Operations Management

Unit 1 Overview of Operations Management
Structure: 1.1 Introduction Objectives 1.2 The Meaning of Operations Management Aspects of Operation Management Scope of Operations Management 1.3 Evolution of Operations Management 1.4 Operations Function Resources in Operating Systems Role of Operations in an Organisation 1.5 Current Trends in Manufacturing in India 1.6 World-class Manufacturing Practices 1.7 Services as a Part of Operations Service and Manufacturing Organisations 1.8 Operations Management-A Systems Perspective 1.9 Challenges in Operations Management Quality Management Issues Lead Time Issues Labour Productivity Issue 1.10 Emerging Trends in Business 1.11 Summary 1.12 Terminal Questions 1.13 Answers 1.14 Case Study 1.15 Glossary

1.1 Introduction Operations Management deals with designing and managing products, processing, and servicing. Manufacturing, service, and agriculture are the major economic activities in any country. In India, manufacturing and servicing together constitute nearly 75% of the Gross Domestic Product (GDP). In recent years, growth in GDP has been primarily due to the growth in these sectors of the economy. Therefore, managing manufacturing and service operations are important economic activities. Utilising appropriate Operations
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methods for planning and control of operations in manufacturing and service organisations can result in significant productivity improvements and cost savings. It can also positively influence the overall health of the economy. „Operations Management‟ is a discipline that focuses on this aspect. Operations Management (OM) is important for both society as well as organisation because the consumption of goods & services is an integral part of our society. Operations Management is responsible for creating goods and services. Hence, operations are the core function of an organisation. Learning Objectives: After studying this unit you will be able to:  Define “Operations Management” and its meanings, aspects and scope.  Distinguish between functions and activities of operations managers/ personnel.  Distinguish between servicing operations and manufacturing operations.  Explain the manufacturing trends in India and compare with World class manufacturing trends.  Explain the emerging business trends in Operations Management.  Discuss the role of services as a part of Operations Management.  Identify the challenges in Operations Managements.

1.2 The Meaning of Operations Management Operations Management is a systematic approach to all the issues pertaining to the transformation process that converts inputs into useful outputs, and fetches revenue to the organisation. Operations Management, deals with the production of goods & services. The variety and types of goods & services that we see everyday are produced under the supervision of operations managers. A modern industrialised society cannot exist without effective management of „operations‟. Operations Managers Operations managers have important positions in every company. They are collectively responsible for producing the supply of products in a manufacturing business. This group also includes those managers at the corporate level (example, Vice President) who are overall in charge or are holding staff functions related to operations such as:
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 The Plant Manager  Production Manager  Inventory Control Manager  Quality Manager  Line Supervisors 1.2.1 Aspects of Operation Management The focus of the Operations Management is on the various aspects of design in the transformation process as well as planning and operational control. A systematic approach involves understanding the issues and problems, establishing measures of performance, collecting relevant data, using scientific tools & techniques and solution methodologies for analysing and developing effective as well as efficient solutions to the problem at hand. Another aspect of Operations Management pertains to addressing several issues that an organisation faces. These issues vary markedly in terms of the time horizon, the nature of the problem to be solved and the commitment of the needed resources. For example, performing the task even though the machine breaks down or during shortage of time or taking decisions on critical issues related to product and service require greater commitment of time and resource. Operations Management provides alternative methodologies to address such wideranging issues in an organisation. Through careful plan and control of the operations, the organisation can keep „costs‟ to the minimum and definitely below „revenues‟ obtained from the market. In order to ensure this, an appropriate performance evaluation system is required, the development of which is also the job of Operations Management. 1.2.2 Scope of Operations Management The scope of Operations Management ranges across the organisation and is vast. It commences with the selection of location followed by activities such as acquisition of land, constructing building, procuring and installing machinery, purchasing and storing raw materials and converting them into saleable products.

Through careful plan and control of the __________. Operations Management.  Design of work systems.Quality management. Self Assessment Questions 1. methods improvement and work simplification and other related items come under the scope of operations management.  Location planning. selection & management of technology. deals with the production of ________ and _______. maintenance management. . production planning and control.  Facilities planning and quality improvement of the organisation‟s products or services. 2. which mostly involve relatively longer-term decisions. Operations Management personnel are involved in activities such as:  Product and service design. the organisation can keep ______ to the minimum and definitely below „revenues‟ obtained from the market.  Process selection.

such as horse-drawn cart or a piece of furniture. Taylor1. Craft production was slow and costly in the early days. Frederick W. Modern machines were not available. Enlightenment and more systematic approach to management were essential. each with its own set of standards.1. Many companies emerged. from start to finish. Factories began to spring up and grow rapidly. it was common for one person to be responsible for making a product. Innovations in the 18th century replaced human power with machine power.3 Evolution of Operations Management During the Industrial Revolution in the 1770s. In spite of changes. management theory and practice did not progress well. headed the Scientific Management 1 The father of Scientific Management Operations Management . providing jobs for countless people. Scientific Management movement Scientific Management brought an extensive change to the management of factories.

movement along with Frank Gilbreth. worker motivation is critical for improving productivity. expecting them to perform like robots. the human relations movement emphasised the importance of the human element in job design. New technologies are forcing organisations to change the ways they do business and conduct their operations. in addition to the physical and technical aspects of work. During the 1930s. a psychologist. worked with her husband. Taylor‟s methods emphasised on maximising outputs but they were not popular with workers as the latter felt they were exploited. a mathematical model for inventory management was developed. three co-workers at Bell Telephone Labs . Decision Models and Management Science The factory movement was followed by the development of several quantitative techniques. Elton Mayo‟s studies at Hawthorne division of Western Electric revealed that. The Computer Revolution Development in communications technologies and computer has allowed companies to easily manage international operations and to work on projects in globally dispersed teams. This paved the way for the human relations movement. in turn. Extensive use of e-mail allows employees to quickly and cheaply communicate with vendors and customers. Harrington Emerson and Henry Ford. Henry Gantt. focusing on the human factor in work. Both Taylor and Ford were despised by many workers. Lillian Gilbreth. The Human Relations movement While the Scientific Management movement heavily emphasised on the technical aspects of work design. These technologies. He introduced Mass Production and division of labour in the automobile industry. . Romig and Shewart – developed statistical procedures for sampling and quality control. resulting in fast decisions and improved operational performance. These concepts helped Ford to increase the production rate at his factories as he used the readily available inexpensive labour. because they held workers in such low regard. To improve efficiency of operations. In 1915. Ford adopted Scientific Management. Many of her studies in the 1920s dealt with worker fatigue. have created additional challenges for operations managers.Dodge. Frank Gilbreth. In the 1930s.

Self Assessment Questions 3. i.4 Operations Functions An operating system is a group of resources combined to provide goods or services. 4. 1. Operations Management Unit 1 .4. without which neither machines nor materials are effectively used. fuel.e. buildings.e.  Transport: The principal common characteristic is that a customer or something belonging to the customer is moved from place to place. hospitals. For example. the focus is on a physical view of operating systems and concentrating on the physical resources used by the system.1 Resources in Operating Systems Operations managers are principally concerned with the use of physical resources. 1. vehicles. they are:  Manufacture: The principal common characteristic is that something is physically created. i. Four principal types of systems that can be identified. which for convenience is categorised as follows:  Materials: The physical items consumed or converted by the system like raw materials.: 7 .  Machines: The physical items used by the system. the output consists of goods which differ physically – in form or content – from the input materials to the system. and indirect materials. In the 1930s. example plant. Therefore. three co-workers at Bell Telephone Labs ______. motels. fire services. dentists. tools. Functions The examples given above illustrate the variety of systems that may be considered as operating systems.  Labour: The people who provide or contribute to the operation of the system. and so on. the utility of its output to the customer. Innovations in the 18th century replaced ________ with _________. A simple categorisation these systems would distinguish between goods-producing and service-producing systems. The function of an operating system is a reflection of the purpose it serves for its customer.______ and _________ developed statistical procedures for sampling and quality control. builders are all operating systems. retail organisations. bus/taxi services.

The marketing function.4. Finance estimates the activities related to operations and marketing. Many organisations comprise several systems with different functions. supply and service where as a typical manufacturing organisation will have internal transport and service systems. 1.  Layer of Innovation: This layer consists of innovative strategies and Research and Development.  Service: There is a change in state of utility of a resource. These five layers are:  Customer layer: This layer consists of the customer and dealers/ retailers.: 8 . Every organisation has a few important activities to be performed. Human Resources Management function deals with the issues related to them.2 Role of Operations in an Organisation Operations functions help to appreciate the role of operations in an organisation and its relationship with other functional areas of business. backgrounds. that is. an airline depends on operating systems that serve the purposes of transport. understands the customer‟s needs. Supply: Unlike in manufacture. This includes:  Operations  Marketing  Finance  Human Resource Management Operations manage the „conversion‟ process in the organisation. and satisfies the customers‟ requirements by delivering the right products and services at the right time. the state or conditions of physical outputs differ from inputs. Every organisation has five layers of functions/activities that make up its „Value Chain‟. Operations Management Unit 1 . goods output from the system are physically the same as the inputs to the system. For example. and at the right place. creates a demand for the products and services. and work requirements. There is no physical transformation and the system function is primarily one of change in possession utility of a resource. Every organisation employs a number of people who have varied skills.

can be better utilised by planning production and carefully scheduling operations so that idle time is minimised. For example. however. costing planning. Further. Strategic decisions frequently involve large capital outlay and are taken with critical inputs from an operations strategy process. Design issues relate to configuration of the operations system and provide an overall frame work under which the operations system functions. Design issues in Operations Management lay down the overall constraints under which the operations system functions. sub-contractors and other service providers. Core operations layer represents the manufacturing setup in case of a manufacturing organisation. The top management take such decisions to Operations Management Unit 1 . material. other activities. machining. IT. required capacity and material could be estimated and made available through purchasing and scheduling procedures. Design issues often turn out to be strategic in nature. Once the design choices are exercised. Every issue addressed in design is inevitably addressed once again in operational control. Issues in Operations Management The two major issues in Operating Management are:  Design  Operational Control Analysis These two issues help you in assessing Operations Management functions better. maintenance. assembly.  Supplier layer: This layer consists of suppliers. design and industrial engineering. Operations Management amounts to putting the available resources to best use and handling various issues. it sets limits for the actual use of the system in operation.: 9 . Core Operations layer: This layer consists of fabrication. quality. differs between the two. represented by operations support layer. The context. once the capacity of the resources to be used in the system is decided. tooling. testing and service delivery system. for example. In every organisation. interact with the core operations layer and provide a variety of support services. All these constitute operational control decisions in Operations Management.  Operations Support layer: This layer consists of marketing. The available capacity.

4 Operations Mix: the Six P.7 Product Life Cycle 2.s of Operations 2. and the Kano Model 2. Table 1. Operational decision can be long term.2 Operations as Systems The Systems View Operations as Transformation Systems 2. repetitive and routine in nature. which is crucial to the success of any organisation. Decisions of multiple levels and huge capital outlay are taken.1 Introduction Objectives 2. Short term Operations decisions are taken for the short run of a week or less. operational control issues are tactical. Lower level operations managers and production supervisors often make such decisions.15 Glossary 2.6 Order Winners. Decisions include detailed scheduling of operations.14 Case Study 2.13 Answers 2. The annual business production planning. Several organisations are involved in three basic activities: .s Value Chain 2. Order Qualifiers.1 gives a comparison of operational decisions. On the other hand. master production scheduling and material and capacity requirements planning are done. Unit 2 Frameworks for Operations Management Structure: 2. short term or medium term.5 Porter. This unit explains the partnership between operations and marketing. quality management and control and reacting to disruptions and changes in plans.10 Universal Principles 2.improve the competitiveness of the organisation.3 Dimensions of Competitiveness 2.1: Comparison of Operational Decisions Long term Operations decision taken once in five to ten years.8 Volume Variety Matrix and Product Process Matrix 2. Medium term Operations decision taken in fixed cycles of one year. Business plan with specific targets of sales.12 Terminal Questions 2. Table 1.1 Introduction By now you must be familiar with the basic concepts of operations management.9 Quality and Productivity 2.11 Summary 2.

Providing the product or service efficiently and effectively . in a manufacturing organisation. seeking to understand their needs. Explain Porter. although from different perspectives. Finance seeks to reduce cost..s value chain . Explain order winner. Differentiate Quality and Productivity . you will be able to: . It is essential for an Operations manager to have a systems view because he or she must be able to see the entire process. Learning Objectives: This unit of operations management familiarises you with partnership between operations and marketing and different frameworks available for the operations management. . After reading this unit. it is comparatively rare. Thus marketing seeks to advance service and to offer a greater variety of product choice to the customer. . Describe product life cycle stages . Typically. We consider each in the following sections. High productivity . Relatively low investment in machines Marketing and operations are. Analyse the six P. order qualifier and Kano model . Explain system view of operations . operations. The entire process chain may include outside suppliers. However.: 22 related to operations in an informal way. Good customer service . service delivery and back-up. Systems can be described as having either open or closed features. Identifying potential customers. Low inventories .2. The typical contradictions between these activities are no longer as strict as was once thought. This may be sufficient. from concept to completion. and encouraging them to use the product or service .s of operations mix . With the use of Just-In-Time (JIT) inventory systems and such other flexible manufacturing systems. High quality products .2 Operations as Systems 2. This conflicts with both marketing and operations objectives. This simple definition contradicts its importance for the Operations manager or for management in general. outside manufacturing companies. it is now often possible to have. Differentiate between volume variety and product process matrix . Managing the organisation. they share numerous common reference frameworks. Various organisations resolve issues Operations Management Unit 2 . by restricting inventories and by reducing expenses on machines and staff. and the information flows that are required for the same. equal partners in the success of the organisation. This conflicts with marketing objectives. these three activities are in a state of tension. List out the universal principles 2. In this view. Discover the relation between operations and marketing . and finance. for the operations function to be identified.s finances to ensure continuing success You can refer to these three activities as marketing. Operations or production seeks to improve competence by reducing inventories and by longer runs of fewer products. or should be. These describe the extent to which communications and interactions take place freely across the system boundaries. Explain dimensions of competitiveness . an organisation of any size needs to take these three activities very seriously irrespective of what they are called. Even though the first and last activities are usually named in even a small organisation.1 The Systems View A system can be defined as a group of entities together with the association among them.

the diversity of boundary crossing communications is increasing continually. In severe cases it leads to failure of the system as it is cut off from its environment. In today.1 Open and Closed System Features The boundaries around systems and sub-systems tend to be defined by the degree of professional control over the resources being used. and recognised as a . When there are more controls on a boundary. Free movement of resources and easy communications recommends a more open system.2. System thinkers argue that every system needs inputs of resources to produce outputs of goods or services. Nowadays. like the walls of a particular functional area. Activity 1: Think of a hospital.relatively-closed. Likewise. when a boundary is more open. Figure 2. An open system has some boundary regulations. 2. potential loss through theft or mistreatment is greater. Closed systems are more expensive to maintain.Boundaries are not just material. unknown and unpredicted inputs No outputs Known and defined outputs varied outputs Figure: 2. There are expenses and threats involved with all points on the band. Systems and sub-systems can be grouped along the open-closed band. Controlled interaction with the environment Free interaction with environment Closed system Relatively closed or Relatively open system Open system No inputs Known and defined inputs Known. the more closed a system is. there is often a global dimension with international companies. the authority exercised by a manager. and represent. A totally closed system exists only as an abstract model. Controlled access and controls tend more towards a closed system. system. Without these resources. the more likely it becomes ill-adapted to the changing world around it.relatively-open. On what basis you call it a closed system? On what basis you call it an open system? Why does it need to be open in some respects and closed in others? Indicate operations management issues which arise when we look at these features. What is in debate is the level of control or limitation of freedom placed on a system boundary. or a . the costs are greater. the system falls down.2 Operations as Transformation Systems Any operations system can be looked in as a composition of three major . Similarly.s business world.1 gives a pictorial representation of systems showing closed and open features. They can also be invisible. for example.

Efficient operations can make a huge difference to the margin. Delivery: Delivery time and delivery consistency are operations-driven dimensions with major impact for marketing. capital. . inputs are resources which are introduced into the system in an organised and controlled way. The transformation procedure consists of the use of manufacturing or service operations which change or employ the input resources to add value. Oddly perhaps. rework. To bring in new products easily. flexibility is regarded as one of the few remaining .order winners. margin) is as significant as the least price. Good design is not just the work of a motivated artist. and returns. Doing things on time results in a reliability benefit . In his book1 argues that there are five performance objectives which allow an operations-based advantage to be gained: . 1 The Manufacturing Advantage . Design: Design is what includes . energy. The outputs of the system include products and services with the right quality. The difference between cost and price (i. .components with significant communication relation. Quality and price are related two ways. In fact. skills and time. the construction of a simple systems diagram showing these components significantly assists our understanding. or to devise and make products faster than a competitor is able to do so. Operations Management Unit 2 . Design may be observed as an aspect of quality. To modify easily from making one product to another within a standard range. . a higher-quality product can often mean lower cost though less waste. Price: For any market there can be only one least price contestant. Frequently being able to deliver ahead of the competition and with greater reliability can command a price payment. Higher quality typically means that a higher price can be asked. it would benefit organisations if they consider the following six dimensions of competitiveness: .e. equipment.: 25 Figure 2. to a product or service. If some contestant reduces the price less than the existing least price contestant then he will become the least price contestant. What is meant by speed in this circumstance is reduced time to bring new products to market.3 Dimensions of Competitiveness Operations management plays a key tactical role inside an organisation.2: The Basic Input-Transformation-Output Model In operations management terms. These inputs include: materials. Achieving Competitive Manufacturing Operations by Nigel Slack (1991) Quality: Quality is one of the most important factors of competitiveness. It requires cooperation from both marketing and operations..that little something special. 2.2 illustrates a basic input-transformation-output model. If we need to create a new operational system or resolve a problem in an active system. Doing things inexpensively results in a cost benefit To have an edge over competition. Speed: Closely related to delivery is speed. in the right quantity and at the right time. Each component and its pathway itself are of interest to the Operations manager. Self Assessment Questions . Doing things quick results in a speed benefit . To change volumes easily. but it is so significant to marketing and operations that we look at it individually. There are different types of flexibility: a.. . personnel. Input(s) Transformation Output(s) Figure 2. Flexibility: Flexibility is a calculated approach aimed at gaining an advantage in an increasingly competitive world. b. c. Changing what you do results in a flexibility benefit . Doing things correct results in a quality benefit .

but an early version was developed by Professor Keith Lockyer of Bradford Management Centre (1988). People drive all the other five Ps. People: Last but not the least.place.process. They range from the manufacture plan to material requirements plan. This is a conventional field of study for operations managers. and detailed shop floor schedules. provide the inputs and customers. indeed their contribution is growing rather than declining. it is the design and quality of the product or service that is vital. equal partners in the success of the organisation. Procedures: Procedures cover . Recently. either internal or external. transformation processes. resources. . 5. Whatever the task. What each stage requires from the previous stage .4 Operations Mix: The Six P¡¯s of Operations Operations mix are the elements of the operations involved in service and manufacturing organisations which convert raw materials into finished products. It should also function between process and suppliers. Inputs. In operations.: 27 2. Discovering the location is a classic problem of operations management. Product design is the essential interface between marketing and operations. How value chain activities are carried out determines costs and affects profits. comes people. the issue is therefore how this best and safest way is to be determined. land. Feedback must function in between customers and the process. The six elements of operations mix are: . means location and layout. but . It also offers an integrated package of the factors that should be measured together when designing a new or revised operation. Then consider: .supply chain. administration and supervision. equipment..: 28 Activity 2: Most operations-based organisations are part of a . in operations means the schedules and plans under which operations are performed.1. either internal or external. The three basic activities of organizations are ______. Having decided on the location. . Product: For convenience we refer to . attention has been given to . there is a best and safest way of performing it. 4. What quality requirements are needed at each stage 2.Programmes. . ____ and ____ should be. Programmes: . Operations Management Unit 2 . capacity plans.. such programmes are comparatively standardised. There are _________ dimensions of competitiveness. attention turns to layout of the factory or office. Similar to the marketing mix. Process: Suppliers. the operations mix offers an easy-to-remember frame of reference.service. 6. and outputs involve the acquisition and utilization of resources such as capital.how should it be done. Operations Management Unit 2 . ________ seeks to reduce cost. The six elements of operations mix transform raw materials into finished products when performed in a chain fashion. receive the outputs. . What communication channels are used between each stage .5 Porter¡¯s Value Chain The proposal of the value chain is based on the process view of organisations. What performance measures are critical at each stage . . ______ and ____ are operations-driven dimensions with major impact for marketing. What distribution channels are used . with its recent origins in the work of Frederick Taylor and the founders of motion study. in operations management. made up of subsystems each with inputs. According to Porter (1985). from the perspectives of quality and time.product. the primary activities are: . 3. such as Frank and Lillian Gilbreth. transformation processes and outputs. could be evenly applicable. The idea of seeing a manufacturing (or service) organisation as a system. The source of the operations mix is not clear. ______ and ____. In manufacturing operations. labour. Select an everyday product such as news paper and draw out the chain which results in the final product reaching the customer. Place: In operations. 2. _________ closely related to delivery. buildings. .

Order Qualifiers and the Kano Model For a specific product.6 Order Winners. or resources. developing.4 depicts the Kano model which shows the degree of achievement of customer satisfaction. and . Figure 2. and distribute inputs. includes associations with suppliers and contain all the activities required to receive. encourage buyers to purchase them.. An order qualifier is your ticket to go into the race. Marketing and Sales .. Service . Figure 2. .. An order winner is what lets you to take off the award. . . compensating and (if necessary) dismissing or laying off personnel. Technological Development . and assist their purchase. for the firm. Procurement . training.: 29 Secondary activities are: . It pertains to the equipment.3: Porter¡¯s Value Chain 2. finance. quality assurance and general management. measures and technical knowledge brought to bear in the firm's transformation of inputs into outputs. Kano is a Japanese quality specialist who believes that product characteristics can be classified into . Operations . planning. Human Resource Management . includes activities notify buyers about products and services. An optional way of looking at the competitive dimensions is through the Kano model3. government relations. Hence. Operations Management Unit 2 . .must be.3 gives us a clear idea of the primary and secondary activities of Porter. Delighters More is better Must Be Neutral Delight Absent Fullfilled Degree of Achievement Dissatisfaction Customer Satisfaction . store. An illustration of an order winner is the operating system of Apple computers.more is better. some of the dimensions of competitiveness are more important than others in a specific market during a specific time. software. store. It consists of all activities involved in recruiting. . public affairs. Inbound Logistics . and distribute the output. It consists of functions or departments such as accounting. It is the purchase of inputs.. includes all the activities necessary to collect. includes all the activities required to keep the product or service working efficiently for the buyer after it is sold and delivered. . currently stipulated by many international companies.delighters. hardware. An example of an order qualifier is the quality assurance standard ISO9000. Figure 2. .s Value Chain. Infrastructure . hiring. it is useful to differentiate between socalled order winners and order qualifiers. It serves the company's needs and ties its various parts together. . Outbound Logistics . includes all the activities essential to convert inputs into outputs (products and services). legal.

Operations Management Unit 2 .5 shows the combination of both marketing and operations implication of the various stages in a life cycle.7 Product Life Cycle The Product Life Cycle (PLC) is a widespread phenomenon. the customer is not particularly satisfied. they contribute to customer classification. . which are those that do not cause dissatisfaction when not present but satisfy the customer when they are. Operations Management Unit 2 . the more satisfied customers are. neutrality. 2.: 31 . These needs are to be taken care first.Figure 2. However. or satisfaction. Identifies the ¡°More Is Better¡± needs. The relating of marketing strategy with life cycle stages is well established. 1994. An example is serving hot chocolate chip cookies during an airline flight. An example is low-priced airline tickets. even if they are entirely satisfied. for example. 3 Joiner. An example of a Must Be need is airline safety. . Must Be needs are usually taken for granted unless they are absent. Identifies the ¡°Must Be¡± needs. Figure 2. . If requirements are satisfied. Helps in the prioritization of needs .: 32 X-Axis Y-Axis Development Growth Maturity Decline Operations implications Product design Limited focused variety Varieties develop Product improvement and cost cutting Reduction in variety Product quality Process Place People Price Delivery Quality through design Quality through conformance Job shop? Batch? Line? Line but with . If they are unfulfilled. which the client expects.4: The Kano Model The Kano model: . Helps to explain requirements. Marketers regularly identify four or five stages through which a product passes. the customer is dissatisfied. But operations also can be connected to the life cycle stages. which have a linear effect on customer satisfaction: The more these needs are met. Identifies ¡°Delighter¡± needs.

procedures and delivery mechanisms should change.8 Volume Variety Matrix and Product Process Matrix A most practical method of viewing operations management is through the product process matrix4. and decline phases. Several products may travel through PLC in a few weeks. growth. This levels out in the maturity step. the characteristic shape of a PLC is a stretched out S. 2. In addition. If you demonstrate a graph of volume versus time.5: The Product Life Cycle: Operations Implications Operations Management Unit 2 . 1984 Operations Management Unit 2 .no further Investments (?) Location is the priority Layout of process is the priority Workplace layout is the priority Innovation Flexibility Consistency Flexibility High Reduction to retain or to gain market share Competing through price Making money as long as possible through pricing for maximum profit without further investment Not critical Becoming critical Critical Less critical Figure 2. We are not suggesting all products evolve through having to adopt particular technologies or layouts at various stages of their PLC. You should refer to section 2. An Operations manager should appreciate that he or she needs to settle in right through the PLC.: 33 The product goes through development. However. Process in this circumstance means the way in which operations are actually arranged and the suitable selection of technology. Corresponding with each stage of the PLC. large quantities are produced at a smaller unit price. we comment on process. others may take decades. 4 Hayes and Wheelwright. one particular choice of layout or technology will probably be compatible with marketing strategy at various stages of the PLC. Figure 2. and ordering of the process on the vertical axis from project to continuous flow.: 34 . You can see the implications for operations management at all stages of the life cycle as mainly process. maturity.8 to get a better understanding of the operations implications.4 and 2. In its development stage. we comment on some features of competitiveness. small quantities are produced and the importance is given to design and innovation. As it reaches this growth step. to make the connection with the next section.6 shows the product dimensions of volume and variety and its ordering along the horizontal axis.

rather than taking the project to the place of work. such as constructing a bridge. enhanced quality cuts fault rates. work is done in batches.9 Quality and Productivity Progressively. As Deming (1986) has pointed out. enhanced efficiency. Operations Management Unit 2 . reduced prices. In a job shop work is ordered around related skills. or in an office all the accountants work in the same section. as the name suggests. On a lesser scale. the start of a new product has similar characteristics. but offices too may have assembly lines for cheque approval. In a cell. In batch processes. this is central to operations management. Finally. It expands markets . continuous flow processes are found in the chemical industry.one-piece flow. we can elucidate process types as follows. A typical case is a civil engineering project. The car assembly line is the typical case. Here. We can also use the product process matrix to visualise suitable approaches to scheduling. for example. managers understand that quality and productivity are partners and not substitutes. 2. the outline order is similar to the job shop but more concentration is paid to the flow of work. reduced cost. is possible. In an office.Civil engineering building Heavy engineering Printer Expensive restaurant Insurance policy processing Electronic components Food manufacturers Newspaper Fast food outlet Car manufacture Botting Oil refinery Project Job shop Batch Cell Assembly line Continuous flow Unique. Cutting fault rates means less waste. application forms for admittance to university. are processed in groups. An assembly line takes specialisation further and tends to be more highly mechanized as is suitable to superior volumes. in a factory all the lathes may be assembled together. all the machines needed for a particular product or assembly are ordered in sequence close to one another so that .6: The Product Process Matrix In brief.: 35 A cell is an intermediate stage between batch and assembly line. The project form of process takes resources to the project. one-off Low volume Repetitive limited variety High volume standardised PROCESS PRODUCT Figure 2.

You could ask if there are principles of operations management that apply across the entire product process matrix. Management accountants will seek to understand variations from budgets by variances in each of these four areas.7: Profit Change: The Accountant¡¯s View This finishes the standard accounting vision. Operations Management Unit 2 . 2. Productivity is of particular importance to marketing and finance. Figure 2. Even though. and price under-recovery replicates the situation where the organisation absorbs some of the cost increases and does not increase the cost of its products by as much as resources costs have risen. Improving quality and productivity have rightly become a central concern for operations manager. Thus price over-recovery replicates a situation where prices of products are increased more than the costs of resources.7 shows the accountants view of profit change. Operations managers have realised that they cannot accomplish quality and productivity goals by themselves. productivity can be defined in common terms as being the ratio of outputs to inputs. Operations managers are usually more concerned in productivity change. Similar to quality. automation and scheduling in the volume variety and product process matrix. Similarly changes in costs result from changes in resource quantities and form changes in resource costs. and related to it. Similarly we can view a change in price recovery as resulting from a change in the ratio of product prices to changes in resource prices. it is suitable for us to start looking at productivity by first looking at changes in profitability from one period to the next. This was possibly one of the most important developments for operations manager. They challenged that these principles can make a massive difference to any .and creates more work. An accountant would view a change in profitability from one period to the next resulting from a change in revenues and/or a change in costs.10 Universal Principles We have seen the variations in processes. Changes in income result from changes in product quantities and/or from changes in product costs. Schonberger and Knod (1994) present one of the most useful lists of principles. We may note that a change in productivity results from changes in the ratio of product quantities to changes in resource quantities. An entire organisational effort is required. This uses the parallel definition of productivity as being outputs/inputs. productivity is an essential concern of operations management. Quality received a huge boost in the late 1980s with the extensive implementation of Total Quality Management (TQM).: 36 Change in product volumes Change in revenue Change in product prices Change in profit Change in resource volumes Change in cost Change in resource prices (costs) Figure 2. applicable both to service and manufacturing operations.

quick improvement in quality. and improved health.: 37 operations-based organisation. and service . Look for simple. Make it easier to make/provide goods or services without error or process variation . lead time. Product life cycle has five stages.: 38 Self Assessment Questions State whether True or False: 7. Function at the customer. . 8. Cut flow time (waiting time). flow lines and plants-in-a-plant . Make sure that front line improvement teams get first chance at problem solving before staff experts . cost. 12. get-ready and start-up times . service or customer family. Cell is an intermediate stage between batch and assembly line. distance and inventory all along the chain of customers . 2. Hence.Kano model classified product characteristics into must be. Trace and own quality. Accomplish unfilled purpose via shared information and team participation in forecasting and implementation of change . each focused on a product. movable. Become committed to repeated. The PLC is a widespread phenomenon. how value chain activities are carried out determines costs and affects profits. safety and security . create cells. It also offers an integrated package of the factors that should be measured together when designing a new or revised operation. Explain in brief relation between operations and marketing.12 Terminal Questions 1. 2.. 9. Kano is a Chinese artist. flexible. each assignable to focused cells. Arrange resources into multiple chains of customers. flow lines and plants-in-a-plant . Cut transactions and reporting Operations Management Unit 2 . Quality and productivity are partners in the success of an organisation and not substitutes.. inconsistency. Cut set-up. and .more is better. job and career path rotation. it is useful to differentiate between so-called order winners and order qualifiers5 . reduce cycle interval and lot size . They compiled a list of principles. . Cut the number of product or service components or operations and number of suppliers to a few good ones . some of the dimensions of competitiveness are more important than others in a specific market during a specific time.s rate of use. According to them. A system view is very important for the operations manager since he has to visualize the operations from concept to completion. Constantly invest in human resources through cross training. There are many frameworks exist to manage the operations. flexibility. the operations mix offers an easy-to-remember frame of reference. A most practical method of viewing operations management is through the product process matrix6. Order qualifier is your ticket to go into the race. 10.11 Summary Partnership between operations and marketing is crucial to the success of an organization. Get to understand the competition and the world-class leaders . Preserve and improve present equipment and human work before thinking about new equipment. For a specific product.delighters. organisations involved in the service and manufacturing sector should: . low-cost equipment that can be acquired in multiple copies. Like marketing mix. Price over-recovery replicates a situation where prices of products are increased more than the costs of resources. Get to understand and team up with the next and last customer . changeover. education.Operations Management Unit 2 .. mechanize incrementally when process inconsistency cannot otherwise be reduced . process and problem data at the workplace . 11. Value chain process is necessary for success of any organisation. Dimensions of competitiveness are essential to survive in the business world. Operating system of Apple computers is an example of order qualifier.

13 Answers Answers for Self Assessment Questions 1. 10.9 11. Explain Volume variety matrix and Product process matrix. Help the participants recognize the various stages of the life cycle and the steps that can be undertaken to extend the life and revenue stream.6 7. False Answers for Terminal Questions 1.: 39 2.6 8. Refer section 2. False 10. Help participants recognize the hidden clues in their relationships. Refer section 2.1 2. Describe the six dimensions of competitiveness. List out five of the universal principles.5 6.14 Case study Beating the Budget with the Product Life Cycle Client Organization A renowned U.8 10.3 4. Operations. Describe operations mix. 5. Refer section 2. Explain Kano model in detail.5 Hill. Speed 6. 6. Refer section 2. True 8. Refer section 2. 1993 6 Hayes and Wheelwright. Client Objective The objective was to educate the corporate account executives and staff about the ¡°Product Life Cycle¡± and how they might use this knowledge in working with licensees to increase sales and profitability for both the company and the licensees. Explain operations as systems with open and closed features. True 12. Refer section 2. 3. False 9. Home Fashion company had just closed down their trade operations in favour of shifting to a licensing organization working with U. 8. 11. 4.4 5. Refer section 2. Marketing and Finance 2. Refer section 2. Marketing and Operations 4.S.s value chain model in detail. Refer section 2. manufacturers and marketers of Home Decorating and Furnishing products. 2.7 9. True 11. Explain Porter.10 2. Delivery time and Delivery consistency 7. Refer section 2. .2 3. Finance 3. Refer section 2. Six 5. S. 9. Describe the different stages of PLC with diagram. Provide a basic understanding of Marketing and the Product Life Cycle. 1984 Operations Management Unit 2 . Describe Quality and Productivity role in an organisation. What are order winners order qualifiers? Explain with examples 7.

Find out the possible outcomes of this case study.7 Summary 3.themanager.PDF 3.4 Strategy 3. Waters. Achieving Competitive Manufacturing Operations by Nigel Slack (1991) Unit 3 Competitiveness and Strategies Structure: 3. Operations Management Unit 2 2.1 Introduction Objectives 3. Map different stages of Product Life Cycle with this case study.10 Case study 3. Operations Management. by David L. H. Problem data Data which gives definition of the problem. Donald J.11 Glossary 3.15 Glossary Term Description Price over-recovery Replicates a situation where prices of products are increased more than the costs of resources.9 Answers 3. Price under-recovery Replicates the situation where the organisation absorbs some of the cost increases and does not increase the cost of its products by as much as resources costs have risen.2 Productivity Different Types of Productivity 3. MacKenzie.What was done? A participative training program was undertaken that involved everyone in the company. Real life examples were analyzed and used by the participants in an experiential process. 2. Kim Snow. 4. F. 2. Phenomenon A remarkable development Lot size Measure or quantity increment acceptable to or specified by the party offering to buy or sell. Contemporary Marketing.org/pdf/ValueChain.1 Introduction .3 Competitiveness Competitive Dimensions of Operations 3. Questions: 1. Kurtz. Customer Service and Cost Challenges Advanced Technologies 3.6 Global Environment of Competition Global Competition Quality. The Manufacturing Advantage . References 1. http://www. Flexibility The quality of being adaptable or variable. by C. Donald Waters.8 Terminal Questions 3.5 Business Strategy and Operations Strategy Operations Strategy model 3.

3. The cross functional coordination of decision making is facilitated by an operations strategy that is developed by a team of managers from across the entire business. We have seen that wealth can only be created by operations that are productive in relation to a known market. energy. the output is referred to in terms of the value of the products or services produced by the company. They are: 1. in business. 3. labour. In the larger context of the organisation. because even for a highly differentiated product. Productivity directly influences the cost of operations. Productivity can be simply defined as the ratio of outputs to Inputs. Operations are either a competitive weapon or a corporate milestone. the cost of operations are key to Operations Management Unit 3 . with the required financing and human resources. This unit familiarises you with competitiveness and strategies of organisations with respect to operations management.12manage. Some of the basic questions businesses need to consider are: „h What factors drive competition in the industry we are concerned with? „h What are our competitors doing to gain an advantage and how can we best respond? 1 Reference: www.. in terms of how effectively and efficiently it is using its resources. Operations strategies and decisions should fulfil the needs of the business and should add competitive advantage to the firm. This means that all of the functions of the firm must be well coordinated to earn revenue and have a competitive advantage. „h Explain about the global environment of business and competition. Operations should be fully connected with business strategy.2.By now you must be familiar with the frameworks of Operations Management.1 Different Types of Productivity Productivity can be divided into three types. a company in order to optimise its cost levels. „h Analyse why some companies are more successful at competing than others. or a combination of them. Each competing organisation in the industry has a competitive strategy1. Thus. In general. This can be done by contributing distinctive capability (or competence) to the business and continually improving the products and processes of the business. capital.html Operations Management Unit 3 .Productivity. etc. 2 Overall Productivity = Output of products / All Resources used Hence. „h Explain how organisations can improve productivity.2 Productivity . value perception.: 44 .: 43 „h How do we.winning. Employee Productivity . and effectively create a competitive advantage should improve its productivity levels.s products and services. „h Discuss how effective strategies can lead to competitive organisations. the demand will be under threat if the costs of operations are so high as to push the product prices beyond the customers.com/methods_porter_competitive_advantage. Labour Productivity = Output of Products / Labour Input On the other hand. in the market. Learning Objectives: After studying this unit you will be able to: „h Define productivity and its importance. Technological Productivity 2. position ourselves to compete in the long run? There is an increasing awareness that operation strategies should lead to global competitiveness and not merely limit to the firm. is a measure of performance of a company. Productivity is related to Operations Management as it focuses on maximising its resources. strategy can either be to differentiate its products without specific focus on the cost. or to focus on being a low-cost producer without a particular emphasis on differentiated product. as an organisation. In either case. while the input can be a number of factors invested in: raw materials. utilisation.

3. Managerial Productivity Technological Productivity is the level of output received after using any technology or device within a certain period of time. Adopting new technological advancements, for example, CAD (Computer-aided Design) and CAM (Computer-aided Manufacturing), can enhance the Technological Productivity. Employee Productivity is the level of output received from the employees within a certain period of time. Good training to the employees, encouraging multi-skilled labours, introducing new tools, encouraging participation in Managerial decisions in the company can achieve good Employee Productivity. 2 For more information on different kinds of Productivity please visit www.alison.com Operations Management Unit 3 .: 45 Managerial Productivity is the level of output received from Managers within a certain period of time. Managerial productivity can be achieved if the Managers crave for quality rather than quantity. They should also encourage employees to participate in the decision-making issues related to the company. Managers should also cultivate the habit to reward the employees for their performance and should adopt some managerial techniques to improve the Productivity. Thus the Productivity of any company or organisation depends on both people and operations variable which in turn improves business competitiveness. Self Assessment Questions 1. Operations strategies and decisions should fulfil the needs of the business and should add ______________ to the firm. 2. Productivity is related to Operations Management as it focuses on ___________ its resources.. 3. Productivity can be simply defined as the ratio of ________________. Activity 1: Visit the branch of Britannia foods in your area and create a report on how productivity influences the cost of operations. 3.3 Competitiveness Competitiveness of a firm is simply its propensity and ability to compete with other firms in the industry. An average company tries to survive in the market whereas a highly competitive company fights the competition and tries even to change the .rules of the game.. Competition has become the major challenge as more and more companies are entering in contest, and trying to corner larger market shares for themselves in their product markets. The size of the .market. remains more or less the same, but the number of firms competing for their individual shares are increasing rapidly. In countries like India and China, where the markets for many products / services are still growing, the markets offer hope and scope for the firms to succeed and operate profitably, provided they plan properly and execute them effectively. Operations Management Unit 3 .: 46 Today, the importance of competitive advantage for a firm could be greater. All well-run firms are constantly striving for and working towards attaining competitive advantage and sustaining it in the long run. This is important in order to run their organisation profitably in a highly competitive and fast-changing market. These are done through formulation of well thought-out competitive strategies and implementing them effectively. 3.3.1 Competitive Dimensions of Operations Some of the factors that influence the competitive position of a firm can be listed under the following categories: „h Cost / Price: Large segments of most markets, especially in less developed countries like India ¡V buy solely on the basis of price. Hence, manufacturers or service providers need to focus on being low-cost producers. Typically, such products are like commodities. „h Quality: Many people prefer products that are superior in quality, in terms of reliability or performance or durability. For manufacturers, quality can be introduced either through product design or through superior process. However, too much emphasis on quality or attributes of a product would render the product over-priced. „h Delivery speed: Ability of a company to deliver a product quickly could give the company an edge in the market.

„h Reliable delivery: This refers to the ability of a company to deliver its product or offering as per commitment made to the customer. Often, this aspect becomes more important than the .speed of delivery.. „h Flexibility in supply: The ability of a company to adjust or respond to sudden changes in demand would give it considerable advantage in the market, since market demands are unpredictable and companies experience sudden surges or fall in demand. Hence, a company with the flexibility in operations can either leverage the situation of excess demand or effectively cope with the sudden fall in demand such that it maintains its inventory or capacity costs at low levels. „h Flexibility in new product introduction: Another important aspect of .flexibility. that company should have is to introduce new products or in offering a variety of products. A company which is able to switch to new products, or from one existing product to another, enjoys market advantage. Operations Management Unit 3 .: 47 Activity 2: Visit any supermarket and note the competitive strategy they use to compete with the other supermarkets in the area. Self Assessment Questions 4. Competitiveness of a firm is simply its propensity and ability to __________ with other firms in the industry. 5. _________,______,_____,______,____,___ are the factors that influence the competitive position of a firm. 3.4 Strategy Essentially, developing a competitive strategy means - developing a broad formula for how a business is going to compete, what its goals should be, and what policies are needed to carry out these goals. Competitive Strategy can be defined as a combination of the goals which the organisation works towards achieving and the policies it needs to implement to attain these goals. Different terminologies may be used by different firms, such as: ¡§mission¡¨ or ¡§objectives¡¨ or ¡§goals¡¨; ¡§tactics¡¨ or ¡§operating policies¡¨ or ¡§functional policies¡¨. The figure shown below (Figure 3.1), which can be called the Wheel of Competitive Strategy3, is a method that can be clearly used to articulate the key aspects of a firm.s competitive strategy. 3 Reference: www.scribd.com/doc/6283720/Competitive-Strategy Operations Management Unit 3 .: 48 Goals Definition of how the business is going Objectives for profitability, growth, market Product Line Finance R&D Purchasing Labour Manufacturing Distribution Sales Marketing Target Markets Figure 3.1: The Wheel of Competitive Strategy The inner circle of the wheel, also called the .hub., broadly identifies the organisation.s goals, i.e., it defines how the organisation intends to compete in the marketplace, and also outlines its specific economic and noneconomic

objectives. The spokes of the wheel indicate the key operating policies, with which the firm desires to achieve these objectives. Depending on the nature of the business, management specifies or articulates these objectives. Once they are defined clearly, the concept of strategy can be used to guide the overall behaviour of the firm. At the broadest level, formulating a competitive strategy involves considering four key factors that define what a company can successfully accomplish. This is depicted in Figure 3.2. The firm.s strengths and weaknesses are its profile of assets and skills relative to competitors, including aspects such as financial resources, Operations Management Unit 3 .: 49 technological posture and brand identification. The personal values of an organisation are the motivations and needs of the key executives and other personnel who must implement the chosen strategy. The strengths and weaknesses of the organisation, together with its values, determine the internal limits of the industry.s opportunities. Figure 3.2: Key Factors of Competitive Strategy The threats to the organisation, together with its inherent risks and potential rewards, determine the competitive environment the organisation forms a part of. Societal expectations reflect the impact on the company of such things as government policy, social concerns, evolving mores, and many others. How effective an organisation.s competitive strategy is, can be identified by checking its proposed goals and policies for consistency with the below mentioned points: „h Organisation.s goals are achievable. „h Key operating policies address these goals. „h Key operating policies complement one another. „h Goals and policies are in sync with industry opportunities. „h Goals and policies can be accomplished with available resources. „h Goals and policies relate to societal concerns. Operations Management Unit 3 .: 50 „h Goals and policies match the availability of resources to the company with respect to its competitors. „h Timing of the goals and policies reflect the organisation.s ability to be flexible. „h Goals are well defined by the key implementers. „h There is a link between the goals, policies, and values of the key implementers to ensure commitment. „h There is sufficient managerial capability to allow for effective implementation. Self Assessment Questions 6. Competitive Strategy is a combination of the ________for which the firm is striving, and the _________through which it is seeking to get there. 7. Industry opportunities and threats with its attendant risks and potential rewards define the________________________. 3.5 Corporate/Business and Operations Strategy The Corporate strategy defines the long term vision of a company. The business strategy of an individual business of a corporate entity follows from the corporate strategy. Most large corporations pursue several businesses representing different industries and operating in different markets. Each business has to find its own way of competing in its markets. Three different types of .Generic. strategies can be pursued by businesses. They are: „h Low Cost strategy. „h Differentiation Strategy. „h Niche strategy which can be either low cost or differentiation in approach. Operations strategy specifies how the firm employs its production capabilities to support its corporate strategy. 3.5.1 Operations Strategy Model

resources (capital or human) or from . the operations Operations Management Unit 3 .: 51 Corporate & Business Strategy Operations Strategy Mission Distinctive Competence Objectives (cost.Policies. Distinctive competence Distinctive competence refers to the company.Objectives.mission. Similarly.unique. the operations mission is derived from the business strategy adopted. If the company chooses to follow other strategies ¡V such as market or price leadership ¡V the corresponding operations missions would be different. human resources. Figure 3. „h The hierarchy of strategies in a typical multi-business firm. flexibility & delivery) Policies (process. .. form the heart of operations strategy. Thus. of operations. and are connected with other functions in the business ¡V such as marketing and finance. Operations Management Unit 3 ..3 depicts: „h The Inputs and Outputs of the operations strategy.Mission.: 52 mission should focus on new product introduction and develop the needed flexibility to adapt product to the changing needs of the market. along with other functional strategies that is connected to the business strategy as well. excelling in new-product innovation). For example.3: Operation Strategy Model Decisions in the four parts of operations ¡V process. quality.. The distinctive competence of the company should be commensurate with the . finance. if the business strategy is product leadership. The competence could be derived either from . The role of Operations Strategy in relation to other functional strategies in any of the businesses of the firm is given below: Operations mission Every business operations should have an articulated . quality.Distinctive Competencies.s ability to carry out a (business) process better than the competitors. Developing the distinctive competence refers to developing a business process in an area (for example. capacity. capacity and inventory ¡V are outcomes of the strategy formulation. and information systems Figure 3. engineering. the distinctive competence must be valued by . & inventory Results Internal Analysis External Analysis Consistent pattern of decisions Functional strategies in marketing.unique. capabilities (sometimes leading to a patent). in quality assurance) which is different from the mission of the operations (say.Mission. . and . quality systems.

