1.

Pick up an organization and discuss the various factors an operations manager

should consider before choosing a production processing system for the organization?

Answer: Production processing systems or manufacturing systems convert inputs into goods
thathave a physical form. Production system is a result of arranging inputs, their conversion
process and output based on some logic and functions. Production system fails if any such
arrangement made don't give a desired level of outcome. Operations manager in an
organization should wisely choose a production processing system. There are some points
and rules which should be kept in mind while choosing it.

An ideal production processing system is one that has the following characteristics:
 Produces only one type of product
 Maintains constant demand of products over a period of time
 Ensures the availability of materials for production
 Ensures the required quantity of materials
 Prevents randomness in processing time
 Avoids defects in production
 Prevents machinery breakdowns

However, in the real world, the ideal production system does not exist. Thisis because
organisations produce different types of products. In addition,the product demand is not
uniform. It keeps varying from one customer toanother. In addition to this, the processing
time always varies and defectsand breakdowns take place in the production process.
Organisations
generally address these deviations by introducing modifications in thedesign and operation of
the existing system. However, this may result inhigh costs, low quality of products and delays
in product delivery.This is where JIT comes into the picture. The JIT system not only
bringsdown the inventory levels but also promotes zero level of inventory, asexcessive
inventories can become problematic for an organisation. Inaddition, it focuses on eliminating
the problems of variations in demand andprocessing time, delays in product delivery and
excessive setup times.

Types of production processing system

There are various types of production processing system so operations manager should
choose the system as per the requirements and check the benefits and drawbacks of all the
systems.

Continuous Production System (CPS)

It involves a continuous or almost continuous physical flow of material. It makesuse of
special purpose machines and produces standardized items in largequantities. The processes
usually operate round-the-clock to maximizeutilizations and to avoid expensive and time
consuming shutdowns and startups.

Advantages of continuous production system

1. Reduced labour cost because highly skilled workers are not generallyrequired. Also,
division of labour and job rotation is possible.
2. Once systems are set, strict supervision is not required since systemtakes care of itself.
3. High volumes of production, so cost is low.
4. Low inventories and reduced material handling.
5. Minimum wastage seen as products are standardized.
6. Possible to use all the techniques of Production control, material control/inventory,
maintenance systems, etc.

Disadvantages of continuous production system

1. Strict maintenance is necessary to avoid production hold-ups.
2. Adjusting to fluctuating demand is difficult as it takes time and capitalinvestment.
3. Huge capital investment.
4. Cannot make sudden or frequent changes in the Production schedulessince system is not
flexible.

The two types of continuous production system are:

(a) Process production: Its name is derived from the way materialsmove through the
process. This system is used for manufacturingitems for which the demand is continuous or
high. Here, a single rawmaterial can be transformed into different kinds of products at
differentstages of the production process. Examples include petroleumrefining – different
fractions, viz. kerosene, gasoline, etc., arerecovered during the process of fractional
distillation and steel making(e.g., Integrated steel plants of SAIL).
(b) Mass or flow production: Few types of products are manufacturedin large quantities.
The volumes are high and products arestandardized which allows resources to be organized
around
particular products. Standardization of products, processes,materials, machines and
uninterrupted flow of materials are the maincharacteristics of this system. It lies between
Process productionand batch production. Examples include automobiles,
appliances,computers, etc.

Intermittent Production System

In this system, the goods are generally manufactured to fulfill customers’ ordersrather than
producing against stock. The flow of materials is intermittent. Theproduction facilities are
flexible enough to handle a wide variety of products andsizes. Considerable storage between
operations is seen.– Individual operationsare usually carried out independent of the preceding
and succeeding operations.

Advantages of intermittent production system

1. Can adjust to new situations and specifications and fluctuation in demandcan easily be
taken care of.
2. Initial investment is not very high compared to continuous production.

