’s
mind into another person so that the two people will then understand it exactly the same way.
The transportation model is valuable tool analyzing and modifying existing transporting
systems of the implementation of new ones. The model is effective in determining resource
allocation in existing business structures.
The model requires a few key pieces of information, which includes the following:
 The Origin of the supply.
 Destination of the supply.
 Unit cost of the ship.
The transportation model can also be used as a comparative tool providing business decision
makers with the information they need to properly balance cost and supply. This model will
help decide what the optimal shipping plan is by determining a minimum cost for shipping
from numerous sources to numerous destinations. This will help for comparison when
identifying alternatives in terms of their impact on the final cost for a system. The main
applications of the transportation model mention in this paper are location decisions,
protection planning, capacity planning and shipment.
Nonetheless, the major assumptions of the transporter model are as follows;
1) Items are homogenous
2) Shipping cost per unit is the same no matter how many units are shipped.
3) Only one route is used from place of shipment to the destination.
The variables in this model have a linear relationship and therefore, can be into a
transportation table. The table will have a list of origins and each one’s capacity of supply
quantity period. It will also, show a list of destinations and their respective demands per
period. It will also show the unit cost of shipping goods from each origin to each destination.
Transportation costs play an important role in location decision.
The transportation model can be used to compare location alternatives in terms of their
impact on the total distribution costs for a system. It is subject demand satisfaction at market
supply constraints. It also determines how to allocate the supplies available from the various
functions to the warehouses that stock or demand those goods, in such a way that total
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shipping cost is minimized. The total transportation cost, distribution cost of shipping cost
and production cost are to be minimized by applying the model.
Unit 6: Quality
1. Introduction to quality and evolution of quality management
Introduction to quality and evolution of quality management
Total quality management (TQM) has evolved over a number of years from ideas presented
by a number of quality Gurus.
Total quality management (TQM) was one of the earliest of the current wave of management
‘fashions’. Its peak of popularity was in the late 80s and early 90s. As such it has suffered
from something of a backlash in recent years and there is little doubt that many companies
adopted TQM in the simplistic belief that it would transform their operations performance
overnight.
Yet the general precepts and principles that constitute TQM are still the dominant mode of
organizing operations improvement. The approach we take here is to stress the importance of
the ‘total’ in total quality management and how it can guide the agenda for improvement.
This is achieved by eliminating common causes of quality problems such as poor design and
insufficient training and special causes such as specific machine or operator. He also places
great emphasis on statistical quality control techniques and promotes extensive employee
involvement in the quality improvement program. Juran put forward a 10 step plan in which
he emphasizes the element of quality planning, designing the product quality level and
ensuring the process can meet this quality control-using statistical process control methods to
ensure quality levels are kept during the production process and quality improvementtackling quality problems trough improvement projects. Crosby suggest a 14 step programme
for the implementation of TQM.
The organization should consider quality both from the producer and customer point of view.
Thus product design must take into consideration the production process in order that the
design specification can be met. Thus it means viewing things from a customer perspective
and requires that the implications from the customers are considered at all stages in corporate
decision making. Secondly quality is the responsibility of all employees in all parts of the
organization. In order to ensure the complete involvement of the whole organisation in all
quality issues TQM uses the concept of the internal customer and internal supplier. This
recognizes that everyone in the organization consumes goods and services provided by the
organizational members or internal supplier.
In turn every service provided by an organisation member will have internal customer. The
implication is that poor quality provided within an organisation will, if allowed to go
unchecked along the chain of customer/supplier relationships, eventually leads to the external
customer. Therefore it is essential that every internal customers needs are satisfield. This
requires a definition for each internal customer about what constitutes an acceptable quality
of services. It is a principle of TQM that the responsibility for the quality should rest with the
people undertaking the task which can either directly or indirectly effect the quality of
customer service.
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This requires not only a commitment to avoid mistakes but actually the capability to improve
the ways in which they undertake their jobs. This requires management to adopt an approach
of empowerment with people provided with training and decision making authority necessary
in order that they can take responsibility for the work they are involved in and learn from
their experiences. Finally a continuous process of improvement culture must be developed to
instill a culture which recognizes the importance of quality to performance.
2. Quality control
Quality Control in TQM
TQM for quality control is ‘an effective system for integrating the quality development,
quality maintenance and quality improvement efforts of the various groups in an organization
so as to enable production and service at the most economical levels which allow for full
customer satisfaction’.
However, it was the Japanese who first made the concept work on a wide scale and
subsequently popularized the approach and the term ‘TQM’. It was then developed further by
several so-called ‘quality gurus’. Each ‘guru’ stressed a different set of issues, from which
emerged the TQM approach. It is best thought of as a philosophy of how to approach quality
improvement. This philosophy, above everything, stresses the ‘total’ of TQM. It is an
approach that puts quality at the heart of everything that is done by an operation including all
activities within an operation.
This totality can be summarized by the way TQM lays particular stress on the following:
 meeting the needs and expectations of customers;
 covering all parts of the organization including every person in the organization;
 examining all costs which are related to quality, especially failure costs and getting
things ‘rightfirst time’;
 developing the systems and procedures which support quality and improvement;
developing a continuous process of improvement.
Not surprisingly, several researchers have tried to establish how much of a relationship there
is between adopting total quality management and the performance of the organization. One
of the best-known studies found that there was a positive relationship between the extent to
which companies implement TQM and its overall performance. It found that TQM practices
did indeed have a direct effect on operating performance but managers should implement
TQM as a whole set of ideas rather than simply picking a few techniques to implement.
The same study also suggests that where TQM does not prove successful in improving
performance the problems could be the result of poor implementation rather than in the TQM
practices themselves, and that a serious commitment on the part of top management to
TQM as a prerequisite for success.
a) TQM means meeting the needs and expectations of customers
Earlier we defined quality as ‘consistent conformance to customers’ expectations’. Therefore
any approach to quality management must necessarily include the customer perspective. In
TQM this customer perspective is particularly important. It may be referred to as ‘customer
centricity’ or the ‘voice of the customer’. However it is called, TQM stresses the importance
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of starting with an insight into customer needs, wants, perceptions, and preferences. This can
then be translated into quality objectives and used to drive quality improvement.
b) TQM means covering all parts of the organization
For an organization to be truly effective, every single part of it, each department, each
activity, each person and each level, must work properly together, because every person and
every activity affects and in turn is affected by others. One of the most powerful concepts that
has emerged from various improvement approaches is the concept of the internal
customer/supplier. This is recognition that everyone is a customer within the organization and
consumers goods or services provided by other internal suppliers, and everyone is also an
internal supplier of goods and services for other internal customers. The implication of this is
that errors in the service provided within an organization will eventually affect the service or
product which reaches the external customer.
c) TQM means including every person in the organization
Every person in the organization has the potential to contribute to quality and TQM was
amongst the first approach to stress the centrality of harnessing everyone’s potential
contribution to quality. There is scope for creativity and innovation even in relatively routine
activities, claim TQM proponents. The shift in attitude which is needed to view employees as
the most valuable intellectual and creative resource which the organization possesses can still
prove difficult for some organizations. Yet most advanced organizations do recognize that
quality problems are almost always the results of human error. Even Google can fall victim to
human error: see the short case ‘Even Google suffers “human error” ’.
d) TQM means all costs of quality are considered
The costs of controlling quality may not be small, whether the responsibility lies with each
individual, or a dedicated quality control department. It is therefore necessary to examine all
the costs and benefits associated with quality (in fact ‘cost of quality’ is usually taken to refer
to both costs and benefits of quality).
