DIRECTORATE OF DISTANCE EDUCATION

M.B.A
MASTER OF BUSINESS
ADMINISTRATION

MBAD 2115
MBAD 1915
OPERATIONS MANAGEMENT
First Semester
Semester – I

SRM INSTITUTE OF SCIENCE AND TECHNOLOGY,

DIRECTORATE OF DISTANCE EDUCATION
Potheri, Chengalpattu District 603203,
Tamil Nadu,INDIA
Phone: 044 – 27417040 / 41
Website: www.srmist.edu.in / Email:[email protected]
 EXPERT COMMITTEE

S.N NAME DESIGNATION ORGANISATION

o.
1 Dr.R.Rajagopal Director DDE - SRMIST
2 Dr.V.M.Ponniah Dean - Management FOM - SRMIST
FOM – SRMIST, KTR
3 Dr.G.Venugopalan Academic Coordinator
FOM – SRMIST, KTR
4 Dr.T.Ramachandran Head of II year MBA
FOM – SRMIST, KTR
5 Dr.V,M.Shenbagaraman Head of I year MBA

Course Writer(s) Dr.K.Sankaramoorthy, Dr.G.Venugopalan

Information contained in this book has been obtained by its Author(s) from sources believed to be
reliable and are correct to the best of their knowledge. However Publishers and the Author(s) shall in
no event be liable for any errors, omissions or damages arising out of this information and specifically
disclaim any implied warranties or merchantability or fitness for any particular.

DIRECTORATE OF DISTANCE EDUCATION

SRM Institute of Science and Technology,
Potheri, Chengalpattu District 603203, Tamil Nadu, INDIA
Phone: 044 – 27417040 / 41
Website: www.srmist.edu.in / Email:[email protected]
 CONTENTS
MODULE I
1.0 Introduction
1.1 Production System in Production and Operation Management
1.2 Classification of production system
1.3 Operations as a source of competitive advantage
1.4 Supply chain trends in modern business environment-giving
Competitive edge to firms
1.5 Production possibility tradeoffs and combination
1.6 Difference between manufacturing and service operations
1.7 Operations – a systems perspective
1.8 Make or buy decision
MODULE II
2.0 Introduction
2.1 Process flow chart and process mapping
2.1.1. Process flowchart symbols
2.1.2 Uses of process flowcharts
2.2 Performance measurement
2.3 Types of performance measures
2.4 Designing the performance measurement system
2.5 Types of processes
2.6 Product matrix and process selection
2.7 Process choices
2.7.1 Product-process matrix
2.8 Factors Affecting Plant Location
2.9 Plant Layout
2.10 Check your Answers
MODULE III
3.0 Introduction
3.1 Usefulness of Demand Forecasting
3.1.1 The Scope of Demand Forecasting
3.1.2 Types of Forecasting
3.2 A B C Analysis
3.3 Selective Inventory Control Techniques
3.4 Types of Inventories
MODULE IV
4.0 Introduction

4.1 Need for supply chain

4.2 Components of supply chain Management

4.3 Measures of supply chain performance

4.4 Inventory levels

4.5 Aggregate production planning

4.6 Difference between MRP I and MRP II

MODULE V

5.0 Introduction
5.1 Phases of Project Management
5.1.1 Phase 1: Project Initiation
5.1.2 Phase 2: Project Planning
5.1.3 Phase 3: Project Execution
5.1.4 Phase 4: Project Performance/Monitoring
5.1.5 Phase 5: Project Closure
5.2 Quality Management
5.3 Control Chart
5.3.1 X-bar and R charts
5.3.2 P Control Charts
5.3.3 Control Charts C
5.4 Sustainable operations Management
5.5 Remanufacturing
5.6 Control chart Problems
 NOTES

MBAD 1915 OPERATIONS MANAGEMENT

STRUCTURE

1.0 Introduction
1.1 Production System in Production and Operation Management
1.2 Classification of production system
1.3 Operations as a source of competitive advantage
1.4 Supply chain trends in modern business environment-giving
Competitive edge to firms
1.5 Production possibility tradeoffs and combination
1.6 Difference between manufacturing and service operations
1.7 Operations – a systems perspective
1.8 Make or buy decision

1.0 INTRODUCTION

Operations management is an area of business concerned with the

production of goods and services, and involves the responsibility of ensuring
that business operations are efficient in terms of using as little resource as
needed, and effective in terms of meeting customer requirements. It is
concerned with managing the process that converts inputs (in the forms of
materials, labour and energy) into outputs (in the form of goods and
services).

Operations traditionally refers to the production of goods and services

separately, although the distinction between these two main types of
operations is increasingly difficult to make as manufacturers tend to merge
product and service offerings. More generally, operations management aims
to increase the content of value-added activities in any given process.
Fundamentally, these value-adding creative activities should be aligned with
market opportunity for optimal enterprise performance.

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DEFINITION OF OPERATION MANAGEMENT

According to S.Buffa ‘production or operation management

deals with decision making related to production process so that the
resulting goods and services are produced according to specifications
,in the amount and by the schedule demanded and at a minimum cost’.

The Association of Operation Management defines operation

management as ‘the field of study that focuses on the effective
planning ,scheduling, use and control of manufacturing or service
organisations through the study of concepts from design engineering,
industrial engineering, MIS, quality management, production
management, industrial management and other functions as they affect
the organisation’.

Operation management is the business function that manages

that part of a business that transforms raw materials and human inputs
in to goods and services of higher value. Operation management is a
business activity that deals with the production of goods and services.

The term operation includes management of materials,

machines, and inventory control and storage functions. Operations
management includes a set of activities performed to manage the
available resources in an efficient manner in order to convert inputs in
to desired outputs.

The value addition to an input can be done in the following ways. They
are mentioned below:

1. Alteration It refers to the transformation of the state of input. This

transformation can be a physical change in the input to produce goods.

2. Transportation It refers to physical movement of goods from one

location to another.
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3. Storage It refers to preserving goods in a protected environment.
NOTES

4. Inspection It refers to the verification of and confirmation towards

the requirements of an entity.

All the above activities in one way or another are making a

product more useful. The operations managers have the prime
responsibility for processing inputs into outputs. They must bring
together the materials, capacity and knowledge available for the
purpose achieving its production objectives. The definition of the
operations Management contains the concepts such as Resources,
Systems, transformation and Value addition Activities etc

Resources

Resources are in the forms of the human, material and capital inputs.
Human resources are the key resources of an organisation. By using
the intellectual capabilities of people, managers can multiply the value
of their employees. Material resources are the physical inputs, which
are needed for production.

Systems

Systems are the arrangement of components designed to achieve

objectives. The business systems are subsystem of large social systems.
Business system contains subsystem such as personnel, engineering,
finance and operations. The ability of any system to achieve its
objective depends on its design and control mechanism. System design
is a predetermined arrangement of components. It establishes the
relationships between inputs, transformation activities and outputs in
order to achieve the system objectives. System control consists of all
actions necessary to ensure that activities conform to pre- conceived
plans.

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Productivity

The objective of combining resources is to transform the inputs into

goods and services having a higher value than the original inputs. The
effectiveness of the production factors in the transformation process is
known as productivity.

SCOPE OF OPERATIONS MANAGEMENT

Operations Management is concerned with the conversion of

inputs into outputs using physical resources so as to provide the
desired utilities to the customers. It involves a number of well planned
activities. Following are the activities that come under Production and
Operations Management functions:

1. Location of facilities.

2. Plant layouts and Material Handling.

3. Product Design.

4. Process Design.

5. Production and Planning Control.

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6. Quality Control.
NOTES
7. Materials Management.

8. Maintenance Management

1.1 PRODUCTION SYSTEM IN PRODUCTION AND

OPERATION MANAGEMENT

The production system of an organization is that part, which produces

products of an organization. It is that activity whereby resources, flowing
within a defined system, are combined and transformed in a controlled
manner to add value in accordance with the policies communicated by
management. A simplified production system is shown above. The
production system has the following characteristics:

¾ Production is an organized activity, so every production system has

an objective.

¾ The system transforms the various inputs to useful outputs.

¾ It does not operate in isolation from the other organization system.

¾ There exists a feedback about the activities, which is essential to

control and improve system performance.

__________________________________________________________________

1.2 CLASSIFICATION OF PRODUCTION SYSTEM

Production systems can be classified as Job Shop, Batch, Mass and

Continuous Production systems.

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JOB SHOP PRODUCTION
Job shop production are characterized by manufacturing of one or
few quantity of products designed and produced as per the specification of
customers within prefixed time and cost. The distinguishing feature of this is
low volume and high variety of products.

A job shop comprises of general purpose machines arranged into different

departments. Each job demands unique technological requirements, demands
processing on machines in a certain sequence.

Characteristics
The Job-shop production system is followed when there is:

¾ High variety of products and low volume.

¾ Use of general purpose machines and facilities.

¾ Highly skilled operators who can take up each job as a challenge

because of uniqueness.

¾ Large inventory of materials, tools, parts.

¾ Detailed planning is essential for sequencing the requirements of each

product, capacities for each work centre and order priorities.

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 ¾ Advantages
NOTES
Following are the advantages of job shop production:

¾ Because of general purpose machines and facilities variety of products

can be produced.

¾ Operators will become more skilled and competent, as each job gives
them learning opportunities.

¾ Full potential of operators can be utilized.

¾ Opportunity exists for creative methods and innovative ideas.

¾ Limitations
Following are the limitations of job shop production:

¾ Higher cost due to frequent set up changes.

¾ Higher level of inventory at all levels and hence higher inventory cost.

¾ Production planning is complicated.

¾ Larger space requirements.

BATCH PRODUCTION
Batch production is defined by American Production and Inventory
Control Society (APICS) “as a form of manufacturing in which the job passes
through the functional departments in lots or batches and each lot may have
a different routing.”It is characterized by the manufacture of limited number
of products produced at regular intervals and stocked awaiting sales.

¾ Characteristics
Batch production system is used under the following circumstances:

¾ When there is shorter production runs.

¾ When plant and machinery are flexible.

¾ When plant and machinery set up is used for the production of item in
a batch and change of set up is required for processing the next batch.

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 ¾ When manufacturing lead time and cost are lower as compared to job
order production.

¾ Advantages
Following are the advantages of batch production:

¾ Better utilization of plant and machinery.

¾ Promotes functional specialization.

¾ Cost per unit is lower as compared to job order production.

¾ Lower investment in plant and machinery.

¾ Flexibility to accommodate and process number of products.

¾ Job satisfaction exists for operators.

Limitations
Following are the limitations of batch production:

¾ Material handling is complex because of irregular and longer flows.

¾ Production planning and control is complex.

¾ Work in process inventory is higher compared to continuous

production.

¾ Higher set up costs due to frequent changes in set up.

MASS PRODUCTION
Manufacture of discrete parts or assemblies using a continuous
process are called mass production. This production system is justified by
very large volume of production. The machines are arranged in a line or
product layout. Product and process standardization exists and all outputs
follow the same path.

¾ Characteristics
Mass production is used under the following circumstances:

¾ Standardization of product and process sequence.

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¾ Dedicated special purpose machines having higher production
NOTES
capacities and output rates.

¾ Large volume of products.

¾ Shorter cycle time of production.

¾ Lower in process inventory.

¾ Perfectly balanced production lines.

¾ Flow of materials, components and parts is continuous and without

any back tracking.

¾ Production planning and control is easy.

¾ Material handling can be completely automatic.

¾ Advantages
Following are the advantages of mass production:

¾ Higher rate of production with reduced cycle time.

¾ Higher capacity utilization due to line balancing.

¾ Less skilled operators are required.

¾ Low process inventory.

¾ Manufacturing cost per unit is low.

¾ Limitations
Following are the limitations of mass production:

¾ Breakdown of one machine will stop an entire production line.

¾ Line layout needs major change with the changes in the product
design.

¾ High investment in production facilities.

¾ The cycle time is determined by the slowest operation.

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CONTINUOUS PRODUCTION
Production facilities are arranged as per the sequence of production
operations from the first operations to the finished product. The items are
made to flow through the sequence of operations through material handling
devices such as conveyors, transfer devices, etc.

Characteristics
Continuous production is used under the following circumstances:

¾ Dedicated plant and equipment with zero flexibility.

¾ Material handling is fully automated.

¾ Process follows a predetermined sequence of operations.

¾ Component materials cannot be readily identified with final product.

¾ Planning and scheduling is a routine action.

¾ Advantages
Following are the advantages of continuous production:

¾ Standardization of product and process sequence.

¾ Higher rate of production with reduced cycle time.

¾ Higher capacity utilization due to line balancing.

¾ Manpower is not required for material handling as it is completely

automatic.

¾ Person with limited skills can be used on the production line.

¾ Unit cost is lower due to high volume of production.

Limitations
Following are the limitations of continuous production:

¾ Flexibility to accommodate and process number of products does not

exist.

¾ Very high investment for setting flow lines.

Product differentiation is limited.

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 1.3 OPERATIONS AS A SOURCE OF COMPETITIVE NOTES
ADVANTAGE

Operations Management is present in many occupations as well as

those of manufacturing and service industries. Operation management is
depending upon five performance objectives that is, Quality, Flexibility,
Cost, Speed and dependability which will act as resource of competitive
advantage.

Quality: Quality means doing things right. An operation needs to be spotless

and in order, have appropriate and attractive furnishings and make sure that
the staffs are friendly and helpful. Quality reduces costs and increases
dependability.Cost: The membership prices need to be a suitable price to
facilitate students and people with different financial situations. The cost of
hiring employment needs to be considered as well as the cost of the
equipment. The lower the cost of producing their services, the lower the cost
to the customer will be. This is a very attractive attribute, especially to
students.

Speed: The speed of the internal processes can reduce inventories and reduce
risks.

Dependability: The staffs want to be able to do things in time for the

customers to receive their services. Being reliable causes the customers to
become more loyal over time. Dependability can save time, save money and
give support throughout the operation, internally and externally.

Cost Leadership

Cost reductions can be achieved by eliminating waste. Various

techniques have been used by Firms to reduce or eliminate waste. The
concept of Lean Management has been built on completely eliminating waste.
Lean has described waste as any non-value added activity in the process. 5S
Management System is another way to reduce or eliminate waste. It focuses
on identifying, eliminating and preventing waste.

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Lean manufacturing also emphasizes on Just in Time. By getting material just
before their use in production or consumption helps reduce cost by not
having to store it. An example here can be given of Hero’s factory in
Gurgaon, where outsourced material are received just a couple of hours
before they are being consumed in production.

Removing variability is another area where Lean Management focuses

on. The more there is variability in the system, more there is waste. Removing
variability allows managers to move material on schedule which in turns add
value at each step of the production process. JIT technique is used to reduce
variability.

Scheduling:

Better scheduling helps drive down inventory in the process. Level

scheduling and Kanban are paramount to help reach JIT goals. Level
scheduling requires producing in smaller lots frequently rather than in a few
larger batches. Kanban is basically a signal that moves production parts via a
‘pull’. For example, Kanban has been used extensively in Harley Davidson’s
plant to reduce inventory.

Reliability

In simple words, reliability can be defined as producing or providing

consistent quality of products or services over a period of time. In every field
of management, Quality has implications on a company’s reputation. Quality
kept not in check results in huge losses by recalling products. In service
organization, loss may be in terms of loss of customer share or loss of
customer loyalty.

Apart from Quality, an organization can become reliable which can

forecast very well. The chief of Disney’s theme park daily receives only 2
numbers, one is the forecast of yesterday’s attendance at the park and the
second is actual attendance. The forecasting team does a whole lot of work.
The team also provides daily, weekly, monthly and annual estimations and
based on these numbers they plan their activities, labour requirement etc.

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 Distribution channels also play a very important role in making an
NOTES
organization reliable. A happy distributor apart from selling their products
also helps in identifying which products are being sold at a greater pace,
which products have low demand etc.

Flexibility

For any organization, there are always some customers, especially in

B2B area, who give order on the last minute, and these customers are too
important to decline. Also the major chunk of profit for any organization
comes from such customers. So, it becomes very important for any
organization to be agile enough to accommodate these customers and change
production schedule accordingly.

Short Throughput time

There is no denying in saying that with decrease in throughput time,

cycle-time the production increases and the efficiency of the system increases.
By employing all the above discussed techniques, any organization can
reduce its throughput time and thus gain competitive advantage.

1.4 SUPPLY CHAIN TRENDS IN MODERN BUSINESS

ENVIRONMENT-GIVING COMPETITIVE EDGE TO FIRMS

A game changer can be a

process, a product or
simply a strategy that
completely changes the
way something is done.
What is a game changing
trend in supply chain?
Game changing trends are
the trends that

™ Have a very big impact on a firms economic profits and

shareholder value

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 ™ Are difficult to implement to implement successfully

There is a massive shift in the way companies are approaching supply

chain today from what they did few years back. This change in approach has
set the game changing trends on track in the years to come. The following
literature some of the game-changing trends in supply chain that can give a
competitive edge to firms.

Customer Relationship Management-

The first trend talks about customer relationship management.

Keeping all the customers satisfied and still improving the firm’s economic
profits is a very tough job and that’s where prioritizing customers comes in to
picture. Customer relationship management talks specifically about that.
Customers are prioritized to maximize the firm’s revenues and profitability
by targeting the available resources. According to the earlier approach,
standardized services were provided to all the customers irrespective of how
big or small the customer is. But the new approach manages each customer or
customer segment as a unique service relationship. A supply chain based on
close customer relationships has the greatest potential to generate unique
solutions that combine elements of timeliness, availability and consistency to
exactly match desired values at prices customers are willing to pay. The
success of the tailored service relationships depends upon the firm’s
managers’ understanding of their strengths in comparison to the differing
needs and desires of each customer or customer segment. Once the specific
needs of each customer or segment are understood, the customers or the
segments must be prioritized based upon their strategic importance.

This approach has its own challenges as well. Marketing and sales
Firms are normally reluctant to classify any paying customer as less
important. The second challenge is a lack of implementation tools.

Collaborative Supply Chain

The second game changer is collaborative relationships with suppliers and

customers. It is about developing win-win situations with suppliers and
customers.

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 NOTES

These types of collaborations can help firms in the following ways

¾ Increase in in-stock fill rates

¾ Reduction in lead times

¾ Improvement in forecast accuracy

¾ Increase in inventory turnover

The facilitators to collaborative relationships are as follow

o Both parties should address the collaboration’s negative

aspects

o To have a good collaboration both the parties should share the

risks and rewards and to do that they must develop
supporting organizational and inter-organizational structures

o Mutual trust has to be there for trust and mutual integration.

Transformational Agile Strategy-

Agility can be defined as a firm’s ability to quickly adjust tactics and

operations within its supply chain to respond to changes, opportunities and
threats in its environment. Very few firms today have a clear cut supply chain
strategy, let alone transformational agile strategy. Firms must have a lucid
strategy to achieve game changing supply chain. A transformational agile
strategy may lead to

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 a. Reduced Inventory levels

b. High service levels

c. Reduced costs

d. Improvement in customer satisfaction

Most firms lack an agile transformational supply chain strategy. To

develop an agile and transformational supply chain, firms must identify the
total cost-to-serve as a framework based on multiple scenarios and not
limited to historical solutions. For situations outside the norms of current
business, business analytics and modelling skills must be developed. Finally,
firms can use decision support and IT tools to identify trends if any, assess
potential performance and manage new processes. The features of an agile
supply chain are as follow-

a. Alertness-Ability to quickly detect changes, opportunities and

threat

b. Accessibility-Ability to access relevant data

c. Decisiveness-Ability to use the available information to make

decision resolutely

d. Swiftness-Ability to implement decisions quickly

e. Flexibility-Ability to modify the tactics and operations to the

extent needed.

Process Integration-

In today’s scenario, when companies are looking to get the best out of
the available resources, process integration is what they are looking for.
Supply chain professionals, instead of asking for more resources, are looking
for partnerships with companies where silos don’t exist.. Focussing on the
next level of cross-functional integration will require companies to make a
move from the traditional view-sales-marketing and supply chain
integration-(design-plan-buy-make-move)-to the new and progressive view

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that integrates sales and marketing, supply chain, finance, regulatory and
NOTES
customer services. Such a move will depend upon certain factors the
important ones of which are listed below

• Decision making should include cross-functional participation

• There has to be transparency, data visibility and information sharing

between the parties

• Functional cost optimization has to give way to total cost or margin

optimization

• The parties must be able to assess trade-offs holistically, respond to each

value chain segment and manage profitability through the product and
customer lifecycle.

Cross-functional integration is perhaps the most challenging task because of

the following reasons

• Operating model- It’s quite a challenge to change the existing operating

model. It may require significant changes in the structure and culture of the
organization

• Metrics alignment-Firms normally have functionally oriented metrics and

given the cross-functional nature of supply chain business processes these
functionally oriented metrics can lead to conflicts between different
functional areas.

• Supply chain strategy alignment-The supply chain strategy should be

devised in such a way that it enables the corporate strategy but it seldom
happens. Most of the times it is not aligned with the firm’s core competencies
or strategy to compete

• Tools-The business tools for important processes don’t enable cross-

functional integration and involvement.

Relative Value for customers-

There is a need of a new metrics/goal settings systems aligned with a

transformational strategy to change the supply chain game. Today firms are

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moving from the supplier scorecards of the 80’s and the balance scorecards of
the 90’s to the masses of data from multiple sources that are usefully
organized in data warehouses to link outcomes with drivers and turn data
into true insight. The right supply chain KPIs along with the right
accountabilities to help the firm to deal effectively with trade-offs and
proactively drive the right behaviours to support the supply chain strategy.

The metrics framework can be established using four key principles

• Creating the right cross-functional accountability- Shared accountability

between the supply and demand sides of the organization for inventory,
forecast accuracy and product availability

• Establishing a driver based metric framework-A framework needs to be

established so that the individuals in the organization can clearly see how
every sub-metric flows into shareholder value

• Setting appropriate goals-Too many companies use internal comparisons

and feel good about achieving those. This may lead to complacency.

• Ensuring that the metrics can’t be easily gained

End-casting or Demand Management-

End-casting is a heightened focus on final consumer demand. Big data

has led to the development of the concept of end-casting. With the ubiquity of
scanners, data is now available for analysis and for developing insights into
demand patterns not just from channel partners but also from end customers.
Big data can be used to sense demand forecast and reduce forecasting errors
by 40%. These are game changing norms in performance that can turn into
considerable financial gains.

Virtual Integration

Virtual integration is the use of internet to replace physical components that a

firm has with timely and useful information. Firms engaged in virtual
integration own only their brand and their clients thus eliminating the need
to produce, ship or handle any such products as they are now outsourced.

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Outsourcing to a third-party service provider should be done only if the firm
NOTES
has a well-defined strategy that optimizes the edge they provide.

Firms are moving towards virtual integration because of the problems

faced in traditional approach of vertical integration. Some such relevant
problems are listed below-

• Requirement of considerable capital investment

• Complex organizational structure

• Lack of available and dedicated workforce

Because of these problems and the benefits of virtual integration most

firms are now slowly moving toward the latter. Some of the benefits of virtual
integration are as follow

• Helps to overcome financial burden of capital

• Gives access to a larger pool of skilled labour and management

• Potential for reduced price and labour cost

• Increased knowledge

• Access to a large customer base

Information sharing and visibility-

Firms have started to find out links that connect the huge loads of
information that is generated from multiple sources and are analysing the
data using powerful hardware systems and business analysis expertise.

