School of Business Studies
Sharda University
MBA – 2nd SEM END-TERM EXAMINATION, 2011
Paper Code: MTH 902 - 1417
Paper Title: PRODUCTION AND OPERATIONS MANAGEMENT Time: 3 hrs.
Max. Marks: 100
Note:(1) The question paper consists of three parts
(2) All the parts are compulsory.
(3) The figures on the right hand side indicate maximum marks.
Part-1
Q1 (i) What is the concept of “Division Labour”? How is it applied to the assembly lines?
Traditionally, assembly line balancing involves determining the number of workstations using a
single criterion method like balance delay, production cost or number of workstations
minimization under certain constraints. The cycle time, determined from the demand of the
product, is taken as an input parameter. This approach may not be well-suited for a batch-model
assembly line under frequent changeover situation because of the desirability to reduce
changeover time. In this paper, a multi attribute-based approach is developed to determine the
number of workstations. At first, a set of feasible number of workstations which are balanced for
each product model are generated. A procedure is then developed to compute the changeover
time for each configuration (number of workstation), and finally, a multi attribute evaluation model
is developed to select the number of workstations considering production rate, variety, minimum
distance moved, division of labor and quality using the analytic hierarchy process and simulation.
The methodology is then applied to a real-life batch-model assembly line for printing calculators
Q1 (ii) What are the six basis components of operations strategy? Are they independent of
each other?
The six components of operations strategy are:
1) Positioning the productive system
2) Capacity / location decisions
3) Product and process technology
4) Work force and job design
5) Strategic implications of operating decisions
6) Suppliers and vertical integration
These components are basic to operations strategy because there is a wide managerial choice
available within each, and each affects the long term competitive position of the firm by impacting
cost, quality, product availability, and flexibility / service. All of the activities in the line of material
flow from suppliers through fabrication and assembly and culminating in product distribution must
be integrated for sensible operations strategy formulation. Leaving any part out can lead to
uncoordinated strategies. In addition to materials, the other crucial inputs of labor, job design, and
technology must be parts of the integrated strategy.
1 (iii) Discuss the importance of facilities location decision in operation planning
Typical steps when making location decisions
1. Decide on the criteria that are important for the location decision
2. Identify the important factors
3. Develop location alternatives
4. Evaluate each of the alternatives
5. Make a selection

Location near raw materials, due to necessity, perish ability, or transportation costs

Location of markets, clients, or constituents

Labor factors … cost, availability, skills, education

Climate

Tax rates and tax incentives

Comparative advantage (e.g., labor) in many developing countries

Challenging to manage facilities, personnel and operations around the world

Tariffs can impede trade

Import restrictions can hurt ability to move technologies, equipment, spare parts

Language differences

Cultural differences

Level of corruption

Different legal systems

Quality of life

Quality of services (police, fire, etc.)

Local attitudes toward certain types of businesses (N.I.M.B.Y.)

Environmental regulations

Public utilities: cost, availability

Developer support

Taxes and tax incentives
Tax incentives and credits are often a major consideration when locating

Land – soil conditions, load factors, drainage rates

Transportation – access for semi-trucks, close to freeway

Zoning – residential vs. commercial vs. mixed use

Environmental regulations – swamp land, endangered species
Service facility location involves
very different considerations
Manufacturing/Distribution
Service/Retail
Cost Focus
Revenue focus
Transportation modes/costs
Demographics: age,income,etc
Energy availability, costs
Population/drawing area
Labor cost/availability/skills
Competition
Building/leasing costs
Traffic volume/patterns
Customer access/parking
Q1. iv) What is just-in time production? What is its aim?
Just-in-time (JIT) Philosophy of JIT is simple: inventory is waste. JIT inventory systems expose
hidden causes of inventory keeping, and are therefore not a simple solution for a company to
adopt. JIT a production strategy that strives to improve a business' return on investment by
reducing in-process inventory and associated carrying costs. Just In Time production method is
also called the Toyota Production System. To meet JIT objectives, the process relies on signals
or Kanban between different points in the process, which tell production when to make the next
part. Kanban are usually 'tickets' but can be simple visual signals, such as the presence or
absence of a part on a shelf. Implemented correctly, JIT focuses on continuous improvement and
can improve a manufacturing organization's return on investment, quality, and efficiency. To
achieve continuous improvement key areas of focus could be flow, employee involvement and
quality. Quick notice that stock depletion requires personnel to order new stock is critical to the
inventory reduction at the center of JIT. This saves warehouse space and costs. However, the
complete mechanism for making this work is often misunderstood.
Q1. (v) What do you understand MRP? Discuss.
Material requirements planning (MRP) is a production planning and inventory control system
used to manage manufacturing processes. Most MRP systems are software-based, while it is
possible to conduct MRP by hand as well.
An MRP system is intended to simultaneously meet three objectives:

Ensure materials are available for production and products are available for delivery to
customers.

Maintain the lowest possible level of inventory.

Plan manufacturing activities, delivery schedules and purchasing activities.
MRP is a tool to deal with these problems. It provides answers for several questions:

What items are required?

How many are required?

When are they required?
MRP can be applied both to items that are purchased from outside suppliers and to subassemblies, produced internally, that are components of more complex items.
The data that must be considered include:

The end item (or items) being created. This is sometimes called Independent Demand, or
Level "0" on BOM (Bill of materials).

How much is required at a time.

When the quantities are required to meet demand.

Shelf life of stored materials.

Inventory status records. Records of net materials available for use already in stock (on
hand) and materials on order from suppliers.

Bills of materials. Details of the materials, components and sub-assemblies required to make
each product.

Planning Data. This includes all the restraints and directions to produce the end items. This
includes such items as: Routings, Labor and Machine Standards, Quality and Testing
Standards, Pull/Work Cell and Push commands, Lot sizing techniques (i.e. Fixed Lot Size,
Lot-For-Lot, Economic Order Quantity), Scrap Percentages, and other inputs.
Q1 (iv) What is the difference between the specification limits and control limits?
This is a crucial distinction that is frequently confused. Basically, specification limits have
to do with the voice of the customer while control limits have to do with the voice of the
process.
First off, what are specifications? Specifications define the allowable deviation from target
or nominal. But to really understand what is going on, we have to define what we mean
by "allowable deviation," "target," and "nominal."
Control limits are based on past performance. They are the voice of the process telling
you what variability the process has produced in the past, with the intention of
recognizing when a sufficient change from the past has occurred to justify adjusting the
process. It is possible for a process to be incapable of meeting a specification while
remaining in statistical control - we are predictably making product out of spec.
Q2. (1) Compare and contrast three different methods of aggregate planning:
graphical, linear programming heuristic.
The Concept of Aggregation
Aggregate Planning is a medium- term capacity planning that typically encompasses a time
period of two to eighteen months. It involves determining the best quantity to produce and
selecting the lowest-cots method that will provide flexibility in capacity while meeting production
requirements.
Aggregation is done according to :
a product family is a group of products that are manufactured similar and have
common labor and materials requirements.
a company can aggregate work force by product family
the time period is usually about 1 year.
Aggregate production planning involves managing
Work Force levels-- is the number of workers required for production.
Production Rate-- is the number of units produced per time period.
Inventory levels-- is the balance of unused units carried forward from the previous period.
Common objectives
Aggregate Product Planning takes place in a complex environment that has a number of
external and internal factors.
Among the common objectives of Production planning are to:
1. Minimize costs
2. Maximize profits
3. Minimize inventory levels
4. Minimize changes in work force levels.
5. Minimize use of overtime
6. Minimize use of subcontracting
7. Minimize changes in production rates
8. Minimize number of machine setups
9. Minimize idle time for plant and personnel
10. Maximize customer service
Procedure for Graphical Method of Solving LP Problems:
1. Is the problem an LP? Yes, if and only if:
All variables have power of 1, and they are added or subtracted (not divided or
multiplied). The constraint must be of the following forms, and the objective must be
either maximization or minimization.
For example, the following problem is not an LP: Max X, subject to X < 1. This very
simple problem has no solution.
2. Can I use the graphical method? Yes, if the number of decision variables is either 1 or 2.
3. Use Graph Paper. Graph each constraint one by one, by pretending that they are
equalities (pretend all £ and ³, are = ) and then plot the line. Graph the straight line on a
system of coordinates on a graph paper. A system of coordinate has two axes: a
horizontal axis called the x-axis (abscissa), and a vertical axis, called the y-axis
(ordinate). The axes are numbered, usually from zero to the largest value expected for
each variable.
4. As each line is created, divide the region into 3 parts with respect to each line. To identify
the feasible region for this particular constraint, pick a point in either side of the line and
plug its coordinates into the constraint. If it satisfies the condition, this side is feasible;
otherwise the other side is feasible. For equality constraints, only the points on the line
are feasible.
5. Throw away the sides that are not feasible.
After all the constraints are graphed, you should have a non-empty (convex) feasible
region, unless the problem is infeasible.
6. Create (at least) two iso-value lines from the objective function, by setting the objective
function to any two distinct numbers. Graph the resulting lines. By moving these lines
parallel, you will find the optimal corner (extreme point), if it does exist.
Classification of the Feasible Points: : The feasible points of any non-empty LP feasible region
can be classified as, interiors, boundaries, or vertices. As shown in the following figure:
The point B in the above two-dimensional figure, for example, is a boundary point of the feasible
set because every small circle centered at the point B, however small, contains both points some
in the set and some points outside the set. The point I is an interior point because the orange
circle and all smaller circles, as well as some larger ones; contains exclusively points in the set.
The collection of boundary points belonging to one set is called boundary line (segment), e.g.
the line segment cd. The intersections of boundary lines (segments) are called the vertices, if
feasible it is called the corner point. In three-dimensional space and higher the circles become
spheres, and hyper-spheres.
Know that, the LP constraints provide the vertices and the corner-points. A vertex is the
intersection of 2-lines, or in general n-hyperplanes in LP problems with n-decision variables.
A corner-point is a vertex that is also feasible.
Q2 (ii) When a product is being produced continuously, accumulating a batch of the
products for acceptance or rejection later may not be very good idea. For such a
continuous production process what kind of an accepting sampling procedure do you
suggest? Explain your rationale?
This standard provides procedures for failure rate (FR) qualification, sampling plans for
establishing and maintaining FR levels at selected confidence levels, and lot conformance
inspection procedures associated with FR testing for the purpose of direct reference in
appropriate - electronic parts established reliability (ER) specifications.
Acceptance sampling. The procedures described here are useful whenever we need to decide
whether or not a batch or lot of items complies with specifications, without having to inspect 100%
of the items in the batch. Because of the nature of the problem – whether to accept a batch –
these methods are also sometimes discussed under the heading of acceptance sampling.
Advantages over 100% inspection. An obvious advantage of acceptance sampling over 100%
inspection of the batch or lot is that reviewing only a sample requires less time, effort, and money.
In some cases, inspection of an item is destructive (e.g., stress testing of steel), and testing 100%
would destroy the entire batch. Finally, from a managerial standpoint, rejecting an entire batch or
shipment (based on acceptance sampling) from a supplier, rather than just a certain percent of
defective items (based on 100% inspection) often provides a stronger incentive to the supplier to
adhere to quality standards.
Fixed Sampling Plans
To construct a simple sampling plan, we would first decide on a sample size, based on the means
under H0/H1 and the particular alpha and beta error probabilities. Then, we would take a single
sample of this fixed size and, based on the mean in this sample, decide whether to accept or
reject the batch. This procedure is referred to as a fixed sampling plan.
Operating characteristic (OC) curve. The power of the fixed sampling plan can be summarized
via the operating characteristic curve. In that plot, the probability of rejecting H 0 (and accepting
H1) is plotted on the Y axis, as a function of an actual shift from the target (nominal) specification
to the respective values shown on the X axis of the plot. This probability is, of course, one minus
the beta error probability of erroneously rejecting H1 and accepting H0; this value is referred to as
the power of the fixed sampling plan to detect deviations. Also indicated in this plot are the power
functions for smaller sample sizes.
Q2. (iii) When a company procures a number of raw materials could be a problem in
calculating the Economic order quantity of individual items?
Inventory management is primarily about specifying the shape and percentage of stocked goods.
It is required at different locations within a facility or within many locations of a supply network to
precede the regular and planned course of production and stock of materials.