Shroeder ¡V page 28 Operations Management Unit 3 . is an essential pre-requisite for working on a successful business strategy. Policies are normally broad guidelines that the company develops in keeping with their strategies and value systems. These policies assist decision-makers (including the senior most management levels) in arriving at decisions. such as marketing and financial strategies. Operations policies This relates is the fourth element of the Operations Strategy. etc.other functional areas such as marketing. it is seen that . A company. as a basis for obtaining competitive advantage.: 54 Operations Policies Superior process . Table 3. Operations policies should generally be developed for each decision categories (process. To be strategic in nature. is logically converted into objectives in the above mentioned areas. these objectives should be long-term (5 to 10 years). and inventory). and should be integrated with other functional decisions and policies. There are four common objectives.1: Comparison of Business Strategies Strategy A Strategy B Business Strategy Product Imitator Product Innovator Market Conditions Price sensitive Mature Market High Volume Standardised product Product-features sensitive Emerging Market Low Volume Customised Product Operations Mission Emphasise low-cost for mature products Emphasise flexibility to introduce new products Distinctive Competence Operations Low cost through superior process technology and vertical integration Fast and reliable new-product introduction through product teams and flexible automation 4 Refer book on ¡§Contemporary Concepts and Cases: OPERATIONS MANAGEMENT¡¨ ¡V International Edition .. Linking strategies Operations Strategy should also be linked with other parts of the whole business. Sometimes. Operations objectives The third element of Operations Strategy is operations objectives.by author Roger G. in order to compete effectively ¡V would need not only a suitable market segment but also a unique capability to service the market segment.Mission. capacity.distinctive competence. quality systems. a business strategy may be derived from a company.s distinctive competence (existing or planned) and the company may work towards matching the market to it.1 shows how two diametrically opposite business strategies give rise to different functional strategies4: Table 3.s . so that it gets all-round support from the entire cross-section of the business. Thus.: 53 The company. finance. they are: „h Cost „h Quality „h Delivery „h Flexibility Operations Management Unit 3 .

„h Rapid onset of new and advanced technologies. ____. customer service and low price. This could be largely attributed to the emergence of new technologies in almost all industries. . the competitive environment is constantly changing. Activity 3: Visit two supermarkets and compare their business strategies.focused. Future business conditions across the world can be estimated by understanding the present conditions. Japanese companies had developed substantial competitive advantage mainly due to their far superior manufacturing techniques and practices. Therefore. 9. 3. but also that the other functional strategies need to be in line with the Operations Strategy. and overhauled them in performance with the help of superior strategies..6 Global Environment of Competition A company should be very effective in its operational performance and should have good strategy.form the heart of operations strategy. _______________________. The Corporate Strategy defines the _________vision of a company. „h Customers. Focused operations Whichever type of strategy the company follows. and _____ are the . increasing demand for quality. to perform well. a company needs to be alert and have the ability to adjust to the changing environment in order to remain competitive. 10. Business Strategy is a company. „h Rapidly growing service sector. it has to ensure that the operations function is carried out in a . In course of time. ____. However. _____.s plan as to how it will compete in the market place.Dedicated automation Slow reaction to changes Economy of scale Workforce involvement Superior products Flexible automation Fast reaction to changes Economies of scope Use product development teams Marketing Strategies Mass distribution Repeat sales Maximising of sales opportunities National sales force Selective distribution New-market development Product design Sales made through agents Finance Strategies Low risk Low profit margins Higher risks Higher profit margins Thus. Some of the business conditions that affect the current business scenario are as follows: „h Global competition as prevailing today. Operations Management Unit 3 . It is very difficult for a company to outperform others merely on the strength of its operational effectiveness. it is seen that not only the Operations Strategy gets dictated by the overall business strategy of a company.four common objectives of Operations. American companies caught up with the Japanese in respect of manufacturing expertise.: 55 For example. manner through a coordinated set of policies. Self Assessment Questions 8.

6. outsourcing. 3.2 Quality.5. with computerised software.. thus affecting international business. have become popular among Operations Management Unit 3 . many companies today are no more satisfied with delivering ¡¥acceptable quality. currency volatility.3 Advanced Technologies Both Manufacturing. billing.lasso?article=397 Operations Management Unit 3 . have emerged as the biggest markets for the future.kings.Total Quality Management. but also by improved productivity. with their very large populations. The initial disadvantages of high investments in automation are outweighed by not only lower manpower costs.automation. Customer Service and Cost Challenges Spiralling competition and great strides in innovation have literally made (prospective) customers to behave like . while the emerging economies churn out superior products offered at lower prices since the industries in their countries look for larger markets. sales order processing. Tremendous growth in transportation and communication has made accessing the modern and distant market easier. huge discounts on large scale purchases and other Supply Chain practices to reduce costs dramatically and thus. Computer applications and software have helped companies replace labour-intensive processes such as payroll. customers demand for quality of products.allaboutbranding.: 57 companies in their attempts to keep costs low. On the other hand. Industry has found ways to reduce cost and to increase scope of fixing prices in the market. reduced wastage and scrap.com/index. Companies are now striving to meet the customers. TQM also focuses on . On the other hand. inventory control. Due to the awareness of the choices available for them. . „h Increasing concern for social issues. Automakers concentrate productivity and retailers try to leverage such aspects as economies of scale.Global Village. quicker response to customers and more frequent introduction of new products and services. The entire world can be perceived today as a . coupled with improved education levels and experience in many industries.: 56 China and India.strategic alliances. industries in most countries are facing intense competition. downsizing. calls for empowering all those who are involved in making and delivering the products. effectively compete in the market place.. 3. Developed countries look for new markets for their products in new countries as their own home markets are maturing. improved quality. are also posing fresh competition to west-based industries. even though the countries are separated geographically by thousands of miles they have set up bi-lateral agreements.6. needs and meet the ideal of perfect quality that is the concept of . Consequently. One of the examples of automation is Computer and Software Technology. wherein economic events in one country promptly affect other countries. which. the European Union is one such example.6. operations managers have to coordinate with geographically dispersed operations. Another area of pressure on companies is that of costs and prices. For example. in turn. Fluctuating international stock markets. inflation and very high levels of trade imbalances have created turbulence in financial markets.1 Global Competition Due to rapid globalisation. 5 www. These have given rise to more . 3. Integrated ERP software systems facilitate real-time data and information to support decision making. the same high population. Consequently.continuous improvement of quality. Other measures such as restructuring. (TQM). Labour-intensive industries have resorted to offshoring their activities. etc.„h Depleting resources. but strive for ¡¥perfect product and service quality¡¦. as well as service industries has experienced far-reaching impact on their operations because of .The above dynamics are giving birth to new international companies whose domain of operations spans several countries. fluctuating interest rates. amongst individual companies. several countries have broken trade barriers and are actively cooperating with other countries.

s business strategy. Consequently. but strive for ____ & _____. and should contribute to the company establishing a . Competitiveness of a firm is its willingness to compete effectively with other firms in their industry. quality. Activity 4: Compare any big mall and a small retail shop and list down the points how the latter is facing tough competition from the former due to rapid growth in globalisation.s competitive posture. Competitive Strategy is. Companies always need to formulate policies which provide guidelines to the operating managers to take effective and timely decisions to accomplish objectives & goals. A strong and steady ______________ is necessary for the growth of service sector. The key operations objectives fall in the areas of cost. It has far outstripped the growth of the manufacturing sector. This fact is no indication of any appreciable decline in the manufacturing sector. Continuous growth of service sector In more recent times. Strategy development generally means developing a road map or a broad formula as to how the business is going to compete in the market place.competitive strategy. A company has to develop Distinctive Competencies in the relevant areas to achieve either of the two attributes mentioned above. . 3. therefore. _____________ have become popular among companies in their attempts to keep costs low. Self Assessment Questions 11. Due to rapid globalisation. many companies today are no more satisfied with delivering . their effective implementation. both the formulation of long-term Plans. there has been a sudden growth in service industries. industries in most countries are facing _______. every company also needs an Operations Strategy.However. Competitive advantage is the ability of the company to generate superior profits as compared to the average profitability of other firms in the industry. 15. Rather.acceptable quality. companies cannot avoid innovating since doing so renders them at a competitive disadvantage. Firms are also increasingly aware that they cannot be satisfied by just being a place to make their products and services. _________.s automation does not last long since competitors invariably duplicate such innovations. quality. and these factors are: „h Company. since it has been practically established that there are significant benefits through an explicit process of formulating strategies. as well as. Both Manufacturing. Operations Management Unit 3 .7 Summary Firms competing in their industries need to have a .: 59 Strategy formulation in the area of operations generally involve major decisions in the areas of process. Hence. capacity and inventory. a strong and steady manufacturing sector is necessary for the growth of service sector. the steep growth in number of service industries reflects the fact that more and more service products are in demand. which emphatically determine the two major elements of delivering value to the customer ¡V benefits through product and service. service industries has experienced far-reaching impact on their operations because of___________. Therefore. and the cost that the customer has to incur to experience the benefits.s strengths & weaknesses „h Industry opportunities & threats „h Personal values of key implementers of the strategies „h Broader societal expectations Operations Management Unit 3 . competitive advantage resulting out of a company. and much of this increased demand is generated by the manufacturing sector. Operations Strategy should be fully connected to the company. 13.: 58 14. 12. delivery and flexibility. as well as.competitive advantage. but their operations should contribute to the company. At the same time.. _______. over its competitors. Formulating strategy involves consideration of four factors which define the boundary of what the company will be able to accomplish. and implementing them effectively.

Cost. Service quality 13. Mission. Finance. it should be in line with other functional strategies ¡V Marketing. reliable delivery. Outsourcing 15. Outputs to Inputs 4. Questions 1. flexibility in new product introduction 6. Intense competition 12. Explain the terms: Operations Mission. The Board also solved problem related to customer-service such as staffing and facilities. it is important to note that while Operations Strategy should be linked to and drawn from the company. 3.5 3. Operation Objectives and Operation Policies. of a firm? What are the factors affecting the competitive position of a firm? 2. The long-term vision Operations Management Unit 3 . Refer section 3.: 61 3. Manufacturing sector Answers to Terminal Questions 1. ¡V of the company. Restructuring.: 60 9. Downsizing.6 3. It is a well established bank with 35 locations throughout India with Delhi as its main operating branch. The Bank started facing problems with the amount of ATM centres. It also introduced on-line banking.10 Case Study SP Banking Corporation was found in 1960. Maximising 3. flexibility in supply. The bank has different kinds of service for different kinds of customers. Quality. Objectives and Policies 10. Cost \price.3 2.9 Answers Answers to Self Assessment Questions 1. Competitive advantage 2. Refer section 3. A board was appointed to develop the strategy of the Bank. These problems posed a great threat to the reputation of the Bank and soon it began losing its old customers.s business strategy. This board decided to start 24 hours customer service centre so that the Bank would concentrate more on customer service to withstand the competition. What are the effects of Global Competition on the industries in India? 3.competitiveness. Create a list of changes that the Bank should have considered for the operations function before appointing a board. Not only that but also the centres were not sufficient for the customers during peak time. What is meant by . Distinctive Competencies. etc.. 2. Delivery and Flexibility 11. Perfect product. Compete 5. Refer section 3. delivery speed. 3. Other Banks were offering lower interest rates on loans with higher interests on savings accounts and fixed deposits. Refer section 3.8 Terminal Questions 1. HR. Goals.Lastly. According to you in which other way can SP Bank solve its problems? Operations Management Unit 3 . Distinctive Competence.5 4. 4. Automation 14. Describe the link of Operations Strategy with other strategies of the company. Customers were getting frustrated due to long hours of waiting.11 Glossary Term . Policies 7. Competitive environment 8. quality.

13 Glossary 4. or correspondence.2 Pay-back Period Analysis 4. sensitivity analysis.alison. It signifies progress or development.4 Opportunity and Ownership Costs Opportunity Cost Ownership Cost 4.9 Summary 4. the quality of agreeing.11 Answers 4. and break ¡V even analysis. a tending towards or natural liking. This unit covers pay-back period analysis. a business involves investing in: „h Assets ¡V capital . opportunity and ownership costs. a continuously accelerating increase or decrease: Strides To achieve a steady. Spiralling To rise or fall with steady acceleration. References 1. effective pace.com/methods_porter_competitive_advantage. Propensity A natural tendency or disposition. a state that continues for a limited time. One of their main objectives is to make sustained profits. a concise explanation of the meaning of a word or phrase or symbol. discounted cash flow analysis. understood though not directly expressed. www. Implicit An underlying meaning. www. by B.12 Case Study 4. Explicit Fully and clearly defined or formulated.1 Introduction By now you must be familiar with the concept of Operations Management and the competitive strategies of any organisation. Basically. use up or empty out.6 Cost ¡V Benefit Ratios Undiscounted Cost-Benefit Ratio Discounted Cost-Benefit Ratio 4. cost ¡V benefit ratios.3 Stakeholder Requirements 4.8 Break ¡V Even Analysis 4.10 Terminal Questions 4.12manage. . stakeholder requirements.com 3.1 Introduction Objectives 4. harmony. Depleting To decrease.5 Discounted Cash Flow Analysis 4.html 2.7 Sensitivity Analysis 4. to attain a maximum level of competence.Operations Management : Theory and Practice. Businesses are economic entities. being suitable and appropriate.Description Congruence Agreement. Mahadevan Unit 4 Profitability of Business Operations Structure: 4.

s management depends on the estimated rate of return on equity obtainable. which is derived from ROI.returns. respect two fundamental principles: „h ¡§The bigger the better¡¨ principle: Investments and equipments being equal. the criteria must have the capability to be applied to any conceivable investment. These decisions have a very high and long-standing impact on the profitability of a business. For a decision on investment in plant and equipment. early benefits are preferable to later benefits. An important technique used in selecting an investment option is the . Pay-back Period Analysis is a simple way to decide whether one should analyse the acquisition as a viable investment decision. „h Explain the concepts of Cash Flows. but also be adequate to upgrade and update the assets to meet the emerging requirements of the market. you will be able to: „h Define profitability and its importance.com/terms/r/returnoninvestment.investopedia. In addition to the above parameters. 4. „h Explain the various types of costs.return.s stakeholders. any option should weigh the ratio of the expected benefit arising out of a decision to the cost incurred due to the decision. bigger benefits are preferable to smaller benefits.Pay-back Period. Investment on plant and equipment is one of the most significant decisions taken by the promoter / top-level-management.. any criteria that are adopted must provide a means of distinguishing between acceptable and unacceptable options.2 Pay-back Period Analysis Pay-back period analysis tells us how long it will take to earn back the money we spent on the asset.conversion processes of raw materials and components into finished products that are marketable at profit. the . Learning Objectives: After studying this unit. The key stakeholders of the company are focused on different parameters such as: „h Return on assets „h Cash flow „h Economic value added 1 For more information on ROI please visit http://www. thus yielding a desirable .s perceived risk associated with the investment opportunity. Besides the parameter of Return on Investment (ROI)1. Finally. „h Analyse accountability of the management of the company towards the company. The discounted cash flow. from among different options of strategies.Sensitivity Analysis. To preserve and maintain the wealth-producing assets of the business. Aptly termed as the Cost-Benefit Ratio. even short-range decisions are made on similar basis. „h ¡§The bird in hand¡¨ principle: Investments and equipments being equal.asp Another very popular parameter used while making investment decisions is the . Pay-back period analysis has been used when new assets have been purchased with a large capital amount.„h Material „h Human resource Businesses use these assets to effectively undertake the . there are other metrics which are important. The expected rate of return is also based on the investor. on the investments made. is another very important concept while evaluating various investment options. a rating of the options in order of their desirability. Accepting a strategy of any company. It also depends on the perceived risk and the acceptability of the option by the stakeholders. on equity must not only be competitive with other investment options available to stockholders and investors. „h Define the basic concept of financial decision making ¡V Cost-benefit ratios. which assesses the dependency of success of a decision on the key assumptions made while taking the decision.. The criteria must. which is the most popular criterion for an investment decision. however. and solve the problem of choosing techniques. The formula to calculate the pay-back period is: .

the economy. This method can also be used in firms where the products are not used for a longer period of time. Pay-back Analysis tells us how long it will take to _________ ________ the money we spend on the __________.: 65 An asset with a shorter back period would rank higher than one with longer paybacks. 3. so that the money can be re-invested elsewhere. The major criticism with this analysis is that it ignores the time value of money. and thus less risky ¡V they allow us to recoup our investments sooner. Payback period is an appealing unit of measurement because it is easily understood when interpreted. obsolescence. Activity 1: Calculate the Payback Period of a company when the assets cost Rs. or . the asset contributes to profits because the invested amount has been recovered. there is less of a chance that market conditions. or other factors affecting the asset will drastically change. the annual returns need to be added up till a point that it reaches the cost of the asset ¡V this would indicate the pay-back period. with any asset. An asset with a _________ back period would rank higher than one with _______ paybacks. groups. 150 million and is expected to generate a return of Rs. if an asset costs Rs. In such a case. consumer electronics.Cost of Asset / Annual Cash Inflow = Payback Period Thus. it is possible that the annual return varies from year to year. interest rates.No. Some of the concepts that can be considered in analysing the investment are discussed in the following sub sections.s profitability? The answer.s stakeholders? ¡V All individuals. Is pay-back period analysis a measure of the investment. The theory is that assets with shorter paybacks are more liquid. 350 million and is expected to generate a return of Rs.3 Stakeholder Requirements Who are an organisation. Self Assessment Questions 1. With shorter payback period.. for example. 30 million annually. Importance of Pay-back Analysis It is the most popular method used in industry for making decisions on investments. It is a means of establishing an upper bound on the acceptable degree of risk where one can appraise the near future with some confidence. the pay-back period would be 150 / 30 = 5 years.Yes. After the payback period. since it ignores benefits that occur after the payback period.NO. the period for both capital recovery and return has to be lower than the economic life of the asset. the risk increases as we look further ahead. Is pay-back period analysis a measure of the investment. is . The Pay-back Period analysis is very important for new companies with poor economic resources. It is the job of operations managers to convince the stakeholders that the investment in plant and equipment is going to enhance the value of the investments already held by them in the organisation. in general. Some of the main stakeholders of any particular company are: „h Shareholders „h Employees „h Management „h Customers „h Suppliers „h Regulatory agencies „h Government „h The community. other organisations and entities that either influence the working of the organisation or are directly influenced by it. Return on Investment (ROI) . Obviously. 2. Operations Management Unit 4 . Moreover.s profitability? Answer . 30 million annually. 4. However.

It is the ration of any company's annual incomes by its total assets.htm 3 For more information on ROA please go to http://www. ROA can be displayed as a percentage. . EVA measures the difference between the pre-investment and post-investment value for the business. OCF = Profit after Taxes. ROI = EBIT (1-t) / Assets X 100 Where.T)2 The EBIT is the revenue earned by the company without regard to how it is financed. The return on investment formula: ROI = Cost of Investment (Gain fromInvestment ƒ{Cost of Investment ) Operations Management Unit 4 . through its day-to-day operations and thus evaluates its capacity for survival and for long-term growth.B.wisegeek. It measures the ability of the company to generate a flow of cash. The formula for return on assets is: ROA = Total Assets Net Income Cash Flow The Operating Cash Flow (cash flow provided by the operations) is a central and crucial concept for financial management. EVA is generally calculated as the net operating after taxes profit 2 For more information on EBIT please go to http://www. t = Tax rate on ordinary income Return on Assets (ROA)3 The RAO indicates profitability of a company relative to its own total assets.com/what-is-ebit. Sometimes this is also called as "return on investment". Interest. That is.I. It is better if it is higher as it gives more flexibility to a company to build a long-term strategy without constraint and interference from economy. indicated as a percentage. EVA can be calculated as: EVA = NOAT ¡V COCC Where. It answers the question: ¡§How much profit is the firm generating from the use of its assets?¡¨ Return on investment is a very popular unit of measurement because it is simple and versatile.com/terms/r/returnonassets. It tells how efficiently a management is using its assets to generate earnings. then EBIT (1 ¡V t) gives the Income after Tax deduction. ROI is defined as the ratio of Income after tax to the value of assets. It is an estimate of the amount through which earnings exceed or fall short of the required minimum rate of return for shareholders or lenders at comparable risk. If it is the rate of corporate tax. Another advantage of ROI is that it can be modified to suit the situation according to what you have included as costs and returns. The Operating Cash Flow (OCF) is the basic and fundamental source of cash for the investment and financing policies of the company.: 67 Earnings Before Interest and Tax (E. a company or division creates value for owners only when its operating income exceeds the cost of capital employed.asp minus ¡V a charge for the opportunity cost of the capital invested.investopedia. Dividend payments + Depreciation Economic Value Added (EVA) According to the concept of EVA. NOAT = The net operating after taxes profit COCC = A charge for the opportunity cost of the capital invested.The ROI is a fundamental measure of efficiency with which a firm manages its assets.

usually at the cost of capital. the person foregoes the interest. So the cost of continued ownership is the opportunity cost. The person can either sell the car for its value or retain the car. 9. While making such decisions.ownership. which could be equated to the landed price of the assets plus the installation and running in costs. through its ________. 6. which becomes the economic value of the car. This loss in the resale value is the second opportunity cost. By retaining the car. by retaining the car for one year. and other entities that either ________ the working of the organisation or are directly _________ by it. and it essentially extends the payback period analysis. The Cost of an investment is not merely the cost of ________ the _________. in order to keep the car running for one more year. Thus. 5.2 Ownership Cost Ownership Cost is the total cost of owning and maintaining an asset over a period of time including the opportunity cost. 2 lakhs.4 Opportunity and Ownership Costs We have seen in the previous section that one of the major decisions in business which especially concerns operations is pertaining to investments in plant and equipment. a flow of _________. groups. In the above example. In brief. 7. The cost of an investment forms one of the elements of the overall ownership costs.5 Discounted Cash Flow Analysis Discounted Cash Flow analysis is the most widely used investment appraisal technique. 4.Self Assessment Questions 4. which is the opportunity cost of ownership. the sale value of the car gets diminished. 4. 2 lakhs can earn interest over a period of one year. plus the capital additions or renewals to keep the car running. the total opportunity cost is the loss of interest earnings plus the loss in sale value. The cost of an investment is not merely the cost of acquiring the assets. cost adequately addresses the need to look at the costs more comprehensively. Let us understand this concept through a more individual-based example of a person owning a motor car whose value in the market is Rs. Besides. the costs of such investments have to be calculated precisely. In case he sells the car.1 Opportunity Cost Opportunity Cost can be defined as the profits foregone by investing funds or efforts in one project instead of in another project. Self Assessment Questions 8.4. The concept of .s stakeholders include all individuals. 4.4. Once the net cash flows have been assessed for each of the years they are discounted progressively at a pre-determined rate. EVA measures the difference between the ___________ and ____________ value for the business. Return on Investment (ROI) is a fundamental measure of the _______ with which a firm manages its _______. the Rs. 4. a Discounted Cash Flow view of the cash flow stream should probably appear with a business case summary when: . So. Operating Cash Flow measures the ability of the company to generate. so that decisions are made on sound and rational basis. Ownership Cost is the total cost of ______ and __________ an asset over a period of time including the opportunity cost. The above logic applies to any asset whether belonging to an individual or an organisation. some capital/maintenance expenses would need to be incurred on the car. An organisation. but the cost of running and maintenance will progressively increase . an asset may indicate reducing opportunity cost over the years. The Net Present Value of the venture is then calculated by adding all the discounted annual cash flows over the anticipated life of the project.

6. Money loses value due to time. The worth of future money today is called the Present Value. The Rate of Return is that rate. „h The business case covers two or more years.in that time. What the ________ money is worth _________ is called the Present Value. depreciation is deducted in computing the benefits. _________ analysis is the most widely used investment appraisal technique. „h Undiscounted cost-benefit ratio analysis.1 Undiscounted Cost-Benefit Ratio Undiscounted cost-benefit ratio analysis can be of two types. to reflect its lesser value. Besides. . money which is not available today but available only later cannot be used now. „h Change in inflow and outflow differs over „h Different cases are compared and differ in cash flow timing within the analysis period. Discounted Cash Flow makes use of the Present Value concept. 1800/. an amount available today is worth more than the same amount available later. say. ________. and . . For example. because. The total of the stream of Present Value calculations is called the Net Present Value. Gross In .Gross. 4. Discounted Cash Flow makes use of the _________ Value concept. Pay-back analysis should be used in conjunction with Discounted Cash Flow analysis.Gross. ¡§Would a thousand rupees earned today be the same as a thousand rupees earned 5 years later? ¡§NO¡¨. and the Costs likely to be generated by that decision. The sum is then divided by the investment cost. it would earn a compound interest over the next 5 years and become. this is a ratio between the anticipated Benefits of a decision.investment. Therefore.Net. 11. An investment can be treated as one such decision area. 12. cost-benefit ratios are calculated without deducting depreciation and the other benefits are then added. The present value of an anticipated future earning is decided by two things: „h The amount of time between now and the future payment. even if the thousand rupees earned today is deposited in a bank. scenario where different uses for money are being compared. more than Rs. Discounted Cash Flow analysis is particularly useful for comparing the financial merits of assets which have very different patterns of expenditure and return.6 Cost ¡V Benefit Ratios As the name suggests. while in the discounted versions calculations are based on a discount factor. for which the present value of net monetary operating advantage equals the cost of the initial investment. the future value of money is discounted in financial evaluation. Gross = Investment Cost Sum of all benefits Net In the net version. In the undiscounted version.. undiscounted benefit. „h The interest rate. Self Assessment Questions 10. the benefits are taken at face value. It also loses value due to risk and many other factors. that is. 4.„h The business case deals with any kind of . To get around the problem of value of time. There are two versions of the Cost-Benefit Ratio analysis: „h Discounted cost-benefit ratio analysis. ________.

It can be used to solve problems of choosing techniques by calculating the incremental cost-benefit ratio on the incremental investment required for the more expensive project.2 Discounted Cost-Benefit Ratio This is a more sophisticated tool when compared to Undiscounted CostBenefit Ratio. 6% and 7% respectively is also given.: 72 Features of Discounted Cost-Benefit Ratio The features of Discounted Cost-Benefit Ratio are: „h The discounted Cost-Benefit ratio takes into account all income.36 in two years Discounted cost-benefit ratios at 5% (DCBR) _ Better Discounted cost-benefit ratios at 6% Equally acceptable Equally acceptable Discounted cost-benefit ratios at 7% Better _ Profitability if Required rate of return is 5% Profitable Profitable Profitability if required rate of return is 6% Equally acceptable Equally acceptable Operations Management Unit 4 . The result of profitability if required rate is 5%. Table 4.1 depicts comparison between two different projects. The principle to which both projects apply is mentioned.: 73 Profitability if required rate of return is 7% Non-Profitable Non-Profitable Principles The bigger the better The bigger the better . The use of compound interest in the calculations effectively gives more weight to early receipts than to later ones. and all investments/expenditures.00 in a year 112. whenever incurred. It is the ratio of the present value of the future benefits. 6% and 7 % respectively. The results of the two projects are given when calculated using discounted cost-benefit ratios at 5%. Table 4. at a specified rate of discount.1: Comparison between Project A and Project B Project A Project B Costs 100 Rs 100 Rs Returns 106. to the present value of the present and future investment outlays and other costs. Operations Management Unit 4 . whenever received.6. „h The cost of capital is of crucial importance in this technique. Project A and Project B. The respective costs and returns of the project have been mentioned. at the same rate of discount. that is. „h This is the first criterion which gives effect to both principles. since rankings depend on the value of cost of capital chosen.4.

Activity 2: Visit a nearby manufacturing company and enquire how performance of a company is affected if the market growth is slow. or that the inflation rate will be limited to 3%. and is typically based on the following assumptions: „h Cost can be divided into two broad categories: Fixed Costs and Variable Costs. 16. „h Inventory changes are Nil. _______analysis. 4. Sensitivity analysis is a useful technique for assessing the extent to which the success of a preferred investment is dependent on the key assumptions. and the Costs likely to be generated by that decision. Sensitivity analysis. In particular. The choice of which sensitivity analysis method to adopt is difficult to specify. as each technique has strengths and weaknesses. input factors. 4.a. This means that total revenue vary linearly with the volume of sales. It is a mathematical technique that is defined by a series of equations. There is no certainty on the quality and impact of the environment on the investment. and also on the computational cost that the organisation can afford. it tests how sensitive it is to predict performance or outcome is to each of these assumptions. For example. In other words. analysis. Such a choice depends on the problem the organisation is trying to address. Sensitivity Analysis is sometimes referred to as . asks the following questions: „h What would be the effect on performance if the market growth is only 5%? „h How would this impact the decision? „h How important is the market growth in the decision process? A similar process might be repeated for the other key assumptions. „h Interactions between the different environmental factors. upon their structure and upon the framing assumptions made to build them. and __________ cost-benefit ratio analysis. ___________ of a decision. How would this impact the decision and how important is the market growth in the decision process.Self Assessment Questions 13. Self Assessment Questions 15. and variables aimed to characterise the strategy being investigated. Cost ¡V Benefit Ratio is a ratio between the ___________. This process helps management to develop a clearer picture of the risks of making particular decisions and the level of confidence it can have in a given decision.8 Break-Even Analysis This is also known as the cost ¡Vvolume ¡V profit analysis. These tools characterise the uncertainty associated with an investment and are used to determine: „h The quality of investment definition. Sensitivity analysis is a technique for assessing the extent to which the success of a preferred investment is dependent on the _________. on the characteristics of the investment under study. parameters. Sensitivity Analysis is sometimes referred to as _________. typically.7 Sensitivity Analysis Uncertainty threatens all decisions taken about the future. the key assumptions underlying an investment might be that market demand will grows by 7% p. which are ideally suited to this analysis. This analysis allows each of the important assumptions underlying a particular investment to be questioned and changed. „h Unit Selling Price is constant over the entire sales volume.what-if. 14. __________. „h The maximum range of variation in results. Two versions of the Cost-Benefit Ratio analysis are _________cost-benefit ratio analysis. „h Factors that mostly contribute to the variability of the results. Its use grew with the incorporation of the mathematical equations in the form of computer spreadsheet packages. The investment selection process has to look into the future and predict outcomes. whatever is produced during a particular period is sold during the same period . Sensitivity Analysis models depend upon the information fed into them.

it maintains the same product mix.contribution margin. marketing and overhead costs. For instance. The choice of the number of products sold/produced obviously depends on the anticipated demand. that is. „h Variable Costs: Several important components of cost vary directly with output.fixed. these costs have to be recovered fully through revenue generation which takes place due to production and selling of the company. They represent items of costs such as depreciation. each unit produced and sold generates a surplus for the company. costs are as low as possible. Hence. capital and material resources.s products and realisation of the money from customers. On the other hand. and higher the number of units of the product produced / sold. and have to be incurred month after month. The point (of level of production/sales) where the total Costs equals the total Revenues is called the . Operations Management Unit 4 .s profits. Operations Management Unit 4 . costs classified as manufacturing costs include direct materials. point.that is. or year after year.break-even. plus other costs such as salaries of fixed personnel. costs incurred by the company month after month.. any manufacturing (whether of products or services) involves the application of human.: 77 Self Assessment Questions 17. the cost-volume-profit analysis is significant since it indicates the level of capacity utilisation that is required in order to break-even and thereafter to contribute to the firm. The total cost of a product can be seen to have two components if viewed from the perspective of manufacturing: „h Manufacturing Costs: Traditionally. The significance of this analysis for decision making regarding investments on plant and equipment is that the investment should (preferably) be such that the break-even point is low as far as possible. there are non-manufacturing costs that constitute overhead. costs of power and other utilities that are incurred only during production but do not happen when production is not taking place. if it produces more than one product. and at some point equals the . and do not vary with the variations of activity (capacity utilisation). interest on long-term debt. Some extent of use of these resources need to be made even before the commencement of production. Costs can be classified on the basis of their relation to the volume of production. All such costs would vary directly with every additional unit produced.„h The firm either produces a single product. Which means that the investment should be such that not only the ensuing . since at this level of production. or.break-even. In other words. but also the investment enables to keep the variable costs low on one side and to create larger value (through the resultant product or service) for the customer and thus realise a higher price. As a company is able to enlarge market demand for its products and sell more (by producing more). the company neither incurs a loss nor gains profit. They are: „h Fixed Costs: These are costs that remain constant irrespective of the volume of production. This point (as related to the level of production/sales) is called the . direct labour and manufacturing overhead. Fixed costs arise as a result of capacity creation. some of the basics of costs should be examined. the costs of materials that directly go into the product . The cost-volume-profit analysis examines alternate levels of profit or loss for different levels (or numbers) of products sold/produced. etc. and are called Variable Costs. the larger is the total surplus. As cost is an important component in selecting processes and plant and equipment. costs of labour hours that are directly utilised for production. Apparently.fixed. „h Non-Production Costs: In addition to the manufacturing costs. insurance.fixed. the surplus keeps increasing. it breaks even. the revenue generation leads to profits only if the unit price at which the product is sold is (in most cases) greater than the total of the unit-related costs incurred to produce the product ¡V otherwise referred to the . irrespective of the level of production. . point. They are function (of essentially) of time. taxes ¡V that are linked to the hiring/owning of the factory premises. Break-even Analysis is also known as the_______¡V________ ¡V ________ analysis.: 76 To examine investment proposals in respect of plant and equipment and other fixed assets required for manufacturing. these costs become . and persisted within order to carry out production on an on-going basis. As mentioned earlier..

costs incurred. whether of long-term nature such as a large investment. generated by operating the business. and how are they relevant to investment decisions? 2. 7. the business starts making profits. or shorter-term decisions. This will be the basis for any entrepreneur to select an appropriate investment option. And profits gained are equal to . 19. One of the most common analysis used is the Pay-Back analysis. and operations managers have to convince the stakeholders that the investments in plant and machinery shall yield adequate returns. What are Opportunity Costs and Ownership Costs.revenues from the business. _________ is called the . always involve money outflow. 4. Influence. Efficiency. point. one of the main objectives of businesses is to make sustained profits. Included in the costs of setting up a business are the Opportunity Costs and Ownership Costs. 4. Decisions. cash is required.break-even.10 Terminal Questions 1. which basically determines the level of production/sales at which the entire costs are recovered. which determines the time period within the entire investment can be recovered through profits. Major investments take place for plant and machinery. Earn. _________ equals the _______. 20. The point (of level of production/sales) where the _______. in order to keep the business in operation. Cash flow analysis is another way to determine whether the business can be operated smoothly. and how is Discounted Cash Flow analysis different? 5. less the . ROA. Return on investment 3. In order to assist decision making. Describe Sensitivity analysis. The ROI of any business would be directly proportional to the . Fixed Costs (in Production) are costs that remain constant irrespective of the ___________ of _________ . influenced 5. the ROI on any investment should be estimated to be better than the corresponding ROI on any other alternate investment opportunity. since profits most get accrued and are not realised immediately. Apart from ROI. cash .9 Summary Being economic entities. Cash Flow. assets Operations Management Unit 4 . EVA. etc are also used to analyse and judge the appropriateness of investments.profit. It is natural that most investors look for the lowest pay-back period. Parallel to the investment decisions the company also studies the consequences if the actual happenings are different than the assumptions made while making the investments. Investment should be such that the break-even point is as ________as possible. What is Cash Flow analysis. Describe the concept of Pay-back period analysis. in not only running the business. but also in setting up the business. cost-benefit analysis and costbenefit ratios are used.11 Answers Answers to Self Assessment Questions 1. that is. as well as. How is Break-even Analysis significant to investment. However. other measures such as EBIT. Logically. operational decisions? 4. and how are they used in analysing investments? 6. This relates to the concept of Return on Investment (ROI). assets 2. The Discounted Cash Flow analysis further gives weight age to the fact that money earned today is worth more than the same money earned in the future. What are Cost-Benefit Ratios. maintaining 4. Owning. Another way to analyse while making major decisions regarding operations is the Break-even Analysis. Operations.: 79 6.18. The expectation of profits would depend on the investments made for starting and running the business. What do the stakeholders of an organisation seek in terms of results of a business? What are the parameters used by managements to satisfy the stake holders? 3. 4.

The result was a common language base and three units of business: Service distribution. if 17. human resource. costs. SP changed its business model altogether and moved to a strategic sourcing model.12 Case study SP is one of the largest travelling agency in India.3 3. Refer to section 4. It stands as synonym for excellent service and commitment. SP wanted a partner who can share the profit and loss evenly which ever was re-invested.13 Glossary Terms Description Appraisal . SP decided to collaborate with SK Software solutions to restructure its business process and IT. What made the two organisations to build a good working relation or environment? 4. Future.7. flow 13.4 5. This enabled SP to have rapid profitability and made to re-invest the profits for new business.5 6. SK did not follow the traditional way of working but came up with innovative thoughts. assumptions 16. Total. assets 9. SK accepted the offer to partner with SP. Acquiring. This method worked well and more benefits with less risk were delivered. financial matters. With it. Low Answers to Terminal Questions 1. project delivery administration and IT. with headquarters at Delhi. Discounted. SP Airlines and Tour Operations. What.4 2. Discounted. In one year SP became a strategic sourcing model. Refer to section 4.sourcing has transformed SP entirely into a very successful company Questions: 1.s 100 years of history it has 150 branches throughout the world. Owning and Maintaining 10. The company improved operations. The new business model delivered the benefits and value of the Shared Services Centre program faster and at significantly reduced risk while creating the structure and the funding to drive additional business transformation. Refer to section 4. SK not only helped SP but also became a partner in its outcomes.7 4. Volume. profit 18. Present 11. Refer to section 4.: 80 partnership in delivering services and common service centres to reduce the back-office functions costs. today 12.2 4. High cost base of a new ownership challenged the commitment of the company. Key. undiscounted 15. It suggested Operations Management Unit 4 . SK appointed a team to take care of the shared service centres. and increased profitability. post-investment 8. Cost. Co. volume. 2. cash. Refer to section 4. Anticipated Benefits 14. During the 15 years of partnership SP was very comfortable in handling with the common service centres and controlled all critical operational activities. production 20.6 7. The new business reduced the risk of creating structure and funding additional business. The team at Delhi started working on reducing costs and optimising revenues. Do you advise SP for out-sourcing rather than co-sourcing? Explain. revenues 19. reduced its cost base by 75 million pounds. Refer to section 4. Refer to section 4. Pre-investment. total . In one year.

the loss.8 Case Study 5. Panneerselvam. . Such decisions are more strategic in nature since they have long-term impact on the profitability of the firm. in the value of an asset such as plant.1 Introduction Objectives 5. http: //www. http://www.5 Summary 5. The next level of consideration after plant and equipment.2 Operation Costs Influencing Factors 5.A valuation by an authorised person. http://www.asp Operations Management Unit 5 Unit 5 Break-Even Analysis and Operations Cost Management Structure: 5.asp 6.investopedia. continue to exist in the process of manufacturing References 1. http://www. Andreas Loffler 3. 2. Production and Operations Management.9 Glossary 5.com/terms/r/returnonassets. is that of actual operations.com/terms/r/returnoninvestment. and implementing those creating capacities of manufacturing.com/what-is-ebit.wisegeek. by R.6 Terminal Questions 5.7 Answers 5.e.1 Introduction By now you must be familiar with some of the tools and techniques used for making investment decisions.: 81 Obsolescence Being in the process of passing out of use or usefulness.investopedia. document criteria used to allocate organisational rewards. Depreciation A decrease in price or value. unit of measurement ¡V any division of quantity accepted as a standard of measurement or exchange. over time.3 Economics of Operations – Economies of Scale Break-Even Point Analysis 5.4 Economics of Operations – Economies of Scope Methods of Achieving Economies of Scope 5. Discounted Cash Flow ¡V A theory of the Valuation of Firms.com/university/dcf/ 4. Monetary Relating to or involving money. cause to experience or suffer or make liable or vulnerable to. Persisted To hold firmly and steadfastly to a purpose. by Lutz Kruschwitz. process or condition of going out of date or being no longer in use. Incurred To acquire or come into. i.investopedia.htm 5. Operations Management Unit 4 . a unit of money unit. and vehicles. equipment. related mainly to plant and equipment.

. Indirect Costs or Operations Overheads are those expenses which cannot be charged specifically to particular output items. the most important aspect of Operations Management turns out to be Cost Management. Nevertheless. and means available for the measurement and control of the cost of operations. levels to the customer have to restrict their price within a very narrow band. as given below: Direct Materials + Direct Labour = Direct Cost Operations Overheads + [General Overhead and Admin Cost] = Total Operations Cost Total Cost + Profit = PRICE Operations Cost Management involves planning and controlling all costs that add up to the Total Operations Cost. i. the selling or purchase price. the cost of moving the customer. Define economics of scale and economics of scope. Define Operations Costs. Together. . Indirect materials . and „cost. Explain the concept of a „Break-Even. The responsibility of the operations manager would be to plan and control the above costs in such a way that the further activities of marketing. in almost every industry and for any type of product or service – the market mechanism is the predominant driver of individual operations. Learning Objectives: After studying this unit. In a manufacturing system. the operations function adds significant cost to total cost of the items or service provided for the eventual customer. and the operations manager must be familiar with the factors contributing to the cost of operations. Thus. for example the cost of the direct materials consumed or incorporated and the cost of direct labour involved in the provision of output items or services. example materials processing and assembly. Analyse Cost Control.In the current prevailing scenario of intense competition.. these costs build up to the total Operations Cost along with the general and administrative costs and the profit. The transformation process within any business adds both „value. These are commonly referred to as Direct Costs and Indirect Costs. the factors influencing these costs. to the total cost to the customer. is often be a major ingredient determining the total cost of the transport to the customer. distributing and selling can be done profitably considering the price that the products can command in the market. 5. example administration costs. Similarly. you will be able to: . Operations Cost Management would exclude costs related to marketing and selling. All other charges involved in operating the system where such charges cannot be allocated accurately to particular goods or services. you have learnt about manufacturing costs and non-manufacturing costs. Direct Costs comprise those which may be identified separately for each goods or service produced.e.s products has become one of the most challenging tasks of an organisation. This does not convey that all firms in the same industry need to offer the same price or very similar prices. to the goods or services output from the system. . These would include both Manufacturing Costs and Distribution Costs that are incurred within the factory premises. This effectively means that there is restricted choice for companies to set the price for their products or services. In transport. Indirect Costs include the cost of: . services or transports. the cost of physical conversion. Indirect labour . point. as well as any overheads. Most of the firms today are compelled to be „market driven. . different firms offering similar products or similar „value. comprising the cost of equipment used (vehicles and service equipment) and the cost of labour employed. common for all such companies. . since obtaining sustained business for company. often represents a major part of the total cost of the products produced. Define the factors that influence Operations Costs. but would include logistics costs that are directly related to the process of reaching the product to the customer.2 Operations Costs In the previous unit. in supply and service systems.

.: 86 Attempts are made to distinguish costs that can be related to production of individual unit.. staff salaries. the Operations Overheads can be sub-divided into: .The final unit cost of a finished product at the factory premises can be depicted by the following equation: Final Cost = Direct Material Cost + Direct Labour Cost + Factory Overheads (suitably allocated to each product) In case. . are included in overheads. Control of Operation Costs Most organisations work with a budgeted costing format. and does not include machinery cost. Each element of variable cost. Fixed Costs consists of those elements of cost that are not dependent on. Overheads Costs always pose a major challenge in analysing them and setting norms or standards. Maintenance and repair costs of the machinery. Indirect materials . the level of production. Controlling the wastage generated in the process of manufacture. or received irrespective of production. Sophisticated accounting techniques such as Activity Based Costing. etc. technical support. the product has to be delivered to the customer at the door-step. and combines them into Direct and Indirect Costs. . the Direct Labour Cost could also include the direct labour involved in handling. Allocation and measurement of individual items. Running costs of the machinery. Machinery Costs would include: . which is treated as an „expense. Hence. However. such as material. Variable Costs As mentioned in the previous unit. welfare costs. etc. loading and transporting each product to the customer. While control of Direct Costs is easier. Variable costs include those costs that are directly dependent on the number of units produced. etc. Other expenses could include expenses such as depreciation. Other expenses Indirect materials could include costs of lubricating oil. labour. The reason for this is that machinery is used for many products and other purposes. It may also be observed from above that the Direct Cost comprises only (direct) materials and labour costs. costs associated with machinery are treated as Operations Overheads. Such costs which cannot be assigned directly. would be directly attributable to an additional unit produced. Indirect labour could include costs of people involved in supervision.s end = Direct Material Cost + Direct Labour Cost + Operations Overheads In the latter case. then the final unit cost would be: Final Landed Cost at Customer. Total Operations Cost can be divided into: . other consumables. Fixed Costs .. power. power consumption that takes place even when production is not on. . cost is a key to effective Cost Management. inspection. help managements to assign costs to individual units of production to a very high degree. Using only the required amount of different raw materials and components for each unit of a product. rent. etc. Recovering and reusing of materials/components rejected during the manufacture. which is the third type of resource used in operations. Similarly. Operations Management Unit 5 . Direct Material Cost can be controlled by: . . The depreciation. etc. . These would include items like rent. the overheads would now be termed as Operations Overheads since it would also include additional overheads that are linked in ensuring that the products are made available to the customer at their premises. Ensuring a high level of quality control during production. or do not vary with. This format lists all the items of cost. Indirect labour . and hence it is very difficult to allocate the related costs directly to any product.

filters. the company is incurring certain costs such as rent for the premises. Final Cost a product is given by the equation _________ . can be controlled in a similar manner by ensuring minimum downtime of machines and minimising the rejections out of production. Quick change-over time of machine settings. . In order to control Fixed Costs.Direct Labour Cost can be controlled by improving productivity i. 4. per day. and „learning curve. getting more output per unit time. 5. if the scale of operations increases. Self Assessment Questions 1.: 88 Total Cost = (F + 10 x v) / 10 = F/10 + „v. In most cases. the Unit Cost of producing a product reduces. Quantity of production: Due to the phenomenon of „economies of scale.. lesser wastage or rework. then the total cost of producing those 40 units would be: Total Cost = F/40 + „v. Now. Features of the product: If the product has more features the price is high because more efforts are required in designing and developing it. 5. 5. the fixed portion of salaries. etc. 3. Productivity: Higher levels of efficiency due to higher throughput.3 Economics of Operations – Economies of Scale The concept of „Economies of Scale. power connections. Employment of temporary labour force.e. etc. In other words. air-conditioning and running of equipments such as compressors. Quality: The level of quality determines the costs. the plant manufactures 40 units of product in a day. we see that as the production level increases during a particular time period. consider the situation when the plant reaches a stage of producing 10 units of product per day.: 87 . Let us say that such an expenditure of fixed nature is Rs. the items of expenditure which generate fixed costs are a function of time. Some of these factors are discussed below: . _________ comprise those costs which may be identified separately for each good or service produced.1 Influencing Factors Certain strategic decisions affect the cost of manufactured products. . __________.. as it determines the extent of quality inspections. the planning should be clear and operations should be flexible. Some of the ways to use the fixed resource to maximum in achieving maximum output are: . Indirect ______ and other expenses. usage of electricity and power for general lighting.. etc. the quality (hence the cost) of materials used and the technology used. Thus.2. It should be appreciated that even before the first unit is produced. and the company is all set to commence manufacture. „F. etc. then the unit . reduces the unit cost of production as the fixed cost (generally proportional to the time elapsed) gets distributed over larger numbers of products. 2. direct other materials. can be explained by considering a situation where a manufacturing facility has been just set up. Operations Management Unit 5 . work force. If after some time. then the total cost of producing 10 units (on any particular day) works out to be: Operations Management Unit 5 . Another division of total Operations Cost would be the _________ Costs and ____________ Costs.. have all been organised. . These generate the fixed costs of operations. Operations Cost Management involves ____ and _____ all costs that add up to the Total Operations Cost. Multi-skilled workmen. If the variable cost (cost of material + cost of direct labour + cost of power + others) per unit of production is „v. . Operations Overheads can be sub-divided into Indirect_______. Other Direct Costs such as direct power. large amount of products can be produced with very low investment. and the necessary raw materials.

