OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
PRELIMS 3. Operations – encompasses the overall activities within
INTRODUCTION TO OPERATIONS MANAGEMENT
Basic Concepts on Operations Management (OM)
Operations as a competitive weapon is important to…
Accounting, which prepares financial and cost accounting
information that aids operations managers in designing and
operating production systems.
The production system consists of inputs, processes, outputs,
and information flows that connect with customers and the
external environment. It uses operation resources to transform
inputs into desired outputs. It is considered as the heart of
Operations Management.
Inputs – includes human resources   ( workers, managers ),
capital (equipment, facilities), purchased materials and services,
land, and energy
 It may also be raw materials, a customer, or a finished
product from another system
Process – any activity or group of activities that takes one or
more inputs, transforms  and adds value to them, and provides
output for a customer
Finance, which manages the cash flows and capital investment
requirements that are created by the operations function.
Human Resources, which hires and trains employees to match
process needs, location decisions, and planned production
levels.
Management Information Systems, which develops
information systems and decision support systems for
operations managers.
Marketing, which helps create the demand that operations must
satisfy, link customer demand with staffing and production
plans, and keep the operations function focused on satisfying
customer’s needs.
Operations, which designs and operates production systems to
give the firm a sustainable competitive advantage.
Let’s take into consideration these terms, for us to have a clear
understanding of our course description.
1. Production – creation of goods and/or services
2. Management - denotes both FUNCTION and PEOPLE
who discharge the functions
-A distinct process of planning, organizing, staffing, directing
(actuating)and controlling for the achievement of stated
objectives efficiently and effectively by the use of human
beings and other business resources.
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the organization
4. Organization – a business, an entity, a private school, a
government office, a hospital, a restaurant, a religious
organization, etc. that is composed of people
5. Manufacturing firms – those companies/businesses
engaged in the manufacture/creation/production of tangible
items. Tangible items are those that we could see and
touch, like your smartphones,                               laptops,
house, buildings, etc.
6. Non-Manufacturing firms – those companies/business
engaged offering non-tangible items. Non-tangible items
are those that we could experience or feel. It includes
services of a hospital, a beautician, an artist, a chef, a hotel,
a school, and many others.
What is Production/Operations Management?
    Set of activities that creates goods and services by
transforming inputs into outputs involving planning,
coordinating, and executing of all activities
    The management of systems or processes that
creates goods and/or services
    The design, operation and movement of the
production systems that create the firm’s primary product
or service.
Figure 1. OM Framework
 The market place ( the firm’s customers for its
products/services) shapes the firm’s corporate strategy.
 The corporate strategy must be based on the corporate
mission and reflects how the firm plans to use all its
resources and functions ( marketing, finance, operations).
 The operation’s strategy specifies how the firm will
employ its production capabilities to support its corporate
strategy.
 The marketing strategy addresses how the firm will
sell and distribute its g/s.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
 The finance strategy identifies how best to utilize the  Usually responsible for the actual transformation of
firm’s financial resources. inputs into finished products/services

Within the operations function, management decisions Transformations that take place may include:
can be divided into three broad areas:
 Physical, as in manufacturing
1. Strategic (long term) decisions – Operations management  Location, as in transportation
decision at this level impacts the company’s long-range  Exchange, as in retailing
effectiveness in terms of how it can address its customer’s
 Storage, as in warehousing
needs. Thus, for the firm to succeed, these decisions must
be in alignment with the corporate strategy  Physiological, as in healthcare
2. Tactical (intermediate term ) decisions – primarily  Informational, as in telecom
addresses how to efficiently schedule materials and labor
within the constraints of previously made strategy  
decisions
Figure 3: Example of Transformation

1. Operational planning and control (short term)

decisions – issues at this level include:
 What jobs do we work on today or this week?
 Who do we assign to what tasks?
 What jobs are priorities?