In the current scenario, management of information is one of the keys

to supply chain excellence How can firms improve their information sharing
ability is the question to be answered today. The above question can be
answered by the ability and willingness to collaborate with partners and
customers. Considering the volume, velocity and variety of data in today’s
scenario, it’s easier said than done. Given that today’s supply chains require
reliable access to timely and cross network data, high-quality information
begins with a scalable integration platform which has the ability to connect all

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participants in the extended network. And this creates a need for one-to-
many and many-to-many sharing of data and information.

This approach enables all relevant participants to access a shared

version of the truth in real time. This approach of information sharing also
provides access to a variety of experts who work together with real time and
accurate data throughout the network. The key issues that may be faced
while adopting this approach of total information sharing can be

• Big Data and key insights

• Data Quality

• Breadth of the anticipated Supply Chain

Value Based Management-

Most of the firms have started realizing the fact that their supply chain
can prove to be the most critical lever in increasing shareholder value. Supply
chain of a firm drives shareholder’s value because it controls the heartbeat of
the firm which is the fundamental flow of material and information from
suppliers through the firm to its customers.

Generating economic profits is the prime goal of all the firms and economic
profit drives shareholder’s value. Supply chain excellence can deliver the
most upside to economic profit because its full potential has been
underutilized which creates a gradient for improvement in the utilization of
supply chain.

• Supply chain controls movement of inventory

• It controls 60-70% of the cost.

• It improves product availability and thus provides a foundation for

revenue generation

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 NOTES

1.5 PRODUCTION POSSIBILITY TRADEOFFS AND COMBINATION:

The Production Possibilities Curve (PPC) is a model used to show the

tradeoffs associated with allocating resources between the production of two
goods. The PPC can be used to illustrate the concepts of scarcity, opportunity
cost, efficiency, inefficiency, economic growth, and contractions.

For example, suppose Carmen splits her time as a carpenter between

making tables and building bookshelves. The PPC would show the maximum
amount of either tables or bookshelves she could build given her current
resources. The shape of the PPC would indicate whether she had increasing
or constant opportunity costs.

Just as individuals cannot have everything they want and must

instead make choices, society as a whole cannot have everything it might
want, either. This section of the chapter will explain the constraints faced by
society, using a model called the production possibilities frontier (PPF).
There are more similarities than differences between individual choice and
social choice. As you read this section, focus on the similarities.

Because society has limited resources (e.g., labor, land, capital, raw
materials) at any point in time, there is a limit to the quantities of goods and
services it can produce. Suppose a society desires two products, healthcare
and education.

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 In Figure 1, healthcare is shown on the vertical axis and education is
shown on the horizontal axis. If the society were to allocate all of its resources
to healthcare, it could produce at point A. But it would not have any
resources to produce education. If it were to allocate all of its resources to
education, it could produce at point F.

Alternatively, the society could choose to produce any combination of

healthcare and education shown on the production possibilities frontier. In
effect, the production possibilities frontier plays the same role for society as
the budget constraint plays for Alphonso. Society can choose any
combination of the two goods on or inside the PPF. But it does not have
enough resources to produce outside the PPF.

Most important, the production possibilities frontier clearly shows the

tradeoff between healthcare and education. Suppose society has chosen to
operate at point B, and it is considering producing more education. Because
the PPF is downward sloping from left to right, the only way society can
obtain more education is by giving up some healthcare. That is the tradeoff
society faces. Suppose it considers moving from point B to point C. What
would the opportunity cost be for the additional education? The opportunity
cost would be the healthcare society has to give up. Just as with Alphonso’s
budget constraint, the opportunity cost is shown by the slope of the
production possibilities frontier.

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 The budget constraints presented earlier in this chapter, showing
NOTES
individual choices about what quantities of goods to consume, were all
straight lines. The reason for these straight lines was that the slope of the
budget constraint was determined by relative prices of the two goods in
the consumption budget constraint. However, the production possibilities
frontier for healthcare and education was drawn as a curved line. Why does
the PPF have a different shape?

To understand why the PPF is curved, start by considering point A at

the top left-hand side of the PPF. At point A, all available resources are
devoted to healthcare and none are left for education. This situation would be
extreme and even ridiculous. For example, children are seeing a doctor every
day, whether they are sick or not, but not attending school. People are having
cosmetic surgery on every part of their bodies, but no high school or college
education exists. Now imagine that some of these resources are diverted from
healthcare to education, so that the economy is at point B instead of point A.
Diverting some resources away from A to B causes relatively little reduction
in health because the last few marginal dollars going into healthcare services
are not producing much additional gain in health.

However, putting those marginal dollars into education, which is

completely without resources at point A, can produce relatively large gains.
For this reason, the shape of the PPF from A to B is relatively flat,
representing a relatively small drop-off in health and a relatively large gain in
education.

Now consider the other end, at the lower right, of the production
possibilities frontier. Imagine that society starts at choice D, which is devoting
nearly all resources to education and very few to healthcare, and moves to
point F, which is devoting all spending to education and none to healthcare.
For the sake of concreteness, you can imagine that in the movement from D to
F, the last few doctors must become high school science teachers, the last few
nurses must become school librarians rather than dispensers of vaccinations,
and the last few emergency rooms are turned into kindergartens. The gains to
education from adding these last few resources to education are very small.

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However, the opportunity cost lost to health will be fairly large, and thus the
slope of the PPF between D and F is steep, showing a large drop in health for
only a small gain in education.

The lesson is not that society is likely to make an extreme choice like
devoting no resources to education at point A or no resources to health at
point F. Instead, the lesson is that the gains from committing additional
marginal resources to education depend on how much is already being spent.
If on the one hand, very few resources are currently committed to education,
then an increase in resources used can bring relatively large gains. On the
other hand, if a large number of resources are already committed to
education, then committing additional resources will bring relatively smaller
gains.

This pattern is common enough that it has been given a name: the law
of diminishing returns, which holds that as additional increments of
resources are added to a certain purpose, the marginal benefit from those
additional increments will decline. When government spends a certain
amount more on reducing crime, for example, the original gains in reducing
crime could be relatively large. But additional increases typically cause
relatively smaller reductions in crime, and paying for enough police and
security to reduce crime to nothing at all would be tremendously expensive.

The curvature of the production possibilities frontier shows that as

additional resources are added to education, moving from left to right along
the horizontal axis, the original gains are fairly large, but gradually diminish.
Similarly, as additional resources are added to healthcare, moving from
bottom to top on the vertical axis, the original gains are fairly large, but again
gradually diminish. In this way, the law of diminishing returns produces the
outward-bending shape of the production possibilities frontier.

Productive Efficiency and Allocative Efficiency

The study of economics does not presume to tell a society what choice
it should make along its production possibilities frontier. In a market-
oriented economy with a democratic government, the choice will involve a

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mixture of decisions by individuals, firms, and government. However,
NOTES
economics can point out that some choices are unambiguously better than
others. This observation is based on the concept of efficiency. In everyday
usage, efficiency refers to lack of waste. An inefficient machine operates at
high cost, while an efficient machine operates at lower cost, because it is not
wasting energy or materials. An inefficient organization operates with long
delays and high costs, while an efficient organization meets schedules, is
focused, and performs within budget.

The production possibilities frontier can illustrate two kinds of

efficiency: productive efficiency and allocative efficiency. Figure 2 illustrates
these ideas using a production possibilities frontier between healthcare and
education.

Productive efficiency means that, given the available inputs and

technology, it is impossible to produce more of one good without decreasing
the quantity that is produced of another good. All choices on the PPF
in Figure 2, including A, B, C, D, and F, display productive efficiency. As a
firm moves from any one of these choices to any other, either healthcare
increases and education decreases or vice versa. However, any choice inside
the production possibilities frontier is productively inefficient and wasteful
because it is possible to produce more of one good, the other good, or some
combination of both goods.

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 For example, point R is productively inefficient because it is possible
at choice C to have more of both goods: education on the horizontal axis is
higher at point C than point R (E2 is greater than E1), and healthcare on the
vertical axis is also higher at point C than point R (H2 is great than H1).

The particular mix of goods and services being produced—that is, the
specific combination of healthcare and education chosen along the
production possibilities frontier—can be shown as a ray (line) from the origin
to a specific point on the PPF. Output mixes that had more healthcare (and
less education) would have a steeper ray, while those with more education
(and less healthcare) would have a flatter ray.

Allocative efficiency means that the particular mix of goods a society

produces represents the combination that society most desires. How to
determine what a society desires can be a controversial question, and is
usually discussed in political science, sociology, and philosophy classes as
well as in economics. At its most basic, allocative efficiency means producers
supply the quantity of each product that consumers demand. Only one of the
productively efficient choices will be the allocatively efficient choice for
society as a whole.

Why Society Must Choose?

Every economy faces two situations in which it may be able to expand

consumption of all goods. In the first case, a society may discover that it has
been using its resources inefficiently, in which case by improving efficiency
and producing on the production possibilities frontier, it can have more of all
goods (or at least more of some and less of none). In the second case, as
resources grow over a period of years (e.g., more labor and more capital), the
economy grows. As it does, the production possibilities frontier for a society
will tend to shift outward and society will be able to afford more of all goods.

But improvements in productive efficiency take time to discover and

implement, and economic growth happens only gradually. So, a society must
choose between tradeoffs in the present. For government, this process often
involves trying to identify where additional spending could do the most good

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and where reductions in spending would do the least harm. At the individual
NOTES
and firm level, the market economy coordinates a process in which firms
seek to produce goods and services in the quantity, quality, and price that
people want. But for both the government and the market economy in the
short term, increases in production of one good typically mean offsetting
decreases somewhere else in the economy.

The PPF and Comparative Advantage

While every society must choose how much of each good it should
produce, it does not need to produce every single good it consumes. Often
how much of a good a country decides to produce depends on how
expensive it is to produce it versus buying it from a different country. As we
saw earlier, the curvature of a country’s PPF gives us information about the
tradeoff between devoting resources to producing one good versus another.
In particular, its slope gives the opportunity cost of producing one more unit
of the good in the x-axis in terms of the other good (in the y-axis). Countries
tend to have different opportunity costs of producing a specific good, either
because of different climates, geography, technology or skills.

Suppose two countries, the US and Brazil, need to decide how much
they will produce of two crops: sugar cane and wheat. Due to its climatic
conditions, Brazil can produce a lot of sugar cane per acre but not much
wheat. Conversely, the U.S. can produce a lot of wheat per acre, but not much
sugar cane. Clearly, Brazil has a lower opportunity cost of producing sugar
cane (in terms of wheat) than the U.S. The reverse is also true; the U.S. has a
lower opportunity cost of producing wheat than Brazil. This can be illustrated
by the PPFs of the two countries in Figure 3.

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 When a country can produce a good at a lower opportunity cost than
another country, we say that this country has a comparative advantage in
that good. In our example, Brazil has a comparative advantage in sugar cane
and the U.S. has a comparative advantage in wheat. One can easily see this
with a simple observation of the extreme production points in the PPFs of the
two countries. If Brazil devoted all of its resources to producing wheat, it
would be producing at point A. If however it had devoted all of its resources
to producing sugar cane instead, it would be producing a much larger
amount, at point B. By moving from point A to point B Brazil would give up
a relatively small quantity in wheat production to obtain a large production
in sugar cane. The opposite is true for the U.S. If the U.S. moved from point A
to B and produced only sugar cane, this would result in a large opportunity
cost in terms of foregone wheat production.

The slope of the PPF gives the opportunity cost of producing an

additional unit of wheat. While the slope is not constant throughout the PPFs,
it is quite apparent that the PPF in Brazil is much steeper than in the U.S., and
therefore the opportunity cost of wheat generally higher in Brazil. When
countries engage in trade, they specialize in the production of the goods that
they have comparative advantage in, and trade part of that production for
goods they do not have comparative advantage in. With trade, goods are

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produced where the opportunity cost is lowest, so total production increases,
NOTES
benefiting both trading parties.

1.6 DIFFERENCE BETWEEN MANUFACTURING AND SERVICE

OPERATIONS

Tangibility of Output

The key difference between

service firms and
manufacturers is the
tangibility of their output.
The output of a service
firm, such as consultancy,
training or maintenance

For example, it is intangible. Manufacturers produce physical goods that

customers can see and touch.

Production on Demand

Service firms, unlike manufacturers, do not hold inventory; they

create a service when a client requires it. Manufacturers produce goods for
stock, with inventory levels aligned to forecasts of market demand. Some
manufacturers maintain minimum stock levels, relying on the accuracy of
demand forecasts and their production capacity to meet demand on a just-in-
time basis. Inventory also represents a cost for a manufacturing organization.

Customer Specific Production

Service firms do not produce a service unless a customer requires it,

although they design and develop the scope and content of services in
advance of any orders. Service firms generally produce a service tailored to
customers’ needs, such as 12 hours of consultancy, plus 14 hours of design
and 10 hours of installation. Manufacturers can produce goods without a
customer order or forecast of customer demand. However, producing goods
that do not meet market needs is a poor strategy.

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Labour Requirements and Automated Processes

A service firm recruits people with specific knowledge and skills in

the service disciplines that it offers. Service delivery is labor intensive and
cannot be easily automated, although knowledge management systems
enable a degree of knowledge capture and sharing. Manufacturers can
automate many of their production processes to reduce their labor
requirements, although some manufacturing organizations are labor
intensive, particularly in countries where labor costs are low.

Physical Production Location

Service firms do not require a physical production site. The people

creating and delivering the service can be located anywhere. For example,
global firms such as consultants Deloitte use communication networks to
access the most appropriate service skills and knowledge from offices around
the world.

Manufacturers must have a physical location for their production and stock
holding operations. Production does not necessarily take place on the
manufacturer's own site; it can take place at any point in the supply chain.

1.7 OPEREATIONS – A SYSTEMS PERSPECTIVE

A System is a group of interrelated items in which no item studied in

isolation will act in the same way as it would in the system. A system is
divided into a series of parts or subsystems, and any system is a part of a
larger system. The system’s boundary defines what is inside the system and
what is outside. A system’s environment is everything outside the system
boundary that may have an impact on the behaviour of the system. A
system’s inputs are the physical objects of information that enter it from the
environment and its outputs are the same which leave it for the environment.

Systems view of operations management states that activities in an

operations system can be classified as inputs, transformation process and
output. Inputs are classified into three general categories-external, market
and primary resources.

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 Transformation resources are the elements that act on, or carry out,
NOTES
the transformation process on other elements. These include such elements as
labour, equipment/plant and energy. The nature and mix of these resources
will differ between operations. The transformed resources are the elements
which give the operations system its purpose and goal. The operations
system is concerned with converting the transformed resources from inputs
into outputs in the form of goods and services. There are three main types of
transformed resource of materials which can be transformed either
physically(e.g. manufacturing),by location (e.g. transportation),by
ownership(e.g. retail) or by storage(e.g. Warehousing)

For our study of systems view of an organization we chose, Vedanta

Resources Pvt.Ltd.We concentrated on its Goa unit, which is called Vedanta
Aluminium Manufacturing Unit. The unit produces aluminium from
aluminium oxide through electrolytic reduction. We consider the factory as a
systems compromising of various subsystems. As we defined earlier, a
system consists of these major components:

Input– Input into an operation systems can be classified into these

categories.:

External- Legal inputs (the Companies Act etc), Economic, Social,

Technological (Electrolytic cells, power generation machinery etc )

Market — Competition (HINDALCO, NALCO,BALCO etc), Customer

Desires, Product info

Department of Management Studies, IIT Rookie Page 3

Primary resources— Material (Alumina, raw aluminium ore ), personnel,

capital, utilities Here the input is Al2 O3 or Alumina. This is the aluminium
ore which is extracted from earth

Conversion Subsystems

– The ore is transformed into pure aluminium. The transformation process is

carried out mainly through electrolytic reduction.

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Output – The output consists of pure aluminium.

Direct

Products : Pure Aluminium

Services : Aluminium Manufacturing

Indirect

Waste

Pollution

Technological Advances

Carbon Section —This section basically deals with the preparation and
maintenance of Carbon anode. The electrolytic process used for reducing
Alumina (Al 2 O3) to pure aluminium. For carrying out this process the
anode used is made up of carbon mainly graphite. This section deals with the
construction and maintenance of Carbon anodes.

Pot Room Cell— This is the section where the process of electrolysis actually
takes place. Here the raw aluminium ore is reduced to aluminium by
electrolysis with the help of carbon anodes. This section deals with the
complete process. The electrolytic cells are called Pot and thus the
department is called Pot Room Cell

Cast House— This section deals with processing of pure aluminium. Once
the aluminium has been extracted from the ore, it needs to be converted into
more suitable forms which can be further sold in the markets. The extracted
aluminium is casted into ingots and plates which are more suitable for selling
in the market.

Captive Power Plant — This section of the plant deals with generation of
electricity for running the whole plant. The electricity generated here is used
by all the other departments.

Each section can be treated as a system in its own and can be divide into
following general parts :

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Human Resource
NOTES
Finance

Production and Operation

Logistics

Information Technology

These sub systems are present in all the 4 major sections. They are centrally
controlled by the Plant Management Office(PMO).

These sub systems are present in all the 4 major sections. They are centrally
controlled by the Plant Management Office(PMO).The PMO controls the
central decision making and is responsible for running all the departments in
sync. The PMO ensures that the decisions made by the departments do not
contradict and a healthy harmony is maintained so that all of them work
together as a part of a system.

OPERATIONS STRATEGY

A plan specifying how an organization will allocate resources in order

to support infrastructure and production. An operations strategy is typically
driven by the overall business strategy of the organization, and is designed to
maximize the effectiveness of production and support elements while
minimizing costs.

Operations strategies drive a company’s operations, the part of the

business that produces and distributes goods and services. Operations
strategy underlies overall business strategy, and both are critical for a
company to compete in an ever-changing market. With an effective ops
strategy, operations management professionals can optimize the use of
resources, people, processes, and technology.

Operations strategy is only one part of overall business or corporate

strategy, but it’s crucial for competitiveness and success. Without a strong
operations strategy, companies fail to keep up with changing markets and
lose out to more strategic competitors. Many companies, big and small, have

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struggled with operations strategy, often lacking in comparison with
technologically savvy competitors. For example, Amazon, while constantly
advancing technology such as drones for delivery, has pushed aside myriad
brick-and-mortar retailers.

To be effective and competitive, all parts of a company must work

together. All departments should contribute to the company mission and
have strategies underlying the overall corporate/business strategy. In
addition to having an operations strategy, they should also have functional
area strategies in finance, IT, sales, marketing, human resources, and possibly
other departments, depending on the type of business.

“An operations strategy should guide the structural decisions and the
evolution of operational capabilities needed to achieve the desired
competitive position of the company as a whole,” says Tim Laseter in his
article "An Essential Step for Corporate Strategy.”

These days, however, it’s not enough to simply follow best practices.
Companies must innovate, not just play catch-up to practices already
mastered by competitors.

Authors Steven C. Wheelwright and Robert H. Hayes categorized types of

organizations based on a company’s attitude toward operations:

Stage 1, Internally Neutral: The operations function is reactive and viewed as

a necessary evil.

Stage 2, Externally Neutral: The operations function adopts best practices

and tries to match the competition.

Stage 3, Internally Supportive: The operations function tries to provide

support for the overall business strategy.

Stage 4, Externally Supportive: The operations function provides

competitive advantage for the company, and sets the industry standard.

Core Operational Strategy Areas

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Different sources use different terms to describe strategy areas. Here’s one
NOTES
way to categorize core strategies:

Corporate: Overall company strategy, driving the company mission and

interconnected departments

Customer-Driven: Operational strategies to meet the needs of a targeted

customer segment

Core Competencies: Strategies to develop the company’s key strengths and

resources

Competitive Priorities: Strategies that differentiate the company in the

market to better provide a desired product or service

Product or Service Development: Strategies in product design, value, and

innovation

A company’s key success factors (KSFs) pertain to competitiveness, such as a

company’s attributes, resources, capabilities, and competencies. By
identifying these, a company can focus on the issues that matter most and
measure them with key performance indicators (KPIs).

Another way to frame strategic areas is by these “distinctive” competencies:

Price

Quality, such as performance, features, aesthetics, and durability

Service

Flexibility

Tradeoffs, or competing on one or two distinctive competencies at the

necessary expense of others

Author Terry Hill used the terms order qualifier and order winner. An order
qualifier means a company or product has a characteristic that allows it to be
a viable competitor. An order winner is a characteristic that causes customers
to choose it over competitors.

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Strategy Formulation Process:

Strategy formulation refers to the process of choosing the most

appropriate course of action for the realization of organizational goals and
objectives and thereby achieving the organizational vision. The process of
strategy formulation basically involves six main steps. Though these steps
do not follow a rigid chronological order, however they are very rational and
can be easily followed in this order.

Setting Organizations’ objectives - The key component of any strategy

statement is to set the long-term objectives of the organization. It is known
that strategy is generally a medium for realization of organizational
objectives. Objectives stress the state of being there whereas Strategy stresses
upon the process of reaching there. Strategy includes both the fixation of
objectives as well the medium to be used to realize those objectives. Thus,
strategy is a wider term which believes in the manner of deployment of
resources so as to achieve the objectives.

While fixing the organizational objectives, it is essential that the

factors which influence the selection of objectives must be analyzed before the
selection of objectives. Once the objectives and the factors influencing
strategic decisions have been determined, it is easy to take strategic decisions.

Evaluating the Organizational Environment - The next step is to evaluate

the general economic and industrial environment in which the organization
operates. This includes a review of the organizations competitive position. It
is essential to conduct a qualitative and quantitative review of an
organizations existing product line. The purpose of such a review is to make
sure that the factors important for competitive success in the market can be
discovered so that the management can identify their own strengths and
weaknesses as well as their competitors’ strengths and weaknesses.

After identifying its strengths and weaknesses, an organization must

keep a track of competitors’ moves and actions so as to discover probable
opportunities of threats to its market or supply sources.

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Setting Quantitative Targets - In this step, an organization must practically
NOTES
fix the quantitative target values for some of the organizational objectives.
The idea behind this is to compare with long term customers, so as to
evaluate the contribution that might be made by various product zones or
operating departments.

Aiming in context with the divisional plans - In this step, the contributions
made by each department or division or product category within the
organization is identified and accordingly strategic planning is done for each
sub-unit. This requires a careful analysis of macroeconomic trends.

Performance Analysis - Performance analysis includes discovering and

analyzing the gap between the planned or desired performance. A critical
evaluation of the organizations past performance, present condition and the
desired future conditions must be done by the organization. This critical
evaluation identifies the degree of gap that persists between the actual reality
and the long-term aspirations of the organization. An attempt is made by the
organization to estimate its probable future condition if the current trends
persist.

Choice of Strategy - This is the ultimate step in Strategy Formulation. The

best course of action is actually chosen after considering organizational goals,
organizational strengths, potential and limitations as well as the external
opportunities.