. The graph below in Figure 5.1 Break-Even Point Analysis The break-even point1 is the point where total income is equal to the total costs associated with the sale of the product.1 shows a simple case of behaviour of Revenue. which in turn. R e v e n u e Y Revenue = PQ Total Operations Cost = F +VQ Fixed Operations Break Even Analysis X Variable Operations QBE Production / Production Rate Figure 5. it is determined by the equation: PQBE = F + VQBE Operations Management Unit 5 . It is mostly used by the production management.3. The variable Operations Cost is represented by a slightly slant line as shown. The X-axis represents the production volume or the production throughput.cost of manufacture comes down. let us assume the following: Q = The Quantity of Production / Sales P = The Unit Price of the Product V = The Unit Variable Operations Cost F = The Fixed Operations Cost Therefore. and consequently procurement costs will come down. This aspect is referred to as the „Economies of Scale. 5. which is constant over the entire range of Volume or Throughput. The horizontal line parallel to the X-axis represents the Fixed Costs. This phenomenon is contributed by more than one factor: . With higher scale of operations. .: 89 accordingly shown by a different line with a different slope. the volumes of purchases of both products and services will be high. thus bringing down the unit cost of production. Revenue = P x Q = PQ Total Cost of Production = F + VQ The Break-Even quantity is the quantity (sold/produced) at which the Revenue equals the Total Operations Cost. If „QBE. Total Operations Costs. (P – V) QBE = F or.net/business/production/break_even. represents the BreakEven quantity. In view of high level of operations. The Fixed Costs get distributed over a larger number of products produced.thus increasing productivity.: 90 Therefore. Variable Operations Costs and Fixed Cost at various levels of output / throughput. reduces the unit cost further. while the Y-axis represents the value (in rupees) of Costs/Revenue/Profit. the workmen would become more adept at manufacturing . and the Total Operations Cost (which is the total of Fixed cost and Variable cost) is 1For more information on Break-Even point please visit http://tutor2u. . .1: Break Even Analysis To understand the concept of Break-even Analysis. It categorises the production cost between the variable cost and the fixed cost.htm Operations Management Unit 5 .

divided by. the Fixed Cost is at a lower level. To illustrate the behaviour of costs and profits as related to the choice of the three variables. at any given quantity Q. becomes more flat as the operations stabilise. but the Variable Operations Cost is a steeper line representing higher variable costs.3 depicts these values in a more realistic fashion. perhaps beyond the normal capacity of the plant. but a high Fixed Cost element. This can happen. the Break-Even Point for I is lower than that for II.: 91 Break Even Point I Break Even Point II Production /Production Rate Fixed Operations Cost I Variable X Variable Fixed Operations Cost II Total Operation s cost I Total Operation s cost II Total Revenue Y Figure 5. regarding the plant and equipment and the other two input variables of material and labour. where initial cost of plant and equipment is high. = (Pr + F) / (P – V) The Operations Management personnel. is equal to: PQ – (F + VQ) The Quantity (Q. In the set of costs represented by I. especially at senior level have different choices to select. In practice. Again. to make decisions on the investments in plant and equipment. typically. as the output is increased. the Variable Costs line is less steep.: 92 R e v . the profit margin (that is the gap between revenue and total cost) is greater for II than for I.) for a given level of Profit (Pr) is given by the equation: Q. The following graph in Figure 5. Operations Management Unit 5 . In case of II. points – I and II. the Revenue and Costs are variable not always in a linear fashion as shown in the above graph (figure 5. but the running costs are low. This analysis is very significant for operations managers.QBE = F / (P – V). thus reflecting lesser variable costs (per unit). which increases linearly initially. The Profit.2: Break Even Point I & II Thus. However. For example.2). beyond a particular level of output.2 compares two „Break-Even. Operations Management Unit 5 . Unit Profit Margin. beyond the Break-Even point. since the fixed costs are appreciably lower in case of I. that is. the variable Operations Cost. the variable Operations Cost becomes steeper. Fixed Cost. The graph in Figure 5. in case of large investments in technology. let us take an example where two scenarios are considered.

. Similarly.e n u e/ C o s t/ p r o f i t Variable Operations Fixed X Axis Loss Profit Total Operation s Total Revenue Y Axis Plus Figure 5. Over a longer „time-frame. therefore. the operations manager has limited flexibility over reducing the cost. But at some point again it increases assuming that the capacity limits are reached. beyond some numbers. and thereafter. Operations Management Unit 5 . In real business situations. the company may need to scale down prices to retain volumes. and then stabilises as the output reaches optimum levels. which impacts not only the fixed costs. the profit continues to increase till the revenue starts dipping or till the total Operations Costs again shows steeper increase. but the manager is also in a position to achieve a continued reduction in the total Operations Costs over a longer time-frame.: 93 The graph in Figure 5.3: Depicting Values in a More Realistic Manner It can be seen that the total variable Operations Cost varies linearly initially. The market has a limit on such leveraging since the demand for one single type of product tends to level off.s product reaches maturity. if a company is into manufacture of only one type of product or service. by changing the Volume to reduce Costs. starts with a negative level (as revenue is zero. and the firm has to work overtime for production or has to be sub-contracted. that is the machinery (capacity) also. the operations manager is in a position to vary the third variable.3 is applicable for an analysis over a short „time-frame. Thereafter. Self Assessment Questions . the revenue also increases linearly till the demand for the company. since the operations manager can play around only with volume of production by varying the input of materials or labour. but the firm is incurring fixed costs) and gradually curves upwards to touch the X-axis (the point of intersection reflecting the Break-Even point) when the total revenue equals total Operations Costs. The „Profit. They can leverage what we call the „Economies of Scale. because the curve starts dipping.

com/doc/1G2-3273100079. To illustrate the advantages of leveraging the economies of scope. if the company employs „flexible manufacturing systems. 9. Efficient and flexible operations systems can develop this process. and the company will be at an advantage over the competitors in successfully marketing the products. The difference is that. Even if this particular model is selling successfully. higher than what the large companies pay. it is common for large firms to produce the primary ingredient in paper and their own pulp. However. Frankly speaking if the benefits from scope have little to do with the size of output. This is done before manufacturing the paper goods themselves.wikipedia. the manufacturer would find it extremely difficult to compete effectively in a market where many leading automobile companies manufacture and offer to the customers a wide variety of automobiles. All this would considerably add to the cost of the second model. and only a marginal additional fixed cost.: 94 through the variety of products. an economy of scope would be the savings from producing both pulp and paper.: 95 advantage by producing a complementary variety of products with a concentration on a core competency.s ability to adjust to change of products and multi-skill can make the operations more flexible. let us consider an automobile company manufacturing only one type of automobile. The manufacturer would need to recruit and train another set of workmen to undertake efficient manufacture of a second model.2. For the large producers. taking up manufacture of another model of automobile would involve large investments in alternate plant and machinery. 10. in his 1998 article. and the workmen. if a company is into manufacture of only one type of product or service.encyclopedia. are forced to broaden into manufacture of different types of products. 7. beyond some numbers. wherein the production of the second model would involve mainly the Direct Costs of material. However. and re-arranging the availability and issue of materials.org/wiki/Economies_of_scope 3 http://www. Economies of scope and economies of scale differ from each other. each producing a single product with the similar output level. then the unit cost of manufacture comes down."that economies of scope will be present if a firm can produce many. Developing very efficient machine settings.6. the operations neither registers a profit not incurs a loss. This would bring down the manufacturing costs of both models. if you take any paper products in the industry. and achieve higher volumes only Operations Management Unit 5 . Activity 1: Visit any manufacturing company which is all set to start production of goods.4 Economics of Operations – Economies of Scope Many businesses. David Kass 3wrote. Smaller firms will have to buy pulp at higher costs from others. "Economies of Scope and Home Healthcare. and also a set of workmen who can efficiently operate in both cases and are also proficient of effecting the change-over in short time – it is possible for them to manufacture both models. If the scale of operations increases. This theory is called as ______________„. “At Break-Even point. This approach is called the „Economies of Scope. The market has a limit on such __________ since the demand for one single type of product tends to level off. Typically. if an organisation or firm receives a cost 2 For more information on Economy of Scope please visit http://en. consisting of machinery and equipments which can take up processing different type of components.” (True / False) 8. the operations manager has ______________ over reducing the cost. although the large companies will probably have economies of scale that make it possible to invest in pulping operations in the first place. .html Operations Management Unit 5 . List the costs that the company incurs even before it starts its first unit of production. In real business situations. For example. economies of scope and scale are often interdependent and positively correlated. The Break-Even quantity of production / sale is obtained by dividing the total ____ cost by the unit ____ _____. due to the competitive market. labour and power. different product lines at a given output level with a lower price than a combination of separate firms. 5.

from Huggies diapers to wipes. organisations choose related diversification according to their corporate-level strategy. This is because. According to Hill. It provides paper for a variety of end users. or areas of expertise for greater competitiveness.s strategic management book. 5. Linked Supply Chains Economies of scope can be brought out with the help of today's linked supply chains among manufacturers. with a single service infrastructure. Ireland.4. They may also share intangible assets like corporate core competence or an expertise. and a number of products for surgical use. such as investment services and retail banking. wholesalers. Related Diversification . It is an attempt to exploit economies of scope among their various business units. these systems allow fast and low-cost switching of one product line to another. Cost-savings in a business can be achieved by transferring transferring expertise in one business to a new business. other vendors and consumers. This increases the scope of products. waste reduction. Clearly. this strategy can be operated. retailers. and cost improvements can be achieved with the Operations Management Unit 5 . raw material suppliers. an attempt to create Economies of Scope. Productivity gains. children. families. Kleenex Corporation is a paper products manufacturing company. ATMs.: 96 Related Diversification. the Merger Wave is in part. The producer can add different varieties of new products to their present line. resources. they are: . As organisations become linked in supply chains. When a firm extends its existing capabilities. The businesses can share operational skills or even share plant facilities. and Hoskisson. Cost savings opportunities can branch out from interrelationships anywhere along with the businesses' value chain. Internet site and their branches. Flexible Manufacturing . A related diversification strategy results in Economies of scope and often termed as “economies of diversification”. Mergers In the United States today. Henderson and Cockburn conducted a research in 1996 which explains that organisations involved in drug discovery realise economies of scope by sustaining different portfolios of research projects that catch both internal and external knowledge spillovers. Operations Management Unit 5 . distributors. Linked Supply Chains Flexible Manufacturing. especially as part of . the costs of using a single infrastructure to provide multiple services would be less than the costs of providing each service separately would be much greater. They produced different kinds of products from facial tissues to paper towels. For example. The companies uses similar raw material inputs and manufacturing processes as well as distribution and logistics channels. These improvements that arise from the ability to reduce or cut costs by operating two or more businesses under same corporate shelter exist whenever it is less costly for two or more businesses to operate under one centralized management than to function independently. or other existing assets. including products targeted specifically for health care providers and hospitals. It is possible if a producer can produce many products with the same equipment and if the equipment permits the comfort and ease to change as market demands change. acting as a barrier for new organisations from entering a competitive synergy. Economies of Scope is the result of the use of flexible processes and flexible manufacturing systems.In another example. infants. and women. that is. Pharmaceutical companies sometimes combine forces to share the expenses of development and research to bring new products in to market. many banks have economies of scope when they offer a different variety of related financial services. know-how in manufacturing and equipments.1 Methods of Achieving Economies of Scope There are four different kinds of methods to achieve Economies of Scope. With such sharing of activities you can maximise limited constraints. Mergers .: 97 integrating of a vertical supply chain.

What is Break-Even Point and how is this concept used in deciding the operational issues? 16. What are the challenges it faces to withstand the competition given by other companies manufacturing multiple products? 5.: 99 8. 5. It is necessary for operations managers to understand the factors that contribute to either of these two varieties of costs. Competitive market. 17. is an approach by which higher volumes are sought to be achieved through manufacturing a ________ of __________. Direct. Operations strategy – in line with business strategy – either aims for „low cost. Economy of Scale refers to the reduction in costs achieved in manufacture due to high levels of production.? Illustrate with an example. variable 5. Operations Cost constitutes a major part of the total cost of a product. Leveraging 10. products. labour 4. The scope economies can also help a firm to reduce risks. Planning. Many businesses. and achieve _______ volumes only through the variety of products. Self Assessment Questions 11. While economy of scale seeks to reduce costs by scaling up operational levels. Break-Even Point. It is therefore the responsibility of the operations managers to control and manage costs.the new E-economy. Fixed. manufacturing. higher Answers to Terminal Questions . for excellent quality and differentiation. products. or through superior. nature of costs are shared between the products. Variety. managers would need to guide and operate every aspect of operations in order to manage the costs. Final Cost = Direct Material Cost + Direct Labour Cost + Factory Overheads Materials. Beginning with the design of the product. the selection of the type of machinery and the manufacturing process to be used. or. How is „Economies of Scope different from Economies of Scale? 5. are forced to __________ into manufacture of different types of products. 11. What are the types of Operations Costs? What kinds of factors influence them? 15. „Economies of Scope. or as. profit. so that they can deliver value to the customer either by Operations Management Unit 5 . True 7.7 Answers Answers to Self Assessment Questions 1.6 Terminal Questions 14. The company decides to manufacture different types of products to withstand the competition. due to the _________. What is „Economies of Scale. 13.5 Summary For most products. 12. margin Operations Management Unit 5 . Limited flexibility 9. Economies of Scale and Economies of Scope are important techniques based on which both planning and execution of operational processes are conducted. broaden. or ‘Indirect’ costs. there is a growing potential for economies of scope. controlling 3. Scope economies have the capacity to increase a firm's value and can increase the performance and higher returns to shareholders. Fixed. so that certain „fixed. Flexible. efficient. 12. Activity 2: A leading company manufactures refrigerators and is not satisfied with the competition it gives to its competitors. Manufacture of a variety of products is done by developing operations systems which are _________ and still _____________. 6. „differentiated. Fixed and Variable costs. Operations Costs can be classified either into „direct.: 98 means of very competitive prices. costs 2. economy of scope is based on the fact that a company can optimise costs even by enlarging the basket of its products.

Refer to Section 5. The modernisation programme by RT was recognised as a very successful step towards modernisation. By the end of the financial year of 2001 Operations Management Unit 5 .8 Case Study RT Steel Company (RT) was established in 1909 by RT Rao at Vijayawada in Andhra Pradesh.2 2. The management could find its own drawbacks in the process of manufacturing.9 Glossary Term Description Adept A highly skilled worker or employee in any company who can adopt the working culture. Do you agree that the performance encouraging programme and cost cutting technique helped RT in gaining a good position in the steel industry? How did these two programmes help RT? 5. According to you what might be the reason for RT becoming one of the few companies in India with such a standing? 2. References 1. Refer to Section 5. shape and usage. RT emerged as a very powerful steel company which produced the lowest cost steel. India. The company planned to reduce the time of product delivery from four weeks to one week and reduce man power. 2. Questions 1. Costs that do not vary over time. Fixed cost A periodic charge that does not vary with business volume. „How To Do A Break Even Analysis. With a lot of communication with employees the company reduced its workforce by 15000 employees. Rather than promoting people on seniority basis RT started to promote young workers based on their performance. by Tom Egelhoff. www. It reduced the use of expensive metal which is generally used to give strength and flexibility to the steel. Leverage To improve the manufacturing capacity and increase the rate of return from an investment.3 4.com Operations Management Unit 6 .3 3. RT initiated a modernisation programme in 1980s for the cause of modernisation. RT produced every steel product irrespective of the quantity.: 100 the operating cost of RT at the hot metal stage was Rs. In spite of the depressed market RT achieved a good amount profit tax in the year 2000. 3750 per tonne and the company.1 Introduction . This performance encouraging programme proposed not only a new structure for the organisation but introduced flexibility in making decisions and encouraging teamwork among all levels of employees.1. as in buying securities on margin.dwmbeancounter. 7600 per tonne.4 5. RT produced a good range of products and services.s cost per tonne of finished steel was Rs. Refer to Section 5.: 101 Unit 6 Facilities Location Planning Structure: 6. Variable cost Expenses that vary in direct proportion to the quantity of output of any company. Refer to Section 5. RT tried to reduce costs by adopting creative strategies and other cost cutting techniques.

„h Explain the importance of location decisions. You must also be familiar with the Economics of Operations . Facilities planning are closely linked to an organisation¡¦s business strategies. 6. Some existing organisations may look for locations to expand their market or as a part of their marketing strategy.5 Service and Retail Locations 6. Such factories also required high levels of technical capability and domain expertise.11 Case study 6. Some companies may experience shift in their markets. „h Explain the decision-making process for making location decisions. you will be able to: „h Evaluate the role of globalisation for location planning. operates mainly in the power and automation technology areas.4 Multiple-Plant Strategies 6.: 102 Other firms could face deficiency of resources ¡V such as raw material. „h Explain the various options available while making location decisions. Learning Objectives: After studying this unit. A cost-leadership strategy may warrant locating operational facilities either close to their customers to optimise their distribution costs or closer to their suppliers in order to reduce the landed-costs of key inputs. a differentiating strategy may call for a judicious selection of location of facilities in order to provide greater value to their customers through extending better service to them. This approach led . These have made location decisions more significant in more recent times. Location decisions need to be made both by organisations that are being set up.2 Role of Globalisation in Location Decisions 6. which would generally mean looking for additional locations.9 Terminal Questions 6.Objectives 6. Switzerland. and by existing organisations. This unit deals with location planning and decisions. sought to set up plants capable of producing world-class products at internationally competitive prices. the cost of continuing business at existing locations may have become more expensive as compared to other locations that can be considered. On the other hand.2 Role of Globalisation in Location Decisions Rapid pace of economic reforms in most countries have led to globalisation of markets. and consider either changing their location or adding new facilities to better cater to their customers. ABB1.10 Answers 6. Sometimes. Operations Management Unit 6 .8 Summary 6.7 Evaluating Location Alternatives Location Cost ¡V Profit ¡V Volume Analysis The Transportation Model Factor Rating The Centre of Gravity Method 6.1 Introduction By now you must be familiar with the concept of operations cost and the factors that influence it. Some other firms may look for locations because they experience increasing demand for their products which cannot be fulfilled by mere expansion of existing facilities. For instance.12 Glossary 6. Globalisation has opened up new opportunities for multi-national companies as far as location decisions are concerned. or even skilled labour.Scale and Scope.3 Location Decisions General Procedure for Location Decisions Regional Factors that Affect Location Decisions Community Considerations Site-Related Factors 6.6 Global Locations 6. a Swiss-Swedish multinational corporation with headquarters in Zurich.

Self Assessment Questions 1. The above example reflects the close relationship between globalising operations and location decisions. It is an artificial sea-level waterway. In short. For example. They generally involve long-term commitment and are difficult or expensive to change. it can be said that there is no ¡¥ideal¡¦ location for any company. Certain specific locations offer organisations _____ advantages which promote globalisation. most companies identify only the acceptable locations from which to make the final choice. the options may be so many as to make it very difficult to make a choice. while non-profit organisations generally tend to seek a balance between their ability to serve their customers and the costs they incur.: 103 at Faridabad in Haryana (the only plant located east of Suez Canal2 to manufacture variable drive motors for global markets). „h Expanding markets: Certain markets in developing or under developed countries are registering very high growth rate. availability of skilled labour in certain locations also is a factor advantage. India initiated a number of regulatory changes that has rendered India as a very attractive destination for locating manufacturing facilities. operating costs and revenues and on operations themselves. Sometimes.3 Location Decisions Location decisions3 are also strategically important due to many reasons. for both manufacturing and services operations. Sometimes. Some of the chief factors which cause globalisation of operations are discussed below. There may be many acceptable locations for a company. „h Factor advantages: Certain specific locations offer organisations factor advantages which promote globalisation.wikipedia. Such countries offer new opportunities for multi-national companies for expanding into new markets. ABB also set up a plant 1 For more information on ABB please visit www. or they may make access to raw materials more difficult. Activity 1: List out the reasons why International companies come to developing countries and locate their business. or availability of better technical infrastructure in the form of ancillary industries. 5. Removal of entry barriers and reduction in manufacturing costs due to tariff reductions are two important reasons. 2 The Suez Canal is located in Egypt. Rapid pace of economic reforms in most countries have led to _____ of markets. Certain markets in developing or under developed countries are registering very high _____. cheaper labour or manpower costs attract them to locate facilities in developing countries. Globalisation has opened up new opportunities for multi-national companies as far as _____ _____ are concerned. 2. Objectives of Location Decisions Profit-based organisations make most of their decisions on the resultant profit potential. Choice of a location can often depend on the position of a company in its ¡¥supply chain¡¦. Considering the extreme ends of a typical chain. the decision on location is bound to have impact on the company¡¦s competitive advantage. Operations Management Unit 6 .: 104 3. for developed countries in the west. It connects the Mediterranean Sea and the Red Sea. A poor choice of location may add to transportation costs or result in difficulty in obtaining required skilled levels in people. Some of the other advantages that companies may experience could be in the form of availability of cheaper water or power resources. a retailer may focus on accessibility to a .org/wiki/ABB_Group Operations Management Unit 6 . Thus. 6. In the early 90¡¦s. Location decisions also tend to have significant impact on subsequent investment requirements. Removal of _____ and _____ in _____ costs are two important reasons why India became attractive for locating manufacturing facilities. Another reason is the emergence of regional trading blocs.them to identify Nasik and Vadodara as perfect locations for setting up plants for manufacturing circuit-breakers. 4. practically. along with how each of these factors affects the location decisions: „h Regulatory issues: This is the most significant factor. However.

considering a wider range of options. c. factors affecting Location decisions. etc. 6. Identify site alternatives within the area chosen. 2.: 106 3. The basic concept would be to weigh the resultant impact of the total system ¡V in other words. b. Identify important factors that influence the calculations ¡V for example location of markets or of raw materials.brc Operations Management Unit 6 . and look for only local alternatives in case of expansion or adding new facilities. Evaluate the alternatives and make the selection. For example. New and small firms may locate their facility at a certain place just because the owner lives there or closeby. a supplier of raw materials may attempt to locate the main facility near the source of raw material.1 General Procedure for Location Decision The approach to location decisions by different companies depends on the company¡¦s size and geographical scope of its operations. d. The procedure of making a decision on location in case of a formal approach may be described as follows: 1. Step ¡¥a¡¦. Identify a small number of area alternatives. They are: „h To expand an existing facility: This pre-supposes that there is scope for expansion in the existing facility. or community service. Operations Management Unit 6 . for a nuclear power plant. this happens in retail operations. while for a steel plant. are some of the typical reasons for considering this alternative. on the other hand. proximity to abundant water supply for cooling is very important. This option generally entails less cost than other options.2 Regional Factors that Affect Location Decisions There are several regional factors that affect Location Decision. running out of raw material supplies or required manpower. 6. 3 For more information on Location Planning please visit www. use a more formal approach. Amongst the many factors that may influence the location decision. the company should examine whether addition of locations would result in a net improvement in business.com/running_your_business/businessbits/ah_busplanan. this option is resorted to pre-empt competitors from entering the market.morebusiness. Such an option is considered if there are sufficient advantages in the existing location that are not available in other options. Sometimes.customer and seek to locate the business nearer the market. „h Move from existing location to a new one: In this option also. increased revenue.: 105 Four possible options exist in case of decision on location. Decide on the criteria to be used for evaluating different location alternatives. which would also be cost-beneficial. Some of them are: „h Market location „h The location of Raw Materials „h Labour issues like ( wage rates in that particular area. Identify a general location. Small companies adopt an informal approach. Step ¡¥b¡¦. „h Add more locations to existing ones: Generally. or cost saving. a few may be more significant. a cost-benefit analysis of moving to a new location should be assessed carefully before taking a decision.3. For example. proximity to iron ore mines and to coal pits would be top priority. Shift in the market. is a matter of managerial decision.3. Develop location alternatives: a. and subjecting the process to a detailed and rational analysis. while at the beginning of a supplychain. Large companies. labour productivity and commitment towards work) . A company would need to identify such important factors and narrow the search for suitable options in a particular geographical area. „h Status Quo: This option may be forced on a company if the latter is unable to identify any better potential location.

flowers. Facilities for food processing or canning of fruits may warrant proximity to raw material because of ¡¥perish ability¡¦. etc. supermarkets. are found in the centre of the markets they serve. workers¡¦ attitude towards work. Operations Management Unit 6 . Even the cost of the land and its future accessibility also matters a lot. However.3 Community Considerations Communities tend to attract businesses due to creation of employment. especially if different states / regions have a totally different tax regime. certain communities may be sensitive to disturbance of ecology. shopping. Retail sales and service organisations. traffic or pollution. etc. In some cases. and may go out of the way to discourage certain types of businesses from setting shop in their area. drugstores. has to be located near the mines. fresh food stores. individual families or residents may have serious objections to certain businesses locating or expanding their facility in the sites next to theirs.3. 6. proximity to customers is sought because of the need for close customer contacts.4 Site-Related Factors The other important factor which has to be considered in Location Decision is Site-Related Factors. health-care. For some other firms. labour factors also play a key part. or because tax collections can be better. Examples of such businesses are: airports. transportation and religious worship. there is a considerable reduction in the weight / volume during the process of conversion from raw material to finished goods. the products of different competitors are not much differentiated. This is particularly so for labour-intensive organisations. Location of raw materials The logic for locating a facility near the source of raw materials may be either ¡¥necessity¡¦ or ¡¥perish ability¡¦ or ¡¥transportation costs¡¦. For example.3. profit-oriented companies tend to locate their facilities near the market as a part of Operations Management Unit 6 . extreme climatic conditions may be avoided by some companies since it may affect worker attendance or create road blocks thus hampering delivery schedules. example ¡V fast-food restaurants. nuclear facilities. etc. dry-cleaners. labour productivity. tendency to form unions and generally. In case of certain products such as finished steel. the construction will be strong enough.: 108 From a company¡¦s view-point. Climate and taxes In some cases. high-way construction. a community can be attractive as a place for its workers and managers to live in view of superior facilities of education.: 107 their competitive strategy. Taxes are also a major consideration. Some firms need to locate their facilities near their markets in view of the perish ability of their products such as bakery products. ¡¥convenience¡¦ to the customer becomes a key attribute. The main considerations in case of site-related factors are: „h Land „h Transportation „h Access and zoning or other restrictions . In some other cases. and hence the facility location may be closer to the supply of iron ore due to ¡¥transportation costs¡¦. Some of the factors considered are labour cost. 6. typically. making transportation of raw materials a key element in production costs. This is so even in case of banks. due to objection to possible increase in noise levels. while the community as a whole may hold a favourable view about location of a business. mining operations. physical distribution costs may become the key criterion. Labour factors In arriving at a decision on the location of a facility.„h Taxes and climate also affect the Location Decision in any particular region. These are important because only if the site and soil condition is good. Since in most cases. Location of markets Location of markets influence location decisions since in many cases.

From this point of view. coordination of production throughout the system becomes highly complex. Most companies identify only the _____ locations from which to make the final choice. different facilities produce different product lines. List out the main site related factors that you will take into consideration. However.In certain cases. Significant savings on distribution / transportation costs of finished products often out-weigh other factors such as larger incoming logistics costs. marketing plants and processing plants. Process plant strategy Here. Self Assessment Questions . Another advantage could be a faster responsiveness to customers in terms of delivery and service. radiators. erection of large buildings or facilities with special requirements.: 110 components. access to main roads. each serving the entire domestic market. transmissions. resulting in Economies of Scale. load bearing capacity and drainage rates can be critical and may need careful and expert evaluation. Product plant strategy Under this strategic approach. plants are designed to serve a particular geographic segment of the market. and hence lower operating costs. Industrial Parks could be ideal locations. centralised administration is required to achieve the same. are manufactured in different plants. have predominance over land cost. the strategy is to focus different aspects of a process in different plants. and a well informed. It can be said that there is no _____ location for any company. and especially if some of the components are sub-assemblies. Another approach could be to service a particular market area from one plant manufacturing different products/product lines. Another option could be to assign to each plant a particular manufacturing process. a key advantage is that each plant is highly specialised and generates large volumes. 8. The approach to location decisions by a company depends on the company¡¦s _____ and _____ scope of its operations. etc. Soil conditions. but supply to a limited geographical area.4 Multiple-Plant Strategies Multi-Plant Strategies are the different types of strategies used in production plants. Individual companies produce either most or all of the product lines. There are a few alternatives available for companies that are contemplating more than one manufacturing facility. 9. Automobile industries often resort to this arrangement where the engines. Operations Management Unit 6 . One alternative could be to take up manufacture of one product line in each plant. In Multiple plants. materials and equipment along product lines. body forgings. Choice of a location can often depend on the position of a company in its _____. 6. Such an arrangement reflects a specialisation approach towards labour. Self Assessment Questions 6. This approach is suitable where a product has a number of Operations Management Unit 6 . Market area plant strategy With this strategy. factors such as scope for future expansions. but on the flip side would be restrictions on certain types of industries inside an industrial park. This approach calls for a ¡¥centralised¡¦ plant. current utility such as sewer connections. etc. sufficient parking space.: 109 Activity 2: Assume that you are planning to open an automobile shop. In view of the fact that decisions on site are long-term. This arrangement is particularly recommended when finished products are heavy in nature. the strategies of work implemented in one plant can be shared by others and improvement in products and processes in all plants can be achieved effectively. In this arrangement. This often contributes to Economies of Scale. 7. sites may need to be evaluated with the help of engineers or technical experts in case of heavy manufacturing units. The different plant locations can either be widely spread or gathered within a small area.

11. 14. competitors¡¦ locations play significant part. Demographics: age. automobile shops and supermarkets together in a particular area. Manufacturing depends on the cost. Under product plant strategic approach. service and retail businesses tend to be focused on revenue. traffic volume and convenience are high on their priority lists. Self Assessment Questions 13. educa-tion are taken into considera-on in service. Service oriented business depends on population and the area it is situated in. _____ and _____ facilities can be vital. restaurants tend to be near hotels and specialty stores tend to be near malls. Activity 4: We generally find many shopping malls. retail shops.10. plants are designed to serve a particular _____ segment of the market. In many cases.: 112 6. each serving the entire _____ market. it is unlikely that businesses will locate near other franchisees. create a list of reasons why these kind of shops which sell the same product. Thus. different facilities produce different _____ lines. The process plant strategy is to focus on _____ aspects of a _____ in different respective plants.: 111 For retail establishments.1: Table 6.6 Global Locations As more and more companies have ventured out of their national borders. automobile component dealers tend to gather together. Operations Management Unit 6 . While manufacturers tend to be costfocused. In manufacturing the organisation has to bear the transportation costs. Competition drives service sector. In other cases.1: Comparison between Manufacturing and Service Manufacturing / Distribution Service / Retail Manufacturing is Cost focussed. For service providers and retailers. Activity 3: Visit any supermarket in your area and enquire about the various issues which were taken in to consideration before opening it in your area. For example. income. parking and transportation facilities can be vital. Under market area plant strategy. Manufacturing depends on the availability and costs of energy. A comparative picture of selection criteria between manufacturing/ distribution businesses and retail/service businesses is presented in the following Table 6. while manufacturers tend to be _____-focused. Retailers tend to locate themselves near other retailers (not necessarily their own competitors) in order to take advantage of traffic volume and to offer more convenience to the customers. in order to take advantage of heavy traffic. such as franchisee operations. flock together in one area. 6. recent trend in locating manufacturing facilities indicate a distinct . Operations Management Unit 6 . malls attract lot more people than downtown establishments since the former offer free parking facilities. service and retail businesses tend to be focused on _____. Customer access /and parking is more important in Service. Service is more Revenue focussed. In urban areas customer safety and security also are considered very important. Some businesses tend to locate near competitors in order to take advantage of concentration of potential customers. For retail establishments. 12. In manufacturing the organisation has to bear the building and the leasing costs Traffic volume also plays a crucial role in Service Business.5 Service and Retail Locations The process of making location decisions in case of service and retail operations involve different considerations as compared to manufacturing locations. availability and skills of the labour. For making location decisions. So. Make a list of the alternate choices that the supermarket owner could have thought of before opening it. and as globalisation has been catching on.

in light manufacturing industries. The year 1994 was a watershed year when General Agreement on Tariffs and Trade (GATT) passed a resolution reducing/eliminating various import tariffs. Amongst the latter. Certain countries like India and China offer tremendously large potential markets for various products. to commence operations. It considers the cost of the land and determines the lowest cost of the same. education and medical service with special efforts.7. Some other organisations may be attracted to outside locations because of availability of labour ¡V abundant resources. The growth in multi-national operations over the past few decades reflects the importance of foreign locations.: 114 In this procedure4: .1 Location Cost ¡V Profit ¡V Volume Analysis Location Cost-Profit Analysis means deciding whether a particular location is suitable for further operations and transactions. Currency fluctuations and devaluations can also make a major impact on the prices of products. The year _____ was a watershed year when GATT passed a resolution reducing / eliminating of various import tariffs. Another trend has been the practice of _____ manufacturing. Another factor that promotes companies to locate their manufacturing facilities in developing countries is that some local markets¡¦ customers do not buy products that are not made in their own country. 6. Operations Management Unit 6 . Some countries offer financial incentives to companies to create jobs for their people. Companies prefer to locate their manufacturing facilities in such countries to reduce delivery costs and also to be closer to the customers. Some of the alternatives are explained in the following paragraphs. 6. and its attitude towards foreign firms. such as electronics. An organisation which is considering locating its operations / facilities in a foreign country must judiciously weigh the benefits of such a move against the potential problems they are likely to face. Development in Information Technology (IT) has also made communication faster and more efficient. while others have ventured beyond their country¡¦s boundaries in order to expand their markets. Another trend has been the practice of Just in Time (JIT) manufacturing. 18. Companies also select such personnel who are a little familiar with the host country¡¦s language and culture. due to which suppliers prefer to locate their facilities nearer the customers.7 Evaluating Location Alternatives A number of alternatives are available that help in evaluating location alternatives. may attract more competent companies to set up their facilities in the country. Currency _____ and _____ can also make a major impact on the prices of products. Changes in currency values alter the price of foreign goods. which in turn. Some firms could be attracted to foreign locations because of proximity to sources of basic raw materials and natural resources. Consequently. In addition. but not the price of domestically produced goods. thus making imports much more expensive. Problems to a company in a different country can also be caused by language and cultural differences. due to which suppliers prefer to locate their facilities near to the customers to reduce the lead time.: 113 result in limiting competition in the country. proximity to markets is gaining precedence to lowcost labour. Problems to a company in a different country can also be caused by _____ and _____ differences. the tendency to locate facilities within a country to escape tariffs became a non-issue. 17. Many organisations have taken initiatives to moderate this problem by providing facilities of housing. Self Assessment Questions 15. Some countries may adopt import tariffs in order to discourage foreign companies from setting up units in their own country.preference for foreign locations. Even distant places are connected within minutes due to advancement in IT and communications. 16. a major source of problem would be the stability of the host country¡¦s government. This would Operations Management Unit 6 .

com/topic/cost-volume-profit-cvp-analysis Operations Management Unit 6 . it is a simple case of factoring in the cost of transportation in the ¡¥variable cost. 6. the alternative location of ¡¥A¡¦ offers the lowest total production cost.First. If the source or destination for raw materials or finished goods is single. The procedure involved is as follows: . ¡¥C¡¦ and ¡¥D¡¦ ¡V each shows the total cost of manufacturing at different levels of output.¡¦ However. the above analysis provides guidance to managers who make decisions on locating their manufacturing facility. The two coordinates (output on one axis and Total Cost on the other axis) are plotted independently for all the locations on the same graph For a given (expected) level of output. in case of multiple locations of raw materials and/or finished products. The four different graphs refer to different location alternatives. the Fixed Cost and Variable Cost for each location is determined: Total Cost = Fixed Cost + ¡¥v¡¦ x Q Where. ¡¥B¡¦. 6. 800 700 600 500 400 300 200 100 0 2 4 6 8 10 12 14 16 Annual Output (000 units) B superior C superior A superior A C B D Total Annual Cost (Rs) Figure 6. the most economical location can easily be determined by reading the graph (alternately. then the resultant total cost of ¡¥transportation¡¦ for any given location of a facility will need to be worked out with the help of a transportation model of ¡¥Linear Programming¡¦. „h Beyond 1400 units of output. Thus. the profit value can be determined for different levels of output at each location).1: Total Cost of Manufacturing at Different Levels The above graph shows four different graphs ¡V ¡¥A¡¦. The same logic holds good even if a company is considering addition of a number of. „h 400 and 1400 of total annual cost.answers.7. new facilities.: 115 It is observed from the above graph that between output levels of: „h 0 and 400 of total annual cost. Both ¡¥quantitative information¡¦ and ¡¥personal information¡¦ can be factored in working out the composite value for each alternative. depending on the visualised output level/levels. the location alternative ¡¥B¡¦ is more economical in terms of total cost of production. ¡¥v¡¦ is the Variable Cost per unit Q is the Output level being considered. A composite value for each alternative is worked out by summarising all related factors.2 The Transportation Model Either because of heavy anticipated movement of raw materials or of the finished products. the alternative ¡¥C¡¦ offers the lowest total cost. transportation costs sometimes influences the location decision.7. 4 For more information please refer http://www.3 Factor Rating Factor rating is a general approach to evaluate alternates and compare them.

Table 6.40(90) = 36. 4. the score is calculated. The relevant Factors (location of market.0 Traffic Volume 0. Operations Management Unit 6 . The particular alternative having the highest composite score is selected.20 40 70 . The ¡¥factor weight¡¦ is multiplied by the score for the respective factor.2: Example for Factor Rating Factor Weight Scores (out of 100) Weighted Scores Alt. 2. 2 Alternative 1 Alternative 2 Proximity to Existing store 0.2 Layout 0.05 80 80 .0 Operating Costs . and the resultant value for each factor is added up together. A common ¡¥scale¡¦ is identified for all factors.0 Rental Costs 0.0 . infrastructure requirements like water supply.10(60) = 6. Example: A photo-processing shop intends to open a new branch store. Each Factor is assigned a ¡¥weight¡¦ based on its relative importance as compared to other factors (the sum of ¡¥weights¡¦ for all factors would be 1.10 86 92 .05(80) = 4.10(92) = 9.10(86) = 8.1.0).40(70) = 28. The following table has information on two different potential locations.0 . 6.05(80) = 4.0 . 1 Alt. 3.20(40) = 8.: 116 5.10(100) = 10.6 .0 . For each location alternative.40 70 90 . etc ) are identified and determined.0 Size 0. parking facilities.10 100 60 .20(70) = 14.

1) D1 (8.4 The Centre of Gravity Method This technique is particularly used for decision on location of a distribution centre.2 the two alternatives locations 1 and 2 are discussed. In an extreme case.5 1. then the company looks for additional factors or can review the threshold level established. In a variation of the simpler model.15 80 90 . As the initial step. 6. 2 4 6 8 10 X Y 4 6 2 0 D1 (2. Hence under certain circumstances.3) D1 (10.6) N E S W . The simpler model is to consider that the weight to be shipped to each destination is fixed.0. the destination locations are plotted on a set of coordinates in such a way that the relative positions of the destinations are accurately positioned.0 70. The concept is to determine such a location for which the distribution cost is the minimum.7. of centre of gravity the weights can be made to vary.0 .15 (90) = 13. Alternative ¡¥2¡¦ is superior since its Composite Score is higher. Operations Management Unit 6 . Alternate 2 has good chances in all the other factors. if each considered factor has a ¡¥less-than-threshold¡¦ composite score (and hence gets rejected).4) D1 (3.: 117 The basis for the cost calculation is to treat the distribution cost as a linear function of the ¡¥distance¡¦ and ¡¥quantity¡¦ shipped.6 82. a minimum threshold is established for the composite score. and any factor for which the composite score is below the ¡¥threshold¡¦ is rejected outright.15(80) = 12. but within the same proportion (for example: seasonal variations). Both have equal advantages when it comes to traffic volume. Alternative 1 scores better than Alternative 2 in proximity to existing store. The next step is to determine the ¡¥centre of gravity¡¦.7) D2 (4.2) Centre of Gravity D3 (7.7 In the above Table 6. So when all the factors are calculated.

More companies are venturing into global operations and hence they need to make location decisions not only within the national borders. 20. labour availability. While the criteria for selection of a location is a management decision. the co-ordinates of the Centre of Gravity that can be determined by calculating the ¡¥average¡¦ of the X-coordinates of all destinations and the average of all the Y-coordinates. The final selection of the location is done based on several criteria. Factor Rating is a general approach for evaluating _____ and comparing them. . Whether an organisation is being newly set up or whether an organisation already exists. by using the following formulae: Operations Management Unit 6 . xi = ¡¥x¡¦ coordinate of destination ¡¥i¡¦ yi = ¡¥y¡¦ coordinate of destination ¡¥i' n = The number of destinations i= 0-10 (x) i= 0-6 (Y) In case. add more locations to existing ones. and cannot be reversed easily. respectively. there are the aspects of community and the infrastructure availability at the site. Such decisions involve high initial costs. operational parameters and revenues. The Centre of Gravity method is a technique particularly used for decision on location of a _____ centre. using the following formulae: x = £UQi xi . the number of units to be shipped to each destination is different from the others. Operations Management Unit 6 . n where. A number of techniques .8 Summary Decisions on location of facilities are of strategic importance to most organisations. £UQi where.2: Determining Centre of Gravity In the above Figure 6.: 119 The planning of facilities is directly drawn from a company¡¦s business strategy. 6.including whether a firm wishes to expand its existing facility. In case of choosing location for service type of business or a retail business. location decisions.Figure 6. have significant impact on subsequent investments. climate. In turn. that is. the focus is generally on the traffic volume and service deliverables. xi = ¡¥x¡¦ coordinate of destination ¡¥i¡¦ yi = ¡¥y¡¦ coordinate of destination ¡¥i' Qi= Quantity to be shipped to destination ¡¥i¡¦ Self Assessment Questions 19. £UQi y = £UQi yi . tax regime. location decisions have to be well thought out. Besides. a company comes up with many suitable locations to suit their strategy and different requirements. or shift its facility. the X axis and Y axis represent the distance and the ¡¥D¡¦ represents the destination.2. Assuming that the quantity to be shipped to each destination is equal. n y = £Uyi . then a ¡¥weighted average¡¦ is used to determine the Centre of Gravity that coordinates. proximity to markets. Generally. etc can influence the calculations. when implemented. Companies initiate such decisions on additional locations due to many other reasons such as fresh access to depleting resources or to deliver better ¡¥service¡¦ to customers. several factors ¡V such as regional factors. but in other countries also. Companies can adopt different strategies focused on either the product or the market or the process.: 118 x = £Uxi .

14. Refer to Section 6. devaluations 18. Size. Distribution Answers to Terminal Questions 1. Product. Ideal 7. 6. ¡¥Munnar¡¦ in Kerala was selected for their business operation in South India. It planned to set a new production facility at a suitable location.: 120 6. Growth. transportation 15. They also considered factors like location. Considerable weightage was given for every factor in the analysis. Language. which is one of the foremost manufacturers of textile handicrafts in North India. Parking. Different. and what options are available for making a choice of locations? 3. Finally. geographical 10. 5.3 3. the main logic in such calculations is to understand the Cost ¡V Benefit equation.: 121 6. The management started collecting relevant data about the major cities and states where they can set up their company. Globalisation 2. Geographic 12. Alternatives 20. and discuss their relative characteristics? 4. realised the growing demand for its products in South India. What are the different types of strategies followed while selecting a location.6 6. Factor 5. Factor rating method was used to find a suitable state and Centre of gravity method was used to find a suitable location for their planned business operations. It started considering many suitable locations for this purpose.10 Answers Answers to Self Assessment Questions 1.9 Terminal Questions 1. Location decisions 3.4 4. Kerela had abundant raw material and the .7 Operations Management Unit 6 . What are the methods of evaluating alternate locations? Operations Management Unit 6 . 6. Refer to Section 6. JIT 17. Acceptable 8. Refer to Section 6. Cost. 1994 16. Whatever the technique.1 2. Fluctuations. What are the objectives of making location decisions. Supply Chain 9. rate. Refer to Section 6. Entry barriers. What are the new challenges faced by any company regarding location decisions in a global scenario? 6. Why should a company give importance to location decisions? 2. reduction. cost and potential. Refer to Section 6.11 Case Study Soha Limited. culture 19.are available to evaluate the suitability of alternate locations. process 13. The analysis had a wide variety of factors based on the information and experience in the field. After considering the result of the analysis. domestic 11. revenue. Refer to Section 6.5 5. manufacturing 4. Explain the peculiarity of location selection in case of service operations.