Operations resources consist of what we term Five P’s of OM

 People – direct and indirect workforce

 Plants – factories or service branches where
production is carried out
 Parts – include the materials that go through the
system
 Processes – equipment and steps by which production 1. Goods Producing ( e.g. farming, mining,
is accomplished manufacturing)
 Planning and Control system – procedure and 2. Storage/Transportation ( e.g. warehousing, trucking,
information management used to operate the system mail service, buses, hotel, airlines)
3. Exchange (e.g. retailing, wholesaling, banking,
Figure 2: Functions within Business leasing, library, loans)
4. Entertainment (e.g. films, radio, TV, plays, concerts,
recording)
5. Communication (e.g. newspapers, radio, TV,
telephone, satellites)

 Finance – secures and invests the company’s capital assets

Finance and operations management personnel cooperate by

exchanging information and expertise in activities such as:

o Budgeting – budget must be periodically prepared to

plan financial requirements
o Economic analysis of investment proposal –
evaluation of alternative investments in plant and
equipment requires inputs from both operations and
finance people
o Provision of funds – the necessary funding of
Operations – consists of all activities directly related to operations and the amount and timing of funding can be
producing goods or providing services important and even critical when funds are tight

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Marketing – consist of selling and/or promoting the g/s of an 3. How will the product or service be designed? How
organization; generates demand for the  company’s output will the work be done? How will resources be allocated?
4. Who will do the work?
 Responsible for assessing customer wants and needs
for communicating to operations people General Approaches to Decision Making:

NOTE: The three major functions within a business are

1. Models
interdependent.
2. Quantitative Approaches
 Having the financial resources and the ability to 3. Performance metrics
produce a product are of little value if there is no market 4. Analysis of Trade-Offs
for the product 5. Degree of Customization
6. Systems Approach
 Having the finance and a market for a product are of
7. Establishing priorities
little value when one cannot provide the product
 The ability to produce a product and a market for the Models – an abstraction of reality, a simplified representation
product are not sufficient if one does not have the of something
necessary capital to employ personnel, buy raw materials Classifications:
and put the other capabilities into action.

Scope of Operations Management 1. Physical models-look like the real-life counterparts

( miniature cars,toy animals, scale-model bldg.,etc.)
The scope of OM ranges across organizations. OM people are
involved in: 2. Schematic models – are more abstract that their physical
 Product and service design counterparts (e.g. graphs, charts, blueprints, etc.)
3. Mathematical models – are the most abstract (e.g. numbers,
 Process selection formulas, symbols)
 Selection and management of technology
Quantitative Approaches to decision making in operations
 Design of work systems management have been accepted because of calculators and
 Location planning computers capable of handling the required calculations.

 Facilities planning Performance metrics are used to manage and control

 Quality improvement of products and services operations (e.g. metrics related to profits, costs, quality, etc.)

The operations function includes many interrelated activities Analysis of Trade-Offs

such as:  Decision makers compare the pros and cons of a
 Forecasting course of action to better understand the consequences
of the decisions they make
 Capacity planning
Degree of Customization
 Managing inventories
 Assuring quality  Highly customized products and services generally is
more time consuming, requires highly skilled people,
 Motivating employees
and involves more flexible equipment than
 Locating facilities standardized ones.
 Scheduling
Systems Approach
 
- Emphasizes interrelationships among subsystems 
OM and Decision Making but its main theme is the whole is greater than the  sum of its
individual parts.
Key decisions include:

1. What resources will be needed?

1. When will each resource be needed? When should the Establishing priorities
work be scheduled? When should materials and other
supplies be ordered? When is corrective action needed?
2. Where will the work be done?

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Managers recognizing the importance of a certain
issue than others enable them to direct their efforts   to where
they will do the most good.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT

OM AS A SET OF DECISIONS AND TRENDS IN OM -operations manager helps establish quality objectives
and seek ways to improve the quality of the firm’s
Lesson Proper:
products and services (TQM) through
Operations Management as a Set of Decisions
1. Customer Satisfaction
Decision making, both strategic and tactical, is an 2. Employee Involvement
essential aspect of a management activity, including operations 3. Continuous Improvement
management. What sets operations managers apart, however,
are the types of decisions that they make. - use of inspection and statistical methods to monitor
the quality produced by the various processes
Decisions are: (Statistical Process Control)
 Strategic Decisions – less structured; have long term
consequences focus on the entire organization. 4. Capacity, Location, and Layout

 Tactical Decisions – more structured; focus on             - often requires long-term commitments
division and departmental lines.
            -operations managers help determine:
 Operational Decisions – repetitive and short-term;
routine focus sections, units teams and tasks. 1. System’s Capacity
  2. Location of new facilities, including global operations
3. Organization of department and a facility’s physical
Terminologies: layout

1. Strategic Decisions 5. Operating Decisions

- it will affect company’s future direction. -it is called operations infrastructure which deal with
operating the facility after it has been built.
- operations managers help determine the company’s global
strategies and competitive priorities and whether its flow  
strategy should organize resources around
products/processes (Operations Strategy) Operations Manager:

2. Process 1. Help coordinate the various parts of the internal and

external supply chain (Supply Chain Management)
            -fundamental to all activity that produce 2. Forecast Demand (Forecasting)
goods/services 3. Manage Inventory
4. Control and Staffing Level Overtime (Aggregate
            -it includes the following:
Planning)
1. Process Management – making process decisions They also make decisions about releasing purchase or
about the types of work to be done in-house, the production orders and the qualities to be purchased or produced
amount of automation to use, and methods of (Materials Requirements Planning), whether to implement
improving existing processes. JIT techniques, which customer or jobs to give top priority
2. Management of Technology – technologies to pursue (Scheduling), and the use and scheduling of resources in large
and ways to provide leadership in technological projects (Managing Projects).
change.
3. Workforce Management – ways to structure the  
organization and foster team work, the degree of Ten Critical Decisions of Operations Management
specialization or enhancement of the jobs created by
the processes, and methods of making time estimates
for work requirements. 

3. Quality

- in a general sense, it is defined as meeting or

exceeding the expectations of the customer.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
  Operations manager draws on many skill areas and
quantitative analysis to solve problems:
 Knowledge of information systems to manage vast
quantities of data
 Concept of organizational behavior to aid in designing
jobs and managing the workforce
 An understanding of international business methods to
gain useful ideas about facility, location, technology
and inventory management   spent in the OM function
            Production System is the heart of Operations
Management. A primary function of an operations manager is
to guide the system by decision-making.
Two Types of Decisions:
  1. System Design
involves decisions that relate to system capacity, the
geographic location of facilities, arrangement of
departments, and placement of equipment within
physical structures, product and service planning, and
acquisition of equipment.
this decision usually, but not always, requires long-
term commitments.
lies in the province of top management.
this decision essentially determines many of the
parameters of system operation (e.g. costs, space,
capacities, and quality)
2. System Operation
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decisions on management of personnel, inventory
planning and control, scheduling, project management
and quality assurance.
in most instances, the operations manager is more
involved in day-to-day operating decisions than with
decision with system design.
Why study operations management (OM)?
 OM is one of the three major functions of any organization
and it is integrally related to all the other business functions.
-to study how people organize themselves for productive
enterprise
 The production function is the segment of our society
that creates the products we use.
-to know how goods/services are produced
 To understand what operations managers do
-to be able to develop the skills necessary to become such a
manager (help explore the   numerous and lucrative career
opportunities in OM)
 It is a costly part of an organization.
-a large percentage of the revenue of most firms is
 The consumption of goods is an integral part of our
society.
 P/O Management is responsible for creating those
goods.
Organizations exist primarily to provide service or create
goods. Hence, production is the CORE FUNCTION of an
organization. Without this core, there would be no need for any
of the other functions
Trends in Operations Management
Several business trends are currently having a great
impact on operations management: the growth of the service
sector; productivity changes; global competitiveness; quality,
time, and technological change; and environmental, ethical, and
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
diversity issues. In this section we look at these trends and their 2. Multifactor productivity – an index of the output
implications for operations managers. provided by more than one of the resources used in
production
Business Trends that have an Impact on OM
Example:
1. Growth of service sector
A team of workers made 400 units of a product, which is
2. Productivity changes
valued by its standard cost of P10 each. The accounting
3. Global competitiveness
department reported that for this job the actual costs were P400
4. Quality, time, and technological change
for labor, P1,000 for materials, and P300 for overhead.
5. Environmental, ethical, and diversity issues
Multifactor productivity
 
=          (400 units) ( P10/unit)
1. Service Sector Growth
            P400+ P1,000 + P300
Services may be divided into three main groups such as:
=          P4,000
1. Government ( local, regional, national)             P1,700
2. Wholesale and retail sales
3. Other services ( transportation, public utilities, real =          2.35
estate, etc.)
3. Global Competition
 
