Rashtreeya Sikshana Samithi Trust

R V INSTITUTE OF MANAGEMENT
CA - 17, 36th Cross, 26th Main, 4th T Block, Jayanagar, Bangalore – 560041

2.6 PRODUCTION AND OPERATIONS RESEARCH

Dr.N.SURESH

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 Rashtreeya Sikshana Samithi Trust
RV INSTITUTE OF MANAGEMENT - [RVIM]
CA 17, 36th Cross Rd, 4th T Block East, Jayanagara 9th Block, Bengaluru, Karnataka 560041

2.6 PRODUCTION AND OPERATIONS RESEARCH

REGULATIONS FOR 2 YEAR FULL TIME MBA (DAY & EVENING) PROGRAM

I ATTENDANCE

1. The candidate who does not put in minimum stipulated attendance of 75% aggregate of all the
subjects put together in a semester shall not be eligible to appear for the end exam in that
semester and the candidate has to re attend the classes along with subsequent batch and satisfy
the minimum requirement for appearing in that particular end semester examination.
2. The statement of attendance shall be displayed on the Notice Board by the
Department/School/Institution at end of every month for information of students.

3. Five marks in Internal Assessment is earmarked for the attendance percentage as a motivation
for the students to attend classes regularly.

II SCHEME OF EXAMINATION
Internal Assessment Test

1. Each Paper will have two components as part of assessment i.e. the First Being Internal
Assessment Test and Second being Semester end exams. The Internal Assessment (IA) is based
on the continuous internal assessment. There shall be two internal tests conducted for each
paper.
2. Each paper will carry 100 marks of which 30 marks will be for Internal Assessment and
remaining 70 marks for written examination (UE) to be held at the end of each semester.

3. The components of Internal Assessment for 30 Marks are as follows:

II Semester Marks
Attendance 5
Two Internal test 10
Assignment 5
Presentations 5
Quiz on respective paper 5
Total 30
Marks for Attendance
% of Attendance Marks
75-79 % 1
80-84 % 2
85-89 % 3
90-94 % 4

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 95-100 % 5

The BOE will monitor the process of Internal assessment test(Issue of Time table, preparing and
transmitting the question paper via e-mail, followed by surprise check by BOE Members). The
Directors of B-Schools are required to maintain the records pertaining to internal assessment tests.

B) Final Examination

9.1B There shall be a University examination (Theory) at the end of each semester in the prescribed
papers which carries 70 marks for 3 hours. (Internal Assessment: Online examination might be
introduced subject to approval of appropriate Bodies of Bengaluru Central University

PATTERN OF QUESTION PAPER

The pattern of question paper will be decided by the Board of Studies from time to time. The Post
Graduate Department of Management of Bengaluru Central University will communicate to all
affiliated colleges about the pattern as well as the changes therein.

Semester End Theory University Examination with 70 Marks

Model Question Paper:

Part No of Questions No of Questions Marks for Each Total marks

/Section Asked To be Answered Question

A 7 5 5 25

B 4 3 10 30

C 1(Compulsory 1 15 15
Case Study)

Total 70
Course Matrix of II Semester MBA ( Day )

Paper Contact Hours U.E Total

Subject Credit I.A
Code L-P* (T-P)** Marks
Entrepreneurship and Start-
2.1 4.0 45 15 30 70 100
ups Management
2.2 Business Research Methods 4.0 45 15 30 70 100
2.3 Managing Human Resources 4.0 45 15 30 70 100
2.4 Business Analytics 4.0 45 15 30 70 100
2.5 Financial Management 4.0 45 15 30 70 100
Production and Operations
2.6 4.0 45 15 30 70 100
Research
2.7 Mini Project Report 2.0 15 15 - - 100
Total 26.0 285 105 210 490 700

*Contact hours include work relating to Lecture and Practical (L-P)

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  Mini Project Report guidelines will be issued by Department of Management from time to
time

SYLLABUS
2.6 PRODUCTION AND OPERATIONS RESEARCH
COURSE OBJECTIVES 60 Hours
1. To provide a formal quantitative approach to problem solving and an intuition about
situations where such an approach is appropriate.
2. To introduce some widely-used mathematical models. The understanding of these models
will allow the students derive solutions by logic demonstrated through numbers & equip them with
techniques for finding solutions.

LEARNING OUTCOMES
1. The students acquire quantitative tools, and use these tools for the analysis and solution of
business problems.
2. The emphasis will be on the concepts and application rather than derivations.

MODULE 1:
PRODUCTION AND OPERATIONS MANAGEMENT 10 Hours
Functions of Production and Material Management, Types of production Systems.
Forecasting – Forecasting types, Exponential smoothening, Measurement of errors, Box-Jenkins
Method.
Facility Planning – Facilities location decisions
Facility layout planning: Layout, types of plant layouts – product layout, process layout, fixed position
layout, cellular manufacturing layouts, hybrid layouts
Quality – Six Sigma, and elimination of 7 wastes (Mudas), Lean operations, JIT, KANBAN

MODULE 2:
FACILITY MANAGEMENT 10 Hours

Productivity and types of productivity

Materials Management – Purchase functions, Procurement procedures including bid systems, Vendor
selection and development, Vendor rating, and ethics in purchasing.
Concepts of lead time, purchase requisition, purchase order, amendments, forms used and records
maintained.
Inventory Management: Classification, ABC, VED and FSN analysis. Inventory costs, Inventory models
– EOQ, safety stocks, Re order point, Quantity discounts
Maintenance: TPM, breakdown maintenance, continuous maintenance.
MODULE 3:
INTRODUCTION AND LINEAR PROGRAMMING TECHNIQUES 10 Hours
Introduction Decision Making, Quantitative Approach to Decision Making, Nature and Significance of
OR in Decision Making, Scientific Methods in Operations Research, Models in Operations Research,
Application Areas of OR in Management.

Linear Programming: Model Formulation, Graphical Methods, Simplex Method, Maximization and
Minimization of L.P.P, Degeneracy in L.P.P.
MODULE 4:

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 TRANSPORTATION MODELS 10 Hours
General Structure; Various methods for finding initial solution: North West Comer Method, Least Cost
Method, Vogel's Approximation Method; Test for optimality (MODI method only) Alternate Optimal
solutions. Variations: Balanced Transportation Problem, Maximization problem, Degenerate Solution.