Devaluations To lessen the value of currency so that it will affect price of products. Kerela was also at a very favourable distance for their operations.cost of the land was also affordable. In which way would the productivity be affected if the location decision was taken in haste? 6.org/wiki/ABB_Group Operations Management Unit 7 .com 3. Pre-empt To have precedence from allowing the companies to get into com. These all factors made Kerela the most favourable place for manufacturing the textile industry. Question: 1.: 122 References 1.8 Associative Forecasting Techniques Simple Linear Regression 7. Sule 4. Operations Management Unit 6 . What according to you might have been the factors that the company considered before deciding Kerela as its centre for business operations? 2.12 Glossary Terms Description Ancillary Subordinate or subsidiary company which helps in better productivity. www.4 The Process of Forecasting 7. Planning.7 Times-Series Approach Approaches to Time Series Data 7.wikipedia. Manufacturing Facilities: Location. Zoning Classifying or dividing any area into different zones for better administration or operations.petition.morebusiness.1 Introduction Objectives 7. and Design by Dileep R.5 Approaches to Forecasting 7. Ventured To proceed despite possible risk in establishing a company abroad.6 Qualitative Forecast Executive Opinions The Delphi Method Sales Force Opinions Consumer Surveys 7.2 Introduction to Forecasting Common Characteristics of Forecasting 7.3 Elements of a Forecast 7.: 123 Unit 7 Forecasting Structure: 7. www.9 Forecast Accuracy & Forecast Management Managing or Controlling the Forecast . General Agreement on Tariffs andTrade (GATT) This is a multinational treaty designed to provide an international forum that encouraged free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mechanism for resolving trade disputes.org 2.ibscdc. It is a United Nations agency. www.

science.2 Introduction to Forecasting Forecasting can be defined as the estimation as to when.science.14 Glossary 7. for the purpose of planning. the planning activity takes a very specific form. so that the plans developed based on forecasts are most appropriate to the company. Operations Management Unit 7 . combined with a . many formal methods and techniques have been developed not only to develop forecasts but also to assess forecast accuracy. the process of forecasting.: 125 In business. Learning Objectives: After studying this unit you will be able to: „h Define the elements of a good forecast. Forecasts impact decisions throughout an organisation in finance. listing the advantages and disadvantages of each. etc. „h Information regarding past experience. It can be more of an . „h Hiring plans. planning is more strategic and qualitative. elements of a forecast. etc.13 Case Study 7.art. Thus. They are: „h Information pertaining to present conditions. marketing. forecasters are well advised to hope for some . costing estimates. and many good companies rigorously use some of these techniques. qualitative approaches. operations management. A Forecasting method has to be carefully chosen depending on the use to which the forecasted figures are put. at business levels and further down. No single existing universal method of forecasting can be used for several situations.. etc. at functional and managerial levels. human resource management. cash-flow estimates. To make forecasts. at organisational level. 7. At corporate levels. . various techniques have been developed using scientific reasoning. and . lay-off plans and counselling. at individual level. forecast accuracy & forecast management.11 Terminal Questions 7. forecasting has not become an exact . and exhibit humility since many a times. and the worst ones develop very effective forecasts.s objectives and to the environment in which it operates. „h Compare qualitative and quantitative techniques of forecasting.. effective forecasting often demands a skilful combination of . Operations Management Unit 7 . etc. Experience and judgment also play a crucial role in forecasting apart from technical expertise. „h Explain the steps involved in the forecasting process „h Describe different qualitative techniques of forecasting. and to what extent future events will take place. Discuss measures of forecast accuracy.1 Introduction By now you must be familiar with the concept of Operations Management. Another reflection of good forecasts and good forecasting would be the ability of the organisation or its planning team to make timely mid-course corrections to its plans based on external events. Some typical applications of forecasts are as follows: „h Profit projections.12 Answers 7. This unit covers common characteristics of forecasting.10 Summary 7.gut-feel. time-series approach associative forecasting techniques. accounting. The aim in any organisation would be to develop forecasts that will turn out to be as close to the actual unfolding of events as possible. In spite of advanced development in computers and mathematical models. two kinds of information are generally taken into account. systems management.7.luck. financing requirements. One of the primary tasks in Operations Management is that of planning of everything that is related to production. „h Equipment needs. In addition.: 124 Pre-requisite for any planning exercise is a FORECAST. approaches to forecasting. of certain key responsible employees.art. The outcome of planning ¡V a PLAN ¡V is expressed in a specific quantitative form. the best forecasters produce awful forecasts.

profits. the time horizon of the forecast should be sufficient to act on the forecast and implement necessary changes. Many decisions have a longer lead time. inaccuracies should be factored in while making decisions.: 126 notwithstanding the fact that the forecasts developed have far-reaching and high level of influence over operations. or the same raw material is required in different products. availability of resources. It is very difficult to predict accurately how a large number of related factors will influence one particular variable under study.1 Common Characteristics of Forecasting Even though there are different kinds of techniques and methodologies used in forecasting certain common features span the entire variety of forecasting techniques.3 Elements of a Forecast We have already discussed the meaning of forecast and its common characteristics in the previous section. . However. Further.Demand Forecasts. the aspect of random occurrences contributes additionally to a forecast being different from the actual. and stock prices are also estimated by forecasting. 7. Now let us discuss about the elements of forecast. capacity planning. What assumptions do different techniques of forecast make? 2. It is not enough to depend solely on models or computers for developing forecasts. Invariably. Therefore. inventory planning. and labour deployment. Such opportunities are available in certain cases. costs. Accuracy of forecasts is inversely proportional to the _______________ of the forecast. etc. of the forecast.„h Product development planning. Future revenues. pricing. Unforeseen events such as weather-specific factors.2. generally rests with the marketing function in a business entity. 3. prices. Elements of forecast mean basic assumptions or principles which make a good forecast. it is necessary for a manager to be very alert and modify forecasts as and when such incidents occur. „h Planning the use of the system. In order to understand the subject better. Business forecasting does not confine itself to predicting demand. new tariffs or taxes and competitors. The task and responsibility of preparing . Operations Management Unit 7 . such as putting up new facilities. Operations Management Unit 7 . The actual events or results generally deviate from the estimates made. 7. thus making it necessary for managers in different functional areas to coordinate while making decisions. moves are likely to have major impact on demand. interest rates.: 127 Self Assessment Questions 1. promotional plans. since the errors during the process of forecasting tend to avoid each other to some extent. The applications of forecasts include: „h Planning the system. Therefore. „h It is possible to get a more accurate forecast for a set of variables than for a single variable. „h Forecasts are never absolutely precise. Therefore. we focus on Demand Forecasting and techniques. when a product is demanded by a number of independent customers. „h Accuracy of forecasts is inversely proportional to the . use of forecast in one area has impact on other areas. The former involves long-term plans (strategic) while the latter generally deals with medium and short-term plans. Some of the common characteristics of forecasting are as follow: „h The different techniques make a common assumption that what happened in the past will continue to happen in future. A well-prepared forecast should fulfil certain conditions: „h The forecast should be prepared at the appropriate time for it to be used effectively. Hence they tend to be more accurate. principles are also equally relevant to other variables. Short-term forecasts need to contend with lesser uncertainties than longer-term estimates. material needs. the operations function itself would need to develop forecasts regarding capacity and time requirements.time horizon. Forecasts are never absolutely ____.

and the nature of data is to choose an appropriate model. man-hours. The time horizon identified would also determine Operations Management Unit 7 . the kind of decision to be made would decide the time horizon for which the forecast is required. For example. Self Assessment Questions 4. the parameters of the selected model have to be established. and the resources that can be justified can be examined. Establish a time-horizon of the forecast: The longer the time-horizon of forecast.s production to meet the market demand. Each of the above situations would call for a different type of forecast. „h The forecast should be expressed in relevant units ¡V whether they are units. The forecasting process consists of six basic steps: 1. At the same time. and the degree of accuracy should be specified. To help do this. This will provide confidence to users when they consider using new forecasts. 5. 7. or. This will reduce the chances of different people using different information.: 129 the type of data required ¡V in terms of variety and source of data and the detail to which the data is required. Based on the sample data. This will facilitate users to factor in likely errors. or . 3. The users of forecasts often get confused with forecasts made through sophisticated techniques and hence loose confidence. Understand and specify the purpose of the forecast: It is necessary to express for what purpose and when the forecast is to be used so that the level of detail and accuracy required. the less is its accuracy likely to be. after which the logic could be used for forecasting. Forecasts developed with the help of a particular technique should work consistently. if a . effect. Information about existence of such patterns helps in selecting the appropriate model for consideration. This may result in misuse of techniques. etc. The forecasting should be cost effective. so that the concerned persons can use it easily. if the top management looking at diversifying into new areas of business. if the firm is interested in introducing a new product within the next six months. Operations Management Unit 7 . For example. and also make comparisons of alternative forecasts available. then the parameter would be the number of periods for which the average will be calculated. „h The forecast should be expressed in writing. 2.„h The forecast should be accurate. rupees. The forecast should be prepared at the ____ or ____ time for it to be used effectively. „h A forecast should be reliable. or if the production department want to plan next month. Simple forecasting techniques are generally more popular.in terms of time-horizon. Select the suitable forecasting technique: The next step after identifying the purpose. It generally defines on how to gather and arrange the information in a logical order. Each model will involve certain parameters that are to be determined. Written forecasts will also help in subsequently comparing actual results with the forecast made.cyclical. technique is to be used to predict future demand.seasonal. a sample set of data relating to earlier period can be picked up and a quick analysis can be done to examine the presence of . Activity 1: Prepare a list of elements which makes a forecast good. The forecast should be ____. „h The forecasting technique should be easy to understand and use.4 The Forecasting Process Forecasting process is the mechanism for approaching for participation from people who are experienced and have the capability to predict the future events and arrange them in a sequence to develop a format. equipment capacities.moving average. or accuracy level of the forecast ¡V and the forecast results would also be used differently in each case. and the degree of ____ should be specified. .: 128 „h The forecasts should give rise to benefits which are more than the costs incurred. timehorizon.

In practice. Self Assessment Questions 6.s market. If the deviation is nominal then the logic can be used. sales staff. Monitoring a forecast includes: „a Checking the forecast regularly against actual data that is present or against the historical data. 4. and panel of experts. They are: „a Be very practical in estimating the forecast.soft. on the other hand. it is vital to know the type of data required and the normal sources through which data can be obtained. inputs. based on knowledge.qualitative. its appropriateness by choosing a small . data obtained through the sales force can be particularly significant in short-term forecasting. the . They are: „h Qualitative approach. if the deviation is abnormal. period and working out the forecast for subsequent periods. 7. the forecasting techniques can be broadly classified under three headings. are either based on historical data or involve . in case of absence of historical data. and for mid-course corrections to sales and production planning. the ____ is its accuracy likely to be. 6.However. Monitor the accuracy of the forecast: A forecast has to be monitored to determine whether it is giving required results. experience and hunches. approach do not resort to such .actual. Since these are very difficult (sometimes impossible) to quantify. it is advisable to . Mobilise relevant data and analyse the same: The quality and quantity of data that a firm can mobilise for forecasting purposes will limit the accuracy in forecasting. 5. . Qualitative approaches mainly involve subjective inputs which cannot be generally expressed in numerical terms. Sales force estimates can provide data about: „a Actual consumption „a Changing profile of consumption „a Competitors. „a Monitoring the operations for getting better results. These sources often provide insights that are not otherwise available. is used to develop forecasts.early. „h Quantitative approach. either of the above approaches. The forecasting processes in .: 131 biases that often influence qualitative methods. and some of the parameters selected may need change. Therefore. Based on the two approaches. Such forecasts could be compared with the . they are: „h Judgmental forecasts „h Time-series forecasts „h Associative model Judgmental forecasts are based on analysing subjective inputs obtained through different possible sources such as ¡V consumer surveys.5 Approaches to Forecasting There are two general approaches for forecasting. However. The forecasting process consist of ____ basic ____. approach make use of human judgment and opinion. figures that have happened during the subsequent period to see the extent of deviation between the forecast and the actual. corresponding performances „a Movement in market shares amongst competitors „a Market growth figures Operations Management Unit 7 . managerial staff. Prepare the forecast: While preparing a forecast you should follow few things which are very crucial. The latter steer clear of personal Operations Management Unit 7 . The longer the ________ of a forecast. „a You should choose the right technique for forecasting.quantitative. (explanatory) relationships. then there is a need to re-examine the logic. Quantitative methods. before using the logic. or both.test. „a Adjusting the forecast as the information flows.causal. 7.: 130 Since sales force normally spans the entire geographical range of the firm.

this promotes receiving honest responses and chances of bias and of one of the opinions prevailing gets minimised. Under some circumstances. in simple terms. the sales people (perhaps due to limited all round experience) tend to be unduly influenced by the recent trend. This process is repeated in several rounds. These forecasts are called judgemental forecasts.2 The Delphi Method The use of this method is not confined to forecasting. past data may not be available at all. or demand and a particular demographic profile. It becomes difficult to spread the responsibility of producing a forecast uniformly over all the members of the group. As the field sales people have updated customer feedback Operations Management Unit 7 . that is. In the area of forecasting. seek to project patterns identified in past data into future probabilities. On the other hand.6 Qualitative Forecasting Qualitative forecasts are based on judgment and opinion. The basic assumption in this approach is that ¡§the future will be like the past¡¨. 10. Some of these judgemental forecasts are discussed below. Simultaneously. The responses received in any round may either be circulated (anonymously) to all respondents before seeking their second round of opinions.s judgment is biased due to self-interest. demand and birth rate. The risk involved in this technique is that one of the personnel in the group would develop a leadership role and their opinion may prevail. to distinguish between what the customers are likely to do and what they actually will do. Such forecasts are generally long term and single-time forecasts for which very little hard data is available to analyse. skills and experience are leveraged. 7. Certain drawbacks with this approach include the inability of the sales force to make considered judgment. 7. approach make use of____ ____ and ____.targets.6. when an anticipated event will occur. This method is generally used for long-term planning or new product development. It could be non-availability of enough time to gather relevant data. sales or any other functional area) whose knowledge. Due to this the judgment or opinions of experts or knowledgeable people is essential. it has also seen that the sales force. and past data available may not be applicable. Often. Associative models use co-relation equations that consist of one or more explanatory variables that can be used to predict future demand.qualitative. The two general approaches for forecasting are____ and ____. For examples. 7. How are forecasting techniques classified based on qualitative and quantitative approaches? 7.: 133 about the existing products and are even aware of the customers. especially if the forecast thus produced should become the basis for the performance . the aim is to forecast. set for them. This not only expands the scope of information on which responses can be based. These techniques are discussed in detail in the coming sections. future plans. demand for a product and money spend on advertising for the product. or. The responses are kept anonymous. if a Operations Management Unit 7 . The Delphi method concept involves circulating a series of questionnaires among individuals who have the knowledge and ability to contribute meaningfully. The reasons can be varied. Delphi method is generally used for technological forecasting ¡V predicting changes in technology and its impact on the organisation. Self Assessment Questions 8. opinions. due to drastic change in the environment. depending on the need for accuracy. forecasters either choose or are compelled to rely on judgment and opinion to make forecasts.6.: 132 product type is new.6.3 Sales Force Opinions The field sales or the customer service personnel are often a very good source to forecast product demand since they are in direct contact with customers. but gives them the opportunity to fine tune the opinion based on others. The goal is to achieve a consensus forecast.1 Executive Opinions The forecast is drawn on the basis of opinions or judgments of a small group of senior level managers (in marketing.Time-series forecasts. . in other cases. they are in a position to give precise opinion about the future demand. 9. The forecasting processes in .

List the various techniques that the manufacturers use to forecast the requirements in order to satisfy the customer.: 135 Random variations just happen without any referable reasons. Wherever possible. output. But.s duration.stock outs. etc. The observations or data may pertain to demand. yearly or periodically. and equally so to interpret the data/information obtained from such surveys. Operations Management Unit 7 . Firms resorting to this method need to have the expertise to overcome these pitfalls. quarterly. should be based on past data of . Activity 2: Visit a soap manufacturing company and learn how they come to know the requirement of their customers without contacting them directly. They can be seen as residual variations after all other types of variations are accounted for. before analysing.6.straight from horses mouths. Irregular variations happen because of unusual conditions such as severe weather conditions. their opinions would be most authentic. profits. Seasonal variation refers to short-term.demand. The Delphi method concept involves circulating a ____ of ____ among individuals. invariably the population of prospective customers is very large. shipments. if they have taken place. it requires considerable skill to design and administer a survey. Cyclic variations reflect wavelike variations of more than a year. Restaurant occupancy. These are related to influence of economic. The analysis of the past data consists of plotting the data against time. the respondents often exhibit irrational behaviour patterns. Forecasting techniques based on time-series data are made on the assumption that future values of the variables can be estimated from past values. Trend refers to a long-term upward or downward movement of data. in order to take into account the aspect of market share of the concerned firm and also that of . and often the response rates are low. data pertaining to such reasons should be identified and removed from the overall data of time-series. firms resort to . no attempt is made to analyse the factors influencing the pattern of the time-series. where a ¡§representative¡¨ of the population is approached for their responses. and visually examining the chart. Surveys can be ____ and ____ ____.4 Consumer Surveys This is a very popular approach since demand is ultimately generated by consumers. Surveys can be expensive and time consuming. Some of the patterns that can be recognised are: „h Trend „h Seasonal variation „h Cyclical variation „h Variations around an average „h Irregular variations or random variations.7 Time-Series Forecast Time series is a sequence of observations taken at regular time intervals ¡Vmaybe daily.. A point to remember is that a . or they may be of earnings. They do not reflect typical behaviour and can distort the analysis of a time-series. 12. monthly.7. political or agricultural factors. this method has been very popular and is known to deliver acceptable results. While this has the potential to obtain inputs . Operations Management Unit 7 . foot-falls in supermarkets and bookings in theatres experience such variations.. The charts shown in Figure 7. and not of sales. changes in income.demand forecast. instead of contacting all of them individually. rejections. weekly. and it is not easy to identify the potential customers amongst them. Thus. Some examples include population changes. etc. regular variations generally linked to the time of the calendar year or time of the day. strikes or a major change in technology or product.: 134 7. Even though.surveys.1 depict some of the variations described . Self Assessment Questions 11..

. 2. or with trend. and that the large variations are .real. the forecast for demand for turkeys during the next Christmas is the same as the actual demand for turkeys during the last Christmas.1 Approaches to Time series Data Various approaches to the analysis of the time-series data1 are discussed as under: 1. variations. Naive Methods This is so called because of the use of a naive approach. For example. the naive approach may appear too simplistic. „h It is easily understandable. Other forecasting techniques offering better accuracy would cost more. Ideal Gradual Figure 7. „h It is quick and easy to prepare because the data need not be analysed. it is a legitimate forecasting tool. It would be ideal to remove all randomness and leave only the . A forecast based on an average.random. if the accuracy level provided by this type of forecast is acceptable. change.: 136 7. A naive forecast uses a single value of a time series as the basis of forecast. Although. Maybe. Averaging techniques smooth such variations. this can be rationalised by hoping that the small variations are . this approach should be seriously considered. The main objection to this method is its inability to provide accurate forecasts.above: 0 Time Irregular Variation Trend O Cycles Time O Time seasonal Year 1 Year 2 Year 3 Jan Feb March April May June July Aug Sep Oct Nov Dec Figure 7.: 137 These techniques smooth fluctuations in a time series because the individual highs and lows in the data offset each other when they are combined into an average. but this is not possible. 1 For more information on Time Series Data please visit www.uoguelph.ca Operations Management Unit 7 . with seasonal variations.true. However.2: Ideal and Gradual Variability Since many of the movements (variability) exhibited by the data may be random in nature. One of the applications of the naive Forecast is to use it sometimes as a standard for comparison against which the cost and accuracy of other techniques can be judged. since it avoids need for the firm to respond to mostly random . Techniques for averaging Historical data typically contains a certain amount of random variations that may hide the systematic movements in the data.7. tends to show less variability than the original data.1: Variations in Forecasting Operations Management Unit 7 . The randomness is mostly due to the combined influence of many factors ¡V each relatively unimportant ¡V and hence cannot be reliably predicted. This method of forecast can be used with a stable series (variations around an average).real. as shown in Figure 7. averaging might be advantageous.2. and not reflect a . The advantages of this tool are that: „h It has virtually no cost.

in the past six months. based on a four-month moving average would be calculated as under: Period Demand 1 82 2 70 3 97 4 73 5 74 100 F7 = (100 + 74 + 73 + 97) / 4 = 344/4 = 86 pairs If actual demand in the seventh month turns out to be 93 pairs (say). Thus.t. F8 = (93 + 100 + 74 + 73 )/ 4 = 340/4 = 85 pairs Note: In the moving average. Operations Management Unit 7 . The disadvantage with the .: 138 considered. Example Assume that the following table shows figures of monthly demand for a certain brand of shoes in a particular locality. and thus the moving average gets updated. is that it is based on just one single corresponding data to predict a forecast. and no smoothing is affected. and the set of data values get updated with most recent values with the passing of each additional time period. The forecast for the demand for this brand of shoes in that locality in the seventh month. the average value over a recent period). then the forecast for the eighth month would be based on the new Moving Average for the just previous four months. the forecast changes for each successive period reflect only the most recent period-value. which is achieved by the Moving Average technique which uses a number of recent data values and averages them. i. There are three techniques for averaging as mentioned below: „h The Moving Average „h The Weighted Moving Average „h Exponential Smoothing Moving Average: The Moving Average technique is one in which a number of recent data values get averaged to determine a forecast. The Moving Average can be computed using the following equation: F MA A n n t n „¸ tƒ{ ƒ ƒ 1 Where. as the value for each new period become available. Averaging techniques generate forecasts that reflect recent values of a time series (example.naive method..e. the latest period-value replaces the oldest period-value considered for calculating the average. although they can work equally well in the case of a gradual or a step change. in order to project a forecast. These techniques are most appropriate when a time series data tend to vary around an average. This can be overcome by increasing the number of data Operations Management Unit 7 . i = An index that corresponds to a time period n = The number of time periods considered in the moving average At-i = The actual value of the data in period t ¡V i MA = The Moving Average Ft = The forecast for the time period .changes and thus save a lot of avoidable cost.

but individual years get different weightage.6 + 14. The larger the number of data points. 0. it would be advisable to have fewer data points. is present in a set of data values. or may not be so. .e. the most recent value of a variable may be given a weightage of 0.5 + 14.2 X 73 + 0. Ft-1 = The Forecast for the previous period £á = The smoothing constant At-1 = The Actual demand or sales for the previous period The smoothing constant .1 X 70) / 5 i.s advantage over a simple moving average is that it reflects the most recent occurrences. while computing a forecast. the forecast for the seventh year based on the weighted moving average of five years would be calculated as: „¸ ƒ ƒ ƒ ƒ{ n t n i i t F WMA W A i 1 (0. ( ) ƒ{1 ƒ{1 ƒ{1 ƒ ƒy„¡ ƒ{ t t t t F F A F Where. the larger is the weightage given to older data and the sensitivity to the latest data value gets reduced. £á is the percentage of the error Putting it down as an equation. In other words. represents the forecast error percentage. Every new forecast will be based on the previous forecast along with a percentage of the deviation between the actual and forecast for the previous period. Exponential Smoothing: It is a more sophisticated weighted averaging method that is relatively easy to understand and use.20.30. Next period forecast = Previous period forecast + £á (Actual ¡V Forecast for the pervious period) Operations Management Unit 7 . more recent values are given more weightage as compared to earlier values. Some common non-linear trend types are shown in Figure 7. If we consider the previous cited example of demand for shoes that we considered for the previous years. The advantage of Moving Average forecast is that it is easy to compute and easy to understand. 93 pairs The weighted average. For better responsiveness. However. 0. and.55 + 7) / 5 = 84. then the necessary analysis involves developing an equation for it.3 X 100 + 0. (30 + 18.25 X 74 +0.: 139 The moving average incorporates as many data points as desired.£á.65 / 5 = 16.. Techniques for Trend If a .15 and 0. A potential disadvantage is that all values considered in an average are weighted equally. Note that the total weight for the values of these five years is 1.t. Each new forecast will be same as the previous forecast plus a percentage of the previous error. Ft = The Forecast for period .0.: 140 Where.15 X 97 + 0. For example. Weighted Moving Average: In a weighted average technique. followed by weights of 0. the choices of weights should not be random.10 for the previous successive four years.trend. (Actual ¡V Forecast for the previous period) represents the Forecast error. but have sufficient rationale behind it. The trend profile may be linear.25.3.

and simple smoothing is used on it. if the data is decreasing. after which a starting forecast and estimation of trend is made. if the data is increasing. is present are: „h Using a trend equation „h An extension of exponential smoothing A linear Trend Equation typically reads as follows: F a bt t ƒ ƒy Where. . we will focus exclusively on linear trends because they are very common.: 142 forecast will be too low. One is the .x.Operations Management Unit 7 . The variations are periodic ¡V whether annual and quarterly. values of . are smoothing constants. This technique can be used when a time-series shows a linear trend. If a series exhibits trend. a = The value of the variable at time t=0 b = The slope of the trend line t = The time period Trend-Adjusted Exponential Smoothing Trend-adjusted Exponential Smoothing. In case a trend is present.additive. type.x. Examples of seasonality are winter/summer clothing. Usually. Seasonality in a time series is expressed in terms of the amount of deviation of the actual value from the average value of the series.e. The Trend-Adjusted Forecast (TAF) is composed of two elements: a smoothed error and a trend factor. This technique is appropriate only when data varies around an average or has step or gradual changes.y. the series value at any point in time is the ¡§average value¡¨ at that point. traffic density on city roads linked to time of the day.t. the forecast will be too high. the seasonality gets expressed in terms of the average. If the series has no trend. seasonality is expressed in terms of the trend value.y. the forecast will all lag the trend. holiday trips of families linked to school vacations. Two major techniques that are used to develop forecasts when .3: Non Linear Trend Types However. Two different types of seasonality can be present. and . ( ) t t t t S ƒTAF ƒy x A ƒ{TAF ( ) ƒ{1 ƒ{1 ƒ{1 ƒ ƒy ƒ{ ƒ{ t t t t t T T y TAF TAF T Where.: 141 Parabolic Trend Exponential Trend Growth Curve Time Figure 7. Ft = The value of the variable at any point of time. Techniques for Seasonality Seasonality refers to increase or decrease in data values at regular intervals that can be linked to recurring events. and . where the variation from the average is almost uniform over time. are selected through trial and error. t t t TAF ƒ S ƒyT ƒy1 Where. each Operations Management Unit 7 . . also known as Double Smoothing. St = The Previous Forecast plus Smoother Error Tt = The Current Trend Estimate and. i.trend.

or the . equals the previous period. but the time duration is usually longer ¡V say. In the other type of seasonality. List out the various ups and downs his forecasting can face in the current telecommunication market.: 143 multiplicative model in practice.Seasonal Relative. that is. A naive Forecast. called the . To incorporate seasonality. „h To incorporate seasonality in a forecast. the deviation of the series value keeps increasing at a compound rate. and the percentage factor is called the .4 depicts the additive and multiplicative seasonality. the series value at any point in time is a percentage of the ¡§average value¡¨ at that point.8 Associative Forecasting Techniques In the Associative Forecasting techniques.8. This is done by dividing each data point by the seasonal index. Cycles reflect ________ variations of more than a year.plus/minus.fixed quantity. Techniques for Cycles Cycles are upward/downward movements of data similar to that of seasonality.s duration.demand. 15. 14. Seasonality refers to increase or decrease in data values at regular intervals that can be linked to ________. sales and demands for his product in the market. The idea behind de-seasonalising is to remove the seasonal component from the data to identify the non-seasonal (trend) component. 7. involving a .. to the variable of . the time period between two Operations Management Unit 7 . This makes it difficulty and sometimes impossible to project past data into future.s _______.1 Simple Linear Regression This is the simplest and most widely used form of regression. for any period. Time Series is a sequence of observations taken at ____ . Self Assessment Questions 13. cycles occur irregularly. Seasonal indices are used in two ways in forecasting: „h To de-seasonalise data.price.price. 17. for a product may be linked to the variable of . You can see the variations almost similar in additive seasonality but in the multiplicative seasonality the variations are increasing. first the trend estimates for the desired period is obtained using a trend equation.: 144 successive peaks or troughs may not be the same. more ________ are given more weight as compared to ____ while computing a forecast. of the product. Then the trend estimates at each point of time period is multiplied (assuming the use of multiplicative model) with the seasonal index. For example. that is.. Usually.. The basic method used in this approach is called Regression.multiplicative. In a weighted average technique. the variable of . 16.4: Additive and Multiplicative Seasonality The above Figure 7. the objective is to identify variables that can be used to forecast the value of our interest. a . of a substitute product. 2 to 6 years.Seasonal Index. Activity 3: Illustrate how a mobile company owner can forecast the rates. 7. or. Organisations predominantly use the Operations Management Unit 7 . Demand Additive Mode Multiplicative Mode Time Figure 7.

J. the accuracy of forecasts is very vital. The equation of the least squares line is given by: Y a bx c ƒ ƒy Operations Management Unit 7 .an equation of a straight line that minimises the sum of the squares of vertical deviations of data points from the least squares line. making accurate future predictions is virtually impossible. is also significant while deciding on which technique to use for forecasting ¡V based on accuracy expected and the corresponding . Therefore. Massachusetts: Kluwer Academic Publishers. where the decision makers need to know the likely error of forecast. Besides.) (2001) (in English). This will provide an idea to the forecaster as to how far a forecast might be. the height of intercept of the least squares line on y-axis) b = The slope of the least squares line x = The predictor (independent) variable The Figure 7. or dissatisfied customers. they are: MSD ƒ„¸ [Actual ƒ{ Forecast]/ n MSE ƒ„¸ [Actual ƒ{ Forecat ]2/(n ƒ{1) MAPE [Actual Forecast]/ActualX100 . Error of Forecast = Actual .9 Forecast Accuracy and Forecast Management In the area of forecasting2. or . ISBN 0-7923-7930-6 Operations Management Unit 7 . Predictor Variable Figure 7.accuracy. Accurate forecasts are needed especially for day-today planning and scheduling of manufacture.Forecast Forecast accuracy is very important for the selection of forecasting method.5 shows the predictor variable.: 145 Where.5: Predictor Variable 7. it may result in allocating either . etc. while making a forecast.. If forecasts are not accurate. resources to the jobs leading to additional costs.: 146 The aspect of . The . Three commonly used methods for expressing forecast accuracy are: „h Mean Standard Deviation (MSD) „h Mean Squared Error (MSE) „h Mean Absolute Percent Error (MAPE) Expressed as formulae. Yc = The predicted (dependent) variable a = The value of y when x = 0 (i. Major decisions such as those of substantial investments. so as to know whether their decision is not out of bounds.e. it is important. also depend on forecasts.cost. is expressed on the basis of historical error performance of a forecast. Forecast error is the difference between the value that eventually occurs and the value that was predicted for a certain time period. The objective in Linear Regression is to obtain . 2 For more information please refer Armstrong. Hence.too little. there has to be adequate control over the process of forecasting. The horizontal line shows the predictor variable. The straight line is the objective as discussed above. Norwell. It is referred to as the least square criterion. Principles of forecasting: a handbook for researchers and practitioners. The variables in real life are complex in nature. Scott (ed. to indicate the likely deviation of the forecast figure from the actual figure that will emerge.accuracy.linear relationship between two variables.too much.

Hence. more than one forecasting technique may be used to obtain independent results. there is a need to take into consideration a number of factors ¡V especially cost and accuracy. the higher tends to be the cost. and the expertise to forecast. What are the essential conditions that a well-prepared forecast should satisfy? 3. and hence a series of forecasts would generate a number of errors. 7. „h There are always random variations in the data. Self Assessment Questions 18.n ƒ„¸ ƒ{ 7. Reactive approach would be for an application such as determining the future demand. temporary shortages or breakdowns. Computers play an important role in preparing Quantitative forecasts. Forecast errors happen more often. Forecast error is the difference between the value that _______and the value that was ________ for a certain time period. . computer software. for linear-trend equation. the cost of forecasting errors.1 Managing or Controlling the Forecast Many forecasts are made at regular intervals ¡V annual. _________happen more often. The likely sources of forecast errors are as follows: „h The model may be inadequate due to (a) the omission of an important variable. monthly and weekly. 19.10 Summary Even though a number of forecasting techniques are available. or (c) the appearance of a new variable (example.11 Terminal Questions 1. Cost would include the cost of generating the forecast. Forecasts can be used for a reactive or a pro-active approach. time for collection of data and its analysis. In order to monitor whether forecasts are performing properly. The better the quality of forecasts is the greater will be the ability for the company to leverage future opportunities.: 147 with (example. (b) a change or shift in the variable that the model cannot deal Operations Management Unit 7 . 20.: 148 In a particular situation. a trade-off between the two becomes inevitable. ________is the inherent variation that remains in the data after all causes of variation have been accounted for. while a pro-active approach would be to use the Forecast to influence demand. The higher the accuracy level required. Randomness is the inherent variation that remains in the data after all causes of variation have been accounted for. etc. reduced inventory levels. there is a case for investigating the reasons and how to correct the problem. so that the company can benefit through better profits. for exponential smoothing. these forecast errors are tracked and analysed. A good strategy would be to obtain improved short-term forecasts. If the different forecasts produce common results. If they are not random. A wide range of software packages are available ¡V such as templates for moving average. Forecasts are basis for many decisions in business. sudden appearance of a trend or cycle). then the confidence level on the forecast remains high. This will also give justification for company managers to rely more on longer-term forecasts. What are the common characteristics amongst the various forecasting techniques / methodologies? 2. etc. and hence a series of forecasts would generate a number of errors. List and explain the six basic steps involved in preparing a forecast. Hence. Catastrophes or similar events. 7. A forecast is considered to be performing well if the errors indicate only random variations. „h The forecasting technique may be used incorrectly or the results misinterpreted.9. new competitor) „h Irregular variations may occur due to severe weather or other natural phenomena. no single technique works well in every situation. Other factors to be considered would include the availability of historical data. better customer service. Operations Management Unit 7 .

i. Wave like. Period Demand 1 32 2 20 3 47 4 31 5 24 6 50 7 38 8 42 a) Determine the forecast for the demand of that brand of toilet soap in the 9th week by the 5month moving average method.12 Answers Answers to Self Assessment Questions 1. 15.3 3. Refer to section 7. Time horizon 4. 6. b) If the actual demand for the soap in the 9th week turns out to be 56 nos. Associative 11. . 12. approach to forecasting? How does it differ from a . Refer section 7.Qualitative. predicted 19. Series. Describe the .Quantitative. 3. Six steps. approach? 5. forecasting techniques? 7.e.5 5.Delphi method.Quantitative. Recent values. 18. Qualitative. Expensive.7 7. A common assumption of what happened in the Past continues to happen in the future.6 6..control. consuming 13. Randomness 20. in the past eight months. What is meant by . Actual value Operations Management Unit 7 . Human. Refer to section 7.accuracy.4 4. 8. questionnaires.9 (a) Demand Forecast for the 9th week is given by the average of the respective demands for the previous 5 weeks. opinion 10.4. 2. suitable 5. Accurate. Recurring events.: 150 16. Judgmental.: 149 8. accuracy. of forecasts important? Operations Management Unit 7 . Why are . 9. Time-series. Precise.2 2. and . of forecasting. Following table shows figures of weekly demand for a certain brand of toilet soap at a retail store. what would be the Forecast for the 10th week. Refer to section 7. 6. Forecast errors Answers to Terminal Questions: 1. Regular time intervals 14. earlier values. 17. Refer to section 7. Appropriate. Eventually occurs. 7. calculated on the same basis? 7. judgment. quantitative. What are the averaging techniques available in . time. Refer to section 7. Refer to section 7. Time horizon. less.

What do you understand about the forecasting done in this case study? 2. www. Massachusetts: Kluwer Academic Publishers. the relation between selected values of x and observed values of y. 4.000 many forecasters opined that the car would come across many challenges in the future. then the Forecast for the tenth month would be based on the new Moving Average for the just previous five months.. an intuitive guess or feeling about the ups and downs in any business management process. ISBN 07923-7930-6. But they were also concerned about the company's low capacity to fulfil high demand. But later they studied all the engines which would probably suit the car and decided to manufacture it. CRC Press. They argued that if the low margins of the company are considered then it would it take a longer time for the project to complete.e. Predictive Inference: An Introduction. Norwell.s board planned to manufacture a rear engine and wheels. The project started in the year 2000. F10 = ( 56 +42 + 38 +50 + 24 ) / 5 = 210/5 = 42 nos. Scott (ed.marketequations. References 1. J.F9 = (42 +38 + 50 + 24 + 31) / 5 = 185 /5 = 37 nos.) (2001) (in English).: 151 While ABC launched the car at the promised price of Rs 80. Chapman & Hall. Questions 1. Forecasters opined that the car will create a new segment in the car market.org. i.workfileepos.13 Case Study ABC is a big automobile company established in 1960.com. Armstrong. Principles of forecasting: a handbook for researchers and practitioners.com. It was one of the low costing cars with exceptional servicing quality. the team suggested many cost cutting ideas but due to various reasons they were not followed. Do you agree that forecasting sometimes can fail? Explain. But in spite of all these predictions made by experts. www. (b) Since the actual demand in the ninth month is 56 nos.14 Glossary Term Meaning Confine To keep within bounds of its rules or regulations or restricting itself in a particular limit. ISBN 0-412-03471-9. www. Hunches An impression that something might be the case. Quantify Some things or elements that can be expressed as a number or measure or quantity. It planned to introduce a low cost car in the market. 7. To reduce the weight of the car they replaced the steering and driveshaft with a steel tube. . The company.icmrindia. They started working on the engine in the year 2003. Since the beginning of the project the team members were instructed to avoid wastage and concentrate on low cost target of the car. Operations Management Unit 7 . The forecasting team thought that they will outsource the engine. Similarly. 2. Geisser. The engine was expected to have two cylinder petrol engines and the mileage was expected to be around 21 km/litre. Seymour (1 June 1993) (in English). Regression To measure associations between variables. 3. 5. 7. It started forecasting on the investments and requirements for that particular project. ABC introduced the car as scheduled.. They explained that the decline in cost of the raw material January 2003 and March 2004 had helped ABC maintain the price target of the car.

we need to schedule various activities for completion of a job or project. The quality of the decision depends on the individual¡¦s knowledge. At a particular stage. a number of activities have to be completed for further progress. we try to quantify the data.3 Perspective of Performance Management Exploring Organisational Effectiveness Suggested Capacities for Organisational Effectiveness 8.11 Case Study 8. and judgment.10 Answers 8. we have two approaches to arrive at a decision that is: „h One is to consider the available facts.9 Terminal Questions 8.that is. Delay in one of the activities creates inventory of materials.1 Introduction Objectives 8. The time for each activity is known approximately. will be idling as they have not received the materials scheduled to have at that place.8 Summary 8. Then evaluate all these based on one¡¦s experience. In the operations field. „h The gut feeling as to what might happen and take a decision based on that. and its likely consequences. The models we choose depend on the type of situations. You must also be familiar with the elements. When the matter concerned is small or personal in nature. various options for action.6 Workforce Productivity Learning Curve Incentive Schemes 8. Some materials or machines or men or all. Rate of .: 152 Unit 8 Workforce Planning and Productivity Structure: 8.: 153 You must have also analysed the importance of decision making in Operations Management.12 Glossary 8. Uncertainties about the activities and results can be anticipated based on probabilities and choices made. process and approaches of Forecasting. However.7 Difference between Performance Management and Performance Appraisal 8. analytical capability. Whenever we have to make decisions in Management.2 Performance Management History of Performance Management Importance of Performance Management Types of Performance Management 8.Operations Management Unit 8 . this process may be sufficient as the consequences are not very serious. which have arrived from another stream.1 Introduction By now you must be familiar with the concept of Forecasting and the impact it has on Operations Management. Historical data guides us to formulate the relationships between the variables. factors are different fields having different impacts on the result. the decision involves complex issues and the data is varied .5 Methods Study Machine Worker Interaction Ergonomics Work Environment 8.4 Workforce Management Work Practices Work Study Work Measurement 8. Operations Management Unit 8 . devise some models for predicting the likely consequences and some techniques to arrive at decisions.

Operations Management Unit 8 .: 154 Learning Objectives: After studying this unit. budgeting.1 shown below can best illustrate the characteristics in performance management. moving to a new building. when we think of performance in organisations. These are: „h Real-time and regular performance data „h Ready to work culture inspired by strong leadership „h Agreed lines of individual accountability „h Performance management review should be clear. product development. automating the billing process. and uncertain lead time causes imbalance in the production system. train. the ongoing delivery of services to a community. „h Teams or groups organised to accomplish the results for internal or external customers. we think on the performance of employees. „h Define the concept of systems of productivity and performance measurement. for a non-profit organisation. This unit will give the details about the various aspects that have to be considered while planning for the workplace and productivity.idea.: 155 The Figure 8. Typically. But planning will have to be done with respect to resources allocated and products promised. apply quantitative techniques. you will be able to: „h Explain the key elements of workforce performance. combining challenge and support Agreed lines of individual accountability . and motivate to improve performance. Transparent set of performance rewards and sanctions Real-time and regular performance data Ready to work culture inspired by strong leadership Performance management review should be clear. etc. combining challenge and support „h Transparent set of performance rewards and sanctions 1 For more information on Performance Management please visit www. Performance management looks different in different places. „h Departments like computer support. but effective organisations share some common characteristics1. „h Programs like implementing new policies and procedures. sales. or.production. We prepare models. to ensure a safe workplace. „h Processes like billing.uk. The workforce that conducts activities has to allocate work. The performance Management should focus on: „h The Organisation. 8. „h Products or services to internal or external customers. delayed arrival of material. financial Management. and so on. breakdown of equipment. „h Explain the process of managing workforce and effecting improvement in various functioning of Management. „h Projects for example. administration. Operations Management Unit 8 .gov.2 Performance Management Performance management includes activities to make sure that goals are being met in an effective and efficient manner. absenteeism. and attempt to conduct activities so that minimum disturbances take place. „h Analyse the workforce motivation and management.

This information must be precise and must reach the right people at the right time. the salary given to any employee was justified. and focusing on exceptions.1: Performance Management Effective performance management requires: „h Systematic decision making and communicating what needs to be done. this technique has become more sophisticated and has been used not only for assessments but also appraisals. Executive information systems were introduced in 1980. The objective of score carding is to test the performance relevant to strategic planning. „h A plan to rely on so that it meets the requirements. The main feature of corporate performance management includes complete integration.: 157 .2. Customer relationship management was also improved. Since then. Those levels are: „h Client „h Application „h Data The essential steps in corporate performance management are: 1) Strategic planning 2) Score carding 3) Budgeting 4) Forecasting 5) Consolidation 6) Business Intelligence Strategic planning is the basic requirement of any business. If the aims/objectives have been achieved. These new advancements gave rise to an integrated methodology. This management is also called as business performance management. Operations Management Unit 8 .1 History of Performance Management You can trace back the history of Performance Management to 1940¡¦s. action or service plans. Corporate performance management utilises metrics to judge the present position of the business. analytical insight. automating data processing.: 156 It was impossible for many businesses to properly gather and analyse data earlier to the 20th century. corporate performance management. In 2001 by Gartner research the concept of Corporate performance management (CPM) was introduced. These support systems can analyse one department at a time. and development planning. These information systems can efficiently and effectively summarise ongoing transaction in an organisation. Data related to metric is consistent and correct. process and systems which are required to control the performance of an organisation. Operations Management Unit 8 . Based on this assessment. This business management is a complete approach in strategic planning. Decision support systems were introduced in business in 1970. By 1990. priorities. and targets of an organisation and communicating the same.The Managers in different Organisations used this technique to assess the performance of employees. feedbacks. methodologies. so that decisions are made on time and relative actions are taken. reporting and planning in business. 8. then some means of assessing them should be present. that is. Advanced management techniques combined with novel technology improved the analysis.Performance Management Figure 8. objectives. These plans include improvement. „h Performance measures. business intelligence had improved with the introduction of computers and technologies. This explains the metrics. „h Performance reporting using the obtained information. That is. making decision about the aims. There are three levels of corporate management performance. support of collaboration.

This information is used while making decision. Performance Management is very important for an _________ and for its ____________. . From the employer¡¦s point of view it is important because. „h Monitoring performance. „h Rating performance periodically. their progress. The Figure 8. 4.htm Operations Management Unit 8 . In nutshell. Consolidation is an important component in CPM. Business intelligence refers to transforming data into information.2 shown below depicts Employee¡¦s Performance Management.2: Employee Performance Management Self Assessment Questions 1. 2. 3. it can be explained as a comprehensive process. With the help of Performance management you can also tap the full potential of your employees or staff.wisegeek. and providing auditable budgets. „h Developing the capacity to perform. „h Rewarding the performances. The forecasting ability assists the business to take appropriate action in keeping with the occasion. we think on the _____________. which employee is performing well and is best in contributing towards their goals. 8.2 Importance of Performance Management2 Performance Management is very important for an organisation and for its employees. Planning Rewarding Rating Developing Monitoring Figure 8.Corporate performance management accelerates the budget and forecasting process. It also involves rewarding them for their involvement and achievements.com 3 For more information on Types of Performance Management please visit http://www. rising and improving the accuracy. It also allows the organisation to know. which starts from monitoring and developing the aspired traits to rating. you can make sure those employees who not only fulfil their responsibilities. it gives him an idea on how his subordinates are working to achieve the goals of the Organisations. when we think of performance in Organisations.: 158 Organisational Performance Management: it is used to analyse the performance of the company towards its goals Employee performance management: it is used to analyse the performance of the employees towards the company¡¦s goals.3 Types of Performance Management3 The performance management in general scenario can have two separate types of managements.2. You can trace back the history of _____________ to 1940¡¦s. This includes: „h Planning work and setting expectations. Typically. With the help of performance management. Financials depend upon the consolidation process. Performance Management is necessary for: „h Striving towards common goals. „h Steps and advices on improving performance of any individual or organisation.com/what-is-performance-management.accaglobal. „h Clear understanding of what the job requires or expects.2. 8. „h Regular performance feedbacks. but to do so or to be the best of their abilities meet your expectations. They are: 2 For more information please visit www. Performance management includes activities to make sure that goals are being met in an _________ and ________ manner. „h Rewarding good performance. From the employee¡¦s point of view performance management gives an idea about his career growth.