Disadvantages of intermittent production system

1. As production is in small quantities, the cost of production per unit is high.This makes the
product costly.
2. Skilled people are required for each operation. So labour cost is high.
3. More inventory, high work in progress and large storage space are required.

The two types of intermittent production systems are (a) Job production,and (b) Batch
production.
(a) Job production: Job Production is the production of a wide varietyof products in
relatively low quantities; customization is high, there isconsiderable complexity and
divergence in the steps performed inproduction, thereby creating a jumbled flow rather than a
line flow.The system requires versatile and highly skilled labour with high capitalinvestment.
Examples – machining a metal casting, producing customizedshelves and cabinets.
(b) Batch production: Here, items are processed in lots or batchesand a new batch is
undertaken for production only when the productionon all items of a batch is complete.In
fact, batch type production can be considered as an extensionof job type system. An example
is the chemical industry wheredifferent medicines are manufactured in batches. Other
examplesinclude production of machine tools, printing press, etc.

Based on the above discussion, it can be said that operations manager should consider the
points about ideal production processing system, suitable type of production system etc. and
accordingly proceed further.

2. With reference to a particular organization, explain the inputs of MRP System?

Answer: These days organisations use a computerised planning and controlsystem popularly
called Material Requirements Planning (MRP).MRP is equally useful for the service
organisations too, especially in thecase of services, such as hotels, banks and hospitals. MRP
has also showngreat relevance in the fabrication industries. In other words, MRP is
atechnique of estimating the quantity and timing for the acquisition ofmaterials required to
produce finished products. MRP helps an organisationin ensuring the availability of materials
as and when required. It alsoreduces the inventory level of an organisation by determining the
exact
quantity of materials required for producing products. It helps anorganisation in converting
the aggregate plan into a detailed one. Apart fromthis, MRP also helps an organisation in
planning and scheduling itspurchasing activities. To do so, MRP requires three types of
inputs, namely,Master Production Schedule (MPS), inventory status file and Bill ofMaterials
(BOM).

MRP works based on lines. Basic inventory information would be providedby regular
inventory records. BOM provides information about the itemsneeded to produce the finished
goods. It is the index in which a product isput together into sub-assemblies and then into final
assemblies, that is, rawmaterials or semi-finished goods are assembled. Then, the items listed
aretime bound and converted into a master schedule, which becomes a primetool of MRP.
The master schedule can be considered as the “productionforecast”. It can generate material
and capacity records over a period oftime, taking into account the interdependency of these
requirements.

Advantages of MRP
The main aim of MRP is to get the right quantity of materials to the rightplace at the right
time. Therefore, it plays an important role in the overallproduction process of an organisation.
Apart from this, following are some ofthe advantages of MRP:
 Helps in keeping the pricing competitive
 Facilitates reduction of the sales price and helps in increasing the actualsales
 Reduces inventory levels, which helps in saving the associated costs
 Reduces the set up costs
 Facilitates timely fulfilment of demands, which reduces the time involvedin sales
 Helps in serving customers more efficiently
 Helps in evoking better response to the market demand
 Helps the organisation in expediting and de-expediting
 Helps in planning the production capacity in a better way
Inputs of MRP in Mahindra & Mahindra Ltd.
Master Production Schedule (MPS)
The master production schedule is the key input that drives the MRPprogram. The MPS tells
the MRP program what an organisation intends toproduce.MPS guides the top management
of an organisation. It helps in planningand controlling the manufacturing operation. An
effective MPS helps anorganisation in the following ways:
 Ensures on-time product delivery to customers
 Limits trade-offs between marketing and manufacturing
 Integrates the financial plan with production budget

Bill of Materials (BOM)

The MRP obtains information about the components needed to make anend product from the
BOM file, which is also known as the product structurefile. The BOM not only lists all the
required parts but also reflects thesequence of steps required to produce the end product. The
BOM has aseries of levels, wherein each level represents a stage in the manufacturingof the
end product. The next lower level may represent the sub-assembliesthat are combined to
make the final assembly. The lower level that comesnext to this one might represent the pans
needed to make the subassemblies,and the bottom most level might represent the raw
materialsfrom which the parts are made.Each component at any level of the BOM is
identified by a unique partnumber.

