Om ibs

Introduction
………………………………………………….

Operations Management
• Operations Management deals with Management
of transforming inputs to outputs.
• Operation management is management of Direct
Resources i.e.
• MEN
MATERIAL MACHINE
• OM deals with
–
–
–
–

Design of Products & Processes
Acquisition of Resources
Transformation of Resources into Output
Distribution of Goods & Services

• Traditional view perceives Operations
Management as a system that is involved with
the manufacture and production of goods and
services
• Modern view perceives OM as a system
designed to deliver Value

Importance of Operations Management • Organizations need to offer superior quality
product /services at competitive price & still
survive.
• This calls for efficiently managed operations
• Upto 1970, basic focus of OM was Cost
Reduction
• Since 1990 focus is shifted to Value Creation

Typical Operations Management Decisions
• Capacity Decisions – Type, Quantum and
Flexibility
• Facility decision – Location and its size
• Workflow and Technology decisions – Type of
production processes and layout of facilities
• Materials and Inventory decisions
• Quality Decisions – Level and how to achieve
it

Production Systems
• Production function is concerned with
transformation of various inputs into required
output
• Production System is the way in which this
production function is carried out
• Selection of production nsystem is based on
criteri like
– What will each alternative cost in short term and long
term
– What will it provide in terms of cost, quality,time and
availability of output
– What will require in terms raw material, energy,
infrastructure, managerial talent and other inputs

Classification of Production Systems
Prod./Opera
. volume
Continuous
Production
Mass production
Mass Production
Batch
Batch
production
production
Job-shop
Job-shop
Production
Production

Output/Product Variety

OM in Organization Chart
President or
CEO

Marketing

Operations
V.P. of Operations
Manages: People,
Equipment,
Technology,
materials and
information
To Produce: Goods
and/or Services

Finance

OM in Organization Chart
• In Manufacturing Firm Operations would
include
– Prod. Control, Scheduling and Materials control
– Purchasing
– Manufacturing
– Quality Assurance
– Engineering Support
– Warehouse Management

• In Service industry it may differ according to
the type of service offered

Product and Service
Manufactured Goods

Services

These are physical

Intangible

Can be stored, transported

Can not be stored

Customers do not have contact

Customers actively participate

with production system
Response time is longer

Response time is very short

Requires large facilities, more

Little facilities, lesser capital

capital
Quality is measurable

Quality is not measurable

Operations as Service
• Emerging model is every organization is in
service business
• In manufacturing such services can be divided
– As Core Service
• Manufacturing and delivering customized product
correctly at required time at competitive price

– As Value-added Service
•
•
•
•

Information
Problem-solving
Sales Support
Field Support

HISTORICAL EVOLUTION
• Adam Smith --

Division of Labor

• Assigning workers to tasks based on their SKILLS

• Production Management was re-titled as
OPERATIONS MANAGEMENT (70’s)
to enlarge the Field

• Taylor’s Scientific Management
–
–
–
–
–
–

Task to workers based on skills
Output time should be used for Plan & Schedules
Standardized & written specifications, Job-Instructions
Training of Supervisors & Workers
Monetary Incentive for Motivation
Working for Maximum Output, rather than Restricted
output
– Developing all workers to the fullest extent possible

• Moving Assembly Line
• Applying Taylor’s Principle in Automobile production
line in Ford Motors, Assembly time was reduced
drastically.
• This increased popularity of Scientific Management

• Hawthorne Studies -- by Elton Mayo
• Introduced Human Dimensions
• Illumination Studies implied the effect of group and
work environment on productivity of workers

• Operations Research -- Started with World War II
Mathematical Technique to Deploy Limited
Resources.
• Computers
– 50’s – Salary & Accounting Statements
– 60’s – L.P. to analyze operational problems
– 70’s -- Mnfrg. Information System
•
Material Requirement Planning (MRP)
– 80’s -- CAD CAM
FMS
AS/RS
– 90’s – Robots for Repetitive & Hazardous tasks

• 1980 -

• 1990 -

Manufacturing Strategy
Just In Time (JIT)
TQC
Service Quality and Productivity
TQM and Quality Certification
Business Process Reengineering
(BPR)
Supply Chain Management (SCM)
E - Commerce

Shift in Emphasis
• Operations Management underwent three key
shifts in emphasis
– From Cost and Efficiency to Value Creation
– From Mass Production to Agility and
Customization
– From Functional Specialization to a Systems
approach to achieve high performance

Current Issues in OM
• Coordinating the relationship between mutually
supportive but separate organizations
• Optimizing Global SCM
• Increased co-production of goods and services
• Operational Challenges
–
–
–
–

Process Design and Improvements
Employee diversity
Human Resource scarcity
Global workforce

Current Issues in OM
• Challenges at Marketplace
– Market fragmentation
– Vocal Customers
– Customer-Supplier relationship

• Technological Challenges
– Technological changes
– Bio-genetic
– Miniaturization

• Societal Challenges
– The Environment
– Intellectual Property

Operations Strategy &
Competitiveness
………………………………………

OPERATIONS STRATEGY
• STRATEGY is a Plan consistent with the Objectives to
eliminate external threats or to take advantage of
Opportunities.
• Levels of Strategy
– Corporate Strategy
– Business Strategy
– Functional Strategy



Operations Strategy

• Operations Strategy is influenced by
Product / Services
Market served

Corporate Strategy Design Process
• Firm should develop comprehensive strategy
that integrates Finance, Marketing and
Operations
• Financial Perspective : two basic strategies
– Growth
• Build the Franchise – Develop new sources of revenue
• Increase customer value

– Productivity
• Improve cost structure
• Improve asset utilization

• Customer Perspective – Find ways to
differentiate itself in the marketplace
– Product Leadership
– Customer intimacy
– Operational excellence

• Internal Perspective
– Defines business process
– Specifies desired outcomes and the process to
achieve them

• Learning and Growth Perspective – Defines
intangible assets needed
– Strategic Competencies
– Strategic Technologies
– Climate for action

Strategy
• Organizations should have Resources and
capabilities to execute and support the
strategy
• The extent to which organization is matching
its resources and capabilities with the
opportunities in external environment is
Strategic Fit
• Strategy is delivered through a set of tailored
activities

Operations Strategy
• Operations Strategy specifies how operations
can help implement firm’s corporate strategy.
• Operations Strategy involves linking design
decisions and operating decisions
• Cross-functional interaction must occur for
implementing any functional strategy.
• Operation Strategy must be linked vertically to
the customer and horizontally to other parts
of enterprise

Operations Competitive Dimensions
Competitive priorities – Four Groups
1. COST
Low cost operations,
products

Commodity type

2. QUALITY
High performance design,

Consistent Quality.

3. TIME
Fast delivery time,
Development Speed

On time Delivery

4. FLEXIBILITY
Volume flexibility,
Varieties of product
Special services to augment the sale

Customisation,

ELEMENTS OF OPERATION STRATEGY
•
•
•
•

Designing the Production System
Product / Service Design & Development
Technology Selection & Process Development
Allocation of Resources to Strategic
alternatives
• Facility Planning

DEVELOPING AN OPERATIONS STRATEGY
• Should be in line with Organization Strategy
And Organization Strategy should be in line with
Corporate vision
• Aim is to achieve Long Term goals of Business
strategy
• Operations Strategy should be Flexible to support
product through its Lifecycle.
• Operations Strategy should be consistent with
strategies of other functional areas.

Long Term Operation Strategy Decisions
•
•
•
•
•

concerned with
Developing New Product
Determining appropriate production capacity
Establishing new production facilities
Adopting new technologies
Locations of Plant & Warehouses

Operations Strategy as Weapon in
Competition
• Identify distinct Competencies
• Expertise in
Product (ITC) / Process / Marketing (P&G) / Supply (HLL)
expertise
• Shorter Product Cycle – Fast entry & Growth (CD Mnfrg)
• Production Flexibility (Garment manufacturing lines)
• Low Cost Process (Labor Intensive Jobs)
• Convenience & Location ( HLL vis a vis Sara Lee)
• Product variety & Facility Size
• Quality

Productivity
• The productivity is the measure of efficiency.
• Productivity is a ratio of Output to Input.
• Higher the ratio, higher the efficiency
Two basic types of Productivity
Total Productivity – Considers all the Inputs &
Ratio is Total Output / Total Input
Gives very little indication about Input areas needing
improvement.
It requires all variables to be expressed in same unit.
Partial Productivity – Considers only Specific Input (like Labor,
R.M.) and
Ratio is total Output / Partial Input
• Partial Productivity ratio is more preferred.