MODULE 5:
ASSIGNMENT PROBLEMS 10 Hours
Concepts, Mathematical Formulation of an Assignment Problem, The Assignment Algorithm
(Hungarian Assignment method), Balanced and Unbalanced Assignment Problems, Travelling Salesman
Problem as an Assignment Problem.
Sequencing: Terminology and notations, types of sequencing problems, processing n jobs through 2
machines, processing N jobs in N Machine.
MODULE 6:
NETWORK ANALYSIS 10 Hours
Terminology; Networking Concepts; Rules for drawing network diagram; CPM Computations: CPM
Terminology, Finding critical path – Different Floats; PERT Computations: Probability of meeting the
scheduled dates; difference between PERT and CPM.
Replacement Models Types of Failure, Replacement of Items whose efficiency deteriorates with Time,
Replacement of Items that Fail Completely
SKILL DEVELOPMENT EXERCISES
1. Linear programming is a general method usable for a wide range of problems. Visit any nutrition
center which sells health-food. Bring into play the applications of LP in formation and building
2. Transportation programming techniques facilitates in maintaining traffic rules. Apply with the help
of illustrations
3. Visit your nearest fast moving consumer goods manufacturing company like LG, Samsung, and
Videocon etc. and apply the concept of assignment model to increase its produce line.
4. Visit one of the construction companies and analyze its modus-operandi to function. Apply the
concept of network model (PERT and CPM) to proper completion of work in time
5. Apply the queuing theory to regulate the problem of huge waiting lines at the railway reservation
counters
PEDAGOGY: Use of case studies and Methods to solve the problems of OR using MS Excel or TORA.
RECOMMENDED BOOKS (Latest Editions)
1. Hillier, Lieberman, Nag & Basu, “Introduction 3. Hamdy A. Taha, “Operations Research:
to Operations Research”, McGraw Hill An Introduction”, Pearson
Education(India) 4. H.M. Wagner, “Principles of Operations
2. Ravindran, Phillips & Solberg , “Operations Research with Application to Managerial
Research – Principles & Practice”, Wiley India Decisions” , Prentice Hall of India
REFERENCE BOOKS (Latest Editions)
1. Srinivas Reddy, “Operations Research”, 7. Mahadevan B, “Production and
Cengage Learning Operations Management”, Pearson
2. J. K. Sharma, “Operations Research-Theory Education India, 2010
& Applications”, MacMillan. India Ltd 8.J.P Saxena, “Production and Operations
3. V. K. Kapoor, “Operations Research- Management”, Tata Mcgraw-Hill Education
Techniques for Management”, Sultan Chand & Pvt Ltd.,
Sons 9. Ajay K.Garg, “Production and
4. Hiller & Lieberman, “Introduction to Operations Management”, Tata
Operations Research-Concepts & Cases”, Tata- McGraw-Hill Education Pvt Ltd.,
McGraw Hill 10. Norman Gaither and Greg Frazier,
5. Gupta & Hira , “Operations Research”, “Operations Management”, South –

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 S.Chand& Co Western College Pub.1999
6. Chawla, “Operation Research”, Kalyani 11. Clifford Gray and Larson, “Project
Publishers Management”, MC Graw-
Hill/Irwin,2008

CONTENTENTS

SL.NO TOPIC PAGE NOS

MODULE 1:
PRODUCTION AND OPERATIONS MANAGEMENT (10 Hours)
I Functions of Production and Material management
II Types of production Systems.
III Forecasting
1. Exponential smoothening
2. Measurement of errors
3. Box-Jenkins Method.
IV Facility layout planning
1. Facilities location decisions
2. Layout, types of plant layouts
3. Product layout
4. Process layout
5. Fixed position layout
6. Cellular manufacturing layouts
7. Hybrid layouts
V Quality
1. Six Sigma
2. elimination of 7 wastes (Mudas)
3. Lean operations
4. JIT
5. KANBAN

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 PRODUCTION MANAGEMENT

MEANING OF PRODUCTION
Production is an intentional act of producing something in an organized manner. It is the fabrication of a
physical object through the use of men, material and some function which has some utility e.g. repair of
an automobile, legal advice to a client, banks, hotels, transport companies etc.
Thus irrespective of the nature of organization, production is some act of transformation, i.e. inputs are
processed and transformed into some output. The main inputs are information, management, material,
land, labour and capital.
Fig. shown below explains the production process of an organization.

Types of production Systems

There are three main types of production Systems are:

 Job production, where items are made individually and each item is finished before the next one
is started. ...
 Batch production, where groups of items are made together..
 Flow production, where identical, standardized items are produced on an assembly line.

Functions of Production Management

Functions of production management are depicted, listed & explained below.

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 The components or functions of production management are as follows:

1. Selection of Product and Design,

2. Selection of Production Process,

3. Selecting Right Production Capacity,

4. Production Planning,

5. Production Control,

6. Quality and Cost Control,

7. Inventory Control, and

8. Maintenance and Replacement of Machines

The above functions of production management are briefly discussed below.

1. Selection of Product and Design

Production management first selects the right product for production. Then it selects the right design for
the product. Care must be taken while selecting the product and design because the survival and success
of the company depend on it. The product must be selected only after detailed evaluation of all the other
alternative products. After selecting the right product, the right design must be selected. The design must

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be according to the customers' requirements. It must give the customers maximum value at the lowest
cost. So, production management must use techniques such as value engineering and value analysis.

2. Selection of Production Process

Production management must select the right production process. They must decide about the type of
technology, machines, material handling system, etc.
3. Selecting Right Production Capacity
Production management must select the right production capacity to match the demand for the product.
This is because more or less capacity will create problems. The production manager must plan the
capacity for both short and long term's production. He must use break-even analysis for capacity
planning.
4. Production Planning
Production management includes production planning. Here, the production manager decides about the
routing and scheduling.
Routing means deciding the path of work and the sequence of operations. The main objective of routing
is to find out the best and most economical sequence of operations to be followed in the manufacturing
process. Routing ensures a smooth flow of work.
Scheduling means to decide when to start and when to complete a particular production activity.
5. Production Control
Production management also includes production control. The manager has to monitor and control the
production. He has to find out whether the actual production is done as per plans or not. He has to
compare actual production with the plans and finds out the deviations. He then takes necessary steps to
correct these deviations.
6. Quality and Cost Control
Production management also includes quality and cost control. Quality and Cost Control are given a lot
of importance in today's competitive world. Customers all over the world want good-quality products at
cheapest prices. To satisfy this demand of consumers, the production manager must continuously
improve the quality of his products. Along with this, he must also take essential steps to reduce the cost
of his products.
7. Inventory Control
Production management also includes inventory control. The production manager must monitor the level
of inventories. There must be neither over stocking nor under stocking of inventories. If there is an
overstocking, then the working capital will be blocked, and the materials may be spoiled, wasted or
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misused. If there is an under stocking, then production will not take place as per schedule, and
deliveries will be affected.

8. Maintenance and Replacement of Machines

Production management ensures proper maintenance and replacement of machines and equipments. The
production manager must have an efficient system for continuous inspection (routine checks), cleaning,
oiling, maintenance and replacement of machines, equipments, spare parts, etc. This prevents
breakdown of machines and avoids production halts.
Materials Management
The basic objectives of management in an organization are:
(1) Sales increase through sales promotion
(2) Profit maximization
(3) Improvement in customer services
(4) Globalization of its product sales
(5) Meet the technological changes
(6) Good employer - employee relationship
(7) Selection of alternative materials
(8) Reduction in manufacturing and other cost.
(9) Social objectives
In order to fulfill these basic objectives of management the objectives of materials management should
be set in such a way that they should totally help to meet ultimate goals.
The functions of materials management are discussed below:
In order to fulfill the objectives of materials management as stated above to meet the basic objectives
and goals, the functions of the materials management are also categorized
as primary and secondary functions.
Introduction to Materials Management
Materials Management is simply the process by which an organization is supplied with the goods and
services that it needs to achieve its objectives, of buying, storage and movement of
Materials Management is related to planning, procuring, storing and providing the appropriate material
of right quality, right quantity at right place in right time so as to co-ordinate and schedule the
production activity in an integrative way for an industrial undertaking.
Most industries buy materials, transport them in to the plant, change the materials in to parts, assemble
parts in to finished products, sell and transport the product to the customer. All these activities of