Today businesses accept that, to prosper, they must
2. Productivity – the ratio of outputs ( goods/services) to view customers, suppliers, facility locations, and competitors in
inputs ( wages, cost of production, etc.) global terms. Most products today are global composites of
materials and services. Strong global competition affects
                Productivity = Output industries everywhere. In order to prosper, they must view
customers, suppliers facility locations, and competitors in
                                               Input
global terms.
At the national level, productivity typically is
measured as the dollar value of output. This measure depends 4. Competition based on quality, time, and technology
on the quality of the products and services generated in a nation
- Quality = Part of the success of foreign competitors has
and on the efficiency with which they are produced. 
been their ability to provide products and services of high
Productivity is the prime determinant of a nation’s standard of
quality at reasonable prices.
living. Conversely, lagging or declining productivity lowers the
standard of living. Wage or price increases not accompanied by - Time = Firms compete on the basis of filling orders
productivity increases lead to inflationary pressures rather than earlier than the competition, introducing products and
real increases in the standard of living. services quickly, and reaching the market first.
Measures of Productivity - Technological change = affects the design of new
products and services and the production processes. 
1. Single Productivity Technology is important in linking the firms internally and
externally with customers and strategic partners.
            Labor productivity – an index of the output per
person or hour worked  The right choices and effective management of
technology can give a firm a competitive advantage.
 Example:

Three employees processed 600 insurance policies last 5. Environmental, ethical, and Work-force Diversity
week. They worked 8 hours per day, 5 days per week. issues

Labor productivity = 600 policies Firms, to be more ethical in doing business;

( 3 employees)(40 hours/employee) -have responsibilities that go beyond producing goods and

services at a profit;
                        = 5 policies/hour
 Help solve important social problems;

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
 Respond to a broader constituency than shareholders
alone;
 Have impacts beyond simple marketplace transactions;
and
 Serve a range of human values that go beyond
economic value

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
WEEK 3&4 DECISION THEORY AND DECISION
ENVIRONMENTS
Lesson Proper:
DECISION ENVIRONMENT
Operation management’s decision environments are
classified according to degree of certainty present:
BASIC CATEGORIES
 CERTAINTY
 Environment in which relevant parameters have
known values.
 Means that relevant parameters such as cost, capacity,
and demand have known values
 The decision maker knows which state of nature will
occur
           e.g. profit/unit is P50. You have an order for 200 units.
How much profit will you make? (profits and total demand are
known)
RISK
 Environment in which certain future events have
probable outcomes
 Means that certain parameters have probabilistic
outcomes
 The decision maker does not know which state of
nature will occur but can estimate the probability that any
one state will occur.
           e.g profit/ unit is P50. Based on previous experience
there is a 50% chance of an order for 100 units and a 50%
chance of an order for 200 units. What is expected profit?
(demand outcome are probabilistic)
UNCERTAINTY
 Environment in which it is impossible to assess the
likelihood of various future events
 Means that it is impossible to assess the likelihood of
various future events
 The decision maker lacks sufficient information even
to estimate the probabilities of the possible states of nature
     e.g. profit is to P50/unit. The probabilities of
potential demand are unknown.
NOTE: These three decision environments require different
analysis techniques. Some techniques are better suited for one
category than for others.
 
DECISION THEORY
Decision theory is a general approach to decision
making when the outcomes associated with alternatives are
often in doubt. It helps operations managers with decisions on
process, capacity, location, and inventory because such
decisions are about an uncertain future. Decision theory can
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also be used by managers in other functional areas. With
decision theory, a manager makes choices using the following
process.
The decision theory is suitable for a wide range of
operations management decisions, e.g. capacity planning,
product and service design, equipment selection and location
planning and inventory, because these are about an uncertain
future. It is a general approach to decision making when the
outcomes associated with alternatives are often in doubt.
Process of Decision Making
1.     List the feasible alternatives
                        One alternative that should always be
considered as a basis for reference is to do nothing or to   
maintain Status Quo.
                        Example.:  where to locate a new retail store
in a certain part of the city
2.      List the events (chance events or states of nature)
that have an impact on the outcome of the choice but aren’t
under the managers’ control
 
States of Nature- possible future conditions; these events
must be mutually exclusive and exhaustive- they don’t
overlap and that they cover  all eventualities.
Examples:
    Number of contracts awarded will be one, two or
three
    Competitors will or will not introduce a new product
    Demand experienced by the new facility could be:
low, medium or high
 