Productivity

• Productivity ratios are used to measure efficiency of operation and
comparison of same with reference to Time, Industry.
• Here it gains importance as control measure.
To improve productivity we look at factors affecting productivity
• Time spent on unproductive activity
• Social or legal obligations
• Unrest in employees
• Learning new skills
It is easy to measure the productivity of quantifiable tasks.
But for Knowledge workers where tasks are
•
Not quantifiable
•
Intangible
•
Dependent on many other factors
•
Such that results are not directly attributable to tasks and
results come up after a long period

Example of Productivity Measures
• Input & Output Data
Output
1. Fin. Units Rs. 10000
2. WIP
2500
3. Dividends
1000
Total
13500
Input
1. Human
Rs. 3000
2. Material
153
3. Capital
10000
4. Energy
540
5. Other expenses 1500
Total
15193

• Total Measure
Total Output
Total Input

13500
15193

0.89

• Multifactor Measures
TotalOutput
Human Material

13500
3153

4.28

Finished Units
10000
3.17
Human Material 3153

• Partial Measures
Total Output
Energy

13500
540

2.5

Finished Units
Energy

10000
540

18 .52

Learning Curve
• Learning Curve is a line displaying relationship
between unit production time and cumulative
units produced
• Learning Curve Theory is based on three
assumptions
– The amount of time required to complete a given task
will be less each time the task is undertaken
– Unit time will decrease at a decreasing rate
– The reduction in time will follow a predictable pattern

No meals

No seat
assignment

Frequent
Reliable
Departur
es

Lean and
highly
productive
ground
and gate
crews

Limited
Passenger
Service

No baggage
transfer

Process Analysis
• Process is any part of the organization that
takes inputs and transforms them into output
expected to be of greater value
• By analyzing process we can understand
– Handling capacity
– Serving time
– Changes required to increase capacity
– How much does the process cost

• We must clearly define the purpose of
analyzing the process

Process Analysis
• Process Analysis generally involves following tasks
– Decide process boundaries that mark the entry point
of the process inputs and exit points of the process
outputs
– Construct process flow diagram showing various
process activities and their interrelationships
– Determine capacity of each step in the process
– Identify the bottlenecks
– Evaluate further limitations in order to quantify the
impact of the bottlenecks
– Use the analysis to make operating decisions and
improve the process

Process Flowcharting
• Process Flow-charting is a tool that categorizes each
activity & provides operational details to understand
the process
• Good way to start analyzing a process is with
diagram showing the basic elements of process
– Tasks
– Flows
– Storage
– Decision points
• Some times diagram is separated into different
horizontal or vertical bands to allow separation of
tasks

Types of Processes
• Single –stage process
• Multi-stage process
–
–
–
–

May be buffered internally
Buffering refers to storage area between stages
Buffering allows stages to operate independently
If no buffering, it is possible that Blocking or Starving
may happen

• Processes by Market Orientation
– Make to stock - generally standard products
– Make to order – generally customize products
– Hybrid – combination of both above

Types of Processes
• Processes by Production Systems
–
–
–
–
–
–
–
–

Project
Job-Shop
Batch Production
Assembly Line
Continuous Flow
Cell Manufacturing
Flexible Manufacturing System
Pacing – refers to the fixed timings of movement of
the items through the process

Multistage Process

Alternate Paths

Multistage Process with Buffer

Measuring Process Performance
• Utilization =Actual utilized time / Available time
• Efficiency = Actual output of the process /
standard
• Run-time – time required to produce a batch of
parts
• Set-up time – time required to prepare a machine
to make a particular item
• Operation time – sum of set-up and run-time for
a batch
• Cycle time – time elapsed between starting and
completing a job

Measuring Process Performance
• Throughput time – time that a unit spends
actually being worked on together with time
spent waiting in a queue
• Throughput rate – Output rate that a process
is expected to produce
• Process Velocity – Ratio of total throughput
time to the value-added time
• Value-added time – time in which useful work
is actually being done on the unit

Throughput Time Reduction
•
•
•
•
•
•

Perform activities in parallel
Reduce back and forth movements
Change the sequence of activities
Reduce interruptions
Eliminate redundant activities
Combine activities wherever possible

Product Design
• Starts with conceptualization with objectives of
– Providing value to the customer
– Return on Investment to the company
– Competitiveness in the market
• Product design has impact on
– Materials & components used
– Processes used for manufacturing
– Machines used for processing
– Methods of storage
– Ways of transportation
– Production / Operations Strategies
– Marketing Strategies

Product Design
• Design for Customer
– Achievement of purpose for which it is required, expressed or
implied
– Features
– Ease of operation
– User-friendly
– Reliability
– Consistency
– Conformance to specification
– Competitive price
– Serviceability
– Safety
– Aesthetic
– Environmental friendly
– Disposal value
– Durability

Quality Function Deployment
• Quality Function Deployment is an approach to
understand the customers requirements and
incorporating it in product design
– Uses inter-functional teams
– Shortens design time
– Process begins with listening to customers to
determine characteristics of a superior product
– Product needs and preferences are defined
– These are broken down into categories called
customer requirements
– Requirements are given weights according to its
importance to customers
– Customer is asked to compare and rate company’s
product with that of a competitor

Value Engineering
• It is “Engineering the Value”
• The prime concern of VE is to enhance the function to
improve value
• VE seeks out best functional balance between Cost, Reliability
and Performance
• VE looks at saving money while providing better value
• Value engineering always improves and / or maintains the
quality, reliability and maintainability of a product
• It promotes progressive change by Identifying and removing
unnecessary cost
• VE shows insights into the basics of Unnecessary cost without
compromising on Quality, Reliability or Maintainability
• Application of Value Engineering is better way to fight
inflation

Value Engineering
• VE is
– Systems Oriented formal job plan to identify and remove
unnecessary cost
– Multidisciplinary team approach
– Lifecycle oriented – examines the total cost of owning and
operating a facility
– Functional Oriented – relates functions required to the
value received

• But VE is not
–
–
–
–

Design Review
A cheapening Process
A requirement done on all designs
Quality Control

Value Programs
• Value Engineering
– Describes a value study on a project or product that is
being developed
– It analyses the cost of project or product while it is being
designed

• Value Analysis
– Describes a value study of a project or product that is
already built or designed
– It analyses product to see if it can be improved

• Value management
– Identifies methodology and techniques used in Value work

Design for Manufacturing and Assembly
• Concurrent Engineering is necessary to speed up
product development
• Form Cross-functional teams for product
development
• Design for Manufacture (DFM) – A good product
design would be such that it would make
manufacturing related functions
– In less time
– With less effort
– At less cost

Product Development
• Activities involved in product development
– Concept development
– Market assessment
– Feasibility Studies
– Prototype Design
– Prototype Testing
– Interaction with suppliers and production departments
– Initial Design of Production Model
– Economic Evaluation
– Market Testing
– Final Design of Production Model