1.8 MAKE OR BUY DECISION

The make-or-buy decision is the act of making a strategic

choice between producing an item internally (in-house) or buying it
externally (from an outside supplier). The buy side of the decision also
is referred to as outsourcing. Make-or-buy decisions usually arise
when a firm that has developed a product or part—or significantly
modified a product or part—is having trouble with current suppliers,
or has diminishing capacity or changing demand.

Make-or-buy analysis is conducted at the strategic and

operational level. Obviously, the strategic level is the more long-range

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of the two. Variables considered at the strategic level include analysis
of the future, as well as the current environment. Issues like
government regulation, competing firms, and market trends all have a
strategic impact on the make-or-buy decision. Of course, firms should
make items that reinforce or are in-line with their core competencies.
These are areas in which the firm is strongest and which give the firm
a competitive advantage.

Elements of the "make" analysis include:

Incremental inventory-carrying costs

Direct labor costs
Incremental factory overhead costs
Delivered purchased material costs
Incremental managerial costs
Any follow-on costs stemming from quality and related problems
Incremental purchasing costs
Incremental capital costs

Cost considerations for the "buy" analysis include:

Purchase price of the part

Transportation costs
Receiving and inspection costs
Incremental purchasing costs
Any follow-on costs related to quality or service

Simple Cost Analysis

It can be explained as a procedure for estimating all costs involved

and possible profits to be derived from a business opportunity or proposal. It
takes into account both quantitative and qualitative factors for analysis of the
value for money for a particular project or investment opportunity. Benefits
to costs ratio and other indicators are used to conduct such analyses.

The objective is to ascertain the soundness of any investment

opportunity and provide a basis for making comparisons with other such

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proposals. All positives and negatives of the project are first quantified in
NOTES
monetary terms and then adjusted for their time-value to obtain correct
estimates for conduct of cost-benefit analysis. Most economists also account
for opportunity costs of the investment in the project to get the costs
involved.

CASE STUDY - 1

A pert bottle manufacturing company is having two different

processes such as semi-automated and fully automated for making their
products. They incurred the cost for all the above alternatives.

Making by
Making by
semi-
Cost of Elements automated Buying
automated
process
process
Fixed Cost / year in Rs. 10,00,000 40,00,000 Not applicable
Variable cost / unit in Rs. 500 300 Not applicable
Purchase cost / unit in Rs. Not applicable Not applicable 700

(a) At what annual volume the company should switch over to semi-automated
to fully automated?

(b)At what annual volume company should switch from buying to make use
semi-automated?

Solution (A):

Q”: At what annual volume the company should switch over to semi-
automated to fully automated?

Annual demand of product in quantity is not given

Therefore, Let the annual volume company should switch over to = Q

Semi-automated to fully automated
(i.e) Semi-automated process > fully automated process
1000000 + 500 Q ≥4000000 +300 Q
(500-300)Q ≥ 4000000 – 1000000
200Q ≥3000000
Q = (3000000 / 200) = 15,000

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Thus, if the production volume is more than 15,000 units, the company
can shift over to semi-automated to fully automated

Solution (B)

Q: At what annual volume company should switch from buying to make use
semi-automated

Annual demand of product in quantity is not given

Therefore, Let the annual volume, company should switch over to Q for
Buying to fully automated
(i.e) Buying ≥Semi-automated process
700 Q ≥ 1000000 + 500 Q
(i.e) (700 – 500) Q = 1000000
Q = 5000
Thus, if the volume of production is more than 5000 units the company
should sitch from buying to Semi-automated process.

BREAK-EVEN ANALYSIS:.

Meaning of Break-Even Analysis:

The study of cost-volume profit analysis is often referred to as ‘break-even
analysis’ and the two terms are used interchangeably by many. This is so,
because break-even analysis is the most widely known form of cost-volume-
profit analysis.

The break-even analysis is based upon the following assumptions:

(i) All elements of cost, i.e., production, administration and selling and
distribution can be segregated into fixed and variable components.
(ii) Variable cost remains constant per unit of output irrespective of the level
of output and thus fluctuates directly in proportion to changes in the volume
of output.
(iii) Fixed cost remains constant at all volumes of output.
(iv) Selling price per unit remains unchanged or constant at all levels of
output.
(v) Volume of production is the only factor that influences cost.
(vi) There will be no change in the general price-level.

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(vii) There is only one product or in case of multi-products, the sales mix
NOTES
remains unchanged.
(viii) There is synchronisation between production and sales.

Break Even Point:

The break-even point may be defined as that point of sales volume at
which total revenue is equal to total cost. It is a point of no profit, no loss. A
business is said to break-even when its total sales are equal to its total costs.
The break-even point refers to that level of output which evenly breaks the
costs and revenues and hence the name.

In the above example, at level of output/sales of 25,000 units, there is a profit

of Rs. 50,000 as indicated by the break-even charts under the three methods.

The break-even point is that point where the contribution line crosses the
fixed cost line. At this point, total contribution is equal to the total fixed cost
and hence there is no profit or loss.

As the contribution increases more than the fixed cost, profit shall arise to the
organisation and as contribution decreases from the fixed cost, there shall be
loss to the organisation. The contribution break-even chart shows clearly

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contribution at different levels of activity and indicates that all levels below
the break-even point are unable to cover the fixed costs.

Break-even point can be stated in the form of an equation:

Sales revenue at break-even point = Fixed Costs + Variable Costs.

(a) Break-Even Point in Units:

As the break-even point is the point of no profit no loss, it is that level of
output at which the total contribution equals the total fixed costs, It can be
calculated with the help of following formula:

P/V Ratio = Contribution/Sales

Since Contribution = Sales – Variable Cost = Fixed Cost + Profit, P/V ratio
can also be expressed as:

P/V Ratio = Sales – Variable cost/Sales

i.e. S – V/S

or, P/V Ratio = Fixed Cost + Profit/Sales i.e. F + P/S

or, P/V Ratio = Change in profit or Contribution/Change in Sales

(c) Break-even Point as a percentage of estimated capacity:

Break-even point can also be computed as a percentage of the estimated sales
or capacity by dividing the break-even sales by the capacity sales. For
example, if a firm has an estimated capacity of 1,00,000 units of products and
its break-even point is reached at 50,000 units, then the break-even point is at
50% of capacity (1,00,000/50,000).

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Problem & Solutions NOTES

Fixed cost for producing formworks is Rs. 300,000. The variable unit cost for
making one panel is Rs. 15. The sale price for each panel will be Rs. 25. If
you charge Rs. 25 for each panel, how many panels you need to sell in total,
in order to start making money?
Solution:

Answer: Break-Even in Units = 30,000 panels

CASE STUDY - 2

The average prices and costs of operating the store are:

Price = Rs. 50 per pair
Cost = Rs. 30 per pair
Rent = Rs. 2,500 per month
Insurance = Rs. 500 per month
Utilities & Telephone = Rs. 300 per month
In addition, you plan to hire two sales ladies on a commission basis of 10% in
order to provide them with incentive to sell shoes. You are required
determine the breakeven point in Rupees?

SOLUTION:

Answer: Break-Even in Rupees = Rs. 11,000

Problem & Solutions

A manufacturing company supplies its products to construction job sites. The

average monthly fixed cost per site is Rs. 4,500, while each unit cost Rs. 35 to

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produce and selling price is Rs. 50 per unit. Determine the monthly
breakeven volume.

Answer: Break-Even in Volume = 300

CASE Study - 3

A store sells t-shirts. The average selling price is Rs. 15 and the average
variable cost (cost price) is Rs. 9. Thus, every time the store sells a shirt it has
Rs. 6 remaining after it pays the manufacturer. This Rs. 6 is referred to as the
unit contribution.

(a) Suppose the fixed costs of operating the store (its operating expenses) are
Rs. 100,000 per year. Find Break-even in units?

Answer: Break-Even in Units = 16,667 T-shirts

(b) If the owner desired a profit of Rs. 25,000, what will be break-even point in
Rupees?
Solution:

Answer: Break-Even in Rupees = 16,667

(c) If fixed costs rose to Rs. 110,000, break-even in units volume would be?

Answer: Break-Even in Units = 18,333 T-shirts

(d) If the average selling price rose to Rs.16, break even volume would fall?
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 NOTES

Answer: Break-Even in Volume = 14,286 T-shirts

ECONOMIC ANALYSIS

Purchase Model EOQ (i.e for Buying Decision)

2CoD
EOQ is Q1 =
Cc

Where D = Demand per year

Co = Ordering Cost
Cc = Inventory Carrying cost

Total Cost = D + P + DCo + Q1 x Cc

Q1 2
Where D = Demand per year
P = Purchase Price / Unit
Co = Ordering Cost
Q1 = EOQ
Cc = Inventory Carrying cost

Manufacturing Model EOQ (i.e for Making Decision)

2 SD
EOQ is Q2 =
Cc(1 − D / R)

Where D = Demand per year

S = Setup Cost per setup
Cc = Inventory Carrying cost
Q2 = EOQ
R = Rate of production in Units per year

To find Total Cost

Total Cost TC = D x P +
DxS + Cc (R-D) x Q2
Q2 2xR
Where D = Demand per year P = Production rate Unit / year

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 S = Setup Cost per setup
Cc = Inventory Carrying cost
Q2 = EOQ
R = Rate of production in Units per year

CASESTUDY - 4

Problem: A company has an annual demand of 1000 Units. Costs with

regard to Make and Buy options are given below. Find which option is
suitable to them.

Particulars (in Rs) Buy Make

Item cost /Unit 6.00 5.90

Procurement cot / Order 10.00 Nil
Setup cost/ Setup Nil 50.00
Annual Carrying cost/item 1.32 1.30
Production rare /year Nil 6000 Units

Solution:
BUY OPTION:

We know that for Buying Decision

2CoD
EOQ is Q1 =
Cc

Where D = Demand per year

Co = Ordering Cost
Cc = Inventory Carrying cost

Total Cost = D + P + D x Co + Q1 x Cc
Q1 2
Where D = Demand per year
P = Purchase Price / Unit
Co = Ordering Cost
Q1 = EOQ
Cc = Inventory Carrying cost

From above given problem: D =1000, Co = Rs.10 Cc =Rs.1.32

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 2 x1000 x10 NOTES
There fore Q1 = = 123 Units
1.32

we have to find the Total Cost for Economic order Quantity for Buying
decision.

We know that TC = D + P + D x Co + Q1 x Cc
Q1 2

Where D = Demand per year

P = Purchase Price / Unit
Co = Ordering Cost
Q1 = EOQ
Cc = Inventory Carrying cost

From above given problem: D = 1000.P = 6, Co = 10 Q1 = 123 Cc = 1.32

There fore TC = (1000) x 6 + 1000 x 10 + 123 x 1.32

123 2
(i.e) = Rs.6,162.48 = Rs.6,162

MAKE OPTION

We know that

2 SD
for Making Decision EOQ is Q2 =
Cc(1 − D / R)

Where D = Demand per year = 1000 Units

S = Setup Cost per setup = 50
Cc = Inventory Carrying cost = 1.32
Q2 = EOQ = ?
R = Rate of production in Units per year =6000

2 x50 x1000
Q2 = = 304 Units
1.32(1 − (1000 / 6000)

Total Cost TC = D x P + DxS + Cc (R-D) x Q2

Q2 2xR

= (1000 x 5.90) = (1000 x 50) + 1.32(6000 – 1000) x 304

304 2 x 6000

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CHECK YOUR ANSWERS

1. Describe the main daily tasks for an Operations Manager.

2. What is budget planning and how do you handle it step-by-step?

3. What is your experience with logistics management?

4. Have you ever negotiated contracts with vendors? What’s the most
effective approach?

5. Which Management Information Systems have you previously used?

6. Are you familiar with Cost Analysis tools? Mention any statistical
tools you have experience working with.

7. If your manager asked you to make a report about production costs,

what method would you use?

8. Which are, in your opinion, the most important financial management

best practices?

9. What does successful communication between different

organizational functions/departments mean to you?

10. How do support services contribute to achieving business goals? Give

some examples.

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 NOTES

Module 2

PROCESS OF OPERATIONS MANAGEMENT

Structure

2.0 Introduction
2.1 Process flow chart and process mapping
2.1.1. Process flowchart symbols
2.1.2 Uses of process flowcharts
2.2 Performance measurement
2.3 Types of performance measures
2.4 Designing the performance measurement system
2.5 Types of processes
2.6 Product matrix and process selection
2.7 Process choices
2.7.1 Product-process matrix
2.8 Factors Affecting Plant Location
2.9 Plant Layout
2.10 Check your Answers

2.0 INTRODUCTION

Processes fall into four different categories for operations

management based on the nature of their function. Some processes
relate primarily to a product’s cost structure; others address the
company’s product standardization needs, output volume, or
production flexibility. Take a look at processes that focus on these
types of business considerations and review general guidelines on
how to best select a process to meet the requirements of your product.

Before classifying a process, consider the nature of the product it’s

intended to produce. After all, creating a unique item, such as an
interstate highway bridge, is wildly different from producing a million
bottles of contact-lens solution or thousands of socks in two different
colours

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_______________________________________________________________

OBJECTIVES

¾ Enable the student to understand Process management is a

means of defining, visualizing, measuring, monitoring, and
optimizing processes.
¾ It enables how all members of a company to know and
understand the processes within their company
¾ To implement them according to the goal to meet customer
requirements profitably

2.1 PROCESS FLOW CHART AND PROCESS MAPPING

A process flow chart is a process analysis tool which maps out

a process and its steps through a set of standardized flow chart
symbols. The process flow chart is an initial step in process re-
engineering and continuous improvement/kaizen initiatives that help
understand the different process steps, the sub-steps within these
and the nature of these steps. It is a similar approach to value stream
mapping where the value stream of a product or service is mapped
from raw materials to customer distribution. Some process flow
charts can be very complex and used in engineering design and plant
designs, these are usually known as schematic diagrams and use a
different set of symbols and provide more detail of the process.

2.1.1. Process Flowchart symbols

The symbols are used to represent a value adding task (a

rectangle), an arrow represents a material / WIP movement, a square
with a rounded side is the symbol for a delay, and an inverted triangle
represents an inventory holding area.

Please refer to here for further explanation on process flow

chart symbols. The process flowchart can contain a variety of

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information, depending on its intended use and complexity. It is up to
NOTES
the user to collect the required information to put on the flow chart.

2.1.2 Uses of process flowcharts

The use of process flow charts are usually used to identify

problems within a production process and inefficiencies. A list is
presented below:
-Understanding a productive process
-Identifying process bottlenecks and excessive waiting periods within
the process
-Identify redundant or unnecessary process tasks
-Identify potential improvements in labour productivity
-Identify inefficient inventory management and unnecessary inventory
costs
The items above are the main reasons why process
engineers or industrial engineers involved in improving process
performance will map a process or value stream with a process flow
chart. Lean teams also use them for similar reasons and as a basis for
their kaizen initiatives to identify sources of waste to eliminate to
make any process more efficient.

Example of a process flow chart

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2.2 PERFORMANCE MEASUREMENT

Improvement in individual, group, or organizational

performance cannot occur unless there is some way of getting
performance feedback. Feedback is having the outcomes of work
communicated to the employee, work group, or company. For an
individual employee, performance measures create a link between
their own behaviour and the organization's goals. For the organization
or its work unit's performance measurement is the link between
decisions and organizational goals.

It has been said that before you can improve something, you
have to be able to measure it, which implies that what you want to
improve can somehow be quantified. Additionally, it has also been
said that improvement in performance can result just from measuring
it. Whether or not this is true, measurement is the first step in
improvement. But while measuring is the process of quantification, its
effect is to stimulate positive action. Managers should be aware that
almost all measures have negative consequences if they are used
incorrectly or in the wrong situation. Managers have to study the
environmental conditions and analyze these potential negative
consequences before adopting performance measures.

2.3 TYPES OF PERFORMANCE MEASURES

Performance measures can be grouped into two basic types:

those that relate to results (outputs or outcomes such
as competitiveness or financial performance) and those that focus on
the determinants of the results (inputs such as quality, flexibility,
resource utilization, and innovation). This suggests that performance
measurement frameworks can be built around the concepts of results
and determinants.

Measures of performance of a business usually embrace five

fundamental, but interlinking areas:

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 NOTES

¾ Money, usually measured as profit

¾ Output/input relationships or productivity
¾ Customer emphasis such as quality
¾ Innovation and adaptation to change
¾ Human resources

Within the operations area, standard individual performance

measures could be productivity measures, quality measures,
inventory measures, lead-time measures, preventive maintenance,
performance to schedule, and utilization. Specific measures could
include:

1. Cost of quality: measured as budgeted versus actual.

2. Variances: measured as standard absorbed cost versus actual
expenses.
3. Period expenses: measured as budgeted versus actual
expenses.
4. Safety: measured on some common scale such as number of
hours without an accident.
5. Profit contribution: measured in dollars or some common
scale.

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 6. Inventory turnover: measured as actual versus budgeted
turnover.

While financial measures of performance are often used to

gauge organizational performance, some firms have experienced
negative consequences from relying solely on these measures.
Traditional financial measures are better at measuring the
consequences of yesterday's actions than at projecting tomorrow's
performance. Therefore, it is better that managers not rely on one set
of measures to provide a clear performance target. Many firms still
rely on measures of cost and efficiency, when at times such indicators
as time, quality, and service would be more appropriate measures. To
be effective, performance yardsticks should continuously evolve in
order to properly assess performance and focus resources
on continuous improvement and motivating personnel.

In order to incorporate various types of performance measures

some firm's develop performance measurement frameworks. These
frameworks appear in the literature and vary from Kaplan and
Norton's balanced scorecard to Fitzgerald's framework of results and
determinants.

Kaplan and Norton's balanced scorecard approach operates from

the perspective that more than financial data is needed to measure
performance and that nonfinancial data should be included to
adequately assess performance. They suggest that any performance
measurement framework should allow managers to ask the following
questions:

How do we look to our shareholders? (financial perspective)

What must we excel at? (internal business perspective)
How do our customers see us? (customer perspective)
How can we continue to improve and create value? (innovation
and learning perspective)

However, the balanced scorecard is flawed as it does not allow for one
of the most important questions of all:

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• What are our competitors doing? (the competitor perspective)
NOTES
Keegan proposed a similar, but lesser known, performance
measurement framework titled the "performance matrix." The
performance matrix is more flexible, as it is able to integrate different
dimensions of performance, and employs generic terms such as
internal, external, cost, and no cost.

2.4 DESIGNING THE PERFORMANCE MEASUREMENT SYSTEM

A number of suggestions have been offered by various experts on

the subject of designing performance measurement systems. Below is
a list of suggestions derived from a number of these experts. Some of
these apply to all measures and some apply to a limited number of a
firm's measures. A firm's performance measures should:

1. Be simple and easy to use.

2. Have a clear purpose.
3. Provide fast feedback.
4. Cover all the appropriate elements (internal, external, financial
and nonfinancial).
5. Relate to performance improvement, not just monitoring.
6. Reinforce the firm's strategy.
7. Relate to both long-term and short-term objectives of the
organization.
8. Match the firm's organization culture.
9. Not conflict with one another.
10. Be integrated both horizontally and vertically in the corporate
structure.
11. Be consistent with the firm's existing recognition and reward
system.
12. Focus on what is important to customers.
13. Focus on what the competition is doing.
14. Lead to identification and elimination of waste.
15. Help accelerate organizational learning.

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 16. Help build a consensus for change when customer expectations
shift or strategies and priorities call for the organization to
behave differently.
17. Evaluate groups not individuals for performance to schedule.
18. Establish specific numeric standards for most goals.
19. Be available for constant review.

Other recommendations for organizations that are developing

performance measures include:

1. Data collection and methods of calculating the performance

measure must be clearly defined.
2. Objective performance criteria are preferable to subjective ones.
3. Recognize that measures may vary between locations; avoid a
"one size fits all" mentality.

Wisner and Fawcett provide a nine-step process for developing a

performance measurement system:

1. Clearly define the firm's mission statement.

2. Identify the firm's strategic objectives using the mission
statement as a guide (profitability, market share, quality, cost,
flexibility, dependability, and innovation).
3. Develop an understanding of each functional area's role in
achieving the various strategic objectives.
4. For each functional area, develop global performance measures
capable of defining the firm's overall competitive position to top
management.
5. Communicate strategic objectives and performance goals to
lower levels in the organization. Establish more specific
performance criteria at each level.
6. Assure consistency with strategic objectives among the
performance criteria used at each level.
7. Assure the compatibility of performance measures used in all
functional areas.
8. Use the performance measurement system to identify
competition, locate problem areas, assist the firm in updating
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 strategic objectives and making tactical decisions to achieve
NOTES
these objectives, and supply feedback after the decisions are
implemented.
9. Periodically reevaluate the appropriateness of the established
performance measurement system in view of the current
competitive environment.

Finally, it is important that the performance measurement

systems used by managers be continually reviewed and revised as the
environment and economy changes. Failure to make the necessary
modifications can inhibit the ability of the organization to be an
effective and efficient global competitor.

2.5 TYPES OF PROCESSES

Processes fall into four different categories for operations

management based on the nature of their function. Some processes
relate primarily to a product’s cost structure; others address the
company’s product standardization needs, output volume, or
production flexibility. Take a look at processes that focus on these
types of business considerations and review general guidelines on
how to best select a process to meet the requirements of your product.

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 Projects: These generally result in an output of one. Examples
include constructing a building or catering a party. Although
the result of a project is one deliverable, the process of creating
the item can be duplicated with modifications for other
projects.

Job shops: This type of process produces small batches of

many different products. Each batch is usually customized to a
specific customer order, and each product may require
different steps and processing times. Examples of job shop
products include a bakery that specializes in baking and
decorating wedding cakes, each one customized for a bride, or
a programmer that creates customized websites for his clients.

Batch shops: These produce periodic batches of the same

product. Batch shops can produce different products, but
typically all the products they produce follow the same process
flow.

A facility producing shirts of different sizes and colors or

a bakery preparing different flavors of cakes or types of cookies
are examples of batch shops. These processes make one type of
shirt or cookie in a batch and then switch to a different type,
but all types follow the same flow.

Batch shops usually require some setup time — time required

to prepare resources to produce a different type of product.

Flow lines: This type of process consists of essentially

independent stations that produce the same or very similar
parts. Each part follows the same process throughout the
process. Output on a flow line is dictated by the bottleneck, or
the slowest operation. The flow line is similar to the assembly
line but the parts don’t move at a constant rate dictated by the
line speed.

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 NOTES
The terms flow lines and batch shop process are often
erroneously used interchangeably.

Assembly lines: These produce discrete parts flowing at controlled

rates through a well-defined process. The line moves the parts to the
resources, and each resource must complete its task before the line
moves on. This requires a balanced line, meaning that each operation
completes its task in a similar amount of time. The line moves at the
speed of the slowest operation, or bottleneck.

Continuous flow processes: As the name implies, these processes

produce items continuously, usually in a highly automated process.
Examples include chemical plants, refineries, and electric generation
facilities. A continuous flow process may have to run 24/7 because
starting and stopping it is often difficult.