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purchase of materials, flow of materials, manufacture them in to the product, supply and sell the product
at the market requires various types of materials to manage and control their storage, flow and supply at
various places.
It is only possible by efficient materials management. The materials requirements planning, purchasing,
inventory planning, storage, inventory control, materials supply, transportation and materials handling
are the activities of materials management.
Need for Material Management
 About 20-25 years ago, there was no cut-throat competition in the market to sell the various
consumer items manufactured by different industrial undertakings and the availability of
materials to manufacture these items was not scarce. Therefore, materials management was not
thought to be so important and its separate identity in the organization was not felt. But today it
has become an important management activity to streamline production.
 Before the production begins it is necessary to ensure availability of all the types of materials
needed for production and its supply at the various production centers. Planning, purchasing and
scheduling are the main functions of materials management. It aims at improved productivity.
Uses of Material Management:
 It reduces the cost, there by increases profitability and streamlines the production.
 Apart from management of material cost and its supply, it helps in its proper utilization,
transportation, storage, handling and distribution.
 It helps in Purchasing, procurement of materials, transportation; storage, inventory control,
quality control and inspection of materials and goods supplied at various production centers
before production are also managed as routine work.
 It increases materials handling, packaging, warehouse utilities.
Objectives and Functions of Materials Management
The objectives and functions of materials management can be categorized in two ways as follows:
(I) Primary objectives (II) Secondary objectives
(I) Primary objectives
This can be classified as-
(i) Efficient materials planning (ii) Buying or purchasing (iii) Procuring and receiving
(iv) Storing and inventory control (v) Supply and distribution of materials (vi) Quality assurance (vii)
Good supplier and customer relationship (viii) Improved departmental efficiency
(II) Secondary objectives
There can be several secondary objectives of materials management. Some of them are given below:
(i) Efficient production scheduling (ii) To take make or buy decisions
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(iii) Prepare specifications and standization of materials (iv) To assist in product design and
development (v) Forecasting demand and quantity of materials requirements (vi) Quality control of
materials purchased (vii) Material handling (viii) Use of value analysis and value engineering
(ix) Developing skills of workers in materials management (x) Smooth flow of materials in and out of
the organization To fulfill all these objectives, it is necessary to establish harmony and good co-
ordination between all the employees of material management department and this department should
have good co-ordination with the other departments of the organization to serve all production centers.
PRODUCTION SYSTEMS
Production systems can be classified as Job-shop, Batch, Mass and Continuous production systems.

Fig. 1 Classifications of production systems

Job-Shop Production
Job-shop production are characterized by manufacturing one or few quantity of products designed and
produced as per the specification of customers within prefixed time and cost. The distinguishing feature
of this is low volume and high variety of products.
A job-shop comprises of general-purpose machines arranged into different departments. Each job
demands unique technological requirements, demands processing on machines in a certain sequence.
Job-shop Production is characterized by:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each product, capacities for each
work centre and order priorities.
Advantages
Following are the advantages of Job-shop Production:
1. Because of general purpose machines and facilities variety of products can be produced.

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 2. Operators will become more skilled and competent, as each job gives them learning opportunities.
3. Full potential of operators can be utilized.
4. Opportunity exists for Creative methods and innovative ideas.
Limitations
Following are the limitations of Job-shop Production:
1. Higher cost due to frequent set up changes.
2. Higher level of inventory at all levels and hence higher inventory cost.
3. Production planning is complicated.
4. Larger space requirements.
Batch Production
American Production and Inventory Control Society (APICS) defines Batch Production as a form of
manufacturing in which the job pass through the functional departments in lots or batches and each lot
may have a different routing. It is characterized by the manufacture of limited number of products
produced at regular intervals and stocked awaiting sales.
Batch Production is characterized by
1. Shorter production runs.
2. Plant and machinery are flexible.
3. Plant and machinery set up is used for the production of item in a batch and change of set up is
required for processing the next batch.
4. Manufacturing lead-time and cost are lower as compared to job order production.
Advantages
Following are the advantages of Batch Production:
1. Better utilization of plant and machinery.
2. Promotes functional specialization.
3. Cost per unit is lower as compared to job order production.
4. Lower investment in plant and machinery.
5. Flexibility to accommodate and process number of products.
6. Job satisfaction exists for operators.
Limitations
Following are the limitations of Batch Production:

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 1. Material handling is complex because of irregular and longer flows.
2. Production planning and control is complex.
3. Work in process inventory is higher compared to continuous production.

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

Mass Production
Manufacture of discrete parts or assemblies using a continuous process are called Mass Production.
This production system is justified by very large volume of production. The machines are arranged in
a line or product layout. Product and process standardization exists and all outputs follow the same
path.
Mass Production is characterized by
1. Standardization of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and
output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any back tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
Advantages
Following are the advantages of Mass Production:
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilization due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.
Limitations
Following are the limitations of Mass Production:
1. Breakdown of one machine will stop an entire production line.
2. Line layout needs major change with the changes in the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.
Continuous Production
Production facilities are arranged as per the sequence of production operations from the first

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 operations to the finished product. The items are made to flow through the sequence of operations
through material handling devices such as conveyors, transfer devices, etc.
Continuous Production is characterized by
1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.
Advantages
Following are the advantages of Continuous Production:
1. Standardization of product and process sequence.
2. Higher rate of production with reduced cycle time.
3. Higher capacity utilization due to line balancing.
4. Manpower is not required for material handling as it is completely automatic.
5. Person with limited skills can be used on the production line.
6. Unit cost is lower due to high volume of production.
Limitations
Following are the limitations of Continuous Production:
1. Flexibility to accommodate and process number of products does not exist.
2. Very high investment for setting flow lines.
3. Product differentiation is limited.
Forecasting:
By the word forecasting, we mean to predict or to estimate beforehand. Given the data of the last
ten years connected to rainfall of a particular district in Karnataka, it is possible to predict or forecast the
rainfall for the near future. In business also forecasting plays a dominant role in connection with
production, sales, profits etc. The analysis of time series and regression analysis plays an important role
in forecasting.
A very important use of time series data is towards forecasting the likely value of variable in
future. In most cases it is the projection of trend fitted into the values regarding a variable over a
sufficiently long period by any of the methods discussed latter. Adjustments for seasonal and cyclical
character introduce further improvement in the forecasts based on the simple projection of the trend.
The importance of forecasting in business and economic fields lies on account of its role in planning and
evaluation. If suitably interpreted, after consideration of other forces, say political, social governmental

