POM READING MATERIAL

INTRODUCTION TO OPERATIONS MANAGEMENT

An organization exists to serve customers – purpose of an organization is to provide satisfaction to
customers. A customer is satisfied when his needs are served by using the organization’s products /
services. Customer needs flow into the organization, and the organization converts these needs into
products / services for the customer.

Operations / production management is concerned with production of products / services. It is a

transformation process – inputs such as material, machines, labor, and capital are transformed into
outputs such as products and services. Operation managers are responsible for producing their
organization’s products and services – managing the transformation process in an efficient and
effective manner is the task of operation manager. They make decisions regarding the operations
function and the transformation systems used – such decisions range from what capacity a
manufacturing facility should have and what kind of people would be hired to what quantity of a
product would be manufactured on the day and which worker would operate which machine.
Operations management is the study of decision making in the operations function.

Most organizations are production systems – not-for-profit and service organizations also have
production systems. Most organizations convert a set of inputs like equipment, labor, and material
into outputs such as air conditioners, electricity, and health care services.

SYSTEMS VIEW OF OPERATIONS / PRODUCTION MANAGEMENT

Production system can be defined in terms of environment, inputs, transformation system, outputs,
and mechanism used for monitoring and control – these are subsystems of the production system.
There is interaction and interdependence among these subsystems.

System view focuses on how the individual subsystems that make up a production system interact
among themselves. It emphasizes the relationships between subsystems of the production system –
for example, if a company invests in new machines, quality of its products improves.
Suboptimization occurs when one part of the system is improved to the detriment of other parts of
the system, and perhaps the organization as a whole – for example, productivity increases when a
company uses low-quality components and materials to make its products, but quality of its
products suffers. This happens when the relationship between subsystems is ignored.

Boundary of the system determines what a decision maker will or will not consider since things
outside the system boundary are considered to be part of the environment and beyond decision
maker’s control – for example, if cost of materials increases, cost of products will also increase, but
product managers cannot do anything about it, but if a competitor installs a new production system,
and hence improves quality of products, it can do the same and maintain its competitiveness.
Important relationships among components may be omitted if the boundary is defined too narrowly,
whereas complexity and cost increase when the boundary is extended – for example, quality of
inputs affect quality of products, and howsoever good a company’s production processes may be, it
will not be able to produce good quality products if its suppliers continue to supply bad quality
components.

1. Environment: Environment includes those things that are outside the actual production
system, but influence it in some way. Environment exerts a great deal of influence on
production system, but it is beyond the control of decision makers. For examples, a
 competitor develops new process technologies to make products of higher quality at lesser
cost, and the company must respond by investing in its process technologies, but if banks
increase their rates it cannot do anything about it, though it costs go up.

2. Inputs: Inputs includes:

 Equipments: Technological sophistication of equipments will determine the quality
and cost of products.
 Production process: It determines how inputs will be converted into outputs using
equipments and labor.
 Employees: Skill and motivation of employees will determine quality and cost of
products.
 Raw materials / components: A company cannot produce good quality products if it
uses raw materials / components of poor quality. Therefore, it must select suppliers
who are capable of supplying good quality raw materials / components, and
maintain an equitable relationships with them – they must collaborate to ensure
that the supplier is able to supply good quality raw materials / components at
reasonable costs.
 Time: Processes are carried on raw materials / components, and components are
assembled into products. All these processes and assembling take time, and lesser
are these times, more efficient is the production process, but if a company tries to
reduce these times by increasing the speed of its machines, quality of its products is
likely to deteriorate, and its machines are likely to breakdown more frequently.
 Infrastructural facilities: Production processes are likely to be carried out smoothly
if production area is clean, airy, and well-lit.

3. Transformation system: This part of the production system adds value to inputs. This can be
done in following ways:
 Alter: Something can be changed structurally: there would be physical change in the
raw materials / components – for example, two components are welded together or
a component is painted. Sensual alteration is very important in service industry –
sensual alteration happens when air conditioner is switched on in a restaurant, and
it increase the value of the meal the guests are having. Psychological alteration can
have value such as feeling of worth from obtaining a masters degree, or feeling of
importance when someone opens the door for a guest entering a restaurant.
 Transport: An entity may have more value if it is located somewhere other than
where it is currently located – for example, when a component is assembled into a
product, it becomes much more valuable than when it was lying in the store, or
when a bouquet is delivered to a guest, it becomes more valuable than when it was
lying in the store.
 Store: The value of an entity may be enhanced if it is kept in a protected
environment for some period of time – for example, value of a fixed deposit
certificate increases in value with time.
 Inspection: An entity may be more valued when its properties are understood better
– for example, when a product is inspected and certified as OK, it becomes much
 more valuable that when it had not been certified as OK. Similarly, when jewelry is
appraised and certified, customers are willing to buy them at higher prices.

4. Output: Two types of outputs commonly result from a production system – products and
services. Products are physical goods, whereas services are abstract or non-physical. But,
difference remains ambiguous in cases like hotel industry – for example, to guests in a
restaurant, quality of meals may be as important as demeanor of employees serving them.
Products are easy to comprehend, but service has to be understood either as an exclusive
offering from a company that is primarily intangible, or as a part of the service-product mix
that a company offers. Services are bundle of benefits, some of which may be tangible and
others intangible, and they may be accompanied by facilitating goods.

 At one level, service is an intangible offering with little or no transfer of physical

products to the customer. Car rentals, insurance and education are some examples
of such services. The physical goods associated with the offering do not provide
major satisfactions to the customer and he is primarily interested in the service part
of the offering.
 At another level, service is one part of product-service mix being offered to
customers. Restaurants are examples of such services. The physical goods are as
important as the service part of the offering and customers have to be satisfied with
both parts of the offering.
 At the third level, the main offering is the product but the supplier also provides
some services. Car service and installation of equipment are some such services. The
product is the main consideration when a customer is evaluating such an offering
but in times of increasing product-parity, such ancillary services have become the
differentiating factor between offerings of competitors.
 At the fourth level, every product or service or any combination of the two,
ultimately is supposed to provide service to customers. Thus, a customer buys a car
because it provides him transportation services. This idea is gaining ground as
companies are increasingly trying to become customer oriented. When a company
thinks of itself as a manufacturer, it tends to focus on measures of internal
performance, but when it considers itself a service provider, its focus is on customer.
Improved customer service should be motive for all improvement efforts of all
companies.

5. Monitoring and control: Consistency is a big problem in operations – no two products are of
exactly the same dimension, and no process variable is of same value at any two times. A
product’s specified length may be 10.5 mm, but no two products will be of exactly 10.5 mm,
and a machine may be required to run at 100 rpm, but at no two times will it be running at
100 rpm.
Monitoring process must tell when significant changes are occurring and apply corrective
measures to alter inputs / transformation system, and thereby the outputs – for example, if
the machine is not running at 100 rpm, it must be stopped and rectified.
Customer needs, underlying technologies of products, and process technologies are constantly
changing, and hence it is necessary to continuously monitor the production system and take action
when the production system is not meeting its goals like those of achieving certain level of quality at
a certain cost. It may also be that current goals are not appropriate, indicating a need to revise the
goals, or the goals may be fine, but the inputs or the transformation system or both have to be
changed. For example, reducing cost may not be an appropriate goal when customers are
demanding high quality products or new process technologies may have emerged which the
company has not incorporated in its production system or new materials may have been synthesized
which the production system is not using in its products.

TASKS IN OPERATIONS MANAGEMENT / SCOPE OF OPERATIONS MANAGEMENT

Operations management is a broad discipline that consists of many different tasks. Two major tasks
are (i) designing the production system and (ii) operating and controlling the production system. The
production system is designed once in many years, and is mostly the responsibility of senior
managers. Operation managers are mainly responsible for controlling and operating the production
system –scheduling of equipments and manpower, quality control, maintenance, and purchase of
materials are its typical tasks.

Product design

The design of product largely determines the design and operation of production system. The
design of the product will mandate the processes that have to be employed to produce the product,
which in turn will determine the equipments and skills that will be required. The design of the
product will mandate the materials that have to used to produce the product, which in turn will
determine the kind of suppliers that have to be contracted to supply the required materials.
Therefore, product designers must consider how their designs will be produced when they are
designing the product – for example, will its production require complex processes and hence
sophisticated equipments or will it be made of expensive materials or will it be produced only by
highly skilled workers. Product designers should not be wary of redesigning their product to make it
producible – difficult-to-produce products will have high manufacturing costs, and the market may
not be able to bear the corresponding high prices.

Production process design or facility layout

The design of the production process will determine the extent of customization, costs, and quality
of product. Two extreme choices of production processes are (i) Line layout and (ii) Job shop layout.
In line layout, the sequence of operations in the product determines the sequence of equipments –
for example, if welding is the first operation that has to be carried out on the product, then welding
machine will be the first equipment in the line layout, and so on. All products have to be processed
on all the equipments in the same sequence. An automobile assembly line is a typical example of a
line layout. Line layout can produce only standard products, but in large quantities and at low costs.
In job shop layout, similar equipments are placed together in departments – for example, all welding
machines are at one place in welding department. Products move to various equipments depending
on whether they are required to be processed on that equipment – for example, product X may go
to welding shop while product Y may not go to welding shop. A hospital or a tool room is a typical
example of a job shop layout. Large variety of products can be produced, but only in limited
numbers and at a higher cost.

Capacity planning
Capacity is the ability to produce in quantitative terms – for example, how many cars can be
produced in a day. Capacity should be linked to demand, but while demand changes frequently and
incrementally, capacity can be added only in larger quantities, and it almost always takes time to
install capacity. There will always be some gap between demand and capacity – sometimes demand
may be more than capacity in which case short term strategies like overtime may be adopted, and
sometimes capacity may be more than demand in which case counterintuitive strategies like
producing a competitor’s products may have to be adopted. Capacity can be kept more than
demand if per unit profit is high, and capacity can be kept less than demand if production cost has
high fixed cost component.

Facility location

A manufacturing facility may be near its competitors – it gets access to competitors’ suppliers and
employees if it is near its competitors. In most cases, manufacturing facilities are located where the
costs of factors of production are minimum. A service facility would not like to be near its
competitors – its competitors will take away its customers if it is near its competitors. But if it is a
strong service brand, it can locate near its competitors – the place having all major providers of a
service will attract large number of customers, but it will take most of them due it being a strong
brand. In most cases, service facilities are located near customers.

Job design

A job is sum of tasks, and a job holder should like all the tasks of his job. A job can be designed in
primarily two ways: (i) A job consists of a single task or very few tasks. The job holder specializes in
the small number of tasks that have been assigned to him, and he enjoys doing them over and over
again – he is not bored. Such narrow jobs are common at both high and low end of job spectrum –
workers working on assembly lines carry out only a few tasks, and super specialized knowledge
workers like doctors again carry out only a few tasks. (ii) A job consists of many tasks. Such broad
jobs are of two types: (a) managers typically have broad jobs – they are expected to deal with variety
of issues, though they may not specialize in any one of them. (b) Workers are given large number of
tasks under the pretext that they would get bored doing a few tasks over and over again – they set
up their machines, bring material to their machine, carry out the required operation, carry out
inspection, and fill a report. Another aspect of job design is the degree of control that workers have
on factors that affect their performance in their jobs – can they influence the purchase of the
equipments that they will operate or do they have a role in deciding the process they will use to
produce their assigned component? A worker is said to be empowered if has significant control over
factors that affect his work.

Quality management

From being a competitive advantage, quality has become a hygiene factor – customers will not even
consider a company’s products if they do not match with their expectations of what a quality
product should be. Though customers’ expectations are shaped by what they pay for a product and
how the company’s competitors are faring on the quality frontier, it is a irrefutable fact that
customers are more finicky about quality today than any time in industrial history. Quality has
multifarious links: (i) Does the design of the product deliver the benefits that the customers expect
the product to deliver? (ii) Can the installed production processes faithfully achieve the dimensions
such as length and width as prescribed by product design? (iii) Are the equipments capable of
achieving the tolerances as prescribed by product design – for example, length of rods should be
between 10.4 and 10.6 millimeters with target length of 10.5 millimeters (iv) Are workers suitably
trained? (v) Are equipments properly maintained – is there a preventive maintenance schedule in
place? (vi) Do suppliers understand the company’s philosophy, and do they have the technologies,
equipments, and the skills to meet the company’s expectations on quality? Since quality has such
multifarious links, it is important that each employee is able to understand as to how his job impacts
the quality of products / services that their company is producing. Every employee is responsible for
quality, and it is not the responsibility of a few people in the company – this is the fundamental
principle of Total Quality Management.

Materials management

Materials should be available as and when, and where they are required, and in the number they
are required – no more than they are required , no earlier than they are required, and no where
other than where they are required. For example, if 100 gear shafts are required on assembly line at
8 am, material should not have arrived the previous night, and more of them should not be lying in
stores. Inventory should not be held at all, and if it is held at all, its purpose should be clearly defined
– for example, a company requires 100 gear shafts, but orders 110 of them because it is not sure if
all 100 of them would be of good quality. Therefore, the company maintains inventory to cover up
for bad quality, and it would not have maintained inventory if it would have been sure of all the
products being of right quality. Similarly, companies maintain inventory because they expect some
of their equipments to fail or they expect their suppliers to falter on their commitments or they have
set up times or lead times. Therefore, companies can reduce their inventories only when they have
(i) robust quality system (ii) rigorous preventive maintenance schedule (iii) competent supplier base
and (iv) small set up or lead times – these are the pillars of Just-in-time production system.

Scheduling

Scheduling allocates available resources like equipments and workers to components and
customers – for example, customer X would be served by service representative A, and component Y
would be manufactured on equipment B. Scheduling is done in ways so that customers /
components do not have to wait to be served / processed, and workers and equipments are not idle
– good scheduling results in low waiting times for customers and components, and less idle times for
equipments and workers.

Table: Tasks in operations management

TASK MAIN ACTIVITIES

Product design Product design should serve customers’
requirements and should be easily producible
Production process design Line process produces small variety of
products in large volumes, and job shop
process produces large variety of products in
small volumes
Capacity planning Capacity can be kept more than demand if per
unit profit is high, and capacity can be kept
less than demand if production cost has high
fixed cost component.
Facility location A manufacturing facility is located where cost
of factors of production is low, and a service
facility is located near customers
Job design An employee is assigned tasks that he likes
doing and is good at
 Quality management Production processes faithfully achieve the
dimensions that are prescribed by product
design
Materials management Materials are made available as and when,
and where they are required, and in the
number they are required
Scheduling Allocates available resources like equipments
and workers to components and customers

COMPARISON OF PRODUCTION SYSTEM OF PRODUCT AND SERVICE

Production systems of product and service differ in following ways:

1. Product is a tangible output that can be touched, held, and stored – examples are cars, air
conditioners, and burgers. Service is an intangible output that satisfy some needs of
customers. It enhances customers’ life in some way, but it cannot be touched or stored –
examples are health care services and legal assistance. Some services also enhance
usefulness of products – for example, after sale service and delivery. Most companies
provide mixture of product and service – for example, restaurants produce the tangible
product of food along with intangible services such as pleasant ambience.

2. Production systems that produce products are called manufacturing systems, and the
production of products is called manufacturing. Production systems that produce services
are called service systems.

3. There is very little customer contact during production of product. There is direct customer
contact during provision of service.

4. There is no customer participation during production of product. Most customers for

products have no contact with the production system. In contrast, there is frequent
customer participation during provision of service. Customers may be required to carry out
part of the process as is the case in quick-service restaurants. In other cases, customers have
to collaborate with service providers to enable the latter to provide good service as is the
case in medical care – for example, patients who are able to explain their medical conditions
clearly are likely to receive better treatment than those who are not able to do so.

5. In manufacturing, division of labor is widely employed, and each worker does only a small
part of the total task of manufacturing a product. Tasks are repetitive – a worker carries out
the same task each time the product is produced. Division of labor is not so widely employed
in service systems, and an employee may provide the entire service all by himself. Also,
customers’ requirement may vary even for the same basic service, and employees of service
systems must be flexible and creative.

6. Response times vary. A manufacturer can take days or even weeks to meet customer
demand, but a service provider must be able to provide service within minutes of a
customer arriving in his facility. Service providers also have difficulty in matching capacity
 with demand as customers usually arrive at times of their choosing – most of them may
choose to come at the same time, as they do when most of them decide to watch evening
show on a weekend. Also, arrival patterns may fluctuate daily or even hourly, creating even
more short-term demand uncertainty – for example, most people like to dine at around 9
pm rather than at 7 pm or 11 pm, and hence restaurants face maximum rush at 9 pm, while
they are relatively empty at 7 pm and 11 pm..

7. In manufacturing, quality is assessed against design specifications – for example, quality is

good if length of rods is between 10 ± 0.1 cm. In service systems, quality is assessed against
customer preferences and expectations, which can be fuzzy – for example, one customer
might value a friendly conversation with the salesclerk during a purchase while another
customer might value speed and efficiency of transaction. And quality can be assessed only
after the service has already been provided. In contrast, bad quality products can be
prevented from reaching customers by inspecting them before delivering them to customers
– service cannot be inspected for its quality before it is delivered. Therefore, service
providers should be properly trained, and motivated to provide good quality service – the
concept of producing good quality ‘first time and every time’ is more important in
production of services than in production of products.

8. Customer needs and corresponding quality standards are defined by customers themselves,
and hence are difficult to identify and measure – each customer may define them
differently. Also, services may have to be customized for individual customers – for example,
doctors and lawyers must customize their services for individual customers.

9. Bad quality products can be recalled and replaced, whereas bad quality service can be
rectified by reparations and apologies – this process of compensating and appeasing
customers is known as service recovery.

10. Production of products can be separated from the customer in space and time more easily
than can the production of services. A manufacturer can produce at a constant rate, and
keep its products in inventory when rate of demand is less than rate of production, and
serve customers from inventory when rate of demand is more than rate of production. In
contrast, service is produced and consumed simultaneously.

11. Product is consumed over time – for example, a customer uses a car for a few years. Service
is consumed immediately – for example, a customer enjoys the hospitality of a resort only
till he is there.

12. Products can be stored for later use and transported over space before use – Products are
manufactured at few locations, and are transported to customer locations. There is time gap
between when a product is produced and when it is used. Service cannot be stored – there
is simultaneous production and consumption of service.
 13. Manufacturing facilities often serve regional, national, or even international markets, and
hence they require larger facilities, more automation, and more capital investment. And
since most services cannot be transported to where customers are, larger number of smaller
service facilities have to be established.

14. Less labor and more equipment is used in creation of product. Since a product can be
produced at a few places, and transported to customer locations, equipments of high
capacity can be employed to produce them. More labor, and less equipment is used in
creation of service. Hence, behavior and morale of service providers play very important
roles in provision of services – for example, hospitals and banks have found out that
behavior of their employees is a strong determinant of customer satisfaction.

15. Some services like air transport are equipment based, while other services like hair styling
are people based.

16. Manufacturing systems use more raw material inputs than service systems – products are
made of materials and components, while services are rendered mostly by acts of service
personnel.

17. Sophisticated methods of measurements are used to measure outputs of conversion process
of product. Elementary methods of measurement are used to measure outputs of
conversion process of service – customer satisfaction measures are often used to measure
effectiveness of service delivery system.

18. In service operations, it is difficult to distinguish output and throughput. Output is a

generated service. Throughput is an item going through the process. In a hospital, output is
the medical service to the patient, who by going through the conversion process is also the
throughput. At a restaurant, customer does not go through the conversion process. The
output is food and throughput is raw materials used in its preparation.

Table: Comparison of production system of product and service

PRODUCT SERVICE
Product can be stored for later use and Service is produced and consumed
transported over space before use. simultaneously
Bad quality product can be recalled and Bad quality service can be rectified by
replaced reparations and apologies
Quality is assessed against design Quality is assessed against customer
specifications preferences and expectations
There is no customer participation during There is frequent customer participation
production of product. during provision of service.
PRODUCT DESIGN
Companies launch new products to serve customers’ expressed needs. Companies also launch new
products when they believe that they have the technology to serve customers’ latent needs. New-
to-the-world products like mobile phones are successful when new technologies are appropriately
applied to serve customers’ latent needs. Ideas for new products can come from customers,
marketers, R & D department, and production and engineering departments.

A company’s ability to design and launch products will determine its competitiveness. Product life
cycle is shortening – customers’ changing preferences and emergence of new technologies make
existing products redundant. Therefore, companies need to design and launch products quickly as
well as efficiently: A product may become outdated by the time it is launched because its underlying
technologies and / or customers’ preferences change as the product is being designed – therefore,
the time lag between conceptualization of a product idea and its launch must be compressed. And
since the company launches many more products than it did earlier, it must expend less resources in
each launch than it did earlier – its product development process must be efficient.

Design cannot be the sole prerogative of designers – a design must be produced easily and
inexpensively. Personnel from production must give feedback on the producibility of the design
before it is finalized so that modifications can be avoided – when a design it modified to make it
producible, it may compromise on some of the customer needs that it was originally designed to
serve. Suppliers give feedback on availability of components and materials – a supplier may already
be producing a component similar to the one that the designers are conceptualizing. Technologists
must be actively involved in the design process – they must regularly update the design team on the
product’s underlying technologies. Similarly, marketers must regularly update the design team on
customers’ preferences. And then social scientists must keep the designers updated on how people’s
needs are changing due to changes in the social and economic environment.

Design is as important for services as it is for products. Since service is intricately linked to its
delivery system, design of service will involve simultaneous design of its delivery system. New
technologies enable a service to be delivered differently than it was done earlier – delivery system
changes, but the service remains the same. For example, people have been transferring money to
each others’ accounts through cheques, but now it can be done through online banking.

Q1 ) PRODUCT DEVELOPMENT PROCESSES

A company’s product development process passes through following stages:

Need identification

It must be demonstrated that the new product will serve some customer needs, and also that
existing products do not already serve the same customer needs.

Generation of ideas

Because of their proximity to customers, marketers can identify customer needs that the company
can serve by designing and launching new products. It is very important that marketers spend time
with technologists and designers of the company, so that they understand as to what type of
customer needs the company can serve. Unfulfilled customer needs are always in plenty, but
marketers will make positive contribution to the product development process only when they are
able to pluck customer needs that the company is capable of serving.
Designers know what customer needs the company can serve well. They can come up with product
ideas based on the technologies and other competencies that the company may possess. If designers
spend enough time with customers, they would instinctively know which of these product ideas
would serve their needs.