2.6 PRODUCT MATRIX AND PROCESS SELECTION

The product-process matrix is a tool for analyzing the

relationship between the product life cycle and the technological life
cycle. It was introduced by Robert H. Hayes and Steven C.
Wheelwright in two classic management articles published in Harvard
Business Review in 1979, entitled "Link Manufacturing Process and
Product Life Cycles" and "The Dynamics of Process-Product Life
Cycles." The authors used this matrix to examine market-
manufacturing congruence issues and to facilitate the understanding
of the strategic options available to a company.

The matrix itself consists of two dimensions, product

structure/product life cycle and process structure/process life cycle.
The production process used to manufacture a product moves
through a series of stages, much like the stages of products and
markets, which begins with a highly flexible, high-cost process and

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progresses toward increasing standardization, mechanization, and
automation, culminating in an inflexible but cost-effective process.

The process structure/process life cycle dimension

describes the process choice (job shop, batch, assembly line,
and continuous flow) and process structure (jumbled flow,
disconnected line flow, connected line flow and continuous flow) while
the product structure/product life cycle describes the four stages of
the product life cycle (low volume to high volume) and product
structure (low to high standardization). Later writers on the subject
sometimes insert an additional stage in the extreme upper-left corner
of the matrix: the project.

A company can be characterized as occupying a particular

region on the matrix (see accompanying Figure). This region is
determined by the firm's stage in the product life cycle and the firm's
choice of production process. At the upper left extreme, firms are
characterized as process oriented or focused while the lower right
extreme holds firms that are said to be product focused. The decision
of where a firm locates on the matrix is determined by whether the
production system is organized by grouping resources around the
process or the product. Note from the figure that the vertices of the
matrix result in four distinct types of operations (described by the
appropriate process choice) located on the diagonal of the matrix.

2.7 PROCESS CHOICES

PROJECT.

Projects are briefly included in the discussion since they are

sometimes found at the extreme upper-left corner of the matrix
(depending on the author). These include large-scale, one-time,
unique products such as civil-engineering contracts, aerospace
programs, construction, etc. They are also customer-specific and often
too large to be moved, which practically dictates that project is the
process of choice.

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JOB SHOP.
NOTES
If a manufacturer had broken a large cog on an outdated (i.e.,
replacement parts are no longer available) but still useful machine,
she would take the broken cog to a machine shop where they would
manufacture a new one from scratch. This machine shop (along with
tool and die manufacturers) is probably the primary example of
manufacturing job shops. A job shop is the producer of unique
products; usually this product is of an individual nature and requires
that the job shop interpret the customer's design and specifications,
which requires a relatively high level of skill and experience.

2.7.1 Product-Process Matrix

Once the design is specified, one or a small number of skilled

employees are assigned to the task and are frequently responsible for
deciding how best to carry it out. Generally, resources for processing
have limited availability with temporary in-process storage capability
needed while jobs wait for subsequent processing. If the product is
not a one-time requirement, it is at least characterized by irregular
demand with long periods of time between orders. Efficiency is
difficult since every output must be treated differently

Product
Process Low
structure Low Higher Very high
structure volume
Product volume volume volume
Process life Unique
life cycle Multiple Standardized Commodity
cycle stage (one of
stage Products product product
↓ a kind)
→

(Project)

Jumbled flow Job

(job shop) shop

Disconnected
line flow Batch
(batch)

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 Product
Process Low
structure Low Higher Very high
structure volume
Product volume volume volume
Process life Unique
life cycle Multiple Standardized Commodity
cycle stage (one of
stage Products product product
↓ a kind)
→

Connected
line flow
Assembly line
(assembly
line)

Continuous
flow Continuous
(continuous)

In a job shop, the outputs differ significantly in form, structure,

materials and/or processing required. Each unique job travels from
one functional area to another according to its own unique routing,
requiring different operations, using different inputs, and requiring
varying amounts of time. This causes the flow of the product through
the shop to be jumbled, following no repetitive pattern.

Job shops and batch operations (upper-left quadrant of the

matrix) are usually organized around the function of the individual
machines. In other words, machinery is grouped according to the
purpose it serves or the capabilities it possesses. For example, in a
machine shop, hydraulic presses would be grouped in one area of the
shop, lathes would be grouped into another area of the shop, screw
machines in another area, heat or chemical treatment in still another,
and so on (also contributing to the jumbled flow). This is labelled
a process layout.

In addition to machine shops and tool and die manufacturers,

job shops are also appropriate for use in service operations, since the
product is customized and frequently requires different operations.

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Service examples include law offices, medical practices, automobile
NOTES
repair, tailor shops, and so forth.

BATCH.

Firms utilizing batch processes provide similar items on a

repeat basis, usually in larger volumes than that associated with job
shops. Products are sometimes accumulated until a lot can be
processed together. When the most effective manufacturing route has
been determined, the higher volume and repetition of requirements
can make more efficient use of capacity and result in significantly
lower costs.

Since the volume is higher than that of the job shop, many
processes can be utilized in repetition, creating a much smoother flow
of work-in-process throughout the shop. While the flow is smoother,
the work-in-process still moves around to the various machine
groupings throughout the shop in a somewhat jumbled fashion. This
is described as a disconnected line flow or intermittent flow.

Examples of batch processing operations include printing and

machine shops that have contracts for higher volumes of a product.
Services utilizing batches could be some offices (processing orders in
batches), some operations within hospitals, classes within universities
(how many classes have only one pupil?), and food preparation.

LINE.

When product demand is high enough, the appropriate process

is the assembly line. Often, this process (along with continuous; both
are in the lower-right quadrant of the matrix) is referred to as mass
production. Laborers generally perform the same operations for each
production run in a standard and hopefully uninterrupted flow. The
assembly line treats all outputs as basically the same. Firms
characterized by this process are generally heavily automated,
utilizing special-purpose equipment. Frequently, some form of
conveyor system connects the various pieces of equipment used.

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 There is usually a fixed set of inputs and outputs, constant
throughput time, and a relatively continuous flow of work. Because
the product is standardized, the process can be also, following the
same path from one operation to the next. Routing, scheduling, and
control are facilitated since each individual unit of output does not
have to be monitored and controlled. This also means that the
manager's span of control can increase and less skilled workers can
be utilized.

The product created by the assembly-line process is discrete;

that is, it can be visually counted (as opposed to continuous
processes which produce a product that is not naturally divisible).
Almost everyone can think of an example of assembly-line
manufacturing (automobile manufacturing is probably the most
obvious). Examples of assembly lines in services are car washes, class
registration in universities, and many fast food operations.

Because the work-in-process equipment is organized

and sequenced according to the steps involved to produce the product
and is frequently connected by some sort of conveyor system, it is
characterized as flowing in a line. Even though it may not be a
straight line (some firms utilize a U-shaped assembly line) we say that
it has a connected line flow. Also, firms in the lower-right quadrant
(line and continuous) are classified as having a product layout.

Continuous manufacturing involves lot-less production

wherein the product flows continuously rather than being divided. A
basic material is passed through successive operations (i.e., refining
or processing) and eventually emerges as one or more products. This
process is used to produce highly standardized outputs in extremely
large volumes. The product range is usually so narrow and highly
standardized that it can be characterized as a commodity.

Considerable capital investment is required, so demand for

continuous process products must be extremely high. Starting and
stopping the process can be prohibitively expensive. As a result, the
processes usually run 24 hours a day with minimum downtime

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(hence, continuous flow). This also allows the firm to spread their
NOTES
enormous fixed cost over as large a base as possible.

The routing of the process is typically fixed. As the material is

processed it usually is transferred automatically from one part of the
process to the next, frequently with self-monitoring and adjusting.
Labor requirements are low and usually involve only monitoring and
maintaining the machinery.

Typical examples of industries utilizing the continuous process

include gas, chemicals, electricity, ores, rubber, petroleum, cement,
paper, and wood. Food manufacture is also a heavy user of
continuous processing; especially water, milk, wheat, flour, sugar and
spirits.

USING THE MATRIX

The product-process matrix can facilitate the understanding of

the strategic options available to a company, particularly with regard
to its manufacturing function. A firm may be characterized as
occupying a particular region in the matrix, determined by the stages
of the product life cycle and its choice of production process(es) for
each individual product.

By incorporating this dimension into its strategic planning

process, the firm encourages more creative thinking about
organizational competence and competitive advantage. Also, use of
the matrix provides a natural way to involve manufacturing managers
in the planning process so they can relate their opportunities and
decisions more effectively with those of marketing and of the
corporation itself, all the while leading to more informed predictions
about changes in industry and the firm's appropriate strategic
responses.

Each process choice on the matrix has a unique set of

characteristics. Those in the upper-left quadrant of the matrix (job
shop and batch) share a number of characteristics, as do those in the
lower-right quadrant (assembly line and continuous). Upper-left firms
employ highly skilled craftsmen (machinists, printers, tool and die

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makers, musical instrument craftsmen) and professionals (lawyers,
doctors, CPAs, consultants).

Hence upper-left firms can be characterized as labor intensive.

Since upper-left firms tend to utilize general-purpose equipment, are
seldom at 100 percent capacity, and employ workers with a wide
range of skills, they can be very flexible. However, there is a difficult
trade-off between efficiency and flexibility of operations. Most job
shops tend to emphasize flexibility over efficiency. Since efficiency is
not a strong point of upper-left firms, neither is low-cost production.
Also, the low volume of production does not allow upper-left firms to
spread their fixed costs over a wide enough base to provide for
reduced costs. Finally, upper-left firms are also more likely to serve
local markets.

Lower-right firms require production facilities that are highly

specialized, capital intensive, and interrelated (therefore, inflexible).
Labor requirements are generally unskilled or semi-skilled at most.
Much of the labor requirement deals with merely monitoring and
maintaining equipment. Lower-right firms are also more likely to serve
national markets and can be vertically integrated.

Hayes and Wheelwright relate three areas affected by the use of the
product-process matrix: distinctive competence, management, and
organization.

DISTINCTIVE COMPETENCE.

Distinctive competence is defined as the resources, skills, and

organizational characteristics that give a firm a comparative
advantage over its competitors. Simply put, a distinctive competence
is the characteristic of a given product that causes the buyer to
purchase it rather than the similar product of a competitor. It is
generally accepted that the distinctive competencies are cost/price,
quality, flexibility and service/time.

By using the product-process matrix as a framework, a firm

can be more precise about its distinctive competence and can
concentrate its attention on a restricted set of process decisions and

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alternatives and a restricted set of marketing alternatives. In our
NOTES
discussion, we have seen that the broad range of worker skills and
the employment of general-purpose equipment give upper-left firms a
large degree of flexibility while the highly specialized, high-volume
environment of lower-right firms yields very little in the way of
flexibility.

Therefore, flexibility would be a highly appropriate distinctive

competence for an upper-left firm. This is especially true when dealing
with the need for flexibility of the product/service produced. Lower-
right firms find it very difficult to sidetrack a high-volume operation
because of an engineering change in the product. An entire line would
have to be shut down while tooling or machinery is altered and large
volumes of possibly obsolete work-in-process are accounted for.
Upper-left firms, however, would have none of these problems with
which to contend. It must be noted though that lower-right firms may
possess an advantage regarding flexibility of volume.

Quality may be defined a number ways. If we define quality as

reliability, then lower-right firms could claim this as a distinctive
competence. Lower-right firms would have the high volume necessary
to quickly find and eliminate bugs in their product, yielding more
reliability to the end user. However, if we define quality as quality of
design (that is, "bells and whistles"—things that embody status, such
as leather seats in an automobile or a handcrafted musical
instrument), then quality would be seen as a possible distinctive
competence of upper-right firms.

Service may also be defined in more ways than one. If one

defines service as face-to-face interaction and personal attention, then
upper-left firms could claim service as a distinctive competence. If
service is defined as the ability to provide the product in a very short
period of time (e.g., overnight), then service as a distinctive
competence would belong to lower-right firms.

Finally, remember that high volume, economies of scale, and low cost
are characteristics of firms in the lower-right quadrant of the matrix.
Upper-left firms produce low volumes (sometimes only one) and

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cannot take advantage of economies of scale. (Imagine, for instance,
what you would have to pay for a handcrafted musical instrument.)
Therefore, it is obvious that price or cost competitiveness is within the
domain of lower-right firms.

MANAGEMENT.

In general, the economics of production processes favor positions

along the diagonal of the product-process matrix. That is, firms
operating on or close to the diagonal are expected to outperform firms
choosing extreme off-diagonal positions. Hayes and Wheelwright
provide the example of a firm positioned in the upper-right corner of
the matrix. This would appear to be a commodity produced by a job
shop, an option that is economically unfeasible. A firm positioned in
the lower-left corner would represent a unique one-time product
produced by a continuous process, again not a feasible option. Both
examples are too far off the diagonal. Firms that find themselves too
far off the diagonal invite trouble by impairing their ability to compete
effectively. While firms operating in the near vicinity, but not exactly
on the diagonal, can be niche players, positions farther away from the
diagonal are difficult to justify. Rolls Royce makes automobiles in a
job shop environment but they understand the implications involved.
Companies off the diagonal must be aware of traps it can fall into and
implications presented by their position.

Also, a firm's choice of product-process position places them to

the right or left of competitors along the horizontal dimension of the
matrix and above or below its competitors along the vertical
dimension of the matrix. The strategic implications are obvious. Of
course, a firm's position on the matrix may change over time, so the
firm must be aware of the implications and maintain the capability to
deal with them appropriately. The matrix can provide powerful
insights into the consequences of any planned product or process
change.

Use of the product-process matrix can also help a firm define

its product. Hayes and Wheelwright relate the example of a
specialized manufacturer of printed circuit boards who produced a
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low-volume, customized product using a highly connected assembly-
NOTES
line process. Obviously, this would place them in the lower-left corner
of the matrix; not a desirable place to be. This knowledge forced the
company to realize that what they were offering was not really circuit
boards after all, but design capability. So, in essence, they were mass-
producing designs rather than the boards themselves. Hence, they
were not far off the diagonal at all.

ORGANIZATION.

Firms organize different operating units so that they can specialize on

separate portions of the total manufacturing task while still
maintaining overall coordination. Most firms will select two or more
processes for the products or services they produce. For example, a
firm may use a batch process to make components for products,
which are constructed on assembly lines. This would be especially
true if the work content for component production or the volume
needed was not sufficient for the creation of a dedicated line process.
Also, firms may need separate facilities for different products or parts,
or they may simply separate their production within the same facility.
It may even be that a firm can produce the similar products through
two different process options. For example, Fender Musical
Instruments not only mass produces electric guitars (assembly line)
but also offers customized versions of the same product through
the Fender Custom Shop (job shop). Again, the matrix provides a
valuable framework for diagnostic use in these situations.

Other Uses of the Product- Process Matrix

Additional uses of the matrix include:

Analyzing the product entry and exit.

Determining the appropriate mix of manufacturing facilities,
identifying the key manufacturing objectives for each plant,
and monitoring progress on those objectives at the corporate
level.
Reviewing investment decisions for plants and equipment in
terms of their consistency with product and process plans.

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 Determining the direction and timing of major changes in a
company's production processes.
Evaluating product and market opportunities in light of the
company's manufacturing capabilities.
Selecting an appropriate process and product structure for
entry into a new market.

It should be noted that recent empirical research by Sohel Ahmad

and Roger G. Schroeder found the proposed relationship between
product structure and process structure to be significant but not
strong. In general terms, they found that as the product life cycle
changes the process life cycle also shifts in the consistent direction,
but not necessarily along the diagonal. Some 60 percent of the firms
studied did not fall on the diagonal. The researchers propose that this
occurred because new management and technological initiatives have
eliminated or minimized some of the inherent trade-offs found on the
Product-Process Matrix.

Researchers classify these initiatives as processing technology,

product design and managerial practice (e.g., TQM and JIT).
Therefore, Ahmad and Schroeder recommend that the matrix be
conceptualized as having three axes instead of two. They propose an
x-axis (product life cycle stages), a y-axis (process life cycle stages),
and a z-axis that represents an organization's proactive effort towards
adopting and implementing these innovative initiatives. As a firm
moves away from the origin along the z-axis, it becomes able to
minimize some of the trade-offs seen in the Product-Process Matrix
framework.

2.8 FACTORS AFFECTING PLANT LOCATION

Factors affecting Facility location decision in Operations Management

Facility location is the process of determining a geographic site

for a firm’s operations. Managers of both service and manufacturing
organizations must weigh many factors when assessing the
desirability of a particular site, including proximity to customers and
suppliers, labor costs, and transportation costs.
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 Location conditions are complex and each comprises a different
NOTES
Characteristic of a tangible (i.e. Freight rates, production costs) and
non-tangible (i.e. reliability, frequency security, quality) nature.

Location conditions are hard to measure. Tangible cost based

factors such as wages and products costs can be quantified precisely
into what makes locations better to compare. On the other hand non-
tangible features, which refer to such characteristics as reliability,
availability and security, can only be measured along an ordinal or
even nominal scale. Other non-tangible features like the percentage of
employees that are unionized can be measured as well. To sum this
up non-tangible features are very important for business location
decisions.

It is appropriate to divide the factors, which influence the plant

location or facility location on the basis of the nature of the
organization as

¾ General locational factors, which include controllable and

uncontrollable factors for all type of organizations.
¾ Specific locational factors specifically required for
manufacturing and service organizations.

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 Location factors can be further divided into two categories:
Dominant factors are those derived from competitive priorities (cost,
quality, time, and flexibility) and have a particularly strong impact on
sales or costs. Secondary factors also are important, but management
may downplay or even ignore some of them if other factors are more
important.

General Locational Factors

Following are the general factors required for location of plant in case
of all types of organisations.
CONTROLLABLE FACTORS
¾ Proximity to markets.
¾ Supply of materials
¾ Transportation facilities
¾ Infrastructure availability
¾ Labour and wages
Factors influencing plant location
¾ External economies
¾ Capital
UNCONTROLLABLE FACTORS
¾ Government policy
¾ Climate conditions
¾ Supporting industries and services
¾ Community and labor attitudes
¾ Community Infrastructure
CONTROLLABLE FACTORS
1. Proximity to markets:
Every company is expected to serve its customers by providing
goods and services at the time needed and at reasonable price
organizations may choose to locate facilities close to the market or
away from the market depending upon the product. When the
buyers for the product are concentrated, it is advisable to locate
the facilities close to the market. Locating nearer to the market is
preferred if

¾ The products are delicate and susceptible to spoilage.

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 ¾ After sales services are promptly required very often.
NOTES
¾ Transportation cost is high and increase the cost
significantly.
¾ Shelf life of the product is low.
¾ Nearness to the market ensures a consistent supply of goods
to customers and reduces the cost of transportation.
Supply of raw material:
It is essential for the organization to get raw material in right
qualities and time in order to have an uninterrupted
production. This factor becomes very important if the
materials are perishable and cost of transportation is very
high.
General guidelines suggested by Yaseen regarding effects of
raw materials on plant location are:

¾ When a single raw material is used without loss of weight,

locate the plant at the raw material source, at the market or
at any point in between.
¾ When weight loosing raw material is demanded, locate the
plant at the raw material source.
¾ When raw material is universally available, locate close to
the market area.
¾ If the raw materials are processed from variety of locations,
the plant may be situated so as to minimize total
transportation costs.
¾ Nearness to raw material is important in case of industries
such as sugar, cement, jute and cotton textiles.
Transportation facilities:
Speedy transport facilities ensure timely supply of raw materials to
the company and finished goods to the customers. The transport
facility is a prerequisite for the location of the plant. There are five
basic modes of physical transportation, air, road, rail, water and
pipeline. Goods that are mainly intended for exports demand a
location near to the port or large airport. The choice of transport
method and hence the location will depend on relative costs,

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 convenience, and suitability. Thus transportation cost to value
added is one of the criteria for plant location.
Infrastructure availability:
The basic infrastructure facilities like power, water and waste
disposal, etc., become the prominent factors in deciding the location.
Certain types of industries are power hungry e.g., aluminum and
steel and they should be located close to the power station or
location where uninterrupted power supply is assured throughout
the year. The non-availability of power may become a survival
problem for such industries. Process industries like paper, chemical,
cement, etc., require continuous. Supply of water in large amount
and good quality, and mineral content of water becomes an
important factor. A waste disposal facility for process industries is
an important factor, which influences the plant location.
Labour and wages:
The problem of securing adequate number of labor and with skills
specific is a factor to be considered both at territorial as well as at
community level during plant location. Importing labor is usually
costly and involve administrative problem. The history of labor
relations in a prospective community is to be studied. Prospective
community is to be studied. Productivity of labor is also an
important factor to be considered. Prevailing wage pattern, cost of
living and industrial relation and bargaining power of the unions’
forms in important considerations.

External economies of scale:

External economies of scale can be described as urbanization and
locational economies of scale. It refers to advantages of a company
by setting up operations in a large city while the second one refers
to the “settling down” among other companies of related Industries.
In the case of urbanization economies, firms derive from locating in
larger cities rather than in smaller ones in a search of having
access to a large pool of labor, transport facilities, and as well to
increase their markets for selling their products and have access to
a much wider range of business services.

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Location economies of scale in the manufacturing sector have evolved
NOTES
over time and have mainly increased competition due to production
facilities and lower production costs as a result of lower
transportation and logistical costs. This led to manufacturing districts
where many companies of related industries are located more or less
in the same area. As large corporations have realized that inventories
and warehouses have become a major cost factor, they have tried
reducing inventory costs by launching “Just in Time” production
system (the so called Kanban System). This high efficient production
system was one main factor in the Japanese car industry for being so
successful. Just in time ensures to get spare parts from suppliers
within just a few hours after ordering. To fulfill these criteria
corporations have to be located in the same area increasing their
market and service for large corporations.

Capital:
By looking at capital as a location condition, it is important to
distinguish the physiology of fixed capital in buildings and
equipment from financial capital. Fixed capital costs as building
and construction costs vary from region to region. But on the other
hand buildings can also be rented and existing plants can be
expanded. Financial capital is highly mobile and does not very
much influence decisions. For example, large Multinational
Corporations such as Coca- Cola operate in many different
countries and can raise capital where interest rates are lowest and
conditions are most suitable.
Capital becomes a main factor when it comes to venture capital. In
that case young, fast growing (or not) high tech firms are concerned
which usually have not many fixed assets. These firms particularly
need access to financial capital and also skilled educated employees.

UNCONTROLLABLE FACTORS
Government policy:
The policies of the state governments and local bodies concerning
labor laws, building codes, safety, etc., are the factors that demand
attention. In order to have a balanced regional growth of industries,
both central and state governments in our country offer the

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 package of incentives to entrepreneurs in particular locations. The
incentive package may be in the form of exemption from a safes tax
and excise duties for a specific period, soft loan from financial
institutions, subsidy in electricity charges and investment subsidy.
Some of these incentives may tempt to locate the plant to avail
these facilities offered.
Climatic conditions:
The geology of the area needs to be considered together with
climatic conditions (humidity, temperature). Climates greatly
influence human efficiency and behavior. Some industries require
specific climatic conditions e.g., textile mill will require humidity.
Supporting industries and services:
Now a day the manufacturing organization will not make all the
components and parts by itself and it subcontracts the work to
vendors. So, the source of supply of component parts will be the
one of the factors that influences the location.
The various services like communications, banking services
professional consultancy services and other civil amenities services
will play a vital role in selection of a location.

community and labor attitudes:

Community attitude towards their work and towards the
prospective industries can make or mar the industry. Community
attitudes towards supporting trade union activities are important
criteria. Facility location in specific location is not desirable even
though all factors are favoring because of labor attitude towards
management, which brings very often the strikes and lockouts.