These costs of quality are usually categorized as prevention costs, appraisal costs, internal
failure costs and external failure costs.
1. Prevention costs- are those costs incurred in trying to prevent problems, failures and
errors from occurring in the first place. They include such things as:
 identifying potential problems and putting the process right before poor quality
occurs;
 designing and improving the design of products and services and processes to reduce
quality problems;
 training and development of personnel in the best way to perform their jobs;
 process control through SPC.
2. Appraisal costsAre those costs associated with controlling quality to check to
see if problems or errors have occurred during and after the creation of the service or
product. They might include such things as:
 the setting up of statistical acceptance sampling plans;
 the time and effort required to inspect inputs, processes and outputs;
3. Internal failure costsAre failure costs associated with errors which are dealt
with inside the operation. These costs might include such things as:
● the cost of scrapped parts and material;
● reworked parts and materials;
● the lost production time as a result of coping with errors;
● lack of concentration due to time spent troubleshooting rather than improvement.
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4. External failure costsAre those which are associated with an error going out of
the operation to a customer.
These costs include such things as:
 loss of customer goodwill affecting future business.
 aggrieved customers who may take up time.
 litigation (or payments to avoid litigation).
 guarantee and warranty costs.
 the cost to the company of providing excessive capability.
3. Obstacles to implementing TQM
Obstacles to implementing TQM
There are many obstacles of TQM as follows:
 The customer’s specification gap.
Perceived quality could be poor because there may be a mismatch between the
organization’s own internal quality specification and the specification which is expected by
the customer. For example, a car may be designed to need servicing every 10,000 kilometres
but the customer may expect 15,000 kilometre service intervals.
 The concept–specification gap.
Perceived quality could be poor because there is a
mismatch between the service or product concept and the way the organiza-tion has
specified quality internally. For example, the concept of a car might have been for an
inexpensive, energy-efficient means of transportation, but the inclusion of a climate
control system may have both added to its cost and made it less energy-efficient.
 The quality specification–actual quality gap.
Perceived quality could be poor
because there is a mismatch between actual quality and the internal quality
specification (often called ‘conformance to specification’). For example, the internal
quality specification for a car may be that the gap between its doors and body, when
closed, must not exceed 7 mm. However, because of inadequate equipment, the gap in
reality is 9 mm.
 The actual quality–communicated image gap.
Perceived quality could be poor
because there is a gap between the organization’s external communications or market
image and the actual quality delivered to the customer. This may be because the
marketing function has set unachievable expectations or operations is not capable of
the level of quality expected by the customer. For example, an advertising campaign
for an airline might show a cabin attendant offering to replace a customer’s shirt on
which food or drink has been spilt, whereas such a service may not in fact be
available should this happen.
There are also cost related obstacles to achieve TQM.
1 The Cost of Quality
All the areas in the production system will incur costs as part of their TQM program. For
example the marketing department will incur the cost of consumer research in trying to
establish customer needs. Quality costs are categorized as either the cost of achieving good
quality- the cost of quality assurance or the cost of poor quality products – the cost of not
conforming to specifications.
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2 The Cost of Achieving Good Quality
The cost of maintaining an effective quality management program can be categorized into
prevention costs and appraisal costs. Prevention reflects the quality philosophy of doing it
right the first time and includes those costs incurred in trying to prevent problems occurring
in the first place examples of prevention costs include;
 The cost of designing products with quality control characteristics.
The cost of designing processes which conform in quality specifications.
 The cost of the implementation of staff training programmes.
3.Appraisal costs are the cost associated with controlling quality through the use
measuring and testing products and processes to ensure that quality specifications are
conformed to. Examples of appraisal costs include:
 The cost of testing and inspecting products
 The costs of maintain testing equipment
 The time spent in gathering data for testing
 The time spent adjusting equipment to maintain quality
4. Criticisms of TQM
Criticisms of TQM
Total Quality Management (TQM) is the approach that focuses on the customer satisfaction.
In this, the main focus of the management team is on the quality of the product. The staff of
the organization focuses on improving the process of manufacturing, the quality of product
and services, and the culture.
TQM involves the continuous process of improving the quality of the product which will
satisfy the customer. It is done to retain the customer as a satisfied customer will not switch
the product.
The criticism of TQM is stated below:
1. Changing culture: To fulfill the satisfaction of the customer, the organization is required
to change the culture of the organization. The culture of the organization involves the change
in the operations of the organization. It is not possible for every organization to change the
culture.
2. Time Consuming: TQM is a time-consuming process as it involves proper evaluation of
the process of manufacturing a product or service. First, it is required to evaluate and then
improve the quality of the product.
3. Expensive: To maintain the quality of the product huge cost is involved. It requires the
cost of training the employees, improving the infrastructure of the organization, charges of
the consultancy firm to provide assistance in improving quality.
4. No creativity and innovation: The staff of the organization focuses on the satisfaction of
the customer. If the product satisfies the needs of the customer then it is not necessary that the
innovative product will also satisfy. Thus, the management cannot use creative ideas as it
may result in losing the customer.
The International Organization for Standardization defines total quality management, or
TQM as “a management approach for an organization, centered on quality, based on the
participation of all its members and aiming at the long-term success through customer
satisfaction, and benefits to all members of the organization and to society.” TQM has
significant advantages in terms of quality improvement, increased productivity, greater
financial yield and more customer loyalty.
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It also has several challenges and disadvantages.
Demands a Change in Culture
TQM demands an organizational culture that focuses on continuous process improvement
and customer satisfaction. It requires a change of attitude and a reprioritization of daily
operations. TQM also requires a long-term management commitment and constant employee
involvement. According to Forbes, changing an organization’s culture is a difficult challenge,
because culture amalgamates an interlocking set of values, processes, attitudes,
communication practices, roles, goals and assumptions, and is often met with resistance by
employees, who view it as a threat to their jobs.