Raw materials - materials and components scheduled for use in making a product.

Work in process, WIP - materials and components that have begun their transformation to
finished goods.

Finished goods - goods ready for sale to customers.

Goods for resale - returned goods that are salable
EOQ only applies where the demand for a product is constant over the year and that each new
order is delivered in full when the inventory reaches zero. There is a fixed cost charged for each
order placed, regardless of the number of units ordered. There is also a holding or storage cost
for each unit held in storage
1. The ordering cost is constant.
2. The rate of demand is constant
3. The lead time is fixed
4. The purchase price of the item is constant i.e. no discount is available
5. The replenishment is made instantaneously, the whole batch is delivered at once.
EOQ is the quantity to order, so that ordering cost + carrying cost finds its minimum. (A common
misunderstanding is that the formula tries to find when these are equal.)
The Economic Lot Scheduling Problem (ELSP) is a problem in Operations management that
has been studied by a large number of researchers for over 50 years. The ELSP is a
mathematical model of a common issue for almost any company or industry: planning what to
manufacture, when to manufacture and how much to manufacture.
The scope of inventory management concerns the fine lines between replenishment lead time,
carrying costs of inventory, asset management, inventory forecasting, inventory valuation,
inventory visibility, future inventory price forecasting, physical inventory, available physical space
for inventory, quality management, replenishment, returns and defective goods and demand
forecasting. Balancing these competing requirements leads to optimal inventory levels, which is
an on-going process as the business needs shift and react to the wider environment.
Q2. (iv) Describe how you would setup an accident prevention programme for potentially
dangerous chemical production unit.
You will need to complete the Chemical Hazards Database for each chemical hazard in your
workplace. You will also need to upload the Chemical Safety Data Sheet [CSDS] (also known as
Manufacturer’s Safety Data Sheet - MSDS) to the CSDS Files folder for reference. Chemical
Hazards are hazards due to contact with chemicals (e.g., cleaners, solvents, gases, asbestos,
pesticides, fertilizers, caustic solutions). Your supplier/manufacturer should provide the CSDS to
assist you with building the Chemical Hazards database.
Chemical Hazards Database Field Descriptions
Identification
Reporting Location – For report sorting
Hazard - Name to identify the hazard
CSDS # - The Chemical Safety Data Sheet reference number
CAS # - The Chemical Abstracts Service registry number
Specific Location - Where the hazard exist
Manufacturer - Who is the manufacturer or distributor
Procedures
1.
Exposure Controls & Personal Protection: What have you put in place to reduce or
eliminate the hazard?
2.
First Aid / Treatment: Describe immediate response to an incident
3.
Monitoring & Surveillance Plan: Describe how you will monitor the hazard to take pro-active
measures
4.
Regulatory Requirements: What are you legal or regulatory responsibilities
Verification
Date Completed – Select date the above fields were completed
Status – Pending if above fields are incomplete or not reviewed and approved
Last Review – Date of last review
Saved By – User who last updated the record
Q2.(v) 480/120 = 4 Min.
!20 Units
120/6= 20 Units
Q2. vi)
A - 100X.5 +200X.2+300X.3 =
B -
190X.5 + 200X.2 + 220X .3 =
C - 150X .5 + 190X .2 + 230X.3 =
Q3. (i) Analyze what you consider might be the distinctive competences in the following
organizations, identifying those aspects of production/ operations management which contribute
ot the achievement of these competences:
(a) A fast – food restaurant
(b) Self-service grocery
(c) Pharmaceutical manufacturer
(d) Manufacturer of specialist sports cards
Any service can be clearly, completely, consistently and concisely specified by means of the
following 12 standard attributes which conform to the MECE principle (Mutually Exclusive,
Collectively Exhaustive) the outputs, process and utilities.
1. Service Consumer Benefits
2. Service-specific Functional Parameters
3. Service Delivery Point
4. Service Consumer Count
5. Service Delivering Readiness Times
6. Service Support Times
7. Service Support Languages
8. Service Fulfillment Target
9. Service Impairment Duration per Incident
10. Service Delivering Duration
11. Service Delivery Unit
12. Service Delivering Price
In too many instances, a firm's operations function is not geared to the business's corporate
objectives. While the system itself may be good, it is not designed to meet the firm's needs.
Rather, operations is seen as a neutral force, concerned solely with efficiency, and has little place
within the corporate consciousness.
Stage 1 firms are said to be internally neutral, meaning that the operations function is regarded as
being incapable of influencing competitive success. Management, thereby, seeks only to
minimize any negative impact that operations may have on the firm. One might say that
operations maintain a reactive mode. When strategic issues involving operations arise, the firm
usually calls in outside experts.
Stage 2 firms are said to be externally neutral, meaning they seek parity with competitors
(neutrality) by following standard industry practices. Capital investments in new equipment and
facilities are seen as the most effective means of gaining competitive advantage.
Stage 3 firms are labeled internally supportive, that is, operations' contribution to the firm is
dictated by the overall business strategy but operations has no input into the overall strategy.
Stage 3 firms do, however, formulate and pursue a formal operations strategy.
Stage 4 firms are at the most progressive stage of operations development. These firms are said
to be externally supportive. Stage 4 firms expect operations to make an important contribution to
the competitive success of the organization. An operation is actually involved in major marketing
and engineering decisions. They give sufficient credibility and influence to operations so that its
full potential is realized. Firms within Stage 4 are known for their overall manufacturing capability.
Fast Food
Product
Order type
Flow
Product variety
Market type
Volume
self service
grocery
Large Batch
Restaurant
Batch
sports card
Pharmaceutical
Sequenced
Medium
Mass
High
Jumbled
Low
Mass
High
Batch or single
portion
Jumbled
Usually high
Custom
Low
Low
Repetitive
Low
Low
Repetitive
Low
High
Less repetitive
Medium to high
High
Low
Special purpose
Medium
Medium
Special purpose
Medium
High
General purpose
Low
Low
Consistent
Fast
Low
Low
Consistent
Fast
High
High
More variable
Moderate
Labor
Skills
Task type
Pay
Capital
Investment
Inventory
Equipment
Objectives
Flexibility
Cost
Quality
Delivery
Control & Planning
Production control
Quality control
Easy
Difficult
Easy
Difficult
Difficult
Difficult
Q 3. (II) IN NORMAL DISTRIBUTION
MEAN = 120 ,
S.D. = 15 , LEAD TIME CONSTANT: 4 DAYS
Ordering cost = $45,
Annual Carrying cost = $ 0.75 / UNIT
ECONOMIC ORDER QUANTITY: ?
REORDER POINT (85 % SERVICE LEVEL) =
VARIANCE
COST TO
EXPEDITEX(IN
$ DAY)
MAXIMUM
TIME THAT
ERXPEDITING
CAN REDUCE
100
3
ACTIVITY
REQD
PREDECESSORS
EXPECTED
TIME IN
DAYS
A
_
6
2
(A)
B
_
11
9
50
1
C
_
13
5
200
2
D
A
6
4
_
_
E
C,F,G
4
4
300
1
F
D
4
1
150
1
G
B
7
3
200
2
Construct a PERT DIAGRAM. Calculate the critical path and clearly designate the critical
path
(B)
Calculate the earliest beginning time, the latest beginning time, and slack time at each
event. Why is slack is always zero at each event on the critical?
Ten new projects await processing at environmental impact affiliates. All projects must be
evaluated first empirically and then legally. Estimates of processing times (in days) for the
empirical and legal phases are:
Waiting
project
A
B
C
D
E
F
G
H
I
J
Empiricala
pahase
20
18
7
30
10
20
3
25
14
24
legal
phase
7
21
36
9
12
17
8
22
17
12
(a) Develop a Gnatt load chart for the work centers (empirical and legal)
(b) Find the processing sequence that minimizes the flow time of the last project processed.
What is the flow time?
3. (iv) In a quality control, what is meant by a process being “in control? When a process is not in
control, what possible causes of variation should be considered? Also discuss the use of control
charts for the control of both process and product variables.
The general approach to on-line quality control is straightforward: We simply extract samples of a
certain size from the ongoing production process. We then produce line charts of the variability in
those samples, and consider their closeness to target specifications. If a trend emerges in those
lines, or if samples fall outside pre-specified limits, then we declare the process to be out of
control and take action to find the cause of the problem. These types of charts are sometimes
also referred to as Shewhart control charts
Interpreting the chart. The most standard display actually contains two charts (and
two histograms); one is called an X-bar chart, the other is called an R chart.
In both line charts, the horizontal axis represents the different samples; the vertical axis for the Xbar chart represents the means for the characteristic of interest; the vertical axis for the R chart
represents the ranges. For example, suppose we wanted to control the diameter of piston rings
that we are producing. The center line in the X-bar chart would represent the desired standard
size (e.g., diameter in millimeters) of the rings, while the center line in the R chart would represent
the acceptable (within-specification) range of the rings within samples; thus, this latter chart is a
chart of the variability of the process (the larger the variability, the larger the range). In addition to
the center line, a typical chart includes two additional horizontal lines to represent the upper and
lower control limits (UCL, LCL, respectively); we will return to those lines shortly. Typically, the
individual points in the chart, representing the samples, are connected by a line. If this line moves
outside the upper or lower control limits or exhibits systematic patterns across consecutive
samples, then a quality problem may potentially exist.
The types of charts are often classified according to the type of quality characteristic that they are
supposed to monitor: there are quality control charts for variables and control charts
for attributes. Specifically, the following charts are commonly constructed for controlling variables:




X-bar chart. In this chart the sample means are plotted in order to control the mean
value of a variable (e.g., size of piston rings, strength of materials, etc.).
R chart. In this chart, the sample ranges are plotted in order to control the variability of a
variable.
S chart. In this chart, the sample standard deviations are plotted in order to control the
variability of a variable.
S**2 chart. In this chart, the sample variances are plotted in order to control the
variability of a variable.
For controlling quality characteristics that represent attributes of the product, the following charts
are commonly constructed:

C chart. In this chart (see example below), we plot the number of defectives (per batch,
per day, per machine, per 100 feet of pipe, etc.). This chart assumes that defects of the
quality attribute are rare, and the control limits in this chart are computed based on
the Poisson distribution (distribution of rare events).