Community infrastructure and amenity:

All manufacturing activities require access to a community
infrastructure, most notably economic overhead capital, such as
roads, railways, port facilities, power lines and service facilities and
social overhead capital like schools, universities and hospitals.
These factors are also needed to be considered by location decisions
as infrastructure is enormously expensive to build and for most

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manufacturing activities the existing stock of infrastructure provides
NOTES
physical restrictions on location possibilities.

Specific Locational Factors for Manufacturing Organization

DOMINANT FACTORS
Factors dominating location decisions for new manufacturing plants
can be broadly classified in six groups. They are listed in the order of
their importance as follows.
™ Favorable labor climate
™ Proximity to markets
™ Quality of life
™ Proximity to suppliers and resources
™ Utilities, taxes, and real estate costs
Favorable labor climate:
A favorable labor climate may be the most important factor in
location decisions for labour-intensive firms in industries such as
textiles, furniture, and consumer electronics. Labor climate
includes wage rates, training requirements, attitudes toward work,
worker productivity, and union strength. Many executives consider
weak unions or al low probability of union organizing efforts as a
distinct advantage.
Proximity to markets:
After determining where the demand for goods and services is
greatest, management must select a location for the facility that
will supply that demand. Locating near markets is particularly
important when the final goods are bulky or heavy and outbound
transportation rates are high. For example, manufacturers of
products such as plastic pipe and heavy metals all emphasize
proximity to their markets.
Quality of life:
Good schools, recreational facilities, cultural events, and an
attractive lifestyle contribute to quality of life. This factor is
relatively unimportant on its own, but it can make the difference in
location decisions.
Proximity to suppliers and resources:
In many companies, plants supply parts to other facilities or rely

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 on other facilities for management and staff support. These require
frequent coordination and communication, which can become more
difficult as distance increases.
Utilities, taxes, and real estate costs:
Other important factors that may emerge include utility costs
(telephone, energy, and water), local and state taxes, financing
incentives offered by local or state governments, relocation costs,
and land costs.

SECONDARY FACTORS

There are some other factors needed to be considered,

including room for expansion, construction costs, accessibility to
multiple modes of transportation, the cost of shuffling people and
materials between plants, competition from other firms for the
workforce, community attitudes, and many others. For global
operations, firms are emphasizing local employee skills and education
and the local infrastructure.
Specific Locational Factors for Service Organization
DOMINANT FACTORS
The factors considered for manufacturers are also applied to service
providers, with one important addition the impact of location on sales
and customer satisfaction. Customers usually look about how close a
service facility is, particularly if the process requires considerable
customer contact.
PROXIMITY TO CUSTOMERS
Location is a key factor in determining how conveniently customers
can carry on business with a firm. For example, few people would like
to go to remotely located dry cleaner or supermarket if another is
more convenient. Thus the influence of location on revenues tends to
be the dominant factor.
TRANSPORTATION COSTS AND PROXIMITY TO MARKETS
For warehousing and distribution operations, transportation costs
and proximity to markets are extremely important. With a warehouse
nearby, many firms can hold inventory closer to the customer, thus
reducing delivery time and promoting sales.
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LOCATION OF COMPETITORS
NOTES
One complication in estimating the sales potential at different location
is the impact of competitors. Management must not only consider the
current location of competitors but also try to anticipate their reaction
to the firm’s new location. Avoiding areas where competitors are
already well established often pays. However, in some industries,
such as new-car sales showrooms and fast- food chains, locating near
competitors is actually advantageous. The strategy is to create a
critical mass, whereby several competing firms clustered in one
location attract more customers than the total number who would
shop at the same stores at scattered locations. Recognizing this effect,
some firms use a follow –the leader strategy when selecting new sites.

2.9 PLANT LAYOUT

Plant layout is about the physical arrangements of departments,

workgroups within departments, workstations, machines and stock-
holding points within a manufacturing facility.

1. Product or Line Layout:

If all the processing equipment and machines are arranged according
to the sequence of operations of the product, the layout is called
product type of layout. In this type of layout, only one product of one

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type of products is produced in an operating area. This product must
be standardized and produced in large quantities in order to justify
the product layout.

The raw material is supplied at one end of the line and goes from one
operation to the next quite rapidly with a minimum work in process,
storage and material handling.

Advantages offered by Product Layout:

(i) Lowers total material handling cost.

(ii) There is less work in processes.

(iii) Better utilization of men and machines,

(iv) Less floor area is occupied by material in transit and for

temporary storages.

(v) Greater simplicity of production control.

(vi) Total production time is also minimized.

Limitations of Product Layout:

(i) No flexibility which is generally required is obtained in this layout.

(ii) The manufacturing cost increases with a fall in volume of

production.

(iii) If one or two lines are running light, there is a considerable

machine idleness.

(iv) A single machine break down may shut down the whole
production line.

(v) Specialized and strict supervision is essential.

2. Process or Functional Layout:

The process layout is particularly useful where low volume of
production is needed. If the products are not standardized, the

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process layout is more low desirable, because it has creator process
NOTES
flexibility than other. In this type of layout, the machines and not
arranged according to the sequence of operations but are arranged
according to the nature or type of the operations. This layout is
commonly suitable for non repetitive jobs.

Advantages of Process Layout:

(i) There will be less duplication of machines. Thus, total investment
in equipment purchase will be reduced.

(ii) It offers better and more efficient supervision through

specialization at various levels.

(iii) There is a greater flexibility in equipment and man power thus

load distribution is easily controlled.

(iv) Better utilization of equipment available is possible.

(v) Break down of equipment can be easily handled by transferring

work to another machine/work station.

(vi) There will be better control of complicated or precision processes,

especially where much inspection is required.

Limitations of Process Layout:

(i) There are long material flow lines and hence the expensive handling
is required.

(ii) Total production cycle time is more owing to long distances and
waiting at various points.

(iii) Since more work is in queue and waiting for further operation
hence bottle necks occur.

(iv) Generally, more floor area is required.

(v) Since work does not flow through definite lines, counting and
scheduling is more tedious.

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(vi) Specialization creates monotony and there will be difficult for the
laid workers to find job in other industries.

3. Fixed Position Layout:

This type of layout is the least important for today’s manufacturing
industries. In this type of layout the major component remain in a
fixed location, other materials, parts, tools, machinery, man power
and other supporting equipment’s are brought to this location.

The major component or body of the product remain in a fixed

position because it is too heavy or too big and as such it is economical
and convenient to bring the necessary tools and equipment’s to work
place along with the man power. This type of layout is used in the
manufacture of boilers, hydraulic and steam turbines and ships etc.

Advantages Offered by Fixed Position Layout:

(i) Material movement is reduced

(ii) Capital investment is minimized.

(iii) The task is usually done by gang of operators, hence continuity of

operations is ensured

(iv) Production centers are independent of each other. Hence, effective

planning and loading can be made. Thus total production cost will be
reduced.

(v) It offers greater flexibility and allows change in product design,

product mix and production volume.

Limitations of Fixed Position Layout:

(i) Highly skilled man power is required.

(ii) Movement of machines equipment’s to production centre may be

time consuming.

(iii) Complicated fixtures may be required for positioning of jobs and

tools. This may increase the cost of production.

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4. Combination Type of Layout:
NOTES
Now a days in pure state any one form of layouts discussed
above is rarely found. Therefore, generally the layouts used in
industries are the compromise of the above mentioned layouts. Every
layout has got certain advantages and limitations. Therefore,
industries would to like use any type of layout as such.

Flexibility is a very important factory, so layout should be such

which can be molded according to the requirements of industry,
without much investment. If the good features of all types of layouts
are connected, a compromise solution can be obtained which will be
more economical and flexible.

Capacity Planning

Capacity planning is the process of determining the

production capacity needed by an organization to meet changing
demands for its products. In the context of capacity planning,
design capacity is the maximum amount of work that an organization
is capable of completing in a given period.

Any manufacturing facility benefits from the financial and

logistical capabilities of capacity planning, no matter the size of the
business. It is a method of management that features the efficient use
of resources through a projection of production needs. Capacity
planning can apply to a company’s computer network, storage,
workforce maintenance, and product manufacturing.

Planning for capacity breaks down into three steps:

determining service level requirements, analyzing current capacity,
and planning for the future. To gain a better grasp on how each
applies to the planning process, let us take a closer look at each one
individually.

Determining Service Level Requirements

In this step, a business breaks down work into categories; it

also quantifies users’ expectations for how that work gets done.

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Within this first step exist three stages: establishing workloads,
determining the unit of work, and setting service levels.

Businesses choose to organize workloads by either who is doing

the work, the type of work performed, or the work process. They then
create a definition of satisfactory service for each load. Whereas a
workload measures the resources needed to accomplish the work, a
unit of work measures a quantity of work completed.

A "service level agreement" lays out the acceptable parameters

between the provider and the consumer.

Analyze Current Capacity

Businesses take an in-depth look at their current production

schedule to evaluate capacity. They analyze each workload and
system as a whole, following these steps:

9 Compare the measurements of any items referenced in service

level agreements with their objectives

9 Check the usage of the various resources of the system

9 Take a look at the resource utilization for each workload and

decipher which workloads are the major users of each resource

9 Determine where each workload spends its time. This provides

insight into which resources take the greatest portion of
response time for each workload

Plan for the Future

Finally, after analyzing current capacity, it’s time to plan for

the future. Base a plan on forecasted processing requirements to
prevent overwhelming the system. In order to accomplish this task,
you need to know the amount of incoming work expected over the
coming quarters. Then, configure the optimal system for satisfying
service levels over this period.

These three steps in capacity planning help your organization

prepare for future growth. Optimal configuration ensures you meet
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service level requirements while only purchasing what you need to get
NOTES
the work completed. This process facilitates a manufacturing process’
well-being. It offers your company an opportunity to optimize its
production process and ready itself for the future.

Capacity Requirements Planning

CRP uses information gained from the methods mentioned

above as well as MRP outputs on existing inventories and lot sizing.
Each work center will then have a capacity report prepared that can
be used in planning.

Capacity Bills

This technique takes bills of material used and parts produced,

work center setup and actual run times and computes capacity by
multiplying the number of units required by the time needed to
produce each.

Resource Profiles

Essentially the same as capacity bills with the inclusion of

acknowledging lead times needed by available resources, so that
workloads are allocated to appropriate shifts. This method takes into
account that different resources and different products will have
different production rates.

Capacity Planning Using Overall Factors

Although its title seems complicated, CPOF is a simple

approach to capacity planning that applies historical ratios. These
ratios are based on the master production schedule along with
established production standards. The data obtained from work
centers and volumes of finished goods in specific time periods are
used to predict capacity needed for future work.

An OEE (overall equipment effectiveness) measure can add

value to this information by noting the optimum cycle time needed to
produce one part and comparing it to the amount of time that was

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actually used. Thus, unrealistic expectations can be excluded from
calculating capacity.

All these techniques use past information to inform future

planning—whether it is numbers of machines available, human
resources available, parts inventory on hand, or the time it has taken
to produce a particular product on a particular piece of equipment.
Advanced planning techniques, however, can add another level of
knowledge to this base by allowing “what-if” simulations.

SOLVED PROBLEMS

Alpha Industry estimates that it will sell 12,000 Units of itsproductsfor the
forthcoming year. The Ordering cost is Rs.100 per order and the carrying cost
per unit per year is 20% of the purchase price per unit. The purchase price is
Rs.50.
1. Find Economic order Quantity(EOQ)
2. No. Of orders per year
3. Time between successive orders

Solution:

2CoD
WE know that EOQ is Q =
Cc

Where D = Demand per year = 12,000

Co = Ordering Cost = 100
Cc = Inventory Carrying cost = 20% of purchase price

= (20/100) x 50 = 2

2 x100 x12000
Therefore EOQ = = 490 Units
10

No. Of ordes/ year = D / Q = 12,000 / 490 = 24.29

Therfore No. Of Ordders / year = 24

Time between successive orders = Q /D = 490 / 12000 = 0.04 yrs = 0.48

Months

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CASE STDUY
NOTES
All well engineering had distribution warehouses at seven locations as A
(150,250), B (350,600), C (700,800), D (400,500), E (650,1200), F
(700,1000) and G (200,900) and these distribution warehouses would be
1500, 500, 1200, 800, 1000, 1800 and 900 units per annum respectively.
Identify the new location by using gravity location method.

Solution:

Given: Seven warehouse locations and the corresponding weights to be

disbursed are:

Coordinates Disbursing of weights

A (150,250), 1500,
B (350,600), 500,
C (700,800), 1200,
D (400,500), 800,
E (650,1200), 1000,
F (700,1000) 1800
G (200,900) 900

We know that X* =Σ Wi Ai
Σ Wi
Where Wi = weights to be disbursed,
Ai = x – ordinates and Bi = coordinates

Therefore X* = (150 X1500) + (350 x 500) + 700 x 1200) + (400 x 800)

+(650 x 1000) + +(700 x 1800) + 200 x900)

1500 + 500 + 1200 + 800 + 1000 + 1800 + 900

(i.e) X* = 3650000 = 474

7700
Similarly Y* = ( 250 x 1500) + (600 x 500) + (800 x 1200) + 500 x 800) +
+(1200 x 1000) + +(1000 x 1800) + 900 x 900)

(1500 + 500 + 1200 + 800 + 1000 + 1800 + 900)

(i.e) Y* = 5845000 = 759

7700
The optimal location of the new facility (X*,Y*) = (474, 759)

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Solved Problems in capacity planning

Problem No:1

A Product line manufacturing shoes has five stations in series whose

individual capacities per shift are stated in the following table. The actual
output of the line is 500 pairs per shift. Find:

1. The System Capacity

2. The system Efficiency

Station No 1 2 3 4 5

Cap/Shift 600 650 650 550 600

Solution

The capacity of the bottleneck operation is 550 pairs per shift

(i.e at station No:4)

The Actual output of the line = 500 pairs per shift

Therfore , the system effiency = Actual output x 100

System Capacity

= ( 500 / 50 ) x 100 = 90.91%

Problem No:2

An automobile component manufacturer has the plan of buying a moulding

machine which can manufacture 1,70,000good parts per year. The moulding
machine is a part of a product line. The system effiencyof the product line is
85%

(a) What is the required systems capacity?

(b) Assume that it takes 100 seconds to mould each part and the plant
operates 2000 hours per year. If the moulding machines are used only 60%of
the time and are 90% efficient, What is the actual output of the moulding
machine per hour?

(c)How many moulding machines would be required?

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Solution
NOTES
System Capacity = Actual output per year

System Effiency

( i. e) = 1,70,000 / 0.85 = 2,00,000 Moulds per year

= 2,00,000 / (2000hr) = 100 Moulds per Hour

(b) Output per Hour = Unit Capacity x % Utilization x effiency

To find Unit capacity

Each part is mould time = 100 seconds

(i.e) out per hour = out put per (60 x 60 seconds)

= 3600 /100 = 36 moulds

Unit Capacity = 36 moulds per hour

Therfore Output per Hour =36 x 0.6 x 0.9 = 19.44 Moulds(Approx)

(c) No.of moulding machines needed = Sys. Capacity/out put per Hr

= 100 / 20 = 5 Machines

2.10 CHECK YOUR ANSWERS

1. Define process
2. Enumerate process mapping
3. Explain briefly process of Flow chart with a neat sketch of an
industrial product.
4. What are the various types of process? How it is implemented
in a plastic Injection moulding manufacturing company.
5. Describe factors influencing Plant Location
6. Why does an Industry give importance to a plant Lay out?
7. Plant location plays a vital role in strategic growth of an
Industry
8. List out different Plant layout and explain each of them

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Module 3

DEMAND FORECASTING AND INVENTORY MODELS

Structure
3.0 Introduction
3.1 Usefulness of Demand Forecasting
3.1.1 The Scope of Demand Forecasting
3.1.2 Types of Forecasting
3.2 A B C Analysis
3.3 Selective Inventory Control Techniques
3.4 Types of Inventories

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3.0 INTRODUCTION NOTES

Demand forecasting is a combination of two words; the first one

is Demand and another forecasting. Demand means outside
requirements of a product or service. In general, forecasting means
making an estimation in the present for a future occurring event. Here
we are going to discuss demand forecasting and its usefulness. It is a
technique for estimation of probable demand for a product or services in
the future. It is based on the analysis of past demand for that product
or service in the present market condition. Demand forecasting should
be done on a scientific basis and facts and events related to forecasting
should be considered.

Therefore, in simple words, we can say that after gathering

information about various aspect of the market and demand based on
the past, an attempt may be made to estimate future demand. This
concept is called forecasting of demand. For example, suppose we sold
200, 250, 300 units of product X in the month of January, February,
and March respectively. Now we can say that there will be a demand for
250 units approx. of product X in the month of April, if the market
condition remains the same.

3.1Usefulness of Demand Forecasting

Demand plays a vital

role in the decision
making of a business. In
competitive market
conditions, there is a
need to take correct
decision and make
planning for future
events related to
business like a sale,
production, etc.

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 The effectiveness of a decision taken by business managers
depends upon the accuracy of the decision taken by them.

Demand is the most important aspect for business for achieving

its objectives. Many decisions of business depend on demand like
production, sales, staff requirement, etc. Forecasting is the necessity of
business at an international level as well as domestic level.

Demand forecasting reduces risk related to business activities

and helps it to take efficient decisions. For firms having production at
the mass level, the importance of forecasting had increased more. A
good forecasting helps a firm in better planning related to business
goals.

There is a huge role of forecasting in functional areas

of accounting. Good forecast helps in appropriate production planning,
process selection, capacity planning, facility layout planning, and
inventory management, etc.

Demand forecasting provides reasonable data for the

organization’s capital investment and expansion decision. It also
provides a way for the formulation of suitable pricing and advertisement
strategies.

Following is the significance of Demand Forecasting:

Fulfilling objectives of the business

Preparing the budget

Taking management decision

Evaluating performance etc.

Moreover, forecasting is not completely full of proof and correct. It thus

helps in evaluating various factors which affect demand and enables

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 management staff to know about various forces relevant to the study of
NOTES
demand behavior.

3.1.1THE SCOPE OF DEMAND FORECASTING

The scope of demand forecasting depends upon the operated

area of the firm, present as well as what is proposed in the future.
Forecasting can be at an international level if the area of operation is
international. If the firm supplies its products and services in the local
market then forecasting will be at local level.

The scope should be decided considering the time and cost

involved in relation to the benefit of the information acquired through
the study of demand. Cost of forecasting and benefit flows from such
forecasting should be in a balanced manner.

3.1.2 TYPES OF FORECASTING

There are two types of forecasting:

Based on Economy

Based on the time period

1. Based on Economy

There are three types of forecasting based on the economy:

i. Macro-level forecasting: It deals with the general

economic environment relating to the economy as measured by the
Index of Industrial Production(IIP), national income and general level
of employment, etc.

ii. Industry level forecasting: Industry level forecasting deals

with the demand for the industry’s products as a whole. For example
demand for cement in India, demand for clothes in India, etc.

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iii. Firm-level forecasting: It means forecasting the demand for a
particular firm’s product. For example, demand for Birla cement,
demand for Raymond clothes, etc.

2. Based on the Time Period

Forecasting based on time may be short-term forecasting and long-term

forecasting

i. Short-term forecasting: It covers a short period of time,

depending upon the nature of the industry. It is done generally for six
months or less than one year. Short-term forecasting is generally
useful in tactical decisions.

ii. Long-term forecasting casting: Long-term forecasts are for a

longer period of time say, two to five years or more. It gives information
for major strategic decisions of the firm. For example, expansion of
plant capacity, opening a new unit of business, etc.
Demand Forecasting methods

One of the most important steps of the Demand Forecasting process

is the selection of the appropriate method for Demand Forecasting.
Demand can be forecasted using (A) Qualitative methods or (B)
Quantitative methods as explained below:

Qualitative methods:

The Delphi Technique: A panel of experts are appointed to produce a

Demand Forecast. Each expert is asked to generate a forecast of their
assigned specific segment. After the initial forecasting round, each
expert reads out their forecast and in the process, each expert is
influenced by other experts. A consequent forecast is again made by
all experts and the process is repeated until all experts reach a near
consensus scenario.

Sales Force Opinion: The Sales Manager asks for inputs of expected
demand from each Salesperson in their team. Each Salesperson
evaluates their respective region and product categories and provides
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their individual customer demand. Eventually, the Sales Manager
NOTES
aggregates all the demands and generates the final version of Demand
Forecast after management’s judgment.

Market Research: In market research technique, customer-specific

surveys are deployed to generate potential demand. Such surveys are
generally in the form of questionnaires that directly seeks personal,
demographic, preference and economic information from end
customers. Since this type of research is on a random sampling basis,
care needs to be exercised in terms of the survey regions, locations,
and demographics of the end customer. This type of method could be
beneficial for products that have little to no demand history.

Quantitative methods:

Trend projection method: Trend projection method can be effectively

deployed for businesses with a large sales data history of typically
more than 18 to 24 months. This historical data generates a “time
series” which represents the past sales and projected demand for a
specific product category under normal conditions by a graphical
plotting method or the least square method.

Barometric technique: Barometric technique of Demand Forecasting

is based on the principle of recording events in the present to predict
the future. In the Demand Forecasting process, this is accomplished
by analyzing the statistical and economic indicators. Generally,
forecasters deploy statistical analysis like Leading series, Concurrent
series or Lagging series to generate the Demand Forecast.

Econometric forecasting technique: Econometric forecasting

utilizes autoregressive integrated moving-average and complex
mathematical equations, to establish relationships between demand
and factors that influence the demand. An equation is derived and
fine-tuned to ensure a reliable historical representation. Finally, the
projected values of the influencing variables are inserted into the
equation to generate a forecast.

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Deterministic Inventory Model

In brief, a deterministic model is a method based on the assumption

that all parameters and variables associated with an inventory stock
are known and that there is no uncertainty associated with demand
and replenishment of inventory stock.

On the contrary, the probabilistic models recognise the fact that there
is always some degree of uncertainty associated with the demand
pattern and lead times for inventory stock.

Deterministic models of inventory control are used to determine the

optimal inventory of a single item when demand is mostly largely
obscure. Under this model, inventory is built up at a constant rate to
meet a determined or accepted demand.

For example, a business has received an order in January for 100

model trains for delivery to be completed by November for the holiday
season. Due to the deadline being 10 months away, the trains can be
produced at a rate of ten per month.

The most common deterministic models used in inventory control

today are:

Economic Ordering Quantity (EOQ) Model

ABC Analysis

Inventory Turnover Ratio

Economic Ordering Quantity (EOQ) Model

One of the important decisions to be made in inventory management

is how much inventory stock to actually buy. The EOQ is a company’s
optimal order quantity that minimises its total costs related to
ordering, receiving and holding the inventory.

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Because of this model’s assumptions that demand, ordering, and
NOTES
holding costs remain constant over time — it is best to use this model
in similar circumstances. EOQ also gives solutions to other problems
like, at what frequency, when and helping determine reserve stock
quantities.