3.     Calculate/determine/estimate the payoff for each
alternative in each event.
Note: Typically the payoff is in terms of total profit or total
cost. These payoffs can be entered into a  payoff table
Payoff table- shows the expected payoffs for each
alternative under the various possible states  of nature
    helpful in choosing among alternatives because they
facilitate comparison of alternatives
Example of a Payoff Table:                                                     
POSSIBLE FUTURE DEMAND (in millions)
Alternatives                 Low                 Moderate                     Hi
gh
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Small Facility              P10                        P10                        Question: If you would make the decision, which is the best
P10
Medium Facility            7                            12                           
12
Large Facility                -4                             2                            the decision would be: If the manager knows the future
16     demand will be low, the company should build a small facility
 
 Payoffs are in terms of present values which represent
equivalent current peso values of expected future. income
 
4. Estimate the likelihood of each event using past data,
executive opinion and other forecasting methods.
Express it as probability, making sure that the probabilities
sum to 1.0; develop probability estimates  from past data if
the past is considered a good indicator of the future.
 
5. Select a decision rule or criterion to evaluate the
alternatives and select the best alternative
Examples:. choosing the alternative with the lowest
expected cost
 
The following are the Three (3) Decision Environments
 Decision making under Certainty
 Decision making under Risk
 Decision making under Uncertainty
DECISION MAKING UNDER CERTAINTY
 manager knows which event will definitely occur
under each alternative
 decision rule is to pick the alternative with the best
payoff for the known event
 the best alternative is the highest payoff if the payoffs
are expressed as profit, if the payoffs are expressed
as costs, the best alternative is the one having
the lowest payoff
 the decision is usually relatively straight forward:
simply choose the alternative that has the best payoff under
state of nature
 
Example:
A manager is deciding whether to build a small or a
large facility. Much depends on the future demand that the
facility must serve and demand may be small or large. The
manager knows which certainty the payoffs that will result
under each alternative. The payoffs, in thousands (P 000), are
the present values of future revenues minus costs for each
alternative in each event.
Possible Future Demand
Alternative                    Low                             High
Small Facility                     200                                 270
Medium Facility                 160                                 800
Large Facility                0                                  0
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choice if the future demand will be low?
Answer: The best choice is the one with the highest payoffs. So
and enjoy a payoff of P200 000.
 
DECISION MAKING UNDER RISK
 The manager or decision maker has estimates of the
probabilities of the various states of nature or is willing to
make them
 The manager can list the events and estimate their
probabilities; the manager has less information than with
decision making under certainty but more information than
with decision making under uncertainty
 Widely used approach under this is the Expected
Monetary Value Criterion.
Expected Monetary Value (EMV)
 The best expected value among the alternatives
 Sum of the payoffs for an alternative where each
payoff is weighted by the probability for the relevant state
of nature or the expected value for an alternative is found
by weighing each payoff with its associated probability and
then adding the weighted payoff scores- the alternative
with the best expected value (highest for profit and lowest
for cost) is chosen.
EMV Criterion
 Determine the expected payoff of each alternative and
choose the alternative that has the best expected payoff
Note:  This EMV approach is most appropriate when a decision
maker is neither risk- averse nor risk- seeking, but is risk-
neutral.
            The expected value is what the average payoff would be
if the decision would be repeated time after time.
            The rule should not be used if the manager is inclined to
avoid risk. This approach provides an indication of the long
run, average payoff that is, the expected value amount is not an
actual payoff but an expected or average amount that would be
approximated if a large number of identical decision, were to be
made.
 
Example 1
                                     Possible Future Demand
Alternative                                           Low                            
High
Small Faculty                                      200                              270
Large Faculty                                      160                              800
Do Nothing                                            0                                  0
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Which is the best alternative if the probability of small
demand is estimated to be .40 and the probability of large
demand is estimated to be .60?
            Solution: The expected value for each alternative is:
Alternative                               Expected Value
Small Facility                          .4(200) +.6(270) = 242
Large Facility                          .4(160) + .6(800) = 544
Choose a large facility because its expected value is
the highest at P544,000
Example 2 Using the expected monetary value
criterion, identify the best alternative for previous payoff table
for these probabilities: low= .30, moderate= .50 and high= .20
Solution:
EV small= .30(P10) + .50(P10) + .2(P10) = P10
EV medium=. 30(P7) + .50(P12) + .2(P12) = P10.5             Solution:
EV large= .30(-4) + .50(P2) + .2(P16) = P3
Choose the medium facility because it has the highest
expected value.
DECISION MAKING UNDER UNCERTAINTY
In here, no information is available on how likely the
various states of nature are.
 