However. 8.1 Exploring Organisational Effectiveness The phrase. ¢wOrganisational effectiveness. In general. Organisational effectiveness is always a matter of comparison When determining the effectiveness of an organisation.5. Ryan and Grossman (1998) suggested four key capacities for organisational effectiveness. ¢wthose Organisations that use correct management practices will be judged as being effective. The authors identified nine fundamental propositions about organisational effectiveness. Their propositions were written about non-profit organisations. automatically produce the best Boards. 8. You should be aware of the different views and be able to choose your own. Organisational effectiveness is a social construction This concept lies ¢win the eyes of the beholder. they also apply to . 9. but how is not clear There is a correlation between effective boards and effective organisations. 8. However. the effectiveness of an organisation might depend to a great extent on the effectiveness of the wide network of organisations in which it operates.3. For example. it is not clear that one necessarily causes the other. 5. a budget surplus or a strong product outcome does not guarantee that. discussing organisations have achieved maximum performance. The performance management in general scenario can have ___________ separate types of managements. Operations Management Unit 8 . the organisation has achieved overall maximum organisational effectiveness. to conclude whether it is effective or not? For example. However. are you comparing to a certain set of best practices or to another highly respected Organisation? 2. Organisational effectiveness is multi-dimensional Organisational effectiveness cannot be measured by one indicator. Probably one of the best overviews of the concept of organisational effectiveness is provided by Herman and Renz (2002). The information in the next paragraphs will explain the people¡¦s suggestions on what it takes for an organisation to achieve maximum performance.¡ü 6. they also apply to organisations in general. More effective Organisations are more likely to use correct Management practices The authors are very keen to point out that the reverse is not necessarily true.3 Perspectives of Performance Management Despite the recent attention to achieve maximum performance.2 Suggested Capacities for Organisational Effectiveness Letts. 3. 8.: 159 Activity 1 Imagine that you are a Manager in an Organisation and you have been given a task of judging the performance of few employees. Measures of responsiveness offer solutions to differing judgments This proposition reframes the concept of effectiveness for an Organisation to how well that organisation is doing in responding to whatever is currently important. one has to analyse to what are you comparing the Organisation. It can be important to distinguish different types of Organisations This is true to progress in understanding the practices and strategies that lead to organisational effectiveness. Make a list of all elements you would consider in an employee. These capacities were suggested for non-profit organisations. 7.¡ü One person might have a completely different interpretation than another person. to apply to any organisations the description of the nine fundamental propositions are modified as follows: 1. Operations Management Unit 8 . which did not agree with the wide assertion that certain practices. That is. Claims about ¡§best practices¡¨ warrant critical evaluation The authors explained the results of their study. Network effectiveness is as important to study as Organisational effectiveness This proposition recognises that. for example.¡ü is commonly referred when.3. Boards make a difference in Organisational effectiveness.: 160 4. there is no standard interpretation of meaning or its approach.

organisations in general. Hence their descriptions are modified as follows to apply to organisations in general: „h Adaptive capacity means the ability to focus on the external environment of any organisation, especially in meeting the requirements of the customers and simultaneously adjusting itself to give response to such Operations Management Unit 8 .: 161 needs and requirements. Attention to assessments, collaboration and networking, planning, and assessing promote the adaptive capacity. „h Leadership capacity means, the ability to guide the organisation in a particular direction successfully. Establishing goals, directing, motivating everyone, decision making, helping everyone in solving problems, and having an eye for vision promotes leadership capacity. „h Management capacity means, the ability to utilise the resources in an organisation effectively and efficiently. Developing and co-ordinating the resource available in an organisation accomplishes management capacity. This includes people, money, and facilities. „h Technical capacity means, the ability to efficiently create, design, operate, and deliver the products and services to the customer. The type of products and services provided by the organisation decides the nature of the technical capacity. One more key capacity has been added later that is: „h Generative capacity means, the ability of an organisation to change the environment positively. Activities like informing, educating, and persuading policy makers, community leaders, and share holders, promote this capacity. Self Assessment Questions 6. The phrase, ______________ is commonly referred to when discussing organisations that have achieved maximum performance. 7. __________ identified nine fundamental propositions about organisational effectiveness. 8. Letts, Ryan and Grossman (1998) suggested _______________ for organisational effectiveness. 9. ______________ means the ability to focus on the external environment of any organisation especially in meeting the requirements of the ________ and simultaneously adjusting itself to give response to such needs and requirements. 10. ____________ means the ability to guide the organisation in a particular direction successfully. 11. __________ means the ability of an organisation to change the environment positively. Operations Management Unit 8 .: 162 12. ___________ means the ability to utilise the resources in an organisation effectively and efficiently. Activity 2 Visit an organisation in your city and list out the various activities that it takes, to track the performance of employee¡¦s who contribute more to achieve the goal of the organisation. 8.4 Workforce Management Workforce management4 is about assigning the right jobs to the right employees with the right skills at the right time. In this section we will consider the various concepts of workers¡¦ contribution for productivity. You will also study the way work is measured, and how the workers get the benefit for superior performance and how productivity is influenced by the environment in the organisation. Workforce management includes: „h Benefits and Payments „h Time and Punctuality „h Career Planning and success „h Human Resource Administration „h Encouraging Talent and tracking applicant „h Performance „h Forecasting „h Workforce tracking

Productivity is achieved by creating an environment, which is helpful for efficient working. By adopting good practices that instil a sense of purpose, cooperative behaviours and openness, workers become willing partners in the process of manufacturing. This gives them life and pride. Reward is important for recognising good work done by the employee. For the same purpose, work measurement and determining efficiency levels are important. 8.4.1 Work Practices Work practices are ways of doing any work that has been in vogue and 4 For more information on workforce management please visit www.wikipedia.org Operations Management Unit 8 .: 163 found to be useful. Work practices are determined by motion and time study conducted over years and found to be efficient and practiced. Any method improvement that will be conducted may change the practice. But this is evident only after trials have shown that they increase the comfort of the worker and get the job done faster. 8.4.2 Work Study When analysing work methods and performing a job on a machine or equipment, we say that work study is being conducted. The study helps in designing the optimum work method and standardisation of the work method. This study enables the method¡¦s engineer to search for better methods, higher utilisation of man and machine, and accomplishment of higher productivity. The study gives an opportunity to the workmen to learn the process of study and will be able to offer suggestions to improve methods. This encourages workmen participation, permits them to make changes, and report the advantages that can be derived from those. This course is in line with the principle of constant improvement and helps the organisation in the long run. Reward systems may be implemented for recognising contributions from the workmen. Work study comprises of work measurement and method study. Work measurement focuses on the time element of work, while method study focuses on the methods deployed and development of better methods. 8.4.3 Work Measurement Work measurement can be defined as a systematic application of various techniques. These are designed to establish the content of work involved in performing a specific task. The task is performed by a qualified worker. International Labour Organisation¡¦s (ILO)s definition for a qualified worker is ¢wone who is accepted as having the necessary physical attributes, possessing the required intelligence and education, and having acquired the necessary skill and knowledge to carry out the work in hand to satisfactory standards of safety, quantity and quality¡ü. With this, we arrive at the standard time for a task. This will be used to fix performance grading of other workers. It forms the basis of incentives, promotion, and training for workmen and assessment of capacity for the plant. Operations Management Unit 8 .: 164 8.5 Methods Study Here the focus is on studying the method currently being used and developing a new method for performing the task in a better way. Operation Flow Charts, Motion Charts, Flow Process Charts are studied to find the purpose of each activity that is an element of the task, the sequence in which they are done, and the effect of these on the work. The study may help in changing some of them and even eliminate some of them to effect improvements. The new method must result in saving time, reduce motions and simplify activities. 8.5.1 Machine Worker Interaction This method studies the amount of time an operator spends on the machine, before it is activated and the time he has nothing to do. In many modern manufacturing centres, where we have automated systems of manufacturing, the role of the worker is limited to observing various screens, dials, and indicator lamps to see that the process is going on smoothly. In some cases, his job may be to load the jobs on the machines and check the settings. What is of concern to us is, to see whether the operations permit an operator to look after two or three machines, without affecting the performance of the machine or man. 8.5.2 Ergonomics

Ergonomics is the study of physical human factors for his functioning. We study the movements, the amount of energy that is available for certain activities, and the coordination among them. In operations management we use these factors at two places as follows: „h The first is to design machines that are operated and the way, the operator does the tasks on the machine using different controls. Levers, wheels, switches, pedals and so on have to be positioned so that, he has maximum comfort for working long hours. „h The other is the consideration given for the type of loads the body can take at various positions. When lifting jobs, clamping them, moving them, and holding them, energy is expended by different organs. Racks, tables, and pallets, are positioned and designed to suit workers¡¦ physical features. 8.5.3 Work Environment The work environments in which tasks are performed will definitely affect the Operations Management Unit 8 .: 165 productivity greatly. The combination of temperature, humidity, and air movements produce a level of comfort or discomfort considering whether they are within a range. All these factors depend on the conditions to which employees are accustomed. A temperature range of 24 to 32 degrees Celsius would be suitable. Good illumination at the workplace helps productivity. Using pleasing colours for the walls and surroundings may also help productivity. Noise levels, when they are continuous and high, affects the concentration of the employees and affects their work. They even become irritable and their interaction with other people produces confusion and conflict. If noise of the machines is inevitable, ear plugs must be supplied to the workmen. 8.6 Workforce Productivity Workforce Productivity is the ratio of the number of pieces produced to the number of hours spent on them. This figure takes into consideration a number of things like machine capability, worker¡¦s skill, his motivation, and the environment. There are various methods by which productivity is sought to be improved. Some of them are: „h Measure all aspects across all functions of the organisation, so that all personnel are spared and nobody is favoured. To ensure performance, uniformity, and fairness are guaranteed. „h Establish reasonable goals of production. They must be either too low for letting satisfaction or too high to be attempted. „h Complaints about the working conditions are treated as opportunities to make corrections and seek higher productivity. 8.6.1 Learning Curve The principle is that people take less time to do the same job subsequently, as the effort and skill expended in earlier activities has resulted in learning. Learning improves performance. But the rate of improvement declines as the repetitive acts increase. For example, if a job takes 15 minutes for the first piece, it takes 13 for the second, 12 for the third and so on. But this improvement is not continuous. If the 100th piece takes 6 minutes, the 101st piece will not take any less time. Training helps to achieve that 6-minute performance. It is also necessary to improve productivity. Operations Management Unit 8 .: 166 8.6.2 Incentive Schemes These are monetary and non-monetary benefits that the management gives in recognition of superior performance. They can be calculated on individual, team, group, department or the plant basis. Most of the times, these are negotiated with labour unions. There are many ways the incentives are calculated wherein; the basis will be a standard level of production. A proportion of the additional production is distributed as incentives. This is a motivational factor for increasing productivity. Self Assessment Questions 13. ______________ is about assigning the right jobs to the right employees with the right skills at the right time. 14. Performance of workforce can be achieved by establishing __________ __________ of production.

Rewarding linkage Do not have direct link to rewards. Isolated system not linked to organisational goals. The differences between the both are explained in a table below. Activity 3 Make a list of measurements that an organisation can do to promote productivity and encourage active participation of an employee. Performs annual appraisal. 20. Suggest some measures for improving good relations between the management and employees. 19. Operations Management Unit 8 . rating less common. ___________ are determined by motion and time study conducted over years and found to be efficient and practiced. We study the __________________. Types of performance measures Emphasise on competency requirements measures as well as quantified measures Emphasise on qualitative and quantitative measures Frequency Continuous review with one or more formal reviews in a year. Owned by human resource department. Table 8. However. _________ that is available for certain activities and the coordination among them. . 21. Emphasise on individual objectives. Rating system Follows joint or participative process. Focus of Performance Reviews Focuses on future performance.15. 17. the sequence in which they are done and the effect of these on the work. or better to say "tools" through which performance management is done. Performance management is when we look at every possible aspect of managing an employee's performance in the organisation. Corporate alignment Integrated business driven system aimed at organisational and people development. team. ____________ can be defined as a systematic application of various techniques that are designed to establish the content of work involved in performing a specific task 18.7 Difference between Performance Management and Performance Appraisal Performance management incorporates performance appraisal. and individual objectives.: 167 8. 16. performance appraisal is one of the ways. promotions. ______________ are studied to find the purpose of each activity.1 Differences between Performance management & Performance appraisal Characteristics Performance management Performance Appraisal Types of objectives Emphasise on integrating organisational. _______. _____________ is the study of physical human factors for his functioning. Ownership Owned by line management. and career paths and so on. Follows top-down systems with ratings. Often linked to pay. The range of temperature which is considered to make it comfortable for workmen is between ________ and ______ degrees Celsius. ____________ method studies the amount of time an operator spends on the machine before it is activated and the time he has nothing to do. (an element of the task). _____________. The combination __________________ produce a level of comfort or discomfort considering whether they are within a range.

analysis. Organisation. We have also seen the different types of operations management like. We have also discussed the concept of Learning Curve and the utility of the same in understanding workforce productivity. organisational and employee management. Leadership capacity 11. ¢wOrganisational effectiveness. Adaptive capacity. The unit also discussed Letts. What is Workforce Management? 8.Focus on past performance Questions Asked What can be done to help employees perform as effectively as possible? How well was the work done? Emphasis On ratings and evaluations. What do you understand by Ergonomics? How does it help the production manager? Operations Management Unit 8 . Two 6. Can you explain the nine fundamental propositions about Organisational effectiveness? 5. 8. 6.: 169 3. Technical capacity and Generative capacity were also explained in brief.10 Answers Answers to Self Assessment Questions 1.8 Summary The Models depict a physical system in a mathematical form so that by changing the variables. You have learnt how workforce management influences productivity. Productivity is achieved by creating an environment. Leadership capacity. developments and improvements. efficient 2. which is helpful for efficient working. Adaptive capacity. How is the study of Learning Curve helpful in Work Study methods? 4. At the beginning of the year. depending on the factors under consideration. customers 10. Management capacity 13.¡ü 7. Herman and Renz 8. 8. Monitoring and Designing By the organisational department. four key capacities 9. Work practices . Workforce management 14. Reasonable goals 15. Effective. employees 4. We have seen a few popular and useful models that help us to understand the business process. Identification of Developing Needs At the end of the year. Ryan and Grossman¡¦s (1998) four key capacities for organisational effectiveness. review. we can predict the effect on the outcomes.9 Terminal Questions 1. performance of employees 5. You also learnt the difference between performance management & performance appraisal. These are used to take decisions for deployment of resources so that optimisation is achieved. On performance planning. 24 and 32 16. Performance Management 3. Management capacity. Designed by the HR department but could be monitored by the respective departments themselves. Briefly discuss the Suggested Capacities for Organisational Effectiveness. Generative capacity 12. Can you list out the differences between performance Management and performance appraisal? 2.

Flow Process Charts 19. Temperature. This paved way for a workforce capabilities program for achieving the goal of an Agile IT Organization. SP recommended the use of role based organisation to meet the requirements of clients. Operation Flow Charts.5 3.uk 3. In result of this solution XYZ was able to plan and see the future business requirements clearly.000 employees.6 4.scribd. what steps XYZ should have taken to mould its relations with the employees? Operations Management Unit 8 . metrics. Motion Charts. career framework and competency alignment a multi-year program was formulated. Vogue A period of general or popular usage or favour References: 1. A metal tool used for printing on book bindings. Machine Worker Interaction 20. Questions 1. XYZ then approached SP solutions for a remedy. http://www. implant or infuse to some thing Pallets A wooden. Instil to introduce gradually. SP defined Career framework for all roles in infrastructure and in application services. XYZ wanted to manage IT workforce capabilities in a way that required competencies were available and inventory of capabilities could be aligned with business needs.com/doc/31073500/Performance-Management 2. Refer to section 8.17. It has 16.3 Operations Management Unit 8 . To look at different dimensions like people processes. Each role¡¦s competencies were planned and depicted in alignment with enterprise-wide HR directives. shovel like potter's tool used for mixing and shaping clay. Instead of going to SP Solutions. Ergonomics. humidity and air movements Answers to Terminal Questions 1. Due to this centralisation all roles and functions of the organisation as well as the employee¡¦s were in a state of confusion. Refer to section 8. Work measurement 18. Performance Management ¡V A Briefcase Book by Robert Bacal .11 Case study XYZ is one of the leading electric utilities company. systems. Competencies are mapped to roles and this enabled XYZ in identifying any shortfall in workforce capabilities. Refer to section 8. Refer to section 8.: 170 8. www. Earlier its structure was decentralised. XYZ named its objective ¡X creating an Agile IT Organization. often adjustable sides or parts for bracing objects or holding them together.3 5. The challenge for XYZ was that it had recently centralised its organisation. movements.7 2.idea.: 171 8. It has transmission and generation business units and nuclear and fossil generation plants.gov.12 Glossary Term Meaning Alignment The grouping or positioning of teams Clamping Any of various tools with opposing. To track the effectiveness of the program metrics was defined. Refer to section 8. Can you give an alternate solution for XYZ? 2. the amount of energy 21.

1 Introduction Objectives 9. .7 Capacity Planning 9.3 Balancing for Material Flow Johnson.4. owing to the necessity of making them efficient and economical. Many companies do not have . Balancing flow lines. You have also learnt about Workforce Management and how it affects the work productivity. Material Handling also refers to .6 Approaches for Shop Floor Sequencing of Material Handling Jobs 9. in the right position.13 Case Study 9. The differences between Performance Management and Performance Appraisal were also discussed. This necessity is the outcome of worldwide outsourcing and meeting the demands of a global market.1 Introduction By now you must be familiar with the concept of Performance Management and its types. http://ezinearticles. different equipments achieving the same and preparing layouts to achieve these is the subject matter of this unit.10 Summary 9. at the right time and place. Practices and Advanced Analysis for Order Picking Equipments Design Considerations Considerations when planning and implementing integrated Material Handling Systems 9. Material handling has become one of the important functions of Operations Management. and the right sequence for the right cost.s Algorithm of Sequencing CDS Algorithm for n jobs on m machines 9.11 Terminal Questions 912 Answers 9.14 Glossary 9.com/?History-of-Corporate-Performance-Management&id=352957 Unit 9 Capacity Planning and Material Handling Structure: 9. 9. the right amount of material.9 Measuring capacity Constraints on capacity Production Scheduling 9. Explain the importance of a good layout in enabling efficient material handling. Assess how material flow is regulated so that balancing of work loads becomes efficient. To reduce inventory. Suppliers deliver the required quantities to the places where they are required for further processing or assembly. This necessitates that flow lines are smooth.5 Ergonomics and Material Handling: A task oriented Assessment of Needs and Solutions 9. only required quantities have to be made and delivered at appropriate times. Explain the principles involved in designing Integrated Material Handling Systems. at their manufacturing facilities. . Learning Objectives: After studying this unit you will be able to: .8 Different kinds of Capacity Planning 9.4 Principles.2 Material handling Material Handling1 means providing. Assemblies take place at different locations and distribution is across the world. Variety and volumes have compelled companies to seek specialised suppliers from various countries.2 Material handling Scope of Material Handling Importance of Material Handling Objectives of Material Handlings 9.main stores.

Providing good working conditions. the material that gets processed has to move further without encountering any bottlenecks. Achieving higher productivity by lowering the manufacturing cost. the product that it manufactures. and procedures related to the moving. as one. the rate of production at each centre. . 9. 1 For more information please visit www. Lowering the cost for handling unit materials. This can be achieved by using the principles of JIT and Lean Manufacturing. It is a part of design of production facility and can hardly be separated. . the number of operations.2. These issues involve the movement or transportation of materials from all places and sources of supply within a particular plant. Dynamic programming. . .com/management-encyclopedia/capacityplanning 9.3 Balancing for Material Flow Production lines have a number of work centres in a particular sequence so that. Linear Programming. Materials delivered by vendors must be unloaded.1 Scope of material handling The scope of material handling within any organisation depends on the size of the organisation. The reason and use of balancing is to check that no shortages occur between work centres and fewer inventories get created. and then ultimately to shipping departments. Some computer-efficient approximate algorithms have been developed to help the process. System point of view The system point of view visualises the problems related to material handling and other closely related issues. It also depends upon the value of the activity being performed and the importance of material handling in the organisation. 9. The main motive is the interrelation between all problems and possibility of establishing an overall materials handling. One of the subsets to plant layout is analysis of material handling.2. Providing good quality by not damaging the products with inefficiency in handling. Efficient use of appropriate materials handling methods reduces costs and helps maximum capabilities to be extracted from a given production facility. and other mathematical models are used to study these problems. System point of view Traditional point of view The Traditional point of view emphasises on the movement of materials from one place to another. and the value of the product.2. they are: . Providing greater safety in the movement of materials.3 Objectives of Material Handlings The main objective of Material Handlings is to reduce the distance through which the materials are handled and the number of handling equipments. This movement adds to the cost of the product.activities. Material Handling has three different points of view. The main motive is to move the materials from one place to another in the best way. . equipment. within the boundaries of an organisation. The quantities produced. protecting and controlling of materials in a system.: 175 9. Plant wide The plant wide emphasises on the entire flow of materials in a plant. must be moved through production operations to stores and inspections. but not to the value of the product.enotes. Traditional point of view . Utilising the storage areas to increase the storage capacity. Plant wide . and the total production required are factors taken into account. Operations Management Unit 9 . Decreasing the time of manufacturing cycle through faster movements of materials.2 Importance of Material Handling Handling materials that are effective is important to manufacturing operations. . A good layout plan helps an operation to use the most effective handling method. Other objectives are listed below: . . storing. This point of view consists broader considerations of material handlings issues.

The steps to be taken are: i) Choose the job which has the shortest processing time in any of the two work centres.5 3. This is applicable when a single product goes through machines where. The technical criterion seeks to maximise the line efficiency. but we have many products that go through the line. All ALB are categorised by Ghosh and Gagnon2 into four categories: 2 http://www. MMS .5 2.1 Johnson’s Algorithm of Sequencing This algorithm is used for sequencing of n jobs through two work centres. Decomposition of the assembly into sub-assemblies and having advanced handling equipment may help to make inventories small and keeping the flow line smooth.25 3. that is. Minimising the number of workstations. Example: Time on Job M/c 1 M/c 2 A B C D E F 2. manual content is more and the operations do not have definite periods. ii) If it happens to be on machine 1. if it is on machine 2.25 1.0 3.3. allot it for loading last. There are no priority rules since all jobs have equal priority. Multi/Mixed Model Deterministic: In this case task times are known.0 . then load it first. Single Model Deterministic: This model assumes that the one product that passes through the dedicated line has all tasks times known. 9. number of operators and reducing the quantum of buffers are the economic criteria. Generally the criteria for all the above cases are technical and economical. The purpose is to minimise idle time on machines and reduce the total time taken for completing all the jobs. Continue this till all jobs have been allotted. called Assembly Line Balancing (ALB).75 1. This model is useful when automatic machines or where operations have their times predictable with certainty. Multi/Mixed Model Stochastic: The task times are variable and we have many products that go through the production line. MMD . SMS .com/doc/31782727/OM0001-set-2 SMD . Single Model Stochastic: This model allows the task times to be variable. The products are assembled in batches.scribd. Many times a trade off may be necessary.75 4. The problems of balancing such lines are more.The Line Balancing Problem Assembly lines are best suited for the study and analysis of the Line Balancing Problem.5 1 2. It is for the operations manager to balance between two competing requirements.25 2. The order of the operations will be machine1 first and machine 2 next. Determining locations and sizes of buffers require to keep the throughput is the purpose of this algorithm. throughput.75 1. iii) Eliminate this job.

The job is C. Get the sequence. The first table will be . ignoring M2 and M3. then 1+2+3 and a M-2. is on M/c1 load it first. continue¡¦ The loading sequence is given in the box below C F B D E A In case the period on two machines for any of the jobs is the same. when the numbers of machines is small. M-1 and M. Next. The next is 1.2 CDS Algorithm for n jobs on m machines This algorithm given by Campbell. ii) Next Combine M1 and M2 . Perform the following steps: i) Take column M1 and M4. like 1 and m. then M-1 and M. This process is useful.25.3. The job is E. Call it MD. Dudek and Smith. Get the sequence by applying Johnson. Choose whichever given the total time. Find the sequence. gives m-1 solutions and we can choose the most optimal between them.5 which is on M/c. We will work out a problem where we have 4 machines. D and E.Time 1 Hr. We will use the Johnson. and call it MC. Load job F next. Load it last.s rule. Cancel the row which contains 1 and 3. and so on. 2. Similarly combine M2 and M3 and M4. iii) Next Combine M1 and M2 and M3 . time 1. then1+2. B C. by considering differing combinations . Make it as one machine MX and combine M3 and M4 and call it MY.s rule by converting the number of machines from m to 2. you may choose either of them for applying the above rule. 9.25 is on M/c1. iv) Calculate the total time taken to process all jobs A.

It should be noted that any of the systems described above are to suit the purpose and economies that can be derived. __________ algorithm is used for sequencing of n jobs through two work centres. Items can be kept on a work bench and be picked up. Efficient order picking is a must for surviving in the competition. In the supply chain process. we expect to move towards small t sizes. You have to include idle times at the beginning. other machines may have to wait to start their operations. middle or the end. c) Part to Picker . The pallet racks can have only one or two levels. 9. 4. which have economic implications. The storage system can also be pallet racks. to increase throughput and space efficiency. storage. retrieval. and moveable shelves that travel in lanes or even an automatic item picker which can eject items on a conveyor belt. the picker is on a platform of the vehicle. He may also pick and place the item on a conveyor. the right amount of material. As it is crucial for the business to meet customer demand efficiently and accurately. humidity . rotary racks. shelves. until the previous operation is over.4 Principles. It is found to take 60% of the activities of the labour in the warehouse. In the manufacturing area. These complete the tasks other instructions received through a remote control device with the picker. Many pickers generally can also access the system. Before implementing any of these a detailed study of alternatives. b) Person Aboard . and the right sequence for the right cost. Here a storage device carries the trays or bins to the person picking. at the right time and place. 9. 2. Self Assessment Questions 1. point-of-use-delivery and cycle time reductions. that except for M1. special equipments are manufactured. These are mandatory to meet the so called targets of JIT. and delivery do not add value to the product. lot of attention is being given to these criteria of operations. _____________________means providing. The worker rides a vehicle and picks the item or product and puts them into the cart. a) Horizontal Travel . In this system. Practices and Advanced Analysis for Order Picking Order Picking is a process through which items or products have to be supplied and regained from specific storage location. o value o fragility o environment . in the right position.Calculate the total time taken when this sequence is followed. System Requirements for the Product o Volume per product o Number of order to be shipped . a plan for expansion or reduction in the requirement of a particular product or a probable shifting of the location etc. temperature. which is in the form of mobile shuttles. _________________point of view consists broader considerations of material handlings issues which involves the movement or transportation of materials from all places and sources of supply within a particular plant and. These can be in the aisle. storage drawers or gravity flow racks.1 Equipments First you will learn about the types of equipments that help us in bringing efficiency to the process. Material Properties o size. e) Workplace Equipment . d) Special equipment . 3. The Traditional point of view emphasises on the movement of materials from one place to another within the ____________of an organisation. he can move up and also horizontally along the aisle. Remember. weight and nest ability o carton counts. picker to divide systems. but they are necessary. pallet counts o fragility.4. Some of these factors are listed below: . The carts also are used to keep items for being picked up. These are mechanised systems. will have to be undertaken.

Number of products received per shift. (True / False) . processes. It is worth mentioned a word of caution. Sizes of bins. Self Assessment Question: 5. storage. racks. carousals. for a long term usage and as also possible changes that can be anticipated. a plan for __________________ is the requirement of a particular product or a probable shifting of the location etc. and push them. You will remember that the same considerations were discussed.5 Ergonomics and Material Handling: A task Determined Assessment of Needs and Solutions In Ergonomics. the particular needs for the products which are handled by us. Total number of products that are to be stored. Management Information System. . automatic item pickers can be made as also the space for locating and moving them. size. This is especially helpful in material handling stations. Choice between carts. we can design equipments to reduce difficulties faced by the workers. and weights are be lifted at different positions of the back. In the supply chain. The dynamic motions that the body and the organs are subjected to are studied with a view to design the systems. we use computer systems and some amount of automation to bring in efficiencies. vehicles. Lumbar Motion Monitor in a study of low back injury. where workmen have to lift weights. Activity 1 Visit any manufacturing company and list the different types. we have to assess the need for implementing any methodology. Solutions that are required should be considered. Economic Factors o Investment Required o Project life o Rate of return 9. fragility and efficiency in productivity of the machines they use. Design considerations arise. the shapes. Variability in the above . . Before implementing any of these detailed studies of alternatives. information and a system of control. 9. which otherwise would be lost. These determine the dimensions of the building required for the purpose. . retrieval and loading can be formulated and projected data will be useful. volumes and the type of handling like lifting. what is popularly known as. This is because these would have been worked out by the operators and supervisors over years in different job situations as it affects them on a personal basis. best practices would have set in. storage. Integration is between various equipments. Dr. Machine shop operations or material handling. pallets are also fixed on the basis of above. It allows measurement of the forces at work in bending and twisting. Labour force . ______________________ determine the dimensions of the building required for the purpose. conveyors. Total numbers retrieved per shift. will have to be undertaken. the knees bend. retrieval and delivery do not add value to the product. . the hands reach or grip.2 Design Considerations Some of the factors mentioned above also are relevant for the purpose of design. Material handling systems are mostly outsourced and the expertise of the contractor will be of great help.4. When the same movements are to be repeated a number of times. knowing the problems the movements can cause. This helps us to make improved decisions regarding job improvements. mainly out of the following: .4. weight. However. move them. hold them. raise them to awkward positions to find a place. 7. the way the limbs move. 8.o Response time o Supporting processes . 9. the body is studied as if it were a machine . Inevitably. pricing. but are necessary. 6. while working on machines. Bill Marris developed. labelling. Efficient ___________ is a must for surviving in the competitive. LMM . o Growth factors .3 Considerations while planning and implementing Integrated Material Handling Systems Material handling systems need to be made efficient so that resources used help in maintaining the flow of material with minimum bottlenecks and maximum throughput.

Long-Term Capacity Planning In the Long-Term. The time frame for short-term planning generally involves a few days. weights are be lifted at different positions of the back 9. Capacity Planning focus is on the strategic issues related to the organisation. One of them involves failure in meeting the demands. Capacity must be analysed first.wikipedia. their ability to work.s main production facilities. if you are operating close to full-capacity. wastage. the firm has to pay one and a half times more than the normal labour rate. The technology and the transferability of the process to different products are also interlaced with this capacity planning (long term capacity planning). Activity 2 List out the factors that you consider when you design equipments to reduce difficulties faced by the workers. if the organisation. Capacity planning4 must take place at many levels. the way the limbs move. In ___________________. in an efficient economic manner. productivity. Our major concern should be to minimum movement. labour shifts. but may run as long as six months. In case the product has to enter assembly. number of machines.The Art of Capacity Planning. and if subcontracting arrangements cannot be made. When short-term changes in capacity are insufficient. we possess material handling equipments such as cranes. Long-term capacity planning may evolve. The main aim of this capacity planning (short-term capacity planning) is to handle unpredicted shifts in demand. the knees bend. The possible alternative is to add capital equipment and optimise the layout of the plant (long-term actions). It is acceptable if most of the product goes to inventory. The company must know well about their current capacity and the right percentage at what they are operating. Capacity planning can be related to both the long term and the short term. capacity planning focus is on issues which are related to scheduling.s additions of a third shift plan does not 3 For more information on Capacity Planning please visit http://en. Other resource-increasing alternatives are available. and paying extra benefits. Many factors can affect capacity such as the number of workers. by John Allspaw produce enough output. capacity planning requires long term analysis. During business planning sessions. Short-Term Capacity Planning In the short term. This number can be confusing. suppliers. if . government regulations. along with other parts that are being manufactured then.9. It might be more desirable to include some more additional plant space or to construct a new facility (long-term alternatives). Some components may be outsourced. hiring. and preventive maintenance. you must purchase new equipments. reduce inventory. the body is studied as if it were a machine . To increase capacity. While. all the required parts arrive at that point at the same time. There are many alternatives for making short-term changes in capacity. mistakes. lifting forks. defects. It exceeds the expenses of training. In result.org/wiki/Capacity_planning 4 For more information on Capacity Planning please refer . The problem for the managers is the limited supply of these equipments and the need to optimise utilisation of the equipment to see that the manufacturing line has smooth flow. It is also a flexible and low cost alternative. This requires an integration of information regarding all the factors and take decisions that can accommodate and optimise utilisation of resources. the hands reach or grip. and timely availability. There are different issues at stake for each.7 Capacity planning Capacity planning3 is the analysis of what can be produced and what the expected demand will be. The main criteria is to take the job through the technological steps in which. 9. To handle different varieties of parts. trucks etc. scrap. Working overtime is the easiest and the most commonly used way to increase capacity in short term.6 Approaches for Shop Floor Arrangement of Material Handling Jobs Arranging takes decisions on the order in which jobs are loaded on different machines. The major concerns are regarding the quantities that need to be processed and the time that the different operations require. the processing requires to be done for the change that is to be effected on the processed material. This can be a lengthy process. For example. and balancing resource capacities. The capacity must be measured against the actual demand but not against actual production.

.000 "machine hours" in each 40 hour week. It may be necessary to take short-term measures. Immediate capacity planning is the capacity made available in the short-term. and facilities subcontracting. assume that a factory has a capacity of 10. However. Activity 3 Assume that you are going to open a retail shop. 9. when making the decision to increase capacity in the medium-term. . 9. These include employing casual or parttime workers. Financial data and comparisons need to be completed. Any extra time required in production (for example. getting workers on lease.1 Constraints on capacity In capacity management there are two general potential constraints. factory) is its ability to produce or do what the customer requires. TIME and CAPACITY. does a product require 1. . 9. Medium-term Capacity Planning In the medium-term. capacity managers generally "plan backwards". The actual volume of product that the particular factory produces will depend on: . although temporarily. adding shifts. The quantity of work involved in production (for example. there are different issues at stake for each. when the production schedule is being released. A job schedule generally shows the plan for the manufacture of a particular task or a job. They are . Effective capacity Potential capacity is the capacity available to influence the planning of senior management. 5. capacity planning is focus is on analysis during monthly meetings. It can be created through "work / study" reviews which will determine the time and method required. Time is a limitation where a customer has a particular demand for delivery date. as it is the ability to work.000 "standard hours of work" during a 40-hour week. Capacity planning can be related to both the long term and the short term. The decision to increase capacity can be extremely costly and is not easy.overtime does not provide enough short-term capacity.9. This is important for a long-term decision that does not influence the daily production management. they assign the final stage (operation) of the production to the period where delivery is required. assisting them to take decisions on overall business growth and investment. Effective capacity is a very simple concept. Potential capacity . In other words. This is essential for production managers to know what capacity is actually receivable. The decision to subcontract or hire more people or use overtime are all over expensive and are required to be analysed properly. This process assists in identifying whether. 9. Ensure that you have checked and analysed all your options and supported them with financial calculations. if the capacity is consistently less than what is demanded. Immediate capacity . machine. For example. The effectiveness or productivity of the factory. Capacity must be analysed in the short-term on a weekly basis.8 Different kinds of Capacity Plannings Any particular production unit.9. Capacity is calculated: (number of machines or workers) ¡¿ (number of shifts) ¡¿ (utilisation) ¡¿ (efficiency). maintenance). In such situations. machine set-up. 10 standard hours?). there is sufficient time to meet the production demands and whether there is any need to increase the capacity. For example. Then this factory must possess the capacity to produce 10. List out the factors as well as issues which you think will affect the Capacity Planning. Production and operations management consists of three different kinds of capacity.2 Production Scheduling A Production Schedule represents the time that is very essential or necessary to carry out a particular assigned task.9 Measuring capacity Capacity must be measured in the unit of work.g. they are: .s capacity (e. It is the highest potential capacity taking it as used productively.

Order picking 6. 11. This process is generally called as "scheduling". Variability in the above 8. Tells if financial performance is most important. . The result is called as the production schedule or factory schedule for the factory/plant as a whole. Measuring Capacity and Constraints on Capacity are covered. Material Handling 2. Performance Measurement. Capacities of departments involved or production sections. 9. Immediate capacity. Outsourced. 9. It also tells if the objectives in marketing more important . . raw materials. True 9. Long-Term and Medium-Term Capacity Planning? 9. We have also discussed the meaning of the Capacity Planning and how can it be related to both the long term and the short term. A job schedule can be created through ___________ reviews which will determine the times and method required.Many different varieties of businesses carry out several production tasks at one time that impose to blend several job schedules. . Expected sickness / absenteeism / training. Efficiency of these production sections or departments. What are the different kinds of Capacity Planning? 5.12 Answers Answers to Self Assessment Questions 1. Job schedules related to each and every production task.10 Summary In this unit we have considered various factors that affect the layout of the manufacturing place to provide for efficient utilisation of the floor space vis a vis workflow. Explain Johnson. In preparing a production schedule. for example. The unit ends with the discussion on Production Scheduling and focussing on the issues which are to be taken in consideration while scheduling the production. What do you understand by Line Balancing? 2.s rule for sequencing and how it is different from CDS algorithm. minimises the amount of stock.s Algorithm is a useful starting point and more advanced methodologies are also available.s Algorithm of Sequencing 5. System point of view 4. What is the importance of Order Picking in material handling? 3. Planned Holidays.likely caused by too much complexity or variety in the production needs of the business. Boundaries 3. Expansion or reduction 7. were discussed. always produce sufficient product to meet customer demand. attention needs to be paid to: . Potential capacity. Ergonomics 10. . The two general potential constraints of Capacity Planning are TIME and CAPACITY. . Balancing the production is a very important aspect of achieving maximum throughput and reducing inventory. and packaging There are two important problems with production scheduling: . Material movement in a manufacturing plan considers economics important. Effective capacity. What are Short-Term. Why? How are its principles applied? 4. Self Assessment Questions 10. . 6. The large number of probable schedules . Availability of components. . Three different kinds of Capacity Planning.11 Terminal Questions 1. Material handling systems are mostly _______________ and the ___________ of the contractor will be of great help. For sequencing of jobs Johnson. Expertise . Johnson. Dates on which delivery of product is planned (when are finished products due?). Material handling systems are also discussed.

According to many workers the gooey formed was a sign of inefficient airflow. coolers.3 2. long dryer is manufactured with a davit lifting system that makes one person to lift the entire cover off of the fluid bed with one single hand. This wedge-wire ensured opening for air flow and plug flow also. No one could come to a conclusion precisely why the mysterious goo was forming on their dryer but the operators at CCC Solutions. The RV dryer. /hr. which lay in the formed screen design of the round dryer.goo. What were the problems faced by the paper manufacturing company? 2.: 190 machine regularly meets the targeted 8% moisture content. Gurgoan. What were the solutions given to CCC Solutions by RV&Co? 9. RV. The RV Operations Management Unit 9 . A goo was being formed on one of their driers. But if the operators of CCC solutions ever want to clean the system. in labour costs and lost production alone.s approach is based on designing a system that meets a target production and quality rate. The company had an issue with one of its driers. which in return completely eliminated the safety risk and also enabled the CEO of CCC solutions to bring the entire processing line down to the floor level. but the design of the dryer damaged his efforts..11. RV. and many other process equipment for companies for many famous companies since a decade. This cost about $5. Questions 1. They had to shut down the entire line once in a month to clean the dryer. Then the paper product manufacturing company tried replacing this troublesome dryer with a another new kind of vibrating fluid bed dryer from The RV & Co. India.9 5. RV engineers have made their job very easy. The material used to frequently stick to the belt and required manual removal.13 Case Study Bhadravathi is a paper manufacturing company that manufactures papers and supplies them through out India.3 6. Rama Krishna targeted the production rates of 3. was a horrendous problem according to the employees working there. providing access instantly to the deck at the chest level. India. Instead of using formed screens with fine holes that attracts clogs.00 every month. screeners. ¡°Reorienting the line onto a single level also cuts down a second source of frustration: a belt conveyor was being used to lift the fibrous sludge nine feet high to the dryer.s in feed.000 lbs. After installing the RV dryer in June 2000. Refer section 9.000. This company has the history of designing and manufacturing the new vibrating fluid bed dryers. A was growing increasingly concerned about its effect on productivity. exceeding the target by 50%. /hr. were being operated at floor level. Drying up to 70% moisture has recovered fibres from the waste stream of the paper mill. Refer section 9. the frequent cleanings required personal visits over a platform which is very tall and carried a basic risk for safety. the 40¡± wide x 16. it is easily adjusted when a 12%-14% specification is desired and product integrity is exceptional.010 inches wide tapered slots with 1/8¡± thick triangular wires. off the floor. Refer section 9. Belgaum. ¡°This . stand only 2-1/2.s machines in contrast. RV used a proprietary wedge-wire deck with 0. Refer section 9. "Work / study" Answers to Terminal Questions 1. Refer section 9. Ramakrishna has been able to increase the production to a very effective and impressive 4.14 Glossary Terms Meanings Aisle .8 9. As the previous dryer operated eight feet above the floor.4 4. It is cleanable by design. Mr. Refer section 9. de-waterers.000 lbs. Mr. The problem prevented efficient airflow and caused hindrance in the productivity. slowing production. allowing the use of an ultra-short in feed conveyor.4 3. had had enough of trying to clean the sticky sap-like goo that was making its screens blind and CEO Rama Krishna. ¡°Identifying the core problem was the first step in the process..

time charting and analysis.a wheel that is covered with soft mater Horrendous A problem that causes fear or dread or terror among everyone Quantum A quantity or amount or Something that can be counted or measured References 1.net/business/production/capacity_introduction.6 Design for Manufacture and Simultaneous Engineering 10. it deals with the development of time.14 Glossary 10.12 Answers 10. This unit familiarises you with lean operation method and time-based competitiveness. Elucidate the development of time-based competitiveness . The Art of Capacity Planning by John Allspaw Unit 10 Lean Operations and Time-based Competitiveness Structure: 10.htm 3.2 Lean Operations: Planning for Flow 10.13 Case Study 10. and Bar Coding 10. Learning Objectives: After studying this unit you will be able to: .1 Introduction By now you must be familiar with capacity planning and material handling techniques. http://www.a long narrow passage which helps in dividing the machine Bottlenecks A point or an area of traffic congestion which creates problem for the machine in functioning smoothly Buffers a power tool used to buff surfaces as a polisher buffing wheel .enotes. Business Process Reengineering (BRP) and EDI. this unit deals with the lean operations method. concept of waste and application of lean operations in service industry.: 192 .com/management-encyclopedia/capacity-planning 2. In the second part. In the first part.4 Lean Operations in Service Industry 10.10 Summary 10. Describe the role of lean operations in the service industry .8 Business Process Reengineering (BPR) Principles of BPR Criticism of BPR 10.9 EDI. Explain lean operations and waste elimination . and bar coding. Define lean operations Operations Management Unit 10 . EPOS.based competitiveness.1 Introduction Objectives 10.s 10. http://tutor2u. EPOS.11 Terminal Questions 10.3 Lean Operations and Waste Elimination The Seven Forms of Waste The 5S. design for manufacture and simultaneous engineering.5 Development of Time Based Competitiveness 10.7 Time Charting and Analysis 10.

and on squeezing out waste in every step of the way. Performing 1 http://en. consider a typical main appliances firm which manufactures washers. Describe time charting and analysis .wikipedia. This way. The need for enhanced manufacturing efficiencies that the lean operations provoked has encouraged Toyota to speed up its JIT ideas which were already formed. lean is often equated with ¡°pull¡± operations. flowing product rapidly through a supply chain makes economic sense.: 193 this delicate operation is at the centre of lean operations and of product flow planning in a lean environment. 10.oil shock. Parts of the lean philosophy have little to do openly with flow planning concepts. which are minor. It is proven in practice also. by forcing product to flow rapidly. the firm has learnt how to re-supply their distribution centres from tiny flow-through inventories at their plants and also how to manage production to meet dealers. Explain the design for manufacture and simultaneous engineering .s reaction to the . for example. such as visual control. Then. the firm either supplied those kits to dealers when they order a dryer or installed the kit at the distribution centre after they received the dealer order. For example. Production is pulled through the plant with Kanbans. It involves using neither much inventory nor much excess capacity to stabilise supply and demand. The firm moved as much of their product segregation into accessory kits in part.org/wiki/Kanban Operations Management Unit 10 . With these conditions. Naturally. Some argue that the beginning of JIT lies within Toyota. demand. the most important part of the lean philosophy is its focus on the elimination of all forms of waste. production levels are very cautiously planned and modulated. lean is much more than that and is of much broader interest. and bar coding 10. In a typical lean environment. However.3 Lean Operations and Waste Elimination The lean approach to supervising operations is founded on doing the simple things well. were also encouraged by the national cultural and economic conditions. EPOS.make every grain of rice count. dryers. They have redesigned the supply chain for flow so that the dealers keep small stock in their stores or warehouses. But as a philosophy of operations. and other Japanese manufacturers. Japan. Lean manufacturing and lean operations in common have presented a persuasive case for organising production. but rather finding ways to stabilise them directly. poka-yoke error reduction. They have some seasonal sales variation due to seasonal home completion and a few other factors.. Waste can be defined as any action which Operations Management Unit 10 . Hence. Instead. Flow-oriented planning is basically a high-performance method. They can be used in non-lean environments as well. or continuous development.s attitude towards waste (. together with its position as a crowded and virtually a country with less natural resources produced ideal conditions. and production control tools. the Toyota Motor Company has developed a set of practices which has shaped what we now call lean or JIT. These developments by Toyota. on regularly doing them better. It includes continual waste reduction and looks at all processes from the perspective of the customer. Possibly. Often seen as the important practitioner of the lean approach in Japan. of rising oil prices in the early 1970s.). Lean manufacturing was first launched to the world through the Just In Time (JIT) concepts and the Kanban1 techniques established as part of the Toyota Production System. the firm has figured out how to keep it very modest. But by reducing error and variability. So the firm keep completing inventory in their regional distribution centres. Describe business process reengineering .2 Lean Operations: Planning for Flow Lean operations are a series of numerical and visual tools to streamline material and information flow. they devised an approach that emphasizes low waste and high added value. the Toyota Production System. dealers should rely on the firm for replacement within a few days. Explain EDI. these non planning elements of lean are a big part of producing the environment where flow can occur. dishwashers and refrigerators.

In banking. more important to address the causes of such costs. Sort: Remove what is not needed and keep what is needed 2. As such. The . The idea of flow and waste is not restricted to manufacturing. has its ancestry in manufacturing. both service and production .3. Self Assessment Questions 1.1 The Seven Forms of Waste Toyota has recognised seven types of waste. This is a simple set of principles for reducing waste. of course. Second is . cheques are sorted at regular intervals. Shine: Keep things clean and tidy. 2. Total costs of quality are much greater than that has traditionally been considered. 10. . The JIT scheduling idea of stability has wide potential in service operations. __________ is the pause between two inter-related processes. we consider the wider application of JIT.the 5S. Lean is often equated with ______________ operations. Inventory: All inventories should become an objective for elimination. Transport: Moving items around the operation does not add value. . they are generally taken to represent the following: 1. therefore. gradually.: 194 does not add value. Ensure perpetual neatness 5.. respectively. 10. waiting for the inputs from the previous process to get started with the next process). which have been found to be applicable in many different types of operations . no refuse or dirt in the work area 4. An operator may look busy but sometimes no value is being added by the work. ____________ has developed a set of practices which has shaped what we now call lean or JIT. producing more than what is immediately needed by the next process in the operation is the greatest cause of waste. Removing what is not needed and keeping what is needed is called ___________. Sustain: Develop a commitment and pride in keeping to standards.3.2 The 5S¡¯s The 5-S terminology originated in Japan and even though the translation into Operations Management Unit 10 . Standardise: Maintain cleanliness and order. Many of them have only an unclear notion of JIT and lean principles. Equipment effectiveness and labour effectiveness are two popular measures which are widely used to measure equipment and labour waiting time. . it can be reduced only by tackling the causes of inventory. . This is concerned with identifying waste as the first step towards eliminating it. It is.e.the seven forms of waste.. However. 5. Over-production: According to Toyota. 10. . 6.4 Lean Operations in Service Industry In this section. it is general to have regular slots for work: for example. . Waiting time: Waiting time is the pause between two inter-related processes (i. Layout changes which bring processes closer together such as improvements in transport methods and workplace organisation can all reduce waste. In this section.. Straighten: Position things in such a way that they can be easily reached whenever they are needed 3. Two simple devices are generally used in lean improvement. It no longer matters what it is that is being done is called. JIT. Process: The process itself may be a source of waste. Several operations may exist only because of poor component design or poor maintenance. we will discuss the use of a few JIT and lean concepts in the service industry. and which form the core of lean philosophy. But. these processes can be eliminated. 3. First is . Motion: Simplification of work is a rich source of reduction in the waste of motion. __________ itself may be a source of waste. Toyota has recognised _______ types of waste. JIT and lean principles are found in the service industry even though they may not be accepted as such by service industry managers. what matters is how effective it all is. Defectives: Quality waste is often very significant in operations. 4. .s.: 195 English is approximate.

is now routinely done within hours as some representatives from all these departments have relocated themselves into a cell. The proofs must arrive at the editor. Operations Management Unit 10 . One example is a local authority who sanctions the building plans approval. All this establishes a routine.5 Development of Time Based Competitiveness Time-based competitiveness has developed out of JIT manufacturing to have a big impact on manufacturing. Normally. Toyota uses the seven wastes in all areas. 10. Cellular design: It can have dramatic results unlike a departmental design. The lean operations idea of waste reduction. but in the opposite way to what many people think. This brings order without having to make a new plan each month. In service. As a result of their research. The 0. . is divided into three components each accounting for one third of the time. than with JIT or lean operations. . In the seminal work Competing Against Time2. less overhead is accumulated. But overhead also reduces. the more it costs. Wal-mart: The American discount store has customer delivery times of about 80% less than those of competitors and as a result enjoys an 2 George Stalk and Thomas Hout. The following are a few techniques used by lean operations in the service industry: . service and distribution. The 3/3 rule: It states that the 95% to 99. Atlas Door: A manufacturer of industrial doors has lead times of about 66% less than those of competitors and as a result enjoys a income advantage of 15% against norm of 5%. Often there is a straight association between time taken and quality levels. These domains can include restaurants.s desk by a certain time each month. Reducing the time to make a product leads to less work in process and quicker detection of any problems that may have arisen. the authors mentions many examples of companies that have benefited through time-based strategies. so that editor is ready to receive them. For example: . and output actually increased although this probably could not be sustained. 1990. Think of a project having to support a head office administration. formerly taking weeks as the plans move around between departments such as the building inspectors. Stalk and Hout (1990) have proposed a number of rules of response: . continuous improvement. structural engineers. health department and sometimes traffic engineering.95% of time that a product or service is inactive. A sensational example occurred when Britain worked a three-day week as a result of power cuts. Several lean techniques are directly applicable in service. Changeover reduction principle: This principle of making the highest possible preparation before the changeover is not only applicable to a Grand Prix pit stop. The same effect is found in services: reducing the time often improves the feedback and leads to improvement before what has taken place is forgotten.: 196 is ready to perform various tasks. . and the supplier knows that paper must be delivered by a certain date. but also to other service domains.05% and 5% of the total time used up in the system. . university registration and for all meetings to ensure good customer service.similar principles apply widely in magazine publishing where there are regular deadlines that must be met at the same time each month. with ongoing costs per month. there is inventory. If the project is completed sooner and another one begun. and its converse. is broadly appropriate. the printer Operations Management Unit 10 . hotel reception desks. Defective processes can be stopped sooner and the amount of rework is reduced.: 197 income advantage of 36% against the industry norm of 12%. The three components . quality improves as time is reduced. town planners. not just in manufacturing. continuous improvement is more closely associated with total quality in general.05 to 5 rule: It states the fact that on an average the amount of time that value is being added to a product or service is among 0. Then. The longer it lies idle. Variety as late as possible: The lean design idea has broad application in insurance where standard policies are made up and necessary special clauses added as necessary.

early prototyping. Going further.design perfection. The suppliers should be used as specialists in their own areas of competency or process speciality. say. that is. Versions of CPA allow for . The aim is to reduce time and cost. where there is an atmosphere of trust and perhaps .6 Design for Manufacture and Simultaneous Engineering Design needs individuals to declare in the lean and time-based operations circumstance.. . the plan is to decrease time without an additional cost punishment or in fact to reduce both time and cost. since the first department is no longer concerned with what happens to the process next.. Supplier involvement in design recognises that with established suppliers. and to have common refreshment areas. to test products with customers.: 199 Computer Aided Design (CAD) is critical today for both better design and for time compression. less time for more price. A particular method is . in decreasing product development times. engineering. method putting together a team from design.crashing. This means that first-tier suppliers increasingly have the responsibility to work with second-tier into the final product. 10. some companies. try to find out about their profitability. or in enhancing the turnaround in most service industries. Time charting and analysis starts by assembling a process chart or a critical path diagram which details . The 3 * 2 rule: It states the advantage of time-based competitors. attempt to locate the design team close to the shop floor. Increasingly. selling. This is a trade-off.rugby scrum. quality. but how about for reduced time? Try to certify Stalk and Hout.2. Lean design demands close co-operation among number of departments: design. to decrease the . The ¨ù . such as Hewlett Packard. Design is potentially one of the most influential tools for lean manufacturing. The whole process is known as simultaneous engineering. Alternatively. physical and intellectual rework and management decision time. Design for manufacture plans to design in quality and manufacturability. quality. or insurance companies. development. and manufacturing. . Superior CAD systems can permit simulation. manufacture. But in the time charting and analysis.20 rule: It states that for every quartering of the time required to produce a product or service. The best JIT or lean companies find ways to bring these groups together to solve what should be a mutual problem. needs designers to work as operators for a week or so each year. Simultaneous engineering involves a . mentality. for example Honda. where a mathematical model of the product can be tested. where the designer only gives the broad prerequisite and allows the supplier to innovate. The organisation of design is also vital for time competitiveness as it brings new products to the marketplace quicker. efficiency will be double and there could be a 20% rate reduction. or claim settlement times.. basically to organise the time co-ordination of a variety of activities. Operations Management Unit 10 . Find some comparable shops. the purposeful reduction of project time by using extra resources.are: conclusion of the batch that the product or service is part of. Early discussion about sharing certain feature product information with trustworthy suppliers is necessary.. Operations Management Unit 10 . which may be better than waiting for .7 Time Charting and Analysis Time charting and analysis can be used in decreasing manufacturing lead times. Others. a development rate of three times the average with twice the profit margin.s findings locally. their finished work over the wall not caring what the next department does to it. not just component parts. suppliers and others such as marketing. The process of developing the product is then seen as more vital than functional departments. furniture or domestic appliances. decrease costs and use the latest technology.. Then. if they are quoted companies.corners. The Critical Path Analysis (CPA) technique has been used for over 30 years for project management.: 198 Activity 1: We know that customers are ready to pay for improved quality. some suppliers are being asked to design and supply entire product . Another method is . before prototyping or manufacture.open specs. think of a few examples where reduced time attracts a premium price. and prices.throws.over the wall. 10. marketing. This means that every department . Ask about their delivery times.co-destiny.