3.2 ABC ANALYSIS

Also known as selective inventory control, the ABC analysis

suggests that inventory values are not equal, and so divides your
inventory stock into three categories A, B and C. The inventory stock
with the highest value are classified as ‘A’ inventory. The items with
relatively low value as ‘B’ inventory and the items which are the least
valuable are classified as ‘C’ inventory. The ABC Analysis allows
different inventory management techniques to be applied to different
segments of the inventory in order to increase revenue and decrease
costs.

Inventory Turnover Ratio

This inventory ratio establishes the relationship between the average

inventory and the cost of inventory sold during a particular period.
This is calculated using the following formula:

Inventory Turnover Ratio = Cost of Goods Sold /Average Inventory

Average inventory is used instead of ending inventory because many

businesses merchandise fluctuates greatly throughout the year. When
comparing the current year’s inventory ratio with those of previous
years, it will reveal the following points relating to inventories:

Fast-Moving Items: High inventory ratio as this has high

demand

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 Slow-Moving Items: Low turnover ratio, as they have a
lower demand they should be maintained at minimum
quantity levels

Dormant or obsolete Items: Zero demand. These should be

liquidated or disposed of as early as possible to curb
further losses

3.3 SELECTIVE INVENTORY CONTROL TECHNIQUES

• To identify items, which bring significant benefit by proper

management from among hundreds and thousands of items managed
by an organisation

• Determine the importance of items and thus allows different levels of

control based on the relative importance of items Stock-Keeping Unit
(SKU)

• Management decisions regarding inventories must ultimately be

made at the level of an individual item or product

• The specific unit to be controlled will be called a stock-keeping unit

• A SKU will be defined as an item of stock that is completely specified
as to functions, style, size, colour, and usually location

Examples: • The same style shoes in two different sizes would

constitute two different SKUs

• Each combination of size and grade of steel rod in raw stock

constitutes a separate SKU

• An oil company must regard each segregation of crude as a separate

SKU

• A tire manufacturer would normally treat the exactly same tire at

two geographically remote locations as two distinct SKUs ABC
Analysis

• Classifies items based on the annual usage value (AUV)

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• Identify a small percentage of items which account for most of the
NOTES
total inventory value Basic Principle 20/80 - Rule Pareto’s Law –
Vilfredo Pareto – Italian Economist “Few are vital’ and ‘many are
trivial’ AUV = Annual demand Χ Price Pareto’s law applied to
inventories

• The relationship between the percentage of items and the percentage

of AUV follows a pattern A – about 20 % of items account for about 80
% of the AUV B - about 30 % of items account for about 15 % of the
AUV C - about 50 % of items account for about 5 % of the AUV Steps
in Making an ABC Analysis 1. Determine the annual usage for each
item 2. Calculate the AUV of each item 3. List the items according to
their AUV (descending order) 4. Calculate the cumulative AUV and the
cumulative percentage of items 5. Examine the annual usage
distribution and group the items into A, B, C based on percentage of
AUV Using ABC approach, there are two general rules to follow:

• Have plenty of low-value items

• Use the money and control effort to reduce the inventory of high-
value items

Different Controls used with different classes

• A Items: High priority – Tight control including complete accurate

records, regular and frequent review by management, frequent review
of demand forecast and close follow-up and expediting to reduce lead
time

• B Items: Medium priority – Normal Control

• C Items: Lowest priority – Simplest possible control. Perhaps use a

two-bin system or periodic review system. Order larger quantities and
carry sufficient safety stock

An example:

A small firm inventories only ten items, but decide to setup an ABC
inventory system with 20 % A items, 30 % B items, and 50 % C items.
The company records provide the information shown below.

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XYZ Analysis

• Based on the value of inventory undertaken during the closing of

annual accounts

X – High value; Y – Medium value; Z – Low value

HML Analysis

• Items are classified according to the unit value as high, medium,

and low. It is used to

control the purchase value of items.

Movement Analysis (FSN Analysis)

• Check stock rotations and identifies the obsolescence of items. This

is particularly useful for spare parts

Fast-, Slow- and Non-moving Analysis

Criticality criteria (VED Analysis) Vital, Essential and Desirable

• This is in the point view of operation particularly useful for spare

parts control

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• A vital equipment is one, which feeds a battery of equipments
NOTES
downstream

GOLF – Government-controlled, Ordinarily available in the open

market, Locally available and Foreign imported purchase

SDE – Scarce item or single source item, Difficult to obtain or Easy to

obtain as it is an offthe-shelf item.

SOS – seasonal and Off-seasonal

3.4 TYPES OF INVENTORIES

1 By the position in company`s production/operation process:

raw materials

works-in-process

finished goods

By Estonian financial accounting rules:

row materials

works-in-process

finished goods

goods purchased for resale

advance payments to suppliers

Types of inventories 2

• Cycle stock – inventories for satisfying usual (predicted) demand

between replenishments (receiving new ordered quantities)

• In-transit inventories / pipeline stock – items that are en route from

onelocation to another. They may be considered part of cycle stock
even they are not available for sale or shipment until after they arrive
at the destination.

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• Safety or buffer stock – held in excess of cycle stock because of
uncertainty in demand or lead time. Amount depends on extent of
demand fluctuation, replenishment lead time and planned availability
level for customers. Makes the majority of inventory in the typical
logistic system

• Speculative stock – held some reasons other than satisfying current

demand (getting quantity discounts, forecasted purchase price
increase or materials shortage, protecting against strikes/natural
disasters etc.Production economies may also lead to the manufacture
of products at times other than when they are in demand.

• Seasonal stock – form of speculative stock that involves

accumulation of inventory before a seasonal period begins (or ends –
in agriculture)

• Dead stock - items for which no demand has been registered for
some specified period of time (obsolete products, demand season
ended, etc).

The inventory control is made by a stock-keeping unit. SKU is an

individual product that differs from other product some way. The
difference could be in size, color, brand, model, package, function or
some other relevant characteristic or combination of these. Each SKU
has its own unique identification code (product code) in inventory
accounting system and it is counted and stored separately from other
items Much of inventory control is directed at controlling each SKU in
inventory. Although daily operations of inventories may require SKU
level control, strategic planning of inventory levels can be
accomplished by substantially aggregating product into broad groups
by some characteristic – product groups. This is approach , when
managing the inventory investment of all SKU-s collectively is the
issue.

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Three possible responses to stock-out
NOTES
• Backordering – the quantity requested by the customer is placed on
a separate order called a backorder and the special order is filled as
soon as the product is available from internal or external source. In
some cases the backorder is shipped directly from its original source
to the customer

• Substitution – occur when a product acceptable for the customer is

substituted for the productthat is not available.

• Lost sales – occurs when unsatisfied client annuls the order.

Common in retail situations
CASE STUDY

The stores of a repair shop has 10 items whose details are shown in the
following table. Apply ABC analysis to the stores and identify A class, B
class and C class items

Component
C01 co2 co3 co4 co5 co6 co7 co8 co9 co10
Code
Price / Unit in
110 3000 225 60 310 7000 500 1000 7000 800
Rs.
Unit / Year 125 40 310 720 425 525 900 90 510 600

Step 1: To find Cumulative value

Component Price / Annual consumption

Unit / Year
Code Unit in Rs. Rs./Yr
(1) (2) (1 x 2 )
CO 1 110 125 13750
CO 2 3000 40 120000
CO 3 225 310 69750
CO 4 60 720 43200
CO 5 310 425 131750
CO 6 7000 525 3675000
CO 7 500 900 450000
CO 8 1000 90 90000
CO 9 7000 510 3570000
CO 10 800 600 480000

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Step 2:

Rearrange the rows in the above ABC analysis working as per the decreasing
order of annual Consumption (Rs. / Yr)
Step 3:
Compute the cumulative annual value

Price / Annual Cumulative

Component Unit /
Unit in consumption consumption
Code Year
Rs. Rs./Yr Rs./Yr
CO 6 7000 525 3675000 3675000
A
CO 9 7000 510 3570000 7245000

CO 10 800 600 480000 7725000 B

CO 7 500 900 450000 8175000
CO 5 310 425 131750 8306750
CO 2 3000 40 120000 8426750
CO 8 1000 90 90000 8516750 C
CO 3 225 310 69750 8586500
CO 4 60 720 43200 8629700
CO 1 110 125 13750 8643450

Step 4:
ABCclassificationasper70% ; 20%; 10% of the total consumption value
“A” Category = 8643450 x 70% = 6050415

In the above table CO6 is only 3675000, Hence we have to consider

CO9 also as A category even though cumulative value of
consumption is marginally higher than 6050415

“B” Category = 8643450 x 20% = 1728690

Add this value with of A category , we get

(i.e) 6050415 + 1728690 = 779105, which covers component CO10

Rest of items components are “C” Cagtegory

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ABC Analysis GRAPH
NOTES

B
A C

Check your Answers

¾ Distinguish between design capacity and system capacity

¾ What are all the determinants of process characteristics?

¾ Discuss the importance of plant location

¾ What are the factors affecting plant location?

¾ Briefly narrate the factors influencing plant location

¾ State and narrate various type os plant Layout

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MODULE 4

SUPPLY CHAIN MANAGEMENT AND

MATERIALSREQUIREMENT PLANNING

STRUCTURE

4.0 Introduction

4.1 Need for supply chain

4.2 Components of supply chain Management

4.3 Measures of supply chain performance

4.4 Inventory levels

4.5 Aggregate production planning

4.6 Difference between MRP I and MRP II

4.0 INTRODUCTION

Supply Chain Management can be defined as the management

of flow of products and services, which begins from the origin of
products and ends at the product’s consumption. It also comprises
movement and storage of raw materials that are involved in work in
progress, inventory and fully furnished goods. The main objective of
supply chain management is to monitor and relate production,
distribution, and shipment of products and services. This can be done
by companies with a very good and tight hold over internal
inventories, production, distribution, internal productions and sales.

Supply chain management basically merges the supply and demand

management. It uses different strategies and approaches to view the
entire chain and work efficiently at each and every step involved in
the chain. Every unit that participates in the process must aim to
minimize the costs and help the companies to improve their long term
performance, while also creating value for its stakeholders and

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customers. This process can also minimize the rates by eradicating
NOTES
the unnecessary expenses, movements and handling.

The key benefits of supply chain management are as follows:

Develops better customer relationship and service.

Creates better delivery mechanisms for products and
services in demand with
minimum delay.
Improvises productivity and business functions.
Minimizes warehouse and transportation costs.
Minimizes direct and indirect costs.
Assists in achieving shipping of right products to the
right place at the right time.
Enhances inventory management, supporting the
successful execution of just-intime stock models.
Assists companies in adapting to the challenges of
globalization, economic
upheaval, expanding consumer expectations, and
related differences.
Assists companies in minimizing waste, driving out
costs, and achieving

4.1 NEED FOR SUPPLY CHAIN

Supply chain management has become an integral part of

business and is essential to any company’s success and customer
satisfaction. Supply chain management has the power to boost
customer service, reduce operating costs and improve the financial
standing of a company.

IMPROVE CUSTOMER SERVICES

Customers expect to receive the correct product mix and

quantity to be delivered on time. For example, if you buy five
books from Amazon and only two of the actual titles arrive, one
is an entirely different book and two are missing, the customer

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 will lose faith in Amazon, prompting them to leave a bad review
and hinder them from returning to the platform.
Products need to be on hand in the right
location. Customer satisfaction is tarnished if your car’s brake
pads fail and the auto repair shop is delayed in making the
repairs because parts are not available in-house.
Follow up support after a sale must be done quickly. When
an appliance store sells a furnace with a warranty and it
breaks down when temperatures are below freezing, it is a
great possibility the customer will be irate if the heating unit
cannot be fixed immediately.

REDUCE OPERATING COSTS

Decreases Purchasing Cost - Retailors depend on supply

chains to quickly distribute costly products to avoid sitting on
expensive inventories.
Decrease Production Cost - Any delay in production can cost
a company tens of thousands of dollars. This factor makes
supply chain management ever more important. Reliable
delivery of materials to assembly plants avoids any costly
delays in manufacturing.
Decrease Total Supply Chain Cost - Wholesale manufacturers
and retailer suppliers depend on proficient supply chain
management to design a network that meets customer service
goals. This gives businesses a competitive edge in the
marketplace.

IMPROVE FINANCIAL POSITION

Insert Profit Leverage - Businesses value supply chain

managers because they help control and decrease supply chain
expenditures.
Decrease Fixed Assets - Supply chain managers decrease the
use of large fixed assets such as plants, warehouses and
transportation vehicles, essentially diminishing cost.

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 Increases Cash Flow - Firms appreciate the added value
NOTES
supply chain management contributes to the speed of product
flows to customers.

4.2 COMPONENTS OF SUPPLY CHAIN MANAGEMENT

1. Planning

This is one of the most important stages. Before the beginning of the
entire supply chain, it is essential to finalise the strategies and put
them into place. Checking the demand for the product or service,
checking the viability, costing, profit, and manpower etc., are vital.
Without a proper plan or strategy in place, it will be well-nigh
impossible for the business to achieve effective and long term benefits.
Therefore, enough time has to be devoted to this phase. Only after the
finalisation of the plans and consideration of all pros and cons, can
one proceed further. Every business needs a plan or blueprint or a
roadmap based on which the strategies are made. Planning helps to
identify the demand and supply trends in the market and this, in
turn, helps to create a successful supply chain management system.

2. Information

The world today is dominated by a continuous flow of information. In

order to be successful, it is essential that a business stays abreast
with all the latest information about the various aspects of its
production. The market trends of supply and demand for a particular
product can be best understood if the information is properly and
timely disseminated through the many levels of the business.
Information is crucial in a knowledge-based world economy, and
ignorance about any aspect of business may actually spell doom for
the prospects of the business.

3. Source

Suppliers play a very crucial role in supply chain management

systems. Products and services sold to the end user are created with

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the help of different sets of raw materials. It is therefore necessary
that suitable quality raw materials are procured at cost effective rates.
If a supplier is unable to supply on time, and within the stipulated
budget, the business is bound to suffer losses and gain a negative
reputation.

It is crucial that a company procures good quality resources so it can

create good quality products and maintain its reputation in the
market. This necessitates a strong role for suppliers in the supply
chain management system.

4. Inventory

For a highly effective supply chain management system it is essential

that an inventory is kept and thoroughly maintained. An inventory
means the ready list of items, raw materials and other essentials
required for the product or service. This list has to be regularly
updated to demarcate available stock and required stock. Inventory
management is critical to the function of supply chain management,
because without proper inventory management the production, as
well as sale of the product, is not possible. Businesses have now
started to pay more attention to this component simply because of its
impact on the supply chain.

5. Production

Production is one among the most important aspects of this system. It

is only possible when all the other components of the supply chain
are in tandem with each other. For the process of production to start
it is essential that proper planning and supply of goods, as well as the
inventory, are well maintained. The production of goods is followed by
testing, packaging and the final preparation for delivery of the finished
product.

6. Location

Any business, that wants to survive as well as flourish, needs a

location which is profitable for the business. Take for example, a

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carbonated drink factory is set up in an area where water supply is
NOTES
scarce. Water is a basic necessity of such business. The lack of water
could hamper the production as well as affect the goodwill of the
company. A business cannot survive if it has to share an already
scarce raw material with the community. Hence, a suitable location,
which is well connected, and very close to the source of essential
resources for production is vital to a business’ prosperity. The
requirement and availability of manpower must also be considered
while setting up a business unit.

7. Transportation

Transportation is vital in terms of carrying raw materials to the

manufacturing unit and delivering the final product to the market. At
each stage, timely transportation of goods is mandatory to sustain a
smooth business process. Any business which pays attention to this
component, and takes good care of it, will benefit from the production
and transportation of its goods on time.

It is essential that a company works towards a safe and secure

transportation process. Be it in-house or a third-party vendor, the
transportation management system must ensure zero damage and
minimal loss in transit. A well-managed logistics system along with
flawless invoicing are the two pillars of secure transportation.

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8. Return of goods

Among the various components that create a strong supply chain is

the facility for the return of faulty/malfunctioning goods, along with a
highly responsive consumer grievance redress unit.

No one is infallible. Even a machine may malfunction once in a

million times if not more. As a part of a strong business process, one
may expect the return of goods under various circumstances. Even
the best quality control processes may have unavoidable momentary
lapses. In the case of such lapses, inevitably followed by consumer
complaints, a business must, instinctively, recall the product/s and
issue an apology. This not only creates a good customer bonding, but
also maintains goodwill in the long run.
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4.3 MEASURES OF SUPPLY CHAIN PERFORMANCE
NOTES

Supply chain performance measure can be defined as an approach to

judge the performance of supply chain system. Supply chain
performance measures can broadly be classified into two categories −

Qualitative measures − For example, customer satisfaction

and product quality.

Quantitative measures − For example, order-to-delivery lead

time, supply chain response time, flexibility, resource
utilization, delivery performance.

Here, we will be considering the quantitative performance measures

only. The performance of a supply chain can be improvised by using
a multi-dimensional strategy, which addresses how the company
needs to provide services to diverse customer demands.

Quantitative Measures

Mostly the measures taken for measuring the performance may be

somewhat similar to each other, but the objective behind each
segment is very different from the other.

Quantitative measures is the assessments used to measure the

performance, and compare or track the performance or products. We
can further divide the quantitative measures of supply chain
performance into two types. They are −

Non-financial measures

Financial measures

Non - Financials Measures

The metrics of non-financial measures comprise cycle time,

customer service level, inventory levels, resource utilization ability to
perform, flexibility, and quality. In this section, we will discuss the
first four dimensions of the metrics −

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Cycle Time

Cycle time is often called the lead time. It can be simply defined as
the end-to-end delay in a business process. For supply chains, cycle
time can be defined as the business processes of interest, supply
chain process and the order-to-delivery process. In the cycle time, we
should learn about two types of lead times. They are as follows −

Supply chain lead time

Order-to-delivery lead time

The order-to-delivery lead time can be defined as the time of delay in

the middle of the placement of order by a customer and the delivery
of products to the customer. In case the item is in stock, it would be
similar to the distribution lead time and order management time. If
the ordered item needs to be produced, it would be the summation of
supplier lead time, manufacturing lead time, distribution lead time
and order management time.

The supply chain process lead time can be defined as the time taken
by the supply chain to transform the raw materials into final
products along with the time required to reach the products to the
customer’s destination address.

Hence it comprises supplier lead time, manufacturing lead time,

distribution lead time and the logistics lead time for transport of raw
materials from suppliers to plants and for shipment of semi-
finished/finished products in and out of intermediate storage points.

Lead time in supply chains is governed by the halts in the interface

because of the interfaces between suppliers and manufacturing
plants, between plants and warehouses, between distributors and
retailers and many more.

Lead time compression is a crucial topic to discuss due to the time

based competition and the collaboration of lead time with inventory
levels, costs, and customer service levels.

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Customer Service Level
NOTES
The customer service level in a supply chain is marked as an
operation of multiple unique performance indices. Here we have
three measures to gauge performance. They are as follows −

Order fill rate − The order fill rate is the portion of customer
demands that can be easily satisfied from the stock available.
For this portion of customer demands, there is no need to
consider the supplier lead time and the manufacturing lead
time. The order fill rate could be with respect to a central
warehouse or a field warehouse or stock at any level in the
system.

Stockout rate − It is the reverse of order fill rate and marks

the portion of orders lost because of a stockout.

Backorder level − This is yet another measure, which is the

gauge of total number of orders waiting to be filled.

Probability of on-time delivery − It is the portion of customer

orders that are completed on-time, i.e., within the agreed-
upon due date.

In order to maximize the customer service level, it is important to

maximize order fill rate, minimize stockout rate, and minimize
backorder levels.

4.4 Inventory Levels

As the inventory-carrying costs increase the total costs

significantly, it is essential to carry sufficient inventory to meet the
customer demands. In a supply chain system, inventories can be
further divided into four categories.

Raw materials

Work-in-process, i.e., unfinished and semi-finished sections

Finished goods inventory

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 Spare parts

Every inventory is held for a different reason. It’s a must to maintain

optimal levels of each type of inventory. Hence gauging the actual
inventory levels will supply a better scenario of system efficiency.

Resource Utilization

In a supply chain network, huge variety of resources is used. These

different types of resources available for different applications are
mentioned below.

Manufacturing resources − Include the machines, material

handlers, tools, etc.

Storage resources − Comprise warehouses, automated storage

and retrieval systems.

Logistics resources − Engage trucks, rail transport, air-cargo

carriers, etc.

Human resources − Consist of labor, scientific and technical

personnel.

Financial resources − Include working capital, stocks, etc.

In the resource utilization paradigm, the main motto is to utilize all

the assets or resources efficiently in order to maximize customer
service levels, reduce lead times and optimize inventory levels.

Finanacial Measures

The measures taken for gauging different fixed and operational costs
related to a supply chain are considered the financial measures.

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Finally, the key objective to be achieved is to maximize the revenue
NOTES
by maintaining low supply chain costs.

There is a hike in prices because of the inventories, transportation,

facilities, operations, technology, materials, and labor. Generally, the
financial performance of a supply chain is assessed by considering
the following items −

Cost of raw materials.

Revenue from goods sold.

Activity-based costs like the material handling, manufacturing,

assembling rates etc.

Inventory holding costs.

Transportation costs.

Cost of expired perishable goods.

Penalties for incorrectly filled or late orders delivered to

customers.

Credits for incorrectly filled or late deliveries from suppliers.

Cost of goods returned by customers.

Credits for goods returned to suppliers.

In short, we can say that the financial performance indices can be

merged as one by using key modules such as activity based costing,
inventory costing, transportation costing, and inter-company
financial transactions.

What is Lean Supply Chain?

Lean supply chain management is about reducing costs and lowering

waste as much as possible. This methodology is important for
organizations with high volumes of purchase orders since waste and
costs can accumulate quickly.

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Additionally, companies with high volumes of low variability purchase
orders, such as food items, benefit their efficiency greatly by utilizing
the lean supply chain methodology.

What is Agile Supply Chain?

Agile Supply Chain is built to be highly flexible for the purpose of

being able to quickly adapt to changing situations. This methodology
is considered important for organizations that want to be able to
adapt to unanticipated external economic changes, such as economic
swings, changes in technology, or changes to customer demand.

Implementing an agile supply chain allows organizations to quickly

adjust their sourcing, logistics, and sales.