Manufacturing Process Selection
& Design
~~~~~~~~~ ~~~~~ ~~~~~~~~~

Major Factors Affecting
Process Design Decisions
• Nature of Demand
– Capacity to meet Estimated future demands
• Influence of
Seasonality
Trend & other factors
Price level
• Degree of Vertical Integration
– Determines extent to which product & its
components are produced internally
– Integration
• Backward or
Forward

Factors Affecting Process Design
• Flexibility
– Ability to respond quickly to changes
• In customer needs
• Market changes
• Product Flexibility
– Change from one product to other
• Results in Small batches
• Calls for
– General purpose machines
– Multi-skilled employees
– Employee Training
• Volume Flexibility
– Ability to change prod. Volume rapidly
– Required for products where demand fluctuates and high
inventories are uneconomical

Factors Affecting Process Design
• Degree of Automation
– It is a Strategic weapon
– Essential for remaining Competitive
– Can achieve flexibility (label manufacture)
• Quality Level & Degree of customer Contact
– Quality decides degree of Automation
– Customer contacts influence process like banking

Process Flow Structure
• Process Flow Structure refers to how a factory
organizes material flow
• Four major process flow structures are
– Job shop – small batches of varieties of products
– Batch shop – somewhat standardized job shop
– Assembly line
– Continuous flow

TYPES OF PROCESS DESIGN
•

Product Focused

•

Process Focused

•

Group Technology

Product Focused
• Also known as Line Flow Production System
Used for High Volume
Use Specialised machines
Product or Services flow in linear path without
backtracking

• Designed for three forms of production
Discreet Unit Manufacturing – Distinct product like Radio
Process Manufacturing – involves movement of material
between operations ; like cement / paper plant
Delivery of services – services are administered while
Customers move in a queue

Product Focused
• Advantages – Low unit cost,
Ease of Planning
Low labor skill required
Reduced training
Reduced Supervision
Ease of Control
• Disadvantages High Initial Investment

Process Focused
• Also called as Intermittent Production System.
Or Job Shop ( Products move in batches)
•
•
•
•
•

Used for Low Volume
Use relatively General purpose machine
Operations are grouped according to Process
Product flows in Irregular path

Process Focused
• Advantages –

Flexibility is good
Less initial Investment

• Disadvantages – Jobs are waiting for their turn
for processing
Require greater employee skill
More Employee training
More Supervision
Complex control
• In practice blend of both the systems is used.

Group Technology
• Dissimilar machines are grouped together into work
centers to process the products which are similar in shape &
have similar processing requirement.
• Each cell is dedicated to a limited range of products
• Each cell is designed to perform specific sets of processes
• Also known as Parts Classification and Coding System
(because each part manufactured is given a Code).

SELECTION OF TYPE OF PROCESS DESIGN
•

Selection depends upon
– Product variety & volume
• Product Flexibility and small batch size Process focused
• Reduction in flexibility & increase in batch
size – Cellular
• Variety decreases, batch size increased –
Product focused
• Investment
• Economic Analysis – by way of Fixed & Variable Cost

Product Structure
Process
Structure

Low volume Multiple
Low
products
Standardizati Low volume
on

1I
Job shop

Commercial
Printer

II
Batch

High volume Effectiveness
High
Measure
Standardizati
on

None (Not
feasible

Flexibility –
High
Unit Cost high

Sugar
Refinery

Flexibility –
Low
Unit Cost Low

Heavy
Equipment

III
Assembly
line
IV
Continuous

Few major
products
Higher
volume

Automobile
Assembly
None (Not
feasible

.

SERVICE PROCESS
SELECTION AND DESIGN

Service Operations
• Service Operations exists in two broad
organizational contexts
– Service Business – Primary business is providing
services
• Facilities-based service – customer goes to service
facility
• Field-based service – service is provided in customer’s
environment

– Internal Services – Required to support activities
of an organization

Characteristics of Services
• Intangibility
– services can not be counted, measured or felt
– This results in each customer having different experience about
the same service

• Customer-centered
• Heterogeneity
– Similar type of services have a different effect depending on
person who renders and person who uses it

• Inseparability
– The production and consumption of service can not be
separated from the source that provides it

• Perishability
– Services are required to be utilized as soon as they are
produced; they are perishable

• Quality of work is not the quality of service

Classification of Service Organization
• Service organizations can be classified on six
dimensions
– Equipment focus / People focus
– Product focus / Process focus (how the purchase is made)
– Level of customization
– Back office focus / Front office focus (direct interaction
with customer)

– Duration of customer contact
– Level of discretion

Categories of Service Organizations
Schmenner’s Service Classification Matrix

Degree of Variation
Customization for and Interaction with customers

Relative throughput
time
High
Low

Low

High

Service Factory

Service Shop

Fast Food
Call for Standard Operating
Procedures

Traditional Restaurant
Focus should be on reducing
the variations and
standardization of services

Mass Service

Professional Service

School
Focus should be on lowering
throughput time

Gourmet Restaurant
Employees are highly skilled
Personal Control

Designing Service Organization
• In service we must meet demand as it arises
• So capacity is dominant issue
• Too much capacity generates excessive cost and
insufficient capacity leads to lost customers
• Strive to reduce duration and variability of
waiting period
• Designing service organization involves
– Identification of target market
– Service concept(how we differentiate our service in
the market)
– Service strategy
– Service delivery system

Buffered Core (none)

Permeable system (some)

Reactive system (much)

Degree of customer/server contact

High

Face to
face tight
specs

Sales
opportunity

Face to face
Low
total
cusomization
Face to
face loose
specs
Production
efficiency

Phone
contact
Internet
and on site
Technology
Mail
contact
Low

High

Worker
requirement

Clerical Skills

Helping skills

Verbal skills

Procedural
skills

Trade skills

Diagnostic
skills

Focus of
operation

Paper
handling

Demand
management

Scripting calls

Flow control

Capacity
management

Client mix

Technological
Innovation

Office
Automation

Routine
methods

Computer
database

Electronic aids

Self-serve

Client/worker
teams

Service System Design
• Depending on High-Contact or Low-Contact System, service
design can differ on
–
–
–
–
–
–
–
–
–
–
–

Facility location
Facility Layout
Product Design
Process Design
Scheduling
Production Planning
Worker Skills
Quality Control
Time Standards
Wage Payment
Capacity Planning

Service Encounter
• Service encounters are simply said as interactions
between service provider and service seeker
• Service encounters are important for perception
of service
• Three aspects of encounter are
– The flow of the service experience (what is
happening)
– The flow of time (how long it seems to take)
– Judging encounter performance (what you think
about it later)

Behavioral Science & Service Encounter
• Front-end and back-end are not created equal
– Company is likely to be better off with a relatively
weak start and upswing at the end
• Segment the pleasure and combine the pain
• Let the customer control the process
• Pay attention to the norms and rituals
– Particularly true for professional services
• People are easier to blame than systems
• Let the punishment fit the crime in service recovery

Service Blueprinting and Fail-safing
• Each activity that makes up a typical service encounter
is mapped into the flowchart
• Distinction is made between the high customer contact
aspects of the services and those activities that
customer does not see by drawing a line of visibility
• Designing Service Blueprint will involve
–
–
–
–
–

Identification of all activities
Identification of activities prone to problems
Decide on time required to deliver service process
Delivery of service
Listing of interactions between service provider and
customer

• Fail-safing can be done through Poka-yoke (procedure
that blocks inevitable mistakes)

Facility Location
//////////////

FACILITY LOCATION & LAYOUT
• Selection of Facility Location is needed
When business is newly started
When expansion in existing plant is not
possible
When a new branch is to be established
When a place has to be vacated
for Social or Economic reasons like inadequate
power, Govt. regulations etc.
• Earlier these decisions were dependent on individual
preferences.

Importance of Location
•

•
•
•

Location fixes the production technology
and cost structure
Size and nature of Business
Ability to serve customer quickly and
conveniently
After facility location, Internal structure is
decided that is
LAYOUT

Steps for Location selection
• Define the Location objectives and associated
constraints
• Identify the relevant decision criteria
• Relate objectives to criteria by appropriate model
• Conduct field research
• Select the location that best satisfies the criteria
• Manufacturing location decisions focus on
minimization of cost
• Service facility location decision focuses on
maximization of profit potential

MODELS
• Cost – Profit – Volume or Break even analysis
between alternatives for the estimated volume.
Lower total cost is the choice.
• Point Rating Method –
–
–
–
–
–

Decide factors important for location decision
Assign weightage to each factor
Give rating to each factor in the form of points
Take sum of weighted rating of all the factors
Highest rating location can be chosen

• Transportation Method of L.P.

TRANSPORTATION PROBLEM
• Methods for initial feasible solutions are
– North-West Corner Method
– Least Cost Method
– Vogel’s approximation Method

• Problem
• Distances between factory and its warehouse and Demand at each
warehouse are given in the table below
•
•
•
•
•

Factory /Warehouse
F1
F2
F3
Demand

W1
16
18
8
175

W2
22
14
14
125

W3
14
18
16
150

Supply
200
150
100

• Find out the solution for transporting the goods at a minimum cost.

MODELS
• Center of Gravity Method - used for optimal location
for distribution center to minimize transportation
costs
– The center of gravity can be found by taking weighted
average of X and Y co-ordinates of different destinations

Xc

X i Vi
Vi

Yc

Y i Vi
Vi

Locating Service Facility
• Services have multiple sites to maintain close
customer contacts
• Location decision is closely linked to market
selection decisions
• Market need affect affects number, size and
characteristics of site
• Service locations many times aim at
maximizing profit potential rather than
minimizing cost

Transportation Methods
~~~~~~~~~~~~~~~~~~~~~~~~

Transportation
• This is a special case of L.P.
• Applicable in situations involving physical distribution of goods from
plants to warehouses and further
• Can also be applied to Production Scheduling & inventory Control
• This model reduces computational efforts involved in simplex
method.
• Transportation problem can be
Balanced
or Unbalanced
• In Balanced problem Qty of Goods Produced is equal to Total
Requirement
• In Unbalanced problem it is not.
• Unbalanced problem is made Balanced by adding Dummy
• If Production Capacity is higher, then Dummy Warehouse is added
&
• If Production Capacity is lesser, then Dummy Origin is added.