A company may follow second-to-market strategy, and may choose to imitate a proven new idea or
it may purchase someone else’s invention. Imitation gives an opportunity to study any possible
defects in original product and rapidly develop a better design, often at a better price. Purchasing an
idea or an invention eliminates the risks inherent in research, but it still requires the company to
develop and market the product.

Competitors are also a source of ideas for new products. A company can use perceptual maps,
benchmarking, and reverse engineering to learn from their competitors.

 Perceptual map: The company compares its product with those of its competitors.
 Benchmarking: The company compares its product with the best product in the market.
 Reverse engineering: The company dismantles and inspects a competitor’s product to see if
it can incorporate some of its benefits and features into its own product.

Screening or Advance product planning

It includes the following stages:

 Market and economic analysis: Customer surveys are carried out to find out if the proposed
product would serve the customer needs that it is meant to serve. Customers are also asked
whether the proposed product would meet their needs as regards its price, performance,
quality, and reliability. The company also tries to assess if the proposed product will have
enough demand to justify investments in its development, production, and launch – will it
earn enough profits?

The company tries to assess if the proposed product is similar to an existing product, and
hence will cannibalize its sale. It also tries to assess as to how the proposed product fits in
the company’s product portfolio: Will it increase the sale of other products or will it reduce
the sale of other products? Will it enhance the overall reputation of its product portfolio or
will it damage the overall reputation of its product portfolio?

The company tries to assess if the proposed product can be produced easily and
inexpensively. It also tries to assess if the proposed product can be produced in the existing
production facility or a new production facility has to be installed to produce it. And, that if a
new production facility has to be installed, will it generate enough sales to justify the
investments in it?

The company tries to identify existing products that would compete with the proposed
product, and tries to gauge the probable reactions of the manufacturers’ of these products
to the launch of the proposed product – will they reduce price or will they increase
advertising intensity or will they load more features and benefits in their products?
 It also determines the possibility of patenting the product as well as possibility of patent
infringement.

It is important to remember that there might be clash of views between business and
technical personnel – good technical ideas are often adjudged to have insufficient market
potential, and hence are not pursued.

 Financial analysis: The company calculates the investment that would be required to design,
produce, and market the product. It also tries to determine per unit profit of the product. It
also calculates payback period, net present value, and return on investment to evaluate the
financial viability of the project. It carries out breakeven analysis to determine the number
of units that it would have to sell before it starts earning profits.

 Analysis of Product Life Cycle: The company tries to determine the length of each phase of
the product life cycle of the proposed product. This is important, because if introduction
phase of product is long compared to its maturity phase, the company might not be able to
recover its investments.

 Organizational fit: The proposed product should capitalize on organization’s core

competencies and competitive advantage, complement its existing products, and fit into its
structure, goals, and plans for future.

Create alternate concepts for the product

The idea is developed into several product concepts. A product concept is a particular combination
of features, benefits and price. Alternate product concepts are evaluated by customers. Though it
may still be a description rather than the actual product, customers have something tangible to react
to. This process allows customer feedback to seep into the new product development process early
enough for designers to evaluate the degree of acceptance of the proposed product. As the physical
product may not be available at this stage, companies go in for a verbal or pictorial description of the
product to let customers have an idea about the actual product. Prospective customers present
feedbacks regarding the attractiveness of the features and benefits offered by the proposed product.
Usually, the intention of the company is to gauge the most desirable combination of benefits and
features that customers are willing to pay for.

Engineering design

The company zeroes on a product concept that it will design, produce, and market. Therefore, the
company has decided what features the product would have, what benefits would it provide, and at
what price would it sell. Design engineers now design the components that would constitute the
product so that it has the required features and gives the desired benefits. Technical expertise of the
company comes to the fore during this stage of the product development process. Large number of
different types of technical specialists may be required to collaborate for long periods of time to
come up with specifications of components.

Though design engineers dominate this phase of product development process, operations
managers should provide design engineers with information about the producibility of the
components being designed. Operations managers should be included in decisions about equipment
design, since they know more about equipments than do design engineers. If the product requires a
new material that has special properties, materials managers and suppliers should be consulted.
Design engineers must be keenly aware that the product must be designed for functionality,
reliability, maintainability, and producibility.

 Design for functionality – The product should serve the customer needs for which the
product is being designed.
 Design for reliability – The product should function adequately over a defined period of
time.
 Design for maintainability – The maintenance processes should not be cumbersome, time-
consuming, and expensive.
 Design for producibility – The product should be easy to manufacture.

Prototype testing

The design is converted into a prototype. The prototype may take the form of physical model, a
computer simulation, or a real product. Tests are conducted and the design may be accepted,
modified, or rejected.

Final design

The design is fine tuned to accommodate the results of prototype testing, and any changes in
product’s underlying technologies and / or customer needs that might have taken place while the
product was being designed.

Design and development of the production process

The detailed product design is now available. The focus shifts to designing production processes,
installing equipments, and enrolling suppliers.

Launch of the product

The company produces the required units of the product, and makes them available to its channel
partners like distributors and retailers.

Product evaluation and improvement

Customers’ feedback is tracked, and failure data is analyzed. Formal research is conducted to
understand customers’ experience with the product. The company keeps itself updated on product’s
underlying technologies and process technologies used to produce the product. Product is
redesigned if customers’ feedback are persistently negative, or if new technological breakthroughs
enable design and production of a better product.

Product use and support

 Customers are trained to use the product. It is important that customers use all the features
of the product, and get all the benefits that the product is capable of providing. Customers
will not rate the product highly if they do not get all the benefits that the product is capable
of providing just because they cannot use them well. For example, less tech-savvy customers
use their smart phones just to make calls and send messages.

Customers are provided with warranty and repair services. The company should provide
comprehensive warranty and prompt repair services for those components of the product which are
most likely to fail
DESIGN PRINCIPLES

Design principles guide the designers. Following design principles are useful:

 Standard component: A standard component is used by many companies in their products –

tire is a standard product, as many brands of cars of different companies may run on exactly
the same tires. Companies specialize in such standard components, and they have
aggregated huge amount of product and process knowledge in their product areas. Since
standard components are used by large number of companies, they are able to achieve huge
economies of scale. The result is that standard components are of very high quality, but their
cost is reasonable. Designers should always consider if a component that they are
contemplating designing can be substituted by a standard product – this deliberation should
always be the first item on the agenda of the first meeting of the team responsible for
designing a component. Most of the time, small amount of tweaking can result in making a
standard product a good substitute for the component that is to be designed – for example,
designers may be contemplating designing a motor of 4.5 horsepower for their product, and
all they need to do is to evaluate if the standard 5 horsepower motor would be good enough
for the product. If yes, they would be saved of the worry and cost of designing the product,
and also its process technologies.

 Common component: A common component is used by many products of the company –

for example, an automobile company may use the same steering wheel in four of its brands
of cars. Designers should always evaluate if a component that is already being used in some
other product of the company can be a good substitute for the component that they are
contemplating designing. Since the component is already being used, its product and
process technologies are understood, and the company can work to improve its quality and
reduce its cost by using the budget that was reserved for designing and developing the
component. And since a common component is produced in large volumes, it can reap the
benefits of economies of scale.

 Simple assembly process: Components should be easy to stack – if components are

designed by separate teams, the teams should meet to discuss how the components would
be stacked in the product, and if some specifications of some components have to be
changed to make their stacking easier, they should always be done. Component designers
should always remember that the assembly process will be carried thousands / millions /
billions of times depending on the success of the product, and hence any amount of time
they can save on the assembly time will have huge impact on the profitability of the product
during its entire life. Ease of assembly is probably as important as quality or cost of
components, but since components are designed by separate teams, ease of assembly
mostly falls through the cracks. The project leader must ensure that component designers
meet to discuss how the assembly process can be made simple.

There are four areas of concern: (i) Designers should ensure what is being called mistake-
proof assembly – the idea is that designers should anticipate what can go wrong in the
assembly process, and instead of relying on intuitiveness and steadfastness of operators to
 avoid such mistakes, they should design the assembly process in such a way that those
mistakes cannot occur. For example, if two components look similar, and there is a fear that
an operator may insert a component in the wrong place, the components should be of
different colors, and their colors should match with the color of the place where it is to be
inserted – for example, blue component will go in the blue colored slot and red component
will go in the red colored slot. (ii) Tests have to be carried out during the assembly process,
and also after the product has been assembled. Designers have to specify locations in the
assembly process where the tests would be carried out, but more critical issue is to decide
the actions that would be taken if a test fails – if a failed test requires lot of de-stacking and
extensive rectification of components, the assembly process would be slowed down.
Therefore, designers should simplify the process of de-stacking and rectification when a test
fails – the process should take as little time as possible. And there should be no final test of
the product since it might involve extensive de-stacking and rectification, which is wasteful.
The tests should be planned in a way that the so called final test is the just the last test in the
series of tests that have to be carried out – no more elaborate than the other tests, involving
no larger de-stacking and rectification than other tests. (iii) Stacking of components should
not require much effort – stacking should be from top, several components should not have
to be held together at one point, and once a component has been stacked it should not have
to be removed or adjusted to stack another component. (iv) Large numbers of components
have to be fastened together during the assembly process, hence fasteners should be
convenient to use – clamps should be used as often as possible, and small screws of high
quality should be used rather than long screws which takes lot of time in fastening.

 Reasonable specifications: Designers are always tempted to use the best – best raw
material and best component should be used. Most designers over-specify – for example, a
lap top should not be able to withstand a fall from The Mount Everest, and a class room
should not be expected to survive a raging wire. Most products are not normally used in
such extreme circumstances, and hence they should not be designed for such usages. Over-
specification has cost, and it can escalate if designers are not questioned frequently if a
lower specification would serve the functionality desired by customers. Designers should
always bear in mind that specifications do not have a life of their own – they are there to
provide the functionalities that customers desire.

 Reasonable tolerance: It is known that lower tolerance results in better quality than higher
tolerance – a product with a target specification of 10 cm is of higher quality if it is produced
within 9.9 – 10.1 cm than if it is produced within 9.8 – 10.2 cm. But producing products of
lower tolerance is expensive – it requires more sophisticated equipments, and chances of
rejects are higher. Designers are tempted to specify lower tolerances because lower
tolerances assure them of high quality, but tolerance should be linked to functionality of the
product. Designers should be encouraged to specify larger tolerances as long as such
tolerances do not compromise the functionality of the product.

Table: Design principles

Design principles Implications

 Standard component They are produced in large volumes, and
hence high quality is achieved at low cost
Common component The component is already being used, and
hence its product and process technologies are
understood,
Simple assembling process Stacking is from top. Fasteners are convenient
to use.
Reasonable specifications Designers do not over-specify – specifications
provide the functionalities that customers
desire.
Reasonable difference Designers specify larger tolerances as long as
such tolerances do not compromise the
functionality of the product.

CONCURRENT DESIGN

Companies have been following what is now famously called ‘over-the-wall’ design process.
Designers would work on a design till they were satisfied that their design would meet customers’
functional and aesthetic needs, and then they would pass on the design to production department.
It never bothered the designers if their designs could be produced, or how difficult or easy, or how
expensive or inexpensive would it be to produce it. The production personnel would often discover
that they have to buy new equipments and tools to be able to manufacture the product, and that its
manufacturing would involve complex processes and expensive materials. Since all these factors
would raise the cost of manufacturing of the product, production personnel would send back the
product to the designers asking them to redesign the product. Designers set down to redesign the
product with explicit intention of making it producible. And such redesigning can become dangerous.
In their obsession to make the product producible, they may make changes that may compromise
the functionality and aesthetics of the product – the key reasons why customers would buy the
product. Therefore, designers may end up designing a producible product, but it may be a product
that customers would not like to buy.

 Producible design: The idea is to motivate the designer to consider how the product would
be manufactured as he is designing the product. He needs to understand that his best design
would no serve no purpose if it cannot be brought to the market fast, and at a price that the
customers find acceptable – the designer has to accept the responsibility for producibility of
the product.

 Concurrent design: The idea is to design and test the production process while the product
is being designed. As designers release specifications, engineers set up production process
to check if they are easily producible. Engineers also determine if they have to buy new
tools and equipments to be able to manufacture the product. If some specifications have to
be changed to make the product producible, engineers sit with designers to explain the
matter to them. Designers have been often reluctant to release specifications of their
modules early in the fear that they would have make changes in them either to
accommodate specifications of other modules or to accommodate new finding from the
market or to incorporate new technologies that might have emerged. It is important that
designers are made to understand that these are very valid reasons for making
modifications in specifications, and that having to make modifications in one’s design is
 indication of their lower designing acumen – they are not sufficiently aware of what their
fellow designers are doing and how their customers’ needs and the product’s underlying
technologies are evolving. Concurrent design can be successful only if designers release
their specifications early. It is important to clarify that designers still control the design
process – if designers insist that certain specifications cannot be changed because they
would compromise the product’s functionality and aesthetics, they cannot be bulldozed into
changing those specifications to make the product producible.

 Design team: Design team should include personnel from manufacturing, purchasing,
marketing, and finance. It should also have a senior manager among its midst. The idea is to
prevent the designers from designing extravagant products which would be difficult to
manufacture and sell. Personnel from manufacturing, purchasing, and finance keep
reminding the designers that the product design has to satisfy criteria other than
functionality and aesthetics, and they are available to give the designers any feedback that
they would require on their designs – purchaser would immediately tell them the cost of the
material that they might be contemplating using, and the process engineer would
immediately tell them if the specification that they were thinking of finalizing could be
inexpensively produced. The senior manager would keep reminding designers that that the
product design be in line with company’s strategy. Such a team structure is not really an
intrusion into the work of the designers – their work is facilitated as they have people to
guide them in processes like manufacturing and purchasing, which they do not understand
very well, but which are critical for the success of the product.

 Supplier involvement: Many companies are outsourcing extensively, and many suppliers
have developed sophisticated competencies in many product areas – they may know more
about latest product and process technologies in their area of competence than the buyer.
Companies that are outsourcing manufacturing of components are losing the technological
grip of the components whose manufacturing they are outsourcing since they do not have
engineers in these product areas – it is futile to believe that companies can keep excelling in
designing of components that they have been outsourcing, because they simply do not have
the technological bandwidth to do so. Therefore, it is best to involve suppliers early in the
design process, and let them design components that they are ultimately going to
manufacture. But, suppliers cannot be left alone to design components since they need to
understand the philosophy and rationale behind designing the product. Therefore, suppliers
have to be intrinsic part of the design team – they are outsiders to the company, but for all
practical purposes, they belong to the company. Suppliers are also helpful in another way –
since they are also working for other companies, they may suggest components that they
may already have designed for another company. If the design is acceptable to the
company, the company is saved the worry and cost of designing the product. In addition,
the supplier will not have to acquire new equipments and tools to be able to manufacture
the product, and since he already has some experience in manufacturing the component,
the cost of manufacturing would be lower than what it would be if he manufactured a
completely new component.
  Customer involvement: Marketers take feedback from customers, and pass them on to
designers – it is too passive a approach to be successful. Also, distortions take place as
customers’ needs travel to designers through marketers. To make a successful product,
designers have to understand customers’ needs in all its glorious sophistication and
nuances, and for this to happen, designers have to be in first-hand contact with customers.
But the idea has to move beyond designers asking their needs – representative and
interested customers have to be part of the design team. They have to be part of the
deliberations when designers make tradeoff between different levels of functionality,
because highest levels cannot be provided for all functionalities – customers will make the
best tradeoff because they know the precise level of each functionality that they want in the
product.

Table: Design philosophy

DESIGN PHILOSOPHY IMPLICATIONS

Producible design Components have simple shapes, and have
higher tolerances
Concurrent design As designers release specifications, engineers
set up production process to check if they are
easily producible
Design team Design team includes personnel from
manufacturing, purchasing, marketing, and
finance
Supplier involvement Suppliers are involved in the design process,
and they help in designing components that
they are ultimately going to manufacture.
Customer involvement Customers are part of the deliberations when
designers make tradeoff between different
levels of functionality

MODULAR DESIGN

A product is separated into modules or subsystems. For example, a pen consists of three modules –
body, cover, and refill. The modules are interchangeable. For example, if a company makes five
varieties each of body, cover, and refill, any of the five covers can fit with any of the five bodies, and
any one of the five riffles can fit into any of the five bodies. A total of 5 3 = 125 varieties of pen can be
made by designing and manufacturing 5 x 3 = 15 components. If 125 varieties of pen had to be made
in the traditional way, 125 varieties each of body, cover, and refill have to be designed and
manufactured – 125 x 3 = 375 components have to be designed and manufactured. Modular design
offers special type of customization – a customized final product is made of standard components. A
customer can select any one type of cover, body, and refill, and get a pen of his choice assembled.
Modular design will work in products which can be made of separate and interchangeable
components, and when range of performance and price of a component is significant. Modular
design will work if the price of the refill, body, and cover ranges from Rs. 10 to 100 – customers will
express themselves by their choice of modules. A sincere student may buy a refill of Rs. 100, but he
may buy cover and body of Rs. 10 each. In contrast, someone who wants to show off will buy cover
and body of Rs. 100 each. But it is unlikely to work if price ranges merely from Rs. 10 to Rs. 20 –
there would merely be two or three segments.
In sum:

 Products are created from some combination of preexisting subsystems.

 Customers get a larger variety of products.
 Only subsystems are stored. Products are assembled as demand arise for them.
 Problems are easier to diagnose and modules are easier to serve.

QUALITY FUNCTION DEPLOYMENT

It is a method to bring customer needs into the design process. Customers are asked as to
what attribute of the product are important to them. For a pen, such customer needs may
be (i) How smoothly does the pen write (ii) How long does it last (iii) How convenient is it
hold it (iv) How does it look (v) Does it leak. The quality function chart depicts these five
customer needs. Customers are also asked to rank them – for example, customers may feel
that it is most important that the pen writes smoothly, and hence it is given a rank point of
5, and they feel that how convenient is to hold the pen is the second most attribute of the
pen, and hence it is given a rank point of 4. This exercise may show interesting results – for
example, out of 100 customers who are surveyed, 50 customers rank the ability of the pen
to write smoothly as the most important customer need, while the rest of the 50 customers
rank the look of the pen as the most important customer need. Such findings reveal
existence of two segments, and the company should explore the possibility of designing two
pens – one focusing on its ability to write smoothly, and the other focusing on its looks. It is
possible to design a pen that has astonishing looks and writes smoothly, but it would be very
expensive, and 50 per cent of customers would not be willing to pay for the one attribute
that they are not passionate about – 50 per cent of the customers who are obsessed with
looks of the pen would not want to pay for the pen’s ability to write smoothly, and vice
versa.
 After customers’ needs have been unearthed and ranked, engineers are brought in the
scene. They are asked to list technical attributes that will lead to satisfactory satisfaction of
identified customer needs. For example, viscosity of ink may be strongly linked to the pen’s
ability to write smoothly, while the quality of the material of the pen may be strongly linked
to the look of the pen. Such technical attributes may be (i) viscosity of ink (ii) density of ink
(iii) quality of nib (iv) quality of material of the body (v) dimension of the body. Further,
engineers specify how strongly is a technical attribute linked to a customer need. For
example, viscosity of the ink is strongly linked to the pen’s ability to write smoothly, and it is
moderately linked to the pen leaking or not leaking, but it is not at all linked to the pen’s
looks. Strong relationships are given top relationship rank point of 5, while weaker
relationships are given low relationship rank points of 2 and 1. The corresponding cell is left
empty if there is no relationship between a customer need and a technical attribute – for
example, viscosity of ink is not linked to looks of the pen. The importance of a technical
attribute is found out by multiplying customer need rank point by the corresponding
relationship rank point and adding them up. The technical attribute with the highest total
points is the most important technical attribute, and hence should receive maximum
investment and attention.
 In the next level of analysis, customers are asked to evaluate competitors’ pens on various
customer needs. For example, customers may reveal that pen of competitor 3 writes most
 smoothly, and hence it is given the highest comparison rank point of 4, and it may consider
the company’s pen to write least smoothly, and hence it receives the lowest comparison
rank point of 1. The company gets a complete picture of how customers view its pen in
comparison to those of its competitors on all customer needs.
 In another level of analysis, engineers tear down competitors’ pens and evaluate their
technical attributes. For example, they may find out that pen of competitor 2 uses the best
material, and hence it gets a technical comparison rank point of 4, and it may consider that
competitor 1 uses the worst material, and hence it gets lowest technical comparison rank
point of 1. The company learns which technical attribute it has to improve.
 PROCESS DESIGN
Line flow process

The products are discrete such as automobiles, and all the products go through all the workstations
in the same sequence, and discrete tasks like welding are carried out at each workstation on each
product as it passes through each workstation. An assembly line is a typical example of a line flow
process.

Line Flow

 There is linear sequence of operations to make the product. Sequence of machines in a line
flow depends on the sequence of operations that have to be carried on the product.
 Product must be standardized. Line flow produces narrow range of standardized products.
Line flow is inflexible beyond the narrow range of products that it is designed to produce.
 Product design is stable – a new line has to be installed for producing a new design.
 Individual tasks are closely coupled, and hence should be balanced so that one task does not
delay the next task – task times of individual workstations should be as close to each other
as possible. If task times vary, products wait at some workstations to get processed while
some workstations remain idle – efficiency of a line flow is highest when all workstations
have the same task time.
 Line processes are very efficient. Labor is mostly substituted by machinery. Total task is
divided into large number of small tasks. Specialized equipments are employed to carry out
these tasks. A worker carries out the task assigned to him repeatedly, and hence becomes
very proficient at carrying it out.
 Workers perform a narrow range of tasks on only a few product designs. Skill requirements
are not high, and workers can manage with minimal training and supervision.
 Specialized equipments are used. These equipments are set up once to perform a specific
task for a long period of time on one product. To change over these machines to a new
product design requires great expense and long down times as the machines have to be set
up to produce the new product design.
 Large volume of output has to be maintained to recover the cost of specialized equipments.
Therefore, standard products are manufactured on line flow, because their demand is
relatively stable.
 Line processes are inflexible due to sequential organization of equipments and work force,
though some flexibility is being introduced by computerized control of equipments and
reduction of changeover / set up times.
 Mass production refers to assembly line type of process flow as is used in automobile
industry, whereas Continuous production refers to process industry as is used in the
chemical industry.
Problems faced by line flow process

 Decomposing the overall production process into tasks can be difficult.