Also process charts. The basic step is to examine the process flow chart and to split the activities into those that add immediate value for the customer and those that do not. Figure 10.1: Value Added Assessment The plan. In any case.: 200 The aim is to reduce time and waste. Therefore. there is an official process chart (what should happen) and a real process chart (what actually happens).1 depicts such a flow chart. Operations Management Unit 10 . and also in services. Activity Necessary to produce output? Contribute to customer requirements? Contribute to business functions? Real value added Business value added No value added Activities that must be performed to meet customer requirement Activities that do not contribute to meeting customer requirements. Often in manufacturing. Preferably the people involved in the process should be used in its analysis and improvement.all the steps involved in producing the product or service. where they are kept are often out of date. These activities could be eliminated without deterioration in product/ service functionality Yes Yes Yes No No No Record order Type policy Research data Record claim Record data received Order forms Update personnel records Prepare financial reports Review and approval Rework Movement Storage Figure 10. of course. and distance covered. It is essentially a creative process. try to make every valueadding . including delays and storage. is to accomplish the added value of the product or service in as little time as possible. the aim is to get the real time process chart. This can often be achieved by following through a product or service and detailing all the steps and times.

one-step. preparing a meal can be considered to be a value-adding activity. Can the time taken for value-adding activities be reduced? This action enables breaking down a value-adding action into more detailed activities. but many disagree. simplified. Are there are any activities. Reengineering is a basic rethinking and radical redesign of business processes to accomplish dramatic improvements in cost. making a fundamental product or service but adding the colour and sunroof as late as possible? . . Where is the finest place. some of which would be non value-adding. Can activities that have to be approved from department to department (and back) be acknowledged into a team activity? Better still.2 depicts the BPR cycle. Where are the bottlenecks? Can the capability of the bottleneck be extended? Do bottleneck operations keep working or are they postponed for minor reasons? Are bottleneck operations delayed by non-bottleneck operations and whether they are value-adding or not? . can one person do it? If so. What arrangements can be made before the major sequence of value-adding steps is initiated so as to avoid delays such as preparing the paperwork and getting the machines ready)? . Figure 10. What availability of information will make the value-adding series smoother or more continuous? Is there more than one resource of information. process? If not. or condensed? .8 Business Process Reengineering (BPR) BPR became a management prospect in 1990 with a typical article in Harvard Business Review3: ¡°don. what will be the delays and how can these delays be decreased? Operations Management Unit 10 . Time based Competitiveness and Total Profit. and if so can this be brought to one place such as a general database? . This is Stalk and Hout. BPR can be seen as a natural improvement from ideas such as JIT. Can some activity that delays a value-adding activity be simplified or carried over? . Is it probable to move assessment points so that they take place earlier? . or must it really be referred somewhere else? . obliterate¡±.t automate . using a computer based expert systems. The continuation should be without disturbances for waiting. Can the necessary customer variety or requirements be added at a later stage. A more detailed analysis is advantageous for repetitive activities 10.step continue from the previous value-adding step. If jobs are done in batches.: 202 . Do clients like a . why they do not like? . mostly non value-adding activities. For example. but this activity itself may involve wastes such as moving around the kitchen. Can the non value-adding steps be removed. BPR joins a strategy of promoting business innovation with a strategy of making major improvements to business processes so that a company can become a much stronger and more flourishing competitor in the marketplace. what training and backup would be required? .: 201 assist the company but not the customer. Hammer states that BPR is as crucial a view of management. thus cutting handing on delays? . Some of the questions that must be answered include: . System Analysis. for instance. In fact. speed and service. They have provided several guidelines. quality. from a time point of view. can the batches be divided so as to move on to a second activity before the whole batch is complete at the first activity? . queuing or for procedures which Operations Management Unit 10 . If problems do extend.s main sequence. What is the decision making preparation? Can decision-making power be handed over to the point of use? Can the routine decisions be accepted so that they can be dealt with on the spot? For example. that can be done in analogous with the sequence of value-adding activities? . to carry out every activity? Can the activity be carried out at the point of use or contact. Design To-Be . Can staff flexibility be enhanced so as to allow several tasks to be done by one person.

Capture information once and at the source: According to Hammer. the finances of information have altered.9 EDI. 10. Organise in the region of outcomes. a gradual and incremental change may be an improved approach. sell or order should process the information themselves rather than handing it on to accounting. This term is used where there is a complete network of companies using EDI. Recognise similarities. EPOS and Bar Code Electronic Data Interchange (EDI) allows straight computer-to-computer communication. manufacturing and so on. With modern IT this is no longer the case. Have those who use the output of the process perform the process: Here Hammer suggests that. the principles of BPR are: . Also.2 Criticism of BPR Reengineering has received a bad reputation because such projects have often resulted in massive layoffs. it made sense to collect it several times. This principle is not only about suitable empowerment. . Link parallel activities instead of integrating their results: In taking a new product to market the conventional way is for each function to work in sequence. with the aid of suitable information technology.master list. This can be extended where a bank is connected to the value added network to permit automated payment.8.2: Business Process Reengineering Cycle 3 By Michael Hammer entitled . 10. Sometimes. . it is no longer essential to have. not tasks: This principle implies that instead of organising a job around departments or persons.s constraints. Once when information was hard to transmit and store. . centralised purchasing. for example.8. .: 203 10. Update Analyse As-Is Figure 10. . These tasks can be done by the users of each service themselves. . . So. On one . marketing or purchasing. again with the help of computers. These functions include marketing. You should think about what the objective of the process is.: 204 the incompetence of its process. and construct control into the process: According to Hammer.s performance is Operations Management Unit 10 . BPR presumes the need to start the process of performance improvement with a ¡°clean state¡±. design.. Put the decision point where the work is performed. Also BPR suggests no means to authorise this assumption.1 Principles of BPR According to Michael Hammer (1990). . each job should be organised with a department and also fixing the department to own the responsibility for the job assigned. but also creative management and once again computer systems. compare Hammer. functions who produce. the distinction between those that do and those that control is increasingly outdated.Test & Implement To-Be Identify Processes Review. Subsume information processing work into the real work that produces the information: People who create the information should also process it. BPR does not provide an efficient way to focus the improvement efforts on the organisation. BPR presumes that the factor that limits organisation. Make up a . The main reasons are. or maybe quite often. This may or may not always be true. . engineering. BPR culturally influenced towards the US way of thinking. One consequence is delayed as different functions have different priorities. Activity 2: Contrast Hammer. . accounting. personnel and so on.Reengineering Operations Management Unit 10 .s principles with what you have learned about JIT and TQM.s principles we have outlined with the principles developed from Stalk and Hout and Harrington (1991).

The JIT scheduling idea of stability has wide potential in service operations. The vast majority of their suppliers now deliver to the nearest distribution centre rather than direct to the supermarkets as previously. but they were not financially successful until they were used to mechanise supermarket checkout systems. tasks that are generically referred to as Auto ID Data Capture (AIDC). universality and low cost of barcodes has limited the role of these other systems. they can be used far away from their obvious advantage of improved data accuracy and customer service. which have the potential to link detailed transactions to particular customers and so to target promotions to specific customers. dots. Clerical staff may be saved. some supermarket chains are now encouraging customers to use personal cards. 11. for manufacturers to write the master production schedules of their suppliers directly. and may be referred to as linear or 1D (1 dimensional) bar codes or symbologies. 10. but now interchange of graphical design data is possible. One of the important . to improve forecasts where EDI is linked to Electronic Point Of Sale (EPOS) and to other information systems. Their use has spread to many other roles as well. a task in which they have become roughly universal. towards the retailers. Once again. Electronic Data Interchange (EDI) allows straight computer-to-computer communication.: 206 Self Assessment Questions State whether True or False: 7. But on another more strategic level.10 Summary Lean operations are a series of numerical and visual tools to streamline material and information flow. but the simplicity. Operations Management Unit 10 . and other geometric patterns within images termed 2D (2 dimensional) matrix codes or symbologies. telephone or fax. A bar code is a visual machine-unreadable depiction of data. Tradanet is a VAN (Value Added Network) used by numerous retailers. and transactions are less expensive than by mail. The real potential is realised when all three technologies are linked. who used to have most of the information about product popularity and the success of promotions.level. EDI has until recently exclusively involved word processing. Even though 2D systems use symbols other than bars. In Britain. They also come in patterns of squares. One of the problems with EDI has been standards. Bar codes can be read by visual scanners called bar code readers. It is probable. They enable maintaining an up-todate record of product usage . Attempts have been made to create a universal standard. or examined from an image by special software. EPOS terminals which examine bar codes to generate itemised receipts are a recognisable feature in most supermarkets. Other systems are attempting to make inroads in the AIDC market. The implications are a shift in balance of power away from suppliers. The initial use of bar codes was to tag railroad cars. 8. for example. In Britain and the USA. Tesco has been able to approximately half the number of distribution centres. a tremendous marketing advantage. hexagons. Cash flow also improves. 10. which shows certain data on certain products. while the number of suppliers and turnover has more than doubled. It includes continual waste reduction and looks at all processes from the perspective of the customer. 4 * 8 is one of the rules of response.: 205 and the British another (Odette). Several networks operate in the USA. EDI opens up other opportunities such as capacity to link intra-company communications with external companies. this paperless trading decreases time and increases accuracy by avoiding re-keying. Initially. A supplier may discover himself having to work through numerous EDI networks with different message standards. to search for prices and suppliers more easily. 9. The German car industry uses one standard Operations Management Unit 10 . Over the last decade. Lean operations plan the flow of the processes in an organisation. bar codes symbolised data in the widths (lines) and the spacing of parallel lines. A bar code is a visual machine-readable depiction of data. Design does not need individual declare in the lean and time-based operations circumstance. they are usually referred to as bar codes as well.

Refer section 10. 10. corporate coverage and workers' compensation.12 Answers Answers for Self Assessment Questions 1. Refer section 10.5 5. List out the seven forms of waste. Business Need Alliances and intermediaries were key development drivers in the long-term approach of the client. Refer section 10.11 Terminal Questions 1. Refer section 10. False 10.parts of lean philosophy is the elimination of wastes from an organisation.8 8. Explain time charting and analysis. This was considered a critical competitive edge and a weak link in client's back office capabilities. which is amongst the top ten banking institutions and top five universal insurers.9 Operations Management Unit 10 . Time-based competitiveness can be used in designing. Waiting time 5.: 207 6. service and distribution. Elucidate lean operations in service industry. The insurance activities of the company cover personal insurance. manufacturing and simultaneous engineering industries.3 3. 2. Pull 2. True 8. False 9. Describe design for manufacture and simultaneous engineering.: 208 10.13 Case Study Business Process Reengineering for the Commissions Process The Client An Australian corporation. EDI. 4. 3. Seven 4. Differentiate between EDI. Time-based competitiveness has developed out of JIT manufacturing to have a big impact on manufacturing. EPOS and bar code are the techniques that are essential for the industries to maintain time-based competitiveness. Also lean operations can be used in service industries effectively to increase the profit. In order to better manage the channel behaviour and meet the organisation's objectives. 10. Operations Management Unit 10 . Refer section 10. 5. EPOS and Bar code. Toyota Motor Company 3. speed and service. Refer section 10.4 4.s are used to eliminate them. Explain how 5S.2 2.7 7. quality. 7. Sort 6. Explain how lean operations can be used for planning the flow with example. Explain in detail the development of time-based competitiveness. Process 7. What is Business Process Reengineering? List out its principles? What are them criticisms it faced? 8.6 6. False Answers for Terminal Questions 1. . Refer section 10. Refer section 10. True 11. has one of the maximum cross-sell rates in the financial sector. Reengineering is a basic rethinking and radical redesign of business processes to accomplish dramatic improvements in cost. the capability to pay accurate and timely commissions was an important element.

collecting data about them. 2. Challenges and Requirements The following challenges were faced during implementation: The existing operations comprised of manual processes using band aid systems which were high cost and presented serious risk This organisation paid a huge amount every year in commissions. by Michael Hammer. Business process change: reengineering concepts. Auto ID Data Capture It is the methods of automatically identifying objects.com/management/Str-Ti/Time-Based. by John Nicholas. What role an organisation should perform which benefit the client? Operations Management Unit 10 .Competition. by Varun Grover. Scheduling The process of deciding how to commit resources between varieties of possible tasks.: 210 Unit 11 Quality Systems in Operations Structure: 11. Benchmarking for people managers.This organisation paid a huge amount every year in commissions which was roughly 20% of its profits before goodwill and taxes. Electronic data interchange It is the structured transmission of data between organisations by electronic means. 3. by John Bramham. Kanban historically uses cards to signal the need for an item.14 Glossary Term Description Poka-yoke error reduction The idea is to prevent mistakes as opposed to relying on operator vigilance. References 1. Map the different stages of BPR cycle with this case study. it lost significant amount on overpayments and commission leakage Questions: 1.3 Quality Control Techniques . which was approximately 20% of its profits before goodwill and taxes. and entering that data directly into computer systems. Lean Production for Competitive Advantage . Kanban Kanban is a signaling system to trigger action.html Operations Management Unit 11 .1 Introduction Objectives 11. A Comprehensive Guide to Lean Methodologies and Management Practices. Reengineering. Kettinger. without human involvement. 2.: 209 10. It is used to transfer electronic documents from one computer system to another. it lost significant amount on overpayments and commission leakage. 5. At the same time. William J.referenceforbusiness. methods. At the same time. http://www. As the name itself suggests. Institute of Personnel and Development. and technologies.2 Quality Control as a system Dimensions of Quality Systems View of Quality 11. Visual control The principle of increasing efficiency and effectiveness simply by deliberately making things visible. 4.

the purpose for which the organisation exists. Statistical tools are Operations Management Unit 11 . materials and processes of producing. . Since we are attempting to measure the same. .Quality at the source Quality Control Tools 11. After deciding upon these factors. 11. Conformance to design . Define Quality. as well as good service. The quality components must be built into the processes.2. Brands get created as a result of offering quality products. Thus. Since its introduction. In the following sub sections the dimensions of quality and systems view of quality are discussed in detail.11 Case Study 11. and supply chain. characteristics. Analyse the TQM concepts. which are expanding. at the right time is not enough. Operations Management Unit 11 . Thus. of which the manufacturer is aware and expects them to meet the customers. The point to which the finished product or service that is delivered meets the parameters that have been incorporated in the design. quality is the policy to survive in the contemporary markets. Explain various methods through which Quality can be achieved. it has been realised that production of items in required quantities. 11.12 Glossary 11. Learning Objectives: After studying this unit you will be able to: . Quality is a very essential part of operations management. and operations that help in manufacturing the product or delivering it (service) either independently or as a part of the product.1 Introduction By now you must be familiar with the concept of operations management and its scope. quality is introduced by designing these parameters. . the product is not of a good quality. maintenance. design. It is the foundation for achieving customer. packaging.2 Quality Control as a System Quality is a procedure for ensuring the maintenance of proper standards in manufactured goods. It verifies that the variability in the process is within acceptable limits so as not to compromise the functionalities that the designer wanted. Generally quality is built-in in the product or service that is rendered to the customer. material handling. Since cost has become an important dimension of customer satisfaction. Customers demand a product with excellent quality.10 Answer 11.8 Summary 11.: 212 . needs. especially by occasional random inspection of the product. finishes and other features that are incorporated in the product.4 Quality Based Strategy 11.ISO 9000 as a platform . A service provider has to set. Explain how quality is achieved by design and robust manufacturing systems. and inspection is very important to check performance quality.s satisfaction that is.5 Total Quality Management (TQM) Approaches to TQM 11.1 Dimensions of Quality Before we consider quality control.6 Towards TQM . It is a marketing strategy that helps an organisation to enter a market or to compete with existing manufacturers. we will look into those aspects of quality called Dimensions of quality: Quality of design . let us see what quality means. marketing. efficiencies have to be built in all operations like production. working with intranet Total Productive Maintenance 11. them in the product.: 211 used to identify sources of defects in such processes. quality of the design of the dimensions. You will notice that there is no relevance in offering good service when. The meaning of design is the specifications of materials.9 Terminal Questions 11.

3. processes. data have to be gathered. This is necessary for dissemination of information. Robustness is built into all aspects of the system to ensure that its quality characteristics do not get affected by providing inputs or during extreme working conditions. organisation. Activity 1 Visit any retail shop and list the elements which they consider to ensure Quality in their goods and service. with clarity and aids in faster rectification. Many times some fundamental processing mistakes get identified and their analysis improves the quality in the long run. movements. Every worker has the authority to stop production. This is an important. onsite training by the manufacturers. After sales service . cooperation. Procedures have to be set up. Help must always be available from the Quality Control personnel. hierarchies. it will be simple enough to be interpreted. 4. The first is by designing the equipments. manufacturing methods.: 213 Self Assessment Questions 1. Structure. but often neglected dimension of quality. Operations Management Unit 11 . All processes have equipments. and abilities. Design ensures that information flow.2 Systems View of Quality A system consists of a number of elements that have specific functions of their own. to help workers understand the implications of the above actions. The mechanism for assuring quality is to anticipate and plan for the proper. facilitating goods. Instructions. This gives workers pride in their work and assigns responsibility for quality in work. manuals. improper assembly or even manufacturing defects. It may be improper use. 11. unexpected /additional demands. The firm must put in place a system. The techniques. so that the purpose for which the product was made is realised by the customer in. and . the criteria to be used and adopted. 2. and the ways of interpreting data must be handed over to them for use. These refer to the necessity of the customer being informed/trained. thus enhancing his satisfaction.2. There are so many reasons why products do not function to the expected levels. personnel improves the perception of quality. goes a long way in establishing ____________. and integration of elements within a system make it effective.s perception of adequacy. 5.1 Quality at the source This concept helps the production worker to be more responsible for inspection of his own work and take right action. Customer. Variability is inherent in any process. Since inspection is done immediately after a job is done. Even though every technique was developed and tested by senior personnel or consultants. implementing actions necessary to monitor the variables. Variability is inherent ________. they do not affect quality.3. TQM is management and control of _________. designed performance of the process within the permissible deviations so that. 11. by which these possibilities are anticipated and attended to give customer satisfaction. as though they come from a single unit. and evaluations have to be made available at all nodal points. help lines. skills. This is the quality control system. if he finds some serious defect. There is a need to rectify these and make products or services perform up to the expected standard. understood. Quality control is exercised mainly by two methods. if not excellence. 11. Quality control is exercised mainly by _______methods. feed back and monitoring take place to make the system efficient. __________________verifies that the variability in the process is within acceptable limits so as not to compromise the functionalities that the designer wanted. and bringing them to acceptable levels. and technologies to ensure that quality parameters are obtained without fail. and people who have their behaviours exhibited depending on their knowledge.3 Quality Control Techniques Techniques are certain procedures and activities adopted using data for deciding a particular aspect of quality and arriving at decisions that are conclusive. These give support and receive support from one another to deliver outputs. We will consider some of them here. and implemented by the personnel for their immediate use. tools.Utilisation conditions . methodologies. All these factors bring in understanding between employees. this helps to identify the cause of the error.

a manufactured product or performed service adheres to a defined set of quality principles or meets the demands of the customer. 1.3. Therefore these defects in 2 have to be attended immediately. List the various steps or activities in a particular job. Table 11. A sample is shown below. The flow chart helps in pin-pointing the exact point at which errors have crept in. Classify them as a procedure or a decision. locations at which they occur. The column representing days can be changed to represent observed by the hour. 3.1: Process Flow Chart 1 Check Sheet: These are used to record the number of defects. if required. commitment and participation. They reveal whether the pattern of distribution has a single peak or many peaks and also . showing the various steps. so that the benefit of correction will be maximum. They are used to record big volumes of data about a process. Flow Chart: It is a visual representation of process. It helps to implement a corrective procedure at the point where the frequencies are more. These sheets make a record of the frequencies of occurrence with reference to possible defect causing parameter. 11. types of defects.: 215 Opn Insp Opn Insp Pack Rej Rej Figure 11. A sample sheet is shown below. It helps in locating the points at which a problem exists or an improvement is possible. Operations Management Unit 11 . and helps in achieving quality. analysed. The entire process brings in openness.improve the achievement of quality. times at which they occur. Detailed data can be collected. and methods for correction can be developed. The information generated may be used to effect improvements at the suppliers.2 Quality Control Tools Quality Control (QC) is a procedure which intends to ensure that.1: Check Sheet DEFECT DAY 1 2 3 4 5 1 // /// /// ///// // 2 / //// /// //// /// 3 // ////// //// // // 4 // //// /// // // 5 /// ////// /// / /// 6 // //// /// /// // The above table depicts that the number of defects in 1 and 5 are not many as compared to defect no 2. end also. and the workmen responsible for its occurrence. The QC tools are used to achieve quality. Criteria and Consequences that go with decision are amenable to evaluation for purposes of assessing quality. Each decision point generates alternatives. Histograms are pictorial representations of distribution of data. 4. A simple chart is shown below. Histogram . which increased over the days and appears to be stabilising at the higher side. 2. The following are considered as the basic tools for achieving quality control: Flow Chart Check sheet Histogram Pareto Analysis Scatter Diagram Control Chart Cause and Effect Diagram Now let us consider each tool listed above and analyse how it helps to improve the quality of a system.

also called 80-20 rule. Pareto principle. When variables remain within a range. states that 80 percent of the problems that we encounter arise out of 20 percent of items. It is observed that 80 per cent of them. the visual patterns help us to identify the problem which must be attended to. in a day. When used in conjunction with parameters Operations Management Unit 11 . you have as many as 184 assemblies having problems and there are 11 possible causes. These are used when we have two variables and want to know the degree of relationship between them. we will observe that some other defect becomes predominantly observed. Scatter Diagram .2: Histogram The values shown in the above figure are the number of observations made regarding a parameter. Pareto Analysis is a tool for dividing problem areas according to the degree of importance and attending to the most important. Control Charts . the effect on Variable 2 is more. we assume that there is no relationship. that is. The design parameters determine the range of permitted deviations. Samples . 147 of them have been caused by just two or three of them.the extent of variation around the peak value. Pareto Analysis .3: Scatter Diagram We can see that the change in Variable 2 does not have much effect on Variable1. If you find that. These are used to verify whether a process is under control. we will march towards zero defects.: 216 that are comparable. in Operations Management Unit 11 . Sometimes. It will be easy to focus on these two or three and reduce the number of defects to a great extent. This helps in identifying whether the problem is serious. they will render the product and maintain the specifications. The other interpretation can be that for a small change in Variable 1. percentages are shown to demonstrate the relative contribution of each of the parameters. This is the quality of conformance. It is observed that if the process is continued. We can determine if there is any cause and effect relationship existing between and its extent over a range of values. When the cause of these defects has been attended.: 217 which we can change one parameter making sure that it does not affect the variable. 14 27 32 50 29 20 0 10 20 30 40 50 60 70 80 90 100 ABCDEF FREQUENCY Figure 11. Sometimes. Figure 11.

01 and -0.: 218 9 A.04 25.99 25. 3.0 25. 25.99 25. The graphical representation of data helps in changing settings to bring back the process closer to the target. x Add all the means calculated above and take the mean of the means . 25. The steps to be followed to find the range for the sample readings of each hour are: Find the mean of the readings of each hour that is.03 25. 24.are taken and the mean and range of the variable of each sample (subgroup) is recorded.99 24.98 25.0 25.04 25.01 25. to calculate the UCL and LCL. Corresponding to + 3. The UCL is x . dn R UCL x 2 3 . 24.0 11 A. is taken every hour and the observations are recorded as shown below: Operations Management Unit 11 . 25.97 24. where .99 25.01 25.01 25. of the samples gives the control lines.. Consider The Following Data: A shaft is to be made with a diameter of 25mm.02 24. Draw A Line Diagram Taking The Means Of Every Hour 2.02 25. 24.98 25.97 12 Noon 24.02 25.M.M.97 24. it is customary to range a constant that depends on the size of the sample. by a process of centre less grinding. The mean of the means.99 24.M.02 25. Draw The R Chart And X Charts And Determine Whether The Process Is Under Control.00 4 P.97 per cent of all values to lie within the Upper Control Limit (UCL) and Lower Control Limit (LCL).0 25.01 25.M. we expect 99. However.03 5 P.01 10 A.M 24. is the standard deviation of the means of dimensions obtained on the dimensions of samples obtained every hour.01 3 P.02 25. The formulas are as under. Assuming normal distribution.03 2 P.01 25.02mm.0 25.01 25.97 25. in drawing the control charts.M.01 1.04 25.98 24. you will get the mean for all samples. A sample of five nos.02 24. They area required to be ground to be between +0.. .M.03 25.

Within the restraints they place on the system. TQM systems are designed to prevent poor quality in products/services. as a philosophy. 11. To achieve quality at low prices. This is where we have Lean Manufacturing. and so on that play a vital role in controlling costs. as they depend on the customer. Sometimes parties go for a doubling sampling plan. Unless these are not based on the quality of the product or service. near the middle of the y-axis while the horizontal axis represents the serial number. if a small number is determined and accepted by both parties are defective. in the direction of the discovery of the problem. Acceptance Sampling .s requirements. In this method of quality control. So the foundation of any strategy should be quality. Cause and Effect Diagram: In this diagram all possible causes are classified on quality characteristics that lead to a defect. Just in time. Most importantly. 11. The main motive is to satisfy customer by involving everybody in the organisation. Nowadays price is also a component of quality. and after sales service acts as an advantage and plays an important role is ensuring customer satisfaction. for reaching the goals. d2 . Malcolm Baldrige Awards increases efficiencies in the organisation and builds customer confidence. the entire lot is rejected. Figure 11.: 219 On a graph sheet. We will also observe that a few of them will have cumulative effect or even a cascading effect. Flexible Manufacturing Systems. The mean value is drawn as a horizontal line. If defectives are less. y axis represents the dimension. manufacture. Variations of the dimensions get marked on both sides of the mean line. These are arranged in such a way that. When each of them is investigated thoroughly. a range of defectives is fixed.values depend on the sample size. we try to identify all possible sources of the causes of defects. by inspecting a small number taken randomly from the bulk supply. in various functions with constant improvement driving all activities. the lot is rejected. If the no of defectives falls between the above two numbers. the lot is accepted. both present and future are evaluated. That is the reason these numbers cannot be fixed. another sample of a higher size is taken for inspection. Quality in design. The available resources. the supplier and customer agree upon accepting a lot. the lot is accepted. delivery. And the converse is also true. of the samples. pricing. We make a study of each of them and try to correct it. so as to maximise the yield. If it is more than the higher number.4: Cause and Effect Diagram When we observe that we have excessive defects from a machine. Out of the sample. If the number of defectives is more than the agreed size.5 Total Quality Management (TQM) TQM is viewed from many angles . efficiencies in all processes have to be realised. we will be able to pinpoint some factors that cause the problem.4 Quality Based Strategy Strategy means planning and supplementing a series of activities based on the evaluation of both internal and external environment. In this case. as an approach and journey towards excellence. As the sample Operations Management Unit 11 .: 220 size increases and the number of acceptable defectives decreases. risks for the producer and buyer exist. Operations Management Unit 11 . an assessment of the competitors in all these aspects is made to either confront it or bypass it. Essentially short term and long term objectives are in the horizon. the most beneficial activities are planned.. different branches representing causes connect the stem. Working for quality awards like Deming. If the total number of defectives is less than another determined number. The steps listed below have to be implemented to achieve Total Quality: . the effort is meaningless. Obviously. the risk for the buyer decreases.dn R UCL x 2 3 . the lot is accepted. packing.

Eliminate fear from the minds of every individual. Do not depend on inspection to deliver quality. as it is called is a constant quality enhancing model. and put up posters. improvement is not necessary¡±.s commitment. All these require top management commitment 11. It is known as fail-saving or fool proofing. The following are some of the approaches used to determine the quality of product/services: Deming Wheel Juran. to find ways and means to improve every aspect of the business process like finance. 3.: 222 Deming Wheel Deming wheel or PDSA Cycle. and consequences. Remove barriers between departments and people.Operations Management Unit 11 . which can be used for decision making. In this aspect. TQM has different approaches towards its achievement. Do not ignore the internal customer that is. Do not set up numerical quotas and work standards.s Quality Loss Function Operations Management Unit 11 . and need. Include elements that make it impossible to commit mistakes.5 is used to indicate that. if efforts are let up. Improve the system of production and service constantly. Give pride of workmanship to the workmen. committed and act. Constancy of purpose for continuous improvement. and management. so that they facilitate doing the job right from the first time. Do not exhort. The slope illustrated in figure 11. Needless to say. Transform the demands into design specifications that meet or exceed customer expectations. Adopt modern methods of supervision and leadership. operations. repeat slogans. Some emphasise on the philosophy of TQM and the role of management and employees in being aware. Education and training to be given vigorously. occurrences.1 Approaches to TQM Being practiced worldwide by different organisations..: 223 Act Plan . Take all measures to know what the customer wants that is. 4. The basic thrust of each of these is realising excellence. Some give us an .: 221 1. Some expect us to use statistics more intensely. State and show top management. so that constant improvement becomes possible. it consists of a logical sequence of four repetitive steps for constant enhancement and learning Deming¡¯s approach is summarised in his 14 points. All the approaches have many features in common. culture plays an important role. Conduct meaningful training on the job. Maintain record of all procedures followed. the programme will roll back. each organisation will use any of these or even a combination to suit its structure. One of the basic tenets of TQM is ¡°just because something is working well. the next person in the process. connected with the organisation. Deming with the help of the above principles gave a four step approach to ensure a purposeful journey of TQM.integrated approach. The search must be continuous. They help in formulising the processes. any gaps can be seen and corrected immediately. Complacency must never be allowed to creep in at any time. but the emphasis shifts from one to the other. 2. The Japanese call it Pokayoke. Operations Management Unit 11 . Processes are to be designed. for better quality and productivity. voice of the customer. culture.s Quality Triology Crosby. Adopt the TQM philosophy for economic purposes. Develop methods that generate facts.s Absolutes of Quality Taguchi. More particularly.5. Do not award any business based on price alone.

Check Do Deming Cycle -Plan -Do -Check- Act Figure 11.5: Deming Wheel The explanation for every quarter of the Deming Wheel, shown in the above figure is as follows: Plan . means that a problem is detected, processes are stated and relevant theories are checked out. Do . means that the plan is implemented on a trial basis. All inputs are correctly measured and recorded. Check . means that the trials taken according to the plan are in accordance with the expected results. Act . means that regular production is started, so that quality outcomes are assured when the above steps are satisfying. Juran¡¯s Quality Triology Juran utilised his well-known Universal Breakthrough Sequence to implement quality programmes. He suggested the following quality programs: Proof of need: This means that there should be a compelling need to make changes. Operations Management Unit 11 .: 224 Project Identification: in this, what is to be changed is defined and determined. Projects with certain time frames and the resource allocation are determined. Organisation with top management.s commitment is made by assigning people and fixing their responsibilities. Diagnostic journey: Every team will determine the systematically or randomly or deliberately arising problems. Root causes are ascertained with utmost certainty. Remedial Action: This is the stage when changes are introduced. Validation, testing, and inspection, are also included at this point. Holding on to the gains: The above steps result in beneficiary results. Maintaining records of all actions and consequences assists in further improvements. The actions that resulted in the benefits derived must be the norm for establishing standards. Juran has classified cost of quality into four categories, they are: Failure costs . Internal: These are costs of rejections, repairs, and so on in terms of materials, labour, machine time, and loss of morale. Failure costs . External: These are costs of replacement, on-site rework including spare parts, and expenses of the personnel, warranty costs, and loss of goodwill. Appraisal Costs: This consists of costs of inspection, including maintenance of records, certification, segregation costs, and so on. Prevention costs: This consists of the sequence of three sets of activities that is, Quality Planning, Quality Control, and Quality Improvement from the trio logy, to achieve Total Quality Management. Juran argues that: Good planning considering the needs of both internal and external customers and developing processes to meet them, results in good quality. The processes are also planned to meet them. Quality is built into the system of manufacture, inputs, and processes that are on stream like raw material, spare parts, labour, machine maintenance, training, warehousing, inspection procedures, packaging, and so on. They Operations Management Unit 11 .: 225 should be prepared to follow certain standards and control exercised, to make sure that mistakes do not repeat often and if they occur they are corrected at the source. Quality Improvement measures are very important to preserve the quality culture. Newer methods will be found, some operations can be eliminated, and improved technology will be available. In short, as experience is gained, things can always be done better. It is for the management to take

the responsibility and encourage the employees to be on the look out for opportunities for improvement. Crosby¡¯s Absolutes of Quality Like Deming, Crosby also lays emphasis on top management commitment and responsibility for designing the system so that, defects are not inevitable. He requested that there should be no restriction on spending for achieving the best quality. In the long run, maintaining quality is easier and cheaper or economical rather than compromising on its achievement. Crosby.s absolutes are listed below: Quality is conformance to requirements, not .goodness.. Prevention, not appraisal, is the path to quality. Quality is measured as the price paid for non-conformance and as indexes. Quality originates in all factions. There are no quality problems. It is the people, design, and process who create problems. Crosby has also given 14 points similar to those of Deming. His approach stresses on, increasing awareness, measurement of quality, error cause removal, corrective action, and continuously reinforcing the system, so that advantages derived are not lost over time. He intends that the quality management regimen must improve the overall health of the firm or organisation and prescribed a vaccine.The ingredients of the vaccine are: Commitment . Integrity and honesty to produce everything right first time and every time. Communication . Flow of information between suppliers, departments, customers helps in recognising opportunities. Systems and operations . These must bring in a quality environment so that everybody is uncomfortable with anything less than the best. Taguchi¡¯s Quality Loss Function His contention is that quality comes from design. He propagated a wide use of Design of Experiments, for experimentation on variables and obtains specifications those results in the highest quality of the product. It assists in bringing price effective improvements in quality. He beliefs that designers must prepare effective designs, so that product can withstand the variability.s that tend to be consistent and give quality for longer periods. His objective in transferring the loss function is, to make producers realise that it is the target value of the specification that must be achieved and not the permissible deviations. The loss caused is the double of the deviation multiplied by a cost constant that is represented as shown below: 2 L . C(X .T) Where L = Total Loss C = Cost constant X = average value of the quality characteristic T = target value of the characteristic. Taguchi also explains about losses to society because of a dent in quality. That is, both the manufacturers and users in society, who will have to endure the consequences of, reduced performance, as long as the product is used. Self Assessment Questions 6. The flow chart helps in _________ the ___________at which errors have crept in. 7. _____________ measures are essential to keep the quality culture alive. 8. Quality is measured as the price paid for _____________ and as indexes. 9. _________-had the belief that designers must prepare effective designs so that product can withstand the variability.s which tend to be consistent and give quality for longer periods. 10. Crosby also has given __________ points similar to those of Deming Activity 2

Assume that you have opened an automobile manufacturing company. List out all the processes which you consider will be essential in delivering the product with best quality. 11.6 Towards TQM - ISO 9000 as a Platform . Working with Intranet In this Unit so far, we saw a number of methods of achieving quality and also the prescriptions of the quality gurus. No particular model or methodology might be completely useful to any organisation. However, with the knowledge gained by becoming aware of the various tools, we must be in a position to implement the steps that will be suitable for us. In this direction, ISO 9000 set of standards details out the requirements to be adhered to, for certification. The certification helps the organisation to be on track, in the journey towards TQM. International Standards Organisation in Geneva brought out a set of standards to the practice of methods which assure quality. The objectives of the standard are: . To maintain product quality in relationship to requirements and reinforce improvement in the organisational systems. . To give confidence to the management and other stakeholders, especially the customers, that the organisation is run on quality lines. . To instill a sense of pride in the employees that motivates them to perform better. The key elements of ISO 9000 that are required for certification, details many functions of the organisation and procedures that needs to be adhered to. Documents that they are being followed have to be formulated and the personnel must be trained to use them. Documentation is a very important requirement. It means, write what has to be done, and do what you have promised to do. Certification is done by accredited agencies, who are specially trained to do the various inspections required before an organisation is certified. During the process of implementation, a number of opportunities open up for improving quality. Since documentation is done for all activities, the records act as a guide for analysing problems for which solutions can be sought. The team work that is required results in better communication. ISO 9000 acts as a starting point towards higher efforts for achieving TQM. Six sigma1 projects can be taken up for a more rigorous implementation of quality standards. The benefits of better communication with intranet cannot be overlooked. Capturing data, analysis of them and distribution of relevant data to users is an important facilitation process which intranet provides. Verification, guidance, and monitoring become easy. All processes whether design, manufacture or dispatch, can be conducted efficiently with proper authorisations sought and got instantly. With video-conferencing, the inconvenience of putting people at one place for discussion and decision making is avoided. Documents can be transferred, and edited instantaneously. The time, energy, and money saved can be utilised for other activities thus, enhancing efficiency of all the people concerned. All these enhance the quality of work of all personnel. Self Assessment Questions 11. _____________acts as a starting point towards higher efforts for achieving TQM. 12. _________is done by accredited agencies who are specially trained to do the various inspections required before an organisation is certified. 13. _____________projects can be taken up for a more rigorous implementation of quality standards. 11.7 Total Productive Maintenance (TPM) Maintenance is a function in any operations system that has the responsibility of keeping the equipments in good condition. Generally, equipments deteriorate because usage makes the parts wear, introducing inaccuracies on the products made on them. When the deterioration produces components that exceed the permitted deviations, rendering them unacceptable, maintenance is undertaken to bring back the machine to produce acceptable components. Sometimes the failure is sudden and serious that the equipment stops working. Disruption of production and emergency repair work are costly and schedules are missed causing delays in supplies and consequent losses. These breakdowns occur because the equipment was carrying hidden defects, which were not apparent during 1 For more information please visit http://en.wikipedia.org/wiki/Six_Sigma conditions that could permit functioning, despite the latent defect. All these are attended to by the maintenance department. Historical records indicate the probability of failures over different periods that help us to plan and attend them. With progress in automation, we have costly

11. to aid the implementation of TPM even in the office rooms. Dennis McCarthy management along with transport. Quality is to be incorporated into all functions of 2 For more information please refer to TPM: a route to world-class performance by Peter Willmott. the housekeeping activities that improve efficiency at workplace is considered a measurable standard. How does Crosby. __________ and machine increases the commitment of the workmen 11.equipments. Crosby. They will also be able to plan for removing the cause before it becomes serious. The various Quality Control Techniques have been discussed with the help of diagrams. We have flow lines and any one machine breaking down causes a series of machines to be idle.s Absolutes of Quality. You have also learnt about the concept of TQM. Team work and participation improves the quality culture. TPM2 puts the responsibility of maintenance where it belongs to and the operator. Two 6. Total quality envisages where suppliers and customers are treated as partners to achieve total quality. Achievement of quality is not limited to the production department or the quality control department. So.s Quality Trilogy. Conformance to design 5. Quality-related activities 2. They work on the machine and will be aware of the slightest variations that occur. The different approaches. Non-conformance 9. Autonomy is the starting point for learning and excellence.9 Terminal Questions 1.s principles? 11. every planned maintenance activity reduces the probability of a breakdown. Why Acceptance sampling is done? 5.s absolute of quality differ from Deming. Long term relationships 3. Juran. Modern concepts of quality go beyond maintaining dimensions and making the products work well. that is. accounting. have been discussed in detail. Self Assessment Questions 14. productivity. So. Explain the concept of Quality at Source. What are the dimensions of Quality? 2. 3. What does Deming Wheel represent? 7. and packaging. Quality improvement 8. The focus is on the operating personnel because they would know about malfunctioning earlier and more than anybody else. The main thrust is eliminating all break downs. You have also learnt that maintenance is a function in any operations system that has the responsibility of keeping the equipment in good condition. The principles of 5S that is. Pin-pointing. Concepts of Six Sigma and their implementation assure enhanced customer satisfaction. This helps in continuous improvement. exact place 7. Deming Wheel. 15. Taguchi . It is a companywide activity that involves all the people. In any process 4. we have to move towards zero breakdowns like. and design. Ownership of the operation and machine increases the commitment of the workmen. Explain how cause and effect diagram helps in finding the root cause of a problem? 6. Taguchi.s Quality Loss Function. The worker can suggest better ways of improving quality.10 Answers Answers to Self Assessment Questions 1. TPM puts the responsibility of ________ where it belongs to the operator who uses the _______________. we want to move towards zero defects by implementing TQM tools. Which are the Q C Tools? 4.8 Summary Importance of quality cannot be overemphasised. who uses the equipment.

This unique system was formed with the help of both the company. ISO 9000 12.5 11. Ownership of the operation Answers to Terminal Questions 1.3 5. ASB focused on five areas . By early 2000. about 70% of the company. the company importantly focused on cost cutting (through lay-offs and closing unprofitable businesses).2 2. people.s objective was to have 100% of its management trained in Six Sigma Plus by the end of the year. While the company began recognising the benefits of Six Sigma implementation in manufacturing processes. Refer section 11. growth. growth. increasing productivity. cultural. the merger was expected to offer many business synergies to the two companies. AS growth owed much to the top management's focus on improving efficient operational. Maintenance. ASB planned to integrate the quality management initiatives of the two companies. and operational strengths of both the companies were expected to drive the growth of the new company. respectively. which in turn assisted the company design a novel customer relationship management system in 1996.3 3. valued at Rs1500 Crores in stock and assumed debt. Both companies decided to work under the name of ASB International Company which was in real a global company with true global technology. The company. and enablers. equipment 15. the most important benefit of the Six Sigma Plus initiative was that it enabled the company to understand the requirements and needs of its customers. According to the company sources. with Rs 2000 Crores in revenues and more than Rs 3500 Crores in market capitalisation. it came up with plans to build on ASB. but to different functional areas.10. which aimed at rising productivity by 7% every year in its industrial sectors. it also aimed at having 100% of its engineers trained in the Design for Six Sigma (DFSS) program by that time. The merger. cash. productivity. another Indian-based aerospace and industrial controls major. To get more benefits out of the merger. . new product/ service development. According to industry professionals. Refer section 11. Refer section 11.thus making Six Sigma Plus an integral part of the organisation's culture. Apart from this.11 Case Study In June 1995 AS. For example. Thus. as well resulted in the creation of the Six Sigma System. Refer section 11.s existing efforts in order to implement a world-renowned quality initiative. Refer section 11. Six sigma 14. The decision to create a broad Six Sigma which was not just bound to processes.s quality systems namely Six Sigma and ASB Quality Value (AQV). effective cash flow management. it also decided to broad-base the Six Sigma implementation exercise by implementing it to other processes such as innovation and product development. created a Fortune 50 company. in December 1995. in DMAIC). managerial.3 4. the company integrated Six Sigma Plus into the way its employees imagined and implemented . and healthy customer and employee relationships.s management was trained in Six Sigma Plus basics (that is. Refer section 11. Foremost among such initiatives was the Six Sigma initiative introduced 1994. Six Sigma Plus became more of a mindset. an Indian-based aerospace company announced its merger with ABC. Certification 13. a tool named 'Voice of Customer' assisted to gain feedback from customers. AS implemented the Six Sigma Breakthrough Strategy. Refer section11. By now. financial. The combined technological. In these areas. 14 11. In real. known as Six Sigma.5 7. Besides cost savings yearly.3 6.

reduce variability and maximise results. who are experts in these methods. The application of Six Sigma tools boosted the company in identifying probable risks and their impact. What were the areas primarily focussed by ASB? 11.pdf Operations Management Unit 12 . including visual signals. Six Sigma greatly increased the efficiency of the product development process. and creates a special infrastructure of people within the organisation like "Black Belts". evaluate the independent variables. TPM: a route to world-class performance by Peter Willmott. AS's Chief Growth Officer. usually diminishing effect or impression Nodalx One place where different lines.7 Terminal Questions . http://www.leanexpertise. Thus. http://www. including statistical methods. the initiative forced the company to make more accurate product development decisions Questions 1.: 234 Unit 12 Independent Demand Inventory Systems Structure: 12. and so on.com/TPManagement-orMaintComparison.12 Glossary Term Meaning Dissemination the introduction of a subject to widespread audience for discussion and debate Dent A significant.1 Introduction Objectives 12.thinkingmanagers. "Green Belts".3 Inventory Decisions Reorder Point (or Perpetual) Model Periodic Review Model 12. define the probability of occurrence. References 1. Dennis McCarthy 2.com/management/total-productive-management.2 Inventory Items 12.php 3.s method is the process of creating workplace cleanliness and organisation. What did ASB planned to get more benefits out of the merger? 2.4 Economic Order Quantity Limitations of EOQ Variations in the EOQ 12.According to Krishna Mohan).6 Summary 12.5 The EOQ and the JIT Philosophy Safety Stock Inventory Control ABC Classification Cycle counting Measuring Inventory Performance 12.s 5 S. or paths meet Six Sigma Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes It uses a set of quality management methods. systems. 5 S.

we must be careful in the manner in which we make those decisions for these two types of items. While we need to make the timing and sizing decisions for all inventory items. finished products. or ingredients. Inventory items are divided into two main types: „h Independent demand „h Dependent demand items Learning Objectives After studying this unit. Independent demand inventory consists of items for which demand is influenced by market conditions and is not related to production decisions for any other item held in stock.12.10 Glossary 12.2 Inventory Items Some inventory items can be classified as independent demand items. „h Explain Inventory Management Techniques. when the stock should be replenished. Demand for such items is usually considered as derived demand. Manufacturing inventory is generally classified into raw materials. rather than its components. supplies. component parts. parts. „h Finished goods: Completed products that are delivered to customers.8 Answers 12. In contrast to this is the dependent demand inventory that consists of items . you will be able to: „h Explain the different types and uses of inventory. „h Maintenance. inventory generally refers to the goods to be sold and the supplies necessary to deal with the service. such as: „h Ensuring on time delivery of completed products to customers „h Providing a buffer against supply chain uncertainty and unpredictability „h Detaching manufacturing operations „h Assuring an uninterrupted supply of seasonal products „h Taking advantage of volume discounts. „h Analyse the role of cycle counting in inventory record accuracy. An inventory system is a set of policies and controls. and how large the orders should be. and work in process. which monitors the levels of inventory and determines what levels must be maintained.1 Introduction Inventory is the stock of any item or resource used in an organisation. „h Analyse the importance of Inventory in manufacturing. and some can be classified as dependent demand items. „h Distribution inventory: Finished goods and spare parts that are at various points in the distribution system. and assemblies that are part of the finished product. manufacturing inventory generally refers to material entities that contribute to or become part of a firm's product output.end items. Inventory serves many purposes. 12. Dependent demand inventory items are usually the materials. By convention. parts. A common classification of inventory items in manufacturing companies is as follows: „h Raw materials: Purchased items or extracted materials that are transformed into components or products. „h Work-in-process (WIP): Any item that is in some stage of completion in the manufacturing process. components. „h Components: Parts or sub-assemblies used in building the final product. Dependent demand inventory item consists of items whose demand is related to (or dependent upon) some higher level item. Hence independent demand inventory is concerned with . using a material requirements planning (MRP) system. In services.9 Case Study 12. „h Calculate appropriate safety stock inventory policies and perform ABC inventory control and analysis. repair and operational (MRO) inventory (often called supplies): Items that are used in manufacturing but do not become part of the finished product.