Formulation of Transportation Problem
• X i j represents the number of units shipped from origin i to
destination j
• C i j represents the cost of shipping a unit from origin i to
destination j
• S i represents the supply available at i th origin
• D j represents the quantity demanded at j th destination
• Then, Objective Function is
– Minimize Z = ∑ C i j X i j
• Subject to supply constraint
•

n
j 1

X ij = S i i = 1,2,….m

• Subject to demand constraint
m

•

X ij = D j j = 1,2,….n
i 1

Steps to solve Transportation Problem
• Define Objective function to be minimized
• Develop Transportation table with Rows representing Origins &
Columns representing Destinations
• Determine the Initial Feasible Solution
• Examine whether Initial Solution is Feasible.
– A solution is feasible, if the numbers of occupied cells in the
solution are
(m + n – 1) where
– ‘m’ is the number of origins &
– ‘n’ is the number of destinations.
• Test the solution for optimality by computing the opportunity cost
associated with unoccupied cells
• If the solution is not optimum, modify the allocation such that
transportation cost can be reduced further.
• Methods for initial feasible solutions are
– North-West Corner Method
– Least Cost Method
– Vogel’s approximation Method

Problem
• Distances between factory and its warehouse and Demand at
each warehouse are given in the table below.Find out the
solution for transporting the goods at a minimum cost.

Factory

W1

W2

W3

Supply

F1

16

22

14

200

F2

18

14

18

150

F3

8

14

16

100

Demand

175

125

150

/Warehouse

North-West Corner Method
• The allocation of products starts at
• North-West (top left) corner of Transportation table
• Assign max. possible qty. to Top Left corner cell of
table
• adjust supply and Demand numbers
• If supply is exhausted move to next Supply
downwards & if Demand is satisfied move to next
warehouse horizontally.
• Continue till entire requirements are met.
• Check the Feasibility of the Solution

W1

F1

W2

175

W3

25

Supply

200

16

22

18

100
14

18

14

100 100
16

F2

F3

8
Demand

175

125

14
50 150

150

North-West Corner Method
• The number of occupied cells is 5 that is equal
to m + n – 1 cells; so solution is feasible.
• The cost associated with this solution is Rs.
7250

Least Cost Method
• Allocations are made on the basis of unit transport cost
• Allocate as many units as possible to the cell with least cost
• Select a cell with the next higher cost and allocate as many
units as possible and continue the process till all requirements
are met
• Number of occupied cells are 5 = m + n -1; hence the solution
is feasible.
• The cost associated with this solution is Rs. 5900

W1

F1

W2

22

150 200
14

50
16

F2

25
18

F3

125
14

175

Supply

150
18

100
8

Demand

W3

100
14
125

16
150

Vogel’s Approximation Method (VAM)
• This is the most preferred method as it usually results in Optimal or
near optimal solution.
• Calculate penalty
i.e. the difference between the least cost and next least cost of that
row/ column, for each row and column of T.T.
• Identify row or column with the largest penalty value;
and assign the possible qty. of product to that cell having the least
unit cost in that row or column.
• Adjust the supply and requirement values after the allocation is
made.
• Delete that row or column where the supply or requirement is zero
• Calculate the values of penalty to all rows and columns for the
reduced transportation problem and repeat the procedure till
entire requirements are met.

W1
F1

W2

22

150 200 ; 50
14

50

16
F2

25
18

F3

W3

100
8

Supply

Penalty
2 ;2 ;2

14

150 25

4 ;4 ;0

100 ;0

125
14

6

18

16

Demand

175 75

125 ;0

150 ; 0

Penalty

8 ;2 ;2

0 ;8

2 ;4 ;4

Vogel’s Approximation Method (VAM)
• Number of occupied cells are 5 = m + n -1; hence the solution
is feasible.
• The cost associated with this solution is Rs. 5900 Number of
occupied cells are 5 = m + n -1; hence the solution is feasible.
• The cost associated with this solution is Rs. 5900

Modified Distribution Method /
MODI Method/ U-V Method
• For allocated cells form equation
ui +vj = Cij, and solve for ui , vj
• With these values of ui , vj ,
find Δij = Cij - ui - vj for all unallocated
cells
• If all Δij are ≥ 0, then it is the optimum solution
• If any Δiiij ≤ 0, select most negative cell and form loop
• Starting point of the loop is positive and alternatively they are
assigned +ve and –ve signs
• Examine the quantities allocated at negative places; select
minimum and add it to positive places and subtract from
negative places
• Form new table and check again for Optimality

Example on moving towards
Optimization

Variations in Transportation Problem
• Unbalanced supply and demand – Add dummy with
zero transportation cost
• Degeneracy – Allocate small quantity (€) to
unoccupied cell which has lowest transportation cost
• Alternate Optimal solution – It exists if the Net Cost
Change for an Unoccupied cell is zero
• Prohibited Transport Route – Assign very large cost
to that route
• For Maximization Transport problem, reverse the
process

FACILITY LAYOUT
• Physical disposition of the facilities of a plant.
• Involves planning & arrangement of manufacturing
machinery, equipment & services for first time &
improvement thereafter.
• Aim is to
allow quick flow of men & material with minimum
cost & least handling process from the stage of
material receipt to shipment of finished goods.
• No set patterns; Requires Expertise

FACILITY LAYOUT
• Revisions are required when changes occur in
•
Product Design
•
Production Method
•
Plant size
• Layout decisions have long term effect

OBJECTIVES of FACILITY LAYOUT
•
•
•
•
•
•
•
•
•

To provide smooth flow of work & material
Providing sufficient production capacity
reducing material handling cost
Reducing accidents & hazards
Reducing congestion & utilizing the space
efficiently and effectively
Efficient utilization of labour
Easy supervision
Easy maintenance & high machine utilization
Improving productivity

CRITERIA FOR GOOD LAYOUT
•
•
•
•
•
•
•
•
•

•

Maximum Flexibility
Max. Co-ordination in different Dept.
Max. visibility
Max. accessibility
Minimum distances / movements
Min. handling
Min. discomfort
Inherent safety
Efficient process flow / Unidirectional flow – no
crossing
Identification – Provide a space for each worker; it
raises morale

PROCESS LAYOUT (Work-centers)
• Also known as Functional layout or Job-shop layout
•
Grouping of similar equipment in one area
•
Use general purpose machines
•
Workers must be highly skilled
•
Require intensive job instructions
•
• Advantages – Greater flexibility
Better & more efficient supervision thr’specialization
Break-down can be handled easily
Better utilization is possible
• Disadvantages – More production time
More floor space is required
Accumulation of work at different process centres

DEVELOPING PROCESS LAYOUT
•
•

•

Graphic & Schematic analysis using templates
Computer Models – CRAFT (Computerised Relative
Allocation of Facilities Technique) is a program
available
Works on criteria similar to Load – distance
Model.
Initial layout is fed with cost of transporting
loads and the loads moved.
Load – distance Model – Used to minimize the
material flow

PRODUCT LAYOUT (Assembly Line)
• Also known as Flow shop / Straight Line Layout
•
Arrangement of machines according to
progressive steps.
•
Preferred in the plant manufacturing standard
products
• Advantages – Material handling cost is reduced
considerably
Less floor space required
Better production control
• Disadvantages – Expansion of production line is
difficult
Break-down of equipment may disrupt entire
line

DEVELOPING PRODUCT LAYOUT
• This is partly established when Product design
is made and the different steps to make it are
determined.
• Line balancing is used to group tasks to be
performed at each work-station
• Line balancing ensures that each work-station
gets equal amount of time approximately

Assembly Line Balancing
• Assembly Line Balancing problem is one of assigning all
tasks to a series of workstations so that workstation is
engaged for maximum amount of time out of Required
Workstation Cycle Time (T)
• Steps in Balancing assembly Line
– Draw Precedence Diagram
– Determine Required Workstation Cycle Time ( C)
C = Production time per day/ Reqd. output per day
– Determine theoretical minimum number of workstations (N)
required to satisfy WCT
N = Sum of Task Time (T) / Cycle Time (C)
– Assign task that has max following tasks to first workstation
untill the sum of the task times is equal to WCT or no other
tasks are feasible because of time or sequence restrictions
– Repeat till all tasks are completed
– Efficiency = Sum of task times / WCT * No. of Work stations

Grouping Technology Layout
• These help in simplifying machine
changeovers.
• Developing A Cellular Manufacturing Layout
– Parts with common sequence are grouped
– Dominant flow pattern is identified as a basis for
location
– Machines are physically grouped into cells

OTHER LAYOUTS
• FIXED POSITION LAYOUT (Project Layout)

– Movement of machines & men to product which is
stationery
– Less investment in Layout
– Avoids transporting bulky material

• HYBRID LAYOUT – Combination
• JAPANESE APPROACH

– Because of space constraint, layouts are COMPACT
– Designed for flexibility and adaptability to different
product models