Demands Planning, Time and Resources
A good TQM system often takes years to implement, and that occurs only after significant
planning, time, long-term resource allocation and unwavering management commitment.
Lack of proper planning can cause a TQM system to ultimately fail.
Quality is Expensive
TQM is expensive to implement. Implementation often comes with additional training costs,
team-development costs, infrastructural improvement costs, consultant fees and the like. The
system also requires continuous investment in the form of refresher trainings, process and
machine inspections, and quality measurement. TQM is not suitable for very small
companies, because its implementation, training and execution costs far supersede its
financial gains.
Takes Years to Show Results
TQM is a long-term process that shows results only after years have passed. It requires
perseverance, patience, dedication and motivation. Many organizations give up on it after
failing to see tangible results quickly. Organizations that function in highly competitive
environments cannot afford the luxury of time.
Discourages Creativity
TQM’s focus on task standardization to ensure consistency discourages creativity and
innovation. It also discourages new ideas that can possibly improve productivity.
Not a Quick-Fix Solution
Many companies, in their excessive focus on quality, end up losing financially. Both Xerox,
the American document management company, and Federal Express, the cargo airline,
suffered significant financial setbacks after winning the Baldrige Quality Awards- awards
that recognize quality performance. According to the book, "Corporate Transformation and
Restructuring," two-thirds of companies that embrace TQM fail to experience major
performance breakthroughs or improvements in customer satisfaction. According to an
Arthur D. Little survey of 500 companies, only 36 percent felt that TQM improved their
competitiveness.
5. Process improvement
PROCESS TO IMPROVEMENT
Achieving conformance to improvement requires the following steps:
Step 1 Define the quality characteristics of the service or product.
Step 2 Decide how to measure each quality characteristic.
Step 3 Set quality standards for each quality characteristic.
Step 4 Control quality against those standards.
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Step 5 Find and correct causes of poor quality.
Step 6 Continue to make improvements.
Step 1 – Define the quality characteristics
Much of the ‘quality’ of a service or product will have been specified in its design and can be
summarized by a set of quality characteristics. Also many services have several elements,
each with their own quality characteristics, and to understand the quality characteristics of the
whole service it is necessary to understand the individual characteristics within and between
each element of the whole service. For example, table below shows some of the quality
characteristics for a web-based online grocery shopping service.
Step 2 – Decide how to measure each characteristic
These characteristics must be defined in such a way as to enable them to be measured and
then controlled. This involves taking a very general quality characteristic such as
‘appearance’ and breaking it down, as far as one can, into its constituent elements.
‘Appearance’ is difficult to measure as such, but ‘colour match’, ‘surface finish’ and ‘number
of visible scratches’ are all capable of being described in a more objective manner. They may
even be quantifiable. Other quality characteristics pose more difficulty. The ‘courtesy’ of
airline staff, for example, has no objective quantified measure. Yet operations with high
customer contact, such as airlines, place a great deal of importance on the need to ensure
courtesy in their staff. In cases like this, the operation will have to attempt to measure
customer perceptions of courtesy.
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Step 3 – Set quality standards
When operations managers have identified how any quality characteristic can be measured,
they need a quality standard against which it can be checked; otherwise they will not know
whether it indicates good or bad performance. The quality standard is that level of quality
which defines the boundary between acceptable and unacceptable. Such standards may well
be constrained by operational factors such as the state of technology in the factory, and the
cost limits of making the product. At the same time, however, they need to be appropriate to
the expectations of customers. But quality judgements can be difficult. If one airline
passenger out of every 10,000 complains about the food, is that good because 9,999
passengers out of 10,000 are satisfied? Or is it bad because, if one passenger complains, there
must be others who, although dissatisfied, did not bother to complain? And if that level of
complaint is similar to other airlines, should it regard its quality as satisfactory?
Step 4 – Control quality against those standards
After setting up appropriate standards the operation will then need to check that the products
or services conform to those standards; doing things right, first time, every time. This
involves three decisions:
1 Where in the operation should they check that it is conforming to standards?
2 Should t hey check every service or product or take a sample?
3 How should the checks be performed?
Developing the systems and procedures which support quality and improvement
The emphasis on highly formalized systems and procedures to support TQM has declined in
recent years, yet one aspect is still active for many companies. This is the adoption of the
ISO 9000 standard. And although ISO 9000 can be regarded as a stand-alone issue, it is very
closely associated with TQM.
ISO 9000 provides a standard quality standard between the supplier and a customer that helps
to reduce the complexity of managing a number of different quality standards when a
customer has many suppliers. ISO 9000 is a series of standards for quality management and
assurance and has five major subsections as follows:
ISO 9000
IS0 9001
provides guidelines for the use of the following four standards in the series
applies when the supplier is responsible for the development, designing,
production, installation, and servicing of the products
ISO9002
applies when the supplier is responsible for production and installation
ISO9003
applies to final inspection and testing of products
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ISO 9004
provide guidelines for managers of organization to help them to develop their
quality system. It gives suggestions to help organizations meet the requirements of the
previous four standards.
The standards is general enough to apply to almost any good or service, but it is a specific
organisation or facility that is registered or certified to the standard. To achieve certification a
facility must document its procedures for every element in the standard. These procedures are
then audited by the third party periodically. The system thus ensures that the organization is
following a documented and thus consistent, procedure which makes errors easier to find and
correct. However the system does not improve quality in itself and has been criticized for
incurring cost in maintaining documentation which not providing guidance in quality
improvement techniques such as statistical process control.
The ISO 9000 approach
The ISO 9000 series is a family of standards compiled by the International Organization for
Standardization (ISO) which is the world’s largest developer and publisher of International
Standards, based in Geneva, Switzerland. According to the ISO ‘the standards represent an
inter-national consensus on good quality management practices. It consists of standards and
guide-lines relating to quality management systems and related supporting standards’. To be
precise, it is the ‘ISO 9001:2008’ standard that provides the set of standardized requirements
for a quality management system which should apply to any organization, regardless of size,
or whether it is in the private or public sector. It is the only standard in the family against
which organizationscan be certified – although certification is not a compulsory requirement
of the standard.
Its purpose when it was first framed was to provide an assurance to the purchasers of
products or services that they have been produced in such a way that they meet their
requirements. The best way to do this, it was argued, was to define the procedures, standards
and characteristics of the management control system which governs the operation. Such a
sys-tem would help to ensure that quality was ‘built into’ the operation’s transformation
processes. Rather than using different standards for different functions within a business, it
takes a ‘process’ approach that focuses on outputs from any operation’s process rather than
detailed procedures. This process orientation requires operations to define and record core
processes and sub-processes. In addition, processes are documented using the process
mapping approach. It also stresses four other principles:
● Quality management should be customer-focused. Customer satisfaction should be
measured through surveys and focus groups and improvement against customer standards
should be documented.