Process and Control limits:

o
Statistical
o
Process limits are used for individual items
o
Control limits are used with averages
o
Limits = μ ± 3σ
o
Define usual (common causes) & unusual (special causes)
Specification limits:
o
Engineered
o
Limits = target ± tolerance
Define acceptable & unacceptable
Process vs. control limits
Distribution of averages
Control limits
Specification limits
Variance of averages < variance of individual items
Distribution of individuals
Process limits
Q3 (vi) Load shipment among work centers - A through – L, tentatively located as shown, are
given in the table:
FROM
Annual loads (in units)
D
G
A
300
600
C
600
300
E
100
H
I
J
200
200
400
500
LAYOUT (TENTATIVE):
A
B
C
D
E
F
G
H
I
J
K
L
Assuming transportation cost of $1/distance unit. For each load, find a good layout
Q3 (vii) Work study is seen by the work-force as “ a means where by management can either get
more work done for the same or the same work done for less pay”. Discuss this statement in the
context of what you regard as the correct objectives for work study in production /operations
management
Work Study is the systematic examination of the methods of carrying out activities such as to
improve the effective use of resources and to set up standards of performance for the activities
carried out. A generic term for those techniques, particularly method study and work
measurement, which are used in the examination of human work in all its contexts, and which
lead systematically to the investigation of all the factors which affect the efficiency and economy
of the situation being reviewed, in order to effect improvement'.
A collection of techniques used to examine work - what is done and how it is done - so that there
is systematic analysis of all the elements, factors, resources and relationships affecting the
efficiency and effectiveness of the work
Efficiency Indices
Using data on measured work, unmeasured work and idle time we can attempt to derive
effectiveness indices. Constable and New exemplify efficiency and effectiveness indices
a. efficiency while performing measured work (ratio of standard/measured hours of work
produced and the actual time taken)
b. effectiveness which includes
• Accounting for work done for which no measured time exists. Such work is typically paid for by
an agreed hourly/day rate i.e. there is no direct, measured relationship between pay and how
much work is actually completed in that hour. Of course a supervisor may pass a judgment or
state that the amount of work and its quality are inadequate.
• Recognition of possible idle time caused e.g. by management not allocating any work,
supplier/materials delays, machine breakdowns etc.
Work study/industrial engineers need time data to plan and evaluate production/transformation
processes. Rewards systems need such data for performance related bonuses. Cost calculations
need to incorporate operative and machine job times Costing systems reference work study data.
Work study data contributes to:
• Improved methods to raise output, quality, reduce wastage, enhance reliability and ensure
safety.
• Standard time data contributes to capacity planning, scheduling, and control of staff, asset
utilization and quality improvement. Service and after-sales method improvements may be
obtained as well as process improvement and better raw materials usage.
• Implementation planning for product/service and process design requires a detailed
understanding of methods and timings. In a distribution/transport system we can evaluate
logistical efficiencies.
We need to remember always that performance inefficiency may arise from many reasons
outside of worker control - a cumbersome planning system, a slow computer system with heavy
overheads, lack of investment or uninformed, disorganized management. It is crass to assume
that the problems will only be due to staff inefficiencies or inappropriate methods.
Q4.
TASK
DESCRIOPTION
REQIRED
PREDECESSORS
TASK TIME
(MINUTES)
A
LOAD CHASIS FRAME
NONE
1
B
INSERT GEAR
ASSEMBLY ON FRAME
A
2
C
INSTALL ELECTRIC
MOTOR ON FRAM
A
4
G
ASSEMBLE
TURNTABLE SETEM
TO GEAR ASSEMBLY
INSTALL RUBBER
BEARING ASEMBLY
ONBTO GEAR
ASSEMBLY
MOUNT, FIT AND
FASTERN TRUN TABLE
MECHANISM TO
STEM
INTERCONNECT GEAR
AND MOTOR
ASEMBLIES
H
D
B
2
B
1
D
5
C,E
1
INSTALL TURNTABLE
F,G
3
I
INSTALL TONE ARM
ASEMBLY
G
4
J
INSTALL COVER (S)
H,I
3
E
F
EXISTING ASSEMBLY LINE AND PERSONNEL
STATION
1
2
3
4
5
6
7
TASK
A&B
d&E
C&G
F
H
I
J
WORKER
ALICE
TOM
BILL
DEBB
SAM
CLOR
IKE
All employees have been with SSS for two years or more. “Tom” finds that he has time on hi9s
hands and enjoys chatting with “Alice”.In all his time as SSS,”Sam” has never worked at another
station. Although “Bill does not like toperform task G, he takes great pride in his skill at doing
C.”Clor and “, “Ike” agrees that their jobs tend to get boring.
Question
What changes would you recommend to “Fred Regos”? What reactions to these changes
would you expect form the line employees
School of Business Studies
Sharda University
MBA – 2nd SEM MID-TERM EXAMINATION, 2011
Paper Code: MTH 902 - 1417
Paper Title: PRODUCTION AND OPERATIONS MANAGEMENT -
Q1. Attempt any two of the following
2 X 2 = 4 Marks
Discuss the impact of technology on product process design with suitable examples.
In order to harmonize engineering effort with major corporate objectives and strategies, a special
technology strategy is needed. The most radical option, technological leadership, also called
‘first-to-the-market’, requires an organic management system and risk-willing engineers who are
able to generate and implement ideas. A follow-the-leader strategy, or ‘second-to-the-market’, is
based on iterative problem solving and proper information about the problems and needs of the
users, usually in terms of predetermined development specifications. A me-too strategy, or ‘lateto-the-market’, requires a mechanistic management system, tight specifications and cost effective
for reducibility.
Product design is cross-functional, knowledge-intensive work that has become increasingly
important in today's fast-paced, globally competitive environment. It is a key strategic activity in
many firms because new products contribute significantly to sales revenue. When firms are able
to develop distinctive products, they have opportunities to command premium pricing. Product
design is a critical factor in organizational success because it sets the characteristics, features,
and performance of the service or good that consumers demand. The objective of product design
is to create a good or service with excellent functional utility and sales appeal at an acceptable
cost and within a reasonable time. The product should be produced using high-quality, low-cost
materials and methods. It should be produced on equipment that is or will be available when
production begins. The resulting product should be competitive with or better than similar
products on the market in terms of quality, appearance, performance, service life, and price.
Product design time can be reduced by using a team approach and the early involvement of key
participants including marketing, research and development, engineering, operations, and
suppliers. Early involvement is an approach to managing people and processes. It involves an
upstream investment in time that facilitates the identification and solution of down-stream
problems that would otherwise increase product design and production costs, decrease quality,
and delay product introduction.
Time-based competitors are discovering that reducing product design time improves the
productivity of product design teams. To reduce time, firms are reorganizing product design from
an "over-the-wall" process to a team-based concurrent process. Over-the-wall means to proceed
sequentially with the limited exchange of information and ideas. When this approach is used,
problems are often discovered late because late-stage participants are excluded from decisions
made early in the process. As a result, poor decisions are often made.
Product design is a labor-intensive process that requires the contribution of highly trained
specialists. By using teams of specialists, communications are enhanced, wait time between
decisions is reduced, and productivity is improved. Participants in this team-based process make
better decisions faster because they are building a shared knowledge base that enhances
learning and eases decision-making. By sharing development activities, design decisions that
involve interdependencies between functional specialists can be made more quickly and more
effectively. This reorganized process creates a timely response to customer needs, a more costeffective product design process, and higher-quality products at an affordable price.
There are several reasons why early involvement and concurrent activities bring about these
improvements. First, product design shifts from sequential, with feedback loops that occur
whenever a problem is encountered, to concurrent, where problems are recognized early and
resolved. The ability to overlap activities reduces product design time. Second, when a team of
functional specialists works concurrently on product design, the participants learn from each other
and their knowledge base expands. People are better able to anticipate conflicts and can more
easily arrive at solutions. As a result, the time it takes to complete an activity should decline.
Third, a fewer changes later in the process results in faster and less expensive product design.
When problems are discovered late, they take more time and money to solve.
Product design requires the expertise and decision-making skills of all parts of the organization.
Marketing, engineering, operations, finance, accounting, and information systems all have
important roles. Marketing's role is to evaluate consumer needs, determine potential impact of
competitive pressure, and measure the external environment. Engineering's role is to shape the
product through design, determine the process by which the product will be made, and consider
the interface between the product and the people. Operations' role is to ensure that the product
can be produced in full-scale production. Finance's role is to develop plans for raising the capital
to support the product in full-scale production and to assist in the evaluation of the product's profit
potential. Accounting and information systems provide access to information for decision making.
Cross-functional teamwork and knowledge sharing are thus keys to success.
2. What are the Advantages and disadvantages of Process / Product Layout?
ADVANTAGES AND DISADVANTAGES OF
PROCESS LAYOUT DESIGNS
ADVANTAGES:
1. Can handle a wide range of products
2. Rather immune to equipment failure
3. Lower capital costs
4. Less costly to maintain
5. Individual incentives can be used
DISADVANTAGES:
1. In-process inventories can be high
2. Routing and scheduling pose continual challenges
3. Material handling can be costly and inefficient
4. Job complexities may narrow management span
5. Special attention may yield higher per-unit cost
6. Accounting, purchasing, and inventory control functions are complex
ADVANTAGES AND DISADVANTAGES OF
PRODUCT LAYOUT DESIGNS
ADVANTAGES:
1. Amenable to high throughput
2. Capital costs spread over many units
3.
4.
5.
6.
7.
8.
Narrow tasks reduce training costs
Allows wide span of supervision
Low material handling costs
Routing and scheduling is automatic
High labor and equipment utilization
Accounting, purchasing, inventory control are fairly routine
DISADVANTAGES:
1. Narrow tasks can be dull and repetitive
2. Individual incentives are impractical
3. Workers may not be motivated to quality
4. Hard to change volume
5. Highly susceptible to breakdowns
6. Capacity for quick repair a necessary expense
ADVANTAGES AND DISADVANTAGES OF
FIXED-POSITION LAYOUT DESIGNS
ADVANTAGES:
1. Minimizes product movement
2. Workers can feel they make a significant contribution
DISADVANTAGES:
1. Mobile equipment may increase per-unit cost
2. Scheduling activities becomes key challenge
3. Arrivals of material and equipment are critical
4. Storage space can be a problem
5. Coordination requires narrow management span
6. Accounting, purchasing, and inventory control functions are very complex
3. What are the various types of warehouse / stores? Give some practical example of warehouse
/ stores, you are familiar with?
A warehouse is a commercial building for storage of goods. Warehouses are used by
manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are
usually large plain buildings in industrial areas of cities and towns. They usually have loading
docks to load and unload goods from trucks. Sometimes warehouses load and unload goods
directly from railways, airports, or seaports. They often have cranes and forklifts for moving
goods, which are usually placed on ISO standard pallets loaded into pallet racks.
Nature of goods stored
Stored goods can include any raw materials, components, or finished goods associated with
agriculture, manufacturing, or commerce.
Some of the most common warehouse storage systems are:
Pallet rack including selective, drive-in, drive-thru, double-deep, pushback, and gravity flow
Mezzanine including structural roll formed, rack supported, and shelf supported
Cantilever Rack including structural and roll formed Industrial Shelving including metal, steel,
wire, and catwalk Automated Storage and Retrieval System (ASRS) including vertical carousels,
vertical lift modules, horizontal carousels, robotics, mini loads, and compact 3D
Part-2
Q2. Attempt any two of the following:
2 X 4=8 Marks
1. Write a detailed note on work study and its importance in today’s production environment.
An operation may be defined as the process of changing inputs into outputs thereby adding value
to some entity. Right quality, right quantity, right time and right price are the four basic
requirements of the customers and as such they determine the extent of customer satisfaction.
And if these can be provided at a minimum cost, then the value of goods produced or services
rendered increases. Thus the objectives of production management are “to produce goods and
services of the right quality, in the right quantities, according to the time schedule and a
minimum cost”.
Objectives of production management may be amplified as under:

Producing the right kind of goods and services that satisfy customers’ needs (effectiveness
objective).

Maximizing output of goods and services with minimum resource inputs (efficiency objective).

Ensuring that goods and services produced conform to pre-set quality specifications (quality
objective).