 Combining the tasks into balanced and compatible workloads at each work station can be
difficult.
 Equipments at work stations have to be set up each time a different product is to be
produced.
 Time taken to complete a task at a work station is not constant.
 Equipment failure at one workstation results in stoppage of work at all workstations.
 One defective product at one stage results in production loss of one final product.
 Volume requirement is not constant, but a line flow is designed to run at a particular speed –
the speed of workstation which takes the longest time is the speed of the line flow. This
workstation is called bottleneck workstation.
 Product obsolescence makes the line flow redundant.
 Workers are dissatisfied because they have to repeatedly perform a narrow set of tasks.
 Line flow works most efficiently when only one product is produced – product variety is
anathema to line flow.
 Innovations in the way a task is performed at workstation is difficult as all workstations are
tightly interconnected, and even if task time is reduced at a workstation, it does not
translate to increase in rate of production – rate of production is equal to rate of production
at the workstation that takes the longest time. The workstation which takes the longest time
is called bottleneck workstation, and it determines the speed / capacity of the line flow.

Advantages of line flow process

 Equipments are specialized since overall production process is decomposed into narrow
tasks, and specialized equipments can perform these tasks very efficiently. Investment in
specialized equipments are justified because they perform their assigned tasks on large
number of products.
 Jobs are specialized since each worker performs only a narrow range of tasks. Workers
learn fast, and they achieve peak productivity much earlier than if they had to perform a
wide range of tasks – this is the benefit of performing a task repeatedly. Less skilled
workers can carry out these tasks, and hence labor cost is low. Workers can be easily
cross-trained to perform tasks of different workstations – cross-trained workers bring in
flexibility in labor deployment which can be used to handle absenteeism, and it eases
the boredom that is caused by a worker doing a narrow range of tasks repeatedly.
 Material handling is efficient as all products flow in the same direction and in the same
sequence. Fixed material handling equipments like conveyers, pipes, and gravity slides
are used.
 Work-in-process inventory is small – one product each is processed at each workstation
all the time. More than one product is kept at each workstation only when it is expected
that defective products would be produced or that equipments can breakdown. It is also
known as to how long a product will have to be wait to be processed at each
workstation, and for how long will each workstation be idle – waiting time and idle time
are fixed for each workstation.
  There is efficient utilization of space as work-in-process inventory is small, and also
because fixed material handling equipments like conveyers and pipes do not take much
space – the wide aisles that are required to run forklifts and other mobile material
handling equipments are not required.
 Quality conformance is easy to achieve because (i) workers become skilled at performing
the narrow range of tasks assigned to them – doing a task repeatedly improves workers’
skills (iii) workers understand the small range of quality requirements (ii) there are less
changeovers and hence less frequent set ups – bad quality is often the result of wrong
set up.
 Scheduling is simple, because products have to be scheduled only on the first
workstation – once a product is placed on the first workstation, it moves from one
workstation to the next workstation automatically.
 Cost is easy to monitor because all products are processed in the same way, and hence
consume the same amount of resources.

Disadvantages of line flow process

 Line flow process is inflexible – only products that require the same processing in the same
sequence can be produced in a line flow. If a product requires different processing or the
same processing in different sequence, the physical configuration of the line flow has to be
changed – new equipments have to be installed or their arrangement has to changed. Once
a line flow has been set, it is expensive and time-consuming to change its physical
configuration. Changeover may take months even when new models of the same product
has to be produced – for example, automobile industry.
 Line flow process is inflexible in terms of volume – in continuous flow process, processing
must occur at a specific rate for the product to be made correctly. Line flow process that
produces discrete products can run at lower speeds, and hence can produce smaller
volumes, but since no other product can be produced, per unit cost of production is very
high when a line flow produces below its capacity.
 It is expensive to install a line flow process – specialized equipments are expensive. It takes
time to decompose the overall production process into tasks and allocate the tasks to
workstations – it should also be ensured that workstations have balanced workloads.
 Work on a line flow is boring – workers have to perform narrow range of tasks repeatedly.
Bored workers make more mistakes which leads to low quality and low productivity. Cross-
training and job rotation allow workers to do different jobs, and hence ease some
tediousness.
 Line flow is extremely vulnerable to unplanned stoppages – if one equipment breaks down,
the line flow is stopped, and if a workstation produces a defective product, work stops on
downstream workstations till a fresh product arrives.

JOB SHOP PROCESS OR INTERMITTENT FLOW PROCESS

A company installs a job shop process when it produces products that require different types of
processing, and / or when products are processed in different sequences – For example, product X
requires to be processed on equipments A, B, and C in the sequence B – A – C while product Y
requires to be processed on equipments A, C, and D in the sequence D – A – C. Hospital is a classical
example of a job shop process and so is a tool room of an automobile company. If such a company
installs equipments as a flow process configured to produce one product, it would be expensive and
cumbersome to change the arrangement of equipments each time a different product has to be
produced. Also, specialized equipments of a line flow process configured to make one product
cannot be used to make another product.

Equipments performing similar tasks are placed in one department – for example, all welding
machines are placed together in welding department. Equipments are general-purpose. Spatial
layout and material handling equipments are so designed that products can move throughout the
system in various ways. Therefore, a job shop is divided into departments, and one department
carries out one type of task such as welding, painting, or scanning. Products move among the
departments in any sequence – depending on the tasks that have to be performed on them,
products go to some departments and skip the rest – for example, product X goes to departments B,
C, and D while product Y goes to departments A and D. A job shop is flexible – it can produce small
quantities of large variety of products.

 Job shop is used when small batches of many different products are to be produced – for
example, 10 units of product A + 5 units of product B + 15 units of product C, and so on.
 Each product is custom designed.
 Each product requires an unique set of processing steps – for example, product A: X – Y – Z,
product B: Y – Z, Product C: Z – X – Y
 Large number of diverse processes have to be performed – for example, welding, painting,
heat treatment, and so on.
 Production is done in batches at intermittent intervals – for example, 10 units of product X is
produced, and then 15 units of product Y is produced.
 All equipments that carry out a process are put at one place – for example, all furnaces are
in Heat Treatment shop.
 A product will flow only to those work centers on which it has to be processed, and will skip
the rest – for example, product A will go department X and then to department Y (will skip
department Z), whereas product B will go to department Z and then to department X (will
skip department Y).
 General purpose equipments and highly skilled labor are used, which enable flexibility in
processing different products. These equipments can be changed over rapidly to carry out
new operations on different product designs. Workers must adapt quickly to the multitude
of operations to be performed on each unique batch of products being produced. These
workers must be highly skilled, and require intensive job instructions and technical
supervision.
 The materials-handling equipment generally consists of forklift trucks and other mobile
vehicles that allow for the variety of paths followed through the facility by the products
produced.
 The jumbled flow pattern and product variety leads to problems in managing inventory,
scheduling, and quality.
 Proper scheduling is required to ensure equal loading on equipments – it often happens that
while some equipments have long waiting lines, others run idle.
 There is job interference when different products require the same equipment / labor at the
same time, which results in high in-process inventory – products wait on workstations to get
processed. Completion time increases, which leads to inefficiency.
  A product may wait on a workstation as some other product may be being processed. In
fact, some of the equipments may have long queues of products waiting to be processed. In
contrast, some equipments may be idle – it may not have any product to process. And it is
not that same equipments are always overloaded or idle. Depending on the type of products
that arrive to be processed, a equipment may be idle now, but may be overloaded a few
hours later. But, when an equipment is consistently overloaded, it means that another
equipment has to be installed, and if an equipment is idle for long periods of time, it means
that its capacity is higher than required.
 Throughput time = Process time + Waiting time
 Throughput efficiency = Process time / ( Process time + Waiting time)

Throughput efficiency of job shop is rarely more than 40 per cent, whereas throughput
efficiency can be 90 per cent for line flow.

 Job shop is justified when product lacks standardization or its volume is low. Job shop is used
in early life cycle of all products, for customized products, and for products with low
demand.
 The startup cost of producing a new product in a small quantity is much lower in a job shop
process than in a line flow process, because many other products are also being produced in
the same job shop – if the new product is successful and is required to be produced in large
numbers, a line flow process may be installed to produce it.
 Job shop / Intermittent flow is also called Process Layout as similar equipments and work
skills are grouped together. Line flow is also called Product Layout as equipments and labor
skills are arranged in sequence according to the way the product is made.

Advantages of job shop process

 Job shop is extremely flexible – products can move in any sequence from one department to
another, and they can have different task times in different departments. For example, a
company has four work centers: A, B, C, and D. Product X is processed at work center C for
10 minutes first, is then processed at work center A for 12 minutes, and is finally processed
at work center D for 8 minutes. Product Y is processed at work center B for 20 minutes first,
is then processed at work center C for 14 minutes, is then processed at work center A for 10
minutes, and is finally processed at work center D for 16 minutes.
 A job shop can handle different batch sizes – product X is produced in batch size of 20,
product Y is produced in batch size of 300, while product Z may be a customized product.
 The breakdown of one equipment need not halt an entire process, because work can be
transferred to other equipments in the department.
 It is less expensive to install a job shop process – general purpose equipments are much less
expensive than specialized equipments.
 Workers perform a variety of tasks, and hence are less likely to get bored.

Disadvantages of job shop process

 Scheduling equipments is a huge challenge. At any one point in time, there may be large
number of products with different processing requirements and different dispatch / due
dates waiting to be processed on equipments, some of which may be idle and some of which
 may be heavily loaded. Scheduling a job shop is difficult because (i) each product has unique
processing requirements in unique sequence (ii) lot sizes vary from a few units to hundreds
of units (iii) processing time at every equipment is unique for every product (iv) dispatch /
due dates are different for different products (vi) it is difficult to forecast what products
would be required to be processed in any future time period.
 General purpose equipments are less efficient – specialized equipments can process more
material than general purpose equipments in a given time.
 Only skilled workers can set up and operate general purpose equipments. Since different
products are made on an equipment, set ups are more frequent – wrong set up will result in
bad quality. Therefore, jobs shops spend considerably on hiring and training of skilled
workers.
 Flexible material handling equipments like forklifts and hand trucks are used, but they are
less efficient than fixed location material handling equipments like conveyers and gravity
slides.
 Work-in-progress inventory is very large since products wait to be processed when
equipments are engaged in processing another product – 100 units of product X may arrive
on work center when it has just started processing a batch of 400 units of product y, and
hence product X cannot be processed till all the 400 units of product Y have been processed.
Also, since products do not move continuously from one work center to another, work-in-
process inventory is maintained at work centers so that they do not run idle when the work
centers that feed them are being set up. Flow of work to a workstation cannot be predicted
since it depends on the process requirements of the products that are entering the job shop,
therefore in-process inventory is maintained at each workstation so that each workstation
has enough work.
 Quality conformance is difficult because (i) there are more product changeovers, and
defective products are most likely to be produced just after a new set up (ii) workers work
on different products, and hence they do not become experts in processing any particular
product (iii) workers work on many products whose quality requirements are different, and
hence workers take time to understand them.
 It is difficult to find out the cost of each product as large number of products with different
processing requirements are being produced – hence, it is difficult to find out the
profitability of each product.

BATCH FLOW PROCESS

Batch flow process is chosen for standard products with volumes insufficient to dedicate line flows
to them.

 Batch can be produced either in a line flow or in a job shop.

 If batch production is done in a job shop, each batch is processed at one work center before
it moves to the next work center – all the units of a batch are processed on the work center,
and all the units move to the next work center as one batch. Since each batch is large, set
up time is reduced, and hence efficiency of job shop improves.
 If batch production is done in a line system, each product of the batch flows through the
work centers as it happens in a typical line, but the line has to be set up before the next
batch can be taken up. Hence efficiency of line flow deteriorates.
  Reduction of set up time will enable production in small batches. Set up time has two
components: External set up time and Internal set up time. Set up activities which can be
carried out while machine is running is called external set up. Set up activities which can be
carried out only when machine is shut down is called internal set up time. Internal set up
activities cut into production time, and each internal set up activity should be closely
scrutinized to explore the possibility of it being carried out while the machine is running –
the idea is to convert internal set up time into external set up time.

Advantages and disadvantages of batch flow process

 Batch in line flow: Flexibility is introduced in the line flow as more than one product is
produced, but the line has to be set up every time a different product has to be produced,
and therefore there is loss of production time. Therefore, the line flow becomes more
flexible, but less efficient. The line flow retains its other advantages and disadvantages.
 Batch in a job shop flow: No set up time is incurred when products of a batch are being
processed on a work center, and therefore the job shop has more available production time
– larger is the batch size, less is the per unit set up time, and hence larger is the available
production time. If the job shop processes large number of large batches, work centers may
not be left with enough capacity to process the large number of different products that the
job shop is meant to process. Therefore, the job shop becomes more efficient, but less
flexible. The job shop retains its other advantages and disadvantages.

CELLULAR PROCESS

Cellular process is hybrid of job shop and line flow. The basic production environment remains that
of a job shop, but a few specific equipments are taken out from their respective departments / work
centers and are arranged in a line flow. For example, a job shop has four work centers – A, B, C, and
D. The job shop produces large number of products, and it is found that a large number of these
products are processed on work centers B and D in the sequence D – B, and therefore one
equipment each of B and D is taken out from their respective work centers and are arranged in the
line flow D – B. The products which were being processed on work centers B and D in the sequence
D – B now come to the line flow D – B when it is their turn to go to work center D. These small line
flows are called cells.

A cellular process is as flexible as job shop because it is still a job shop, and other than the ones in
the small line flows, the equipments are still grouped together in departments / work centers. A
cellular process is more efficient than a job shop, because once a product comes to the line flow, less
time is incurred in set ups and waiting than if it had gone to work centers.

A company divides its products into groups of products that require to be processed on a set of
equipments in the same sequence, and a small line flow or cell is created for each group of products.
For example, one group of products requires to be processed on equipments B, D, A in the sequence
B – D – A, and hence cell B – D – A is created for this group of product while another group of
products requires to be processed on equipments C and A in the sequence C – A, and hence cell C –
A is created for this group of products. It is important to always bear in mind that the basic
production environment remains that of a job shop, and hence after being processed in a cell, a
group of products may be send to another worker center to get processed, while another group of
product may emerge as finished products from its cell, while some products may not visit any cell at
all.
Advantages of cellular process

 Set up times are reduced because products that are processed at a cell are similar, and
hence less set up times are incurred when changeovers occur between products of the same
group.
 Material handling is reduced, and materials travel lesser distances as equipments of a cell
are placed close to each other.
 Throughput time is reduced – products move out faster from the job shop because set up
times, waiting times, and travel times are less in a cell.
 In-process inventory is less because the cell operates as a line flow, and a product moves
from one equipment to another in a single unit. Also, because set up times are smaller, large
in-process inventories do not have to kept at equipments to keep them running while their
feeder equipments are being set up.
 Less space is required as equipments of a cell are placed together, and also because in-
process inventory is less.
 Equipments are mostly pulled out of departments / work centers and arranged in cell, and
hence new equipments do not have to be purchased to create cells. Utilization of
equipments improves because less set up times are incurred, and hence the same set of
equipments is able to produce larger number of products. Requirements of fixtures and
tools are reduced since similar products are processed in a cell.
 Quality conformance is easier as similar products are processed in a cell, and hence their set
ups are similar – and hence there are fewer wrong set ups, and hence fewer defective
products are produced due to wrong set ups.

Disadvantages of cellular process

 It is not easy to identify groups of products which are required to be processed on the same
set of equipments in the same sequence – a job shop may handle thousands of products,
and the process requirements of all the products have to be analyzed to arrive at such
groups of products.
 Equipments have to be withdrawn from departments / work centers and space has to be
made available for installing cells.
 Cells operate as line flows, and hence separate managers must be appointed to manage cells
– managers who manage job shops have different skills and attitude from managers who
manage line flows.

PROJECT PROCESS

A company may produce unique products such as flyovers or software programs. Products that
cannot be physically moved once completed use a project process. Resources like materials,
equipments, and people are brought to the site where the product is to be built. These resources are
allocated for the duration of the project, and are reallocated once the project is over – resources are
allocated to complete specific tasks of the project, and are reallocated once those tasks have been
completed. The company uses similar equipments and skills for all the products that it makes, but
each product is made in a particular way – skills and equipments are combined in unique ways to
make a product. Coordination is a huge challenge since large number of skills and equipments may
be required to produce a product and a company may be simultaneously working on large number
of products – required skills and equipments must be made available to a project when it is required,
and any delay in providing them will result in the project getting delayed. Another challenge is to
complete a project on time and within budget.

Project process is dictated by the product itself – project process is used when each product is
unique and requires a unique combination of activities.

 It deals with one-of-a-kind products that are tailored to unique requirements of each
customer. It is used to produce an unique product such as a building or a movie.
 Each unit of product is produced as a single item. Products are not standardized.
 There is no product flow, but there is sequence of operations. All operations should be
sequenced to contribute to the completion of the project.
 There is precedence among tasks required to complete the project. It is important to plan,
sequence, and control the individual tasks so that the project is completed on time.
 Since each project is unique, it involves lot of creativity. Hence, it is difficult to define how a
project will ultimately turn out to be.
 There is less automation, but general purpose machines are used.
 Flexibility in equipment capabilities, human skills, and procedures are required.

Advantage of project process

 Project process is flexible – a customized product can be produced.

Disadvantage of project process

 Project process cannot exploit economies of scale and productivity gains from doing a
process repeatedly.

FLEXIBLE MANUFACTURING SYSTEM

Flexible manufacturing system (FMS) is an automated job shop process – it is a self-contained system
of programmable computer-controlled machines, a tool changing system, and a material handling
system. The simplest flexible manufacturing system is a CNC (computer numerically controlled)
machine with an automatic tool changer, a rack to hold tools, and an automatic loading and
unloading system. The most popular flexible manufacturing systems contain (i) two or more CNC
machines that can change tools automatically (ii) a tool storage and changing system (iii) automatic
loading system to feed materials into the CNC machines (iv) a material handling system that moves
materials between the CNC machines, and to and fro from the system (v) an unloading and stacking
system (vi) a central computer that controls the movement of materials, the changing of tools, and
the operation of the CNC machines. Many flexible manufacturing systems can be connected to
create a production system that can produce entire products.

Flexible manufacturing system is a job shop process, but the delays that happen in a job shop
process are avoided – set ups are done rapidly, materials are loaded rapidly into the machines,
materials are moved rapidly between the machines, and materials are rapidly unloaded from the
machines. For example, a flexible manufacturing system has three CNC machines A, B, and C, and
three products X, Y, and Z have to be produced and their processing requirements are as follows:
Product X: B – C – A – C – B, Product Y: A – B – A – C – B, Product Z: C – B – A – C. The processing
requirements (with their sequence) of all the products are fed into the central computer which
controls all the sub-systems like tool changing system and material handling system. When product
X arrives at machine B, its set up has already been done, and while it is being processed at machine
B, machine C is being set up for it . And as soon machine B has finished processing product X, it is set
up for product Y which would be the next product to arrive on machine B. Similarly, product Z arrives
at machine C which is already set up for it. Products wait at machines as they do in a typical job
system – either product Y or product Z may wait at machine B. It would have been wise to use batch
flow in job shop to handle such variety of products, but a flexible manufacturing system can produce
in unit of one because the set ups are done rapidly and materials are moved rapidly between the
machines – product A is produced and then product C is produced and then product A is produced
and so on.

 Flexible manufacturing system produces moderate variety of products in flexible quantities.

 It contains several work stations. Each work station performs a different operation. Work
stations contain automated and programmable machines. There are many tool options.
 A batch of components or a single unit of a component moves to an appropriate work
station and then to preprogrammed machines which use specific tools.
 Next batch of components or the next unit of component will arrive which may use different
machines and different tools. The batch or the single component processed will move to
next workstation.
 Equipments are costly, and hence product design must be stable. Products must use the
same type of components.
 Flexible manufacturing systems can produce variety of products rapidly and in large
volumes, but many companies are not installing them because they are very expensive.

Product – process matrix

 Process selection depends on the company’s product mix – the right process of a company
depends on whether it is producing one standard product in large volumes or large number
of products in small volumes. Line flow is the appropriate process for producing a standard
product in large volume, but it will be impossible or inordinately expensive to produce large
number of products in small volumes in a line flow – long set up times would be incurred
during the frequent changeovers that the variety of products will warrant. Job shop is the
most appropriate process for producing large number of products in small volumes, but it
will be very expensive to produce a standard product in large volume – the cost will be way
above the price that customers would be willing to pay for a standard product. Similarly,
batch flow in a job shop process is an appropriate process when many products have to be
produced in small volumes, and batch flow in line flow is an appropriate process when a few
products have to be produced in high volumes.
 Process selection is dynamic in nature. It evolves from one stage of Product Life Cycle (PLC)
to another, and change in process is closely related to product changes.
 QUALITY MANAGEMENT
PRODUCT QUALITY: DESIGN QUALITY + CONFORMANCE QUALITY

A product is of superior quality when the following two conditions are met simultaneously: (i) Design
of the product is such that it provides all the benefits and has all the features that customers desire –
Design quality (ii) The design is faithfully and consistently converted into products – Conformance
quality. It may happen that designers of a company may do an excellent job of identifying customers’
needs and coming up with a design that will meet customers’ needs, but if production department is
not able to produce products according to the design, customers will reject the product – Inferior
quality due to poor conformance quality. Similarly, if production department is able to produce
products according to the design, but the design does not provide benefits and does not have
features that customers desire, customers will reject the product – Inferior quality due to poor
design quality.

DESIGN QUALITY

Design quality is about incorporating customers’ needs into products faithfully. A designer can
include the benefits and features that customers desire in the product design only when he
understands customers needs intimately. A designer can use following three methods to understand
customers’ needs and incorporate them into the product being designed:

 Customers are included in design team: Designers survey customers to understand their
needs, but customers’ needs are often sidelined when difficult trade-offs have to be made –
for example, a feature desired by customers is not included in the design because it will
increase the cost of the product. But, when customers are part of the design team, they do
not allow designers to make such trade-offs. When customers and designers interact during
the design process, they are able to understand each other’s positions, and suitable
compromises are found – for example, the designer will be willing to include the aforesaid
feature, but will the customer be willing to bear the extra cost?

 Quality function deployment: It is a structured method to understand customer needs and

convert them into corresponding benefits and features. First, customers are asked the
relative importance of benefits and features that they desire, and they are also asked as to
what they feel about the performance of competitors’ products in providing these benefits
and features. Second, the designers decide as to which benefits and features they are going
 to provide in the product such that it serves customers’ needs better than competitors’
products. Third, designers decide the technical attributes of the product such that it is able
to provide the required benefits and features.