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policies etc., this statistical technique can be of immense help in decision making.
The success of any business depends on its future estimates. On the basis of these estimates a
business man plans his production stocks, selling market, arrangement of additional funds etc.
Forecasting is different from predictions and projections. Regression analysis, time series analysis,
Index numbers are some of the techniques through which the predictions and projections are made.
Whereas forecasting is a method of foretelling the course of business activity based on the analysis of
past and present data mixed with the consideration of ensuring economic policies and circumstances.
Particularly forecasting means fore-warning and Casting means predicting.
Forecasts based on statistical analysis are much reliable than a guess work.
Methods of Business forecasting:
There are three methods of forecasting
1. Naive method 2)Barometric methods 3) Analytical Methods
1. Naive method :
It contains only the economic rhythm theory.
2. Barometric methods:
It covers
i) Specific historical analogy ii) Lead- Lag relationship ( Time series and Regression models)
ii) Diffusion method and iii) Action –reaction theory
3. Analytical Methods:
It contains
i) The factor listing method ii) Cross-cut analysis theory iii) Exponential smoothing
ii) Econometric methods
I) Naive method
The economic rhythm theory:
In this method the manufactures analysis the time-series data of his own firm and forecasts on the basis
of projections so obtained. This method is applicable only for the individual firm for which the data are
analyzed; the forecasts under this method are not very reliable as no subjective matters are being
considered.
II) Barometric methods:
Historical analogy: A judgmental forecasting technique based on identifying a sales history that
is analogous to a present situation, such as the sales history of a similar product, and using that past
pattern to predict future sales. This theory is based on the assumption that history repeats itself. It simply
implies that whatever happened in the past under a set of circumstances is likely to happen in future
under the same set of conditions. Thus, a forecaster has to analyze the past data to select such period

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 whose conditions are similar to the period of forecasting. Further, while predicting for the future, some
adjustments may be made for the special circumstances which prevail at the time of making the forecasts.

II) Sequence Method or Time Lag Method:

This theory is based on the behaviour of different businesses which show similar movements occurring
successively but not simultaneously. As such, this method takes into account time lag based on the
theory of lead-lag relationship which holds good in most cases. The series that usually change earlier
serve as forecast for other related series. However, the accuracy of forecasts under this method depends
upon the accuracy with which time lag is estimated.

III) Action and Reaction Approach:

This theory is based on the Newton’s ‘Third Law of Motion’, i.e., for every action there is an equal and
opposite reaction. When we apply this law to business, it implies that it there if depression in a particular
field of business, there is bound to be boom in it sooner or later. It reminds us of the business, cycle
which has four phases, i.e., prosperity, decline, depression and prosperity.
This theory regards a certain level of business activity as normal and the forecaster has to estimate the
normal level carefully. According to this theory, if the price of commodity goes beyond the normal
level, it must come down also below the normal level because of the increased production and supply of
that commodity.

IV) Diffusion method of Business forecasting

The diffusion index method is based on the principle that different factors, affecting business, do not
attain their peaks and troughs simultaneously. There is always time-log between them. This method has
the convenience that one has not to identify which series has a lead and which has a lag. The diffusion
index depicts the movement of broad group of series as a whole without bothering about the individual
series. The diffusion index shows the percentage of a given set of series as expanding in a time period. It
should be carefully noted that the peaks and troughs of diffusion index are not the peaks troughs of the
business cycles. All series do not expand or contract concurrently. Hence if more than 50% are
expanding at a given time, it is taken that the business is in the process of booming and vice - versa.
The graphic method is usually employed to work out the diffusion index. The diffusion index can be
constructed for a group of business variables like prices, investments, profits etc.
Analytical Methods:
I) The factor listing method:
In this method of business forecasting, the combined effect of various factors is not studied, but the effect
of each factor, that has a bearing on the forecast, is studied independently. 
II) Cross cut analysis theory of Business forecasting:

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In this method a thorough analysis of all the factors under present situations has to be done and an
estimate of the composite effect of all the factors is being made. This method takes into account the views
of managerial staff, economists, consumers etc. prior to the forecasting. The forecasts about the future
state of the business are made on the basis of overall assessment of the effect of all the factors. This theory
is similar to the Analysis of Time Series under the statistical methods.
be broadly classifies as:-
 ARIMA (Autoregressive Integrated Moving Average)
 ETS (Exponential smoothing state space model)
ARIMA (Autoregressive Integrated Moving Average)
The ability to make predictions based upon historical observations creates a competitive advantage. For
example, if an organization has the capacity to better forecast the sales quantities of a product; it will be
in a more favorable position to optimize inventory levels. This can result in an increased liquidity of the
organizations cash reserves, decrease of working capital and improved customer satisfaction by
decreasing the backlog of orders. In the domain of machine learning, there’s a specific collection of
methods and techniques particularly well suited for predicting the value of a dependent variable
according to time. Autoregressive models operate under the premise that past values have an effect on
current values. AR models are commonly used in analyzing nature, economics, and other time-varying
processes. As long as the assumption holds, we can build a linear regression model that attempts to
predict value of a dependent variable today, given the values it had on previous days.
Exponential smoothing: It is a time series forecasting method for univariate data that can be extended to
support data with a systematic trend or seasonal component. It is a powerful forecasting method that
may be used as an alternative to the popular Box-Jenkins ARIMA family of methods. These forecasts
can predict sales, revenue or customer demand. No matter how carefully one examine past periods, our
forecast for the next period will vary from our estimates. The formula used Ft = F ) + α (A
(t-1 (t-1 ) - F (t-1).
Where Ft is the present forecast, F (t-1) is the previous forecast, and A (t-1) is the actual forecast of previous
year. The smoothing constant is α (generally lies between 0-1). The smoothing constant make our
estimates much closer to reality. It is represented by α (Alpha). It is a measure of sensitivity of one
variable to another. It generally lies between (0-1). The following example shows the exponential
smoothing can be done.
1) An emergency call to the fire department over the past 15 weeks are as follows:-
20 27 25 22 18 21 20 19 16 28 25 26 17 23 27
Use exponential smoothing method with exponential smoothing constant of 0.5 to forecast the number
of calls for the next week.
Solution: Using the formula Ft = F (t-1) + α (A (t-1) - F (t-1). we make the forecast.

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Weeks Actual Calls (At) Forecast (Ft )= F (t-1) + α (A (t-1) - F (t-1))
1 20 (A1) F1 = 20 (ASSUMED)
2 27(A2) F2 = F(2-1) + 0.5 (A (2-1) - F(2-1)) i.e. F2 = F1- 0.5(A1- F1) = 20-0.5( 20-20) =
20
3 25(A3) F3 = F2- 0.5( A2- F2) = 20-(0.5( 27-20) = 23.5
4 22(A4) F4 = F3 – 0.5 (A3- F3) = 23.5- 0.5( 25-23.5) = 24.25
5 18(A5) F5 =
6 21(A6) F6 =
7 20(A7) F7 =
8 19(A8) F8 =
9 16(A9) F9 =
10 28(A10) F10 =
11 25(A11) F11 =
12 26(A12) F12 =
13 17(A13) F13 =
14 23(A14) F14 =
15 27(A15) F15 =
16 F16 =
17 F17 =
18 F18 =
19 F19 =
20 F20 =
21 F21 =