● Quality performance should be measured. In particular, measures should relate both to
processes that create products and services and customer satisfaction with those prod-ucts and
services. Furthermore, measured data should be analyzed in order to understand processes.
● Quality management should be improvement-driven. Improvement must be demonstrated
in both process performance and customer satisfaction.
● Top management must demonstrate their commitment to maintaining and continually
improving management systems. This commitment should include communicating the
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importance of meeting customer and other requirements, establishing a quality policy and
quality objectives, conducting management reviews to ensure the adherence to quality policies, and ensuring the availability of the necessary resources to maintain quality systems.
The ISO illustrates the benefits of the standard as follows: ‘Without satisfied customers, an
organization is in peril! To keep customers satisfied, the organization needs to meet their
requirements. The ISO 9001:2008 standard provides a tried and tested framework for taking a
systematic approach to managing the organization’s processes so that they consistently turn
out product that satisfies customers’ expectations.’
In addition, it is also seen as providing benefits both to the organizations adopting it
(because it gives them detailed guidance on how to design their control procedures) and
especially to customers (who have the assurance of knowing that the products and services
they purchase are produced by an operation working to a defined standard). Further, it may
also provide a useful discipline to stick to ‘sensible’ process- orientated procedures which
lead to error reduction, reduced customer complaints and reduced costs of quality, and may
even identify existing procedures which are not necessary and can be eliminated. Moreover,
gaining the certificate demonstrates that the company takes quality seriously; it therefore has
a marketing benefit.
Unit 7: Inventory Management
1. Effective inventory management
Effective inventory management
Operations managers need to manage the day-to-day tasks of managing inventory. Orders
will be received from internal or external customers; these will be dispatched and demand
will gradually deplete the inventory. Orders will need to be placed for replenishment of the
stocks; deliveries will arrive and require storing. In managing the system, operations
managers are involved in three major types of decision:
● How much to order. Every time a replenishment order is placed, how big should it
be some-times called the volume decision?
● When to order. At what point in time, or at what level of stock, should the
replenishment order be placed sometimes called the timing decision?
● How to control the system.
What procedures and routines should be installed to help make these decisions? Should
different priorities be allocated to different stock items? How should stock information
be stored?
Decisions on how much to order for effective management of the inventory
1. Volume decision
To illustrate this decision, consider again the example of the food and drinks we keep at our
home. In managing this inventory we implicitly make decisions on order quantity , which is
how much to purchase at one time. In making this decision we are balancing two sets of
costs: the costs associated with going out to purchase the food items and the costs associated
with holding the stocks. The option of holding very little or no inventory of food and
purchasing each item only when it is needed has the advantage that it requires little money
since purchases are made only when needed. However, it would involve purchasing provisions several times a day, which is inconvenient. At the very opposite extreme, making one
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journey to the local superstore every few months and purchasing all the provisions we would
need until our next visit reduces the time and costs incurred in making the purchase but
requires a very large amount of money each time the trip is made – money which could
otherwise be in the bank and earning interest. We might also have to invest in extra cupboard
units and a very large freezer. Somewhere between these extremes there will lie an ordering
strategy which will minimize the total costs and effort involved in the purchase of food.
2. Inventory costs
The same principles apply in commercial order-quantity decisions as in the domestic
situation. In making a decision on how much to purchase, operations managers must try to
identify the costs which will be affected by their decision. Earlier we examined how
inventory decisions affect some of the important components of return on assets. Here we
take a cost perspective and re-examine these components in order to determine which costs
go up and which go down as the order quantity increases.
Inventory management can have a decrease as order size is increased, whereas the next four
generally increase as order size is increased:
1. Cost of placing the orderEvery time that an order is placed to replenish stock, a number of transactions are
needed which incur costs to the company. These include preparing the order,
communicating with suppliers, arranging for delivery, making payment, and maintaining internal records of the transaction. Even if we are placing an ‘internal order’
on part of our own operation, there are still likely to be the same types of transaction
concerned with internal administration.
2. Price discount costs.
Often suppliers offer discounts for large quantities and cost penalties for small orders.
3. Stock-out costs.
If we misjudge the order-quantity decision and our inventory runs out of stock, there
will be lost revenue (opportunity costs) of failing to supply customers. External
customers may take their business elsewhere, internal customers will suffer process
inefficiencies.
4 Working capital costs.
After receiving a replenishment order, the supplier will demand payment. Of course,
eventually, after we supply our own customers, we in turn will receive payment.
However, there will probably be a lag between paying our suppliers and receiving
payment from our customers. During this time we will have to fund the costs of
inventory. This is called the working capital of inventory. The costs associated with it
are the interest we pay the bank for borrowing it, or the opportunity costs of not
investing it elsewhere.
5 Storage costsThese are the costs associated with physically storing the goods.
Renting, heating and lighting the warehouse, as well as insuring the inventory, can be
expen-sive, especially when special conditions are required, such as low temperatures
or high security.
6 Obsolescence costs .
When we order large quantities, this usually results in stocked items spending a long
time stored in inventory. This increases the risk that the items might either become
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obsolete (in the case of a change in fashion, for example) or deteriorate with age (in
the case of most foodstuffs, for example).
8. Operating inefficiency costsAccording to just-in-time philosophies, high inventory levels prevent us seeing the
full extent of problems within the operation. It is worth noting that it may not be the
same organization that incurs the costs. For example, sometimes suppliers agree to
hold consignment stock. This means that they deliver large quantities of inventory to
their customers to store but will only charge for the goods as and when they are used.
In the meantime they remain the supplier’s property so do not have to be financed by
the customer, who does however provide storage facilities.
Inventory profiles
An inventory profile is a visual representation of the inventory level over time.
Every time an order is placed, Q items are ordered. The replenishment order arrives in
one batch instantaneously. Demand for the item is then steady and perfectly
predictable at a rate of D units per month. When demand has depleted the stock of the
items entirely, another order of Q items instantaneously arrives, and so on.
Why should there be an inventory?
There are plenty of reasons to avoid accumulating inventory where possible
The following are some of the benefits of inventory.
1. Physical inventory is an insurance against uncertainty-Inventory can act as a buffer
against unexpected fluctuations in supply and demand.
For example, a retail operation can never forecast demand perfectly over the lead-time.