Inventory status file

The inventory status file contains important information, such as what itemsshould be
ordered and when the orders should be released. The inventorystatus file keeps data about the
projected use and receipts of each item anddetermines the amount of inventory that will be
available in each timebucket. If the projected available inventory is not sufficient to meet
therequirements in the given time period, the MRP program will recommendthe item to be
ordered.

The inventory status record includes information on the following items:

Gross Requirements (“GR”): It is the total demand for a stock in a giventime period.
Scheduled Receipts (“SR”): These are receipts of orders that are placedbut not yet
completed/received. It is also called "open orders".
Projected on Hand (“POH”): It is an estimated amount of inventoryavailable each week
after satisfying the gross requirements.
Planned Order Receipts (“POR”) – It is the quantity determined that willbe required for
receipt at the beginning of a time period. This will help inminimising the chances of dropping
of POH below safety stock.
Planned Order Releases (“PORL”) – It is the planned amount needs to beordered in each
time period. This amount should be equal to the POR offsetby the lead-time.

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

MRP provides exception reporting whenever a mismatch of timing between demand and
supply exists. It is a priority system: typical messages are to delay, expedite, or cancel an
existing order, launch a new order, etc. It attempts to make the due date and need date
coincide, so operations proceed as planned while inventory investment is minimised.

3. An electronics company purchases transistors at Rs.30 per unit. An annual

requirement of the transistors is 5000 units. The ordering cost is Rs.200 and carrying
cost is Rs.4 per unit, lead time is 5 days.
a. Calculate EOQ
b. Reorder point based on the given information.(Assume 275 working days).

Answer: a) Economic order quantity (EOQ)

Economic order quantity (EOQ) refers to the optimal order size that will result in the lowest
ordering and carrying costs for an item of inventory based on its expected usage, carrying
costs and ordering cost. EOQ model answers the following key quantum of inventory
management.
 What should be the quantity ordered for each replenishment of stock?
 How many orders are to be placed in a year to ensure effective inventory
management?
 What order size will minimise the total inventory costs?

EOQ is defined as the order quantity that minimises the total cost associated with inventory
management.

Assumptions
 Constant or uniform demand – The demand or usage is even throughout the period.
 Known demand or usage – Demand or usage for a given period is known i.e.
deterministic.
 Constant unit price – Per unit price of material does not change and is constant
irrespective of the order size.
 Constant carrying costs – The cost of carrying is a fixed percentage of the average
value of inventory.
 Constant ordering cost – Cost per order is constant and is not affected by the size of
the order.
 Inventories can be replenished immediately as the stock level reaches exactly equal to
zero. Constantly there is no shortage of inventory

Solution:
Given:D (Annual Demand) = 5000 Units

K (Ordering cost) = Rs.200 per unit

Kc (Carrying cost) = Rs.4 per unit

Formula:
EOQ = √2DK/√Kc

= √(2x5000x200)/√4

= √2000000/√4
= √500000

= 707.11

b) Re-order Point
“When to order” is another aspect of inventory management. This is answered by re-order
point. The re-order point is that inventory level at which an order should be placed to
replenish the inventory. To arrive at the re-order point under certainty, details of the two keys
required are:
 Lead time
 Average usage
Lead time refers to the average time required to replenish the inventory after placing orders
for inventory.
Re-order point = Lead time x Average usage

Under certainty, re-order point refers to that inventory level which will meet the consumption
needs during the lead time.

Solution:
Daily Usage = 5000/275

= 18.18

Safety stock = 4*18.18

= 72.72

Re-order point= (lead time x Average usage) + safety stock

= (5 x 18.18) + 72.72

= 90.9 + 72.72

= 163.62 units