• SERVICE FACILITY LAYOUT

– Include features for customer contact & conveniences
– Layout in Banks is built totally around
customer
receiving service
– Layout in Hospital is more of process
oriented
than customer

Retail Service Layout
• Objective may be to maximize net profit per sq.
ft. of floor space
• Aim is to maximize product exposure to
customers
• Some rules for this layout
– Locate high-draw items around the periphery of the
store
– Use prominent locations for high margin items
– Remove cross-over aisles
– Distribute “Power items” to both sides of aisles
– Also consider ambient conditions

Office Layout
• Basic design of the entire office and
workspace
• Should include everything that is required in
the particular office for people to work
smoothly and efficiently
• Relationship diagrams are considered for
placing different departments adjacent to
each other

Measuring Flow - Qualitatively
• Can be measured by using Closeness relationship
values
• Value
Closeness
A
Absolutely necessary
E
Especially important
I
Important
O
ordinary closeness okay
U
Unimportant
X
Undesirable
• It is reasonable to expect
– 5% of the pair-wise combinations to have A activity

Department /
Person

Closeness
Relationship
Value

Reason
in code

Relationship Chart

Graph based Method
Relationship Chart

Relationship Diagram
0

1

1

9

2

9
12

3
4

12

8

2

20
2

10

13
0

0

13

8

7
5

10

7
3

2
20

4

5
0

Graph based Method
Step 2

Step 3

3

4

2

Tot
al

1

8

10

12

13

3

4

1

9

8

10

27

5

7

0

9

16

13

18

2

2

12

25

5

0

2

3

2

4

20

1

2
Faces

Total

1-2-3

7

1-2-4

9

1-3-4

2

2-3-4

9

2

5

1
3

1
3

5

4

4

Waiting Line Management
<<<<<<<<<<<<<<<<<<<<<<<<

Waiting Line Models
• Capacity decisions in Service system are often
made on the basis of impact on customer
• In service system, waiting time is important
operational measure
• Waiting line models analyze impact of
alternative capacity choices on operational
measures

Queuing Models
• Can be applied to operational situations when there is
imperfect matching between customers and service facilities
• Imperfect matching occurs because of inability to predict
accurately arrival and service times of customers.
• Queuing Models are used to determine the level of service
(either service rate or the number of service facilities) that
balances the two conflicting costs
– Cost of offering the service
– Cost incurred due to delay in offering service
• The optimum service level is the one which minimizes sum of
these two costs

Total Cost

Cost
Cost of
Customer
Waiting

Cost of
Service
Capacity

Service
Capacity

Elements of Queuing Models
• Customer – entities that arrive and require some
service
• Server – entities that provide the service required by
the customer
• Queue discipline – refers to the behavior of the
customer in the waiting line and the design of waiting
line
• Service Discipline – refers to the manner in which
customers are served

Waiting Line Models
• Structure of Queuing System
– Calling Population – It places demand and uses
capacity deployed
– Arrival Parameters – The rate at which customers
arrive and the pattern of the same
– Queue Parameters – Indicate how waiting jobs are
handled and how arriving customer behaves
– System Structure – Refers to manner in which
resources are organized in operating system

Structure of Queuing System
•Service Parameter – determines how resources are
likely to be consumed i.e. it specifies service time
•Performance Metrics
Average no. of customers in the system = Ls
Average no. of customers in the waiting line = Lq
Average time a customer spends in the system = Ws
Average time a customer spends in waiting line = Wq
Generalized relationship known as Little’s formula
λ = Arrival rate
&
µ = Service rate

Ws

Ls

Wq

Lq

Ls

Lq

Infinite
Calling population
Finite
Rate

Markovian, Gen dist, Deterministic

Arrival parameters
Pattern
Queue Parameters

System Structure &
parameters

Single, Bulk, Spl Group
FCFS, LCFS, Random, Balk, Renege, Jog

Servers
Stages
Routing
Capacity

Single, Multiple
Single, Multiple
single, Serial,Network
Finite, Infinite

Service Parameters

Markovian, Gen dist, Deterministic

Performance
Metrics

Queue Length, Waiting Time, Utilization,
Cost Based

Basic Elements of Waiting Line Models

QUEUING MODELS
• To study varieties of Queuing problems following classification
scheme is adapted
•
(x / y / z) : (u / v / w)
where
•
x = Arrival (or inter-arrival) distribution
•
y = The departure (service time) distribution
•
z = Number of parallel service channels
•
u = The service discipline
•
v = Maximum number of customers allowed in the
system
•
w = The size of population

Codes used for Symbols
• M = Exponential inter-arrival or service time distribution (equivalent to
Poisson arrival or departure distribution)
• GI = General independent distribution of arrival
• G = General distribution of departure
• D = Deterministic inter-arrival or service time
• Symbol z, v and w are replaced by appropriate numerical designations
• Symbol u is replaced by codes like
•
FCFS = First come, first served
•
LCFS = Last come, first served
•
SIRO = Service in random order
•
SPT = Shortest processing time
•
GD = General service discipline
• Superscript is attached to the first symbol if bulk arrival exists and to the
second symbol if bulk service is used

Notations in Queuing System
n = Number of customers in the system
Pn = Probability of ‘n’ customers in the system
= Average (expected) customer arrival rate
= Average (expected) service rate

Average service completion time
= Traffic intensity
Average inter - arrival time
c = Number of service channels
N = maximum number of customers allowed in the system
L = average number of customers in the system
Lq = average number of customers in the queue
Lb = average length of non-empty queue
W = average waiting time in the system
Wq = average waiting time in the queue
Pw = Probability that an arriving customer has to wait

Operating Characteristics
Relationship among Performance measures
1.

N

L

&

nPn
n 0

N

Lq

( n c )Pn
n s

ˆ

2.

L

Lq

3.

W

Wq

4.

Average no. of customers served per busy period

1

Lb
5.

U = Server Utilisation = (L – Lq) / c

6.

W = L / ˆ and Wq = Lq / ˆ

Model I – {(M/M/1):(FCFS/Infinity)}
Single server, exponential service – unlimited queue

P
0

1

1
n

P
n

1

Pw = Prob. of arriving cust. has to wait = 1 - P0 =
2

Ls
Wq

Lq

;
Lq
(

Ws

)
k

P( n

k)

(

)

Ls
k

; P( n

1

k)

Expected length of non-empty queue
= Lb

1

Example on Model I
Customers arrive at one window drive-in bank according to Poisson
distribution with mean 10 per hour. Service time per customer is
exponentially distributed with mean 5 minutes. The space in
front of the window including that for the serviced car can
accommodate a maximum of 3 cars. Others can wait outside this
space.
i) What is the probability that an arriving customer can drive
directly to the space in front of the window?
ii) What is the probability that an arriving customer will have to
wait outside the indicated space?
iii) How long is an arriving customer expected to wait before
starting service?

Strategic Capacity Management
???????????????????????????

Capacity
• What is Capacity
– Capacity denotes maximum amount of output of
products or services one can achieve

• Capacity can be expressed in terms of hours
available of a resource or output in some units
of measure
• Capacity has significant impact on cost of
operations

Measures
• Measures of Capacity
– Low volume – high variety firms generally indicate
capacity by quantum of input that it can process in
unit time
– High volume – low variety use output as measure
of capacity
• Capacity Utilization is one of the important
parameter in determining capacity required
• Capacity Utilization
= Capacity put to use /Total capacity available
• Rated capacity = Capacity X Utilization X Efficiency

CAPACITY PLANNING
•
•
•

•
•
•
•

100 % capacity utilization is not possible
Capacity requirement should not be under or over
estimated
Economies of Scale – As the size of operation increases, per
unit cost of operation decreases
– Because of decrease in the fixed cost per unit of output
& adoption of efficient processes and technologies
– But beyond a certain point this cost per unit starts
increasing because of increase in storage and
distribution cost and complexities of operations
Consider the concept of capacity focus
In response to changing market scenario capacity decision
should be addressed from time to time
Capacity can not be added in incremental terms at frequent
intervals
Firms undergo a cycle of over, appropriate and under
capacity

Factors Affecting Capacity Planning
•
•
•
•

Type of Product and Services that are offered
Process
Resource availability
External factors

Capacity Planning
• Capacity Planning is systematic approach to
– Identification & Evaluation of Long-term & Short-term
capacity Requirements
– Ascertain available capacity & additional capacity
requirement
– Identify Action to bridge gaps

– Evaluation of alternative methods for augmenting the
capacity
– Select the action plan