It will order goods from its suppliers such that there is always a minimum level of
inventory to cover against the possibility that demand will be greater than expected
during the time taken to deliver the goods. This is buffer, or safety, inventory. It can also
compensate for the uncertainties in the process of the supply of goods into the store. The
same applies with the output inventories, which is why hospitals always have a supply of
blood, sutures and bandages for immediate response to Accident and Emergency
patients. Similarly, auto-servicing services, factories and airlines may hold selected
critical spare parts inventories so that Inventory should only accumulate when the
advantages of having it outweigh its disadvantages. Primarily time-cost to the customer,
i.e. wastes customers’ time Cost of set-up, access, updating and maintenance staff can
repair the most common faults without delay. Again, inventory is being used as an
‘insurance’ against unpredictable events.
2. Physical inventory can counter act a lack of flexibilityWhere a wide range of customer options is offered, unless the operation is perfectly
flexible, stock will be needed to ensure supply when it is engaged on other activities.
This is sometimes called cycle inventory. Because of the nature of the mixing and baking
process, only one kind of bread can be produced at any time. The baker will have to
produce each type of bread in batches large enough to satisfy the demand for each kind
of bread between the times when each batch is ready for sale. So, even when demand is
steady and predictable, there will always be some inventory to compensate for the
intermittent supply of each type of bread.
3. Physical inventory allows operations to take advantage of short-term opportunities
Sometimes opportunities arise that necessitate accumulating inventory, even when there
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is no immediate demand for it. For example, a supplier may be offering a particularly
good deal on selected items for a limited time period, perhaps because they want to
reduce their own finished goods inventories. Under these circumstances a purchasing
department may opportunistically take advantage of the short-term price advantage.
Physical inventory can be used to anticipate future demands- Medium-term capacity
management may use inventory to cope with demand. Rather than trying to make a
product (such as chocolate) only when it is needed, it is produced throughout the year
ahead of demand and put into inventory until it is needed. This type of inventory is called
anticipation inventory and is most commonly used when demand fluctuations are large
but relatively predictable.
3. Physical inventory can reduce overall costsHolding relatively large inventories may bring savings that are greater than the cost of
holding the inventory. This may be when bulk-buying gets the lowest possible cost of
inputs, or when large order quantities reduce both the number of orders placed and the
associated costs of administration and material handling. This is the basis of the
‘economic order quantity’ (EOQ) approach that will be treated later in this
4. Physical inventory can increase in valueSometimes the items held as inventory can increase in value and so become an
investment. For example, dealers in fine wines are less reluctant to hold inventory than
dealers in wine that does not get better with age. (However, it can be argued that keeping
fine wines until they are at their peak is really part of the overall process rather than
inventory as such.) A more obvious example is inventories of money. The many financial
processes within most organizations will try to maximize the inventory of cash they hold
because it is earning them interest.
2. EOQ model
The economic order quantity (EOQ) formula
The most common approach to deciding how much of any particular item to order when
stock needs replenishing is called the economic order quantity (EOQ) approach. This
approach attempts to find the best balance between the advantages and disadvantages of
holding stock.
For example, Figure below shows two alternative order-quantity policies for an item. Plan A,
represented by the unbroken line, involves ordering in quantities of 400 at a time. Demand in
this case is running at 1,000 units per year. Plan B, represented by the dotted line, uses
smaller but more frequent replenishment orders. This time only 100 are ordered at a time,
with orders being placed four times as often. However, the average inventory for plan B is
one-quarter of that for plan A.
To find out whether either of these plans, or some other plan, minimizes the total cost of
stocking the item, we need some further information, namely the total cost of holding one
unit in stock for a period of time (Ch) and the total costs of placing an order (Co). Generally,
holding costs are taken into account by including:
● working capital costs
● storage costs
● obsolescence risk costs. Order costs are calculated by taking into account:
● cost of placing the order (including transportation of items from suppliers if
relevant);
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● price discount costs.
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Sensitivity of the EOQ
Examination of the graphical representation of the total cost curve in Figure above shows
that, although there is a single value of Q which minimizes total costs, any relatively small
devia-tion from the EOQ will not increase total costs significantly. In other words, costs will
be near-optimum provided a value of Q which is reasonably close to the EOQ is chosen.
Put another way, small errors in estimating either holding costs or order costs will not result
in a significant deviation from the EOQ. This is a particularly convenient phenomenon
because, in practice, both holding and order costs are not easy to estimate accurately.
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Worked Example
The approach to determining order quantity which involves optimizing costs of holding
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stock against costs of ordering stock, typifi ed by the EOQ models, has always been subject
to criticisms. Originally these concerned the validity of some of the assumptions of the
model; more recently they have involved the underlying rationale of the approach itself. The
criticisms fall into four broad categories, all of which we shall examine further:
● The assumptions included in the EOQ models are simplistic.
● The real costs of stock in operations are not as assumed in EOQ models.
● The models are really descriptive, and should not be used as prescriptive devices.
● Cost minimization is not an appropriate objective for inventory management.
Responding to the criticisms of EOQ
In order to keep EOQ-type models relatively straightforward, it was necessary to make
assumptions. These concerned such things as the stability of demand, the existence of a fixed
and identifiable ordering cost, that the cost of stock holding can be expressed by a linear
function, shortage costs which were identifiable, and so on. While these assumptions are
rarely strictly true, most of them can approximate to reality. Furthermore, the shape of the
total cost curve has a relatively flat optimum point which means that small errors will not
significantly affect the total cost of a near-optimum order quantity. However, at times the
assumptions do pose severe limitations to the models. For example, the assumption of steady
demand (or even demand which conforms to some known probability distribution) is untrue
for a wide range of the operation’s inventory problems. For example, a bookseller might be
very happy to adopt an EOQ-type ordering policy for some of its most regular and stable
products such as dictionaries and popular reference books. However, the demand patterns for
many other books could be highly erratic, dependent on critics’ reviews and word-of-mouth
recommen-dations. In such circumstances it is simply inappropriate to use EOQ models.
Cost of stock
Other questions surround some of the assumptions made concerning the nature of stockrelated costs. For example, placing an order with a supplier as part of a regular and multi-item
order might be relatively inexpensive, whereas asking for a special one-off delivery of an
item could prove far more costly. Similarly with stock-holding costs – although many
companies make a standard percentage charge on the purchase price of stock items, this
might not be appropriate over a wide range of stock-holding levels. The marginal costs of
increasing stock-holding levels might be merely the cost of the working capital involved. On
the other hand, it might necessitate the construction or lease of a whole new stock-holding
facility such as a warehouse. Operations managers using an EOQ-type approach must check
that the decisions implied by the use of the formulae do not exceed the boundaries within
which the cost assumptions apply.
An EOQ approach of regarding inventory as being more costly than previously believed.
Increasing the slope of the holding cost line increases the level of total costs of any order
quantity, but more significantly, shifts the minimum cost point substantially to the left, in
favour of a lower economic order quantity. In other words, the less willing an operation is to
hold stock on the grounds of cost, the more it should move towards smaller, more frequent
ordering.