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 NOTES

______________________________________________________

4.5 AGGREGATE PRODUCTION PLANNING

Aggregate Production Planning Aggregate production planning

is concerned with the determination of production, inventory, and
work force levels to meet fluctuating demand requirements over a
planning horizon that ranges from six months to one year. Typically
the planning horizon incorporate the next seasonal peak in demand.
The planning horizon is often divided into periods. For example, a one
year planning horizon may be composed of six one-month periods
plus two three-month periods. Normally, the physical resources of the
firm are assumed to be fixed during the planning horizon of interest
and the planning effort is oriented toward the best utilization of those
resources, given the external demand requirements. Since it is
usually impossible to consider every fine detail associated with the
production process while maintaining such a long planning horizon, it
is mandatory to aggregate the information being processed. The
aggregate production approach is predicated on the existence of an
aggregate unit of production, such as the “average” item, or in terms

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of weight, volume, production time, or dollar value. Plans are then
based on aggregate demand for one or more aggregate items. Once the
aggregate production plan is generated, constraints are imposed on
the detailed production scheduling process which decides the specific
quantities to be produced of each individual item. The plan must take
into account the various ways a firm can cope with demand
fluctuations as well as the cost associated with them. Typically a firm
can cope with demand fluctuations by: (a) Changing the size of the
work force by hiring and firing, thus allowing changes in the
production rate. Excessive use of hiring and firing may limited by
union regulations and may create severe labor problems. (b) Varying
the production rate by introducing overtime and/or idle time or
outside subcontracting. (c) Accumulating seasonal inventories. The
tradeoff between the cost incurred in changing production rates and
holding seasonal inventories is the basic question to be resolved in
most practical situations. (d) Planning backorders. These ways of
absorbing demand fluctuations can be combined to create a large
number of alternative production planning options. Costs relevant to
aggregate production planning: (a) Basic production costs: material
costs, direct labor costs, and overhead costs. It is customary to divide
these costs into variable and fixed costs. (b) Costs associated with
changes in the production rate: costs involved in hiring, training, and
laying off personnel, as well as overtime compensations. (c) Inventory
related costs

Techniques of Aggregate Planning

Various techniques are used to perform the task of aggregate

planning. Usually, there are two categories: Informal trial-and-error
techniques and mathematical techniques. In practice, informal
techniques are more commonly used. However, a substantial amount
of research has been done to mathematical techniques, but still, they
are not as extensively used, they often serve as a basis for comparing
the effectiveness of alternative techniques for aggregate planning.

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 NOTES

There are several steps in general procedure for aggregate planning:

1. Determine demand for each period.

2. Determine capacities (regular time, overtime, subcontracting)
for each period.
3. Identify company or departmental policies that are pertinent
(e.g., maintain a safety stock of 5 percent of demand, maintain
a reasonably stable workforce).
4. Determine unit costs for regular time, overtime,
subcontracting, holding inventories, back orders, layoffs, and
other relevant costs.
5. Develop alternative plans and compute the cost for each
activity.
6. If satisfactory plans emerge, select the one that best satisfies
objectives. Otherwise, return to step 5.

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Procedure for Aggregate Planning

It can be useful to employ a worksheet or spreadsheet to summarize

demand, capacity, and cost for each plan. Additionally, graphs can be
used to guide development of alternatives. Among all methods, the
spreadsheet solver approach is the most appropriate for industries
because the solver on spreadsheet software is readily available on
virtually all personal computers, the APP model is comparatively easy
to devise in a spreadsheet format, and lastly, the results are easy to
construe.

There are certain guidelines for developing optimal aggregate

production plan using spreadsheet solver. First of all, necessary data
must be collected for developing Aggregate production planning mode.
Secondly, formulate APP model in the spreadsheet format.

Next step is to appraise the obtained solutions. This can be done by

presenting the constructed spreadsheet aggregate production
planning model and its solutions to related departments of the
company such as production, personnel, planning, sales and
marketing, and warehousing, and judge whether the solutions are
satisfactory. The comparison between the existing aggregate
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production plan and the optimal plan generated from the Aggregate
NOTES
production planning model may be done in financial term. If the
solution is not satisfactory, values of some input parameters may
need to be reconsidered or the constraints may need to be
customized. The spreadsheet APP model will be changed until the
solutions are acceptable.

Last step is to implement the aggregate production plan. After the

spreadsheet APP model is agreeably developed and solved, the
obtained solutions can be implemented. During the execution of the
aggregate production plan, some parameters of the model may be
altered such as demands, productivity rates, related costs, number of
workers, and inventory levels.

These parameters should be modernized regularly and the APP model

is solved to resolve the revised aggregate production plan.

Steps for Developing the Aggregate Production Plan

To summarize, aggregate production planning, is an effectual

approach to operations management and concentrate to satisfy
demand as it relates to production, labour force, inventory and other

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models. Aggregate production planning can attach in facility planning
with scheduling decisions. Aggregate production planning assists to
lessen production costs, the effect of variant demand, cost of
inventory and labour costs.

Aggregate production planning also exploits plant and equipment

utilization and profits. The efficiency of aggregate production planning
is a production plan that indicates how many workers are needed in
each period, the amount and type of production (such as regular,
overtime, subcontracting, etc.), and the units to be produced, stored,
and back ordered per month or per quarter.

Aggregate production planning is also a constructive tool to create

and assess alternatives such as the adjustment of the labour force
through hire/fire/layoff/overtime, the use of subcontractors,
anticipatory inventory, and even the development of corresponding
products and pricing strategies.

1. Meaning of Material Requirement Planning (MRP):

Material Requirement Planning is a special technique to plan the
requirements of materials for production. For the manufacturing
company to produce the end items to meet demands the availability of
sufficient production capacity must be coordinated with the
availability of all raw materials and purchased items from which, the
end items are to be produced.

In other words, there is a need to manage the availability of

dependent demand items from which the products are made.
Dependent demand items are the components, i.e., materials or
purchased items, fabricated parts or sub-assemblies that make up
the end product.

One approach to manage the availability of dependent demand items

is to keep a high stock of all the items that might be needed to
procured the end items and when the on-hand stock drops below a
present re-order level, the items are procured or bought as the case
may be to replenish the stock to the maximum level.

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However, this approach is costly due to the excessive inventory of
NOTES
components, fabricated parts and sub-assemblies to ensure high
service level.

An alternative approach to manage these items is to plan for

procurement or manufacture of the specific components that will be
required to produce the required quantities of end products as per the
production schedule indicated by the master production schedule
(MPS). The technique is known as Material Requirement Planning
(MRP) technique.

MRP is a computer-based system in which the given MPS is exploded

into the required amounts of raw materials, parts and sub-assemblies
needed to produce the end items in each time period (week or month)
of the planning horizon. The gross requirement of these materials is
reduced to net requirements by taking into account the materials that
are in inventory or on order.

2. Objectives of MRP:
The objectives of material requirement planning in operations
management are:
(a) It determines the quantity and timing of finished goods demanded.

(b) It determines the time phased requirements of the demand for

materials, components and sub-assemblies over a specified planning
time horizon.

3. Material Requirement Planning System Inputs:

Following are the basic three inputs of any MRP System:
a. Master Production Schedule (MPS):
This is the schedule of the quantity and timing of all end products to
be produced over a specific planning horizon. The planning horizon
should be long enough to cover the cumulative lead times of all
components that must be purchased or manufactured to meet the
end product requirement.

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MPS is developed from customer’s orders or from forecasts of demand
or both. MPS is the key input which drives the MRP programme as it
tells what the company intends to produce. The maximum length of
time that is planned in a MPS will depend on the company’s ability to
forecast demand and its requirements, but a one year span is usually
common.

b. Bill of Material (BOM) File:

A bill of material file, also known as product-structure file, is a
computerized file listing all finished products, the quantify of raw
materials, parts, sub-assemblies and assemblies in each product.

The MRP programme obtains information about the components

needed to make an end product from BOM file. A bill of material not
only lists all the required parts but also is structured to reflect the
sequence of steps required to produce the end product.

BOM level: Each part or assembly in the BOM must receive a

number or ranking that explains where it fits into the BOM
hierarchy. This makes it easier for anyone to understand the
BOM.
Part number: The BOM should assign a part number to each
item, which allows anyone involved in the manufacturing cycle
to reference and identify parts instantly. To avoid confusion,
each part must receive only one part number.
Part name: Each part, material, or assembly should also
include a detailed, unique name that allows anyone to identify
the part easily without having to reference other sources.
Phase: Make sure to record the lifecycle stage of each part in
the BOM. For example, for parts that are the process of being
completed, a term like "In Production" can be used. Other
terms, such as "Unreleased" or "In Design" can be used for
parts that have not yet been approved. Such terms are
especially helpful during new product introductions since they
allow progress to be tracked easily.

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 Description: A comprehensive, informative description of each
NOTES
material or part must be included. This description helps you
and others identify parts and distinguish between similar parts
and materials.
Quantity: The number of each part used in each assembly
must be specified in order for the BOM to serve as an accurate
purchasing tool.
Unit of measure: The BOM must specify what unit of measure
is being used to quantify the part or material. Terms like
"each," "inches," "feet," "ounces," and similar identifiers of
quantity can be used. This information helps ensure that
correct quantities are purchased and delivered to assembly
lines.
Procurement type: Each part should be identified as
something that is purchased off the shelf or manufactured
according to project specifications.
Reference designators: When a product includes printed
circuit board assemblies (PCBAs), the BOM should have
reference designators that explain in detail how the part fits on
the circuit boards.

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Source: www.arenasolutions.com

c. Inventory Status File:

This file contains important information such as what items should
be ordered and orders should be released. The file gives the complete
and up-to-date information on the hand quantities, gross
requirements, scheduled receipts and planned order releases for the
item. It also tells about lot sizes, lead times, safety stock level, etc.

The gross requirements are total needs from all resources. Whereas
the net requirements are ‘net’ after allowing for available inventory
and scheduled receipt. Schedule receipts are quantities for which
order has already been placed with vendor and in-house shop.

Planned receipts are quantities that will be order on a vendor or in-

house shop. Planned order release indicates the quantity and date to
initiate the purchase so that inventory will be received on schedule
after the lead time offset.

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 NOTES

The inventory status file keeps the data about the projected use and
receipts of each item and determines the amount of inventory that will
be available in each time period. If the projected available inventory is
not sufficient to meet the requirement in a period, the MRP program
will recommend that item to be ordered

Besides the above, following may also be the inputs:

(i) Routing File:
This file specifies the sequence of operations required to manufacture
components, sub-assemblies and finished goods.

(ii) Master Parts File:

It contains information about production time of sub-assemblies and
components produced internally and lead time for externally procured
items.

4. MRP System Outputs:

The outputs of any MRP System are:
a. Planned order schedule which is a plan of the quantity of each
material to be ordered in each time period. The order may be
purchase order on the suppliers or production orders for parts or sub-
assemblies on production departments.

b. Changes in planned orders (reschedule notices).

c. Planning reports like inventory forecast, purchase commitment

reports, stock-out incidences, etc.

d. To project capacity requirements.

5. Benefits of MRP:
MRP is a new way of managing manufacturing operations. It is not
only to calculate how much material to order and when. It is a
decision support system which provides timely and valuable
information to operations managers.

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The potential benefits of MRP system are:
a. Inventory:
MRP will substantially reduce inventory investment in dependent
demand items while improving operational efficiency by removing the
risk of shortages associated with the EOQ. The MRP system has
numerous benefits over the fixed order size system (EOQ) for control
of production items.

MRP system focuses on actual requirements. It is product oriented.

Whereas EOQ focuses on replenishing supply and is part oriented.
MRP is based on future production data while EOQ is on past demand
data.

b. Purchases:
MRP helps in generating purchase order and in case of any changes,
reschedule notices are also generated. These reports facilitate the
purchase department in listing out the priority items and making
them available in time.

c. Planning, Engineering and Schedule:

MRP plans orders for purchasing and shop scheduling for the
quantity of items that must be available in each time period to
produce the end items. The orders are planned for enough ahead to
allow adequate time for scheduled completion of the final product
without having material waiting unnecessarily for entry into a
particular stage of the production process.

d. Production:
MRP can improve flow of work, thereby reducing intermittent delays
and reducing the manufacturing cycle time for the jobs.

e. Sales:
As one of the functions of MRP is to report the changes in demand, it
improves the company’s ability to react to changes in customer
orders, improves customer services by helping production meet
assembly dates and helps to reduce delivery lead times.

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Although MRP is an excellent tool for initial planning and scheduling,
NOTES
its greatest benefits may be its ability to re-plan and reschedule in
view of unforeseen contingencies. The MRP system can predict
shortages and overages soon enough so that something can be done
to prevent them. It can help order priorities to help up-to-date by
planning and re-planning order due dates.

Limitations of MRP:
The effective operation and efficiency of an MRP system depends on
the integrity of the files and records of relevant data. The quality is
directly influenced by data accessibility, up-to-dateness, and
accuracy. Lack of record integrity is the major reason for the failure of
MRP system.

Computer- based MRP, even more than manual, will not perform
satisfactorily with poor files and records. The outputs from computer-
based MRP systems are dependent on its inputs.

Following are the weaknesses of MRP:

a. It assumes that lead times are known constants that are
independent of the lot size.

b. It requires fixed routing for the items. It is not able to access and
plan for the use of alternate routings.

c. The sequencing logic priorities order only by period or date. It

provides no priority for sequencing with in a period based on similar
set-ups, tooling, favoured customers, etc.

d. It is time consuming process as it requires let of processing and

analytical times. This is achieved usually by lot of iterations.

e. To make MRP system effective, an organisation must have effective

communication system, motivated personnel, right leadership and an

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effective computer system. It should also have support and
commitment of the top management.

Supplier lead times must be short and reliable. The MPS must be
prepared before the start of actual production. What is produced must
be known with certainty and quantity and timing of receipts of raw
materials and components must be dependable.

Difference Between MRP I and MRP II

Materials Requirements Planning I (MRP I)

Materials requirements planning (MRP) has functions that pertain to

the following:

Inventory Management - The main objective of a materials

requirements planning software is to ensure that materials are
available at a moments notice and are being transferred throughout
production with ease. This eliminates the necessity for manual-
entered data and also ensures that material orders are carried out.
MRP also alerts the production facilities when products are ready to
be delivered.

Cost Reduction - In correlation with inventory management, cost is

significantly reduced through ensurement of a steady inventory flow,
reduced holding and untimely delivery cost, and more. This will
ultimately lead to bringing more revenue into the operation.

Production Optimization - While the overall goal of MRP is to

manage materials, it benefits the rest of the system as well. As
materials are flowing throughout the supply chain equipment and
employees are able to work much more efficiently.

While these components of materials requirements planning (MRP)

are beneficial, MRP II is a much more advanced and strategic software
that offers key insight into various areas of production. MRP is
basically a less complex version of MRP II, in which MRP is able to
take the reins in other areas of production.

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Materials Requirements Planning (MRP II)
NOTES

The functions pertaining to materials requirements planning (MRP

II) pertains to the following:

Master Production Scheduling (MPS) - Through creation of a master

production schedule, production is easily able to follow the best route
available. MPS allows software to easily and accurately predict how
much product is needed to be produced within a given time period.
This will then effectively combat bottlenecks, inefficient productivity,
and other inefficient areas. This will ultimately lead to increased
production and revenue.

Purchasing Management - This feature within the software pertains

to the purchasing of any raw materials that are needed for
production. This capability is able to effectively purchase materials
without manual input, ultimately saving the production manager
time. This portion of the software allows for a steady flow of materials
throughout production.

Materials Requirements Planning (MRP) - With MRP II, you receive

all of the benefits of material requirements planning (MRP) along with
the features of MRP II. This feature is a production planning,
scheduling, and inventory control component that effectively manages
the overall manufacturing process. This capability is software based
and functions without human interaction, which then carries out
objectives pertaining to ensurement of product availability, product
control, and developing a plan for manufacturing, scheduling, and
purchasing.

Capacity Planning - Utilization of accurate data for demand enables

the software to produce a plan for capacity. This plan accounts for a
varying demand and the maximum amount of product that can be
produced and utilizes an advantageous route for capacity. This
portion of the software will save manufacturing operations from high
inventory cost and prolonged lead times, ultimately leading to reduced
cost within the operation.

Manufacturing Resource Planning Problem

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Consider an item that has projected requirements given below. Beginning of
inventory is 30 Units. Carrying cost per unit per week is Rs.2.50 The cost per
setup is Rs.250. The lead time to assemble the item is one week.

period 0 1 2 3 4 5 6 7 8 9 10 11 12

Requirement -- 30 50 40 -- 15 20 20 -- 10 -- 15 50

(a)Develop an EOQ solution and calculate the total relevant cost

(b)Develop an MCP solution and calculate the total relevant cost

Solution

EOQ Method

In this method, the Economic order quantity based on the following data is
computed.
Whenever there is a planed order release, it is made for this EOQ.
The data given in the problem are:
Initial on hand Quantity = 30 Units
Average Demand / Week(D) = 20.83 units /week
Average of 12 weeks projected requirements = 21 units / week (Approx)
Set-up cost per set-up (Co) = Rs.250

2CoD 2 x 250 x 21
EOQ = = = 64._8 = 65 Approx
Cc 50

As per the assumption of planned order release amount equal to this EOQ
value is 65 Units

The total ordering cost = 250 x 4 = 1000

Total Carrying Cost = 370 x 2.50 = 925
Total Inventory cost --------------- = (1000 + 925) = 1925

Manufacturing Resource Planning calculations as per EOQ Method

Period 0 1 2 3 4 5 6 7 8 9 10 11 12
Projected
-- 30 50 40 -- 15 20 20 -- 10 -- 15 50
Requirements
Receipts 65 65 65 65
Stockon 30 0 15 40 40 25 5 50 50 40 40 25 40
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Hand
NOTES
Planned
65 65 -- -- -- 65 -- -- -- -- 65 --
order Release

Minimum cost per period Method(MCP)

In this method,
Step 1 :The cumulative cost for each periods combination is calculated

Periods Total Lot size Cumulative Cost Cost / period

combined (Cum .Net Req.
2 50 250 250
2, 3 (50+40) = 90 (250+(40x2.5x 1) =350 (350 / 2) = 175
(350/3) =
2,3,4 (50+40+0) = 90 250+(40x2.5x1)+0) =350
116.67
250+(40x2.5x1)
(50+40+0+15+20) (662.5 / 5) =
2,3,4,5,6 +0 +(15x2.5x3)
= 125 132.5
+(20x2.5x4) = 662.5
Combine periods 2, 3, 4, and 5 because the corresponding cost per period is
minimum (i.e)116.67 and 115.65

Periods Total Lot size Cumulative Cost / period

combined (Cum .Net Req. Cost
6 20 250 250
6 ,7 40 300 150

6 ,7,,8,9,10 50 375 75
6 ,7,8,9,10,11 65 562.5 93.75

Combine periods 6.7.8.9 and10 because the corresponding cost per

period is minimum
11 15 250 250
11, 12 65 375 187.5
Combine periods 11 and12 because the period 12 is the last period

Working sheet:
1. Total Lot size (Cumulative Net Requirement working method:
For Period 2 see the table projected requirement is 50

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 For the period 2,3,4,5 see the table projected requirement 50,40,0,15.
Hence the cumulative net requirement is (50+40+0+15) = 105 .
This procedure is to be followed for other periods of combined

Cumulative cost working Method (Example: combined period 2,3,4,5)

No. Of Set-
Projected Cum.
Period Periods(Weeks) Carrying cost up
Requirement cost
from period 2 cost
0(Since
2 50 beginning from Nil
2)
3 40 1 40x2.5x1 =100
250 462.5
4 0 2 0x2.5x2=0

5 15 3 15x2.5x3=112.5

Total Period(Weeks) = 4
There for Cost period = ( Cum. Cost) / Cost Period = 462.5 / 4 = 115.65

References:

https://www.global-business-school.org/announcements/what-is-
supply-chain-management-why-is-important

https://www.iqualifyuk.com/library/business-management-
section/the-eight-components-of-supply-chain-management/

https://www.tutorialspoint.com/supply_chain_management/sup
ply_chain_management_performance_measures.htm

https://blog.procurify.com/2014/04/22/agile-lean-supply-chain-
management/

http://www.logforum.net/pdf/6_4_3_10.pdf

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https://www.civilserviceindia.com/subject/Management/notes/a
NOTES
ggregate-production-planning.html

http://www.accountingnotes.net/cost-accounting/mrp/material-
requirement-planning-mrp/5834

MODULE V

PROJECT MANAGEMENT AND QUALITY MANAGEMENT

STRUCTURE

5.0 Introduction
5.1 Phases of Project Management
5.1.1 Phase 1: Project Initiation
5.1.2 Phase 2: Project Planning
5.1.3 Phase 3: Project Execution
5.1.4 Phase 4: Project Performance/Monitoring

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5.1.5 Phase 5: Project Closure
5.2 Quality Management
5.3 Control Chart
5.3.1 X-bar and R charts
5.3.2 P Control Charts
5.3.3 Control Charts C
5.4 Sustainable operations Management
5.5Remanufacturing
5.6Control chart Problems

5.0 INTRODUCTION

Project management is the practice of initiating, planning, executing,

controlling, and closing the work of a team to achieve specific goals
and meet specific success criteria at the specified time.The primary
challenge of project management is to achieve all of the project goals
within the given constraints.

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 NOTES

5.1 PHASES OF PROJECT MANAGEMENT

According to PMI, “project management is the application of

knowledge, skills, tools, and techniques to a broad range of activities
in order to meet the requirements of a particular project.” There are
five phases of project management and if the lifecycle provides a high-
level view of the project, the phases are the roadmap to accomplishing
it.

5.1 Phase 1: Project Initiation

This is the start of the project, and the goal of this phase is to define
the project at a broad level. This phase usually begins with a business
case. This is when you will research whether the project is feasible
and if it should be undertaken. If feasibility testing needs to be done,
this is the stage of the project in which that will be completed.

Important stakeholders will do their due diligence to help decide if the

project is a “go.” If it is given the green light, you will need to create a
project charter or a project initiation document (PID) that outlines the

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purpose and requirements of the project. It should include business
needs, stakeholders, and the business case

5.1.2 Phase 2: Project Planning

This phase is key to successful project management and focuses on

developing a roadmap that everyone will follow. This phase typically
begins with setting goals. Two of the more popular methods for setting
goals are S.M.A.R.T. and CLEAR:

S.M.A.R.T. Goals – This method helps ensure that the goals have
been thoroughly vetted. It also provides a way to clearly understand
the implications of the goal-setting process.

Specific – To set specific goals, answer the following questions: who,

what, where, when, which, and why.
Measurable – Create criteria that you can use to measure the success
of a goal.
Attainable – Identify the most important goals and what it will take to
achieve them.
Realistic – You should be willing and able to work toward a particular
goal.
Timely – Create a timeframe to achieve the goal.

C.L.E.A.R. Goals – A newer method for setting goals that takes into
consideration the environment of today’s fast-paced businesses.

Collaborative – The goal should encourage employees to work

together.
Limited – They should be limited in scope and time to keep it
manageable.
Emotional – Goals should tap into the passion of employees and be
something they can form an emotional connection to. This can
optimize the quality of work.
Appreciable – Break larger goals into smaller tasks that can be
quickly achieved.
Refinable – As new situations arise, be flexible and refine goals as

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needed.
NOTES

During this phase, the scope of the project is defined and a project
management plan is developed. It involves identifying the cost,
quality, available resources, and a realistic timetable. The project
plans also includes establishing baselines or performance measures.
These are generated using the scope, schedule and cost of a project. A
baseline is essential to determine if a project is on track.