– Devising various methods to use existing capacity
effectively

Capacity Planning
• Capacity Planning should be focused on each
stage of production or Service Delivery System
• Time horizon
– Long term i.e. 2 – 5 years
– Medium term i.e. 1 year
– Short term i.e. 1 week – 3 months

Capacity Augmentation
• Adding additional resources may not be always attractive
• There can be alternatives to this
– Waste Elimination
– Multi-skilling of work-force
– Over time working
– Sub-contracting / Outsourcing
• Considerations are
– Lack of capacity
– Technological Intensity and criticality of item
– Cost of Manufacturing vs. Outsourcing

• Advantages are
– Flexibility in handling demand fluctuations
– Reduction in response time
– Reduction in risk in investment for new equipment

Service Capacity
• Services has typical characteristics
– Cannot be stored
– Must be located near customer
– Volatility of demand

• Capacity decisions in Service system are often made on the
basis of impact on customer
• In service system, waiting time is important operational
measure
• Waiting line models analyze impact of alternative capacity
choices on operational measures
• Enough capacity is required to be built for meeting
maximum demand
• Demand management principles can be utilized to utilize
capacity and regulate waiting time

Aggregate Sales & Operations
Planning
-------------------------------------

Aggregate Sales & Operations Planning

• Traditionally this is known as Aggregate Planning
• Aggregate plan links strategic goals and objectives with plan for
individual products, services and their various components
• Aggregate Sales & Operations Planning is a process to help
–
–
–
–
–

Give better customer service
Lower inventory
Shorter customer lead times
Stabilize production rates
Keep business in control

• Process is built on teamwork between sales, operation, finance and
product development
• Process is designed to help company get demand and supply in
balance
• The balance must occur at aggregate level and also at detailed
individual product level

AGGREGATE PLANNING
• Aggregate Planning reflects operational decisions to
ensure that resources required are available
• To satisfy demand, essential to have Resource
planning.
• Easy for Single product; but difficult for multiple
product company.
• For multiple products, take group of products.
• Decision can be taken on this basis.
• Measure output in common terms – AGGREGATE
OUTPUT
• Planning on this basis is AGGREGATE PLANNING

AGGREGATE PLANNING
• AGGREGATE PLANNING reflects decisions on
– Output rates
– Workforce Requirement
– Inventory levels

– Equipment allocation
– Backorders
– Sub-contracting / Outsourcing
– Overtime etc.
• Aggregate plans are disaggregated into smaller tasks to give master
schedule for individual products.
• Aggregate plan gives stages for future course of action

• MASTER PRODUCTION SCHEDULE (MPS) gives quantity to be
produced & time frame for deliveries.

AGGREGATE PLANNING PROCESS
• Objective is
To minimize production cost / Improve profit
Improve customer service
Minimize inventory investment
Utilization of resources
Make changes in Production Rates & Workforce
levels
• Concept of aggregation – Identify a measure of
output.

AGGREGATE PLANNING
• Aggregate Planning Goals –
# Specify required output
# Specify Inventory levels
# Utilize facility’s capacity in an efficient
way w.r.t. organization's strategy
# Should be in line with company’s
policy & objectives regarding its
employees.

Variables in Development of
Aggregate Planning
• Developed on considering the variables like
• Operations Current machine Capacities
Plan for future capacities
Workforce Capacity
Current staffing levels
• Materials Supplier capabilities
Storage capacity
Materials availability
• Engineering - New Products

VARIABLES
• Distribution & Marketing – Customer needs
Demand Forecast
Competition
• Accounting & finance – Cost data
Financial condition of a firm
• Human resources – Labour market condition
Training Capacity
• Use different combinations of variables
To satisfy demand efficiently & economically

Strategies for Managing Supply
• Chase Strategy – Capacity is adjusted to match
the demand as close as possible
• Level Strategy – Maintains constant capacity over
a period of time, irrespective of fluctuations in
demand
– This strategy is used when skill level, training required
and cost of hiring or terminating people is high

• Mixed Strategy – Trying to keep workforce
constant
– Adjustments by o/t, sub-contracting, inventory levels,
hiring or lay-offs

Pure Planning strategy
• Pure Planning strategy – When only one strategy is adapted,
then it is a pure strategy. Normally a combination is used.
• Different pure Strategies used
– Varying Workforce
• Disadvantages – Hiring & lay-off costs
Training Cost
Morale of workforce
Non-availability of skilled workforce
– Varying the utilization of workforce –
• Disadvantages Idleness or overtime
Inefficiency in employees
Loss of interest in employee
Prone to job related accidents
Morale down

Pure Planning strategy
•

•
•
•

Varying the size of Inventory –
Disadvantages - Increased inventory cost
Increased material handling cost
Additional storage space required
Risk of damage, loss, obsolescence
Back-orders
Sub-contracting
Adjusting Plant Capacity

Aggregate Planning Techniques
Graphical method –
–
–
–
–

Cum days on X-axis & cum. Output on Y-axis
Select planning Strategy & plot output for the period
Compare demand and output
Estimate the cost

• Optimal Models–
– Linear programming for minimizing the cost
– Useful when cost & variable relationship is linear

– Linear Decision Rules – Set of equations for
calculating optimal solution
• Overcomes limitations of L.P. by taking into account
non-linear cost relationship
• Drawback is that for any changes in equation, extensive
mathematical analysis is required
• Must be tailored to suit specific requirement

•

Heuristic Approach – based on historical data
– Management Co-efficient Model – uses
Regression Method; objective is to find
regression equation that fits best for past data &
then use that equation for future.
• Computer Search method – When large amount of
information on different variables is available,
Computer Programme Simulation of all conditions
to find best solution
• Computer Simulation in capacity Evaluation – Used
to evaluate performance of plans.

INVENTORY MANAGEMENT
.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,

Inventory
• What is Inventory?
• It is Stock of Goods, Commodities or other
Economic Resources held for future
production requirements.
• Two Categories Direct – Used directly in production
Indirect – Goods necessary for
production process

Types of Inventories
• Types of Inventories & Reasons for holding –
• Raw Materials – Delay in delivery, Qty. discount,
Reduction in freight charges because of large
shipments
• Semi-finished Goods – Flexibility in planning,
Unequal production rates of processing stations,
Reduction in handling & prod. Cost due to large
batch size.
• Finished Goods – To meet Customer demand in time,
Production in batches, High level of production to
take advantage of economies of scale, to show
product to customer.
• Replacement Parts & Consumables Inventory

Independent versus Dependent Demand
• Inventory items are divided into two types
– Independent Demand & Dependent Demand

• Independent Demand
– Not controlled directly by the company
– Generally includes finished products
– Demand is generally independent of company’s own production
plans

• Dependent Demand
– Usually generated by company’s own production plan
– It is related to the demand for another inventory item or
product
– Vertical dependency (Assymbly – Sub-assymbly – component
– Horizontal dependency (Attachments, manual with product)

• To manage dependent demand Materials Requirement
Planning is used

Inventory Management
• Inventory Management –
To minimize Inventory cost ,
without affecting Customer service.
• Objective is To Order

Right Quantity, at Right Time
Without affecting Production

• Purpose for Inventory
– Smooth Production
– Better services to the customers
– Protection against business uncertainties
– Take advantage of quantity discounts

Inventory Costs
•
•

Purchase Cost – Cost per unit of item
Carrying Cost (or Holding Cost) – Cost incurred due
to storing of inventories. Include
–
–
–
–
–
–
–

Opportunity cost of investment,
Cost of Storage (Rent, Electricity),
Staffing
Equipment & Maintenance
Insurance, Interest, Taxes, Security,
Loss due to Pilferage. Spoilage, Breakage, Obsolescence
Generally expressed as percentage of material cost(2025 %).

Inventory Costs
•

Ordering Cost
–
–
–

•

Incurred for process of purchasing i. e. preparing order,
communication, record-keeping & accounting, material
receiving
Incurred every time the order is placed
Fixed cost does not change even if order quantity is
changed.