Minimizing throughput-time- the time that elapses in the conversion process- by reducing
delays, waiting time and idle time (lead time objective).

Maximizing utilization of manpower, machines, etc. (Capacity utilization objective).

Minimizing cost of producing goods or rendering a service (Cost objective)
Work-study and job design: Work-study, also called time and motion study, is concerned with
improvement of productivity in the existing jobs and the maximization of productivity in the design
of new jobs. Two principal component of work-study are: Method study and Work measurement
Method study has been defined as the systematic recording and critical
examination of the
existing and proposed ways of doing work, as a means of developing and applying easier and
more effective methods and reducing costs. Method study when applied to production methods
yields one or more of the following benefits:

Improved work environment

Improved facility layout

Better utilization of facilities

Greater safety

Lesser materials handling

Smooth production flow

Lower work-in-process

Higher earnings for the workmen
2. What are the issues involved in selecting a suitable forecasting method. Explain DELPHI
method of forecasting?
We looked at evidence from comparative empirical studies to identify methods that can be useful
for predicting demand in various situations and to warn against methods that should not be used.
In general, use structured methods and avoid intuition, unstructured meetings, focus groups, and
data mining. In situations where there are sufficient data, use quantitative methods including
extrapolation, quantitative analogies, rule-based forecasting, and causal methods. Otherwise, use
methods that structure judgement including surveys of intentions and expectations, judgmental
bootstrapping, structured analogies, and simulated interaction. Managers’ domain knowledge
should be incorporated into statistical forecasts. Methods for combining forecasts, including
Delphi and prediction markets, improve accuracy. We provide guidelines for the effective use of
forecasts, including such procedures as scenarios
Significant gains have been made in forecasting for marketing, especially since 1960. Advances
have occurred in the development of methods based on judgment, such as Delphi, simulated
interactions, intentions studies, opinions surveys, bootstrapping, and combining. They have also
occurred for methods based on statistical data, such as extrapolation, rule-based forecasting, and
econometric methods. Most recently, gains have come from the integration of statistical and
judgmental forecasts.
General principles
• Managers’ domain knowledge should be incorporated into forecasting methods.
• When making forecasts in highly uncertain situations, be conservative. For example, the trend
should be dampened over the forecast horizon.
• Complex methods have not proven to be more accurate than relatively simple methods. Given
their added cost and the reduced understanding among users, highly complex procedures cannot
be justified.
• When possible, forecasting methods should use data on actual behaviour, rather than
judgments or intentions, to predict behaviour.
• Methods that integrate judgmental and statistical data and procedures (e.g., rule-based
forecasting) can improve forecast accuracy in many situations.
• Overconfidence occurs with quantitative and judgmental methods.
• When making forecasts in situations with high uncertainty, use more than one method and
combine the forecasts, generally using simple averages.
Methods based on judgment
• When using judgment, rely on structured procedures such as Delphi, simulated interaction,
structured analogies, and conjoint analysis.
• Simulated interaction is useful to predict the decisions in conflict situations, such as in
negotiations.
• In addition to seeking good feedback, forecasters should explicitly list all the things that might be
wrong about their forecast. This will produce better calibrated prediction intervals.
3. How do facilities location decisions differ for service facilities and manufacturing plants?
Service operations are different from manufacturing operations in terms of




tangible and intangible output
customer consumption
use of labor and equipment
customer contact


customer participation in conversion process
measuring activities and resources
manufacturing is characterized by tangible output, outputs that consumer consumes over time,
jobs that use less labor and more equipment, little consumer contact, no consumer participation
in conversion process (in production), and sophisticated methods for measuring activities and
resource consumption as products are made.
Service on the other hand is characterized by intangible outputs, outputs that customer consumes
immediately, jobs that uses more labor less equipment, direct customer contact, frequent
customer participation in conversion process and elementary methods for measuring conversion
activities and resource consumption.




productivity is more easily measured in manufacturing operations than services.
quality standards are more difficult to establish and product quality is more difficult to evaluate in
service operations.
manufacturing operations can increase and decrease finished goods inventory levels in response
to change in customer demand patterns.
In services, the most expensive resource is people, while in manufacturing the most expensive
resource is machinery.
The type of facility is a major determinant of its location. Different factors influence the location of
manufacturing, service and warehouse facilities.
Heavy Manufacturing
Heavy manufacturing facilities are plants that are large, require a lot of space, and are expensive
to construct, such as automobile plants, steel mills, and oil refineries. Factors in the location
decision for plants include:
o
o
o
o
o
o
o
Construction costs
Land costs
Modes of transportation for transporting heavy manufactured items and large
quantities of bulk raw materials -- access to railroads could be important
Proximity to raw materials
Utilities
Means of waste disposal and means of minimizing destruction to the
environment
Labor availability and cost
Proximity to customers is less of a factor for heavy manufacturing plants than for other types of
facilities.
Light Industry
Light industry facilities are perceived as cleaner plants that produce electronic equipment and
components, computer products, assembled products like TV’s, or breweries, or pharmaceutical
firms.
Factors important for the location of light industry facilities include:
o
o
o
o
o
o
Land and construction costs, especially for the needs of high technology
Familiarity of construction contractors with climate-controlled manufacturing
facilities designed for advanced technology and equipment
Skilled labor force availability
Access to good education and training capabilities
Attractive geographic area for retaining skilled workers
A good transportation system for supply and distribution
Environmental controls tend to be somewhat less important than for heavy manufacturers since
toxic materials are produced in smaller amounts.
Warehouses and Distribution Centers
Warehouses are an intermediate point in the supply chain where products are held for
distribution. Normally, a warehouse is a building that is used to receive, handle, store, and then
ship products. Light assembly and packaging may sometimes be done in a warehouse, and some
warehouse operators will provide sales support and personnel. Some companies that market
primarily through the internet, like Amazon.com, operate exclusively in a warehouse-like
environment.
Factors important in influencing the location of a warehouse include:
o
o
o
o
o
Moderate environmental conditions
Utilities if refrigeration is required
Security
Transportation costs
Proximity to markets, especially if frequency of delivery is high
Construction and land costs, labor availability, proximity to raw materials, and waste disposal are
less important for location of warehouses.
Retail and Service
Retail and service facilities can be costly, like hospitals, resort hotels, universities, and company
headquarters, or less costly than other types of facilities, like groceries, department stores,
restaurants, banks, hotels, cleaners, clinics, and law offices.
Factors that influence the location of retail and service facilities include:
o
o
Proximity to customers
Land costs in prime locations
For retail, location is everything, so prime land in downtown and retail areas tend to be high.
Construction costs, however, are less expensive than for heavy manufacturing facilities, and
zoning, utilities, transportation, environmental constraints, and labor tend to be less important for
service operations. Closeness to suppliers may be important, but not as much as for
manufacturing facilities.
Site Selection -- Where to Locate
Site selection is a very long and involved process because the choice of a poor location can be
very costly. Sometimes, hundreds of sites are evaluated before a final site is chosen. We will
review several techniques for narrowing the choices down to a cognitively manageable level.
Global, domestic, and site-specific location factors will be identified, and then quantitative
techniques for location analysis will be reviewed.
Global Location Factors
While locating plants overseas is often attractive for access to low cost labor and large markets,
such locations can also be troublesome for a variety of reasons. Confiscation of a plant by a
government attempting to nationalize its economy is perhaps one of the most damaging events
related to international location. Other events, however, could also be detrimental to a plant
located overseas. For example, poor infrastructure, political instability, and cultural acceptance of
bribery may create uncertainty and the need for costly change. International location decisions,
therefore, should analyze the following factors:
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Government stability
Government regulations
Political and economic systems
Economic stability and growth
Exchange rates
Culture
Climate
Export and import regulations, duties, and tariffs
Raw material availability
Number and proximity of suppliers
Transportation and distribution systems
Labor force cost and education
Available technology
Commercial travel
Technical expertise
Cross-border trade regulations
Group trade agreements
Regional and Community Location Factors
Several factors for domestic location decisions have already been discussed in the context of
facility type. They are summarized below, but recognize that the importance of each factor is
related to a facility’s purpose:

Labor (availability, skill, education,
cost, and unionization)
n/leasing costs
Community inducements
utilities)
Domestic location decisions have tended to follow certain trends related to regional peculiarities.
Historically, heavy manufacturing facilities located in the Midwest and Mid-Atlantic states where
plants could be close to large labor pools, raw materials, and multiple modes of transportation. In
the 1960’s and 1970’s, heavy manufacturing shifted its locations to the South, where labor is
cheap and non-unionized, and the climate is mild. The West has seen the growth of high tech
industries, a trend often attributed to the free- enterprising, pioneering nature of the inhabitants of
the West. In the 1990’s, more companies are shifting heavy manufacturing plants back to the
Midwest/North Central areas as the demand for more tightly linked suppliers grows.
Site Location Factors
Once a region or community is identified as a potential location, specific sites must be identified
and evaluated. Some of the factors that are relevant to specific site location are:
o
o
o
o
o
o
o
o
o
o
o
o
Customer base
Construction/leasing cost
Land cost
Site size
Transportation
Utilities
Zoning restrictions
Traffic
Safety/security
Competition
Area business climate
Income level and other demographic characteristics
A business has several options for facilities:
o
o
o
Purchasing an existing building.
Leasing an existing building.
Constructing a new facility.
Service-related businesses often rent or purchase existing facilities in shopping malls or office
buildings. A recent trend for many businesses has been to locate in industrial and office parks
that cater to business needs.
Location Incentives
Most communities welcome the economic growth and job opportunities that come with new
businesses locating there, therefore, they willingly provide incentives to attract businesses with
high growth potential and good-paying jobs. Location incentives include:
o
o
o
o
o
Tax credits
Relaxed government regulation
Job training
Infrastructure improvement
Money
Incentives are a good public investment unless they bankrupt the locality. While some
communities are successful at attracting new businesses, they are left with little remaining tax
base to pay for the infrastructure improvements needed to support the increased populations
drawn by job demand. Thus, states and communities, much like businesses, need a strategy for
economic development that weighs the costs versus the benefits of attracting companies.
Location Analysis Techniques
Site selection can be a complex process, so several quantitative techniques have been
developed to assist decision-makers in narrowing choices down to a manageable level or in
choosing from among several similarly desirable choices. The three techniques we will be
reviewing are:
o
o
o
Location factor rating
Center-of-gravity
Load-distance
Location Factor Rating
The location factor rating technique may be used when many sites are available, and each site
has some appealing characteristics. The purpose of the technique is to "score" each site to be
somewhat objective about the location decision. The steps in using the technique are:
o
o
o
o
o
Identify important location factors.
Weight the factors on importance for project success (0.00 to 1.00).
Subjectively score each factor (1-100).
Sum weighted scores.
Use the score in conjunction with other factors to make a final decision.
Center-of-Gravity Technique
The center-of-gravity technique can be used when multiple suppliers or customer bases exist at
different geographic locations, and it is economically sensible to locate centrally to service all of
them. In general, transportation costs are a function of distance, weight, and time. The center-ofgravity technique is a quantitative method for locating a facility, such as a warehouse, at the
center of movement in a geographic area, based on weight and distance. The following list
summarizes the technique:
o
o
o
o
o
Purpose: Locate facility at center of geographic area
Based on "weight," (weight, volume, or sales) & distance traveled
Establish a grid-map of the area.
Identify coordinates & weights shipped for each location.
Calculate the center of gravity by using the equations:
Part-3
Q3. Attempt any one of the following:
1 X 8 Marks
(i) Management may choose to build up capacity in anticipation of demand or in response to
developing demand. Cite the advantages and disadvantages of both approaches.
The strategy of building up capacity ahead of demand is a risk-taking stance. Investment is based
on projections. This investment involves costs for new facilities, equipment, human resources,
and overhead. If the demand materializes, the investment is worthwhile since the firm may
capture a large amount of market share. If it does not materialize, the firm must redirect the
invested resources. This strategy is most appropriate in high growth areas.
If the demand materializes, but the capacity planning strategy is risk averse, i.e., building capacity
only as demand develops, then most likely market share will be lost. The growth in demand will
encourage new entrants, resulting in more competition. The risk adverse strategy may be most
appropriate for small firms who cannot afford to invest in unproven prospects. To prevent
potential loss of market share, firms may choose to incrementally increase capacity to match the
increase in demand.
In a perfectly balanced plant, the output of each stage provides the exact input requirement for
the subsequent stage. This continues throughout the entire operation. This condition is difficult to
achieve because the best operating levels for each stage generally differ. Variability in product
demand and the processes may lead to imbalance, in the short run.
There are various ways of dealing with capacity imbalances. One is to add capacity to those
stages that are the bottlenecks. This can be achieved by temporary measures such as overtime,
leasing equipment, or subcontracting. A plant may choose to maintain a capacity cushion for a
number of reasons. If the demand is highly unstable, maintaining cushion capacity will ensure
capacity availability at all times. Also, capacity cushions can be useful if high service quality
levels are established. Some organizations choose to use capacity cushions as a competitive
weapon to create barriers to entry for competitors.
Negative capacity cushions may be maintained when demand is expected to decrease rapidly
and capacity investment is high enough to discourage short run capacity acquisitions.
Interdependence between two departments can be loosened. A third approach involves
Duplicating the facilities of one department upon which another is dependent
(ii) Write short note on the following:
a) Value engineering
VALUE ENGINEERING
Value engineering is an approach to productivity improvement that attempts to increase the value
obtained by a customer of a product by offering the same level of functionality at a lower cost.
Value engineering is sometimes used to apply to this process of cost reduction prior to
manufacture, while "value analysis" applies the process to products currently being
manufactured.
Both attempt to eliminate costs that do not contribute to the value and performance of the product
(or service, but the approach is more common in manufacturing).
Value engineering, thus, critically examines the contribution made to product value by each
feature of a design. It then looks to deliver the same contribution at lower cost.
Different types of value are recognised by the approach :
Use value relates to the attributes of a product which enable it to perform its function.
Cost value is the total cost of producing the product.
Esteem value is the additional premium price which a product can attract because of its intrinsic
attractiveness to purchasers.
Exchange value is the sum of the attributes which enable the product to be exchanged or sold.
Although the relative magnitude of these different types of value will vary between products, and
perhaps over the life of a product, VE attempts to identify the contribution of each feature to each
type of value through systematic analysis and structured creativity enhancing techniques.
Value engineering programs are best delivered by multi-skilled teams consisting of designers,
purchasing specialists, operations personnel, and financial analysts.
Pareto analysis is often used to prioritise those parts of the total design that are most worthy of
attention. These are then subject to rigorous scrutiny. The team analyses the function and cost of
those elements and tries to find any similar components that could do the same job at lower cost.
Common results are a reduction in the number of components, the use of cheaper materials, or a
simplification of the process
Value engineering (VE) is a systematic method to improve the "value" of goods or products and
services by using an examination of function. Value, as defined, is the ratio of function to cost.
Value can therefore be increased by either improving the function or reducing the cost. It is a
primary tenet of value engineering that basic functions be preserved and not be reduced as a
consequence of pursuing value improvements.
In the United States, value engineering is specifically spelled out in Public Law 104-106, which
states “Each executive agency shall establish and maintain cost-effective value engineering
procedures and processes."
Value engineering is sometimes taught within the project management or industrial
engineering body of knowledge as a technique in which the value of a system’s outputs
is optimized by crafting a mix of performance (function) and costs. In most cases this practice
identifies and removes unnecessary expenditures, thereby increasing the value for the
manufacturer and/or their customers.
VE follows a structured thought process that is based exclusively on "function", i.e. what
something "does" not what it is. For example a screw driver that is being used to stir a can of
paint has a "function" of mixing the contents of a paint can and not the original connotation of
securing a screw into a screw-hole. In value engineering "functions" are always described in a
two word abridgment consisting of an active verb and measurable noun (what is being done - the
verb - and what it is being done to - the noun) and to do so in the most non-prescriptive way
possible. In the screw driver and can of paint example, the most basic function would be "blend
liquid" which is less prescriptive than "stir paint" which can be seen to limit the action (by stirring)
and to limit the application (only considers paint.) This is the basis of what value engineering
refers to as "function analysis".
Value engineering uses rational logic (a unique "how" - "why" questioning technique) and the
analysis of function to identify relationships that increase value. It is considered a quantitative
method similar to the scientific method, which focuses on hypothesis-conclusion approaches to
test relationships, and operations research, which uses model building to identify predictive
relationships.
Value engineering is also referred to as "value management" or "value methodology" (VM), and
"value analysis" (VA) . VE is above all a structured problem solving process based on function
analysis—understanding something with such clarity that it can be described in two words, the
active verb and measurable noun abridgement. For example, the function of a pencil is to "make
marks". This then facilitates considering what else can make marks. From a spray can, lipstick, a
diamond on glass to a stick in the sand, one can then clearly decide upon which alternative
solution is most appropriate.
A thinking system (also called value management or value analysis) used to develop decision
criteria when it is important to secure as much as possible of what is wanted from each unit of the
resource used. The resource may be money, time, material, labor, space, energy, and so on. The
system is unique in that it effectively uses both knowledge and creativity, and provides step-bystep techniques for maximizing the benefits from both. It promotes development of alternatives
suitable for the future as well as the present. This is accomplished by identifying and studying
each function that is wanted by the customer or user, then applying knowledge and creativity to
achieve the desired function. Resources are converted into costs to achieve
direct, meaningful comparisons. By using the methods of value engineering, 15 to 40% reduction
in the required resources often results.
Value engineering has applications in five broad areas: in design, purchase, and manufacture of
products; in administrative groups, private or public, where the task is to achieve accomplishment
through people; in all areas of social service work, such as hospitals, insurance services, or
colleges; in architectural design and construction; and in development as well as research.
The system is used to improve value in either or both of two situations: (1) The product or service
as used or as planned may provide 100% of the functions the user wants, but lower costs may be
needed. The system then holds those functions but achieves them at lower cost. (2) The product
or service may have deficiencies, that is, it does not perform the desired functions or lacks
quality, and so also lacks good value. The system aims at correcting those deficiencies, providing
the functions wanted, while at the same time holding the use of resources (costs) at a minimum.
VALUE ANALYSIS -- The Job Plan
Value Engineering is often done by systematically following a multi-stage Job Plan. IT IS a 8-step
procedure , called the Value Analysis Job Plan. Others have varied the Job Plan to fit their
constraints. One modern version has the following eight steps:
PREPARATION /INFORMATION /ANALYSIS /CREATION /EVALUATION /DEVELOPMENT /
PRESENTATION /FOLLOW-UP
VALUE ENGINEERING CAN BE APPLIED TO A TRACTOR MANUFACTURING
FIRM IN THE FOLLOWING AREAS
1.TRACTOR DESIGN
-make the design simple
- easy to use
-reduce COMPLICATED / expensive parts.
2.TRACTORS RAW MATERIAL / PARTS PROCUREMENT
-establish the demand planning system [ reduce the fluctuations in production]
-establish the inventories of raw materials [ reduce the cost of stock holding]
-establish the economic order quantity [ """"""""""""""""""""""""""""""]
3. TRACTORS PRODUCTION PLANNING
-establish an effective / efficient production planning system [ cost savings]
4.TRACTORS PRODUCTION
-establish a lean production [ cost effective]
5. TRACTORS TOTAL QUALITY ASSURANCE.
-set up quality assurance system to reduce quality problems/ rejections]
[ cost savings ]
6.TRACTORS FINISHED GOOD INVENTORY
-match the finished stock inventory to market demand / sales requirements]
[ cost saving in stock holding ]
7.TRACTORS CUSTOMER SERVICE
-provide effective customer order processing/order service/
timely despatch to customers.
[ adds value to customers / reduces distribution cost]
8.TRACTORS AFTER SALES SERVICE
-offer warranty/ after sales service to customers
[ adds value to the product and increases sales ]
TRACTORS MANUFACTURER CAN ADD VALUE/ REDUCE COST
BY APPLYING THE VALUE ANALYSIS -JOB PLAN TO EACH
OF THE ABOVE LISTED 8 STAGES OF TRACTORS MANUFACTURING.
VALUE ANALYSIS -- The Job Plan
Value Engineering is often done by systematically following a multi-stage Job Plan. IT IS a 8-step
procedure , called the Value Analysis Job Plan. Others have varied the Job Plan to fit their
constraints. One modern version has the following eight steps:
PREPARATION /INFORMATION /ANALYSIS /CREATION /EVALUATION /DEVELOPMENT /
PRESENTATION /FOLLOW-UP
b) Operating characteristic in POM
OPERATING CHARACTERISTICS CURVES
is distribution-free permutation test procedure used for comparing receiver operating
characteristic curves based on continuous data from a paired design. The method tests the
hypothesis that the two curves are identical for all operating points, unlike previously proposed
methods which test the equivalence of the areas under the curves. The new test is shown by
simulation to have very similar operating characteristics to the standard method based on
comparisons of the areas when the curves are parallel, but markedly superior power when the
curves cross, that is when the curves are different but have similar areas. The prospects of
generalising the approach to unpaired experiments and to comparisons of ordinal rating data are
discussed.
This predictive approach uses the number of detected faults instead of the failure-occurrence
time in the testing phase. Experimental results illustrate the effectiveness and the much improved
performance of the proposed method in comparison with the Bayesian prediction approaches
Operating Characteristic Curve (O.C. Curve)
The concepts of the two types of risk are well explained using an operating characteristic - curve.
This curve will provide a basis for selecting alternate sample plans. For a given value of sample
size (n), acceptance number (C), the O.C. curve is shown in Fig..
In the above figure, percent defective is shown on x-axis. The probability of accepting the lot for a
given percent defective is shown on y-axis. The value for percent defective indicates the quality
level of the lot inspected. AQL means acceptable quality level. LTPD means lot tolerance percent
defectives. These represent quality levels of the lot submitted for inspection. If the quality level of
the lot inspected is at AQL or less than AQL, then the customers are satisfied with the quality of
the lot. The corresponding probability of acceptance is called 1 – α. On the other hand, if the
quality level is more than or equal to LTPD, the quality of the lot is considered to be inferior from
Fig. Operating characteristic curve.
Consumer’s view point. The corresponding probability of acceptance of the lot is called β. The
quality level in between AQL and LTPD is called indifferent zone.
So, we require α, β, AQL and LTPD to design a sample plan. Based on these, one can determine
n and C for the implementation purpose of the plan.
Figure shows various O.C. curves for different combinations of n and C.
Fig. O.C. curve for different n and C
c) Stock out risk (SOR), Service Level (SL) and safety stock (SS)
Stock out risk [ SOR ] SERVICE LEVEL
SOR means Exposure to loss resulting from running out of one or more inventory items.
SAFETY STOCK IS USED IN ORDER TO PREVENTA STOCKOUT OCCURING. IT PROVIDES
AN EXTRA LEVEL OF INVENTORY ABOVE THE NEEDED TO MEET THE PREDICTED
DEMAND, TO COPE WITH THE VARIATIONS IN DEMAND OVER A TIME PERIOD. THE
LEVEL OF SAFETY STOCK USED, IF ANY, WILL VARY FOR EACH INVENTORY CYCLE,
BUT AN AVERAGE STOCK LEVEL ABOVE THAT NEEDED TO MEET DEMAND WILL
BE CALCULATED.
TO CALCUALTE THE SAFETY STOCK LEVEL, A NUMBER OF FACTORS
SHOULD BE TAKEN INTO ACCOUNT INCLUDING
-cost due to stock out
-cost of holding safety stock
-variability in the rate of demand
-variability in delivery lead time.
IT IS IMPORTANT TO NOTE THAT THERE IS NO-STOCKOUT RISK BETWEEN THE
MAXIMUM INVENTORY LEVLE AND THE RE-ORDER LEVEL.THE RISK OCCURS DUE
THE VARIABILITY IN THE RATE OF DEMAND AND DUE TO THE VARIABILITY IN THE
DELIVERY LEAD TIME BETWEEN THE REORDER POINT AND THE ZERO STOCK
LEVEL.
THE REORDER LEVEL CAN OF COURSE BE ESTIMATED BY A RULE OF THUMB,
SUCH AS WHEN STOCKS ARE AT TWICE THE EXPECTED LEVEL OF DEMAND
DURING THE DELIVERY LEAD TIME. HOWEVER TO CONSIDER THE PROBABILITY OF
STOCK OUT ,COST OF INVENTORY, AND COST OF STOCK OUT THE IDEA OF
SERVICE LEVEL IS USED.
THE SERVICE LEVEL IS A MEASURE OF LEVEL OF SERVICE OR HOW SURE,
THE ORGANIZATION IS, THAT IT CAN SUPPLY INVENTORY FROM THE STOCK. THIS
CAN BE EXPRESSED AS PROBABILITY THAT THE INVENTORY ON HAND DURING
THE LEAD TIME IS SUFFICIENT TO MEET THE EXPANDED DEMAND [eg a service
level of 90% means that there is a 0.9 probability that the demand will be met during the
lead \ time period, and the probability that a stockout will occur is 10%.
THE SERVICE LEVEL SET IS DEPENDENT ON A NUMBER OF FACTORS SUCH AS
A STOCKHOLDING COSTS FOR THE EXTRA SAFETY STOCK AND THE LOSS OF
SALES IF THE DEMAND CANNOT BE MET.
School of Business Studies
Sharda University
MBA – 2nd SEM MID-TERM EXAMINATION, 2011
Paper Code: MTH 902
- 1417
Paper Title: PRODUCTION AND OPERATIONS MANAGEMENT -
Time: 1 ½ hrs.
Max. Marks: 20
Note:(1) The question paper consists of three parts
(2) All the parts are compulsory.
(3) The figures on the right hand side indicate maximum marks.
Part-1
Q1. Attempt any two of the following
2 X 2 = 4 Marks
1. Critically discuss the role and responsibilities of a product manager of a multi product
consumer durable company you are familiar with..
2. Define Productivity. List some factors that can affect productivity and some ways in which
productivity can be improved.
3. Explain in detail how can the product life cycle (PLC) concept be operationalised in a real life
situation.
Part-2
Q2. Attempt any two of the following:
2 X 4=8 Marks
1. Write a detailed note on work study and its importance in today’s production environment.