At this time, roles and responsibilities are clearly defined, so everyone

involved knows what they are accountable for. Here are some of the
documents a PM will create during this phase to ensure the project
will stay on track:

Scope Statement – A document that clearly defines the

business need, benefits of the project, objectives, deliverables,
and key milestones. A scope statement may change during the
project, but it shouldn’t be done without the approval of the
project manager and the sponsor.
Work Breakdown Schedule (WBS) –This is a visual
representation that breaks down the scope of the project into
manageable sections for the team.
Milestones – Identify high-level goals that need to be met
throughout the project and include them in the Gantt chart.
Gantt Chart – A visual timeline that you can use to plan out
tasks and visualize your project timeline.
Communication Plan – This is of particular importance if your
project involves outside stakeholders. Develop the proper
messaging around the project and create a schedule of when to
communicate with team members based on deliverables and
milestones.
Risk Management Plan – Identify all foreseeable risks.
Common risks include unrealistic time and cost estimates,
customer review cycle, budget cuts, changing requirements,
and lack of committed resources.

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5.1.3 Phase 3: Project Execution

This is the phase where deliverables are developed and completed.

This often feels like the meat of the project since a lot is happening
during this time, like status reports and meetings, development
updates, and performance reports. A “kick-off” meeting usually marks
the start of the Project Execution phase where the teams involved are
informed of their responsibilities.

Tasks completed during the Execution Phase include:

Develop team
Assign resources
Execute project management plans
Procurement management if needed
PM directs and manages project execution
Set up tracking systems
Task assignments are executed
Status meetings
Update project schedule
Modify project plans as needed

While the project monitoring phase has a different set of

requirements, these two phases often occur simultaneously.

5.1.4 Phase 4: Project Performance/Monitoring

This is all about measuring project progression and performance and

ensuring that everything happening aligns with the project
management plan. Project managers will use key performance
indicators (KPIs) to determine if the project is on track. A PM will
typically pick two to five of these KPIs to measure project
performance:

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 Project Objectives: Measuring if a project is on schedule and
NOTES
budget is an indication if the project will meet stakeholder
objectives.
Quality Deliverables: This determines if specific task
deliverables are being met.
Effort and Cost Tracking: PMs will account for the effort and
cost of resources to see if the budget is on track. This type of
tracking informs if a project will meet its completion date based
on current performance.
Project Performance: This monitors changes in the project. It
takes into consideration the amount and types of issues that
arise and how quickly they are addressed. These can occur
from unforeseen hurdles and scope changes.

During this time, PMs may need to adjust schedules and resources to
ensure the project is on track

Tip: Review the business case at the end of each phase and make
adjustments to the project plan as needed.

5.1.5 Phase 5: Project Closure

This phase represents the completed project. Contractors hired to

work specifically on the project are terminated at this time. Valuable
team members are recognized. Some PMs even organize small work
events for people who participated in the project to thank them for
their efforts. Once a project is complete, a PM will often hold a
meeting – sometimes referred to as a “post mortem” – to evaluate what
went well in a project and identify project failures. This is especially
helpful to understand lessons learned so that improvements can be
made for future projects.

Once the project is complete, PMs still have a few tasks to complete.
They will need to create a project punchlist of things that didn’t get
accomplished during the project and work with team members to
complete them. Perform a final project budget and prepare a final

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project report. Finally, they will need to collect all project documents
and deliverables and store them in a single place.

5.2 QUALITY MANAGEMENT

Quality management is the act of overseeing all activities and tasks

needed to maintain a desired level of excellence. This includes the
determination of a quality policy, creating and
implementing quality planning and assurance, and quality control
and quality improvement.

There are eight such dimensions of quality. These are:

1. Performance:
It involves the various operating characteristics of the product. For a
television set, for example, these characteristics will be the quality of
the picture, sound and longevity of the picture tube.

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2. Features:
NOTES
These are characteristics that are supplemental to the basic operating
characteristics. In an automobile, for example, a stereo CD player
would be an additional feature.

3. Reliability:
Reliability of a product is the degree of dependability and
trustworthiness of the benefit of the product for a long period of time.

It addresses the probability that the product will work without

interruption or breaking down.

4. Conformance:
It is the degree to which the product conforms to pre- established
specifications. All quality products are expected to precisely meet the
set standards.

5. Durability:
It measures the length of time that a product performs before a
replacement becomes necessary. The durability of home appliances
such as a washing machine can range from 10 to 15 years.

6. Serviceability:
Serviceability refers to the promptness, courtesy, proficiency and ease
in repair when the product breaks down and is sent for repairs.

7. Aesthetics:
Aesthetic aspect of a product is comparatively subjective in nature
and refers to its impact on the human senses such as how it looks,
feels, sounds, tastes and so on, depending upon the type of product.
Automobile companies make sure that in addition to functional
quality, the automobiles are also artistically attractive.

8. Perceived quality:
An equally important dimension of quality is the perception of the
quality of the product in the mind of the consumer. Honda cars, Sony
Walkman and Rolex watches are perceived to be high quality items by
the consumers.

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SEVEN TOOLS OF QUALITY

Many organizations use quality tools to help monitor and manage

their quality initiatives. There are several types of tools that can be
used. However, there are seven management tools for quality control
that are the most common. Different tools are used for different
problem-solving opportunities, and many of the tools can be used in
different ways. The trick is to become familiar and comfortable with
all of these quality tools so you can pull the appropriate one out of
your toolbox when there is a problem that needs to be solved.

7 Management Tools For Quality Control

1. Flowchart

Most of us are familiar with flowcharts. You have seen flowcharts of

reporting relationships in organizational structures. Flowcharts are
also used to document work process flows.

This tool is used when trying to determine where the bottlenecks or

breakdowns are in work processes. Flow-charting the steps of a
process provides a picture of what the process looks like and can shed
light on issues within the process.

Flowcharts are also used to show changes in a process when

improvements are made or to show a new workflow process. This
example provides a picture so those checking children in will know
the steps each takes depending on whether it is their first time or a
child who has been there before.

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 Example Flowchart
NOTES

2. Check Sheet

A check sheet is a basic quality tool that is used to collect data. A

check sheet might be used to track the number of times a certain
incident happens.As an example, a human resource department may
track the number of questions by employees, per category, per day.In
this particular check sheet the tool shows the total number of
questions received by the human resources department.This
information helps that department identify opportunities to

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proactively share information with employees in an effort to reduce
the numbers of questions asked.

Example Check Sheet

3. Cause and Effect (fish bone) Diagram

A cause and effect diagram, also known as a fish-bone diagram shows

the many possible causes of a problem.To use this tool, you need to
first identify the problem you are trying to solve and simply write it in
the box (head of the fish) to the right.

Next, you will list the major causes of the problem on the spine of the
fish. Causes are typically separated into categories of people, process,
materials and equipment. Causes are then identified through
brainstorming with a group familiar with the problem. Once all of the
possible causes are identified, they can be used to develop an
improvement plan to help resolve the identified problem.

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 Example Cause and Effect (Fish Bone) Diagram
NOTES

4. Pareto Chart

A Pareto chart is a bar graph of data showing the largest number of

frequencies to the smallest. In this example, we are looking at the
number of product defects in each of the listed categories. When you
look at the number of defects from the largest to the smallest
occurrences, it is easy to see how to prioritize improvements efforts.
The most significant problems stand out and can be targeted first.

Example Pareto Chart

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5. Control Charts

Control charts or run charts are used to plot data points over time
and give a picture of the movement of that data. These charts
demonstrate when data is consistent or when there are high or low
outliers in the occurrences of data. It focuses on monitoring
performance over time by looking at the variation in data points. And
it distinguishes between common cause and special cause variations.
The Dow Jones Industrial Average is a good example of a control
chart.

Example Control (Run)

6. Histograms

Histograms are bar chart pictures of data that shows patterns that
fall within typical process conditions.Changes in a process should
trigger new collection of data. A minimum of 50-75 data points should
be gathered to ensure an adequate number of data points have been
collected. The patterns that are detected demonstrate an analysis that
helps understand variation.

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In this example, it shows that the receptionist received the most
NOTES
phone calls about contribution statements for that period.

Example Histogram

7. Scatter Diagrams

Scatter diagrams are graphs that show the relationship between

variables. Variables often represent possible causes and effect.As an
example, a scatter diagram might show the relationship between how
satisfied volunteers are that attend orientation training. The diagram
shows the relationship between volunteer satisfaction scores and
volunteer orientation training.

Example Scatter Diagram

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5.3 Control Charts

5.3.1 X-bar and R charts

X-bar and R charts are used to monitor the mean and variation of a
process based on samples taken from the process at given times
(hours, shifts, days, weeks, months, etc.). The measurements of the
samples at a given time constitute a subgroup. Typically, an initial
series of subgroups is used to estimate the mean and standard
deviation of a process.

The mean and standard deviation are then used to produce control
limits for the mean and range of each subgroup. During this initial
phase, the process should be in control. If points are out-of-control
during the initial (estimation) phase, the assignable cause should be
determined and the subgroup should be removed from estimation.

Determining the process capability (see R & R Study and Capability

Analysis procedures) may also be useful at this phase. Once the
control limits have been established of the X-bar and R charts, these
limits may be used to monitor the mean and variation of the process
going forward. When a point is outside these established control limits
it indicates that the mean (or variation) of the process is out-of-
control. An assignable cause is suspected whenever the control chart
indicates an out-of-control process.

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5.3.2 P Control Charts
NOTES
P charts are used to monitor the proportion of nonconforming units of
a process based on samples taken from the process at given times
(hours, shifts, days, weeks, months, etc.). Typically, an initial series of
samples is used to estimate proportion nonconforming of a process.
The estimated proportion is then used to produce control limits for
the proportions. During this initial phase, the process should be in
control. If points are out-of-control during the initial (estimation)
phase, the assignable cause should be determined and the sample
should be removed from estimation.

Once the control limits have been established for the P chart, these
limits may be used to monitor the proportion nonconforming of the
process going forward. When a point is outside these established
control limits it indicates that the proportion nonconforming of the
process is out-of-control. An assignable cause is suspected whenever
the control chart indicates an out-of-control process.

5.3.3 Control Charts C

Control Charts C charts are used to monitor the number of

nonconformities on a unit of a process based on units taken from the
process at given times (hours, shifts, days, weeks, months, etc.).
Typically, an initial series of units is used to estimate the average
number of nonconformities of a process. The estimated value is then
used to produce control limits for the number of nonconformities.
During this initial phase, the process should be in control. If points
are out-of-control during the initial (estimation) phase, the assignable
cause should be determined and the unit should be removed from
estimation.

Once the control limits have been established for the C chart, these
limits may be used to monitor the number of nonconformities (defects)
of the process going forward. When a point is outside these
established control limits it indicates that the number of
nonconformities for a unit of the process is out-of-control. An

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assignable cause is suspected whenever the control chart indicates an
out-of-control process.

____________________________________________________________

5.4 Sustainable operations Management

OM is increasingly connected with the environment and sustainable

development (i.e. the development that meets the needs of the present
without compromising the ability of future generations to meet their
own needs), and it now concerns both the operational drivers of
profitability and their relationship with people and the planet.

Following the definition of sustainability by the World Commission on

Environment and Development (WCED), Sustainable Operations
Management (SOM) is defined as the set of skills and concepts that
allow a company to structure and manage its business processes in
order to obtain competitive returns on its capital assets without
sacrificing the needs of stakeholders and with regard for the impact of
its operations on people and environment.

In order to perform sustainable operations, it is necessary to enlarge

the perspective of OM, including people and the planet. According to
Kleindorfer et al., SOM integrates the profit and efficiency orientation
of traditional OM with broader considerations of the company’s
internal and external stakeholders and its environmental impact.
SOM helps companies to become agile, adaptive and aligned,
balancing the people and the planet with profits.

Considering the sustainability, environmental responsibility and

recycling regulations, the packaging system plays an increasingly
important role. Several environmental aspects are affected by
packaging issues:

Waste prevention: packages should be used only where needed.

Usually, the energy content and material usage of the product being
packaged are much greater than that of the package;

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Material minimization: the mass and volume of packages is one of the
NOTES
criteria to minimize during the package design process. The use of
“reduced” packaging helps to reduce the environmental impacts;

Re-use: the re-use of a package or its component for other purposes

is encouraged. Returnable packages have long been used for closed
loop logistics systems. Some manufacturers re-use the packages of
the incoming parts for a product, either as packages for the outgoing
product or as part of the product itself;

Recycling: the emphasis focuses on recycling the largest primary

components of a package: steel, aluminium, paper, plastic, etc.;

Energy recovery: waste-to-energy and refuse-derived fuel in facilities

are able to make use of the heat available from the packaging
components;

Disposal: incineration, and placement in a sanitary landfill are

needed for some materials.

According to the studies conducted by Regattieri et al. users and

companies have shown an interest in the environment and its link
with the packaging system. Indeed, they believe that careful use of
packaging can lead to an important reduction in environmental
impact. Companies have begun to use recyclable materials (e.g.
cardboard, paper, and plastic) and to re-use packages for other
activities (for example online retailers are beginning to re-use
secondary packages of back products for future shipments). The next
section describes the packaging system and its crucial role for the
activities along the supply chain, and then in OM.

Reverse Logistics.

Reverse logistics is the set of activities that is conducted after the sale
of a product to recapture value and end the product's lifecycle. It
typically involves returning a product to the manufacturer or
distributor or forwarding it on for servicing, refurbishment or

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recycling. Reverse logistics is sometimes called aftermarket supply
chain, aftermarket logistics or retrogistics.

The aftermarket processes that a product can undergo in

reverse logistics are numerous and include:

¾ Remanufacturing - rebuilding the product with reused,

repaired or new parts

¾ Refurbishment - resale of a returned product that has been

repaired or verified to be in good condition

¾ Servicing - a broad category that includes customer service,

field service and product returns, such as issuance of return
merchandise authorizations

¾ Returns management

¾ Recycling and waste management

¾ Warranty management

Warehouse management

Like other supply chain management (SCM) processes, reverse

logistics can be made more efficient and profitable with better
planning, management and execution, and is a key component of
service lifecycle management (SLM). Reverse logistics can have a
significant impact on a company's bottom line, in good and bad ways.
For example, generous return policies can encourage distributors and
retailers to order more stock than they expect to sell, which can
increase inventory costs for manufacturers. Proper disposal of
products can minimize penalties from noncompliance with
environmental regulations.

The same SCM and e-commerce technologies involved in moving

products to consumers (known as forward logistics) are used in
reverse logistics, including barcodes and scanners used to track
returns, materials handling systems in warehouses and Electronic

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Data Interchange (EDI) for transmitting documents between supply
NOTES
chain providers. SCM and ERP software vendors were initially slow to
support reverse logistics, according to some experts, but most sellers
now include some reverse logistics features in their suites. A number
of niche vendors specialize in it.

5.5 REMANUFACTURING

Remanufacturing is "the rebuilding of a product to specifications of

the original manufactured product using a combination of reused,
repaired and new parts".[1] It requires the repair or replacement of
worn out or obsolete components and modules. Parts subject
to degradation affecting the performance or the expected life of the
whole are replaced. Remanufacturing is a form of a product recovery
process that differs from other recovery processes in its completeness:
a remanufactured machine should match the same customer
expectation as new machines.

In 1995, the United States Environmental Protection Agency (EPA)

implemented the Comprehensive Procurement Guideline[2] (CPG)
program to promote waste reduction and resource conservation
through the use of materials recovered from solid waste, and to
ensure that the materials collected in recycling programs will be used
again in the manufacture of new products. The EPA is required to
designate products that are or can be made with recovered materials,
and to recommend practices for buying these products. Once a
product is designated, state and federal procuring agencies are
required to purchase it with the highest recovered material content
level practicable.

In 2004, the EPA published its third CPG update (CPG IV) which
designated seven additional products and revised three existing
product designations. One of the new product categories to be added
was Rebuilt Vehicular Parts.[3] The EPA defines rebuilt vehicular parts
as "vehicle parts that have been re-manufactured, reusing parts in
their original form. Rebuilt parts undergo an extensive re-

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manufacturing and testing process and must meet the same industry
specifications for performance as new parts."

In the UK, a market potential of up to 5.6 billion GBP has been

identified in remanufacturing, with the benefits said to be
improvement to business margins, revenues and security of supply.[4]

1. Reuse implies that items are used by a second customer

without prior repair operations or as originally designed.
2. Repair: the process of bringing damaged components back to a
functional condition.
3. Refurbishing/Reconditioning is the process of restoring
components to a functional and/or satisfactory state to the
original specification, using methods such as resurfacing,
repainting, etc.
4. Recycling is the process of taking a component material and
processing it to make the same material or useful degraded
material.
5. Cannibalization (parts)

Many formal definitions of remanufacturing exist in the literature, but

the first published report on remanufacturing, by R. Lund (1984),
describes remanufacturing as "... an industrial process in which
worn-out products are restored to like-new condition. Through a
series of industrial processes in a factory environment, a discarded
product is completely disassembled. Useable parts are cleaned,
refurbished, and put into inventory. Then the product is reassembled
from the old parts (and where necessary, new parts) to produce a unit
fully equivalent and sometimes superior in performance and expected
lifetime to the original new product".[5]

Furthermore, the Automotive Parts Remanufacturers Association

(APRA) realized that communication problems can arise when people
from different countries with different language skills talk about
remanufacturing. Certain terms can have different meanings as
definitions between countries and individuals vary. In 2013, APRA
was able to solve these communication problems by publishing a

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common translation list in many different languages in order to unite
NOTES
all those who deal with the automotive industry.

There are three main types of remanufacturing activities, each

with different operational challenges.

1. Remanufacturing without identity loss With this method, a

current machine is built on yesterday’s base, receiving all of
the enhancements, expected life and warranty of a new
machine. The physical structure (the chassis or frame) is
inspected for soundness. The whole product is refurbished and
critical modules are overhauled, upgraded or replaced. If there
are defects in the original design, they are eliminated. This is
the case for customized remanufacturing of machine
tools, airplanes, computer mainframes, large medical
equipment and other capital goods. Because of its uniqueness,
this product recovery is characterized as a project.
2. Remanufacturing with loss of original product identity With
this method, used goods are disassembled into pre-
determined components and repaired to stock, ready to be
reassembled into a remanufactured product. This is the case
when
remanufacturing automobile components, photocopiers, toner
cartridges, furniture, ready-to-use cameras and personal
computers. Once the product is disassembled and the parts
are recovered, the process concludes with an operation not too
different from original manufacturing. Disassembled parts are
inventoried, just like purchased parts and made available for
final assembly. Remanufacturing with loss of original product
identity encompasses some unique challenges in inventory
management and disassembly sequence development. Some of
the open questions relate to the commonality of parts in
products of different generations, the uncertainty in the supply
of used products, and their relationship with production
planning. The National Center for Remanufacturing and
Resource Recovery (NCR3) at Rochester Institute of

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 Technology (NY) is researching remanufacturing processes
including testing standards for remanufactured products.
3. Repetitive remanufacturing without identity loss In this
method, there is the additional challenge of scheduling the
sequence of dependent processes and identifying the location
of inventory buffers. There is a fine line between repetitive
remanufacturing without loss of identity and product overhaul.
Again, the critical difference is that remanufacturing is a
complete process. The final output has a like-new appearance
and is covered by a warranty comparable to that of a new
product.

5.6 CONTROL CHART PROBLEMS

X Chart and R Chart

Control Limts for X

UCL = Upper control Limit : UCLx = X + AR

LCL = Loer control Limit : LCLx = X - AR

Control Limits for R : UCLR = B R

LCLR = C R

The following data are obtained over a five day period to indicate X and R
control chart for a qual;ity characteristic of a certain manufacturing product
that had required a substantial amount of rework. All the figure apply to the
product made on a single machine by a single operator. The Smple was5. Two
samples were taken per day. Comment on the processing using X – and R
Chart.

X=
Sample R=
No Observations (Sum of 5 observations /
(Range)
5)
1 17 10 8 11 9 (7+10+8+11+9} /5 = 9.0 4
2 7 10 8 11 9 (7+10+8+11+9} /5 = 9.0 4
(11+12+9+12+10}/5 =
3 11 12 9 12 10 3
10.8
4 10 9 8 13 11 (10+9+8+13+11}/5 = 10.2 5
5 8 11 11 7 7 (8+11+11+7+7}/ 5 = 8.8 4
6 11 8 8 11 10 (11+8+8+11+10} / 5 =9.6 3

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 (10+12+13+13+9}/5 =
7 10 12 13 13 9 4 NOTES
11.4
(10+12+12+10+12}/5
8 10 12 12 10 12 2
=11.2
9 12 13 11 12 10 {12+13+11+12+10}/=11.6 3
10 10 13 7 9 12 {10+13+7+9+12}/5 = 10.2 6

Range = Highest observation – Lowest observation

∑X = {10.4+9+10.8+10.2+8.8+9.6+11.4+11.2+11.6+10.2} = 103.2

∑R = {5+4+3+5+4+3+4+2+3+6} = 39

X = 103.2 / 10 = 10.32

R = 39 /10 = 3.9

The values for A B C for the Sample size of 5 are given below( Taken from
Table)
For n = 5, A= 0.58 B = 2.11 C = 0

Control Limit for X

UCLx = X = AR = 10.32 +0.58 x 3.9 =10.32 +2.262 = 12.582

LCLx = X – AR = 10.32- 0.58 x 3.9 = 10.32 – 2.262 = 8.058

Control Limit for R

UCLR =B R = 2.11 x 3.9 =8.229
LCLR = 0 x 3.9 = 0

Upper Control Limit - 12.582

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 MEAN ‐

LOWER Control Limit - 8.058

Comment: All the points in X – chart are within the control.

All the points on the R – Chart are also within control limits

But there is a dominating up‐trend towards right hand side of X chart. So, we will
have to hunt for the reasonsfor variations. This may be due to tool wear, operator
fatigue etc.,

In an automobile manufacturing company shafts are frequently found

defective. Hence the quality control department took certain parameter to
identify the defect. They considered 100 shafts per day taken for identifying
defections. The following are the results of last 15 days

1 1 1 1 1 1 1
Sample 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6
No. of
defectives 4 3 6 7 5 2 4 8 3 5 6 3 2 3 4 1

Identify appropriate control chart for the given data and determine the
quality parameter for the same.. Draw appropriate control charts and
comment on them.

Solution: To bring the management attention, if there is any change in average

quality level. Appropriate control chart to be used for this problem is “P” –
chart

P Chart calculations

Sample No No. Of defective shaft % of defective shaft

1 4 0.04
2 3 0.03
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 3 6 0.06
NOTES
4 7 0.07
5 5 0.05
6 2 0.02
7 4 0.04
8 8 0.08
9 3 0.03
10 5 0.05
11 6 0.06
12 3 0.03
13 2 0.02
14 3 0.03
15 4 0.04
16 1 0.01
= 66

UCLp =P + 3 Sq Root(P (1-P) / n) .

LCLp = P -3 Sq Root(P(1-P) / n) .

Where p = process percentage defective of sample

P = Process mean percent defective

N = sample size

K = Number of samples

p = 66 / (16 x 100) = 0.04125

UCLp = 0.04125 + 3 Sq.R(0.04125 (1- 0.04125) / 100)

= 0.04125 + 3 Sq.R(0.04125 (0.95875) / 100) =

= 0.04125 + 3 Sq.R 0.000395 = 0.04125 +0.052624 = 0.093874

LCL p = 0.04125 -3 Sq.R 0.002434 = 0.04125 -0.052624= -0.01137

LCL p = -0.01137

UCLp= 0.093874

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