The Econometric Methods make use of statistical tools and economic theories in combination to

estimate the economic variables and to forecast the intended variables. The econometric model can
either be a single-equation regression model or may have a system of simultaneous equations.
Facility layout:
It is an arrangement of different aspects of manufacturing in an appropriate manner as to achieve desired
production results. Facility layout considers available space, final product, safety of users
and facility and convenience of operations. Facility planning is an important component of
strategic planning, for it provides an accurate assessment of the institution's physical environment and
its development potential.
Facility Layout Objective
A model facility layout should be able to provide an ideal relationship between raw material, equipment,
manpower and final product at minimal cost under safe and comfortable environment. An efficient and
effective facility layout can cover following objectives:

1) To provide optimum space to organize equipment and facilitate movement of goods and to create
safe and comfortable work environment.
2) To promote order in production towards a single objective

19
3) To reduce movement of workers, raw material and equipment
4) To promote safety of plant as well as its workers
5) To facilitate extension or change in the layout to accommodate new product line or technology up
gradation
6) To increase production capacity of the organization

An organization can achieve the above-mentioned objective by ensuring the following:

Better training of the workers and supervisors. 2) Creating awareness about of health hazard and safety
standards 3) Optimum utilization of workforce and equipment 4) Encouraging empowerment and
reducing administrative and other indirect work

Plant layout:
Plant layout is a mechanism which involves knowledge of the space requirements for the facilities
and also involves their proper arrangement so that continuous and steady movement of the
production cycle takes place. Moore, a very well known name in the business world, explained plant
layout as,” The plan of or the act of planning, an optimum arrangement of facilities, including
personnel, operating equipment, storage space, materials handling equipment and all other
supporting services along with the design of the best structure to accommodate these facilities”.
The problems related to plant layout are generally observed because of the various developments
that occur. These developments generally include adoption of the new standards of safety, changes
in the design of the product, decision to set up a new plant, introducing a new product, withdrawing
the various obsolete facilities etc.

Objectives of a good Layout are:

1. Providing comfort to the workers and catering to worker’s taste and liking.
2. Giving good and improved working conditions.
3. Minimizing delays in production and making efficient use of the space that is available.

4. Having better control over the production cycle by having greater flexibility for changes in the
design of the product.
Principles of a good plant Lay out are:
1. A good plant layout is the one which is able to integrate its workmen, materials, machines in the
best possible way.
2. A good plant layout is the one which sees very little or minimum possible movement of the
materials during the operations.
3. A good layout is the one that is able to make effective and proper use of the space that is available

20
for use.
4. A good layout is the one which involves unidirectional flow of the materials during operations
without involving any back tracking.
5. A good plant layout is the one which ensures proper security with maximum flexibility.

6. Maximum visibility, minimum handling and maximum accessibility, all form other important
features of a good plant layout.
Types of layout:
1. Process layout – These layouts are also called the functional layouts and are very suitable in the
conditions, when the products being prepared are non – standard or involve wide variations in times
of processing of the individual operations.

Such layouts are able to make better utilization of the equipment that is available, with greater
flexibility in allocation of work to the equipment and also to the workers. Imbalance caused in one
section is not allowed to affect the working of the other sections.
2. Product layout – These layouts are also known as the line layouts or the layout by sequence. In
such layouts, the manufacturing cycle is small with minimum material handling. The space required
is small and quality control is easy to exercise.
3. Project layout – Such layouts are also referred to as the fixed position layouts. In these layouts, the
components, heavy materials, sub assemblies – all remain fixed at one place and the job is completed
by movement of machines, men and tools to the location of the operations.
PLANT LOCATION

Plant: A plant is a place, where men, materials, money, machinery etc. are brought together for
manufacturing products. The objective of minimization of cost of production can be achieved only when
the plant is of the right size and at a right place where economies of all kinds in production are available.
The planning for ‘where’ to locate the operations facilities should start from ‘what’ are organization’s
objectives, priorities, goals and the strategies required to achieve the same in the general socio-
economic-techno-business-legal environment currently available and expected to be available in the
long-term future. Unless the objectives and priorities of an organization are clear i.e. the general
direction is clear, effective functional or composite strategies cannot be designed. And, it is these
strategies of which the location design is a product.
Different Situations for Plant Location Decision
(i) To select a proper geographic region : The organizational objectives along with the various long-
term considerations about marketing, technology, internal organizational strengths and weaknesses,