1 Reorder Point (or Perpetual) Model The Reorder Point (ROP) or Perpetual model formula allows determining the Safety Stock (SS) required to achieve a certain cycle service level. It might be required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. asset management. MRP is _______________________. Inventory is drawn out from the first bin until it is empty.3.sawtooth. 12. „h Demand is higher than expected. it is the forecasted demand expected during the lead time. the formula for the reorder point is: ROP = DLT+SS Where. such as who to buy from and where it is to be stored. The scope of inventory management also concerns the fine lines between replenishment lead time. There is sufficient inventory in the second bin to cover expected demand during the delivery lead time. Here each inventory item is literally kept in two bins. Self Assessment Questions 1. As a result. available physical space for inventory. __________________ are nothing but the parts or sub-assemblies used in building the final product. physical inventory.how much to order. However. SS is maintained. future inventory price forecasting. system.2 Periodic Review Model . 2. This is the ROP. replenishment. quality management. pattern.3 Inventory Decisions Managing independent demand inventory involves answering two questions: „h How much to order? „h When to order? There are other questions as well. Independent demand item techniques are subdivided into: „h Reorder point (or Perpetual) Model „h Periodic review models 12. and demand forecasting. visual system that is commonly used for lowcost C type items.3. Of course the demand during the lead time may not materialise as we expect. but these are rare issues. Inventory Management Techniques Inventory management is primarily about specifying the size and placement of stocked goods. The ROP is that level of inventory which is just sufficient to help during the period that it takes for your supplier to deliver. DLT = forecast demand during the lead time = expected average demand per period x number of periods for lead time SS = Safety Stock A well-used variation of the ROP inventory model is called the . ______________ consists of items for which demand is influenced by market conditions and is not related to production decisions for any other item held in stock. 4. involves regular reassessment. You experience a shortage or stock-out before the shipment is delivered. To allow this possibility.1: ROP Inventory Model 12. if: „h Demand is lower than expected. more is the need for safety stock. 3. inventory visibility. It is a simple. Figure 12. inventory valuation. Figure 12. Assume that an inventory holding is continually depleted. Material Requirements Planning (MRP) is used for dependent demand. Inventory items are divided into ___________ and ________________. carrying costs of inventory. and .1 illustrates the . returns and defective goods. More precisely. and these questions interact with each other. side by side.required as components or inputs to a product or service. the longer the lead times and greater the variability of demand and lead times. You experience excess of stock when the new shipment is delivered. the questions . In general. inventory forecasting.when to order.two bin.

in case if there is a common supplier. perhaps coinciding with a scheduled order delivery cycle. and for this reason this model is also known as the mm/max model. the optimal quantity of orders that minimises total variable costs required to order and hold inventory. . Operations Management Unit 12 .2: The Periodic Review Model Operations Management Unit 12 .4 Economic Order Quantity Economic Order Quantity is defined as. where: „h The review period is 7 days „h The delivery lead time is 5 days „h Demand averages 2 units per day „h The safety stock is 4 units „h The on-hand inventory is 15 units „h The quantity on order is 6 units. Q = Order quantity M = Target Inventory level I = quantity on hand O = quantity on order Activity 1: Calculate the target inventory level and order quantity. The EOQ is the classic formula in inventory management. Usually. Operations Management Unit 12 . 12. where there is increased use of point of sale terminals.: 241 Following are the assumptions of EOQ formula: „h New inventory is delivered in batches „h There are no stock.: 240 The relevant formulas are: M = DL+DR+SS Where. R is the review period and Q is the order quantity.outs „h Demand is constant and continuous „h Delivery lead time is constant and known. Normally inventory is topped to a target level. Note that an order quantity determined at A must be sufficient to last through the review period and the next lead time.2 graphically depicts the situation where L is the lead time. M = Target inventory level DL = Forecast demand during the lead time DR= Forecast demand during the review period SS = Safety stock Q = M ¡V I-O = D (R+L) + SS ¡V (I+O) where.In many cases. this is a practical consideration. Figure 12. The question with a periodic system is how often we must make the review.: 239 This inventory model is still widely used because of the following common situations: „h Where individual transactions are difficult to record „h Where shelf life is a problem „h Where joint orders are placed with a supplier The first of these situations is rapidly disappearing in supermarkets. It represents the optimal trade-off between the costs of ordering and the costs of holding inventory. So it makes sense to review all items from the common supplier periodically and order just what is needed. And also note that the quantities are different for each review period. Figure 12. it is more practical to order several items at the same time.

3 illustrates the EOQ graphically. as shown below.: 242 inventory handling equipment such as racks and fork lift trucks. receiving and inspecting. preparing the order. data processing and record keeping. EOQ can be derived by equating the Holding cost and the Order cost. Figure 12. We can now write down the formulas for each cost as: Carrying cost = (Q/2) C I Order cost = (D/Q) S There is also the basic cost of the items which is constant irrespective of order size: Item cost = D C and so. comprises the sum of the cost of the capital tied up and the costs of holding inventory. or by calculus.: 243 By calculus: 0 2 Q2 . the costs of insurance and the costs of risk including obsolescence and possible pilferage. inventory levels decline. then the average quantity held is equal to half the order quantity. If we assume that demand is constant.3: Economic Order Quantity We can see that the average level of inventory being held is very different in the two cases: The unit carrying cost rate. Total cost = Carrying cost + Order cost + Item Cost = (Q/2) C I + (D/Q) S + D C Where Q = Order quantity C = Item cost I = Annual carrying cost interest rate D = Annual demand S = Order cost per order. multiplied by the carrying cost rate and the unit cost. Operations Management Unit 12 . expressed as percentage. and the latter the costs of storage and control. EOQ method assumes this cost to be constant irrespective of the number of orders placed. The former includes the opportunity cost of the cash tied up. and the training of inventory control staff. Deriving Holding cost using Order cost: S Q D CI Q ƒ 2 2DS = Q2CI CI DS Q 2 ƒ Operations Management Unit 12 . but are replenished just in time to avoid stock-out.Over the time. paying the invoice when order is received. Figure 12. There are also less obvious costs including the cost of inspection. Order cost is the cost of placing a single order and comprises of factors such as selecting the supplier. The monetary value of the carrying cost is equal to the average inventory held.

If so. Periodic review model is also known as __________. then you may need to take into account the ratio of production to consumption to more accurately represent the average inventory level. e. 12. ordering costs reduced by ecommerce. Self Assessment Questions 5. stock is seen as a liability not asset. The disadvantages are very obvious if you've got a high periodicity or seasonality to your consumption.: 244 „h Additional logic is programmed to determine the maximum quantity of items subject to spoilage or to prevent obsolescence on items reaching the end of their product life cycle.2 Variations in the EOQ There are many variations in the basic EOQ model. Some of the useful variations are listed below: „h Quantity discount logic is programmed to work in conjunction with the EOQ formula to determine optimum order quantities. there are advantages and disadvantages with EOQ. the optimal quantity of orders that minimizes total variable costs required to order and hold inventory.4. . „h It helps you purchase only necessary items. they can take the advantage of JIT in inventory physical plant space reduction. 6. EOQ should only be applied to higher volume items that are worth inventorying. or if your usage is very minimal. Most systems require this additional programming.5 The EOQ and the JIT Philosophy In this section. Operations Management Unit 12 . 12.4. „h Safety Stock calculation may take into account the order cycle time that is driven by the EOQ.( cos ) ƒ ƒ{ ƒ CI DS dQ d Total t 2 Q2 CI DS ƒ CI DS Q 2 ƒ Advantages Some of the advantages of EOQ are: „h It provides a baseline for getting the best deal. Some of the disadvantages of EOQ are: „h Applicable only to non-perishable products with staple demand „h Ignores delivery quantities and discounts „h Assumes storage space is unlimited „h Assumes retailer controls delivery scheduling „h Cost structures have changed. _________ pattern represents Reorder Point (or Perpetual) Model. ______________ is defined as. you may need to include the cost of the change in safety stock levels into the formula. the Just-In-Time (JIT) view of the holding costs of inventory is discussed. keeping away from over purchasing. where production runs are very long (weeks or months) and finished product is released to stock and consumed/sold throughout the production run.g. 7.1 Limitations of the EOQ Though EOQ is one of the best known formulae in operations management. 12. When firms are purchasing to meet high and consistent levels of demand. „h When used in manufacturing to determine lot sizes.

Two new concepts are developed to underpin the idea that, even if the JIT approach can induce inventory physical plant space reduction, it is possible for EOQ to be more cost effective, as the inventory demand approaches the break-even point between the function of the annual holding capacity of an inventory facility and the function of the EOQ-JIT cost indifference point. JIT has recognised that there are several additional costs of inventory. They are: „h Lead time and responsiveness: In factories, large batches contribute directly to longer queues. Longer the queue, longer is the lead time before another batch can be worked on and hence slower the responsiveness. A large batch, either made or ordered from a supplier, may have to cover requirements (or a longer period of time). Near the Operations Management Unit 12 .: 245 end of the period, we would find that either we have been too optimistic leading to unsold products, or too pessimistic leading to shortages. It would be better to make or order small batches more frequently which simultaneously reduces the inventory costs and decreases the forecast horizon. Of course, the key to this is to reduce order or set-up costs. „h Quality: Larger the batch size, lesser the frequency of inspections. Also, there is an increased risk of spoilage with some categories of inventory. This means that there are likely to be more detectives. „h Space: Inventory occupies space in the warehouse on the factory floor. Not only this, there is a possibility that the space could be used for other purpose. A large accumulation of inventory often creates physical barriers, thereby lengthening transportation distances, preventing visual controls and inhibiting communication. These may have an impact on quality and lead time. „h Control: More inventories mean more controls in the form of counting and checking to ensure freshness. „h Material handling: With JIT, it is ideal to have human-movable containers to move inventory between closely spaced operations, rather than using expensive forklift trucks to move large batches over longer distances. These points are mutually supportive. They may be hard to quantify, but for certain the JIT attitude leads to a conclusion that the true costs of holding inventory arc much higher than we thought they would be. 12.5.1 Safety Stock Safety Stock (SS) is defined as extra units of inventory, carried as protection against possible stock outs (shortfall in raw material or packaging). It is the level of extra stock that is maintained below the cycle stock to buffer against stock outs. 12.5.2 Inventory Control Inventory control is the supervision of the supply, storage and accessibility of items in order to ensure an adequate supply without excessive supply. It is also referred as internal control, an accounting procedure or a system designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error and so on. Operations Management Unit 12 .: 246 12.5.3 ABC Classification In inventory management, ABC classification is a method of categorising the products. There are a different methods to set up an ABC Ranking, such as Annual Sales Volume ranking, Velocity (times sold), Quantity sold/Consumed or by Margin. But the most commonly used method is the Annual Sales Volume ranking. This method allows identifying small amount of products that usually account for most of the sales. Here is the method for determining ABC ranking based on Annual Sales Volume: 1. Calculate the 12 month dollar usage for all of the products (Volume X Cost). 2. Rank the items in descending order by the dollar usage. 3. The ¡§A¡¨ items are the top 80% of the total annual usage dollars. 4. The ¡§B¡¨ items make up the next 15% of total annual usage. 5. The ¡§C¡¨ items are the remaining items are the remaining 5% with >0 usage in the past 12 months. 6. Label zero-usage items as ¡§D¡¨. 12.5.4 Cycle counting

A cycle count is an inventory management procedure where a small subset of inventory is counted on any given day. Cycle counts are less disruptive to daily operations, provide an ongoing measure of inventory accuracy and procedure execution, and can be tailored to focus on items with higher value, higher movement volume or those that are critical to business processes. A special case of inventory control is record accuracy. The importance of inventory control is no less with independent demand inventory control. The most universally agreed best practice in inventory management procedure is cycle counting. However, cycle counts can introduce inventory errors if the cycle count process is poorly executed. Multiple locations per item, work in process, and lag in paperwork processing can contribute to these errors. Operations Management Unit 12 .: 247 12.5.5 Measuring Inventory Performance A common method of measuring inventory performance is by inventory turns. It is the number of times the inventory is turned around per year. It is measured by taking total sales and dividing by the value of the inventory. Another measure is to divide days of inventory on-hand (this could be the number of days or working days) by the number of turns and average age of inventory. 12.6 Summary Inventory management is a huge subject and the essentials are discussed in this section. Inventory is a vital part of any business. Control of inventory offers tremendous opportunity for a business which has given low priority to this aspect in the past. In this unit, the basic inventory decisions as how much to order and when to order were discussed. We considered the classic economic order quantity method, which can be used to calculate how much to order, provided the assumptions underlying the formula are valid. And also, two basic inventory control philosophies are introduced. The perpetual system and the periodic system and a set of inventory management techniques, time phased order point, which is well-suited for non-uniform demand and for high-value items. It is noted that all inventory management systems should incorporate ABC analysis and cycle counting. Finally, Inventory turns, a common way of measuring inventory performance is also discussed. Self Assessment Questions 8. Inventory Control is also referred to as _________. 9. Define cycle counting. 10. Explain Safety Stock. 12.7 Terminal Questions 1. Name and explain the different types of inventory. 2. Explain two different Independent demand item techniques. 3. Explain Economic Order Quality. 4. What are the limitations of EOQ? 5. Explain measuring Inventory Performance. 12.8 Answers Answers to Self Assessment Questions 1. Independent demand and Dependent demand items 2. Independent demand inventory 3. Material requirements planning 4. Components 5. Economic Order Quantity 6. mm/max model 7. Sawtooth 8. internal control 9. Refer Section 12.5.4 10. Refer Section 12.5.1 Answers to Terminal Questions 1. Refer section 12.1

2. Refer section 12.3.1 3. Refer section 12.4 4. Refer section 12.4.1 5. Refer section 12.5.5 Operations Management Unit 12 .: 249 12.9 Case Study Zhou Bicycle Case Study Zhou Bicycle Company, located in Seattle, is a wholesale distributor of bicycles and bicycle parts. These retail outlets receive the order from ZBC with 2 days after notifying the distribution centre, provided that the stock is available. However, if an order is not fulfilled by the company, no backorder is placed. The retailers arrange to get their shipment from other distributors, and ZBC loses that amount of business. The company distributes a wide variety of bicycle. The most popular model, and the major source of revenue to the company, is the AirWing. ZBC receives all the models from a single manufacturer in China, and shipment takes as long as 4 weeks from the times an order is place. With the cost of communication, paperwork, and customs clearance included, ABC estimates that each time an order is in place. It incurs a cost of $65. The purchase price paid by ZBC, per bicycle, is roughly 60% of the suggested retail price for all the styles available, and the inventory carrying cost is 1% per month (12% per year) of the purchase price paid by ZBC. The retail price (paid by the customers) for the AirWing is $170 per bicycle. ZBC is in interested in making an inventory plan for 2006. The firm wants to maintain a 9.5% service level with is customers to minimize the losses on the lost orders. The data collected for the past 2 years are summarized in the following table. A forecast for AirWing model sales in 2006 has been developed and will be used to make an inventory plan for ZBC. Month FORECAST FOR 2004 FORECAST FOR 2005 FORECAST FOR 2006 January 6 7 8 February 12 14 15 March 24 27 31 April 46 53 59 May 75 86 97 June 47 54 60 July 30 34 39

G.html .com/book-info.uiowa. It is the stock of any item or resource used in an organisation. by S. It is also known as Selective Inventory Control. 3.August 18 21 24 September 13 15 16 October 12 13 15 November 22 25 28 December 38 42 47 Total 343 391 439 Develop an inventory plan to help ZBC.edu/~c06k100/chap10sum99. Brooks. Inventory Record Accuracy: Unleashing the Power of Cycle Counting. References 1. Paul Herbert Zipkin. 2nd Edition. H. Economic Order Quantity It is the optimal quantity of orders that minimises total variable costs required to order and hold inventory. C. 12. http://www. ABC classification It is a business term used to define an inventory categorisation technique often used in materials management. It is also used for a list of the contents of a household and for a list for testamentary purposes. Cycle count It is an inventory management procedure where a small subset of inventory is counted on any given day. Discuss ROP's and total costs. Larry W. Wilson.PDF 4. Logistics of production and inventory. Safety stock It is a level of extra stock that is maintained below the cycle stock to buffer against stock outs. by Roger B. Graves.10 Glossary Term Description Inventory It is a list for goods and materials available in stock by a business. 2. Rinnooy Kan. It is a way to categorise/group the products. http://inventoryexplained. A.

management.4 The Stem-and-Leaf plot 13.7 Summary 13.1 Introduction By now you must be familiar with the concepts of Independent demand inventory control.1 Introduction Objectives 13. 13. It determines whether the process is in control or not. and other functional components of the business communicate effectively about quality. If the process is not in control. It is generally represented with formal analyses. However. the Statistical Quality Control (SQC) chart is used as a basic tool that formally distinguishes between the normal.10 Case Study 13. subgroup sample sizes. Thus. a process is said to be in a state of statistical control if the variations of the sample stay within the limits. in a study involving human subjects.Unit 13 Statistical Quality Control Structure: 13. These control charts further helps in distinguishing the random variances from the variances that need managerial investigation. For example. then necessary and corrective actions are taken. as well the abnormal variances. Statistical Quality Control (SQC) monitors the production samples of determining the quantities statistically. manufacturing. there appears a table that provides information such as the overall size of the sample. statistics is that language that facilitates engineers. most statistics can be used either as a statistic that is descriptive or in an inductive analysis.2 Statistical Quality Control Statistical Quality Control (SQC) is a method that uses various statistical sampling of units that are produced by a production process. the proportion of subjects with each gender. 13. . Thus. The information facilitates controlling and improving the process of manufacturing. Thus.8 Terminal Questions 13. this identification of the chance variances avoids unwanted and unnecessary investigations of variances and there by eliminating frequent changes.5 The Frequency Distribution and Histogram 13.9 Answers 13. Learning Objectives: After studying this unit you will be able to: „h Define Statistical Quality Control and various methods associated with it „h Explain descriptive statistics „h Define probability distribution „h Explain various types of Probability Distribution. Some of the various tools and methods associated with the Statistical Quality Control (SQC) are: „h Descriptive Statistics „h Stem and leaf Plot „h Frequency Distribution and Histogram Now let us discuss these tools and methods in detail. These are further checked and verified for defectives called as variances. the final analysis helps in obtaining the improvements in the products and the processes. and information about the demographic or the clinical characteristics. procurement.2 Statistical Quality Control 13. However.3 Descriptive Statistics Descriptive statistics is a process that is used to describe the features of data in terms of quantity. when a process is out of control it is necessary to locate the specific causes for the variation and take a corrective action. such as the average age. Furthermore.3 Descriptive Statistics Descriptiveness Measures 13. This unit familiarises you with the concepts of Statistical Quality Control. Thus.6 Probability Distribution Types of Probability Distribution 13.11 Glossary 13.

For example. 13. we are doing inductive rather than the descriptive analysis. the sum of all the quantities .wikipedia. o Median: It is computed in such a way that half of the measurements are below it and half of the measurements are above it.1 Descriptiveness Measures Descriptive statistics provides various numerical and graphic procedures. It is illustrated in the table 13. They are as follows: „h Central Tendency Measures: They are computed in such a way that.2: Example of Median Measurements Measurements Ranked X X . For example Consider the quantities as mentioned in Table 13. measures of dispersion and measures of association. the average reading test score for the students in each classroom in a school can be reported. However. is obtained and the mean is calculates as: MEAN= 40/10 = 4 The mean of all quantities is 4. This could give a descriptive sense of typical scores and their variation. Table 13.2. cross tabulation. the measurements in the data are distributed. However.org/wiki/Central_tendency Operations Management Unit 13 . and the sum of deviations is 0.X. when a formal hypothesis test on scores is performed. and histogram.: 254 Therefore. contingency table. Some of the common examples of the descriptive statistical analysis include measures of central tendency.3.11 Table 13. There are various measures of the descriptiveness statistics. Thus.1: Example of Mean Measurements Deviation X X-Mean 3 -1 5 1 5 1 1 -3 7 3 2 -2 6 2 7 3 0 -4 4 0 40 0 1 en. descriptive statistics provides various numerical and graphic procedures. a ¡§center¡¨ is achieved around which. there are various measures under central tendency measures such as: o Mean: It computes the sum of all the measurements and divides by the number of measurements. This facilitates to summarise a collection of data in a clear and understandable way.

5. Mode: It computes the most frequent measurement in the data. Operations Management Unit 13 . is obtained for the population. It is calculated as: Then.3: Example of Mode Measurements X 3 5 5 1 7 2 6 7 0 4 In this case. all the values are plugged in the formula for the variance of a population: XNi 2 2 ƒã ƒ„¡( ƒ{ƒÝ) [(1 4) (3 4) (5 4) (7 4) ] 4 2 2 2 2 2 ƒã ƒ ƒ{ ƒy ƒ{ ƒy ƒ{ ƒy ƒ{ [9 1 1 9] 4 20 4 5 2 ƒã ƒ ƒy ƒy ƒy ƒ ƒ Thus a variance value . The median is not sensible to extreme values. consider that a population has four observations {1.3 0 5 1 5 2 1 3 7 4 2 5 6 6 7 7 0 7 4 7 40 40 Therefore. Median is (4+5)/2 = 4. only two central values are used in the computation. What is the variance?? Solution: First. 3.5. . the data has two modes: 5 and 7 because both the measurements are repeated twice.5 Thus. we need to compute the mean of the population. For example. „h Variation or Variability measure: They are performed to compute how far away the measurements are from the center. 7}.: 255 Table 13.

they are encountered in the data set. ƒÝ ƒ (1ƒy 3ƒy 5 ƒy 7) 4 ƒ 4 x ƒ{ƒÝ ƒã ƒ 78 ƒ{ 69. Self Assessment Questions 1.21 x ƒ{ƒÝ ƒã ƒ 76 ƒ{ 63. One of the most useful graphical techniques is the stem-and-leaf display. beside each stem in the order in which.8 ƒ 3. we need to standardise the heights by converting them to z scores Jordan: z= Lobo: z= Thus. List out the differences between mean. no two units of a product that is produced by a manufacturing process are identical.netmba.s height among men exceed Lobo.s height among men. .4 The Stem-and-Leaf plot Statistics is the science of analysing data and drawing conclusions. This means that Rebecca Lobo. u2 .com/statistics/plot/stem/ Table 13. . Some variation is inevitable.6 inches and a standard deviation of 2. The leaves that correspond to the observed data values are listed in order. Consider women have heights with a mean of 63.0 2. then they are listed along the left hand margin side of the display. each number ui is divided into two parts i.96 For Example: Consider a scenario where. To construct a stem-and-leaf plot. How do we calculate median? 4. 2 www.e.4. The table represents the weekly yield data from a semiconductor fabrication facility. taking variation in the data into account. un and that each number u1 consists of at least two digits.5 inches. 13.„h Relative Standing Measures: They are computed to describe the relative positions of specific measurements in the data. Statistics can be used either as a statistic that is descriptive or in an inductive analysis. the construction of a stem and leaf plot can is illustrated in the table 13. For example: Consider the data that consists of percent defective information ranging between 0 and 100 on various semiconductor wafers. 3. By this observation.s height among women? Consider Men have heights with a mean of 69. median and mode.(True/False) Activity 1 Analyse how the central tendency measures are calculated. . However. A Stem: It consists of one or more of the leading digits A Leaf: It consists of the remaining digits.s height is 4. 2.0 inches and a standard deviation of 2. the net content of a soft drink can vary slightly from. _________ computes the most frequent measurement in the data. the data are represented by u1.21 standard deviation above the mean. NBA superstar Michael Jordan is 78 inch tall and WNBA basketball player Rebecca Lobo is 76 inch tall.2 There are several graphical methods that are very useful for summarising and presenting data.s height among woman is relatively greater than Michaels Jordan. Rebecca Lobo. But which player is considered taller relatively? Does Jordan. Suppose that. Define Descriptive statistics 5.8 inches. Michael Jordan. Once a set of stems has been selected. one unit to another. can to can and the output voltage of a power supply is not exactly the same from.4: Weekly yields Week Yield . For example. it is obvious that Jordan is taller by 2inches than Rebecca. Solution: In order to compare the heights of Michael Jordan and Rebecca Lobo that are relative to the populations of men and woman. However. The value 76 can then be divided into the stem 7 and the leaf 6.6 2.5 ƒ 4. the heights of two superstars are compared. For example.96 standard deviations above the mean.s height is 3. _________ is a measure to calculate a measurement from the center.

Week Yield 1 48 21 68 2 53 22 65 3 49 23 73 4 52 24 88 5 51 25 69 6 52 26 83 7 63 27 78 8 60 28 81 9 53 29 86 10 64 30 92 11 59 31 75 12 54 32 85 13 47 33 81 14 49 .

5. 7.34 77 15 45 35 82 16 64 36 76 17 79 37 75 18 65 38 91 19 62 39 73 20 60 40 92 In order to construct a stem and leaf plot.: 259 By inspecting the plots. 8 and 9 are selected as stems. the resulting stem and the display of leaf are as shown in the Table 13. 6.5: Stem-and-leaf display for the data in 13. Table 13. the values 4. 5. Thus.3 Stem Leaf Frequency 4 89795 5 5 3212394 7 6 3044520859 10 7 93857653 8 8 8316512 7 9 212 3 Operations Management Unit 13 . it is clear that the yield distribution has a symmetric shape. Variation of the Stem-and-Leaf Display: . approximately with a single peak.

5 In some stem-and-leaf displays. The tenth percentile is computed by observing the rank (0.5 Operations Management Unit 13 . Suppose the number of observations is n and is an odd number.5. by sorting the observations in the ascending order or descending order.5 (halfway between the thirtieth and thirty-first observation). or (49+49)/2 = 49. the inter-quartile range is IQR = Q3 ¡V Q1 = 80 ¡V 53. We could increase the number of original stems by five by defining five new stems: 5* with leaves 0 and 1. half of the measurements are below it and half of the measurements are above it.9 % (100 minus 9) of the data are above it. if n is even. The first and third quartiles are occasionally denoted by the symbols Q1 and Q3. However.7.6: Variation of the stem and leaf Stem Leaf Frequency 4 57899 5 5 1223349 7 6 0023445589 10 7 33556789 8 8 1123568 7 9 122 3 The display facilitates the process of finding the percentiles of the data. the median will be in the rank position [(n-1)/2 + 1] on the list.5 = 26. consider the value of n to be 40 that is an even number. and the stem 5# has leaves 5. For the semiconductor yield data. and 9.6.6 Table 13. 5s (for sixes and sevens) with leaves 6 and 7.The first quartile is the observation with rank (0. Thus.5. the fiftieth percentile of the data distribution is called the sample median .5 = 30. as shown in the table 13.1. it may be desired to provide more classes or stems. The median can be calculated. The median is computed in such a way that. and 4. 5t (for twos and threes) with leaves 2 and 3. and the third quartile is the observation with rank (0. For example. and 5# with leaves 8 and 9. 5* and 5#.. Finally.3. On the other hand. then the median is calculated by taking the average of the (n/2) and (n/2 +1) ranked observations. although the stem-and-leaf display is an excellent way to visually show the variability in data.25)(40) + 0.8. For example.An ordered stem-and-leaf display has the leaves arranged by magnitude. The stem 5* has leaves 0. it does not take the time order of the observations into account. One way is modifying the original stems and follows: Divide the stem 5 (say) into two new stems. 5f (for fours and fives) with leaves 4 and 5. in a certain data the 85th percentile is 340. The percentile is a number such that at most p% of the various measurements is below it and at most 100 . These will double the number of original stems.75)(40) + 0.: 260 = 10.1) (40) +0. Time is often a very . or (79+81)/2 = 80. the median is calculated by taking the average of the two observations. It means that 15% of the measurements in the data are above 340 and the remaining 85% of the measurement are below 340.5 (halfway between the tenth and eleventh observation) or (53+54)/2 = 53. respectively and the inter-quartile range IQR = Q3 ¡V Q1 is occasionally used as a measure of variability.5 =4.2.

985 mm.965 mm and 73. yields in the first 20 weeks of production are substantially below the yields reported in the last 20 weeks. What does a stem contain? 8.8. Something may have changed in the process (or have deliberately changed by operation personnel or the process engineers) that is responsible for the yield improvement.992 . Note that there is some variability in piston-ring diameter. and so forth.030 74.6 represents 125 observations on the inside diameter of forged piston rings used in an automobile engine.For example. What do we understand by the term ¡§percentile¡¨? 7. a frequency distribution of the piston-ring data is shown in Table 13. we note that there was one ring that had a diameter between 73. Stem and leaf display is a graphical technique.: 262 Table 13. This display clearly indicates that time is an important source of variability in this production process. Leaf Stem Time Series plot (run chart) Frequency 212 2156138 35675839 9580254403 4932123 59798 10 9 8 7 6 5 4 3 7 8 10 7 5 Figure 13. However.002 74. a useful. More specifically.7: Forged Piston-Ring inside Diameter (mm) Sample Number Observations 1 74.970 mm. than a stem-and-leaf display. Operations Management Unit 13 . it is very difficult to see any pattern in the variability or structure in the data.important factor that contributes to variability in quality improvement problems.019 73. We could. with the observations arranged as they are in Table 13. Table 13. simply plot the data values versus time.1: A dig dot plot of the data Self Assessment Questions 6.1 shows the dig dot plot for the semiconductor yield data.7. of course. Figure 13. From this table. eight rings having diameters between 73.980 mm and 73. It is a more compact summary of data. approach is to combine the time series graph with the stem-and-leaf display to produce a dig dot plot. such a graph is called a time series graph or a run chart. The data were collected in 25 samples of five observations each.5 The Frequency Distribution and Histogram A frequency distribution is an arrangement of the data by magnitude. State (True/False) 13. However.

998 74.985 73.015 74.994 73.985 74.009 5 73.008 73.009 74.004 3 73.993 74.015 73.998 9 74.001 74.024 74.007 73.021 74.003 73.995 11 .994 74.988 74.005 8 73.006 73.004 10 73.993 74.74.989 74.000 74.990 74.014 6 74.011 74.005 74.005 74.015 73.000 73.008 2 73.992 74.995 73.993 7 73.997 73.995 74.992 74.007 74.009 73.002 73.996 73.995 74.002 4 74.

994 73.000 73.983 74.014 73.002 74.005 73.003 74.998 73.999 74.007 18 74.010 .998 73.997 20 74.998 73.012 74.012 14 74.984 74.984 74.996 17 73.998 73.000 73.984 15 74.995 73.000 74.004 74.000 74.006 74.012 73.018 74.73.986 74.994 74.997 74.003 74.000 73.005 74.007 16 74.994 73.005 73.000 19 73.007 74.006 73.967 73.990 12 74.002 73.996 13 73.010 74.994 74.

008 73.009 23 74.004 73.008 0.970 „T u < 73.965 „T u < 73.020 74.975 0 1 0.990 74.006 74.982 73.000 0.984 73.008 73.985 8 .999 73.000 74.001 74.988 74.005 73.009 74.8: Frequency Distribution for Piston-Ring Diameter Ring Diameter.003 21 73.995 74.010 25 73.014 24 74.996 22 74.000 0.008 73.008 73.74.010 73.980 „T u < 73.990 74. u (mm) Frequency Cumulative Frequency Relative Frequency Cumulative Relative Frequency 73.009 74.970 1 1 0.013 74.015 74.975 „T u < 73.989 73.980 0 1 0.993 74.013 Table 13.017 74.

9 0.000 Total 125 1.152 73.000 A graph of the observed frequencies versus the ring diameter is shown in Figure 13.080 0. The height of each bar in Figure 13.030 1 125 0.016 0.176 0. The histogram represents a visual display of the data in which one may more easily see three properties.840 74.990 „T u < 73.990 10 19 0.944 74.025 2 124 0.992 74.976 74.2 is equal to the frequency of occurrence of ring diameter.664 74.995 „T u < 74.025 „T u < 74.072 73.020 4 122 0.010 22 105 0. This display is called a histogram.152 0.176 0.015 „T u < 74.008 1.304 73.064 0.000 23 61 0.032 0.2.000 „T u < 74.015 13 118 0.005 „T u < 74.005 22 83 0.020 „T u < 74.985 „T u < 73.995 19 38 0.488 74. They are as follows: „h Shape .104 0.184 0.010 „T u < 74.

or when the observations only take a few values. the 125 piston-ring diameters in Table 13. For example. the histogram may be constructed from a frequency distribution of the ungrouped data. of any value of ring diameter. the variability in ring diameter is apparently relatively high. a stem-an-leaf display could be used. „h Make the bins of uniform width. Thus. Thus.2: Histogram for Piston-ring Diameter Data In the piston-ring diameter data.1 Types of Probability Distribution Generally. which can be listed.967 mm.6. The various factors that needs to be considered while constructing histogram is as follows: „h Use between 4 and 20 bins ¡V often choosing the number of bins approximately equal to the square root of the sample size works well. Thus. The population in this example is the collection of all piston rings produced by that process. we might visualise piston-ring diameter as a random variable. we may be able to analyse the sample piston-ring diameter data and draw certain conclusions about the process that manufactures the rings. the distribution of the number of nonconformities or defects in printed circuit boards would be a discrete distribution. Discrete Distribution: When the parameter being measured can only take on certain values. while others are as large as 74. For example. . In other words. the individual observations are preserved.„h Location or central tendency „h Scatter or spread 0 5 10 15 20 25 Frequncy Figure 13. There are two types of Probability Distribution: „h Discrete Distribution „h Continuous Distribution 1. such as the integers 0. with the probability of occurrence of that value in the population. as some rings are as small as 73. Thus. 2. a probability distribution is called discrete. runs through the set of all possible values of X. X is called a discrete random variable if: As . the probability distribution is called a discrete distribution. selected from the manufacturing process.6 Probability Distribution The histogram or stem-and-leaf plot is used to describe sample data. This is because it takes on different values in the population according to some random mechanism. if it is characterised by a probability mass function. whereas they are lost in a histogram. However. „h Start the lower limit for the first bin just slightly below the smallest data value. Then. A discrete probability can take on only a limited number of values. 13. the probability distribution of ring diameter describes the probability of occurrence. there are many factors that have to be considered while constructing histograms such as when the data is large. Alternatively. By using statistical methods. grouping the data into bins condenses the original data. A sample is a collection of measurements selected from some larger source or population. the distribution of a random variable X is discrete.7 are a sample of piston-ring diameters.u. we see that the distribution of ring diameter is roughly symmetric with the central tendency very close to 74mm. a probability distribution is a mathematical model that relates the value of the variable. in the population. when the number of observations is relatively small.030 mm. 13. This results in loss of details of some data. 1. Thus. it is very essential to group data into bins or cells as in the piston ring. A primary advantage of the stem-an-leaf display is that.

by the preceding trials and doesn. all the probabilities can be obtained. is not affected in any way. The process of Bernoulli distribution can be used under the following conditions. hit or miss. and so on. the result of any trial. the outcome of each trial may be classified into two mutually disjoint categories. Binomial distribution is a discrete probability distribution.e. success or failure. p(x)}. The set of all possible ordered pairs {x. On the average. yes or no. called success (the occurrence of the event) and failure (the non-occurrence of the event). Pr. good or defective. Every hour.m. p = probability of success q = probability of failure r = no. of successes desired n = no.t affect the result of succeeding trials. where each test or trial may indicate a defective or a non defective item. then the probability distribution of x is. success or failure. is termed as the probability of failure. „h The outcome of the random experiment (trial) results in the dichotomous classification of events. that is. Obviously. There are two types of Discrete Probability Distributions. for each possible outcome x. 1% of these diodes do not conform to specifications. Constants of binomial distribution include: ƒÝ = np ƒã2 = npq ƒã = „©(npq) Example A manufacturing process produces thousands of diodes per day. if: „h The random experiment is performed repeatedly a finite and fixed number of times. Since the random variable X takes only integral values. [x. if we let x be the random variable representing the number of nonconforming parts in the sample. then the probability of r successes in n independent trials is given by: P(r) = P(X=r) = nCr. Operations Management Unit 13 . each with two possible outcomes that may be labelled success or failure. The most obvious application deals with the testing of items as they come off an assemble line. then £U f(x) = 1 and P(X=x) = f(x). is called the probability distribution of the random variable X. „h All the trials are independent. „h The probability of a success (say p) remains constant from trial to trial.. and is constant for each trial. that is. „h The number of trials is fixed. 0. if f(x) . q=1-p. In other words n. if n & p are known. „h Each trial is independent of other trials. f(x)] is a probability function. q is known when p is given because q=1-p. In other words. an inspector selects a random sample of 50 diodes and classifies each diode in the sample as conforming or nonconforming.f) of the random variable X. Theory: If the probability of success in any trial is p. The process is referred to as Bernoulli process. That is non-occurrence of the event and is constant for each trial. The distribution is useful in such an experiment where there are only two outcomes.The function pi=P(X=Xi) or p(x). probability mass function or probability distribution of the discrete random variable X. We may choose to define either outcome as a success. the no. Each trial is called a Bernoulli trial. q n-r Where. and that of failure in any trial is q. To summarise the set of ordered pairs. The probability of success (happening of an event) in any trial is p. i. Assumptions: The assumptions of Bernoulli distribution are: „h Each trial has mutually exclusive possible outcomes. of trials is finite & fixed. They are as follows: „h Binomial (Bernoulli) Distribution „h Poisson Distribution „h Binomial (Bernoulli) Distribution: An experiment often consists of repeated trials. of trials undertaken X = random number The binomial distribution is completely determined. is called the probability function or more precisely probability mass function (p.

Operations Management Unit 13 .01) x. a Poisson experiment can generate observations for the random variable X. a day..e. 1 Constants of Poisson distribution include: 1. 1. ƒã = „© £f .s school is closed due to heavy rain or the no.: 268 P(x) = 50Cx. we may compute the probability of finding one or fewer nonconforming parts in the sample as: P(x „T 1) = P(x = 0) + P(x = 1) = p (0) + p (1) = 0. „h The possibility that more than one outcome that will occur in a short time interval or fall in such a small region is considered negligible. n„_„V „h p. of postponed games due to rain during a cricket tournament.: 269 Assumptions: The assumptions of Poisson distribution are: „h The occurrences of events are independent that is. p„_0 „h Np=m. ƒÝ = np = £f 2. is finite. representing the number of telephone calls per hour received by an executive in a service centre.3056 = 0. of occurrences per interval of time e = 2. a week. mean no. the given time interval can be of any length. Thus. the number of X of outcomes occurring during a Poisson experiment is called Poisson random variable. or even a year. „h The probability of a single occurrence of the event in a given interval is proportional to the length of the interval. r is no. a volume. the constant probability of success for each trial is independently small i. (say). of day. mr r! Where. of typing errors per page.71823 (aprox. 2¡K 50 Since this is a binomial distribution of having nonconformity. the no. Thus. the number of bacteria in a given culture. „h The possibility or the probability that a single outcome will occur during a very short time interval or in a small region.. or the no. of success (occurrence of the event) m = np. are called Poisson experiments. „h The probability of occurrence of more than one event in a very small interval is negligible. and its probability distribution is called the Poisson distribution. x = 0. the no.. Theory: Poisson distribution may be obtained as a limiting case of Binomial probability distribution. a month. ƒã2 = £f 3. under the above three conditions the Binomial probability function tends to the probability function of the Poisson distribution given below: P(r) = P (X=x) = e-m.t depend on the number of outcomes occurring outside this time interval or region.e. of the number that occurs in any other disjoint time interval or region. Hence.9106 „h Poisson Distribution: The number of outcomes occurring during a given time interval or in a specified region. of trials is independently large i. (0. It doesn. the occurrence of an event in an interval of time or space does not affect the probability of a second occurrence of the event in the same (or any other) interval.99) 50-x Where. In such instances X might represent the number of field mice per acre. an area. The Poisson process includes the following: „h The number of outcomes that occur in one time interval or specified region is independent. 2. such as a minute.) & r! = r (r-1) (r-2) ¡K¡K 3. is proportional to the length of the time interval or the size of the region. The specified region could be a line segment. Thus.6050 + 0. (0. under the following conditions: „h n. or perhaps a piece of material.

The probability distribution of x is assumed to be: f(x) = 1/1. Example Suppose that x is a random variable that represents the actual contents in ounces of a can of coffee. d) = P(c . 15. P (a . In other words.333 There are various types of Continuous Probability Distributions. The probability distribution of piston-ring diameter is Operations Management Unit 13 . 0. it does not matter if one or both the end points of the interval (c . in a continuous probability distribution. X . so we cannot list all the possible values. X . the probability at a point is always zero. i. X . for all single point values of c. the probability at a point is always zero.0 ¡V 15.: 270 continuous..0) = ¡ì 1/1. the density curve. in case of continuous random variable. its probability distribution is called a continuous distribution. if it satisfies the following properties: „h p(x) .5) / 1. Ultimately.0 oz is: Operations Management Unit 13 .b] „h For 2 distinct numbers c & d in the interval [a.5.5 = (16. Hence. A function p(x) is said to be the probability density function of the continuous random variable X. Thus. and the class intervals becomes more numerous and narrower.0 Since the range is assumed to be normally distributed. Continuous distributions: When the variable being measured is expressed on a continuous scale.2. P(X=c) =0. in case of continuous random variable. d) = P(c < X .0 P (x „T 16. A frequency polygon gets smoother & smoother as the sample size gets larger. the density polygon becomes a smooth curve called. that is. d) are included or not.5 „T x „T 17. the probability of a can containing less than 16. b) = 1 For a continuous random variable.5 16. the variable under consideration is allowed to take on any value within a given range.5 = 0.5 dx 15. They are as follows: „h Normal Distribution „h Exponential Distribution „h Poisson Distribution „h Normal Distribution: Normal probability distribution or commonly called the normal distribution is a continuous probability distribution in which. for all x in the interval [a. the relative frequencies of a continuous variable are distributed according to the normal probability law.: 271 16. d) = [Area under the probability curve between the ordinates „h (vertical lines) at x=c & x=d] „h Total area under the probability curve is 1. X < d) = P(c < X < d) Hence. Since in the case of continuous random variable. using addition theorem of probability. The function that defines the curve is called the probability density function.e. b] „h P (c . we get: P(c . we always talk of probabilities in an interval & not at a point that is always zero.0 ) = ¡ì f(x) dx 15. it is a symmetrical .0 P (x „T 16.

f(x) = [¡V1/(2ƒã2)] (x-ƒÝ)2 1 E ƒã „©(2ƒà) Where. It is an approximation to binomial distribution when n is large & p or q is not very small.e.: 272 Theory: Consider a continuous random variable X. Standard Normal Distribution: If X is a random variable following normal distribution with mean ƒÝ and standard deviationƒã.. the normal frequency curve or simply normal curve. and other measures of interest to managers. mean is zero f(x) = [¡Vx2/(2ƒã2)] 1 e ƒã „©(2ƒà) Probability density can be converted into frequency density by multiplying the former equation with N. it is necessary to make inferences by taking samples. the frequencies are distributed evenly about the mean of the distribution. they are: „h It has some properties that make it applicable to many situations in which. There are two basic reasons why the normal distribution occupies such a prominent place in statistics. Operations Management Unit 13 . the total number of items in the distribution. Z = X . that is.ƒÝ ƒã For standard normal variety. This includes human characteristics like weights. in both the public and private sectors.: 273 Exponential Distribution: Consider a continuous random variable X is said to have an exponential distribution with parameter £\ if its probability density function is given by: P (x) = { . then the random variable Z defined as follows is called the standard normal variety.1416 e = 2.7183 When ƒÝ = o. i. the mean m is large. The limiting frequency curve obtained as n becomes large is called. output from physical process like dimensions and yields.. ƒã = standard deviation of the given normal distribution ƒÝ = mean of the random variable x ƒà = 3.distribution in which. and IQs. ƒÝ = 0 & ƒã = 1.s distribution when. ƒÖ(Z) = [¡VZ2/2] 1 E „©(2ƒà) Operations Management Unit 13 . if it has the probability density function represented by the equation. hence the probability density function of standard normal variety is given by. Normal distribution is a limiting case of Poisson. „h The normal distribution comes close to fitting the actual observed frequency distributions of many phenomena. heights. It is said to have a normal distribution with parameter m & standard deviationƒã.

Answer: The average number of failures per week is: ƒÝ ƒ 3 20 ƒ 0. Expand P. Instead of going for testing whole of the population. The number of outcomes occurring during a given time interval or in a specified region.£\ e-£\x. 13. 0. there will not be more than one failure during a particular week. 10.15 1 0 1 ƒy ƒ ƒy ƒ ƒ{ p X P X e e Thus there is 98.F Activity 2: Consider that the electricity power failures occur according to a Poisson distribution with an average of 3 failures every twenty weeks. we need to include the probabilities for ¡§0 failures¡¨ plus ¡§1 failure¡¨.7187 This distribution is also referred to as negative exponential distribution.: 274 13. The cumulative density function of the exponential distribution is. are called as _________________ 14. There is a relationship between the Poisson distribution and exponential distribution. Calculate the probability that there will not be more than one failure during a particular week. The probability distribution of piston-ring diameter is ________________ 12. If the Poisson distribution describes the number of failures per unit time.15 . then the exponential distribution will represent the time between two successive failures. can be used to express variation.15 0 0. Define a discrete distribution 15. £\ is a positive constant e = 2.9891 1! ( ) ( ) 0.150. Binominal Distribution is also called as _________________ Operations Management Unit 13 . List the types of Continuous Probability Distributions.7 Summary We have understood how the descriptive statistics such as histograms and frequency distribution. the tools can be used to select a sample . x x P (x) = ¡ì £\ e-£\x.M. for 0 < x < „V 0.91% probability that.15 0! 0.e-£\x 0 0 Constants of exponential distribution are: „h Mean = 1/£\ „h Variance = 1/£\2 Self Assessment Questions 9. Not more than one failure means. The constant value of e is _________________ 11. dx = . Otherwise Where.