improve methods - get it right:
 Method study
 O & M & Ergonomics
 Industrial & systems engineering
define & maintain work standards
incentive schemes e.g. piece work & measured day work
human-computer interface & systems analysis & design
rationalisation, automation & substitution of machine technologies for people

Select job/process to be examined & observe current performance





 high process cost, bottlenecks, tortuous route, low productivity, erratic quality
Record & document facts
 activities performed
 operators involved - how etc
 equipment and tools used
 materials processed or moved
apply critical examination - challenge job components & necessity (purpose, place,
sequence, method).
develop alternative methods & present proposals
document as base for new work system
Install, monitor (slippage) & maintain
A time and motion study (or time-motion study) is a business efficiency technique combining
the Time Study work of Frederick Winslow Taylor with the Motion Study work
of Frank and Lillian Gilbreth (not to be confused with their son, best known through the
biographical 1950 film and book Cheaper by the Dozen). It is a major part of scientific
management (Taylorism). After its first introduction, time study developed in the direction of
establishing standard times, while motion study evolved into a technique for improving work
methods. The two techniques became integrated and refined into a widely accepted method
applicable to the improvement and upgrading of work systems. This integrated approach to work
system improvement is known as methods engineering.
Time and motion study have to be used together in order to achieve rational and reasonable
results. It is particularly important that effort be applied in motion study to insure equitable results
when time study is used. In fact, much of the difficulty with time study is a result of applying it
without a thorough study of the motion pattern of the job. Motion study can be considered the
foundation for time study. The time study measures the time required to perform a given task in
accordance with a specified method and is valid only so long as the method is continued. Time
studies are applied today to industrial as well as service organizations, including banks, schools
and hospitals. Once a new work method is developed, the time study must be changed to agree
with the new method.
Time study is a direct and continuous observation of a task, using a timekeeping device
(stopwatch for example) to record the time taken for accomplish a task. After recording the time,
the worker’s performance time (level) is recorded, and then the data are used to make the
standard time for the task. Personal time, fatigue, and delays are then added to the standard time
that had been made
2. What is productivity cycle? Explain the concept and applications of total productivity
model.
Productivity is a measure of output from a production process, per unit of input. For
example, labor productivity is typically measured as a ratio of output per labor-hour, an input.
Productivity may be conceived of as a metric of the technical or engineering efficiency of
production. As such, the emphasis is on quantitative metrics of input, and sometimes output.
Productivity is distinct from metrics of allocative efficiency, which take into account both the
monetary value (price) of what is produced and the cost of inputs used, and also distinct from
metrics ofprofitability, which address the difference between the revenues obtained from output
and the expense associated with consumption of inputs.
The main processes of a company are as follows