Using EOQ models as prescriptions
Perhaps the most fundamental criticism of the EOQ approach again comes from the
Japanese-inspired ‘lean’ and JIT philosophies. The EOQ tries to optimize order decisions.
Implicitly the costs involved are taken as fixed, in the sense that the task of operations
managers is to find out what the true costs are rather than to change them in any way. EOQ is
essentially a reactive approach. Some critics would argue that it fails to ask the right question.
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Rather than asking the EOQ question of ‘What is the optimum order quantity?’ operations
managers should really be asking, ‘How can I change the operation in some way so as to
reduce the overall level of inventory I need to hold?’ The EOQ approach may be a reasonable
description of stock-holding costs but should not necessarily be taken as a strict prescription
over what decisions to take. For example, many organizations have made considerable efforts
to reduce the effec -tive cost of placing an order. Often they have done this by working to
reduce changeover times
on machines. This means that less time is taken changing over from one product to the other,
and therefore less operating capacity is lost, which in turn reduces the cost of the changeover.
Under these circumstances, the order cost curve in the EOQ formula reduces and, in turn,
reduces the effective economic order quantity. Figure 12.9 shows the EOQ formula
represented graphically with increased holding costs ( see the previous discussion) and
reduced order costs. The net effect of this is to significantly reduce the value of the EOQ.
Should the cost of inventory be minimized?
Many organizations (such as supermarkets and wholesalers) make the most of their revenue
and profits simply by holding and supplying inventory. Because their main investment is in
the inventory it is critical that they make a good return on this capital, by ensuring that it has
the highest possible ‘stock turn’ (defined later in this chapter) and/or gross profit margin.
Alternatively, they may also be concerned to maximize the use of space by seeking to
maximize the profit earned per square metre. The EOQ model does not address these
objectives. Similarly, for products that deteriorate or go out of fashion, the EOQ model can
result in excess inventory of slower-moving items. In fact the EOQ model is rarely used in
such organizations,
3. Fixed Order Interval model
FIXED ORDER INTERVAL SYSTEM
Fixed Order Interval System is a method of inventory control system. It is also known as
fixed reorder cycle inventory model. In this, a fixed interval is developed by keeping a check
on the demand of the product. It is used in managing the supply of the raw material.
In fixed order interval system, the stock levels are evaluated and a periodic schedule of fixed
order is developed. This operation is developed on the basis of time. Stock levels refer to the
inventory or the stock kept in the warehouse of the organization.
Fixed order interval system involves a regular check of the inventory so as to develop an
interval of reordering. It is important for the efficient and effective operations of the
organization. Through this, there will be no surplus inventory kept in the warehouse. Thus,
the cost of storing inventory is reduced.
The supplier of the raw material mostly accepts this method of inventory system as there is
no uncertainty of changing the orders. Suppliers know the quantity and the time period of
reordering. So, the inventory is not kept idle in the warehouse. It is delivered as per the time
of its requirement. Thus, the supplier is secured as there are fewer chances of switching the
supplier.
The quantity of the order is determined by the three factors:
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1. The daily usage which is anticipated. It is developed by analyzing the inventory regularly.
2. The time period which occurs between the analyses of the inventory.
3. The quantity of inventory available and the demand for the product.
4. Single model
A single period inventory model is a business scenario faced by companies that order
seasonal or one-time items. There is only one chance to get the quantity right when
ordering, as the product has no value after the time it is needed. There are costs to both
ordering too much or too little, and the company's managers must try to get the order right
the first time to minimize the chance of loss.
The single period inventory model is often explained in terms of the "newsboy problem." A
newsboy who stands on the corner and sells papers to passers-by must order the papers the
day before. He only has one chance to order because the papers only have any value on the
day they are published; the next day they are worth nothing. If he orders too many he'll
have to absorb the loss of the unsold papers, and if he orders too few he will have lost
profits and annoyed customers. Getting the order quantity correct is how the newsboy
makes the most profit.
The Cost of Ordering Too Much
Stocking too much of a seasonal item can lead to large losses for a business. In the case of
Christmas cards, for example, sales go to zero on the day after Christmas. The company has
the choice of destroying the remaining inventory, selling some at huge discounts or storing
them until next Christmas. The latter option may save the cost of the inventory, but will
cost the company in warehouse and storage fees. Inventory that is dated, such as magazines
or royal wedding memorabilia, may have no market after the date.
The Cost of Ordering Too Little
There are many costs associated with having too little inventory on hand, and not all of
them are directly financial. The main cost is the lost opportunity to make profit. The
difference between the sales price and the cost multiplied by the number of customers who
had to be turned away equals the lost profit. It could even be higher if some customers told
others that the company was out of stock and those potential customers did not show up. A
more subtle but just as damaging cost is customer goodwill. If customers are expecting to
be able to buy a product from you and cannot because you ordered ineffectively, their
annoyance can extend farther and they may choose to buy products elsewhere in the future.
Marginal Analysis Approach
The marginal analysis approach is one way to find the order quantity that has the best
chance of being correct. The cost of ordering one more unit is compared to the profit gained
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of ordering another unit. Quantitative analysis is used to determine the economic order
quantity based on expected demand and the costs of getting it wrong. Complex calculations
are often used to come up with a statistically sound order quantity.
Unit 8: Just in Time Systems
1. Conversional systems
Conversional systems
Just-in- time (JIT) is a philosophy originating from Japanese auto maker Toyota where
Taiiichi ohno developed the Toyota Production system.
The basic idea behind JIT is to produce only what you need, when you need it. This may
seem a simple idea but to deliver it requires a number of elements in place such as the
elimination of wasteful activities and continuous improvements.
Eliminate Waste
Waste is considered in the widest sense as any activity which does not add value to the
operation seven types of wastes identified by Toyota are as follows;
 Waiting time; this is the time spent by labour or equipment waiting to add value to a
product. This May be disguised by undertaking unnecessary operations ( e.g
generating work in progress (WIP) on a machine) which are not immediately needed (
i.e the waste is converted from time to WIP)

Transport; unnecessary transportation of WIP is another source of waste. Layout
changes can substantially reduce transportation time.

Process; some operation do not add value to the product but are simply there because
of poor design or machine maintenance. Improved design or preventative
maintenance should eliminate these process.

Inventory; inventory of all types ( e,g pipeline cycle) is considered as waste and
should be eliminated

Motion; simplification of work movement will reduce waste caused by unnecessary
motion of labour and equipment.

Defective goods; the total costs of poor quality can be very high and will include
scrap material, wasted labour time and time expediting orders and loss goodwill
through missed delivery dates.