Stock-out Cost – Include
–
–
–
–

Loss of Sale
Customer shift to competitor’s product
Additional cost associated with urgent purchase
Loss of Customer good-will

INVENTORY SYSTEMS
There are
• Single period Models (Perishable products) or
• Multiple period Models (for items required on
on-going basis)
• In multiple period models there are two
general type of systems
– Fixed Order Quantity (EOQ) Model or Q-System
– Fixed Time Period Model or P-System

Fixed Order Quantity System ( Q – system)
• Check stock level continuously
• Place new order, when level reaches certain
point (Reorder point)
• Order Quantity is constant
• Quantity of order is determined by demand &
cost consideration
• Objective is to determine order quqntity soas
to minimize total cost

Annual
Total Cost

Total Cost
Shortage
Cost

Carrying
Cost

Order
Quantity

Economic Order Quantity Model
• Order quantity is such that the Total cost ( Ordering cost +
carrying cost ) is minimized.
• Assumptions
– Price of item is independent of order quantity
– Cost of ordering is fixed & independent of qty.
– Carrying cost is proportional to inventory level
– Usage rate of product is constant
– Lead time is known & is fairly constant
– Reorder Point – assumes that inventory reaches zero at the
end of each reordering cycle
• Reorder Point = Demand X Lead Time
D X LT

Economic Order Quantity Model
• Optimal Order Quantity
– Shortages are not allowed i.e. no Shortage Cost
– So, total cost is having three components

•
•
•
•

Ordering cost
Holding Cost
Variable Cost
Ordering cost / unit time = C o x D / Q
D – Demand per unit time
Q – Order quantity
Holding Cost / unit time = C h x Q / 2
Total Cost - TC = C o x D / Q + C h x Q / 2 + C p x D
Total Cost is minimum when
Co x D/Q=Chx Q/2
EOQ =

2Co D
Ch

Examples
•

A company purchases 9000 parts of a machine
for its annual requirements, ordering one
month’s usage at a time. Each part costs Rs.
20. The ordering cost per order is Rs. 15 and
the carrying charges are 15% of the average
inventory per year. Suggest a more economical
purchase policy for the company

Fixed Order Period System ( P - System)
• Order period is fixed
• Order quantity varies according to inventory
level & future requirements
• No continuous check on Inventory is required
• But safety stocks are high
• Safety stock can be = z *S.D.
SL

Inventory Classifications
• ABC Classification System
– Principle of Selective Control
• Items with high Usage value are paid more attention.
• Usage value = Unit cost X Qty. consumed in a year
• ‘A’ - represents material of high usage value (60-70
%)
• ‘B’ - represents material of Moderate usage value
(10-30 %)
• ‘C’ - represents material of low usage value (5-15 %)
• ABC - ALWAYS BETTER CONTROL

Inventory Classifications
VED Classification – Based on importance
of a particular item in production process
• V – Vital
• E – Essential
• D – Desirable
• Item categorized as V, need maximum control and
investment
FSND Classification – Based on the turnover of the
goods
• F – Fast-moving
S – Slow-moving
• N – Non-moving
D - Dead

Other Inventory Systems
• Optional replenishment System
– Like P-system review is taken at regular interval
but order is placed only when stock reaches reorder level
– Order is placed for a quantity as calculated in Psystem

• Two Bin System
– Involves use of two containers for inventory
– When first bin is empty, it is time for re-order
– The second bin contains stock sufficient to satisfy
demand during lead time and safety stock

Materials Requirement Planning
MRP

Dependent Demand & MRP
• Dependent Demand – Demand for an Item that can be
linked to the demand for another item.
• To manage dependent demand Materials Requirement
Planning (MRP) is used
• MRP –
– combines Inventory Control with Production Planning
– finds Net requirement & Generates Schedules
through Computers
– Backward scheduling process considering
Date of Requirement of End Product
Lead Time for Components & inventories

MRP
• Dis-assembles End Products into Product Hierarchy i.e.
Sub-Assemblies
Components
Raw material
Std. Bought-out Parts
• Schedules the activities in Time Period of Planning
• Co-ordinates orders from Internal and External sources
• Aims at replenishing stock when required
• Examines production Schedule regularly to adjust material flow to reduce
Inventory
• Helps taking Capacity Planning Decisions
• Useful in
Complex products Involving many components and subassemblies
Products with shorter delivery schedule
Job shop, Assemble to order process
Also for continuous process to adjust production disruption

MRP
•

OBJECTIVES of MRP
Improved Customer Service
Reduced Investment in Inventory
Improved Operating efficiency
Faster Response to market change

•

COMPONENTS of MRP
Input

Processing

&

Output

•

To process it requires
Order position
Demand forecast
Capacity Information
Stock position of Dependent demand items (W.I.P. & R.M.)
Expected receipts & consumptions of items
Design changes expected

•

This information is converted into a form acceptable to MRP system

MRP - INPUT
•
•
•
•

Master production Schedule (MPS)
Bill of material (BOM)
Inventory Record file
MPS – MRP system assumes that Production
Capacity is sufficient for production as per
MPS
• From MPS, Replenishment plan is generated
for items used
• Time horizon is divided into time Bucket like
Days, Weeks

MRP - INPUT
• BOM – also known as Product Structure file
Shows production Phase Levels
Lists all the sub-assy. & components which
make end product
• Inventory Record file –
Complete Record of each material held like
Opening stock
Expected Receipts & consumption
Lead time for the item
Rate of purchase
Supplier’s information

INFORMATION PROCESSING –

• Develops Production & Purchase Schedules
• Explosion – End product is dis-assembled into
components
• Generates the Sequence followed to produce the
End Product
• Netting –Development of Material requirement Plan
for each item in BOM, for each time
Bucket
• Offsetting – Planned Order release
• Consolidation – of Material Requirement in
Master Material Requirement Plan

OUTPUT
• Reports -

Planning Information
Schedules
Customised Reports
• Primary Reports – Main Reports like
Orders
Changes in due date
Cancellation
• Used in Inventory & Production Control
• Secondary Report – To assess the Performance like
Planning Report
Performance Report
Exception Report

MRP System
• Advantages of MRP System –
Reduction in per unit cost of production
Low Inventory levels
Better market response
Better Customer service
Optimised production scheduling
Improved Capacity allocation & Planning

MRP System
• Disadvantages –
High Cost
Technical Complexities
Longer implementation time
Large amount of Inputs are required
Assumed data may be misleading
• Problems in Implementation –
Inadequate Employee Training & involvement
Use of inaccurate & obsolete data
Inappropriate product environment

MANUFACTURING RESOURCE PLANNIG
(MRP II )
• Integrating other functional areas like
engineering, production, Finance, marketing,
Purchasing with MRP is Manufacturing
Resource planning (MRP II)

MASTER PRODUCTION SCHEDULE(MPS)
• Gives details of Type and Quantity of each
product to be produced.
• Detail plan includes scheduling of different
stages in production &
• Reflects most economic use of labor &
equipment capacities.

Functions of MPS
• Translates aggregate plan to
Break-up of total production into Groups of product
or lots
• Gives specific number of individual products to be
produced with workstations and time-frame.
• Evaluate alternative schedule
• Identify material requirement
• Generate Capacity Requirement
• Effectively utilize capacity – assign load for labor &
equipment

MASTER PRODUCTION SCHEDULING
•
•
•

Planning of activities to achieve production objectives.
MRP & CRP are part of this activity.
Steps in scheduling –
Determine the Gross Requirement of materials
Obtain Net Requirement considering inventories
Correction in MPS if required
Convert Net Requirement into Planned Release Orders
Developing Load – Report containing information on
amount of work assigned to individual worker, m/c &
work-stations
If mismatch between available & required capacity,
modify MPS or add capacity.

•
•
•
•
•
•

MPS
MPS is generally based on Demand forecast.
Demand forecast is not always accurate.
Actual demand is not equal to schedule
Schedule is not equal to Actual Output
So, MPS needs modifications.
These are done by –
Modifying the size or composition of product
Allow changes in inventory level
Divert resources at the cost of some other
function
Sub-contract the requirements
Alter the price to influence the demand level

MASTER SCHEDULE FORMATION
•
•
•
•

Made from aggregate Plan.
Influenced by Market Environment & Resource availability.
Main inputs which influence MPS are forecast & orders.
For Make-to-stock items
Input is Demand forecast
Inventories are replenished at plant or distributor.
Finished goods inventories are maintained constantly.
• For Make-to-Order items
Detail scheduling is essential
No finished goods inventory.
Production begins after order is received

What is SCM
•
•

•

•
•

Supply Chain covers various stages in provision of product to customers
SCM is involved with integration of three flows between different stages
– Flow of information
– Flow of product / material
– Flow of Funds
A typical Supply Chain may involve variety of stages like
– Customers
– Retailers
– Wholesalers/Distributors
– Manufacturers
– Component/Raw material suppliers
Supply Chain Management is integration of activities at these stages for
competitive advantage of the organization
Supply Chain management should be EFFICIENT & RESPONSIVE.