Consider that vehicles are passing through a junction on a busy road at an average rate of 300 per hour. the probability distribution is called a discrete distribution. 14. It is computed in such a way that half of the measurements are below it and half of the measurements are above it 4.9 Answers Answers to Self Assessment Questions 1. Bernoulli Distribution. 6. 7. Analyse the various types of Probability distribution. 13. 2. 9. Find the probability that none passes in a given minute. Variability measure. True. Refer section 13. Exponential Distribution. X= 0. How do we calculate mean of given quantities? 2.6 4. Poisson experiments. Refer section 13. Thus. Descriptive statistics is a process that is used to describe the features of data in terms of quantity.and test it. 1. 1. Explain the various measures of the descriptive statistics.3 Operations Management Unit 13 . Refer section 13. 2.3 2. Poisson Distribution.: 275 3. 11. What is the expected number passing in two minutes? . 13. When the parameter being measured can only take on certain values. it ensures that any given sample is determined in terms of quantity.4 3.10 Case Study Imagine a busy road in Bangalore. Thus.7187. Answers to Terminal Questions 1. 5. 2. Operations Management Unit 13 . 5. Explain the procedure of constructing the stem and the leaf plot of the measurements. Probability Mass Function. 2. We know that the Poisson random variable satisfies the following conditions: The number of success in two disjoint time intervals is independent The probability of success during a time interval that is small is proportional to the entire length of the time interval. Continuous.8 Terminal Questions 1. such as the integers 0. A Stem consists of one or more of the leading digits. 13. Mode. The percentile is a number such that at most p% of the various measurements is below it and at most 100-9 % of the data are above it. Refer section 13. 10. P(X ) e X! X ƒÝ ƒ{ƒÝ ƒ Where. 8. 15. Refer section 13. 3.6 5. True.718 £g = mean number of successes in the given time interval or region of space 1. 3¡K¡K e = 2.: 276 13. 2. Explain the process of Bernoulli distribution. Further the data can be used for probability approximation. the process of Statistical control is an effective method of monitoring a process through the use of control charts. 4. Normal Distribution. 12.

com/college/sc/reid/chap6. books.12511 10 10 10 ƒ ƒ ƒ{ p x e Based on the function: 10 ! 10 e x x ƒ{ Operations Management Unit 13 . Answers: The average number of cars per minute is:ƒÝ ƒ 300 60 ƒ 5 (a) 5 0 3 0 ( ) 5 0! 6. This facilitates to summarise a collection of data in a clear and understandable way.we have. manufacturing. References 1. www.wiley.. It is generally represented with formal analyses.pdf 2.1 Introduction Objectives 14.2 System Failure Why Do Things Fail? 14. procurement.... the height of the column is proportional to the frequency of observations within the interval.britannica. It is a visual graph that shows the frequency of a range of variables.com/EBchecked/.3 Measuring Failure Failure Rate Failure over Time the =Bath-Tub‘ Curve 14.3. Thus. withƒÝ ƒ10. The range of the variable is divided into class intervals for which the frequency of occurrence is represented by a rectangular column.4 Failure Detection and Analysis . management and other functional components of the business communicate effectively about quality. www. 3. It is that language that facilitates engineers. Descriptive statistics Descriptive statistics is a process that is used to describe the features of data in terms of quantity. descriptive statistics provides various numerical and graphic procedures. ( ) 10 10! 0.: 278 Unit 14 Failure Prevention and Recovery Structure: 14. Histogram A histogram is a graphical representation of a frequency distribution.in/books?isbn=0849323479.: 277 We can plot a histogram of the probabilities for the number of cars per minute: 13.7379 10ƒ{ ƒ{ P x ƒ e ƒ „e (b) E(X) = 5 ¡Ñ 2 = 10 E(x) ƒ 5„e2 ƒ10 (c) Now.google.11 Glossary Term Description Percentile The percentile is a number such that at most p% of the various measurements is below it and at most 100-9 % of the data are above it.co. Find the probability that this expected number actually pass through in a given two-minute period. It is also called as centile and is the value of a variable below which a certain percent of observations fall./statistical-quality-control Operations Management Unit 14 . Statistics Statistics is a collection of techniques for making decisions about a process or population based on an analysis of the information contained in a sample from that population.

For example. Learning Objectives: After studying this unit.9 Terminal Questions 14. For example.: 280 In this unit on failure prevention and recovery we mainly deal with less frequent but more serious failures. and trying to have strategies in place to minimise the likelihood of failure. Operations managers are always concerned with improving the dependability of operations. However. the effect may be irritating but not necessarily serious. Usually. Identify why failure occurs in operations. For example. it is essential.1: Model of Operations Improvement Failure is when something does not work as it should do. . Some failures are incidental and may not be noticed. The concert like all systems may be more tolerant to some types and some levels of failure than others. the products and services that they produce. the failure of one component of a system may threaten the whole system. however. the failures do occur. 14. . Describe the means of detecting and analysing failure. and this does not imply that operations cannot or should not attempt to minimise failure. in some operations it is vital that the products and services do not fail.12 Glossary 14.8 Summary 14. Operations Management Unit 14 . In these situations dependability is not just desirable.7 Recovery in Service Operations Failure planning 14.Mechanisms to Detect Failure 14. . Yet. the police service and other emergency services. electricity supplies to the hospitals.10 Answers 14. Not all failures are equally serious.1 Introduction Although no operation must be indifferent to failure.2 System Failure There is always a chance that in developing a product or providing a service. such as car seat belts. Describe the different approaches to maintenance. having dependable products and services is a way for organisations to gain a competitive advantage.11 Case Study 14. things might go wrong. In less critical situations. . it is technically a failure. If he or she is giving a solo performance. we use the term failure to denote a more dramatic event.1 explains how this unit fits into the operation‘s improvement activities. Discuss the importance of failure recovery. if the shop assistant who sells you an item of clothing =fails‘ to inform you the fact that it should be dry cleaned.6 Improving the Operation‘s Reliability 14. the minor =failures‘ are addressed in =quality management‘. they have plans in place to help them recover from the failures. For example. There is a clear spectrum of failure which goes from regular minor failures to very serious and/or catastrophic. then the error may sour the whole performance. Conversely. in spite of all the attempts to prevent them. if the cigarette lighter in a car or the pen used by a police officer to write a statement fails. Explain the various ways of measuring failure. Japanese companies made great gains in share market (automobiles and electrical goods) through their reputation for high product reliability. Other products and services must be available when needed. Figure 14. Nothing is perfect. For example. Accepting that failure occurs is not equivalent to ignoring it. In the finale of a concert performance a violinist may play a wrong note and the effect is unlikely to have any great impact. Figure 14. leaking hydraulics in a car or a prisoner not informed of his or her rights can put the whole process at risk. Mistakes are inevitable and are an intrinsic part of life. you will be able to: . . frequently in operation management.5 Failure Analysis 14. What is important is that.

a total and sudden cessation of operation.2. Some design failures occur because a characteristic of demand was overlooked or miscalculated. The =breakdown‘ may only be partial. customers might make unexpected demands which the operation fails to meet. Supplier failures Design failures The overall design of an operation can be the root cause of failure. Other failures might have a significant impact only if they occur at the same time as other failures.1 Why Do Things Fail? Failure in an operation can occur because of many different reasons. For example. Facilities failures All the facilities (i. Alternatively. but because it now takes bookings for shows with complex lighting needs. It is just the straightforward errors in translating the requirements of demand into an adequate design that causes the problems. this can be regarded as a =failure‘ . A production line might have been installed in a factory which in practice cannot cope with the demands placed upon it or a theatre front-of-house layout might cause confused and jumbled customer flow at peak times. materials from suppliers could be faulty and so on. the machines. In its design stage an operation might look fine on paper. But they are still considered as design failures. Staff failures . 14.: 282 examples.Failure is perceived differently from the viewpoints of the evaluators. equipment. staff may make simple errors in their jobs which prevent normal working. Those which have their source inside the operation because its overall design was faulty. equipment and buildings) or staff fail to operate as they should . or because its facilities (machines. In both cases the demands placed on the operation were unexpected at the point of design and this led to some kind of failure. Either way. a biscuit production line might have been installed assuming a certain pack size but then the market demands a larger pack size which causes the machine to jam occasionally. for example a worn or marked carpet in a hotel or a machine that can only work at half its normal rate. Those caused by the actions of customers Types of failures that occur in operations are: . it is the effects of a breakdown that should be considered. only when it has to cope with real circumstances does inadequacies become evident. For a person who is only interested in the final result of an activity would consider it to be an Outcome Failure if the core issue has not been resolved or a core need is not met. Facilities failures . Machines can break down. Adequate design includes identifying the range of circumstances under which the operation has to work and designing accordingly. Design failures . The three main causes for failures are: . there is no unexpected demand placed on the operations. In both the examples. Those caused by faults in the material or information inputs to the operation .: 281 A failure can also be a process failure. buildings and fittings) of an operation are liable o break down. a computer failure in a chain of supermarket could paralyse several large stores until it is repaired. Staff failures .e. Other design-related failures occur because the circumstances under which an operation has to work are not as expected. Operations Management Unit 14 . wherein the activity is completed successfully but a person may still feel dissatisfied if the underlying process is perceived to be below expected standard or benchmark. A theatre‘s lighting controls might have been designed for simple lighting sequences. Some breakdowns can cause a large part of the operation to halt. the control system overloads and fails. Consider the following Operations Management Unit 14 .

3. the failure rate of security at an airport can be measured by the number of security breaches per year. Customers‘ inattention. However. Failure Rate (FR) is usually calculated from examining actual operating or test data. =Availability‘ is a measure of the consequences of failure in the operation. It can be measured either as a percentage of the total number of products tested or as the number of failures over time: FR = Or FR = 14. the sequence of questions at automatic teller machines (ATM) is designed by banks to make their operation as =fail-free‘ as much as possible. The customer is not =always right‘.3 Measuring Failure There are three main ways of measuring failure. if the manager of a sports shop fails to anticipate an increased demand for footballs during the World Cup. yet the customer who buys it could overload it or misuse it in some way which causes it to fail. which is caused by missing or sub-standard inputs. A person must have done something different that might result in significant deviation from normal operation. At different stages during the production life cycle the probability of it failing is different. For example. Violations are acts that are clearly contrary to defined operating procedure. it is eventually likely to fail. the concert could also be regarded as a failure. For example.: 283 Supplier failures Any failure in the delivery or quality of goods and services into an operation can cause failure within the operation. Operations Management Unit 14 . incompetence or lack of common sense can be the cause of failure. This is an error of judgment. Customers can misuse the products and services which the operation has created. the shop runs out of stock and fail to supply its potential customers. For example.Staff failures occur due to errors and violations. The failure of the band to turn up at a concert causes the whole event to =fail‘. a washing machine might have been manufactured in an efficient and fail-free manner. Any small defect in the filament material or in the way the lamp is assembled could cause the lamp to fail. Failure rates — how often a failure occurs . Similarly. The failure rate of an engine can be measured in terms of the number of failures divided by its operating time.2 Failure over Time . or part of an operation. 14. is a function of time.1 Failure Rate Failure rate is calculated as the number of failures over a period of time. Errors are mistakes in judgement with hindsight. if a machine operator fails to clean and lubricate the machine in the prescribed manner. Most organisations accept that they have a responsibility to educate and train their customers and to design their products and services.The ‘Bath-Tub’ Curve Failure. Customer failures Not all failures are (directly) caused by the operation or its suppliers. Reliability — the chances of a failure occurring . For example. This indicates that the operator has violated a set procedure. They are: . The more an operation relies on suppliers of materials or services. the more it is liable to failure.: 284 14. so as to minimise the chances of failure. to fail. if the band does show up but proves to be of dubious talent. If the lamp survives . For example. for most parts of an operation.3. the probability of an electric lamp failing is relatively high when it is first plugged in. For example. Operations Management Unit 14 . Availability — the amount of available useful operating time =Failure rate‘ and =reliability‘ are different ways of measuring the same thing – the tendency of an operation. merely complaining about customers is unlikely to reduce the chances of this type of failure.

the bottom of the bathtub should be as low as possible. __________ is calculated as the number of failures over a period of time. . Failure of students to take advantage of the learning opportunities they are presented with. . _______ is when something does not work as it should do. . Self Assessment Questions 1. Deceptive because the processes that universities use to detect =failures‘ are subtle and often deeply flawed! List out the different kinds of failure that occur at a university. Failures during infant mortality are undesirable and are always caused by defects and blunders like material defects. Because these failures are liable to warranty expense or create service support costs. failures during normal life occur at random but with a relatively constant rate when measured over a long period of time. Three main ways of measuring failure MRP are _______. Conversely. Failure of staff to carry out their contracted functions. Failure of equipment. ________ and _________. many failures often considered as normal life failures are actually infant mortality failures.2 does not depict the failure rate of a single item. but is undesirable because a significant number of failures occur in a short time. Most physical parts of an operation behave in a similar manner. Activity 1: A deceptively simple activity. it could still fail at any point. . the more likely its failure becomes. Failure of outside suppliers. wear-out does not always happen long after the expected product life. but the longer it survives. causing early customer dissatisfaction and warranty expense. but describes the relative failure rate of an entire population of products over time. and may last for years. The infant mortality period is the time over which the failure rate drops.2: The Bathtub Curve Some individual units fails relatively early (infant mortality failures). Theoretically. Figure 14. These may include some of the following: . And no wear-out failures should occur during the expected useful lifetime of the product. the actual time periods for these three characteristic failure distributions can vary greatly. The bathtub curve is generally used as a visual model to illustrate the three key periods of a product failure and not calibrated to depict a graph of the expected behaviour for a particular product family. It is uncommon to have enough short-term and long-term failure information to actually model a Operations Management Unit 14 . Wear-out is due to fatigue or depletion of materials (such as lubrication depletion in bearings). errors in assembly. Also.: 285 Figure 14. total number of products tested number of failures operating time number of failures Operations Management Unit 14 . 2. design blunders. It is a period when the failure rate increases. etc. A product's life is usually limited by its shortest-lived component. and is observed in products after just a few months of use. Infant mortality is the time when the failure rate of a product decreases. The curve which describes failure probability of this type is called the bathtub curve. and some fails during the relatively long period typically called normal life. others lasts until wear-out. A product manufacturer must check that all specified materials are adequate to function through the intended product life. of course. is a disaster from a warranty standpoint.these initial stages. Infant mortality does not mean that "products fail within 90 days" or any other defined time period. Normal life failures are considered to be random cases of "stress exceeding strength. 3." However.: 286 population of products with a calibrated bathtub curve. This.

Phone surveys: These can be used to solicit opinions about products or services. In-process checks: Employees check if the service is acceptable during the process itself.: 287 14. This is sometimes seen when car and electrical components or food items are recalled.1 Mechanisms to Detect Failure Organisations sometimes may not be aware that the system has failed and thereby lose the opportunity both to put things right for the customer and to learn from the experience. . Accident investigation Large-scale national disasters like oil tanker spillages and aeroplane accidents are usually investigated by accident investigators specifically trained in analysis of the causes of the accident. operations managers must have: .4. Complaints and indeed compliments need to be taken seriously as they are likely to represent only the =tip of the iceberg‘ of customer attitudes. Questionnaires: These may generate a slightly higher response than complaint cards.4 Failure Detection and Analysis When failure occurs. they may only generate general information from which it is difficult to identify specific individual complaints. Complaint analysis Just like errors. Any failures can be traced back to the process which produced them. . all other similar products can be recalled for checking. for example. . however. Focus groups: These are groups of customers who are requested to focus on some aspects of a product or service. complaints always arise. This activity is called failure analysis. Product liability Many organisations (either by choice or more often because of a legal requirement) adopt product liability. This means that any fault can be rectified and also that. However. These can be used to discover either specific problems or more general attitudes towards the product or service. They are increasingly seen to be a cheap and easily available source of information about errors. It may possible. Although the techniques they use have usually been developed to be appropriate for the particular type of accident being investigated.. 14. There are different techniques and approaches used to uncover the root cause of failures. . Mechanisms in place. Operations Management Unit 14 . if necessary. . . Television rental companies. . may check on the installation and servicing of equipment in this way. Computer servicing procedures often include this type of check. Complaint cards or feedback sheets: These are used by many organisations to solicit views about the products and services. Procedures in place. There are many methods available to actively look for failure.: 288 14. They are: . This ensures that all their products are traceable. to identify the respondents and so follow up on any individual problem. Some of these approaches are briefly described in this section.5 Failure Analysis One of the critical activities for an organisation when failure has occurred is to understand why the failure occurred. Machine diagnostic checks: A machine is tested through a prescribed sequence of activities designed to expose any failures or potential failures. . Point-of-departure interviews: At the end of a service. to analyse the root cause for this failure. Operations Management Unit 14 . The problem with this method is that very few people tend to complete them. the common role of accident investigators is to make recommendations to minimise or even eradicate the likelihood of any such failures occurring again. to ensure that a failure has occurred. Although in some situations this form of failure detection can detract from the service itself. the components from which they were produced or the suppliers who provided them. staff may formally or informally check if the service has been satisfactory and try to solicit problems as well as compliments. Failure to follow an appropriate strategic direction.

They are asked to write down incidents that led dissatisfaction or Operations Management Unit 14 . Learn . especially in service operations. machines and buildings) is an important activity in all operations.: 290 Figure 14. The activity of devising the procedures that allow the operation to recover from failure is called failure planning. Responses are always linked to cost and inconvenience caused by the failure.: 289 satisfaction.3 shows a simple tree identifying the possible reasons for a hot dish being served cold in a restaurant. the next responsibility of operations managers is to try to prevent the failures occurring. for example. Recovery should be a planned process. All the events at the branches below an AND node need to occur for the event above the node to occur. They are: 1. Organisations need to design appropriate responses to failure.3: Fault-Tree Analysis . It should meet the needs and expectations of the customer. =Fail-safing‘ some of the activities in the operation . Discover 2.The prime function of complaint analysis involves analysing the content of the complaints to understand better the nature of the problem as it is perceived by the customer.Example 14. 14. It is a popular way of collecting information. It is achieved by: . Figure 14. However. Service recovery does not just mean . Designing out the fail points in the operation . The word =Recovery‘ has originated from British Airways =Putting the Customer First‘ campaign.7. spend considerable resources in deciding how to cope with failures. especially those where the consequences of failure are particularly severe. 14. Service operations managers need to recognise that all customers have recovery expectations that they want organisations to meet. Only one of the events at the branches below an OR node needs to occur for the event above the node to occur.6 Improving the Operation’s Reliability Once a thorough understanding of the causes and effects of failure have been established.: 291 The maintenance of physical facilities (equipment. Act 3. Fault tree analysis Fault tree analysis is a logical procedure that starts with a failure or a potential failure and works backwards to identify all the possible causes and therefore the origins of that failure. The Critical Incident Technique (CIT) was originally developed during the Second World War by psychologist John Flanagan and was used to determine the reasons for the high rate of pilot failure during training.return to a normal state. There are four stages in failure planning. Building redundancy into the operation . it is also of interest to other.1 Failure planning Identifying how organisations can recover from failure is of particular interest to service operations because they can turn failures around to minimise the effect on customers or even turn failure into a positive experience. Bulk chemical manufacturers and nuclear processors. but to a state of enhanced perception.7 Recovery in Service Operations Recovery has been developed particularly in operating services. Critical incident analysis Critical incident analysis requires customers to identify the elements of products or services that they find either particularly satisfying or not satisfying. Operations Management Unit 14 . Maintaining the physical facilities in the operation Operations Management Unit 14 . The fault tree is made up of branches connected by two types of nodes: AND nodes and OR nodes.

the effects of failure need to be contained in order to stop the consequences spreading and causing further failures. The first of these tasks is. In all operations. the benefits of failure in providing learning opportunities should not be underestimated.4. This is why operations managers need to be concerned with the causes and effects of failure. it is important to communicate what action is going to happen so that everyone can set their own recovery plans in motion. The precise containment action depends on the nature of the failure. Second. in fact. 5. Three important pieces of information are needed: first of all. Not all failures are equally serious and attention is usually directed at those that have adverse impact on the operation or its customers. who will be affected by the failure. formally defining the procedures that the organisation should follow in the case of each type of identified failure. this involves identifying all possible failures that might occur and then.: 292 Act: The discover stage could take only minutes or even seconds. inform the people involved. First. or because there is a human error. ________ is one of the ways to improve operations reliablity. we need to do something about it quickly. Plan Discover: The first thing any manager needs to do when faced with a failure is to discover its exact nature. depending on the severity of the failure. This is often done by working through =in theory‘ how they would react to failures in the future. because one or more of its physical facilities break down. Third. a prerequisite for the other two. however. Self Assessment Questions 4. what exactly has happened. second. 14. In service operations this is especially important where customers need to be informed. . This is the key stage for failure planning. Once the nature of the failure is understood. The third task is to devise plans and procedures that help the operation to recover from failures when they do occur. what you propose to do about the failure. either because there is an overall failure in its design. This means carrying out three actions. 6. Operations managers need to formally incorporate these lessons into their future reactions to failures. _______ is one of the ways to analyse failure. When the failure occurs. In practical terms. both for their peace of mind and to demonstrate that something is being done.8 Summary Failure problems and mistakes are inevitable and intrinsic part of operations life. an operations manager‘s second task is to examine ways of either reducing the chances of failure or minimising the consequences of failure. with important consequences. Some are a direct result of goods or services which are supplied to the operation. learning involves revisiting failure to find out its root cause and then engineering out the causes of the failure so that it does not happen again.: 293 Failures occur in operations for several reasons. Learn: As discussed earlier in this unit. operations managers must have __________ and __________ in place. Things are always going wrong. Operations Management Unit 14 . depending on the urgency of the situation. the first two of which could be carried out in reverse order. operations managers have three sets of activities which relate to failure. and third. Plan: Learning lessons from a failure is not the end of the procedure. 7. This chapter deals with these three tasks. Operations Management Unit 14 . as well as being active in attempting to minimise failure. why did the failure occur? The last point is not intended to be a detailed inquest into the causes of failure (that comes later) but it is often necessary to know the causes of failure to determine further action. The first is concerned with understanding what failures are occurring in the operation and why they are occurring. In failure planning. there needs to be some kind of follow-up to make sure that the containment action has really contained the failure. Specifically. Customers can also cause failures through their incompetence in handling goods and services. The word =Recovery‘ has originated from _________. If the failure is severe. Others happen within the operation.

00 am Monday – 2. in order to compete must be able to offer a high level of customer service. she was pondering her latest project – how service businesses have to be more aware of their customers‘ needs and. Failure 2. waiting to board the afternoon Operations Management Unit 14 . bathtub curve 9.9 Terminal Questions 1. 9. Fail-safing 7. What are the types of failures? 4. procedures 5. What are the three main ways of measuring failures? 5.1 4.1 3. Inevitably. Refer section 14. the half-hour delay soon unfolded into a bigger problem and an apologetic captain announced that he felt that passengers would be better placed in the departure lounge rather than waiting for the repair to be completed. The ___________ period is a time when the failure rate is dropping.1 14. Returning home to the UK after a week of energetic academic research. 2. The ________is typically used as a visual model to illustrate the three key periods of product failure. Refer section 14.00 pm Monday 1. The phenomenon of understanding the reason for failure is called ___. Activity 2: A 24-hour ATM machine outside a bank was closed down between the following times during a seven-day period: 11.: 294 14. Refer section 14. What is Failure? Explain with an example.10 Answers Answers to Self Assessment Questions 1. After an hour in the departure lounge and with no definitive answer available on the estimated take-off . Warsaw airport was busy with passengers. failure rates. availability 3.1 2.00 pm Tuesday – 10. Operations Management Unit 14 .3 5. Refer section 14. infant mortality Answers to Terminal Questions 1. the anticipation growing as they passed through the scanners and walked down the aisle onto the aircraft. Failure Analysis 10. the 200 passengers were soon depressed to hear from the captain that there was a slight mechanical problem and that their take-off would be delayed by approximately half an hour.: 295 British Airways flight to London Heathrow. Failure rate 4. reliability.00 pm Friday – 10. 10.30 am Tuesday 4. mechanisms. Name the mechanisms to detect failure. A few grumbles and mutters about connections at Heathrow and other missed appointments could be heard – but generally the mood was fairly genial and the airline staff went out of their way to try to accommodate passenger queries. British Airways 8. Safely in their seats. the mean time between failures and its availability.00 am Tuesday – 10. Accident investigation 6.8.11 Case Study Better late and happy than just late Fiona Rennie sat and enjoyed her coffee as she waited at Warsaw airport. What are the three main causes for failures? 3. Refer section 14.00 am Saturday Calculate the ATM‘s failure rate (in time). This delay did not merit having to disembark and complimentary drinks were soon on the way round.4.2. 14.00 am Wednesday 3.2.

Operations Management Unit 14 .12 Glossary Term Description Failure Is when something does not work as it should. the airline announced the departure time – some four hours behind schedule. On arrival (finally) at Heathrow.cw/index. the four-hour delay meant considerable problems in trying to reach their onward destinations that evening and the airline sales desk was soon busy with anxious passengers looking for help. Operations management.html Operations Management Unit 15 . Robert Johnston. 3. expressing his concerns at the late arrival and hoping that it had not inconvenienced them too greatly. Errors Mistakes in judgement.2 The Strategy Challenge All Operations Should Have a Strategy Difficulties in Formulating Operations Strategy .time. queries on connecting flights and subsequent travel arrangements. References 1. How could it help the airline to improve its recovery procedures further? 2. the captain. where possible. the airline‘s Customer Service Manager quickly took it upon himself to arrange chauffeur-driven transport for these people. 2. The priority was not necessarily to deal with each customer as quickly as possible. the airline moved into the next stage of its =customer-placating programme‘ by providing meal vouchers for everyone and directing them to the airport restaurant.pearsoned. by Nigel Slack.1 Introduction Objectives 15. Stuart Chambers. Fiona was certainly impressed. by Mike Pycraft. Failure Analysis The phenomenon of understanding the reasons for failure.: 296 ensuring that the inconvenience caused by the delay was effectively minimised. though. For some. leaving them to recommence their travels. As the mood quietened and passengers began to question further just how long they were going to have to wait. bade the passengers‘ farewell. In the case of failure.co. courtesy of the airline. http://wps. The flight itself went according to plan and the cabin crew walked up and down the aisles answering. who had been very apologetic throughout the whole process. the airline could activate various levels of preconceived and ad hoc customer care. Questions 1. Unperturbed. glad to be safely home as planned. but to ensure that each person was given a solution that suited his or her needs. When are failure and recovery particularly important to an operation? 14. Failure rate A way to calculate the number of failures over a period of time. Airlines are known to have well-developed recovery procedures. Others did not have so far to go and to stay overnight in the UK‘s capital city actually meant more inconvenience the following day.uk/ema_uk_he_slack_opsman_4/17/4473/1145139. fresh. Operations management. Several were to be put up in a local hotel. and although very late. Draw up a =failure plan‘ for delays of this type. The infant mortality period The time when the failure rate starts dropping.: 297 Unit 15 Challenges in Operations Structure: 15. the next morning.

The statement of strategy does not appear in any particular order of priority. . we will discuss about the strategic view of operations and the process of operations strategy. in two ways. it enables to achieve company. Operations Management Unit 15 .14 Glossary 15. The need for creativity in devising operations strategies.s.: 299 . .9 System Failure Failure Analysis Improving the Operation. Describe how operations managers need to set an . The ultimate challenge of implementing the chosen strategies. to put their strategies into practice. but there are four important challenges to discuss: .1 illustrates these issues: Figure 15. The company. that is. . Second. After studying this unit. . The necessity to consider the international dimension of operations strategies. Explain why and how operations strategies are put together. . Operations Management Unit 15 . the way in which operations strategies are formulated.15.2 The Strategy Challenge A strategy is the pattern of decisions and actions.6 Transferring Operations Practices 15.5 Strategies must be Ethical 15.s strategies are the means to achieve the company. Describe how operations managers need to consider their operations strategies from an international perspective. you will be able to: . Now we are in a position to discuss some of the issues related to Operations challenge.s vision. .3 Generic Operations Strategies 15. The moral imperative to develop ethical operations strategies .: 298 Of course.Gregory procedure 15. Explain why achieving creative operations strategies involve challenging the trade-off paradigm of operations.4 Formulation Procedures The Hill Methodology The Platt. .implementation agenda.1 Introduction By now you must be familiar with the purpose and decisions of Operations management. 15.7 Strategies Must be Creative 15.8 Strategies Must be Implemented 15.11 Terminal Questions 15. which helps an organisation to achieve the intended long term goals. this list of strategic ¡°challenges¡± could be very long. we will identify some of the challenges that all operations managers face in an attempt to cut through the complexity which characterises most operations and develop their own operations strategies appropriate for the modern world.s vision. Discuss the importance of failure recovery.s Reliability 15. when taken as a group. Figure 15.1: Important Operations Challenges Learning Objectives: By now you must be familiar with the concept of Operations management.13 Case Study 15.10 Summary 15. First. It must be read as a co-ordinated and coherent whole.12 Answers 15. Explain the way in which the decisions resulting from operations strategies have an ethical dimension.

. from which.s strategy areas to be explored. increasing quality . There is some empirical evidence to support this.2. Operations managers are expected to make sure things do not go wrong. Operations Management Unit 15 . The operations function is expected to provide as efficient and reliable service to the rest of the organisation as possible without much investment. They respond to this competition by enhancing or extending their level of customer service.2.s technology strategy. but also to see whether they can make enough sense of the operation to fit it into a strategic context. and so on. advocating the preservation of the best in society and opposing radical changes).real time. among other things. They can only allow their attention to drift from the running of the operation for relatively short periods.s planning and control strategy has to work within the constraints imposed by the technology.2 Difficulties in Formulating Operations Strategy Operations management is a complex business.1 All Operations Should Have a Strategy Why should operations bother around for putting a strategy together since it requires considerable effort and time? The obvious answer is that an effective operations strategy helps the organisation to compete more effectively.The important test for operations managers is not only to understand and command the detailed complexity of all the operations decisions. job design. This might include things such as broadening the range of their products or services.2: Generic Operations Strategies The Caretaker strategy This strategy is often employed when an organisation believes that there is little competitive advantage to be gained by differentiating itself from its competitors. an organisation. So. so trying to make strategic sense of any operation is always a difficult task.: 302 The Marketeer strategy Marketeer strategies are used by organisations which experience increased competition.3 Generic Operations Strategies Generic operations strategies are common approaches to organise the operational functions. Operations managers operate in . Operations managers are central to the strategy formulation process. or possess common elements. 15. all point in the same direction. yet they are likely to be geographically dispersed among the company. For example. Marketeer strategy . and then make sure that its contribution to the competitiveness is both clear and ongoing. that they operate under a . Reorganiser strategy . Caretaker strategy . This responsibility for the day-to-day running of the operation means. layout. . rather than provide much in the way of innovation or creativity. A shared strategy allows not only these areas to measure their own decisions against the common purpose. change or disruption. Innovator strategy Figure 15. adopted by different types of organisation. shapes the integration between different parts of its processes. It.need to deliver. Operations Management Unit 15 . The inertia of operational resources imposes a certain amount of conservatism (an orientation.2 depicts the four way classification in generic operations strategies. it becomes evident that the strategies of the individual organisations are clustered into groups within which the strategies are similar.: 300 15.. In this way a formally constructed operations strategy gives the basic structure which ensures that the many individual decisions taken around the organisation. 15.s sites. organisation. The major difficulties that affect the formulation process are: . only the most important strategic pressures can divert them. reshape and improve it. The four way classification results in generic operations strategies which are termed as: .: 301 Figure 15. Operations Management Unit 15 . Some organisations take a traditional approach in designing their processes which do not included many of the innovations in technology. if the operations strategies of many different organisations are reviewed. but also allows the implications of each other.

Hill Methodology. The Reorganiser strategy This strategy implies a change in the way an organisation designs and manages its processes.levels or giving delivery guarantees. These steps are as follows: . This means investment in new technology and (more significantly) a different way of organising its methods of producing goods and services. Most consultants have developed their own frameworks. even if they adopt one of the generic strategies described above. Companies adopting Just In Time (JIT) and cellular manufacturing principles are typical organisations adopting this strategy. or quality management methods. There are several alternative procedures which have been suggested as providing the outline framework for developing an operations strategy. it also expects enhanced customer service from its operations function. Self Assessment Questions 1. 3. is illustrated in Table 1. and certainly most influential. The Platt. There are ___________ in almost every decision area.aspx?is=1403934665 Operations Management Unit 15 . 15. . as have several academics. Identify the product market: This step helps in understanding how the marketing strategy of the organisation is developed to achieve corporate objectives.: 304 . but it is expected to respond to marketing-led changes in competitive stance. _________. 1 http://www.4 Formulation Procedures Most organisations. In other words. A __________ is the total pattern of the decisions and actions which position the organisation in its environment and are intended to achieve its long term goals. The Hill Methodology . mix and volume which the operation is required to provide. approaches to operations strategy formulation is devised by Professor Terry Hill of London Business School1.4. The new processes often give enhanced flexibility that allows the operation to respond quickly and effectively to changes in marketing strategy. working practices. Following are the two important procedures that explain how operations strategies are formulated in practice: . as well as identifying the product or service characteristics such as range. Identify the corporate goals: This step helps in understanding the long-term corporate objectives of the organisation so that the eventual operations strategy can be seen in terms of its contribution to these corporate objectives. The operations function tries to do this by developing its infrastructural resources such as planning and control systems. The Innovator strategy The innovator strategy is a combination of the marketeer and the reorganiser strategies. The .palgrave. _____________ is the act of creating the strategy. Not only does the organisation adopt an enhanced approach to design its operations. after which they can undertake the more difficult infrastructural changes towards an innovator strategy. This step identifies the products/service markets which the operations strategy must satisfy. _________ is the output from operations strategy. it has enhanced not only to be flexible in the short term in response to competitive pressure. Organisations adopting either a caretaker or a marketeer strategy are recommended first to enhance their operations structure to achieve a reorganiser strategy. it follows the well-tried approach of providing a connection between different levels of strategy making. No fundamental change is made to the physical design and organisation of the operation itself.s-Gregory Procedure 15.: 303 2. would want to formulate their own operations strategy to cope with their individual competitive circumstances.1 The Hill Methodology One of the first. but also to introduce new products and services faster and more effectively than competitors. Operations Management Unit 15 .com/products/title. It is a five step procedure.

4. This stage looks at the external environment that includes opportunities and threats in the competitive marketplace. location Functional support Operations planning and control systems Work structuring Payment systems Organisational structure Operations Management Unit 15 . Involve infrastructural features. This step involves the . measures Product / service markets and segments Range Mix Volumes Standardisation or customisation Innovation Leader or follower Price Quality Delivery Speed Delivery dependability Product/service design Brand image Technical service Process technology Trade-offs embodied in products Role of inventory Capacity. Define the characteristics of operations: This step helps in setting structural characteristics of the operation which are consistent with each other and appropriate for the way the company wishes to compete.: 305 15. size.non-process.1 gives an illustration of the Hill methodology. infrastructural features of the operation. Table 15. . This is in terms of winning business or satisfying customers. They are: . Translate marketing strategy into competitive factors: This step helps in converting the operating strategies identified in the previous step into competitive advantage.2 The Platt¡¯s .s and Gregory (1990)2 developed a procedure to help formulate an operations strategy. ..financial. Gregory Procedure Platt. This step is called process choice. Stage 1: It starts with an analysis of the market position of the organisation.1: Illustration of Hill Methodology Step 1 Step 2 Step 3 Step 4 Step 5 Operations Strategy Corporate Objectives Marketing Strategy How do products or services win orders Process Choice Infrastructure Growth Profit ROI Other . timing. . Table 15. it has three stages. This is similar to the volume-variety analysis.

The operation. Recording performance in this way shows the gaps. The community in which the operation exists . Repetitive/alienating work . Activity 1: Consider that you are an operations manager. which are then be addressed by the operations strategy. Employment implications of vertical integration .5 Strategies Must be Ethical The concept of ethical decision making permeates operations management.2: Ethical Considerations in Operations Management Decision area Some Ethical issues Product/service design .s customers . Noise pollution . Also. . Formulate an operations plan/strategy using Hill methodology as given in the table. Recyclability of materials .2 identifies some of these ethical considerations: Table 15.pdf Operations Management Unit 15 . Table 15. Staff safety .In particular. it identifies the elements that are required by the market and then compares these with the achieved performance.: 306 . Employment implications of location . . The operation. Employment implications of plant closure . Staff safety . this model is regarded as being over-simplistic by authorities in the strategy area.s suppliers . Nearly all the decisions made by operations managers have some kind of ethical considerations that affect one or more of the following groups: 2 http://www. Environmental impact of location Layout of facilities . Waste and product disposal . This stage assesses the current operations practices and how important are these achieved performance levels identified in Stage 1. Energy efficiency Process Technology . Customer safety .s staff . Staff safety . Stage 2: In this stage the capabilities of the operation are assessed. so it enables an organisation to chart how the operation performs with in the market perspective. in a manufacture industry. It does provide a framework for asking some important questions though. Repetitive/alienating work . Stage 3: Reviewing the options open to the organisation takes place at this stage and results in the selection of options that best satisfy the criteria identified in the earlier stages. Disabled customer access .s shareholders and owners There are ethical implications in almost every decision area. 15. Energy consumption Network design .unimep. This procedure identifies the gaps between operations performance and the market requirements. Workplace stress . The operation. The operation. Energy efficiency Job design .br/phpg/editora/revistaspdf/rct16art02. Fume and emission pollution .

What priority to give customers waiting to be served . Staff safety Ethics are considered as the framework of moral behaviour which determines whether we judge a particular decision as either being right or wrong. economic conditions.: 307 Capacity planning and control . Prompt payment to suppliers . Customer safety . Relationships with sub-contractors . Linking this back to the discussion of ethics in the earlier part of this unit. Service cover in emergencies . and so on. and are likely to develop different operations practices. Regional configuration . JIT and project planning and control) . 15. prevent its operations from giving small gifts to potential suppliers or customers in a country where this is culturally acceptable? Similarly. profitability and sustainability of the organisation. Minimising energy consumption in distribution . developed a rigorous and highly standardised way of organising its operations. history. ethical judgements are not straightforward. Home country configuration . McDonald. Non-exploitation of developing country suppliers . Customer safety(in high contact operations) Planning and control (including MRP. Transparency of cost data . Using recycled materials Quality planning and control and TQM . Scrap and wastage of materials Failure prevention and recovery . which was one of the main reasons for its world-wide success. should an organisation which has built up a strong Operations Management Unit 15 . market needs. ¡°Hire and fire¡± employment policies . When locating operations internationally organisations can adopt four configurations.6 Strategies Must be International Different parts of the world have differing cultures. Materials utilisation and wastage . Working hours fluctuations . Unsocial working hours . Unsocial staff working hours . These are: . Staff safety . as in other areas of management. Customer safety . Workplace stress . Unsocial working hours . In operations management. Workplace stress . Such decisions have to be weighed against cost.s the fast-food chain. ¡°Dumping¡± of products below cost Supply chain planning and control . should an organisation which originates in a culture where any kind of gift or bribe is highly unethical. Environmental impact of process failures . Honesty in supplier relationships .: 308 world-wide brand image allow this to be adapted in different regions? For example. The most obvious example is the way Just-in-Time (JIT) and lean manufacturing practice grew up in Japan in the aftermath of the Second World War. Restrictive organisational cultures Operations Management Unit 15 . Global coordinated configuration .. demography.

hub-and-spoke. Some failures are incidental and may not be noticed. 15. They help operations managers to go about developing a strategy. Many successful operations are successful because of the innovative way of creating their products and services. things might go wrong. There is always a chance that in developing a product or providing a service. It is only half of the success to develop a good strategy. Procedures in place. Influenced by the moves towards greater European integration. while others might be more innovative and creative in coming up with an original strategic solutions. Combined regional and global coordinated configuration Transferring operations practices Companies all over the world differ in their conditions and culture and hence develop their own approach to operations management. Machines can break down. Learning from emotional responses in the early stages of implementation process. In other words. Europe is far from being a single integrated economic entity as is the US. Long-term transfers of operations practice In the long term operations. emotions serve as feedback signals in strategy implementation. operations managers must have: . one can trace the movement and development of operations management practice as it responds to conditions in one part of the world and then is adopted by other parts. Tennessee.: 310 Failure in an operation can occur because of many different reasons. currency. to analyse the root cause for this failure. Nothing is perfect. Operations Management Unit 15 .9 System Failure System Failure is one of the major challenges in operations. reveals the presence of unexpected emotional triggers. since they do not connect operations with goals. to ensure that a failure has occurred . Many businesses fail to achieve the objectives. Operations Management Unit 15 . face exactly the same set of circumstances. After a few years of struggling to develop the overnight express business it gave up the struggle and closed this part of its business. which can easily make or break the best strategy. Mechanisms in place. can allow timely adjustments. customers might make unexpected demands which the operation fails to meet. When failure occurs. an operational practice that is extremely successful in one part of the world does not transfer easily. operations in the United States guarantees overnight delivery from any part of the country to any other part by routing all packages through a single hub in Memphis. tax rates and so on. However. posed problems which were not experienced in the US. The execution is an important step. is a good example of this. so can the practices which grew up under one set of conditions transfer successfully to parts of the world where conditions might be very different? Sometimes. Federal Express. and materials from suppliers could be faulty and so on. the Federal Express Corporation in America invented the overnight express deliver service. Federal express attempted to duplicate its US operation in Europe. Implementing strategy is challenging for many organisations. they come up with very different strategic solutions. For example. these procedures do not provide the single best strategic solution.: 309 15. staff may make simple errors in their jobs which prevent normal working. Accepting that failure occurs is not equivalent to ignoring it and this does not imply that operations cannot or should not attempt to minimise failure. .. Not all failures are equally serious. Differences in culture. Mistakes are inevitable and are an intrinsic part of life. the parcel delivery company described earlier in this unit.8 Strategies Must be Implemented Implementation is the structure and the condition which connects strategic initiatives to measurable results. However.7 Strategies Must be Creative The operations strategy formulation procedures which are described earlier in this unit provide a structure and logical process that help operation managers to move in a sensible direction. they do not instruct them what to do. Its . or at least develop ones which embody some original idea. 15. Some operations managers might follow the conventional and traditional routes (which may well provide adequate solutions). language. When different sets of operations managers.

Although not all operations have operation strategy. 10.2 Improving the Operation¡¯s Reliability Once a thorough understanding of the causes and effects of failure have been established. 15. There are different techniques and approaches used to uncover the root cause of failures. Phone surveys and Questionnaires are mechanisms to detect failure. 15. machines and buildings) is an important activity in all operations. . Critical incident analysis Fault tree analysis Fault tree analysis is a logical procedure that starts with a failure or a potential failure and works backwards to identify all the possible causes and therefore the origins of that failure. whereas the content of operations strategy is concerned with the output from the operations strategy formulation process. 7. Designing out the fail points in the operation. What do you think are the ethical and cultural challenges that the company would face. Machine diagnostic checks. 15.Mechanisms to Detect Failure Organisations sometimes may not be aware that the system has failed and thereby lose the opportunity both to put things right for the customer and to learn from the experience. There are many methods available to actively look for failure. marketeer strategies. the next responsibility of operations managers is to try to prevent the failures occurring. some of the activities in the operation. ____________ is often employed when an organisation believes that there is little competitive advantage to be gained by differentiating itself from its competitors. formulation process should have obtained a better understanding of the organisation. _________ is one of the major challenges in operations. .10 Summary The process of operations strategy is concerned with the act of creating the strategy.9.1 Failure Analysis One of the critical activities for an organisation when failure has occurred is to understand why the failure occurred. Building redundancy into the operation. Product liability . Operations Management Unit 15 . Activity 2: A leading American cosmetic company. __________ of physical facilities (equipment. . The innovator strategy is a combination of the ______________and the strategies. 9. . Self Assessment Questions 4. 8. One of such classification distinguishes between caretaker strategies. while implementing its operation strategy. ______________is a logical procedure that starts with a failure or a potential failure and works backwards.9. ____ and _________ are the two important formulating procedures. and innovator strategies.: 311 The maintenance of physical facilities (equipment. there is some evidence to suggest that those who do are more likely to be successful. This activity is called failure analysis. Some of these approaches are briefly described in this section. 6. .Fail-safing. planning to open a branch in India.s overall strategy. Operations strategies can be classified into categories of generic strategies. and those operations managers who take part in the strategy. machines and buildings) is an important activity in all operations. reorganiser strategies. Accident investigation . Name the four way classification of generic operations strategies. It is achieved by: . Maintaining the physical facilities in the operation. . Complaint analysis . In-process checks. 5.

The maintenance Operations Management Unit 15 .11 Terminal Questions 1. Marketeer. System Failure 9.2 3. producing almost a million tonnes of finished product a year. Content. in the UK. . The Platt. The Caretaker strategy 6. It uses profiling methods to determine the gaps between the importance of competitive factors and the operation. is one of the most modern. efficient and environmentally friendly plants in Europe.liner grades. The Hill methodology.s-Gregory procedure places a greater emphasis on comparing the needs on comparing the needs of markets with the achieved performance of operations. Refer section 15.10 15. The Platt. Ethical implications 4.: 313 Answers to Terminal Questions 1. This activity is called failure analysis.13 Case Study Short Case Recycled St Regis The trend towards materials recycling in many countries can have a significant impact on the way in which some products are manufactured. Refer section 15. Some companies make their ethical stance explicit through a statement of mission and values.1 4.The Hill methodology uses a five step procedure which progressively establishes a strategic logic between the long corporate objectives of the organisation. 5. the structural process choice decisions of operations and the infrastructural decisions of operations. What is Failure? Explain with an example. 'strategy' 2. One of the critical activities for an organisation when failure has occurred is to understand why the failure occurred. 15. St Regis Paper is one of the largest manufacturers of recycled paper in Europe. Explain strategy challenge.12 Answers Answers to Self Assessment Questions 1. 15. and its competitive Operations Management Unit 15 .4.s-Gregory procedure 5.: 312 factors for each product or service group. process 3. Two paper machines running at speeds of up to 900 metres per minute each make 250 000 tonnes a year of highquality brown . reorganiser 8. System Failure is one of the major challenges in operations. Its mill in Kemsley. Refer section 15.8 5. the marketing strategy of the organisation. Refer section 15. (used to make corrugated boxes). Explain the five steps involved in Hill methodology. Mention the four ways to improve the operations reliability.s performance at delivering them. The four way classification of generic operations strategies are: ¨¬ Caretaker strategy ¨¬ Marketeer strategy ¨¬ Reorganiser strategy ¨¬ Innovator strategy 7. Perhaps the industry which has had to adjust the most is paper-making.2. 3.2 2. Refer section 15. 4. Fault tree analysis 10. What are the three main difficulties faced in formulating operation strategy? 2.

: 314 15.The raw material is 100% cent recycled paper. Operations management: an international perspective. 2.com/products/title. This process cleans and sorts the individual paper fibres. http://www.14 Glossary Term Description Generic Operations strategies Are common approaches to organise the operational functions. Operations management: an active learning approach. by John Bicheno. http://findarticles. by David Barnes. Failure Analysis The phenomenon of understanding the reasons for failure. Brian Elliot. 3.aspx?is=1403934665 5. Fault tree analysis Is a logical procedure that starts with a failure or a potential failure and works backwards to identify all the possible causes and therefore the origins of that failure. References 1. When this material is used on the paper machines.pdf .palgrave.col1 4. Questions 1. which is treated on a state-of-the-art stock preparation plant.unimep. which are adopted by different types of organisation. Formulation Procedures Are the two important procedures which explain how operations strategies are formulated in practice. http://www. What production problems would you anticipate from using waste papers in the stock preparation plant and in the paper-making process? 2. Challenges posed to operations management by the "new economy". In what ways would you expect recycled products to differ from their conventional counterparts? What steps could you take in the production process to minimise these differences? Operations Management Unit 15 .com/p/articles/mi_qa3796/is_200204/ai_n9067667/pg_2/?tag=content. it produces a product which is practically indistinguishable from conventional paper made from wood pulp.br/phpg/editora/revistaspdf/rct16art02.

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