Continuous improvement
Continuous improvement or Kaizen, the Japanese term is a philosophy which believes that it
is possible to get to the ideas of JIT by continuous stream of improvements over time.
JIT pull system
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2. Conversion to a JIT system
The idea of pull system comes from the need to reduce inventory within the production
system. In a push system a schedule pushes work on to machines which is then passed
through to the next work centre. A production system for an automobile will require the
coordination of thousands of components many of which will need to be grouped together to
form an assembly. In order to ensure that there is no stoppages it is necessary to have
inventory in the system because it is difficult to coordinate parts to arrive at a particular
station simultaneously. The pull system comes from the idea a supermarket in which items
are purchased by a customer only when needed and are replenished as they are removed. The
inventory coordination is controlled by a customer pulling items from the system which are
then replaced as needed.
To implement a pull system a Kanban (Japanese for ‘card’ or ‘sign’) is used to pass the
information through the production system. Each Kanban provides information on the part
identification quality per container that the part is transported in the preceding and next work
station. Kanban in themselves do not provide the schedule for production but without them
production cannot take place as they authorize the production and movement of materials
through the pull system. Kanban need not to be a card, but something that can be used aa a
signal for production such as marked area of flootspace. There are two types of Kanban
system, the single card and the two card. The single card system uses only one type of
Kanban system called the conveyance Kanban which authorizes the movement of parts. The
number of containers at a work centre is limited by the number of Kanbans. A signal to
replace inventory at work centre can only be sent when the container is emptied. Toyota use a
dual card system which in addition to the conveyance Kanban, utilizes a production Kanban
to authorize the production of parts. This system permits greater control over production as
well as inventory. If the processes are tightly linked (i.e one always follows the other) then a
single Kanban can be used in order for a Kanban system to be implemented it is important
that the seven operations rules that govern the system are followed. These rules can be
summarized as follows;
Move a Kanban only when the lot it represents is consumed
No withdrawal of parts without a Kanban is allowed
The number of parts issued to the subsequent process must be the exact number specified by
the Kanban
A Kanban should always be attached to the physical product
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The preceding process should always produce its parts in the quantities withdrawn by the
subsequent process.
Defective parts should never be conveyed to the subsequent process
A high level of process must be maintained because of the lack of buffer inventory. A
feedback mechanism which reports quality problems quickly to the preceding process must
be implemented.
Process the Kanban in every work Centre strictly in order in which they arrive at the work
Centre
If several Kanban are waiting for production they must be served in the order that they have
arrived. If the rule is not followed there will be a gap in the production rate of one or more of
the subsequent processes. The system is implemented with a given number of cards in order
to obtain a smooth floor. The number of cards is then decreased, decreasing inventory and
any problem which surface are tackled. Cards are decreased one at a time to continue the
continuous improvement process.
3. Goals and objectives of JIT
GOALS AND OBJECTIVE OF JIT
Definition of Just-In-Time (JIT) Method:
Just-In-Time (JIT) is a purchasing and inventory control method in which materials are
obtained just-in-time for production to provide finished goods just-in-time for sale. JIT is a
demand-pull system. Demand for customer output (not plans for using input resources)
triggers production. Production activities are “pulled” not “pushed” into action.
As philosophy, JIT targets inventory as an evil pres-ence that obscures problems that should
be solved, and declares that, by contributing significantly to casts, target inventories keep a
company from being as competitive or profitable as it otherwise might be.
A just-in-time manufacturing system requires making goods or service only when the
customer, internal or external, requires it. JIT requires better coordination with suppliers so
that materials ar-rive immediately prior to their use. It reduces or eliminates inventory and the
costs associated with carrying the inventory. It emphasises that workers immediately correct
the system making defective units because they have no inventory.
With no inventory to draw from for delivery to customers, just-in-time relies on high quality
materials and production. It is required that the companies that use just-in-time
manufacturing must eliminate all the sources of failure in the system. Production people must
be better trained so that they can carry out their works without errors. Suppliers must be able
to produce and deliver defect free materials or components just when they are required, and
equipment must be maintained so that machine failures are eliminated.
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Objectives of Just-In-Time (JIT) Method:
JIT aims to achieve the following objectives in the inventory system:
(i) Zero inventory
(ii) Zero breakdowns
(iii) 100% on time delivery service
(iv) Elimination of non-value added activities
(v) Zero defects.
The major differences between JIT manufacturing and traditional manufacturing are as
follows:
Difference between JIT and Traditional Manufacturing
JIT applies to raw materials inventory as well as to work-in-process inventory. The goals are
that both raw materials and work in process inventory are held to absolute minimums. JIT is
used to complement other materials planning and control tools, such as EOQ and safety stock
levels. In JIT system, production of an item does not commence until the organisation
receives an order.
When an order is received for a finished product, productions people give orders for raw
materials. As soon as production is complete to fill the order, production ends. In theory, in
JIT, there is no need for inventories because no production takes place until the organisation
knows that it will sell them. In practice, however, companies using just-in-time inventory
generally have a backlog of orders or stable demand for their products to assure continued
production.
The fundamental objective of JIT is to produce and deliver what is needed, when it is needed,
at all stages of the production process-just-in-time to be fabricated, sub-assembled,
assembled, and dispatched to the customer. Although in practice there are no such perfect
plants, JIT is an ideal and therefore a worthy goal.
The benefits are low inventory, high manufacturing cycle rates, high output per employee,
minimum floor space requirements, minimum indirect labour, and perfect in-process control.
An associated requirement of a successful JIT operation is the pursuit of perfect quality in
order to reduce, to an absolute minimum, delays caused by defective product units.
Example:
Godrej Manufacturing has developed value-added standards for its activities among which
are the following three: materials usage, purchasing, and inspecting.
The value-added output levels for each of the activities, their actual levels achieved, and the
standard prices are as follows:
Value-added output levels
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Assume that material usage and purchasing costs correspond to flexible resources (acquired
as needed) and inspection uses resources that are acquired in blocks, or steps, of 2,000 hours.
The actual prices paid for the inputs equal the standard prices.
Required:
1. Assume that continuous improvement efforts reduce the demand for inspection by 30
percent during the year (actual activity usage drops by 30 percent). Calculate the activity
volume and unused capacity variances for the inspection activity. Explain their meaning.
Also, explain why there is no activity volume or unused capacity variance for the other two
activities.
2. Prepare a cost report that details value-added and non-value-added costs.
3. Suppose that the company wants to reduce all non-value-added costs by 30 percent in the
coming year. Prepare kaizen standards that cap be used to evaluate the company’s progress
toward this goal. How much will this save in resource spending?
4. Suppose that Godrej Manufacturing has implemented the Balanced Scorecard. Explain
how non-value-added cost reduction, non-value-added cost reports, and kaizen standards
might fit into the Balanced Scorecard framework.