 Prototyping: Even when designers have done all that they could to ensure that customers’
needs are incorporated into the product being designed, they would not know if they have
been able to do so until customers use the product. Designers produce a few units of the
product before going for full-scale production, and test them for its functionality and looks –
Do the products provide all the benefits and have all the features that were planned, and do
they look as was thought they would look? The product is redesigned if the designers are not
satisfied with the functioning and looks of the products. Customers are also asked to use
these products, and the product is redesigned if their feedback is negative. This process of
producing few products and testing them for functionality and looks is called prototyping.

CONFORMANCE QUALITY

Once customers’ needs have been incorporated in the product design, it must be faithfully
converted into products – the products should provide the benefits and have the features that are
incorporated in the product design. Though production process is primarily responsible for
conformance quality, the way the product has been designed also determines if the product design
will be faithfully converted into products.

Product design: Good Product design facilitates conformance quality

Designers can so design a product that it is easily producible – designers should always keep in mind
the producibility of the product being designed while they are designing the product. Following
product design principles improve conformance quality:

 Minimum number of components: When a product can be made from fewer components,
there are lesser number of production processes to install and monitor – company can buy
the best equipments for its production processes and hire skilled operators to run them.
Lesser number of components have to be inspected, and hence their inspection can be
made more stringent – defective components are not allowed to move to the next
production stage.

 Common components: Common components are components that the company uses to
produce its products. When a product can be made from components that are already being
used to make other products of the company, their production processes are already well
established, and hence chances of producing defective components are lesser. Also, since
common components are used in many products, they are produced in large volumes, and
hence the company installs high-capacity equipments to produce them. High-capacity
equipments are generally imbued with latest technologies, and hence they are less likely to
produce defective products – they would also make components with finer tolerances.

 Standard components: Standard components are components that are used by large
number of companies to produce their own products. The company purchases standard
 components from manufacturers who specialize in production of these components.
Manufacturers of standard components produce in large volumes, and hence they use high-
capacity equipments to produce them. High-capacity equipments are imbued with latest
technologies, and hence they can produce components with finer tolerances at low cost.

 Assembly process: External dimensions of components should be such that they can be
easily put together to make a product. When designers create prototypes, they should also
pay attention to whether the components are being easily put together – external
dimensions of components should be changed if components are not easily put together.

 Reasonable tolerance / design range: Narrower tolerances result in better quality, especially
when large number of components have to be put together to get a functional output – it
may happen that all components are within their specified ranges, but too many
components are near the end of their specified ranges, and the product does not perform
due to what is called ‘tolerance stack up’. Therefore, narrower the design range, lower is the
probability of producing a defective product due to ‘tolerance stack up’. But, it is expensive
to produce components in narrower tolerances – equipments that produce in narrower
tolerances employ sophisticated technologies, and hence are expensive. Therefore, if a
designer prescribes narrower design range / tolerance, either expensive equipments have to
be purchased or large number of defective components would be produced. Therefore,
designers should not prescribe tolerances narrower than those needed for the components
to work well together – cost of production is raised, but customers are not more satisfied if
unreasonably narrower tolerances are prescribed.

TYPES OF QUALITY PROBLEMS

1. Sporadic problems – Sporadic problems are short term and cause sudden change in quality.
These are identified and controlled by techniques like statistical process control.
2. Chronic problems – Chronic problems are long term and cause poor quality continuously.
They require new and scientific solutions.

STATISTICAL PROCESS CONTROL

Statistical process control is used to measure the performance of a process. Statistical process
control uses control charts to identify when a production process has gone out of control and needs
corrective action. A process is said to be operating in statistical control when the only source of
variation is natural or random. The process must first be brought into statistical control by detecting
and eliminating assignable or non-random causes of variation. Then its performance is predictable,
and its ability to meet design specifications can be assessed. Control charts provide statistical signals
when assignable causes of variation are present.

VARIATION IN PROCESSES

There is conflict between two facts:

1. Variation or non-uniformity is inevitable – no two units of outputs are alike.

2. Products and use of products are most economical when products are of uniform quality.
There is non-uniformity because

 People behave differently.

 Materials are different.
 Machines are not consistent.
 Workers adopt different work methods.

Types of variations

A production process is designed to produce a specific dimension. For example, a lathe machine is
designed to produce rods of 10 cm, but the length of rods will vary from its target value of 10 cm.
Production process face two kinds of quality conformance problems:

1. Natural or Random variation – Random variation is related to the process, and there is no
specific cause for it. All processes exhibit some random variation, and this variation is due to
factors like temperature variation, machine vibration, and randomness in human actions.
The process is under control, and this variation can never be reduced to zero. It can be
reduced by increasing the technical sophistication of equipments – high-technology
equipments will have lower random variations than low-technology equipments.

2. Assignable or Non-random variation – Assignable variations are caused by specific problems

like machine wear, faulty materials, and untrained workers. The process goes out of control
and defective products are produced. The process can be brought back under control, and
this variation will be reduced to zero.

It is important to be able to distinguish between these two variations – both show up as deviations
from the target value. For example, a rod of 10.3 cm is produced when the target value of length is
10.0 cm. The deviation of 0.3 cm can be either random variation or assignable variation – if the
deviation is random variation, then nothing can be done about it, and the machine should continue
to run, but if the deviation is assignable variation, then the machine should be stopped, and
repaired. If a company is not able to distinguish between the two kinds of variations, it will stop a
process that is under control, and it will continue running a process that has gone out of control.

Statistical process control recognizes that some variation from the target value is inherent in a
production process – this variation is less when more technologically sophisticated equipments are
used, but some variation will always be there. Statistical process control uses control charts that
helps to determine whether variations from the target value are due to natural randomness or due
to process being out of control. Control charts identify an out-of-control situation before defective
products starts getting produced.

CONTROL CHART OR PROCESS CONTROL SYSTEM

Control charts provide a signal when assignable causes of variation are present.

1. Take a sample of around 20 units, and measure a characteristic like radius. Plot frequency
and radius.
2. Take around 10 such samples at different times and plot the curves.
3. If all curves are normally distributed, variation is only natural – distribution is stable over
time and is predictable. But, if there is any curve which is not a normal distribution curve,
then there are some assignable variations, and investigations should be carried out to find
 their cause. Unexpected distributions that vary by mean, standard variation, and shape
signal that assignable causes of variation are present.
4. In both random and assignable variation, some radius may be out of lower and higher design
limits, which additionally means that the process is not capable of performing within control
limits.

PROCESS CAPABILITY STUDY

Process capability study is carried out to find if the process is capable of producing within design
limits.

1. Take around 100 samples.

2. Measure some characteristics like length.
3. Plot length and frequency.
4. A normal distribution curve (Bell shaped) should emerge. Non-normality is a signal for
caution, and further investigation is carried out to find out the assignable cause of variation.
5. There is acceptable value of lower and upper design limit of length – say 9.8 cm and 10.2 cm.
6. Average of the 100 samples should be close to 10 cm, and most of the samples should be
within upper and lower design limit of 10.2 cm and 9.8 cm respectively.
7. Average may be 10 cm or near it, but some samples may be outside the range of upper and
lower design limit, which means that there is large variation – difference between sample of
highest length and lowest length is large.
8. Process capability study reveals as to how much output will conform to specification – how
many lengths will lie between upper design limit and lower design limit. For example, 100
units of a component X are processed on equipment A. Upper design limit = 20.2 cm and
Lower design limit = 19.8 cm. It is found that 92 units of component X are within 19.8 – 20.2
cm. The company replaces equipment A with equipment B, and processes 100 units of
component X on it. It is found that 98 units of component X are within 19.8 – 20.2 cm.
Therefore, equipment B is better, and the company should persist with it.

CENTRAL LIMIT THEOREM

Central limit theorem is theoretical foundation of control charts.

1. Total population is N. Say N = 1000 rods

2. Take 100 samples. Each sample has 10 (n) rods.
3. Take average of each sample.
4. Plot the averages – these averages should be distributed normally.
5. Also, standard deviation of sample = standard deviation of population / √n

CONTROL CHARTS FOR AVERAGES OR X-CHART

1. Take samples of 10 rods (n)
2. Take average of each sample.
3. Take average of averages.
4. Upper control limit = Average of averages + K x Standard deviation of sample (σ)
UCL = AA + k x σ = AA + K x standard deviation of population / √n

Lower control limit = Average of averages – K x Standard deviation of sample (σ)

 LCL = AA – K x σ = AA – K x standard deviation of population / √n

5. Value of K is decided by management. It has to decide whether its applications require use
of wider or narrower control limits. Generally it is kept at 3. Therefore, substituting K = 3 in
UCL and LCL,

Process range = UCL – LCL = AA + 3σ – (AA – 3σ) = 6σ

For all products to fall within UCL and LCL, process range or UCL – LCL ≥ 6σ or

(UCL – LCL) / 6σ ≥ 1

(UCL – LCL) / 6σ is called Process Capability Index or C P

When (UCL – LCL) / 6σ or CP ≥ 1, the process is under control

6. It is important to understand features of Normal Distribution Curve to fully understand

control charts. In a normal distribution curve, data is distributed around an average, and 68
per cent data lies within Average ± 1σ, 95.5 per cent data lies within Average ± 2σ, and 99.7
per cent data lies within Average ± 3σ. Figure 1 shows normal distribution curve of lengths
of rods cut by a machine. The lengths are distributed around its average, hence the process
is under control – the variation is only due to random causes. If the Upper design limit (UDL)
and Lower design limit (LDL) are set at Average + 1σ and Average – 1σ respectively, around
68 per cent of the rods would be OK and around 32 per cent would be defective. If the
Upper design limit (UDL) and and Lower design limit (LDL) are set at Average + 2σ and
Average – 2σ respectively, around 95.5 per cent of rods would be OK and around 4.5 per
cent rods would be defective. If the Upper design limit (UDL) and Lower design limit (LDL)
are set at Average + 3σ and Average - 3σ respectively, around 99.7 per cent of rods would be
OK, and around 0.3 per cent rods would be defective. Similarly, if Upper design limit (UDL)
and Lower design limit (LDL) are set at Average + 6σ and Average – 6σ, only 3.4 in a million
rods would be defective and rest would be OK – when k = 6, it is called six sigma quality
level.

Therefore, for six sigma quality level, (Upper design limit – Lower design limit = Design range)
≥ (Average + 6σ) – (Average – 6σ) ≥ 12σ

 If K is kept small (K = 1), control range is small. The process may seem out of control even
when it might be meeting functional requirements. This is called Producer’s risk or Type I
error.

 If K is kept large (K ≥ 3), control range is large. The process may seem in control even though
it might not be meeting functional requirements. This is called Consumer’s risk or Type II
error.

Six sigma quality level

When K is kept at 6, it is called six sigma quality levels. At K = 6,

Process range = UCL – LCL = AA + 6σ – (AA - 6σ) = 12σ

(Upper design limit – Lower design limit = Design range) ≥ 12σ

 Therefore, process range is high when K = 6, and product should be performing its functions
at this high range, which can happen only under two circumstances:

 Innovations in design enable the product to function even when design range is high
– Design range ≥ 12σ.
 σ is reduced significantly from K = 3 levels so that 12σ is still an acceptable range
within which the product performs. Control of the process is strong – variability is
low. Since only chronic problems exist, lowering σ means that process variability is
less. Process variability will be less when technological capabilities of the equipment
will be upgraded.

Therefore, six sigma quality level can be achieved either by making design innovations or by reducing
σ.

It is important to keep in mind that products’ performance is better when range is as low as possible
so that even when components of extreme specifications come together, performance is still
adequate. For example, consider the body of a pen and its cover. The design specification of the
body is 9 mm while the design specification of the cover is 10 mm. Two possible ranges for body are
8.9 – 9.1 and 8.7 – 9.3. Similarly, two possible ranges for cover are 9.9 – 10.1 and 9.7 and 10.3. If the
larger range is considered, and body of dimension 8.7 and cover of 10.3 are matched, the fit would
be loose. Similarly, if the body dimension of 9.3 is considered and cover dimension of 9.7 considered,
the fit would be tight. If the smaller range is considered, and body dimension 8.9 and cover
dimension of 10.1 are matched, the fit would be better than the earlier case. Similarly, if the body
dimension of 9.1 is matched with cover dimension of 9.9, the fit would be much better than the
earlier case. And this is simple product with just two components. When many components have to
work together, it is very important that range of each component is small so that even when
components of extreme specifications come together, the performance of the product is still
adequate.

7. Once UCL and LCL established, a sample is taken periodically (say, 5 units every hour), and its
mean is plotted on the X-chart. If the mean is within UCL and LCL, the process is in control,
and is allowed to run. But, if a mean of a particular sample is above UCL or below LCL,
another sample is taken immediately, and if it is again outside the limits of UCL or LCL, the
process is stopped, and investigation is carried out. The idea is that even when k = 3, only 0.3
(100 – 99.7) per cent of products should lie outside UCL and LCL, and when two consecutive
samples are outside LCL and UCL, there is something wrong with the process.

PROCESS CAPABILITY

If natural variation or process standard deviation or σ is less compared to design range / tolerance,
defect rate would be low – process capability is high. If natural variation or σ is high compared to
design range, defect rate would be high – process capability is low. For example, if σ of a process is
0.1, the process capability will be higher if the design range is ± 0.4 than if the design range is ± 0.2.
An expression for process capability is Design range / σ. If a process has high process capability, it
will not produce defective products even if process mean moves out of control by 1-2 σ. If process
capability of a process is low, it will produce defective products even when the process is in control,
and defect rate will increase dramatically if the process goes out-of-control even slightly. Therefore,
if a process has high process capability, process mean can be allowed to move away from the target
value without producing defective products. And when the design range / tolerance is ± 6 σ (12 σ),
only 3.4 products in a million products would be defective – six sigma quality level.

Another related term is process capability ratio.

Process capability ratio = Design range / Process range. Process range is 2 n σ, and since n = 3 in
most cases, process capability ratio = Design range / 6 σ. Following conditions emerge:

 If process capability ratio is greater than 1, the process is capable of producing within design
specifications.
 If process capability ratio is less than 1, the process is not capable of producing within design
specifications.

Another related term is process capability index, which indicates if the process mean has shifted
away from the design target, and in which direction it has shifted.

Process capability index = minimum of (Average – Lower specification) / 3 σ and (Upper specification
– Average) / 3 σ. Following conditions can emerge:

 If process capability index is greater than 1, the process will produce within the design
range / tolerance.
 If process capability index is less than 1, the process mean has either moved to upper design
specification or lower design specification, and defective products would be produced.

σ can be found out through controlled experiments, but a simpler way to calculate σ is by using
range of an initial set of samples – at least 20 samples must be used. A minimum of 20 samples are
taken, and range of each sample is calculated – range is the difference between the largest and
lowest value in the sample. The average of ranges is calculated and is divided by d 2 to get the value
of σ.

Natural variation = Process standard deviation = σ = Average of ranges / d 2

ACCEPTANCE SAMPLING

Acceptance sampling is a statistical quality control technique used to decide to accept or reject a
batch of input / output by examining the quality of random samples of the batch.

100 per cent inspection is time consuming and costly. 100 per cent inspection might be essential in
industries with life-and-death consequences like aerospace, but here too, the system must move
from human inspection towards automated methods. In case of destructive testing, acceptance
sampling is the only acceptable alternative.

 Accepting sampling involves taking random samples of batches of products and measuring
them against predetermined standards. The quality of the samples is used to judge the
quality of all the products in the batch.
 Sampling plan specifies the number of units to sample and the number of sample units that
must conform to specifications if the shipment is to be accepted.
 The specification must contain a statement of what constitutes non-conformance.
 How is it done: n units are taken from the batch and quality of each sampled unit is
determined. If C or fewer units are non conforming, the entire shipment is accepted. And if
 more than C units are non conforming, the whole batch is rejected or subjected to 100 per
cent inspection. C is called acceptance number. This plan is called single sampling plan.
 Acceptable Quality level (AQL) is the quantity or proportion of non-conformance which is
allowed if a batch of product is to be considered satisfactory. It is the poorest level of quality
that will be acceptable – lots that have this level of quality will be accepted. For example, if
an acceptable quality level is 20 defects in a lot of 1,000, then AQL is 100 x 20 / 1,000 = 2 per
cent defectives. AQL will depend on the end use of the product. There are critical, major,
and minor defects which demand different quantification if customer satisfaction is to be
ensured – AQL should be low for critical defects.
 Lot tolerance percent defective (LTPD) is the quality level of lot that is considered bad – lots
with this level of quality will be rejected. For example, if unacceptable quality level is 70
defects in a lot of 1,000, then LPTD is 100 x 70 / 1,000 = 7 per cent defective.
 Double sampling – Two samples are taken and cumulative evidence from both samples lead
to either an acceptance or rejection.
 Multiple sampling – Many samples are taken and cumulative evidence of all samples lead to
either an acceptance or rejection.

Sampling errors

The batch is accepted or rejected based on quality of samples – if decision is to accept, the whole
batch is accepted, and if decision is to reject, the whole batch is rejected. It does not give guarantee
of actual quality of the batch. The producer wants to avoid the mistake of having a good lot rejected,
and the customer wants to avoid the mistake of accepting a bad lot.

1. Type I – α – Producer’s risk: It is the probability that a good lot will be rejected. A batch of
good quality can be rejected if disproportionately large number of defective units from the
batch is selected in the sample – the sample has higher proportion of defects than the batch
as a whole.
2. Type II – β – Consumer’s risk: It is the probability that a bad lot will be accepted. A batch of
bad quality can be accepted if disproportionately large number of good units from batch is
selected in the sample – the sample has lower proportion of defects than the batch as a
whole.

Operating characteristic curve

Operating characteristics curve describes how well an acceptance plan discriminates between good
and bad lots. A curve pertains to specific plan – a combination of n and C.

1. Ideally, all batches which have defects less than C should be accepted, and all batches which
have defects greater than C should be rejected. In practice, no sampling plan will offer such
discrimination.
2. Operating characteristic curves reveal how sampling plans discriminate among lots.
3. If a lot is of high quality (low percentage of defective items), a good sampling plan yields a
high probability of accepting the lot. If a lot is of poor quality (high percentage of defective
items), a good sampling plan yields a low probability of accepting the lot.
4. Operating curves show relationship between probability of accepting lot on Y axis and
quality of lot (percentage of defective items) on X axis. A sampling plan specifying an unique
 pair of n and C has an unique operating characteristic curve – Steeper is the curve better is
the sampling plan. These curves are developed by using Poisson distribution.
5. As n increases, the sampling plan becomes more discriminatory – the operating
characteristic curve is more rectangular. Therefore, larger is the value of n, larger is the
probability of accepting good quality lots and lower is the probability of accepting bad
quality lots. But inspection cost is increased.
6. By decreasing C, the inspection is made more stringent. Low value of C does not guarantee
defective free batches, but many bad lots will be rejected which might have been accepted if
value of C was higher.
7. Choosing the value of n and C is a management decision. High value of n and low value of C
show high quality consideration.

COST OF QUALITY

Quality cost audit

Most companies do not know what it costs them to produce products of inferior quality. Quality cost
audit identifies all costs which are incurred to produce products of superior quality or costs that
results from producing products of inferior quality. It is important that a company carries out quality
cost audit so that it learns how expensive can it be to produce products of inferior quality – most
companies need compelling evidence to install quality systems that enable them to produce
products of superior quality.

Traditional cost of quality was costs incurred in production of defective products and in their rework.
These costs include direct material and labor costs and overheads during production and rework. An
in-depth analysis of costs of quality often reveals that companies are actually spending several times
this amount on activities related to quality.

Quality costs are all the costs or losses of revenue that are linked to prevention of production of
defective products. They are also linked to producing, detecting, rectifying, and scrapping defective
products. There are four categories of quality costs: (i) External failure cost (ii) Internal failure cost
(iii) Appraisal cost (iv) Prevention cost. Failure costs result from producing defective products. Failure
cost is external failure cost if it is discovered by customers. Failure cost is internal failure cost if it is
discovered before it is delivered to customers. Appraisals costs are the costs of inspecting the
condition of raw materials, work-in-progress, and final products, and identifying the defectives ones
among them. Prevention costs are incurred to minimize appraisal and failure costs – focus is on
installing better equipments and setting better production processes.

External failure costs – Product fails after the product is delivered to the customer.

 Cost is incurred to investigate and resolve complaints attributable to defective products.

 Cost of warranty: It is the cost of repairing a defective product. It may also include the cost
of renting a replacement product when the defective product is being repaired. A warranty
is a written guarantee that the company will replace or repair a defective product.
 Cost of replacement: It is the cost of replacing a defective product. It includes the costs of
recalling the defective product and shipping the replacement product.
 Liability: It is the cost of defending lawsuits and compensating customers for injury, death,
and loss of business.
 Costs of field service.
  Some customers may decide not to buy company’s products.

Internal failure costs – Product fails before the product is delivered to the customer.

 The cost of determining as to what activities would be undertaken when a defective product
is discovered: (i) Rework the defective product. (ii) Discard the defective product (iii) Adjust
the equipment which produced the defective product.
 Scrap cost: It is the material and processing cost of a defective product that has to be
scrapped.
 Rework cost: It is the cost of processing a defective product to make it reusable.
 Retesting cost: It is the cost of retesting the defective products that have been reprocessed.
 Yield loss: It is the cost of any extra material that is used in producing a product.
 Downtime cost: Equipments run idle when production is stopped to solve a quality problem.
 The cost of safety stock that is held to at all production stages to substitute for defective
products that might be produced.

Appraisal costs – It is cost of determining the quality status of raw materials, in-process materials,
and final products.

 Cost of inspection of incoming material: This is the cost of inspecting components and
materials from suppliers.
 Cost of inspection of in-process material: Inspection is carried out at production stages to
determine if the output of each stage conforms to its design specification.
 Cost of inspection of final products.
 Cost of purchasing and maintaining testing equipments.
 Salary and other benefits of inspectors.

Prevention cost – It is the cost of actions that are taken to reduce defect rates.