real process

income distribution process

production process

monetary process

market value process
Productivity is created in the real process, productivity gains are distributed in the income
distribution process and these two processes constitute the production process. The production
process and its sub-processes, the real process and income distribution process occur
simultaneously, and only the production process is identifiable and measurable by the traditional
accounting practices. The real process and income distribution process can be identified and
measured by extra calculation, and this is why they need to be analysed separately in order to
understand the logic of production performance.
Real process generates the production output from input, and it can be described by means of
the production function. It refers to a series of events in production in which production inputs of
different quality and quantity are combined into products of different quality and quantity.
Products can be physical goods, immaterial services and most often combinations of both. The
characteristics created into the product by the manufacturer imply surplus value to the consumer,
and on the basis of the price this value is shared by the consumer and the producer in the
marketplace. This is the mechanism through which surplus value originates to the consumer and
the producer likewise. Surplus value to the producer is a result of the real process, and measured
proportionally it means productivity.
Income distribution process of the production refers to a series of events in which the unit prices
of constant-quality products and inputs alter causing a change in income distribution among those
participating in the exchange. The magnitude of the change in income distribution is directly
proportionate to the change in prices of the output and inputs and to their quantities. Productivity
gains are distributed, for example, to customers as lower product sales prices or to staff as higher
income pay. Davis has deliberated the phenomenon of productivity, measurement of productivity,
distribution of productivity gains, and how to measure such gains. He refers to an article
suggesting that the measurement of productivity shall be developed so that it ”will indicate
increases or decreases in the productivity of the company and also the distribution of the ’fruits of
production’ among all parties at interest”. According to David, the price system is a mechanism
through which productivity gains are distributed, and besides the business enterprise, receiving
parties may consist of its customers, staff and the suppliers of production inputs. In this article,
the concept of ”distribution of the fruits of production” by Davis is simply referred to as production
income distribution or shorter still as distribution.
The production process consists of the real process and the income distribution process. A result
and a criterion of success of the production process is profitability. The profitability of production
is the share of the real process result the producer has been able to keep to himself in the income
distribution process. Factors describing the production process are the components of
profitability, i.e., returns and costs. They differ from the factors of the real process in that the
components of profitability are given at nominal prices whereas in the real process the factors are
at periodically fixed prices.
Monetary process refers to events related to financing the business. Market value process refers
to a series of events in which investors determine the market value of the company in the
investment markets.
Productivity model
The next step is to describe a productivity modelby help of which it is possible to calculate the
results of the real process, income distribution process and production process. The starting point
is a profitability calculation using surplus value as a criterion of profitability. The surplus value
calculation is the only valid measure for understanding the connection between profitability and
productivity or understanding the connection between real process and production process. A
valid measurement of total productivity necessitates considering all production inputs, and the
surplus value calculation is the only calculation to conform to the requirement.
The process of calculating is best understood by applying the term ceteris paribus, i.e. "all other
things being the same," stating that at a time only the impact of one changing factor be
introduced to the phenomenon being examined. Therefore, the calculation can be presented as a
process advancing step by step. First, the impacts of the income distribution process are
calculated, and then, the impacts of the real process on the profitability of the production.
The first step of the calculation is to separate the impacts of the real process and the income
distribution process, respectively, from the change in profitability (285.12 – 266.00 = 19.12). This
takes place by simply creating one auxiliary column (4) in which a surplus value calculation is
compiled using the quantities of Period 1 and the prices of Period 2. In the resulting profitability
calculation, Columns 3 and 4 depict the impact of a change in income distribution process on the
profitability and in Columns 4 and 7 the impact of a change in real process on the profitability.
3. How do facilities location decisions differ for service facilities and manufacturing plants?
Being in the right location is a key ingredient in a business's success. If a company selects the
wrong location, it may have adequate access to customers, workers, transportation, materials,
and so on. Consequently, location often plays a significant role in a company's profit and overall
success. A location strategy is a plan for obtaining the optimal location for a company by
identifying company needs and objectives, and searching for locations with offerings that are
compatible with these needs and objectives. Generally, this means the firm will attempt to
maximize opportunity while minimizing costs and risks.
A company's location strategy should conform with, and be part of, its overall corporate strategy.
Hence, if a company strives to become a global leader in telecommunications equipment, for
example, it must consider establishing plants and warehouses in regions that are consistent with
its strategy and that are optimally located to serve its global customers. A company's executives
and managers often develop location strategies, but they may select consultants (or economic
development groups) to undertake the task of developing a location strategy, or at least to assist
in the process, especially if they have little experience in selecting locations.
Formulating a location strategy typically involves the following factors:
1. Facilities. A facility planning involves determining what kind of space a company will need
given its short-term and long-term goals.
2. Feasibility. Feasibility analysis is an assessment of the different operating costs and other
factors associated with different locations.
3. Logistics. Logistics evaluation is the appraisal of the transportation options and costs for
the prospective manufacturing and warehousing facilities.
4. Labor. Labor analysis determines whether prospective locations can meet a company's
labor needs given its short-term and long-term goals.
5. Community and site. Community and site evaluation involves examining whether a
company and a prospective community and site will be compatible in the long-term.
6. Trade zones. Companies may want to consider the benefits offered by free-trade zones,
which are closed facilities monitored by customs services where goods can be brought
without the usual customs requirements. The United States has about 170 free-trade
zones and other countries have them as well.
7. Political risk. Companies considering expanding into other countries must take political
risk into consideration when developing a location strategy. Since some countries have
unstable political environments, companies must be prepared for upheaval and turmoil if
they plan long-term operations in such countries.
8. Governmental regulation. Companies also may face government barriers and heavy
restrictions and regulation if they intend to expand into other countries. Therefore,
companies must examine governmental—as well as cultural—obstacles in other
countries when developing location strategies.
9. Environmental regulation. Companies should consider the various environmental
regulations that might affect their operations in different locations. Environmental
regulation also may have an impact on the relationship between a company and the
community around a prospective location.
10. Incentives. Incentive negotiation is the process by which a company and a community
negotiate property and any benefits the company will receive, such as tax breaks.
Incentives may place a significant role in a company's selection of a site.
Depending on the type of business, companies also may have to examine other aspects of
prospective locations and communities. Based on these considerations, companies are able to
choose a site that will best serve their needs and help them achieve their goals.
Part-3
Q3. Attempt any one of the following:
1 X 8 Marks
Management may choose to build up capacity in anticipation of demand or in response to
developing demand. Cite the advantages and disadvantages of both approaches.
If there is a wide variation in the yields of different production operations in a production system,
will you advocate the use of the LOB technique? (Assume that the situation is one of single batch
production)
Capacity Strategy
One of the strategic choices that a firm must make as part of its manufacturing strategy. There
are three commonly recognized capacity strategies: lead, lag, and tracking. A lead capacity
strategy adds capacity in anticipation of increasing demand. A lag strategy does not add capacity
until the firm is operating at or beyond full capacity. A tracking strategy adds capacity in small
amounts to attempt to respond to changing demand in the marketplace
Capacity Expansion : Strategic Decisions Article List
Elements of the Capacity Expansion Decision
Causes of Overbuilding Capacity
Preemptive Strategies
One approach to capacity expansion in a growing market is the preemptive strategy, in which the
firm seeks to lock up a major portion of the market to discourage its competitors from expanding
and to deter entry. If future demand is known with certainty, for example, and a firm can build
enough capacity to supply all the demand, other firms may be discouraged from building capacity.
Usually a preemptive strategy requires not only investments in facilities but also in withstanding
marginal or even negative short-term financial results; capacity is added in anticipation of
demand, and prices are often set in anticipation of future cost decline.
The preemptive strategy is an inherently risky one because it in valve the early commitment of
major resources to a market before the market outcome is known. In addition, if it is unsuccessful
in de terrain competition it can lead to disastrous warfare since major overcapacity results and the
other firms attempting preemption have made a major strategic commitment to the market from
which it may be hard to back down.
As a result of the cost and risk of a preemptive strategy, it is important to set forth the conditions
that must be present for success. The preemptive strategy is risky partly because all these
conditions must be satisfied.
Large Capacity Expansion Relative to Expected Market Size. If a move is not large in relation to
the expected size of the market, it cannot be preemptive. Thus there are straightforward
conditions for UI the size of the capacity expansion that must be made to preempt a market
whose future demand conditions are known. However, a crucial issue is the expectations each
competitor and potential cornpetitOr holds about future demand. If any competitor or potential
competitor believes that future demand will be large enough to absorb the preemptive capacity
move and then some, it may choose to invest as well. Thus a firm attempting preemption either
must be confident it knows the expectations of its competitors or must try to influence those
expectations in such a way as to insure that its move will be viewed as preemptive.7 If
competitors' view of potential demand is unrealistically high, the preempting firm must
communicate a credible commitment to quickly add further capacity if future demand proves
higher than initially anticipated.
Large Economies of Scale Relative to Total Market Demand, or Significant Experience Curve. If
economies of scale are large relative to total market demand, an early preemptive capacity move
may deny competitors enough residual demand to be efficient. In this case, competitors who
invest must invest heavily and risk a bloody battle to fill capacity, or they will have inherently
higher costs if they invest on a small scale. Either they will be deterred from investing at all, or if
they invest on a small scale they will have a permanent cost disadvantage.
• If there is a significant experience curve operating whose benefits can be made proprietary, the
early, large-scale investor in capacity will have a lasting cost advantage as well.
Credibility of the Preempting Firm. The preemptive firm must carry credibility in its
announcements and moves that it is committed to and able to execute the preemptive strategy.
Credibility involves the presence of resources, needed technological capacity, historical delivery
on planned investments, and so on.8 Without credibility, competitors either will not perceive the
move as preemptive or will be willing to take on the preemptor anyway.
Ability to Signal Preemptive Motive Before Competitors Act.
A firm must be able to signal that it is preempting the market in advance of competitors'
commitments to invest. Thus it must put a preemptive amount of capacity in place before
competitors even consider capacity decisions, or more likely, it must be able to announce or
otherwise credibly communicate its intentions. A firm must have credibility in executing the
preemptive strategy as discussed, and it must also have a credible way of indicating that
preemption is its motive. Willingness of Competitors to Back Down. The preemptive strategy
assumes that competitors will weigh the potential returns of fighting the preempting firm and
conclude that they do not justify the risks. A number of conditions may interfere without a
decision, a common thread being perceived high stakes in establishing or maintaining a
significant position in the particular business being contested. Preemption will be risky against the
following types of competitors:
1. Competitors with goals other than purely economic: If competitors highly value participation in
the industry because of a long history or other emotional commitments, they may try to maintain
their position against the preemptor despite the presence of other favorable conditions for
preemption as described above.
2. Competitors for whom this business is a major strategic thrust or is related to others in their
portfolio: In this situation, even though it might be rational not to fight the preemptor firm were a
competitor to view the contested business in isolation, it perceives its presence in the business as
broadly significant. Thus it may be nearly impossible to successfully preempt.
3. Competitors who have equal or better staying power, a longer time horizon, or a greater
willingness to trade profits for market position: There may be competitors who will take a very
long view of success in the business and be willing to battle it out for a long period of time. A
preemptive strategy becomes questionable in such a situation.
Causes of Overbuilding Capacity
There seems to be a strong tendency toward overbuilding of Capacity, particularly in commodity
businesses that goes far beyond that due to mistaken attempts at preemption. Since overbuilding
is a key problem in capacity expansion, we must explore its causes in some detail.
The risk of overbuilding is most severe in commodity businesses for two reasons.
1. Demand is generally cyclical. Cyclical demand not only guarantees overcapacity in downturns
but also seems to lead to excessively optimistic expectations in upturns.
2. Products are not differentiated. This factor makes costs crucial to competition, since the
buyers' choice is heavily based on price. Also, the absence of brand loyalty means that firms'
sales are closely tied to the amount of capacity they have. Thus, firms are under great pressure
to have large, modern plants to be competitive and adequate capacity t to achieve their target
market share.
A number of conditions lead to overbuilding in industries, both in commodity businesses and
other businesses, which can be divided into the following categories. If one or more factors are
present in an industry the risks of overbuilding can be severe.
TECHNOLOGICAL
Adding Capacity in Large Lumps. The necessity to add capacity in large units increases the risk
that bunching of capacity decisions will lead to serious overcapacity. This was a major factor in
the overcapacity of color picture tubes that developed in the late 1960s. Many firms producing
television sets perceived the née to assure a supply of tubes, but the size of an efficient tube
plant was very large relative to that of a television set assembly plant. Demand did not grow
rapidly enough to absorb the massive color tube capacity put on stream all at once.
Economies of Scale or a Significant Learning Curve. This factor makes it more likely that attempts
at preemptive behavior like that previously described will occur. The firm with the largest capacity
or which adds capacity early will have a cost advantage, putting pressure on all firms to move
quickly and aggressively.
Long Lead Times in Adding Capacity. Long lead times require firms to base their decisions on
projections of demand and competitive behavior far into the future or pay a penalty in not
capitalizing on opportunity if demand materializes.3 Long lead times increase the penalty to the
firm who is left behind without capacity, and hence may cause risk-averse firms to be more prone
to invest even though the capacity decision itself is risky.
Increased Minimum Efficient Scale (MES). Where MES is increasing and the new larger plants
being built are significantly more efficient, unless demand is growing rapidly the number of plants
in the industry must shrink or there will be overcapacity. Unless every firm has several plants and
can consolidate them, some firms will necessarily have to reduce market share, something they
may loathe to do. More likely every firm will build the larger new facilities, creating overcapacity.
A variation of this situation has been occurring in the oil tanker shipping industry, where the new
Supertankers are many times the size of the older vessels. The capacity of Supertankers ordered
in the early 1970s far exceeded the market demand.
Changes in Production Technology. Changes in production technology have the effect of
attracting investment in the new technology, though plants using the old technology are left
operating. The higher the exit barriers for the old facilities, the less likely will they be withdrawn
from the market in an orderly way. This situation is occurring in the production of chemicals, in
which there is a changeover from natural gas to oil as a feedstock. When the oil-fed plants come