Key Drivers of SCM
•

Inventory – R.M., WIP. & F.G.
– Required because of mismatch between Demand & supply
Lead Time & to increase Responsiveness
– Objective of SCM is to reduce Inventory cost without compromising
on the Responsiveness
• Transportation – Decision on
– Mode, Route & Network
– Whether company should own Transport
– There is always trade-off between Efficiency & Responsiveness
• Facilities – Locations where
– R. M. & F.G. are stored
– WIP is assembled
– Finished Goods are distributed
– Facility’s location & capacity has effect on SCM
4. Information – SC is made up of various entities;
Proper co-ordination of them is key to efficiency.
Flow of Information improves the co-ordination

Supply Chain Strategy
• Supply Chain strategy should support Business
strategy
• Look at your
– Core competencies
– Focus
– Means of differentiation

• Assess the extended supply chain

•
•
•
•
•
•

Performance Measures for
Overall Supply Chain
Delivery Performance - % orders delivered as per
schedule
Fill rate by line item – Customer would prefer to get
all the items they order at the time they ordered
them
Order fulfillment lead time
Perfect order fulfillment
Supply Chain Response time – This measures how
long it will take for the effect to be felt in the
supply chain given a change
Upside production flexibility – Assesses response
time required by the manufacturing facility to meet
increase in demand

Performance Measures for
Overall Supply Chain

• Supply Chain Management cost
• Warranty Cost as % of revenue – Affects in two ways:
one is warranty cost and other is loss of goodwill or
even customer
• Value added per employee
• Inventory days of supply – It quantifies how long
enterprise can continue to run if all sources of supply
are cut off.
• Cash-to-cash cycle Time
• Asset Turns – How many times the same asset can be
used to generate revenue and profit (Inventory
turnover ratio)

.

• Push strategy pushes a product through the trade
channel
– Creates inventory of F.G.

• Pull Strategy – Customer initiates demand
– Focus is required for reduction in WIP
– Inventory of common raw material required. can be
increased to reduce lead time

• Push/Pull strategy –
• Bullwhip Effect distorts demand information within the
supply chain
– when complete information is not shared between stages
due to conflicting objectives, the information gets
distorted as it moves within the supply chain and it creates
bullwhip effect
– Results in loss of SC co-ordination, trust in the members
– Also results in damage to performance metrics

Outsourcing

• Outsourcing refers to the process of contracting to the
third party
• Considerations are
– Lack of capacity
– Technological Intensity and criticality of item
– Cost of Manufacturing vs. Outsourcing

• Advantages are
– Flexibility in handling demand fluctuations
– Reduction in response time
– Reduction in risk in investment for new equipment

• Disadvantage
– Product differentiation may be lost
– If it is because of cost consideration, efficient competitor
may overtake you

Global Sourcing
• Aims to exploit global efficiencies in the delivery of product
or services
• These efficiencies include low cost of labour/ raw material
and other economic factors
• Advantages
–
–
–
–

Learning how to do business in new potential market
Tapping into skills or resources so far unavailable
Developing alternate sources
Increasing total capacity

• Disadvantages
–
–
–
–
–

Hidden costs associated with different culture, time zone
Exposure to financial and political risks
Increased risk of loss of intellectual property
Increased monitoring cost, lead time
Difficulties in monitoring quality

Mass Customization
• Aim is increase in variety and customization of product
or service without corresponding increase in cost
• It is mass production of individually customized goods
or services
• Four types of Mass Customization
– Collaborative Customization – On getting information from
customer, make a product that suits the specific customer
– Adaptive Customization – Firm produces standard product
but product is customizable in the hands of the end user
– Transparent customization – provide customized product
without telling customer about it
– Cosmetic Customization – produce standardized product
but market it to different customers in a unique ways

Total Quality Management
!!!!!!!!!!!!!!!

CONCEPT OF TQM

• W.E. Deming – Father of TQM
• It is a Philosophy for improvement through
Involvement of everyone
• Earlier, quality was referred only to Product and
Production; now it is referred to entire Organization
• TQM refers to meeting the customers Requirement
consistently by continuous improvement in the
quality of Work
• TQM is a process approach
• Process approach is also used in ISO 9000

Objectives and essentials of TQM
• Meeting Customers Requirement Consistently
• Continuous Improvement to meet ever-changing Requirements
– It may be better quality
– different size
– Price reduction
– Comparison with Competitors Product
– Advancement in Technology
• Involvement of all Employees
– It should be a concern of all Managers & Workers
– Improvement in Quality of work of employees through Training
& Development
– Employees should be conscious about need for Improvement.
• A positive attitude towards Customer and Constant enhancement
of Quality must be the attitude of all Employees.
• In TQM each dept. treats other dept. as their customer

What is Quality?
• Quality means ability of the Product to meet stated or implied
needs.
– Quality of Design
– Quality of Conformance
– Quality of Performance
• Availability
• Reliability
• Maintainability
• Quality was viewed as defensive function.
• Quality control was used to reduce number of customer
complaints.
• It was concerned with inspection after the defect is produced.

Quality Functions

• Eight different Quality Function
– Performance
– Features
– Reliability
– Conformance
– Durability
– Serviceability
– Aesthetics
– Safety
– User-friendliness
– Customizability
– Environmental friendliness
– Perceived quality
• Role of Inspection in Quality Control

Cost of Quality Assurance
•

•

Cost of Inspection includes
Man power cost
Equipment cost
Material cost
Training cost
Sample cost
Cost of quality or undetected faults includes
Customer complaints
Loss of goodwill
Product replacement & recall
Returned products
Liability suits

Cost of Quality

• Cost of quality or undetected faults categorized into
– Cost of Prevention –which includes
• Investment in machinery, technology
• training to reduce number of defect
• Cost of quality programs, data collection and analysis
• This brings high returns
– Cost of detection/appraisal
• associated with quality evaluation
– Cost of failure
• Internal failure cost – include
Scrap, repair, retesting, downtime
• External failure cost – include
Cost of returned material, warranty charges, legal suits,
loss of customer goodwill

Six Sigma
• Six Sigma is a technique to manage process variation that
causes defect
• It aims to achieve world-class performance, reliability
and value for customers
• Traditionally Quality programmes focus on detecting and
correcting defects whereas Six sigma focus on variations
in process which lead to defect creation
• The performance of a process is measured in terms of
Defects Per Million Opportunities (DPMO)
• In Six Sigma , on a long term basis, no more than 3.4
DPMO are permitted
• Successful implementation of six sigma is based on sound
personnel practices as well as technical methodologies
• To convey the need to vigorously attack the problems, professionals
are given martial arts titles

Six Sigma Methodology
• DMAIC and DMADV are the methodologies to
implement six sigma
• DMAIC
DMADV
–
–
–
–
–

D – Define
M – Measure
A – Analyze
I – Improve
C- Control

D - Define
M – Measure
A - Analyse
D - Design
V – Veify

• DMADV methodology is used when

– Product or process is not in existence
– Existing product or process does not meet the
customer specification or Six Sigma level

Shingo System

• Two aspects of Shingo System

– Hoe to obtaindrastic cuts in equipment set-up
time by Single Minute Exchange of Die (SMED)
– Use of source inspection or Poka-Yokesystem to
achieve zero defect

• According to Shingo SQC does not prevent
defects, it is inadequate to improve quality
• Shingo’s approach
– Defects occur because people make error
– Defects can be prevented if feedback leading to
corrective action takes place immediately after
error is made

Shingo System
• Such feedback requires 100 % inspection
• Inspection can be
– Successive checks – Performed by next person in
the process
– Self-check – Done by individual worker
– Source Inspection – Done by individual worker; in
this case worker checks for error that causes
defect

• All these inspection depend on fail-safe
procedure

Fail-safe
• Fail-safe are the methods to prevent human
errors from becoming defects in the end product
• Concepts are particularly appropriate when full
scale automation is too costly or it is otherwise
impractical
• Fail-safe does not require that a specific value be
put on process parameters
• It requires only ability to discriminategood from
bad
• Poka-Yoke is automatic device or method used in
fail-safing

ISO 9000
• ISO 9000
– It is a series of standards agreed by International
Organization for Standards
– Adapted by more than 100 countries in 1987
– It says “Document what you do & then do as you
documented”.
– Relates Quality Management System
– Provides standardized requirement for Quality
Management System

ISO 14000
• ISO 14000
– It is Environmental Management Standard
– This is significant international initiative for
Sustainable Development
– Objective is to promote most effective and
efficient Environmental Management System

• ISO 19011
– It isaudit standard applies when auditing for both
ISO 9000 & ISO 14000 compliance at once

Kaizen
(Continuous Improvement)
• No process can ever be declared as perfect and
so there is always a scope for improvement
• Kaizen is about continually aiming for small
improvement across the whole company
• Kaizen is based on principles that
– Process creates result – Without improving the
process, results do not improve
• Look for improvement in five inputs to the process –
persons, machines, methods, materials and environment

– Total systems are more important than each of the
parts
– Be non-blaming and non-judgemental – find what is
wrong and not who is wrong

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