 Planning: Costs are incurred to ensure that tasks are performed correctly. These include
costs to install correct procedures for performing tasks.
 Product design: Product design is reviewed. All product designs should be evaluated on two
counts: (i) Does the product design include benefits and features that are desired by
customers. (ii) Is the product design easily producible?
 Process design: Production process is reviewed. Can the installed process convert the
product design into products faithfully and consistently, or should new processes be
installed?
 Process control: Equipments are continually monitored to ensure that products are being
produced within the range that has been specified by the product designers – for example,
within 10 ± 0.1 cm. Statistical control charts are used to monitor production processes – they
are able to indicate if a process is behaving normally and will continue to produce products
within the design range or if it is behaving abnormally and will soon start producing
defective products.
 Preventive maintenance of equipments is carried out.
 Job design: Jobs are so designed that workers get to learn the quality status of the output
they have produced as early as possible. Workers are regularly trained.
 Suppliers are trained.
  Data collection and analysis: Data related to defects, downtime, and other quality problems
are collected at every production stage. This data is analyzed to arrive at solutions to quality
related problems.
 Root causes of manufacturing problems are solved.
 Quality improvement programs: The company runs quality improvement programs like
quality circles, suggestion schemes, and other defect reduction programs.

INVENTORY MANAGEMENT
Inventory is stock of material which is used to facilitate production or to satisfy customer demand.
Therefore, inventory is the product at some point in conversion and distribution process. There are
three types of inventory: Raw materials, Work-in-process, and Finished products. Raw material and
work-in-process facilitate production, and finished product serves customer demand. Inventory of
finished product is required because rate of demand differs from rate of supply.

Cost of material forms a substantial part of the total cost of a product. Material is frequently stored
either raw, partly finished or completely finished, and cost of storing such materials can be high.
Stock should be considered as an investment from which some return should be expected – thus if
target rate of return is 10 per cent, the stock will cost at least 10 per cent of the average value of
stock held. If stock is purchased from borrowed money, then cost of capital should also be added to
the cost. Therefore, there is urgent need to manage inventory well.

Companies are trying to reduce inventory. Inventory ties up capital which can be used for other
purposes, and they incur expenditures of storage, insurance, and deterioration. Excess inventory is
often a symptom of deeper malaises such as poor quality, poor maintenance of machines, slow set
up, poor scheduling, and unreliable suppliers – when inventory is reduced these problems come to
the surface one by one, and management can take actions to solve them. For example, a company
may be keeping work-in-progress inventory because it expects some of the components to be
defective – the company will not need to keep inventory when it has improved its quality system to
the extent that it does not expect any component to be defective.

It is not to be believed that inventory serves no purpose at all – when production is done in lots, the
set up cost is distributed among the components in the lot, and when transportation is done in lots,
the transportation cost is distributed among the components in the lot. Therefore, inventory enables
efficient production. Inventory also enables a company to serve customers more promptly, and
serve unpredictable demand more efficiently.
INVENTORY COSTS

Following costs influence the inventory policy of a company:

 Product cost: It is the price of the product.

 Ordering cost: It is the cost of placing an order with a supplier. Ordering cost does not
depend on the number of units of a product in an order – for example, if it costs Rs. 100 to
place an order, it does not matter if the order is for 100 units of the product or for 1000
units of the product. Ordering cost is assigned to an entire batch – per unit ordering cost is
lower if the batch size is large because the ordering cost is spread over a larger number of
units.
 Setup cost: It is cost of reconfiguring a machine to enable it to manufacture a product. Setup
cost does not depend the number of products in a batch – once a machine has been setup, it
does not matter if 100 products are manufactured or 1000 products are manufactured.
Setup cost is assigned to an entire batch – per unit set up cost is lower if the batch size is
large because the set up cost is spread over a larger number of units.
 Carrying cost or holding cost: It is the cost of keeping the inventory for a particular period of
time. Holding costs includes the following costs:
1. Cost of capital: Capital locked in inventory could have been used for some other
purpose to earn revenues. It is also called the opportunity cost of capital, and it is
usually the largest component of holding cost.
2. Cost of storage: It is the cost of space occupied by the inventory, and the cost to
maintain the particular type of environment to keep the inventory in good state.
3. Costs of obsolescence is the loss that a company incurs when customers do not
want to use the product lying in its inventory either because a technologically
sophisticated or a more fashionable product has become available.
4. Cost of insurance is directly related to capital locked in inventory.
5. Cost of deterioration

Since all components of holding cost is directly proportional to the amount of inventory
being held, holding cost is generally given as ‘holding cost per unit of product per unit time’.
It is normally given as a fraction of the product’s price – for example, holding cost may be 10
per cent for potato and 20 per cent for tomato, and if the price of both potato and tomato
is Rs. 20 per kg, holding cost of potato is 10 / 100 x 20 = Rs. 2 per kg per year, and holding
cost of tomato is 20 / 100 x 20 = Rs. 4 per kg per year.

 Stockout cost: A stockout situation arises when the company does not have products in
inventory to serve customers. Cost of stockout is the loss of profit that the company would
have earned if it had productS in inventory to sell to customers. It also includes lost future
profits if the customers feel so aggrieved that they stop buying the company’s products.
But, if it is a strong brand, some of its customers might be willing to wait to be served or the
company can offer some incentives like lower prices to the customers to make them willing
to wait to be served – such a situation is called Backordering, and it can actually be a good
situation to be in, because a backorder is a confirmed demand.

A company can proactively convert some of its demand into backorders by asking customers
to place orders in advance in return of some price concessions so that sigma or variability
 influences lesser part of its total demand, and hence it would need to keep lesser safety
stock – for example, a car company may offer a price reduction of Rs. 5,000 to customers
who book their cars one month in advance. It is important to keep in mind that backorder is
type of demand in which customers want to be served in the current period but are willing
to wait either because they do not want to buy any other product or because there is some
financial incentive to do so. Backordering is different from reservation in which the
customers want to be served in a future time period but book company’s capacity in current
period as they do not want to take the risk of not being served due to company’s lack of
capacity – for example, railway reservation.

Another type of stockout situation occurs if a company does not have raw materials or work
in progress inventory to run its production, and associated costs in this type of stockout
situation are idle machines and workers, and lost production.

 Hidden costs: Companies keep inventories because (i) they expect some of the products to
be defective (ii) they expect some of their machines to break down (iii) they expect their
suppliers to default on their delivery schedules (iv) they expect their forecasting to be
wrong (v) they expect their lead times to be longer than what they are supposed to be.
Therefore, companies keep inventory to compensate for fundamental shortcomings in their
operations, and that if these shortcomings were removed, they would not have to keep
these inventories – worse, these inventories help in hiding these problems and companies
do not get to identifying and removing these shortcomings. The solution is to slowly reduce
the level of inventory and solve the problems as they surface – for example, current level of
inventory is 100 units, and when it is reduced to 80, it is discovered that the planned
number of output could not be produced because two machines broke down, and company
develops a preventive maintenance schedule to prevent such breakdowns.

Table: Inventory costs

ORDERING / SETUP HOLDING COST STOCKOUT COST HIDDEN COST

COST
Is the cost of placing Is the cost of keeping Product is not in Inventory is kept to
an order or setting up a product in store per stock, and profit that compensate for
a machine unit time could have been defective products /
earned is lost broken down
machines / unreliable
suppliers
Increase order / Reduce order / Improve forecasting Improve quality,
production batch size production batch size maintenance, and
reliability of suppliers

PURPOSE OF INVENTORY

Inventory can be useful – a company should not try to eliminate all inventory, and it should be able
to identify inventory which is useful, and should do away with only the unnecessary inventory.

 Decoupling the stages of production: Inventory uncouples various stages of operation. Raw
materials uncouple a manufacturer from its suppliers. When a manufacturer keeps inventory
of raw materials, its operation can run uninterrupted even when its supplier is not able to
 supply for some time. Inventory of raw material also helps when the supplier’s lead time is
uncertain. Work-in-process inventory uncouples various stages of manufacturing. If a
company does not keep work-in-process inventory, and a machine breaks down, all the
machines that follow the ‘machine under break down’ will run idle because they will not get
material from their preceding machines. But, if work-in-process inventory is kept at all
machines, then all the machines will run for at least some time even if a machine breaks
down. Similarly, if a machine produces a defective product, the machines that follow will
produce one product less if the machines do not keep work-in-process inventory. But, if
work-in-process inventory is kept at all machines, they can produce the required number of
products even if some defective products are produced.

Inventory of raw material and work-in-process insulate a stage of production from its
preceding stage, and hence work continues to be done even when a supplier does not
supply on time , or a machine breaks down, or when a defective product is produced. It also
implies that a manufacturer need not keep inventory if it takes care to enroll reliable
suppliers, has a robust preventive maintenance program, and has installed an effective
quality management program. Therefore, it can be inferred that a manufacturer keeps raw
material and in-process inventory to compensate for unreliable suppliers, and a production
system that is likely to break down, and also produce defective products.

Finished product uncouples a manufacturer from its customers. A manufacturer produces at

its lowest cost when it produces at a constant rate, but customers buy according to their
requirements and convenience. For example, most customers would buy milk in morning,
but the manufacturer would produce all day, and therefore has to keep inventory for a few
hours every day. Such mismatch becomes aggravated when a manufacturer is producing
seasonal products like an air conditioner. The manufacturer continues to produce at a
constant rate throughout the year, but most customers buy their air conditioners when
summer season arrives. Therefore, the company has to keep inventory for a few months
every year.

 Takes care of unpredictable demand: A manufacturer keeps inventory of finished products

because it cannot forecast demand accurately. A company needs to study sale of its product
in previous time periods, and keep high amount of inventory if its sales has high variability /
standard deviation / sigma. The inventory which is kept to take care of unpredictability in
demand is called Safety inventory, and it should be strictly related to sigma of sales of
previous time periods – higher the variability in demand, higher should be safety stock. Most
companies erroneously link safety inventory to average sales – they keep high safety stock if
the average sales of a product is high.

 Set up cost and transportation cost are spread over larger number of units: Inventory
allows economic production and transportation. Most machines produce many products. A
machine has to be reconfigured or setup if it has to produce a product different from the
one it is producing currently. Therefore, a machine incurs setup time each time it has to
produce a product different from the one it is producing now. For example, a machine
processes products A, B, and C. It takes 10 minutes to setup the machine to produce B when
it is producing A, 15 minutes to setup the machine to produce C when it is producing B, 5
minutes to setup the machine to produce A when it is producing C. It takes 5, 7, and 9
 minutes to produce A, B, and C respectively. If the company decides to produce one unit
each of A, B, and C in the sequence A-B-C, the average production time of one piece would
be 5 + 10 (set up) + 7 + 15 (set up) + 9 / 3 = 15.3 minutes, but if it decides to produce 10
pieces each of A, B, and C in the sequence A-B-C, the average production time of one piece
would be 5 x 10 + 10 (set up) + 7 x 10 + 15 (set up) + 9 x 10 / 30 = 7.8 minutes. The average
production time would decrease as the production lot size increases because the setup time
is spread over larger number of units. But as production lot size increases, the average
inventory of each product increases – the average inventory is half of lot size. Companies
have to reduce setup times of their machines if they have to reduce their production lot
sizes.

The per unit cost of transportation is low when products are transported in bulk. For
example, a truck has a capacity of 1000 units of product A, and it takes Rs. 2,000 to transport
from location X to location Y. If a company moves 100 pieces, then per unit cost of
transportation would be Rs. 2000 / 100 = Rs. 20, but if it moves 1000 pieces, then per unit
cost of transportation would be Rs. 2000 / 1000 = 2, but the inventory at Y increases. If a
company wants low per unit cost of transportation, and also keep its inventory low, it should
use third party to transport its products. The third party will fill its truck with products of
large number of clients, and hence achieve low per unit cost of transportation as well as low
inventory levels for its clients. Companies that follow Just in-Time principles insist that their
suppliers locate themselves close to their manufacturing premise so that the cost of
transportation is low even when suppliers are supplying in smaller lot sizes.

 Takes care of predictable rise in demand: Companies keep inventory to take care of
anticipated changes in demand and supply. For example, an automobile company will keep
higher inventory during Diwali as it understands that large number of customers would have
postponed their purchase to Diwali. Similarly, if a manufacturer anticipates a shortage of a
particular raw material or component, it may stock the particular raw material or
component so that its production does not get adversely affected. These are speculative
inventories.

 Takes care of operations during transit time: Companies keep inventory to take care of
transit between locations and between stages. For example, if takes 10 hours to get a
component from a supplier, the company will need to have enough inventory to run its
production unit for 10 hours when it orders the component, but if it took only 5 hours to get
the component from its supplier, it would need enough inventory to run its production unit
for 5 hours. Therefore, the larger the transit time of a component, more inventory of it have
to be kept to ensure uninterrupted operation.

TYPES OF INVENTORY

Inventories are held for different purposes, and inventory can be of three types depending on why
they are being held.

1. Cycle inventory: A company produces in lots because its set up cost is significant – when it
produces in lots, the set up cost is spread over all the units in the lot, and hence per unit set
up cost is low. Similarly, when a company transports in lots, the transportation cost is spread
over larger number of units, and hence per unit transportation cost is low. Such inventories
 which enable companies to decrease their cost of production / distribution are called cycle
inventories – they enhance economic efficiency.
Average cycle inventory = Lot size / 2
It also means that half of the lot remains unused throughout the year.

Reduction in cycle inventory: Cycle inventory can be reduced if production / transportation

lot size is reduced. Production lot size can be reduced only if set up time is reduced – if
production lot size is reduced without reducing set up time, there would be huge loss of
production time as large number of setups would have to be done. Transportation lot size
can be reduced by using third part carriers – a truck will carry small lots of many companies.

2. Safety inventory: Demand is unpredictable, and hence inventory is kept to serve demand
that is above the average demand of previous periods. Hence, safety stock is related to
sigma / variability of demand – higher the sigma of demand, higher should be the safety
stock.
Safety inventory = Z σ (t)

Z is safety factor which is related to service level. Service level is the percentage of
customers that a company may want to serve. Though a company may keep any service
level that it may want to, a suitable expression for service level is (Price – Cost) / (Price –
Salvage value). Salvage value is the price fetched after a certain period of time – salvage
value of biscuits is higher than the salvage value of bread. Hence, a company should keep
higher service level if its profit per unit (Price – Cost) is high, and also if its salvage value is
high. A company can also try to increase its salvage value – a retailer of milk can have
contract with paneer makers to supply them milk after it has deteriorated. It is also
important to remember that as service level moves closer to 100 per cent, the safety stock
needed to increase service level by 1 per cent is much more than the safety stock needed to
increase service level at lower values of service level – for example, it may need 10 units of
safety stock to increase service level from 80 per cent to 81 per cent, but may require 100
units of safety stock to increase service level from 95 per cent to 96 per cent, and 1000 units
of safety stock to increase service level from 98 per cent to 99 per cent. This happens
because as service level increases close to 100 per cent, safety stock has to be kept to care
of the few unusual hikes in demand. Once a company has determined its service level, it can
find the corresponding safety factor(Z).

Cost of understocking Cu
Service level is also equal to =
Cost of undetstocking+Cost of overstocking Cu+Co
A service factor table has been given below or one can use Excel function NORMSINV to
convert service level percentage to safety factor (Z).
Table 1: Safety factor
Service Safety Service Safety
  Level Factor Level Factor
50.00% 0.00 90.00% 1.28
55.00% 0.13 91.00% 1.34
60.00% 0.25 92.00% 1.41
65.00% 0.39 93.00% 1.48
 70.00% 0.52 94.00% 1.55
75.00% 0.67 95.00% 1.64
80.00% 0.84 96.00% 1.75
81.00% 0.88 97.00% 1.88
82.00% 0.92 98.00% 2.05
83.00% 0.95 99.00% 2.33
84.00% 0.99 99.50% 2.58
85.00% 1.04 99.60% 2.65
86.00% 1.08 99.70% 2.75
87.00% 1.13 99.80% 2.88
88.00% 1.17 99.90% 3.09
89.00% 1.23 99.99% 3.72

Reduction in safety inventory: If forecasting is done close to the selling period, chances of it
turning out to be closer to actual sale is higher than if forecasting is done away from the
selling season – more changes are likely to happen in the intervening period. But, forecasting
can be done closer to the selling period only if lead time is small – for example, if lead time is
six months, forecasting has to be done six month before the selling season, but if lead time is
only one month, forecasting can be done just a month before the selling season, and this
forecast would be more accurate. Also, if lead time is small, multiple forecasting can be done
for one selling season, and products can be produced and dispatched in smaller batches –
for example, if selling season is of four months, and lead time is of one month, then
forecasting can be done for each month of the selling season, and since each forecast will be
done closer to its selling period, it will be more accurate. Hence, safety inventory can be
reduced by reducing lead time.

Safety inventory can also be reduced by motivating customers to place advance orders by
offering them incentives. For example, a car company offers an incentive of Rs. 10,000 if a
customer places an order one month in advance, and if say, 20 per cent of customers place
orders in advance, uncertainty / sigma impacts only 80 per cent of the demand.

3. Speculative / Anticipation inventory : Speculative inventory is kept to serve a predictable

rise in demand or to protect against imminent rise in price or shortage of a material that is
used in production – a milk retailer may keep higher stock during festival seasons and a steel
maker may buy large amount of coal as it expects a rise in price of coal in near future.
Speculative inventory does not increase or decrease in a regular manner as does cycle
inventory nor is it held permanently as is safety inventory – it is held for short periods on an
irregular basis to take advantage of predictable rise in demand or to protect against a price
rise or shortage of a factor of production.

Reduction in speculative inventory: If the production rate is equal to demand rate of high-
demand period, speculative inventory is not required, but there would high idle capacity
during low-demand periods. Hence, increasing production rate may not be a viable strategy.
A more viable strategy would be to shift demand from high-demand periods to low-demand
 periods by offering lower prices during low-demand periods, and when such a shift occurs
demand in various time periods are more equal to each other.

4. Pipeline inventory: It is the inventory in-transit such as the one in a truck moving from a
supplier to its buyer.
Pipeline inventory = Average demand x Lead time (Time taken to move inventory from
supplier to buyer)

Reduction in pipeline inventory: Reduce lead time by using faster means of transport or by
selecting customers who are close by.

ECONOMIC ORDER QUANTITY OR ECONOMIC BATCH SIZE (EOQ)

There is cost in placing an order. This cost is spread over the number of units in the batch. Larger the
batch size, fewer the number of batches required per year and lower is the ordering cost. With
larger batch size, average inventory levels are higher and stockholding costs increase – Average
inventory level = Batch size / 2. The optimum batch quantity is where the total cost is minimum and
this quantity is known as Economic order quantity or Economic batch size – sum of ordering cost and
holding cost is minimum at economic order quantity. Total cost (ordering cost + holding cost) is
considered because ordering cost and holding cost move in opposite directions with regards to batch
size – ordering cost decreases when batch size increases, and holding cost increases when batch size
increases and vice-versa.

A company has to decide its order size. For example, a company’s annual demand for a product may
be 1000. It can place one order of 1000, or it can place 5 orders of 200 each, or it can place 10 orders
of 100 each. There is tradeoff between ordering frequency and inventory level. Small order size will
lead to frequent reorders, but inventory level will be lower. Large order size will lead to less frequent
orders, but inventory level will be higher.

It is important to remember that half of order size remains in inventory permanently. If a company
orders Q amount, and keeps ordering Q amount after T time when Q has been consumed, it carries
an average inventory of Q / 2 throughout the year. For example, a company has an order size of 10
units and one item is consumed every day. Therefore, it receives an order of 10 units every 11 th day.
On the 1st day, the company has inventory of 10 items, on the 2 nd day, it has inventory of 9 items,
and so on. It has zero inventory on the 11 th day. The average inventory that the company holds = 10
+ 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 + 0 / 11 = 5 = 10 / 2 = Q /2. The average inventory is the inventory
that is held throughout the year.

FIGURE 3 – Average inventory = Q / 2

Therefore, it is important that steps are taken to reduce order size, since it directly results in
reduction of average inventory levels. Holding cost is directly proportional to average inventory –
Holding cost = Holding cost per unit per year x Average inventory ( Q / 2 ). Holding cost is normally
given as some percentage of cost of product – for example, holding cost of tomato may be 15 per
cent of its price, whereas holding cost of potato may be 5 per cent of its price, since tomato requires
a more controlled environment than potato.
Ordering cost is cost of all the orders that a company places. Therefore, ordering cost = ordering cost
of one order x number of orders. Number of orders = Annual demand / Order size. The number of
orders will be more if order size is small, but the average inventory will be lower. Conversely, the
number of orders will be less if order size is large, but the average inventory will be higher. Since
ordering cost is directly proportional to number of orders and holding cost is directly proportional to
average inventory, ordering cost is inversely proportional to holding cost. For example, if annual
demand is 1000, and order size is 10, the number of orders will be 1000 / 10 = 100, and the average
inventory will be 10 / 2 = 5, but if the order is 100, the number of orders will be 1000 / 100 = 10, and
the average inventory will be 100 / 2 = 50.

Since ordering cost and holding cost move in opposite directions with regards to order size, ordering
cost decreases and holding cost increases when order size is large, whereas ordering cost increases
and holding cost decreases when order size is small. Therefore, the best order size is one where the
sum of ordering cost and holding cost is minimum.

To arrive at an expression for the best order size or economic order quantity (EOQ) , let

D be annual demand (1000)

S be cost per order placed in money value (Rs. 100)

C be cost of one product or unit cost (Rs. 10)

I be holding cost, expressed as percentage of unit cost ( 10 per cent)

Q be best order size or economic order quantity

Number of orders = D / Q

Ordering cost = S x D / Q

Holding cost per unit = I x C

Holding cost = Holding cost per unit x Average inventory = I x C x Q / 2

Total cost = Ordering cost + Holding cost = S x D / Q + I x C x Q / 2

When Q is the best order size or economic order quantity, Total cost is minimum. To find a value the
Q, expression of Total cost is differentiated with respect to Q, and equated to zero.

d(Total cost) / dQ = - S x D / Q2 + I x C / 2 = 0

S x D / Q2 = I x C / 2

Q2 = 2 x S x D / I x C

Q=√2xSxD/IxC

Q = √ 2 . S . D / I. C = √ 2 X 100 X 1000 / 10 X .10 = 447

Total cost (447) = 10 x 1000 / 447 + .10 x 10 x 447 / 2 = 246

CONTINUOUS REVIEW SYSTEM OR FIXED ORDER QUANTITY SYSTEM – Q SYSTEM

Orders are placed when the level of stock drops to a previously determined level called Reorder level
or ROL. An order is placed for a fixed quantity called Reorder quantity or ROQ. ROL is based on
demand rate and procurement lead time, so that the order arrives before stockout or before a
minimum level is reached. ROQ is based on ordering cost, holding cost and quantity discount.
Continuous review system has fixed order quantities but variable time intervals between orders.