21
region specific resources and business environment, legal-governmental environment, social
environment and geographical environment suggest a suitable region for locating the operations facility.
(ii) Selecting a specific site within the region: Once the suitable region is identified, the next problem is
that of choosing the best site from an available set. Choice of a site is much less dependent on the
organization’s long-term strategies. It is more a question of evaluating alternative sites for their tangible
and intangible costs if the operations were located there. Cost economies now figure prominently at this
final stage of facilities-location problem.
(iii) Location choice for the first time: In this case, there is no prevailing strategy to which one needs to
confirm. However, the organizational strategies have to be first decided upon before embarking upon the
choice of the location of the operating facility/facilities. The importance of the long-term strategies
cannot be over emphasized. Cost economics are always important but not at the cost of long-term
business/organizational objectives.
(iv)Location choice for an ongoing organization: A new plant has to fit into multi-plant operations
strategy as discussed below:
(a) Plant Manufacturing Distinct Products or Product Lines
This strategy is necessary where the needs of technological and resource inputs are specialized fir
distinctively different for the different products/product lines. For example, a high quality precision
product-line should preferably not be located along with other product-line requiring little emphasis on
precision. It may not be proper to have too many contradictions such as sophisticated and old equipment,
highly skilled and not so skilled personnel, delicate processes and those that could permit rough
handling, all under one roof and one set of managers. Such a setting leads to much confusion regarding
the required emphasis and the management policies. Product specialization may be necessary in a highly
competitive market; it may also be necessary in order to fully exploit the special resource potential of a
particular geographical area. Instances of product specialization could be many : A watch manufacturing
unit and a machine tools unit; a textile unit and a sophisticated organic chemical unit; pharmaceuticals
unit and a consumer products unit; etc. All these have to be distinctively different-in technological
sophistication, in process, and in the relative stress on certain aspects of management. The more
decentralized these pairs are in terms of the management and in terms of their physical location, the
better would be the planning and control and the utilization of the resources.
(b) Manufacturing Plants each supplying to a Specific Market Area
Here, each plant manufactures almost the company’s entire product. This type of strategy is useful
where market proximity consideration dominates the resources and technology considerations. This
strategy requires a great deal of coordination from the corporate office. An extreme example of this
strategy is that of soft-drinks bottling plants.
22
(c) Manufacturing Plants Divided According to the Product/Product Line being Manufactured; and
these Special-Product Plants Located in Various Market Areas.
(d) Plants Divided on the Basic of the Processes or Stages in manufacturing each production process or
stage of manufacturing may require distinctively different equipment capabilities, labour skills,
technologies, and managerial policies and emphasis. Since the products of one plant feed into the other
plant, this strategy requires much centralized coordination of the manufacturing activities from the
corporate office who are expected to understand the various technological and resources nuances of all
the plants. Sometimes such a strategy is used because of the defense/national security considerations.
For instance, the Ordnance Factories in India.
(e) Plants Emphasizing Flexibility in Adapting to Constantly Changing Product Needs: This needs much
coordination between plants to meet the changing needs and at the same time ensure efficient use of the
facilities and resources. The new plant or branch-facility has to fit into the organization’s existing
strategy, mainly because the latter has been the product of deep thinking about the long-term prospects
and problems, and strengths and weaknesses for the organization as a whole.
Factors Affecting Plant Location Decisions
Hardly there is any location which can be ideal or perfect. One has to strike a balance between various
factors affecting plant location. Some factors are crucial in deciding the location of the plant while some
other factors are less important. In taking the decision of location of plant, due regard should be given to
minimisation of cost of production & distribution and maximization of profit. The decision of plant
location should be based on nine M’s, namely money, material, manpower, market, motive power,
management, machinery, means of communication and momentum to an early start.
The following are some of the important factors which the management must carefully bear in mind in
selecting an optimum site for the plant:
(i) Nearness to Raw Material: It will reduce the cost of transporting raw material from the vendor’s end
to the plant. Especially those plants which consume raw material in bulk, or raw material is heavy
weight, must be located close to the source of raw material. If the raw materials are perishable, the plant
is to be located near the source of material. This is true of fruit canning industry. Sugar and paper and
other industries using weight losing materials are also located near point of supply. Industries which
depend for their raw materials on other industries tend to be located near such industries e.g. the
petrochemicals industries are located near refineries. Similarly, Thermal Power Stations are situated near
coal mines. In case the raw material is imported, the unit must be established near the port. When a
company uses a number of raw materials and their sources are at different location, the ideal site for the
plant shall be a place where the transportation costs of various raw materials are the minimum. Apart
23
from these considerations, a promoter must view the supply of raw materials from the following angles
also:
(a) If supply of raw materials is linked with finance, it must be set up where the raw material is available
at reduced or concessional rates.
(b) Reliability and continuity of the source of supply, and
(c) The security of means of transport.
(ii) Nearness to Markets: It reduces the cost of transportation as well as the chances of the finished
products getting damaged and spoiled in the way. Moreover a plant being near to the market can catch a
big share of the market and can render quick service to the customers. Industries producing perishable or
fragile commodities are also attracted towards the market because of savings in time and transportation
costs. Industrial units have a tendency to disperse if they find a new market for their products.
(iii) Availability of Labor: Stable labour force, of right kind, of adequate size (number) and at reasonable
rates with its proper attitude towards work is a few factors which govern plant location to a major extent.
The purpose of the management is to face less boycotts, strikes or lockouts and to achieve lower labour
cost per unit of production.
(iv) Availability of Fuel and Power: Because of the wide spread of electric power, in most cases fuel
(coal, oil etc.) has not remained a deciding factors for plant location. It is of course essential that electric
power should remain available continuously, in proper quantity and at reasonable rates.
(v) Availability of Water: Water is used for processing, as in paper and chemical industries, and is also
required for drinking and sanitary purposes. Depending upon the nature of the plant, water should be
available in adequate quantity and should be of proper quality (clean and pure). A chemical, fertilizer,
thermal power station etc. should not be set-up at a location which IS famous for water shortage.
(vi) Climatic Conditions: Climate conditions also influence the location decision. Some industries need
special type of climate to run the unit effectively. For example, cotton industry requires a humid climate
and therefore it is mainly localised at Bombay, Ahmedabad, etc. But the scientific development and new
inventions have lowered down the importance of the factor. So due to the development of artificial
humidification, cotton textile industry can now be started in any region of the county. The question of
climate is more important for agricultural product like tea, coffee, rubber, cotton etc. even today.
(vii) Government Policy: Certain states give aid as loans, machinery, built up sheds etc. to attract
industrialists. In planned economy, Government plays an important role on the location of industry. In
India Government follows the policy of balanced regional growth of the country which is very important
from the point of view of defense and social problems like slum, disparity of income & wealth and
optimum use of resources. In order to implement this policy, Government offers several incentives to
entrepreneurs to locate their industrial units in backward regions or no-industry regions. It offers tax
24
concessions or loan facilities or factory sheds at cheaper rates. Sometimes Government announces
certain disincentives to industries located at a certain place. Thus Government policy plays an important
role in the location of industry.
(viii) Land: The shape of the site, cost, drainage, the probability of floods, earthquakes (from the past
history) etc. influence the selection of plant location.
(ix) Community Attitude: Success of Industry depends very much on the attitude of local people and
whether they want to work or not.
(x) Security: Considerations like law and order situation, political stability and safety also influence the
location decision. No entrepreneur will like to start the industry at a place which is not safe and where
there are law and order disturbances off and on.
(xi) Transport Facilities: A lot of money is spent both in transporting the raw material and the finished
goods. Depending upon the size of raw material and finished goods, a suitable method of transportation
like roads, rail, water or air is selected and accordingly the plant location is decided. Transportation
costs depend mainly on the weight carried and the distance to be covered. In some industries, weight of
the raw material is much higher than that of finished product. e.g. in a weight losing industry like sugar
manufacturing four to five tons of sugarcanes have to be carried per ton of sugar. Similarly in Iron and
Steel Industry two tons of iron is required to produce one ton of pig iron. Therefore the transport costs
can be saved by locating near the source of materials. In case of weight gaining industry, location near
the market may result in savings in transportation costs. e.g. in soft drink the weight of finished product
is higher than raw material.
(xii) Momentum of an early start: Another factor of some importance has been the momentum of an
early start. Some places got localised only because one or two units of that industry started production
there. With the passage of time, these places gained importance and attracted other units of the industry.
As a place gains importance, certain facilities usually begin to develop. For example, (i) transport
facilities are developed because railways and other agencies find it economical to serve that centres, (ii)
specialised firms start to take up repair and maintenance job for such units, (iii) banking facilities are
made available and
(iv) labor possessing various skills are attracted there. These facilities further attract more industries.
(xiii) Personal Factors: Personal preferences and prejudices of an entrepreneur also play an important
role in the choice of location.
Economic consideration does not weight much. For instance, Mr. Ford started cars manufacturing motor
in Detroit because it was his home town. It must however, be recognized that such location cannot
endure unless they prove to be economical enough in the long run.

25
(xiv) Communication Facilities: Every business firm requires every type of business information
regarding the position of labour, market, raw materials and finished goods and this facility is available
only when communication facilities are there. As communications facilities are not adequately available
in rural areas, industries are very much reluctant to start their business there.
(xv) Other Considerations: There are certain other considerations that influence the location decisions
which are:
(a) Presence of related Industry
(b) Existence of hospitals, marketing centres, schools, banks, post office, clubs etc.
(c) Local bye-laws, taxes, building ordinances etc.
(d) Facility for expansion
(e) New enterprise owned or operated by a single group of companies should be so located that its work
can be integrated with the work of the associated establishments.
(f) Industries like nuclear power stations, processes explosive in nature, chemical process likely to
pollute the atmosphere should be located in remote areas.
(g) Historical factors etc.