on stream, serious excess capacity is expected to occur, which will slowly be eliminated as gas
prices rise argufied plants are shut down.
STRUCTURAL
Significant Exit Barriers. Where exit barriers are significant, inefficient excess capacity does not
leave the market smoothly. This factor accentuates and elongates periods of overcapacity.
Forcing by Suppliers. Equipment suppliers, through subsidies, easy financing, price cuts, and the
like, can increase overbuilding of capacity in their customers' industries. In a scramble for orders,
suppliers can also make it possible for marginal competitors to build capacity who would be
unable to under normal circumstances. Shipbuilders have forced capacity increases in the
shipping industry, aided by heavy government subsidies, to maintain employment. Lenders for
new capacity can also accentuate the overbuilding problem by providing capital to all comers.
Aggressive real estate in-vestment trusts (REITs) are partially to blame for overbuilding in the
U.S. hotel industry in the late I 960s and early I 970s, for example.4
Building Credibility. Some period of significant overcapacity is often virtually required in industries
trying to sell new products to large buyers, particularly if a new product is an important input. Its
buyers will not switch to the new product until sufficient capacity is on stream to meet their needs
without making them vulnerable to a few suppliers. This has been the case with the high-fructose
corn syrup industry.
A related, and very common, case is one in which buyers strongly encourage firms to invest in
capacity with implied promises of future business. They may do so directly or indirectly through
statements designed to indicate their feelings about the need for new capacity. Of course buyers
are not required to actually place orders once the capacity is built; it is in their interest to insure
that adequate capacity exists to serve their greatest possible needs even if putting that much
capacity in place is not the most prudent decision for suppliers - since this level of demand is
quite unlikely.
The pressure of buyers is strongest where the ministry faces close substitutes. Here lack of
capacity can help substitutes penetrate the industry, and firms are motivated to prevent it.
Integrated Competitors. If competitors in the industry are also integrated downstream, pressures
for overbuilding may be increased because each firm wants to protect its ability to supply its
downstream operations. Under these circumstances, if the firm has insufficient capacity to supply
demand, it will lose not only market share in the industry but also possibly share (or greater risks
of obtaining input supplies) in its downstream unit. Therefore, it is more apt to insure it has
enough capacity even if there is uncertainty about future demand. A similar argument holds if
competitors are integrated upstream.
Capacity Share Affects Demand. In industries such as airlines the firm with the greatest capacity
may get a disproportionate share of demand because buyers are prone to approach it first. This
characteristic creates strong pressures for overbuilding capacity as several firms strive for
capacity leadership.'
Age and Type of Capacity Affects Demand. In some industries, such as many service
businesses, capacity is marketed directly to buyers. Having the most modern, well-decorated
fast-food outlet, for example, may yield competitive benefits. In industries where buyers choose
among firms based solely or in part on the type of capacity they have available, these pressures
for overcapacity exist.
COMPETITIVE
Large Number of Firms. The tendency toward overbuilding is most severe when many firms have
the strengths and resources to add significant capacity to the market, and they are all trying to
gain market position and possibly to preempt the market. Paper, fertilizer, corn milling, and
shipping are industries in which large numbers of firms have contributed to making overbuilding a
severe problem.;.
Lack of Credible Market Leader(s). If a number of firms are lying for market leadership and no
firm or firms have the credibility to enforce an orderly expansion process, the insolubility of the
process is increased. A strong market leader, conversely, can credibly add sufficient capacity to
meet a major portion of industry demand, if necessary, and can credibly retaliate against
overaggressive building by others. Thus a strong leader or small group of leaders can often
orchestrate an orderly expansion through their announcements and actions. The conditions for
credibility and the mechanisms used
New entry. New entrants often create or aggravate the problem of overbuilding. They seek
positions in the industry, often significant ones, and incumbent firms refuse to yield. Entry has
been a major cause of overcapacity in such industries as fertilizer, gypsum, and nickel.
Businesses with easy entry are also subject to overbuild sing because entrants rush in response
to periods of favorable industry conditions.
First Mover Advantages. Ordering and building capacity early may offer advantages that tempt
many firms to commit early to capacity when future prospects look favorable. Possible
advantages from committing early include short lead times in ordering equipment, lower
equipment costs, and the first opportunity to take advantage of supply/demand imbalances.
INFORMATION FLOW
Inflation of Future Expectations. There seems to be a process by which expectations about future
demand can become overinflated as competitors listen to each other's public statements and to
security analysts. This situation appears to have occurred, for example, in the ethylene and
ethylene glycol industries. A related point is that managers may be optimists who prefer positive
action to inaction or a negative posture.
Divergent Assumptions or Perceptions. If firms have differing perceptions of each other's relative
strengths, resources, and staying power, they tend to destabilize the capacity expansion process.
Firms may misestimate (under or over) the likelihood that their rivals will invest, leading them
either to invest unwisely or not to invest initially at all. The former case leads directly to
overbuilding, whereas in the latter case, the firm left behind may make a Desperate attempt to
catch up, triggering a sequence of excessive investments.
Breakdown of Market Signaling. Where firms no longer trust market signals because of new
entrants, changed conditions, recent outbreaks of warfare, or other causes, the instability of the
capacity expansion process increases. Signaling that is credible, on the other hand, promotes an
orderly expansion by allowing firms to warn others of planned moves, to plan for the expected
starting and completion of capacity expansions, and so forth.
Structural Change. Related to the preceding point, industry structural change can often promote
overbuilding of capacity, either because it requires firms to invest in new types of capacity or
because the turmoil of structural change makes firms prone to misestimate their relative
strengths.
Financial Community Pressure. Although the financial community can sometimes be a stabilizing
force, often security analysts seem to accentuate pressures toward overbuilding of capacity by
questioning managements who have not invested once their competitors have. Also,
managements' need to make positive statements to the financial community to improve stock
prices may lead to statements that can be misinterpreted by competitors as aggressive,
prompting retaliation.
MANAGERIAL
Production Orientation of Management. Capacity overbuilding seems to be particularly liable to
occur when production has been the traditional concern of management, as contrasted to
marketing or finance. In such businesses, pride in having the shiniest new plants is high, and the
perceived risk of being left behind in adding the newest and most efficient capacity is great. Thus
pressures for overbuilding are compelling.
Asymmetric A version to Risk. A strong case can be made that managers lose more by being the
only firm caught with insufficient capacity in a strong market than they do by having built too
much : capacity, along with all their competitors, if demand fails to materialize. In the latter case
they can take safety in numbers and have not lost relative position. In the former case, their jobs
as well as the company's strategic position may well be in jeopardy. Such an asymmetry between
the consequences of building and not building insures that there will be strong pressures for all
companies to build capacity once a few have taken the plunge.
GOVERNMENTAL
Perverse Tax Incentives. Tax structures and/or investment tax credits can sometimes encourage
overinvestment. This is an acute problem in shipping, where Scandinavian tax laws shelter profits
reinvested in capacity but tax uninvited profits. This motivates all shippers to reinvest in capacity
when industry conditions are good. Overbuilding is also promoted by tax-free retention of
earnings by U.S. subsidiaries abroad.
Desire for Indigenous Industry. Industries of such stature as to be subject to a nationalistic fervor
to have an indigenous industry are prone to world overcapacity. Many countries will seek to
establish a home-based industry, hoping to sell excess supply on world markets. If minimum
efficient scale is large relative to the world market, it is likely to lead to overcapacity.
Pressures to Increase or Maintain Employment. Governments sometimes exert great pressures
on firms to invest (or not disinvest) to increase or maintain employment, a social goal. This factor
accentuates problems of overcapacity.
LIMITS TO CAPACITY EXPANSION
There are some checks against the tendency for overbuilding, even when some of the conditions
discussed are present. Some of the most common are the following:
Financing constraints
• Company diversification, which raises the opportunity cost of capital and/or widens the horizons
of management who may have been production-oriented or prone to overbuild to protect their
position in their traditional industry
• Infusion of top management with finance background to replace management with marketing or
production backgrounds
• Pollution control costs and other increased costs of new capacity
o Great uncertainty about the future that is widely shared
• Severe problems because of previous periods of overcapacity
Several of these conditions were present in the aluminum industry in 1979, and as a result the
industry may break from its pattern of boom or bust in capacity utilization. Poor earnings resulting
from overcapacity in the late 1960s and restricted profits in high demand years because of wageprice controls have left this industry financially unable to make major investments until several
good years swell the coffers. In addition the cost of constructing facilities has quadrupled since
1968.6
A firm can sometimes influence the capacity expansion process in a number of ways, by using its
own behavior to signal to competitors about its expectations or plans or by otherwise trying to
influence competitors' expectations. For example, the following actions will tend to discourage
capacity additions by competitors:
• a large announced capacity addition by the firm (see the next section of this chapter on
preemptive strategies);
• announcements, other signals, or information that carries a discouraging message about future
demand;
• announcements, other signals, or information that elevates the perceived likelihood of
technological obsolescence of the current generation of capacity.
Elements of the Capacity Expansion Decision
The mechanics of making a capacity expansion decision in the traditional capital budgeting sense
are quite straightforward - any finance textbook will supply the details. Future cash flows resulting
from the new capacity are forecasted and discounted to weigh them against the cash outflows
required for the investment. The resulting net present value ranks the capacity addition against
the other investment projects available to the firm.
However, this simplicity masks an extremely subtle decision- making problem. The firm usually
has a number of options for adding capacity which must be compared. In addition, to determine
future cash inflow from the new capacity the firm must predict future profits. These will depend
crucially on the size and timing of capacity decisions by each and every one of its competitors, as
well as on any number of other factors. There is also usually uncertainty about future trends in
technology, as well as about what future demand will be.
The essence of the capacity decision, then, is not the discounted cash flow calculation but the
numbers that go into it, including probability assessments about the future. Estimating these is in
turn a subtle problem in industry and competitor analysis (not financial analysis).
The simple calculation presented in finance textbooks does not allow for uncertainty and alternate
assumptions about competitors' behavior. In view of the complexity of the discounted cash flow
calculation that properly includes these elements, it is useful to model the capacity decision with
as high a precision as possible. The steps in Figure 15-1 describe the elements of the modeling
process.
The steps must be analyzed in an interactive fashion. The first step is to determine the realistic
options available to the firm in adding capacity. Usually the size of the additions can vary, and the
degree of vertical integration of the new capacity may be a variable as well. The addition of
uninterested capacity can be a hedge against risk. Since the firm's own decision about how much
capacity to add can influence what its competitors do, each of its options must be analyzed
separately in conjunction with competitor behavior.
Having developed the options, the firm then must make predictions about future demand, input
costs, and technology. Future technology is important because it is necessary to forecast the
likelihood that present additions to capacity will be made obsolete or that de- sign changes will
allow effective increases in capacity from in-place facilities. Forecasting input prices must account
for the possibility that increased demand due to new capacity may increase input prices. These
predictions about demand, technology, and input costs will be subject to uncertainty, and
scenarios (Chapter 10) may be used as a device for coping with this uncertainty for analytical
purposes.
The firm must next forecast how and when each and every one of its competitors will add
capacity. This is a subtle problem in corn- petit or analysis, which must draw on the full range of
techniques presented in Chapters 3, 4, and 5. Competitors' capacity moves Will, of course, be
determined by their expectations about future demand, costs and technology. Thus, predicting
their behavior involves uncovering (or guessing) what these expectations are likely to be.
Predicting competitors' behavior is also an iterative process, because what one competitor does
will influence the others, particularly if that competitor is an industry leader. Therefore,
competitors' capacity additions must be played against each other to predict a probable sequence
of actions and resulting responses. There is a bandwagon process in capacity expansion, to be
discussed later, which is important to try to forecast.
The next step in the analysis is adding competitors' and the firm's behavior to yield aggregate
industry capacity and individual market shares, which can be balanced against expected demand.
This step will allow the firm to estimate industry prices, and in turn, expected cash flows from the
investment.
The whole process must be scrutinized for inconsistencies. If the result of the predictions is that
one competitor fares poorly by not adding capacity, for example, the analysis may have to be
adjusted to allow that competitor to see the error of its ways and add capacity late. Or if the entire
process of predicted expansion leads to conditions that violate most firms' predicted expectations,
it may have to be adjusted. The modeling of the capacity expansion process is complex and will
involve a great deal of estimation. However, the process gives a firm a great deal of insight into
what will drive expansion in the industry, as well as possible ways to influence it in its favor)
A model of the capacity expansion process reveals that the degree of uncertainty about the future
is one of the central determinants of the way the process proceeds. Where there is great
uncertainty about future demand any differences in risk aversion and financial capabilities of firms
will usually lead to an orderly expansion process. Risk taking firms, those loaded with cash or
with high strategic stakes in the industry, will jump in, whereas most firms will wait and see what
the future actually brings. However, if future demand is perceived to be fairly certain, the capacity
expansion process becomes a game of preemption. With known future demand, firms will race to
get the capacity on stream to supply that demand, and once they do so it will not be rational for
others to add still more ca paucity. This game of preemption will generally be accompanied by
heavy market signaling to try to deter other firms from investing. The problem occurs when too
many firms try to preen, and capacity is overbuilt because firms mistake each others' intentions,
misread signals, or misjudge their relative strengths and staying power. Such a situation is one
major cause of the overbuilding of industry capacity-, which I will explore further.
Ques: Here are some of the questions that you'll need to explore to help you understand your
situationin terms of the 7S framework. Use them to analyze your current (Point A) situation first,
and then repeat the exercise for your proposed situation (Point B).
Strategy:
What is our strategy?
How to we intend to achieve our objectives?
How do we deal with competitive pressure?
How are changes in customer demands dealt with?
How is strategy adjusted for environmental issues?
Structure:
How is the company/team divided?
What is the hierarchy?
How do the various departments coordinate activities?
How do the team members organize and align themselves?
Is decision making and controlling centralized or decentralized? Is this as it should be, given what
we're doing?
Where are the lines of communication? Explicit and implicit?
Systems:
What are the main systems that run the organization? Consider financial and HR systems as well
as communications and document storage.
Where are the controls and how are they monitored and evaluated?
What internal rules and processes does the team use to keep on track?
Shared Values:
What are the core values?
What is the corporate/team culture?
How strong are the values?
What are the fundamental values that the company/team was built on?
Style:
How participative is the management/leadership style?
How effective is that leadership?
Do employees/team members tend to be competitive or cooperative?
Are there real teams functioning within the organization or are they just nominal groups?
Staff:
What positions or specializations are represented within the team?
What positions need to be filled?
Are there gaps in required competencies?
Skills:
What are the strongest skills represented within the company/team?
Are there any skills gaps?
What is the company/team known for doing well?
Do the current employees/team members have the ability to do the job?
How are skills monitored and assessed?