FIGURE 5 – Continuous Review system (Q system)

The stock position is continually monitored, and when the stock position drops to Reorder point
(ROL), a fixed quantity (ROQ) is ordered. The order arrives after its lead time (L), and cycle of
consumption, reorder, and order receipt is repeated.

Reorder level (ROL) is set such that there is enough stock to serve the demand that arises during
lead time. Normal distribution of demand is assumed during lead time, and the inventory is exposed
to stockout during lead time – order has been placed, but stock is yet to arrive.

Reorder level (ROL) = Average demand over lead time + Safety stock

Average demand over lead time = Average demand x Lead time = D x L

Safety stock = Safety factor (Z) x standard deviation of demand over lead time (σ) = Z x σ (L)

Reorder level (ROL) = D x L + Z x σ (L)

For example, a company has an annual demand of 60,000, and its supplier’s lead time is 5 days. The
σ of its daily demand is 160, and its desired service level is 90 per cent. Its ordering cost is Rs. 20, and
its holding cost is 15 per cent. The cost of the product is Rs. 10.

Order size (ROQ) = √2.D.S / I.C = √2 X 60,000 X 20 / 0.15 X 10 = 1131 (Economic order quantity)

Average daily demand = d = 60,000 / 365 = 164

Variance (σ2) is additive, hence σ2 over lead time ( 5 days) is 5 times daily variance = 5 x 160 2 =
128,000

σ2 ( 5 days) = 128,000, and hence σ (5 days) = √128,000 = 358

For 90 per cent service, the corresponding value of z = 1.3 (From table 1)

Reorder level = Average demand x Lead time + z x σ (lead time) = 164 x 5 + 1.3 x 358 = 820 + 465 =
1285

Therefore, an order of 1131 is placed every time the stock position drops to 1285.

It may also happen that lead time itself may vary with a mean of L and a standard deviation of σ L. In
such cases, σ during lead time is calculated by the following formula:

σ( during lead time ) = √L σ2 + D2 σL2

For example, daily demand of a product is 1000 (D), and σ of demand is 100 per day. Its average lead
time is 0.5 day with σ of lead time being 0.1 day. Therefore, σ during lead time = √ 0.5 x 100 x 100 +
1000 x 1000 x 0.1 x 0.1 = 105

Continuous review system can be followed when current inventory position is known – ROQ is
ordered when inventory level drops to ROL. With advances in computer technology, it is now
possible to know the inventory position of any number of items any time, and hence continuous
review system is becoming popular. Since the company always knows its inventory position, it can
place an order at such a time that new stock arrives before stockout can occur.

Two-bin system: It is the visual system version of Q system – a visual system allows employees to
place orders when inventory visibly reaches a certain level. In two-bin system, inventory of a product
is kept in two bins. Inventory is first withdrawn from one bin. When the first bin is empty, an order is
placed. Inventory is withdrawn from the second bin till replenishment arrives. When the
replenishment arrives, the second bin is filled first, and the remaining units are put in the first bin.

PERIODIC REVIEW SYSTEM OR THE FIXED RE-ORDER INTERVAL SYSTEM (P System)

Re-ordering is done at fixed intervals of time after assessing the usage rate. The quantity ordered is
calculated to bring the stock to some predetermined maximum level. Suppliers know well in advance
when orders are going to be received. It also allows purchasing department to plan its own work.
Periodic review system has variable order quantities but fixed time intervals between orders.

Most companies have been using periodic review system because it was prohibitively expensive to
be update about inventory positions of thousands of items. The company counts the inventory for a
product and places an order at fixed time intervals – every Monday or 1 st of a month.

The stock position is reviewed at fixed intervals (p), say every Monday or 1 st of every month, and an
amount equal to Target inventory minus the stock position is ordered after each review.

P is the time between orders, and if d is the daily demand or usage rate, then Q or the order size or
the economic order quantity = P x d

Q = P x d, and hence P = Q / d, where Q = √2 . D . S / I . C

√2.D.S/ I .C
P = (1 / d) x (√2 . D . S / I . C) =
d
Target inventory (T) is set high enough to cover demand during the review period (P) and lead time
(L). Such high inventory is required because new stock will not be ordered again until the next review
period (say next Monday or 1ST of next month), and the ordered stock will arrive only after the lead
time (L) is elapsed – therefore, target inventory (T) should be enough to cover demand during the
time period ( P + L)

Target inventory = T = Average demand x (Review period (P) + Lead time (L) ) + Safety stock

T = d x (P + L) + Z x σ (P + L )

Taking the above example (in continuous review system) where Q and d were calculated to be 1131
and 164 respectively

P = Q / d = 1131 / 164 = 7, and L = 5 ( as in the example)

σ2 over (P + L ) = (7+5) X 160 2 = 12 X 128, 000, therefore, σ (P + L ) = √1,536,000 = 1239

Therefore, T = 164 X ( 7 + 5 ) + 1.3 X 1239

T = 1968 + 1611 = 3579

Therefore, the stock position is reviewed every 7 days, and order is placed to reach the target level
of 3579.
It is worthwhile to note that the periodic review system needs a safety stock of 1611 units to achieve
a service level of 90 per cent, while the continuous review system just needs safety stock of 465
units (refer example of Q system) to achieve the same service level. This happens because the
periodic review system must provide safety stock for (P + L ) time period, whereas the continuous
review system needs safety stock for L time period.

Single-bin system: It is the visual system version of P system. Inventory of a product is kept in a
single bin, and inventory is withdrawn from this bin. After a fixed period of time, say every Monday,
the bin is filled to the top with fresh replenishment.

CONTINUOUS REVIEW SYSTEM VS PERIODIC REVIEW SYSTEM

Both the systems are used to manage independent demand, where σ plays a significant role.
However, there are situations in which one system is better than the other.

 In periodic review system, inventory is exposed to vagaries of demand (σ ) over the entire
time period of review period and lead time, and hence stock out can happen at any time.
Therefore, to prevent stock out, safety stock is kept for the entire time period of review
period and lead time. In continuous review system, inventory is exposed to vagaries of
demand (σ ) only during lead time, and hence stock out can occur only during lead time.
Therefore, safety stock has to be kept only for lead time.
 The periodic review system is used when orders have to be placed at specified intervals, say
every Monday or 1st of every month.
 The periodic review system is used when multiple products are ordered from the same
supplier and delivered in the same shipment. The supplier achieves economies of scale of
transportation over multiple products.
 The periodic review system is used for inexpensive products whose inventory status is not
maintained – inventory is not counted after every withdrawal. For example, bins containing
nuts or jars containing toffee are filled to top (Target inventory) at fixed intervals of time
(Monday).
 The periodic review system should not be used for expensive products, since keeping high
amount of safety stock of expensive products can tie lot of capital in inventory. Therefore,
continuous review system should be used for expensive products.
 The periodic review system has been popular because inventory has to be continually
counted to be able to implement continuous review system. Computers have simplified the
process of continual counting – the stock position is changed after every withdrawal, and
hence it is easier to implement continuous review system now.

Table: Continuous review system / Periodic review system

CONTINUOUS REVIEW SYSTEM PERIODIC REVIEW SYSTEM

An order equal to EOQ is placed when An order of {d x (p + L) – Existing stock} is
inventory falls below d x L placed after every p time period
Safety stock = z x σ ( L) Safety stock = z x σ (p+ L)
RESOURCE PLANNING
It is always best to produce at a constant rate – 100 units of product every hour. When a company
produces at a constant rate, and when production rate is nearly equal to its capacity, production is
carried out at a low cost – optimum production rate. But, demand almost always fluctuates –
sometimes, demand rate is more than the optimum production rate, and sometimes, it is less than
optimum production rate. And most of the time, it is imperative that a company meets its demand.
A production plan specifies how much of each product would be made and when they would be
made – for example, 1,000 units of X and 1,200 units of Y would be produced in May and 1,500 units
of X and 8,00 units of Y would be produced in June.

Production plan is made over at least three different time horizons:

 Long range production plan: The company forecasts how many units of its product would it
be able to sell in coming years, and installs capacity to meet its forecast – for example, it will
sell 5 million units per year over the next five years. Long range production plan is very risky
– if actual demand does not match the forecast in coming years, the company is burdened
with extra capacity, and its cost of production increases, and if actual demand is more than
the forecast, the company foregoes profits that it could have earned if it had sufficient
capacity. Forecasting is a very important element of long range production planning.

 Intermediate range plan: The company forecasts how may units of its product would it be
able to sell in the next few months – for example, it will sell 50,000 units per month over the
next few months. The company readies and tweaks its already installed capacity to meet its
 forecast. This planning process is called aggregate planning – for example, a company uses
overtime to meet the extra demand or hires temporary workers to run an extra shift or does
not run second shift.

 Short range plan: The company forecasts how many units of each variety of its product
would it be able to sell in the next few days or weeks, and the company makes a plan to
produce them. This is called master production schedule – for example, 100 units of X and
150 units of Y would be produced in second shift on Thursday. Resources like machines and
workers are allocated to products – for example, a company decides to produce 50 units of X
on machine A. This process is called scheduling.

AGGREGATE PLANNING PROCESS

Capacity decisions are hierarchical. Capacity is installed to meet demand that is expected to
materialize in the coming years – for example, a company installs an assembly line to produce
10,000 units every day. Aggregate Planning tweaks the installed capacity to meet demand that is
expected to materialize in the next few months – for example, a company decides to run an extra
shift in March, and hence hires temporary workers. Scheduling is allocating available resources to
specific jobs and orders – for example, a company decides to produce X in first shift and Y in second
shift or decides to load M on machine P and load N on machine Q.

Purpose of aggregate plan is to specify the optimal combination of production rate, work force level,
and inventory at hand so that demand is met. Production rate is number of units produced per
worker per unit of time – for example, one worker produces 100 units per hour. Workforce level is
the number of workers needed to produce the required number of units: Number of units produced
= Production rate x Workforce level. Inventory on hand is unused inventory carried over from the
previous period. A typical aggregate planning problem reads like this: Given that the demand for
product X is 100 units per month over the next six months, determine the production level,
inventory level, and workforce level for each month so that cost incurred over the six months is
minimum.

Salient features of aggregate planning process

 Aggregate planning determines the capacity that the company will need to serve demand in
the next 6 – 12 months. Aggregate plans are prepared for product lines, rather than
individual products.

 Aggregate planning matches supply with demand over the medium time range up to
approximately 6-12 months into the future. It is done for a single product or a few similar
products that require similar components and processing.

 A meaningful and common measurement of output has to be decided. Outputs which share
common production processes or consume similar resources can be put under one category
– for example, an automobile company will produce 1,000 units of small cars and 500 units
of sedans per month over the next six months. The units of output are small cars and
sedans, though the automobile company produces many brands of small cars and sedans.
  An aggregate plan sets an overall output level to deal with demand which is inherently
uncertain. It also specifies the mix of resource inputs that would be used to achieve the
planned output level – for example, an extra shift is run or temporary workers are hired or
workers are fired.

 During aggregate planning, capacity of facility is considered fixed and cannot be expanded –
for example, if installed capacity is 100 units per shift, more than 100 units cannot be
produced during a shift. Therefore, aggregate planning uses installed capacity to serve
demand in the most profitable way – for example, a company runs an extra shift or works on
Sunday.

 Aggregate planning also tries to influence demand by manipulating price, advertising, and
product mix – for example, a company reduces price to increase demand if demand is
significantly less than installed capacity, or advertises profusely during low-demand periods
to shift demand from high-demand periods to low-demand periods, as do companies that
sell air conditioners and refrigerators. Therefore, operations and marketing work together to
serve demand in the aggregate planning stage.

 In services, capacity is often limited by space – for example, number of rooms in a hotel
determines its capacity, and number of seats in a plane determines its capacity. Time also
affects capacity – for example, the number of customers who can be served dinner in a
restaurant is determined by the number of seats as well as the number of hours dinner is
served.

AGGREGATE PLANNING BY MODIFYING DEMAND

A production system works best when its rate of production is constant, and it is always expensive to
change rate of production. Product companies hold inventory to meet demand, and keep its rate of
production constant, but holding inventory is costly when the product is expensive or perishable, or
when high levels of fashion and / or technology are embedded in it. Service cannot be inventoried,
and hence if rate of demand is very different from rate of production, it either results in idle capacity
or unserved customers. Therefore, most companies should always explore the possibility of making
rate of demand stable – demand should not vary much from one time period to another.

Pricing – A company uses differential pricing to reduce peak demand or increase demand during
low-demand period – higher price is charged when demand is high, and lower price is charged when
demand is low. The idea is to shift demand from high-demand period to low-demand period so that
demand is more even throughout the time period.

Advertising – A company advertises profusely during low-demand period to stimulate demand, and
also to shift some demand from high-demand period to low-demand period.

Backlog – When a company cannot meet the demand of all its customers, it asks its customers to
wait for their orders to be delivered at a later date. Backlogging shifts demand to a future time
period, but customers may not be willing to wait, and may buy some other brand. Backlogging can
be used only by a strong brand. Backlog is confirmed demand.
Reservation – A company motivates its customers to reserve capacity – customers promise to buy in
some future time period. The company is able to know demand in advance, and hence it is able to
arrange capacity to meet demand.

Table: Aggregating planning by modifying demand

PRICING ADVERTISING Backlog RESERVATION

Differential pricing Demand is shifted Demand is shifted to Customers promise to
reduces peak demand from high-demand future time period buy in future period
or increase demand period to low-demand
during low-demand period
period

AGGREGATE PLANNING BY MODIFYING SUPPLY

The company changes its rate of production to make it equal to rate of demand. It is important to
keep in mind that a company cannot go beyond its design capacity to match rate of demand.

Vary the number of employees – hire or layoff to meet demand

A company hires new employees when the demand is high, and it fires its employees when the
demand is low. This is a good strategy when the production process is mostly manual and output is
almost directly proportional to the number of employees. But, when production is mostly done by
machines, the relationship between output and the number of employees is no longer linear –
output is largely determined by capacity of machines. Therefore, for most manufacturing facilities,
hiring and firing is not a good strategy since most of them employ machines to produce their
products. This strategy affects labor relations and worker morale, which affect productivity. This
strategy is becoming useful in knowledge industry where output is again directly proportional to
number of employees – for example, software companies, law firms.

Procedure:

 Determine the productivity of each employee – for example, one employee produces 10
units of the product per hour.
 Calculate the number of employees needed to produce the output – if rate of demand is 100
units per hour, the company requires 100 / 10 = 10 employees.
 Hire new employees or layoff – if the company has 5 employees on its rolls, it hires 10 – 5 = 5
employees, but if it has 15 employees on its rolls, it fires 15 – 10 = 5 employees.
 Hiring and layoff costs are incurred – it costs Rs. 10,000 to hire an employee, and hence the
company incurs 5 x 10,000 = Rs. 50,000 as hiring cost, and its costs Rs. 15,000 to fire an
employee, and hence the company incurs 5 x 15,000 = Rs. 75,000 as firing cost.

Problems:

 Direct and indirect costs of training are incurred: New employees may have to be trained
for long periods if difficult-to-acquire skills are required to do tasks that would be assigned
to them. New employees take time to reach the desired productivity levels, and hence there
is loss of output. Also, new employees are likely to make mistakes while performing their
tasks, and hence are likely to produce defective products.
  Employees of required skill may not be available: Employees with difficult-to-acquire skills
are mostly in short supply, and it is especially difficult to hire them during economic
prosperity when all companies of an industry are expanding production, and hence are
hiring.
 Time is required for hiring and training: It always takes time to hire employees, and then
train them, and in the meantime, customers cross over to competitors and are lost forever.
 Competent employees with multiple jobs may not join the company: Employees do not like
companies which do not provide stable employment, and hence if a company develops a
reputation of firing employees when they are not required, competent employees may not
join the company.
 This strategy may not work in unionized environment: Union will not allow the
management to fire employees.

Keep work force constant, but vary its utilization – use overtime and undertime to meet demand

A company uses overtime and undertime to match supply with demand. It is an useful strategy
when change in demand is temporary. A company uses overtime when its demand is more than its
capacity. For example, a manufacturer may have capacity to produce 140 tractors in two shifts of 8
hours each – it is able to produce one tractor in (8 + 8) x 60 / 140 = 6.9 minutes. If the company
forecasts that its demand of tractors will be more than 140, it can run overtime to produce the
required number of tractors because the company has 8 hours of idle capacity in third shift. But it
can only produce 8 x 60 / 6.9 = 70 tractors during overtime – if its forecasted demand exceeds 140 +
70 = 210 tractors, it cannot satisfy demand by producing during overtime. The advantage of
overtime is that a company can meet a fluctuating demand without increasing its capacity, but a
company should not try to meet permanent increase in demand by overtime – it should increase its
capacity to meet permanent increase in demand. If a company uses too much overtime, its machines
will deteriorate faster because it will not have enough time to carry out preventive maintenance,
and its people will face burnout. Workers are interested in overtime, because wage during overtime
is significantly higher than in normal working hours.

A company uses undertime when its demand is less than its capacity – its capacity remains
underutilized. A company does not like undertime, and the issue really is to make it less painful for
the company. For example, if a manufacturer has capacity to produce 140 tractors in two shifts of 8
hours each, but if its demand is only for 70 tractors, it can follow one of the following options: (i) it
can produce 70 tractors in one shift and close the plant in second shift (ii) it can produce 35 tractors
in first four hours of each shift (iii) it produces 35 tractors in each shift, and workers are allowed to
work at a slower pace (iv) it produces the required number of tractors in 15 days and closes the
plant for the rest of the month. The fourth option works out to be better than the first three
methods as (i) workers do not drop their pace, and hence there is no decline in productivity when
demand picks up (ii) since the plant is shut during 15 days, it does not incur any cost in running the
plant for 15 days (iii) it can plan an extensive preventive maintenance schedule during the 15 days
that the plant is shut (iii) workers come back fresh and energized after the break. It is important to
remember that though workers are not fully utilized during undertime, they are supposed to be paid
their full wages.

To sum up:

 Employees are put on overtime if demand is more than capacity.

 Employees are left idle when demand is less than capacity.
  Labor costs are higher during overtime, and hence a company needs to calculate if it is
earning enough on products produced during overtime. There are also related costs of more
frequent breakdowns and increased absenteeism of employees due to fatigue and sickness
caused by long hours of work. And, hence there is limit to overtime.
 Company forgoes opportunity of additional output during idle time. Idle time also produces
frustration and fear among workers.

Part Time and Temporary workers

Companies in certain industries face predictable surges in demand during parts of the day / week /
month / year. For example, a restaurant has high demand for four hours in the evening. Therefore, it
keeps a base level of employees and hires part time employees who work four hours in the evening.
It is able to meet peak demand without having to keep large number of employees throughout its
working hours. It is important that a company pays higher wages to part time employees so that it is
able to attract competent part time employees. It is important to ensure that the part time
employees are able to provide a high level of service, and hence the company should standardize its
processes and provide adequate training to its part time employees. It is also important that it is
able to retain its part time employees so that they do not have to be trained very frequently.
Companies in certain industries face predictable surges in demand during parts of the year. Most
holiday destinations attract tourists during only some part of the year, and hence it would not be
wise to keep the same number of employees throughout the year. A hotel in such a place can hire
temporary employees during its peak period.

Vary size of inventory

Demand for most products fluctuate, but a company is always better off producing at a constant
rate. A company continues to produce at a constant rate even if its demand is less, and it stocks the
product that it is not able to sell. It uses this inventory to serve customers when its demand becomes
more than its rate of production. Therefore, inventory decouples demand from capacity, and is a
safe aggregate planning strategy for most products. But this strategy will not be effective if there are
large and predictable swings in demand between two time periods, and hence inventory has to be
stored for longer time periods which is what happens when the demand of a product is seasonal in
nature. Products like air conditioners and refrigerators are examples of products whose demand is
seasonal. Holding inventory cannot also become dangerous if demand varies wildly and
unpredictably from one time period to another – there would be stockout when the demand is high,
and there would be idle inventory when the demand is low. Holding inventory can become
dangerous if a product has high levels of technology and fashion embedded in it – the inventory can
become obsolete by the time the selling season arrives. Inventory also cannot be held if the product
is perishable. This is a good strategy for products whose demand does not change significantly from
one time period to another, and products which are not perishable, and products which will not
become obsolete due to changes in fashion and technology that are embedded in them.

To sum up:

 Production is carried out at a constant rate, and hence equipment utilization is high.
Production cost is low.
 Workforce is constant, and there is no overtime and idle time. Employee morale is high.
 Inventory accumulates during low-demand periods, which is used to serve customers during
high-demand periods.
  Inventory ties up working capital, takes space for storage, and there is risk of damage and
obsolescence.

Subcontracting

A company may use capacity of another company if its demand outstrips its capacity – it contracts
with another company to manufacture a part of its demand. This can be a good strategy when the
industry in which the company operates has overcapacity, but it will generally not be applicable in an
industry whose capacity is less than its demand, because it will be difficult to find companies with
spare capacity. The company also has to ensure that its subcontractor is able to produce quality
products – it is always better to forgo demand than serve customers with inferior products. It is also
important to remember that subcontracting is different from outsourcing – when a company
outsources to a company, it procures all its supplies, and does not manufacture at all, but when a
company subcontracts, it manufactures major part of its demand and uses the subcontractor to
supply only a part of its demand.

Arrangement with competitors

Companies of an industry may make arrangements among themselves to shift customers to each
other when demand of any one of them outstrips its supply. Airlines shift passengers if they are
already full, and hospitals and restaurants are known to recommend customers to competitors if
they do not have capacity to serve them. If played fairly and with some amount of generosity, this
can be a good strategy as the industry as a whole can serve larger number of customers with less
total capacity – the industry becomes more profitable.

Table: Aggregate planning by modifying supply

SUPPLY STRATEGY IMPLICATIONS

Hire / Fire Is employed when output is directly
proportional to number of employees
Overtime / undertime Workers work extra hours when there is
temporary increase in demand. Facility is left
unutilized when demand is less
Part time / Temporary employees Are hired when demand is seasonal –
predictable surges in demand
Vary size of inventory Company uses inventory to serve customers
when its demand becomes more than its rate
of production
Subcontracting Company uses capacity of another company if
its demand outstrips its capacity
Arrangement with competitors Companies make arrangements among
themselves to shift customers to each other

BASIC STRATEGIES

Level production strategy: Constant output

A company produces at a constant rate which is defined by its capacity, and hence it is able
to utilize its capacity well. It serves most of its demand at its lowest possible cost. It uses
 demand modifying strategies like differential pricing to shift demand from high-demand
periods to low-demand periods (to reduce the peaks and troughs in demand), and then uses
supply strategies like inventory and subcontracting to match supply with demand. Inventory
costs are high, but there are no costs of overtime, hiring, and layoff. This strategy is common
in industries where fixed costs dominate the cost structure of the manufacturing
infrastructure – utilization of the manufacture infrastructure is vital, and has direct bearings
on per unit manufacturing cost.