Quality Management

Total Quality Management (TQM) is a philosophy aimed at improving business as a whole. Some of
the benefits lie in the continuous improvement of processes and products, and enhanced efficiency of
people and machines leading to improved quality. The application of Total Quality Management helps
in streamlining processes, and ensures a proactive work system ready to counter deviations from the
ideal state. What are some of the major benefits of Total Quality Management? The major thrust of
Total Quality Management (TQM) is to achieve productivity and process efficiency by identifying and
eliminating problems in work processes and systems. TQM addresses key problem areas such as
mistakes in work processes, redundant processes, unnecessary tasks, and duplicate efforts. TQM
interventions also help with predicting and pre-empting such mistakes and unproductive activities.
Benefits of quality Management: The TQM makes:
1. Committed and involved management which provide long-term top-to-bottom organizational
support.
2. It focuses on the customer, both internally and externally.
3. There is Effective involvement and utilization of the entire work force, continuous improvement
of the business and production process.
4. It treats suppliers as partners of the establishment.
5. It establishes performance measures for the processes.

26
The need of control charts:
From days of the early industrial revolution till 1920s the only way to control quality was to inspect. Lot
of man hours were spent in ins pection at all stages and an army of inspectors
t h r o n g e d t h e workplaces. However, it hardly improved the quality. Inspectors did
mistakes and managers over reacted to variations as per their own judgment. W A Schewart created
the control charts to let the managers to avoid employing large number of inspectors but still have
control on the output.
The control charts are needed to
1. Avoid spending on inspection
2. Know when to intervene and correct the process.
3. Find whether the process is stable or not.
4. Empower the operator to act if required.
5. Save time in waiting for inspection to pass the lot.
6. transparent as far as the process is concerned with customers
Construction of control chart:
Control charts are constructed as follows:
A process which is to be put under statistical control is selected. The items produced are taken from routine
production every hour in groups of 4 or 5 and the characteristic say weight is measured. This is called sub

group. These 4 or 5 sample have a mean and a standard deviation σ(sigma). Similarly, it is possible to continue

collecting about 30 readings continuously. Now, we have enough data to construct a control chart. Before we do it, some
checks are required to be done.
1. If there are outliers meaning some point which is totally irrelevant and could be an error and they
should be removed as they will affect the calculation.
2. All data should be independent which means one point should not affect the other.
3. There should not be trend time wise.
After carrying out these checks, the mean of sample means is calculated (average of sample averages) this

is called bar.

The control limits are calculated as follows.

LCL = – 3 σ (sigma or standard deviation)

UCL = + 3 σ (sigma or standard deviation)

27
The control chart looks like this:

Similarly the range values in each sub group are plotted as a range chart.

The centre line of the chart being (mean of ranges).

The control limit for ranges + D4 and

-D3 where value of D3 and D4 are taken from the statistical tables for the sub group size.

Control charts for variables:

For subgroup based data X bar R chart is the most suitable one. Typical applications are from any manufacturing industry.
For instance in injection molding four plastic bottles is produced in every stroke. Here, the weight of the bottle is
critical. So, a control chart can be constructed where every hour, 4 bottles are taken and the readings taken.
The control chart read at the end of the day shows the variation in the weight of bottles from hour to
hour. As far as the variation in weight is within the control limits, the process is stable and is behaving
within the statistical control, In case any data point has gone out of the control limit, the process has
deviated at that time due to an assignable cause and this needs to be acted upon by stopping the process and
investigating.
The range chart is to be studied for within group variation. Incase any point has go ne out of the control
limit then the inter group (one of the four moulds) is the cause for creating instability.
For manufacturing situations where the subgroup is not possible because the events are taking place one
at a time, individual x readings are plotted and it is called I –MR or individual and moving range chart.
These two charts are used for variables which are continuous.
 For discrete/ attribute type data.
P charts for proportions and np charts for non conforming items are used.

28
 For low numbers like defects or complaints
C charts or u charts are used.

1) Manufacturing process manufacturing vegetables oil tins. A sample of 4 tins is selected at equal
intervals of time. The following data reveals the weight of tins. Construct (1) charts. (2) R Chart and
comment.

Sub group no Weights of each tin (4 tins in each samples)

1 8 6 12 14
2 9 8 13 15
3 9 8 11 10
4 16 18 13 8
5 13 21 19 17
6 18 16 20 22
Given : A2 = 0.729 D3 = 0, D4 = 2.282

Solution: Calculation of and R values.

Sub group Weights of each tin (5 tins in each

no samples)
1 8 6 12 14
2 9 8 13 15
3 9 8 11 10
4 16 18 13 8
5 13 21 19 17
6 18 16 20 22
Total

29
30
31
Lean Organization Definition
Many of the largest and most profitable companies in the World use lean operations principles to
improve operations and increase profitability. The two primary objectives of lean operations are
providing higher value to customers and eliminating waste. A company operating on lean principles
strives to be efficient. It seeks to optimize its operations through a careful and painstaking process that
looks at every aspect of the business and eliminates everything that is nonessential to create long-term
profits.
Lean Operations Definition: Lean operations are a means of running an organization by focusing on
providing greater customer satisfaction while using as few resources as possible. The objective of lean
operations is twofold:
1) Creating value for customers and 2) Eliminating waste.
Companies that use lean operations are highly concerned with efficiency. Lean operations are the
ultimate end of providing customers’ their value and increase the profits of the organization. Lean
operations, eliminates all inefficiencies. It allows companies to do more with less expenditure which
increases profits.
There are several areas of waste that companies should consider reviewing when taking on lean
operations. The following are a few examples of the areas where businesses can improve their
operations and slash inefficiencies:
Elimination of 7 wastes (Mudas)
Waste elimination is one of the most effective ways to increase the profitability of any business.
Processes either add value or waste to the production of a good or service. The seven wastes originated
in Japan, where waste is known as “muda." "The seven wastes" is a tool to further categorize “muda”
and was originally developed by Toyota’s Chief Engineer Taiichi Ohno as the core of the Toyota
Production System, also known as Lean Manufacturing. To eliminate waste, it is important to
understand exactly what waste is and where it exists. While products significantly differ between
factories, the typical wastes found in manufacturing environments are quite similar. For each waste,
there is a strategy to reduce or eliminate its effect on a company, thereby improving overall performance
and quality. 

The seven wastes consist of:

1. Overproduction

32
Simply put, overproduction is to manufacture an item before it is actually required. Overproduction is
highly costly to a manufacturing plant because it prohibits the smooth flow of materials and actually
degrades quality and productivity. The Toyota Production System is also referred to as “Just in Time”
(JIT) because every item is made just as it is needed. Overproduction manufacturing is referred to as
“Just in Case.” This creates excessive lead times, results in high storage costs, and makes it difficult to
detect defects.
2. Waiting
Whenever goods are not moving or being processed, the waste of waiting occurs. Typically more than
99% of a product's life in traditional batch-and-queue manufacture will be spent waiting to be processed.
Much of a product’s lead time is tied up in waiting for the next operation; this is usually because
material flow is poor, production runs are too long, and distances between work centers are too great.
Linking processes together so that one feeds directly into the next can dramatically reduce waiting.
3. Transporting
Transporting product between processes is a cost incursion which adds no value to the product.
Excessive movement and handling cause damage and are an opportunity for quality to deteriorate.
Material handlers must be used to transport the materials, resulting in another organizational cost that
adds no customer value.
4. Inappropriate Processing
Often termed as “using a sledgehammer to crack a nut,” many organizations use expensive high
precision equipment where simpler tools would be sufficient. This often results in poor plant layout
because preceding or subsequent operations are located far apart. In addition they encourage high asset
utilization (over-production with minimal changeovers) in order to recover the high cost of this
equipment. Investing in smaller, more flexible equipment where possible; creating manufacturing cells;
and combining steps will greatly reduce the waste of inappropriate processing.
5. Inventory: Having too much stock on hand is a waste of money for a company because it costs
money to store inventory. The longer it sits around not being sold, the more it costs the company.
However, one need to make sure to have enough stock to meet customer demand and this is where
optimization comes into play. The organisation should keep an optimal level of inventory, and no
more and no less, to ensure lean operations.
6. Unnecessary / Excess Motion
This waste is related to ergonomics and is seen in all instances of bending, stretching, walking, lifting,
and reaching. These are also health and safety issues, which in today’s litigious society are becoming
more of a problem for organizations. Jobs with excessive motion should be analyzed and redesigned for
improvement with the involvement of plant personnel.
33
7. Defects
Having a direct impact to the bottom line, quality defects resulting in rework or scrap are a tremendous
cost to organizations. Associated costs include quarantining inventory, re-inspecting, rescheduling, and
capacity loss. In many organizations the total cost of defects is often a significant percentage of total
manufacturing cost. Through employee involvement and Continuous Process Improvement (CPI), there
is a huge opportunity to reduce defects at many facilities.
Just-in-time (JIT) manufacturing, also known as just-in-time production or the Toyota Production
System (TPS), is a methodology aimed primarily at reducing times within the production system as well
as response times from suppliers and to customers. Its origin and development was in Japan, largely in
the 1960s and 1970s and particularly at Toyota.
Just-In-Time (JIT) manufacturing is a process by which companies don’t keep lots of excess inventory;
instead, they manufacture a product as an order comes in. It is a management philosophy of continuous
and forced problem solving.
The objective of JIT manufacturing system is to:
 Eliminate waste that is, minimise the amount of equipment, materials, parts, space, and worker’s
time, which adds a great value to the product
 Increase productivity
JIT means making what the market demands when it is in need. It is the most popular systems that
incorporate the generic elements of lean systems. Lean production supplies customers with exactly what
the customer wants, when the customer wants, without waste, through continuous improvement.
Deploying JIT results in decrease of inventories and increases the overall efficiencies. Decreasing
inventory allows reducing wastes which in turn results in saving lots of money.
There are many advantages of JIT:
1) Increases the work productivity 2) Reduces operating costs 3) Improves performance and out put
4) Improves quality 5) Improves deliveries 6) Increases flexibility and innovativeness
For industrial organisations to remain competitive, cost efficiencies have become compulsory. JIT helps
in this process. It is extended to the shop floor and also the inventory systems of the vendors. JIT has
been extended to mean continuous improvement. These principles are being applied to the fields of
Engineering, Purchasing, Accounting, and Data processing.
Characteristics of JIT
The consequent savings are to be utilised for reducing cost and rendering better service to the customer.
Shigeo Shingo an authority on JIT at Toyota classifies the wastes to be eliminated as follows.
The seven wastes to be eliminated according to JIT are:
1) Over production 2) Inventory 3)Waiting time 4) Movement 5) Effort 6) Defective products
34
7) Over processing
1. Over production: Over production is to manufacture products before it is actually needed. If the
demand for that product decreases, the extra parts or products produced may not be useful or needed.
Also over production results in high storage costs and is also difficult to detect defects. So, over
production is considered a waste.
2. Inventory: Excess procurement or production builds up stock of materials which are not immediately
used, thus locking space and funds carrying heavy costs. The figure 13.2, illustrates the inventories at
different levels of an organisation – Supplier distribution, Production, and Customer distribution.
3. Waiting time: Waste of time happen when goods are not moving or being processed. The operator,
the machine or the part will either be not working or be worked upon. The duration of waiting is can be
said to be unproductive and may create more serious consequences.
4. Movement: Any unnecessary movement is a waste of energy; it causes blockages, disrupting
movements and delaying the flow of other items creating delays.
5. Effort: The people, who work, do not make a study as to how the products on which they are making
are utilized and do not realize the purpose for which they are made. This lack of education will lead to
waste of resources. Finally, they end up in shortage of resources when needed.
6. Defective products: The defective products lead to a tremendous loss to the company. This is because
they use up the same equipments, workmen and the time that would be used to make good products.
Thus defective products use up resources and result in losses.
7. Over Processing: Some steps like unnecessary processing or production do not add value to the final
output. As a result, it is waste of all the inputs that go into the process.
KANBAN
Kanban is a visual method for controlling production as part of Just in Time (JIT) and Lean
Manufacturing. As part of a pull system it controls what is produced, in what quantity, and when. Its
purpose is to ensure that you only produce what the customer is asking for and nothing more. It is a
system of signals that is used through the value stream to pull product from customer demand back to
raw materials.
Its literal meaning is that of a flag or sign, when you see that flag you know that it is time to
manufacture the next part. Kanbans can take many forms but in most production facilities they will use
Kanban cards or bins to control the process, although there are no limits to how one can control and
design kanbans; only by their our imagination.
Kanban visualizes both the process (the workflow) and the actual work passing through that process.
The goal of Kanban is to identify potential bottlenecks in your process and fix them so work can flow
through it cost-effectively at an optimal speed.
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Important Point (not exclusively mentioned in syllabus)
Kaizen is a Japanese word for the philosophy continuously encouraging and implementing small process
of continuous improvement.
The 5S is a lean method for workspace optimization and one of the foundations of Kaizen. It consists of
5 consecutive steps that allow any team to organize their workplace for maximum process efficiency. 5S
stands for:
1) Sort (Seiri)
Separate required tools, materials, and instructions from those that are not needed. Remove everything
that is not necessary from the work area.
2) Set in order (Seiton)
Sort and organize all tools, equipment, files, data, material, and resources for quick, easy location, and
use. Label all storage locations, tools, and equipment.
3) Shine (Seiso)
Set standards for cleanliness. Clean and remove all trash, grease, and dirt. Cleanliness provides a safe
workplace and makes potential problems noticeable (e.g., equipment leaks, loose parts, loose paperwork,
or materials).
4) Standardize (Seiketsu)
Engage the workforce to systematically perform steps 1, 2, and 3 above daily, to maintain the workplace
in perfect condition as a standard process. Establish schedules and set expectations for adherence.
5) Sustain (Shitsuke)
Build organizational commitment so that 5S becomes one of your organizational values so that everyone
can turn it into a habit.
The method was popularized by Taiichi Ohno and Shigeo Shingo as part of the original Toyota
Production System that laid the foundations of lean manufacturing.
Definitions: 1) A pull system is a lean manufacturing strategy used to reduce waste in
the production process. In this type of system, components used in the manufacturing process are only
replaced once they have been consumed so companies only make enough products to meet customer
demand.
2) The original meaning of  push and pull, as used in operations management, logistics and supply
chain management. In the  pull system production orders begin upon inventory reaching a certain level,
while on the push system production begins based on demand (forecasted or actual demand).

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