Just-In-Time (JIT) Method - Solution
There is no reduction in resource spending for inspecting because it must be purchased In
increments of 2,000 and only 1,200 hours were saved—another 800 hours must be reduced
before any reduction in resource spending is possible. The unused capacity variance must
reach Rs 2, 40,000 before resource spending can be reduced.
4. The Balanced Scorecard has four perspectives: financial, customer, process, and learning
and growth. One of the objectives of the financial perspective is reducing the unit costs of
products. Reducing non-value-added costs should produce a reduction in the company’s
product costs. But the most direct connection to the Balanced Scorecard is with the internal
process perspective of the Balanced Scorecard. Value- and non-value-added cost reports are
financial measures that relate to internal process efficiency.
Similarly, kaizen standards deal with improving internal process efficiency. Activity volume
variances and unused capacity measures also are concerned with process efficiency. Finally,
the value of the Balanced Scorecard relative to these measures is that the Balanced Scorecard
will integrate these measures into the overall strategic framework.
The learning and growth perspective provides the enabling factors needed to reduce nonvalue-added costs. What good are non-value-added cost reports if nobody has the capability
of finding ways to improve activities and processes? As process efficiency increases and
costs are reduced, then customer value can be increased by reducing prices. As customer
value increases, market share may increase, and this, in turn, may increase revenues and
profits.
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4. JIT
JIT
Most manufacturing facilities are looking to lower the costs associated with their production
in order to maximize their profits. Over time, many scheduling techniques have emerged as a
way to help these manufacturing facilities meet their production goals and increase their
efficiency.
Just-In-Time manufacturing was designed to help manufacturers reduce inventory-related
costs by receiving materials and producing goods only when they are needed. Just-In-Time
scheduling is used to accommodate last-minute changes to orders and prevent damage or
spoilage of inventory by preventing jobs from starting too early.
JUST-IN-TIME (JIT) MANUFACTURING
When the techniques are implemented, production facilities are able to align their raw
material orders directly to their production schedules so that these items do not have to be
stored for long periods of time. Just-In-Time production scheduling prevents jobs from being
scheduled much before they are needed, which requires WIP items to be held in inventory.
JIT means that your production operations start with just enough time to be completed by the
need date so that your goods are being produced to ship, not to be stored.
There are many benefits associated with Just-In-Time production, but the main goals of this
method is to increase the efficiency of production while decreasing waste to ultimately lower
the production costs and increase profits. On the flip side, implementing JIT methodology
requires producers to be able to accurately forecast their demand to avoid running into
material shortages.
Before implementing Just-In-Time strategies, it is essential to understand the advantages and
disadvantages of the process.
The advantages of Just-In-Time (JIT) manufacturing include the following:
Reduced Space Needed - With JIT you have a faster turnaround of stock, which means that
you do not need a lot of warehouse or storage space to store goods or materials. Ultimately,
this will reduce the amount of storage space your organization will need to rent or buy, which
will free up funds for other parts of the business.
Smaller Investments - JIT inventory management is an ideal methodology for small
production facilities that do not have the funds needed in order to purchase huge amounts of
stock at once. Ordering stock materials only when they are needed enables you to maintain a
healthy and smooth cash flow.
Waste Elimination/Reduction - A quicker turnaround of stock prevents goods that have
become damaged or obsolete while sitting in storage, reducing waste. This again saves
money through preventing investment in any unnecessary stock and reducing the need to
replace old stock.
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While there are many advantages to the Just-In-Time manufacturing methodology, there are
also some drawbacks to it as well. Listed below are some of the disadvantages of Just-InTime (JIT) manufacturing.
Disadvantages of Just-In-Time (JIT) Manufacturing
The disadvantages of Just-in-Time (JIT) Manufacturing include the following:
Risk of Running Out of Stock - With JIT manufacturing, you do not carry as much stock.
This is because you base your stock off of demand forecasts, and if those are incorrect, then
you will not have the correct amount of stock readily available for your consumers. This is
one of the most common issues with manufacturing that utilize methodologies such as JIT
and lean.
Dependency on Suppliers - Having to rely on the timelessness of suppliers for each order
puts you at risk of delaying your customers’ receipt of goods. If you are unable to meet
consumer expectations, then they could take their business elsewhere. This is why it is
important to choose reliable suppliers and have a strong relationship with them so that you
can make sure that you have the materials you need to meet your customer demands.
More Planning Required - JIT inventory management requires companies to understand
sales trends and variances in close detail. Many companies have seasonal sales periods,
meaning that a number of products will need a higher stock level to combat consumer
demand. Therefore, you must plan ahead for instances like this and ensure that your suppliers
are able to fulfill the requirements.
5. JIT in services
JIT IN SERVICE
Just in time (JIT) manufacturing is a workflow methodology aimed at reducing flow times
within production systems, as well as response times from suppliers and to customers. A
digital Kanban board is an essential element of any true just-in-time manufacturing system.
JIT manufacturing helps organizations control variability in their processes, allowing them to
increase productivity while lowering costs. JIT manufacturing is very similar to Lean
manufacturing, and the terms are often used synonymously.
The ins and outs of JIT manufacturing, including its history, the basic concepts included in
this methodology, and its potential risks.
Applying JIT only to manufacturing you may not see how JIT could be applicable to service
organizations. However, we have seen in this chapter that JIT is an all-encompassing
philosophy that includes eliminating waste, improving quality, continuous improvement,
increased responsiveness to customers, and increased speed of delivery. That philosophy is
equally applicable to any organization, service or manufacturing.
Following are examples of JIT concepts seen in service firms.
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Improved Quality
Service quality is often measured by intangible factors such as timeliness, service
consistency, and courtesy. Building quality into the process of service delivery and
implementing concepts such as quality at the source can significantly improve service quality
dimensions. For example, McDonald's has become famous by building quality into the
process and standardizing the service delivery system. Regardless of location, McDonald's
customers receive the same product and service consistency.
Uniform Facility Loading
The challenge for service operations is synchronizing their production with demand. Many
service firms have developed unique ways to level customer demand in order to provide
better service responsiveness. For example, hotels and restaurants use.
Supporting a JIT manufacturing system requires discipline, structure, and explicit processes.
In addition to strictly limiting inventory, the following methods are included in a true JIT
system:
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








Housekeeping – physical organization and discipline
Setup reduction and flexible changeover approaches
Small lot sizes
Uniform plant load – leveling as a control mechanism
Balanced flow – actively managing flow by limiting batch sizes
Skill diversification – multi-functional workers
Control by visibility – using visual tools to improve communication
Designing for process
Streamlining the movement of materials
Cellular manufacturing
Pull system
Elimination of defects
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