Chase demand strategy: Variable output

A company is able to produce to meet fluctuating demand, which essentially means that the
company keeps extra capacity – production rate is kept equal to demand rate. This can be a
good strategy in industries where incremental costs of installing larger capacities are small.
For example, if the cost of installing an assembly plant for 1500 cars is just 110 per cent the
cost of installing an assembly plant for 1000 cars, the company would be wise to install an
assembly plant for 1500 cars. Unfortunately, in most traditional manufacturing setups, costs
are almost directly proportional to capacity – the cost of installing an assembly plant for
1500 cars would be around 150 percent of the cost of installing an assembly plant for 1000
cars. Keeping extra capacity in such industries can be suicidal since per unit manufacturing
cost would be high, as its utilization would be low. But, in new industries like data storage
and processing, the incremental costs of installing larger capacities are small, and companies
in such industries can afford to keep extra capacity. In industries, where the output is
directly proportional to number of employees, a company can hire and employees to match
supply with demand, but in most traditional manufacturing setups, where manufacturing is
done by machines, output is no more directly proportional to number of employees. But, in
people-based industries like law firms and software companies, where output is directly
proportional to number of employees, a company can hire and fire to match supply with
demand. Inventory costs are low, but costs of overtime, hiring, and firing are high.

Mix strategy

Demand rate is relatively constant – it does not change significantly from one time period to
another. The company keeps some extra capacity – say, 20 per cent of average demand. It
mostly produces at a constant rate, and uses inventory to serve any moderate increase in
demand. But, it is also willing to produce during overtime. And if output is directly
proportional to number of employees on its rolls, it is also willing to hire and fire to match its
production rate with demand rate.

Table: Basic strategies

LEVEL PRODUCTION STRATEGY CHASED DEMAND STRATEGY

Production is at a constant rate Production rate = Demand rate
Capacity utilization is high There is excess capacity
MASTER PRODUCTION SCHEDULE

The aggregate plan is converted into a master production schedule. Master production schedule
specifies which product would be produced when and in how many units. A master production
schedule is generally developed for a week – for example, 500 units of X and 700 unit of Y would be
produced in the first week of June. Master production schedule generally covers a 6- to 12- month
time horizon.

 Demand of the individual product in various time periods is taken into consideration – for
example, of the 1,500 small cars that is expected to be sold next month, 800 would be brand
X, 400 would be brand Y, and 300 would be brand Z.
 Master production schedule translates aggregate plan into production schedules for
individual products – for example, of the 1,500 small cars that would be produced next
month, 800 would be brand X, 400 would be brand Y, and 300 would be brand Z.
 Master production schedules specifies as to which product and how many of them will be
manufactured in which week, on which day, and in which shift – for example, brand X would
be produced during from 1st to 18th of the month, brand Y would be manufactured from 19 th
to 25th of the month, and brand Z would be manufactured from 26 th to 30th of the month.
 Capacity and availability of machines is taken into consideration – for example, 100 units of
A have to be processed on machine M in shift 1 on Monday, but it can process only 80 units
of A.
 Availability of unique components needed for a particular product is considered – for
example, component N is required to assemble brand Y.

Time fences in Master Production schedules

Master production schedule gives the quantity of end products that would be produced each week
in next 24 – 48 weeks. For example, 100 units of brand X and 200 units of brand Y would be
produced in week 1, and 150 units of brand X and 150 units of brand Y would be produced in week
2, and so on till the next 24 – 48 weeks. The first few weeks of the master production schedule
cannot be changed except under extraordinary circumstances because it would be expensive to
reverse the plans to purchase materials and produce the components that go into the products.
Production schedules for later weeks can be changed more easily.

Updating Master Production schedule

Master production schedule is updated weekly – after one week has passed, one week is removed
from the front end of the Master production schedule and one week is added to its back end, and
production schedule for all the weeks are estimated afresh. Production schedule of later weeks are
more likely to be changed as they are mostly forecasts rather than confirmed orders. Production
schedule of early weeks are less likely to change as they are mostly confirmed orders. Since
production schedule of all weeks are updated every week, they more accurately reflect actual
demand as they move towards the front end of the master production schedule.

Production schedule of 9 weeks in Week 1:

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9

1100 1300 1200 1200 1400 1200 1300 1200 1400

Production schedule of 9 weeks in Week 2:

 Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9
1300 1200 1200 1100 1400 1200 1400 1100 1300

Production schedule of week 1 is removed as it is already produced. Production schedule of week 2

becomes the production schedule of week 1. Similarly, production schedules of other weeks move
forward by a week. Production schedules of earlier weeks (1, 2, 3) have not changed, but production
schedules of later weeks have changed. New production schedule is added in week in 9.

LEAN & JUST-IN-TIME PRODUCTION SYSTEM

Just-in-production system is largely understood as a type of production scheduling and inventory
management system in which products are produced in just the right quantities to supply to final
customers or next stage of production at just the right time – no inventory is kept in anticipation of
demand. But, this is a limited view of Just-in-time production system, and is called Little JIT.

A more comprehensive view of just-in-production system is to transform the way product is

designed, work is delegated, and responsibility is assigned – it seeks to eliminate all forms of waste
at all stages of the value chain. It specifically seeks to eliminate the reasons for holding inventory –
long setup time, unreliable delivery from suppliers, breakdown of machines, and defective products.
Inventory covers up for a faulty production system – inventory protects the company from shortages
and work stoppages due to long setup times, unreliable deliveries of materials, machine
breakdowns, and defective products. Hence, it strives to (i) reduce setup time (ii) ensure reliable
delivery of materials from suppliers (iii) reduce machine breakdowns (iv) ensure that no defective
products are produced. Reduction of inventory is a natural consequence of such improvements in
the production – why would a company keep inventory if it never produced a defective product, its
machines never broke down, it did not incur any setup time, and its suppliers always supplied the
right amount of materials at the right time. Such a comprehensive view of just-in-production system
is called Big JIT. In sum, a just-in-time production is a robust production system.

JUST-IN-TIME PRODUCTION SYSTEM

Just-in-time production system was pioneered by Toyota Automobile company. It is based on

following principles:
  It is based on the logic that nothing is produced until it is needed. Need is created by actual
demand for the product.
 Waste is to be avoided at all cost. Waste can be of many kinds – time wasted in
maintenance, investment locked in inventories, and idle workers.
 It considers organization in terms of value chain that extends from suppliers through
transformation to the final customer.
 It organizes employees in teams and makes everyone in the organization conscious of their
work.
 The endeavor is to produce goods of high quality and to have continuous improvement as its
goal.
 It organizes operations by product or cellular manufacturing – a work center will have all
machines that are required to make a product. For example, a work center may have
machines for boring, drilling, and shaving.
 It produces the quantity of units that is needed – no more and no less.
 It produces the quantity of units that is needed on date and time that they are required –
not before and not after.
 Supplier delivers the exact quantity demanded, at the scheduled time and date.
 Stable production schedule is required. Same products are produced in the same sequence,
in the same quantities , and in similar time periods.
 It presents a system of enforced problem solving. There are no safety factors as every item is
expected to meet quality standards, every item must arrive at the right place, and at right
time, and every machine must function without breakdown.
 Adhering to just-in-time principles leads to reduced lot size, reduction in inventory levels,
low production cost, and superior quality product.

Most companies cannot follow the above principles, and keep inventories at various stages of the
value chain due to following reasons:

 A company keeps inventory of raw material because its suppliers are unreliable, and hence it
fears that it may run out of stock – production is stalled due to unavailability of material. It
buys in bulk to take advantage of economies of scale in purchasing, and hence has to keep
inventory.
 It expects its production stages to produce some defective components, and hence keeps in-
process inventory between production stages – if it does not keep in-process inventory, it
will lose production of final products equal to the number of defective components.
 It expects some of its final products to be defective, and hence keeps inventory of final
products – if it does not keep inventory of final products, it will lose sales equal to the
number of defective final products.
 It schedules large production runs to spread the fixed cost of machine set up over a larger
number of units, and hence has to keep large cycling inventories.
 It keeps in-process inventory between production stages to protect against delays resulting
from machine breakdowns and employee absenteeism, and also to keep production stages
running during product changeovers at other production stages.
 Demand of final product is uncertain, and it keeps safety inventory to take care of variability
in customer demand.
The right way to implement just-in-time principles is to reduce inventory gradually – say 10 per cent
every month. As inventory is reduced, there would be work stoppage at some production stages due
one or few of the following problems – defective products, long setup time, machine breakdown,
and delayed supply from a supplier. The problem which causes work stoppages at maximum number
of production stages is attacked first – for example, if defective products cause work stoppages at
maximum number of production stages, the company improves its quality system. Once it has
improved its quality system, it reduces its inventory by another 10 per cent, and then attacks the
next problem that causes work stoppages at the maximum number of production stages.

PUSH OR CLASSICAL PRODUCTION SYSTEM

Products are manufactured and pushed through the supply chain where it is then up to the
salespeople to find customers. The company makes a forecast, and develops a Master Production
Schedule (MPS), which specifies the quantity of products to be produced in various time periods –
for example, 100 units of product X and 150 units of product Y are to be produced on 26.09.2012.

 Material is put on the first machine of the line flow, and each machine passes on the
material (semi-finished product) to the next machine after it has processed it. For example, if
Master production schedule specifies that 100 units of product A has to be produced on a
particular day, 100 units of raw material of product A are put on the first machine in the
morning of the day, and all the 100 units move one by one through all the machines till all of
them are processed at all the machines by the end of the day. If more than one product is to
be produced on the same line flow, their production is organized in batches. For example,
after 100 units of product A has been produced, 150 units of product B are scheduled for
production, and 150 units of raw material of product B arrive on the first machine after the
line flow is set up for product B. Production is organized in batches because set up time is
incurred each time a line flow is required to produce a different product.
 Rate of production of a product is unrelated to rate of demand, especially if a number of
products are produced in batches on the same line flow. For example, daily demand of
product A and Product B may be 100 and 150 units respectively, but when product A is
scheduled for production, its rate of production is much higher than 100 units per day (its
daily demand), and rate of production of product B is zero (while its rate of demand is 150
units per day. Therefore, when multiple products are produced in batches one after another
on a line flow, rate of production of a product is either higher than its rate of demand or is
zero (when other products are being produced).
 Each operator works at his own rhythm disregarding what is going upstream or downstream.
 Workstations produce at different rates – workstation 1 may produce one piece in 30
seconds while upstream workstation 2 may produce one piece in 40 seconds. Workstations
are unbalanced.
 Inventory build-up creates panic – operators are stressed.
 Machines run idle – operators are not fully occupied.

PULL OR JIT PRODUCTION SYSTEM

It is the customer’s order that triggers a demand. This demand pulls the required product through
the supply chain. When a product is sold or its inventory falls below a predetermined level, a
replacement product is pulled from the last stage of the production line. The last stage pulls a semi-
finished product from the next upstream stage, which pulls a semi-finished product from the next
upstream stage – each stage pulls semi-finished product from its upstream stage till the material is
pulled from first stage, which pulls raw materials from suppliers. Just-in-time production system is a
pull production system.

Just-in-time is a unit by unit operation where the operator upstream waits until the immediate
downstream workstation needs a unit before producing it.

Cycle time is the rate at which units are being produced on a production line. To be efficient and to
avoid unnecessary inventory, the cycle time should be equivalent to customers’ demand rate.

COMPARISON OF PUSH PRODUCTION SYSTEM AND PULL PRODUCTION SYSTEM

Push production system and pull production system differ in following ways:

 Type of demand: Production in push production system is based on speculative demand. A

company forecasts demand, and then schedules production of required number of products
taking into account production lead time – for example, if it forecasts that its demand would
be 500 units in January, and it would take 15 days to produce 500 units, the first machine of
its production process starts rolling on 16 December. Therefore, production is initiated by
scheduling the first production stage, and then the product is simply pushed from one
production stage to the next till its completion at the last production stage. And production
continues till 500 units are produced.

In a pull system, products are produced to replenish stocks that are depleted by actual sales
– when the inventory of a product falls below a certain level, the final stage of the
production process carries out its designated process on the semi-finished product (in-
process inventory) lying with it, and produces a product. And it signals to its previous
production stage that it should send another semi-finished product – the second last
production carries out its operations, and similarly sends a signal to its previous production
stage that it needs another semi-finished product. This process continues all the way to the
first production stage and the material procurement process – the supplier receives signal
that it has to send material to the first production stage. Few points are noteworthy (i) each
stage carries a semi-finished product or in-process inventory (ii) production of a product is
initiated by the final stage of production in response to actual demand – the depletion of
stock is proxy for actual demand (iii) the final production stage pulls the semi-finished
product from its preceding stage, which pulls from its preceding stage – each production
stage pulls semi-finished product from its preceding stage and finally the first production
stage sends a signal to the supplier of raw material that it needs another raw material.

It is important to keep in mind that rate of production is strongly linked to rate of demand –
the rate of depletion of inventory is related to rate of demand, and since rate of production
matches the rate of depletion of inventory, the rate of production is related to rate of
demand.

 Lot size: Most production systems produce more than one product – for example, an
automobile company may manufacture three models of cars: X, Y, and Z. And since most
production systems have significant set up times, products cannot be produced in single
units – the automobile company cannot produce one unit of X, and then one unit of Y
 followed by one unit of Z, because set up time would take up most of the production time.
For example, if it takes 10 minutes to process one unit of X, Y, and Z, and it takes one hour
to set up the machine, it will take 10(X) + 60(setup time) + 10(Y) + 60 (set up) + 10(Z) = 150
minutes to produce one unit each of X, Y, and Z, of which 120 minutes is spend in setup – on
an average, it takes 50 minutes to produce one unit. Therefore, most production systems
produce in batches – for example, the automobile company produces X, Y, and Z in batch of
100. And now it will take 10 x 100(X) + 60(setup time) + 10 x 100(Y) + 60(setup time + 10 x
100(Z) = 3120 minutes to produce 100 units each of X, Y, and Z – on an average, it take
3120 / 300 = 10.4 minutes to produce one unit. The average production time will decrease
as the batch size increases, but since the average inventory being held is half of batch size,
holding cost will go up – therefore, the tradeoff is between the average production time and
average inventory being held. But, a production system can work with smaller batch size if it
has been able to reduce its set up time, and since JIT production systems have lower set up
times, it can have lower batch sizes – production at the last stage Is scheduled in batches
when variety of products are being produced.

It is important to remember that pull or JIT production system cannot produce variety of
products if it has any significant amount of set up time, because by principle JIT production
system should have small batch size – in fact, it should produce in batch size of one. Since
most production systems have not been able to reduce set up times to close to zero, JIT
production systems work best when just one product is manufactured.

 Responsiveness: Push production systems maintain inventory to meet unexpected surges in

demand, but pull production systems keep extra capacity to meet unexpected surges in
demand. Though inventory and capacity are substitutes of each other, it is important to
remember that holding inventories of products that are perishable or have high levels
technology or fashion imbued in them can be dangerous – the products deteriorate or
become obsolete, and have to sold at discounted prices or scrapped.

Table: Push production system / Pull production system

PUSH PRODUCTION SYSTEM PULL PRODUCTION SYSTEM

Is based on speculative demand Is based on real demand
Lot size is large Lot is small
Maintains extra capacity to meet unexpected Maintains extra capacity to meet unexpected
rise in demand rise in demand

LEAN PRODUCTION SYSTEM

Highly trained employees are committed to removing waste and doing only those activities where
value is added. Empowered employees analyze every aspect of their work and squeeze out waste.

Elimination of waste

1. Defective products: Do not make defective products. Improve production process to make
perfect products rather than rely on inspection to sort out good products from bad ones.
2. Overproduction: Produce only what is needed.
 3. Motion and effort: Eliminate unnecessary human motions. Reengineer the necessary human
motions so that less effort has to be expended in performing them. Try to automate as many
processes as possible – use more machines.
4. Waiting: Machines and workers should not be idle. Employ more multi-skilled people and
install more general purpose machines.
5. Transportation: Facility layout should be such that movement of materials, employees, and
customers is minimum.
6. Unneeded production processes: Production processes that do not add value must be
eliminated.
7. Work-in-progress inventory: Reduce set up time, and eliminate work-in-progress inventory.

Elements of Lean production system

1. Flexible resources: Multifunctional workers can operate more than one machine at a time,
and they can easily be shifted from one machine to another – this reduces idle time of
workers and machines. General purpose machines can carry out more than one operation –
for example, a general purpose machine can bore holes in an engine block, and then do
drilling, milling, and threading operations at the same station. Wastes of moving the engine
to other stations and setting up other machines at those stations are eliminated when
multipurpose machines are used.

2. Cellular layouts: A cell groups dissimilar machines to process a family of components with
similar processing requirements. Machines of a cell are arranged in a line flow, and a
component moves from one machine to the next as in a line flow. Since a cell processes
similar components, set up requirements are low, and components can be produced in small
batch sizes.

3. Pull system: In a pull system, a worker goes back to his preceding (upstream) workstation
and takes the materials that he needs to produce his output, and does so immediately. The
worker at the preceding workstation produces the materials (his output) that the worker of
the succeeding (downstream) workstation took away – the worker at this workstation will
not produce his output till the one that he has already produced is taken away by the worker
of succeeding stage to produce his own output. Therefore, the rate of production of a stage
is determined by the rate of production of its succeeding stage – there is neither
overproduction nor underproduction.

In a push system, a schedule is prepared for all the workstations, and each workstation
pushes his output to the next (downstream) workstation.

4. Small production batch size: When production is done in small batches, defective products
are quickly identified – since work-in process inventory is small, a workstation processes
output from his preceding workstation as soon as it receives it, and if the output is defective
 it is immediately known. Less work-in-progress inventory makes workstations dependent on
each other, and bottleneck workstations are easily identified.

5. Quick setups: Production cannot be done in small batches if set ups are elaborate and take
up a long time. All the set up activities which can be done while the machine is running are
completed before the machine is stopped for setting it up. Further, it is explored if the set up
activities that are being carried out when the machine is stopped can actually be carried out
while the machine is running. The precise procedure in which the setup activities will be
carried out is established. Before the machine is stopped for setting it up, it is ensured that
all the required personnel and materials are available.

6. Constant production rate: Finished product is produced at a rate near its design capacity. If
production rate of finished product is high, machines that produce components would have
to operate at speeds higher than its design capacity which would lead to higher breakdown
rates. If production rate of finished product is low, machines that produce components
would run idle. Forecasts have to be accurate if production rate is to be constant, which
essentially means that forecasting has to be done closer to the actual selling period. And
forecasting can be done close to the selling period only if lead time is small.

Another way to achieve constant production rate is to arrange daily production in the same
ratio as monthly demand – at least some quantity of each product is produced every day,
and the company always has some quantity of a product available to respond to variations in
demand. For example, if demand for a company’s three products (X, Y, Z) are in the ratio
1:2:3, production is carried out as follows: 1 X is produced, then 2 Y are produced, and then
3 Z are produced, and then 1 X is produced, and so on. But, a company can follow such a
production plan only if there is almost no set up time, which essentially means that large
number of common components are used, and that assembly processes are very similar –
product design plays a very significant role if set time has to be reduced close to zero. A
more viable approach is this: If capacity of the production line is 120 units, 120 x 1 / (1 + 2 +
3) = 20 units of X is produced first, then 120 x 2 / (1 + 2 + 3) = 40 units of Y is produced next,
and then 120 x 3 / (1 + 2 + 3) = 60 units of Z is produced next. Such a schedule can be
managed even if there is some amount of set up time. Such a schedule also ensures that
components are produced in smaller batches, which means that their inventory levels are
low – here too, the essential requirement is that machines that produce the components
have small set up times.

7. Zero defects: It is a huge waste to produce defective products and then rework or reject
them.
Quality problems are identified and solved at their source, and a defective product is never
allowed to move to the next stage. Workers, and not inspectors, are responsible for quality,
and they have the authority to stop the production line if they detect a quality problem.

Quality in lean production systems is based on kaizen or continuous improvement – every

employee is continually looking for ways to improve quality, reduce inventory, and quicken
 setups. Workers are forever willing to detect quality problems, halt production when
necessary, generate ideas for improvement, analyze processes, perform different functions,
and adjust their working routines.

8. Total productive maintenance: Lost production and poor quality products from broken
down machines can be very significant wastes. It is extremely important that machines
never breakdown as all downstream machines will run idle as soon as a machine breaks
down – because there are no work-in-progress inventories. Total productive maintenance
involves operators maintaining their own machines with daily care, periodic inspections, and
preventive repair activities.

9. Supplier network: A lean production system cannot tolerate late deliveries or supplies of
defective products as it has no inventory to take care of production till the right quality
products arrive. Therefore, suppliers are expected to deliver the ordered quantities of right
quality at just the right time. Buyers develop long-term relationships with suppliers, award
them long-term contracts, and they collaborate to improve quality and reduce cost of
components being supplied by suppliers. In return of assured business with their buyers,
suppliers locate near their buyers if possible, use small, side-loaded trucks and ship mix
loads, establish warehouses near their buyers, and use standardized containers and make
deliveries according to delivery schedule prescribed by their buyers. A certified supplier gets
payment at regular intervals rather than on delivery, and its supplies are subjected to limited
amount of quality and quantity checks.

Kanban production control system

Kanban is a card, and it is used to communicate To and From a workstation. No component

can be moved, produced, or used without an appropriate Kanban. Components are
transferred from one workstation to another in containers. Fixed quantities of one particular
container are put in the container. Storage areas and associated workstations are written on
the Kanban.

Production Kanban

 An operator at the downstream workstation 2 has an empty container containing a

production Kanban KP. The fact that the container is empty is the authorization to the
operator to obtain additional parts.
 The operator goes either to the storage area or to the upstream workstation 1 where the
needed parts are being produced.
 The operator exchanges the empty container for a full container containing the required
parts, in which there is also a KP. Kanban.
 The production Kanban that was contained in the empty container is posted at the upstream
workstation 1. This is the authorization for workstation 1 to produce another container of
parts.
 The operator returns to the workstation 2 to continue production.
 Number of kanbans = (Average demand during lead time + Safety stock) / Capacity of
container
 Or number of Kanbans = Demand rate x ( Production time + Transfer time ) ( 1 + Variation in
demand rate) / Capacity of container

Kanbans outside workstations

 Suppliers deliver full containers of components directly to the workstations.

 Empty containers with Kanbans are removed by suppliers – the kanbans are instructions to
the supplier to provide additional parts.
 Finished products are delivered to customers’ delivery vehicles in Kanban containers.
 The empty containers that are returned are instructions to workstation to provide more
finished products.

THEORY OF CONSTRAINTS AND SYNCHRONOUS PRODUCTION SYSTEM

In a line flow, the rate of production is determined by the production stage that takes the
longest time – the production stage that takes the longest time is called the bottleneck
stage. For example, if five stages of a line flow have the processing times of 40, 45, 35, 50,
and 40 seconds, the fourth stage is the bottleneck stage since it has the longest processing
time of 50 seconds, and a product is produced every 50 seconds – it does not matter that
other stages have processing times of less than 50 seconds. It also follows that if processing
time of the bottleneck stage can be reduced, the rate of output can be increased. For
example, if the processing time of fourth machine is reduced to 40 seconds by employing a
faster machine, the bottleneck stage shifts to the second stage, and now a product can be
produced every 45 seconds. It also follows that any reduction in processing times of non-
bottleneck stages does not have any influence in increasing rate of output. For example, if
processing time of the first stage is reduced to 35 seconds by employing a faster machine, it
does not result in increase of rate of output since the rate of output is still governed by the
fourth stage – any reduction in processing times of non-bottleneck stages simply result in
increased waiting for products or increased idleness for machines.
10. The bottleneck stage is the most critical stage of a line flow, and should deserve
management’s maximum attention. If management has money to invest in improving the
line flow, it should first focus on the bottleneck stage. The best operator should run the
bottleneck stage, and if any inventory has to be kept, it should be kept at the bottleneck
stage. If the bottleneck machine breaks down, it should be attended to first, since any time
lost on the bottleneck stage is time lost for the whole line flow, and hence it directly affects
volume of output.
In JIT production system, the rate of output is related to rate of demand, but if rate of
demand exceeds the rate of production as determined by the bottleneck stage, the JIT
production stage cannot feed the demand rate. For example, if the rate of demand is one
unit every 30 seconds, the JIT system cannot serve this demand since the bottleneck stage
has processing time of 50 seconds, and hence it can produce an output only every 50
seconds. Similarly, in push production system, material can be fed on the first stage at any
speed, but the rate of output can only be one unit every 50 seconds

Kaizen / Continuous process improvement

A company has to find ways to continually improve operations – it is not restricted to improving
quality, but applies to process improvement as well. Focus is on business processes rather than
functions – a process like new product development cuts across different functions, and sometimes
even different companies. Therefore, process improvement teams are cross-functional, and they
may also include suppliers and other partners. It tries to understand as to how all the functions,
suppliers, and other partners work together to carry out the process. It involves benchmarking one’s
processes with the best ones of its industry or even outside of its industry, and trying to match their
level of excellence. It involves eliminating activities that do not add value and thus are wasteful. It
also involves instilling a sense of employee ownership in the process – it is based on the belief that
people most closely associated with a process are in the best position to identify as to how it can be
improved. Workers are trained to use methods of statistical process control and other tools for
improving quality and processes. They are also trained to use plan-do-check-act cycle for problem
solving.

OPERATIONS STRATEGY
Strategy provides direction, and strategy decisions are widespread in their effect. They define the
position of the company relative to environment, and they move the company closer to its long term
goals. A company’s strategy provides answers to following two questions: (i) where is the company
heading and (ii) how will it get there. A company’s strategy should clearly delineate as to what it
intends to do for its target customers, and how will it be different from or better than its
competitors in doing whatever it is trying to do for its customers. Hence, effective strategy can be
achieved in two ways – by performing different activities than those of its competitors or by
performing the same activities better.

STRATEGY AND COMPETITIVE ADVANTAGE

Competitive advantage is a company’s ability to be better than its competitors in providing value to
customers. A company can achieve competitive advantage by being better than its competitors on
quality, speed of delivery, innovativeness, and so on. A company uses its competencies like its
superior technology or its creative employees to create competitive advantage – such competencies
are called core competencies.

Competitive advantage through low cost

The company produces a few mature products (or only one) in high volumes using line flow process,
and hence its cost of production is low. Since the products are mature, there are hardly any changes
in product design or process design. It focuses on achieving high productivity and capacity utilization.

Competitive advantage through differentiation

The company provides high level of performance in a few areas of concern to customers – for
example, a company may deliver its products faster than all its competitors, while product of
another company may be more innovative than the products of all its competitors. A company’s
ability to differentiate its products depends on it possessing the corresponding core competencies –
the company that delivers its products faster than its competitors has elaborate distribution
structure in place, and the company that launches innovative products has large pool of creative
people among its ranks.

Competitive advantage through flexibility and variety

The company sells large variety of products. It is able to do so because it has installed large number
of different types of equipments, and it has hired large number of employees possessing different
types of skills.

Competitive advantage through short lead time

The company focuses on reducing the time gap between a customer ordering a product and him
receiving it. Such a company uses information technologies to get a customer’s order into its
production system fast, keeps inventory of components, and keeps extra capacity to ensure that the
customer’s product does not have to wait to be produced, and uses fast means of transport to
deliver the product to the customer.

Competitive advantage through innovation

The company’s products are embedded with latest underlying technologies. The company hires large
number of experts of different technologies, and allows them to combine their individual
technologies in novel ways.

Competitive advantage through superior service

The company provides the most prompt and / or comprehensive after-sale services. The company
sets up its service centers near where its customers are, and uses information technologies to let
customers’ request flow into its service delivery system.

Table: Competitive advantage and core competence

COMPETITIVE ADVANTAGE CORE COMPETENCE

Low cost Company has installed a line process, and
focuses on utilization
Differentiation Company possesses corresponding
technologies and skills
Company has installed large number of
Flexibility and variety different types of equipments, and has hired
large number of employees possessing
different types of skills.
Short lead time Company keeps extra capacity and uses fast
means of transport
Innovation Company hires large number of experts of
 different technologies
Superior service Service centers are located near customers

OPERATIONS SUB-STRATEGIES

Product / Service strategy

A company’s operations strategy is driven by the kind of products that it offers. Product can be
classified as make-to-order, make-to-stock, or assemble-to-order. Make-to-order products are
designed, produced, and delivered to customer specifications in response to customer orders. They
are unique, and cost is generally not an issue. Important operational issues concern understanding
and meeting customers’ needs as each customer wants something unique, and delivering the
product to the customer in the shortest possible time – on-time delivery, quality, and the capability
to design and manufacture different products will determine success. Make-to-stock products are
designed and produced for average customers in anticipation of demand. Shelves are prestocked
with products, and customers select from the products available for purchase. Important operational
issues concern forecasting demand, reducing costs, and maintaining inventory to serve customers –
high-volume production, standardization in design, low manufacturing cost, and high availability of
product will determine success. Assemble-to-order products are assembled from standard
components / modules according to customer specifications. Components are made-to-stock and
then assembled to order after the customer has placed his order. Important operational issues
concern minimizing the inventory level of standard components, and delivering the product to the
customer in the shortest possible time.

Technology strategy

Technology comprises the equipment, processes, and people that are used to produce products. A
company’s technological capabilities and the way it uses technology to serve customers will
increasingly decide whether a company will succeed or not. Choice of technology affects (i) scale of
operation (ii) location (iii) level of personnel skills and training (iv) scheduling (v) tooling (vi)
maintenance (vii) and safety.

It is important that managers are always keen to explore the possibility of using new technologies to
serve customers – technology averse managers are impediments in companies’ adopting new
technologies in the ways they work and serve customers. All managers need not be engineers, but
they must be keenly aware as to how technology is weaved into their company’s strategy. Some
companies outsource their production processes, and hence lose their expertise of process
technology. It is important to keep in mind that a company’s innovation process is most effective
when product innovation and process innovation are done together – knowledge of process
technology enables designers to know if the design specifications can be produced by the existing
process technology, and they also understand how the existing or emerging process technologies
can be used to make new products.

Large number of technologies are embedded in products, and it is important that companies keep a
tab on technological developments that are happening outside its organizational borders – a
company is likely to be stumped by a new technology than anything in its competitive environment.
Therefore, it is important that a company mandates its employees to visit companies outside its
industry, and attend seminars on science and technology.
It is also important that a company employs latest relevant technologies in not only producing their
products, but also in managing other aspects of their company.

Facility strategy

It takes money and time to establish, expand, or close production and distribution facilities, and
therefore, a company must have a clearly defined capacity strategy. It is important to remember
that size, location, and production processes of a facility are related to each other – for example, if a
company’s decides to build a huge production facility instead of large number of small facilities, it
will be located centrally with respect to its markets, and it will employ a production process that will
allow it to reap benefits of economies of scale. Facility strategy is linked to marketing strategy in
services – a service provider may decide to open large number of small outlets so that its customers
do not have to travel long distances to avail its services, or it may open small number of large outlets
so that it can provide large number of services in each outlet.

Some production processes exhibit significant economies of scale – the per unit cost decreases as
production volume increases. Therefore, it is important to have a clear capacity strategy:

 A company can have one large production facility, and hence it will have low per unit cost,
but its distribution cost will increase. Therefore, if a company’s production process does not
exhibit significant economies of scale, it may decide to open large number of small
production facilities, and since now each production facility will be nearer to customers, its
distribution cost would be lower.
 A company’s production process may be such that a small facility is simply unviable – for
example, an automobile assembly line must be designed to produce thousands of units
every day.
 In some services, customers will not travel large distances to avail the company’s services,
and hence the company must have large number of outlets close to its customers – for
example, people will not travel long distances to have meals. In some other services,
customers need large number of services at one place, and hence a company has small
number of large outlets – for example, hospitals need different types of medical and
diagnostic services to attract patients.

It takes money and time to expand capacity, and therefore a company should have a clear capacity
expansion strategy. A company has four options:

 It adds capacity before it is needed – it has extra capacity to meet surges in demand. It is a
good strategy when profit per customer is high.
 It lets capacity lag behind demand – it maximizes capacity utilization, and hence it operates
at low costs. It is a good strategy when production cost structure has high fixed cost and low
variable cost.
 It tries to match capacity to demand – is possible when its production process is labor
intensive, and hence its capacity is proportional to the number of employees. It is a good
strategy when hiring / firing costs are low, and production processes are simple – and, hence
newly hired workers are able to reach peak productivity quickly.
 It adds capacity on a regular basis, say every year – it has excess capacity when it has just
added capacity, and demand may slowly outstrip its capacity till it adds capacity in the next
 round. It is a good strategy when embedded technologies of equipments that constitute the
production system are updated frequently.

Location strategy

Once a company has located a facility at a particular place, it is not easy to relocate. Therefore, a
company should have a clear location strategy.

The cost of producing a product may be low at particular location for following reasons: (ii) Good
quality raw materials may be available at low prices (ii) There may be competent suppliers of
components (iii) There may be abundant supply of cheap but competent labor (iv) Taxes may be low
(v) Government may be providing incentives (vi) Cost of infrastructural facilities like land, power and
water may be lower.

When a company has to decide the location of its facilities, it should clearly know if it is more
important to be close to its customers or it is important that its cost of production is low. If it decides
that it is important that its cost of production is low, it must locate its facilities at locations where
cost of production is low. It has been seen that most customers do not care much about where the
products that they buy are being produced, as long as their quality is acceptable. It has also been
found that if a location has significant advantages in terms of enabling low cost production, lower
production cost easily dwarfs higher distribution cost. Therefore, most manufacturers of products
are locating their manufacturing units at locations where cost of production is low.

Being spatially close to customers is important for some services, and hence service providers must
locate their outlets wherever their customers are, even when cost of production is high. Therefore, a
gourmet coffee shop must be located in the most posh locality of the city, because that is where its
customers are, even though its cost of production may be prohibitively high. In deciding where to
locate its outlets, a service provider must consider (i) Current and predicted spatial distribution of
customers (ii) Interaction among its own outlets (iii) Locations of its competitors’ outlets. Some
service providers are location leaders – they are first to locate in areas with a growing customer
population. Location leaders pays less for land and they get the best site in terms of centrality and
highway access. And since they are the first service provider in the region, they are able to establish
a base of loyal customers. Some service providers are location followers – they wait till a competitor
or a complementary service provider has opened an outlet, and then they open one of their own.
Location followers incur less search and evaluation cost, and face less risk of opening an outlet in an
undesirable area, but they have to struggle to get customers. It is also important that a service
provider decides as to how many outlets it will open in an area, and what is the time frame in which
it will open these outlets. For example, if a service provider plans to open only one outlet in an area,
it will open the outlet at a central place, but if it plans to open 5 outlets over a period of 5 years, it
may not be a good idea to open the first outlet at the central place, because when it would have
opened all its outlets it might find that a few of its outlets are too close or too far away from each
other. It is the best that a service provider decides the locations of all its 5 outlets before it opens its
first outlet, and opens its outlets according to that plan – if a service provider plans to open one
outlet a year for the next 5 years, the best location for the first outlet may not be the same as it
would be if the service provider had to open just one outlet.

Companies are increasingly becoming global – they are selling their products to country markets
other than the ones they belong to, and they also have manufacturing facilities in more than one
country. Therefore, companies must have a international location strategy in place.
  The costs of land, equipment, materials, and labor are different in different countries and so
are government regulations and tax rates. Therefore, a company needs to know cost of
production in different countries, and locate its production facility in the country in which its
cost of production will be low. Companies whose production processes constitute of low-
skill, labor-intensive operations should have production facility in a country where labor rate
is low. Another international location strategy that companies adopt is to develop different
expertise at different locations throughout the world. For example, an automobile company
may make engines for all its cars in one country, and sheet metals for all its cars in another
country, while the cars themselves may be assembled at multiple locations throughout the
world.
 Changes in exchange rates, inflation rates, wage rates, and labor productivity change the
cost of production, and it may happen that a country that has low cost of production sees
unfavorable changes in exchange rates, inflation rates, wages rates, and labor productivity,
and hence finds its cost of production going up. A company that has production facility in
only one country may be at serious disadvantage if the that country’s exchange rates,
inflation rates, and labor rates move in ways that raises the cost of production in that
country. A company that has production facilities in many countries can shift most of its
production to countries where their exchange rates, inflation rates, wage rates, and labor
productivity are moving in ways that will lower the cost of production in those countries.
 Though most customers do not overtly care where the products that they buy are produced,
they do believe that that some countries have systems, practices, and values that enable
companies located in those countries to produce products of high quality. Similarly, they
believe that companies located in some countries are simply incapable of producing
products of high quality. Countries have been known to specialize in production of certain
products, and customers are keen to buy products of those companies which are located in
those countries. Some customers also like to buy products of companies which are located
in the countries where the live – swadeshi syndrome. Companies that make products for
other companies find out that the buyer companies would want the seller companies to
locate where they are – deliveries in small batches can be made quickly and they can
cooperate in multiple ways if buyers and sellers are located close to each other. Some
countries have home content laws that impose import restrictions – a country may have a
law that mandates companies located in its country to buy all its components and supplies
from local companies only.

Process strategy

A company’s production system has two dimensions: (i) Flexibility in terms of the variety and volume
of products it can produce (ii) Efficiency in terms of its cost. At one end of the flexibility-efficiency
continuum is project process. Project process has maximum flexibility, and is used to produce unique
products such as computer programs, buildings, and space shuttles. Project process cannot exploit
the production efficiencies of specialization and repetitiveness.

At the other end of the flexibility-efficiency continuum is line flow process. Line flow process can
produce a narrow range of products in large volumes at low cost. All products move through all
equipments in the same sequence. A line flow process uses specialized equipments, and each
worker carries out only a narrow set of tasks. Most line flow processes are automated. Line flow
process has limited flexibility as it can produce only a limited range of products – it is most efficient
when only one product is produced.

In the middle of the flexibility-efficiency continuum are job shop process, batch flow process, and
cellular process. These processes can produce moderate to wide range of products in small to
moderate volumes. In job shop process, similar equipments and workers with similar skills are
grouped in separate departments – all equipments and workers required to carry out a task are
grouped together. For example, in a hospital, all X-ray machines are placed together in a separate
department. A product moves from one department to another depending on what tasks needs to
be carried out on it – all products need not go through all departments, and even when they go
through the same departments, they may not do so in the same sequence. Therefore, a job shop
process is very flexible – large variety of products can be produced. For example, a patient with a
broken limb will go to X-ray department whereas a patient with stomach infection will go the
ultrasound department. A job shop process is inefficient because products wait on equipments to be
processed, and equipments remain idle – some equipments may have long waiting lines while some
equipments may be idle, and even the same equipment may sometimes have long waiting lines and
sometimes may be idle. Job shop process also has high set up times because an equipment has to be
reconfigured each time a different product has to be processed on it.

When identical products are moved from one department to another in batches, and the products of
the batch are processed one after another on an equipment, the job shop process is converted to
batch flow process. Batch flow process is as flexible as job shop process because similar equipments
are placed in separate departments as they are in job shop process, but is more efficient than job
shop process because no set up time is incurred when products of one batch are being processed on
an equipment.

When large number of products require to be processed on two or more equipments in the same
sequence, these equipments are taken out from the job shop process, and put together to form a
small line flow process. For example, if 20 per cent of products are required to be processed on
equipments C, E, and F in the sequence E – F – C, equipments C, E, and F are taken out from the job
process, and are put together in the sequence E – F – C to form a small line flow. A cellular process is
as flexible as a job shop process because similar equipments are placed in separate departments as
they are in job shop process, but is more efficient than job shop process because no waiting time is
incurred when products are passing through the small line flow process.

Therefore, the process that a company installs depends on the variety and volume of products that it
has to produce, and the order winning dimensions that it is using to compete.

Choice of process also depends on the stage of product life cycle. Products go through four stages in
their life cycle: (i) Introduction (ii) Growth (iii) Maturity (iv) Decline. Product, and the process used to
produce it change as the product moves through the stages in its life cycle. In the introduction stage,
it is not yet clearly known as to what features and functions customers want in the product, and
volume is low as large number of customers are not yet buying the product. Design changes are
frequent in the introduction stage, and hence the production system must be flexible enough to
produce the new designs. Also, alternate production methods must be tested to arrive at the
production method which would be suitable for producing the product in high volume. Therefore, a
job shop process is most suitable for a product in the introduction stage of its life cycle.
In the growth stage, product design is stable, and large numbers of customers buy the product, and
hence it has to be produced in high volume. Hence, a line flow is most suitable for a product in the
growth stage of its life cycle.

In the maturity phase, competition becomes intense, and high quality product has to be produced in
large volume at low cost. Line flow process continues to be the most suitable process, but focus in
on improving quality and reducing cost through making improvements in the way work is done at
each workstation.

In the decline phase, demand for the product goes down, and it is produced in smaller volume. Line
flow process continues to be used, but the company starts preparing for discontinuance of the
product. It considers if the line flow process can be modified to produce another product.

Classification of services emphasizes degree of customization and degree of labor intensity. A

professional service, such as lawyer or doctor, is highly customized and labor intensive. A service
shop, such as schools and hospitals, is less customized and labor intensive, but still caters to
requirements of individual customers. A mass service, such as retailing and banking, offers the same
services to all customers, and it is difficult to cater to requirement of individual customers. A service
factory, such as airlines and trucking, offers the least customizations, and is least labor intensive.

Quality strategy

Quality is an important order winning factor, and hence It is imperative that the production system
produces products of high quality. Product quality is strongly related to the production process that
a company employs to produce its products, and to skill and motivation of its employees. Though
standard measures like defect rates are routinely use to measure quality levels, it is important that a
company allows its customers to evaluate its product. Successful companies implement principles of
Total Quality Management, some of which are:

 What constitutes quality is decided by the customer – quality is customer focused. Markers
unearth the benefits that a product should provide and the features that it should possess,
and designers incorporate these benefits and features in the design of the product.
 The company knows how quality affects its long term as well as routine decisions – there is
companywide philosophy with respect to quality, and each decision that the company
makes is evaluated for its affect on quality.
 Every employee feels responsible for quality – quality product is made first time and every
time.
 The company believes that high product quality does not necessarily translate into high cost
– high quality and low cost can go together as defect rates are lower when quality is
improved.
 Employees are empowered to make changes and suggestions that improve product quality –
employees are treated with respect, and are trained and motivated to make changes that
improve quality.

Personnel strategy

A company’s personnel policies should be consistent with its choice of technology, process, and
quality strategies. For example, if a company has decided that its products will be embedded with
latest technologies, it must have a policy of hiring and nurturing the best scientists and
technologists. It must allow them to have greater control over their jobs and allow them to pursue
their own interests. Similarly, if a company expects its employees on the shop floor to make
suggestions on how quality can be improved and cost can be reduced, it must train them and
empower them.

Information strategy

Acquiring and processing information quickly and accurately can be a competitive advantage.
Retailers who can know quickly what their customers are buying can reorder products that
customers are buying and discontinue buying products that customers are not buying. Companies
that can know what features and functions their customers want in their products can quickly
introduce products bearing those functions and features.

Flow of information should be clearly delineated – who should send what information to whom, and
what actions are expected of the party which receives the information. For example, when a
storekeeper learns that the quantity of a component has fallen below its reorder level, it places an
order with the supplier, who dispatches the ordered quantity in two days. It is important that a
company employs the latest information technology equipments to acquire, process, and transmit
information. It is important to remember that while it is expensive to install information technology
equipments, their operating cost is minimal, and the operating cost does not increase significantly
with the increase in data that it handles. For example, when a retailer installs a point-of-sales system
which is linked to its suppliers’ ordering systems, the system tracks sales of products, checks
inventory status of products, and places orders with products’ suppliers whenever their inventory
levels drop below reorder levels – the cost of carrying out these operations are minimal, and it does
not matter much whether the system handles few hundred products or a few thousand products.

Sourcing strategy

A vertically integrated company sells the product, makes all the components, and extracts all the raw
materials that are needed to make the components. But, most companies do not produce all the
components that go into a product. Therefore, a company has to decide as to which components it
should outsource, and which components should it produce in-house – this decision involves
competency-building, dependence, proprietary knowledge, and cost.