Taking into account again this example:
 
Example:
             A manager is deciding whether to build a small or a
large facility. Much depends on the future demand that the
facility must serve and demand may be small or large. The
manager knows which certainty the payoffs that will result
under each alternative. The payoffs, in thousands (P 000), are
the present values of future revenues minus costs for each
alternative in each event.
Possible Future Demand
Alternative                   Low                             High
Small Facility                200                              270
Medium Facility          160                              800
Large Facility                 0                                  0
4 Decision rules or criteria:
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1. Maximin - It maximizes the minimum payoffs given the
various decisions that are possible.
                   -Its rule is a very conservative one that takes
a pessimistic view on the various states of nature.
2. Maximax - It maximizes the maximum payoffs for the
different decisions starting with the identification of the
maximum payoffs of each alternative decision (optimistic
view).
3. Laplace – determines the average payoff for each alternative
and chooses the alternative with the best average.
4. Minimax Regret – determine the worst regret for each
alternative and choose the alternative with the “best worst”
            Example #1 (same problem given in certainty) Profit
Payoffs
Required: Determine the best alternative for each decision rule
Maximin
1. Select the column with minimum payoff.
2. Choose the highest amount.
Alternative Payoffs                 Worst Payoffs (000)
Small Facility                           P 200
Large Facility                           P 160
Decision: The manager would build a small facility if
demand would be low with a payoff of P200,000.
 Maximax
 1. Select the column with the maximum payoff
2. Identify the largest payoff.
 Alternative Payoffs                 Best Payoffs (000)
Small Facility                          P270
Large Facility                          P800
Decision: The manager would build a large facility if
demand would be high with a payoff of P800,000.
NOTE: In stating your decisions for maximax criterion and
minimin/maximin criterion, always include the three elements
in your decision.
The Three (3) ELEMENTS are the following:
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT

Maximin

1. Select the column with highest payoff.

Laplace
With two events, we just get the average.
Alternative Payoffs                 Weighted Payoffs
Small Facility                          200 + 270/2 = 235
Large Facility                          160 + 800/2 = 480
 Decision: The manager would build a large facility with a
payoff of P480,000.
 Minimax Regret
2. Identify the lowest amount.
Alternative Payoffs                 Worst Payoffs (000)
Small Facility                          P270
Large Facility                          P800
 Decision: The manager would build a small facility if
demand would be high with a payoff of P270,000.
Minimin
1. Select the column with the lowest payoffs.

2. Choose the lowest amount.

1. Determine the largest element in both columns ( in
BOLD) Alternative Payoffs                 Best Payoffs (000)
2. Subtract every element from the largest payoff in both
columns. Small Facility                          P 200
3. Select the largest amount in each row. ( in colored Large Facility                          P 160
BOLD)
4. Identify the maximum regrets.  Decision: The manager would build a large facility if
demand would be low with a payoff of P160,000.
Alternative Payoffs                 Low Demand              High
Demand              Maximum Demand  

Small Facility                          P 200-200=0               P 800-

270=530                       P 530

Large Facility                          P 200-160=40             P 800-

Laplace
800=0                           P 40
With two events, we just get the average.
 
 
The column on the right shows the worst regret for
each alternative. To minimize the maximum regret, pick a large Alternative Payoffs                 Weighted Payoffs (000)
facility. The biggest regret is associated with having only a
Small Facility                          P200 + 270 = P235
small facility and high demand.
Large Facility                          P160 + 800 = P480
 
Decision: The manager would build a small facility with a
Decision: The manager would build a large facility with a
payoff of P235,000.
minimum regret of P 40,000.
 
 
Minimax Regret
NOTE: In stating your decisions for laplace criterion and
minimax regret criterion, only two (2) elements are included in
your decision. These are the alternative and payoff. 1. Determine the lowest element in both columns. (in
BOLD)
  2. Subtract every element from the lowest payoff in both
columns.
Example #2 (same problem given in certainty) Cost Payoffs
3. Select the largest amount in each row.
 Required: Determine the best alternative for each decision rule 4. Identify the lowest payoff.

Solution:

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Alternative Payoffs                 Low Demand              High
Demand              Maximum Demand
Small Facility                          200-160=40                 270-
270=0                   40
Large Facility                          160-160=0                   800-
270=530               530
 Decision: The manager would build a small facility with a
minimum regret of P40,000.
1.
2.
1.
2.
PRODUCTIVITY AND GOODS AND SERVICES
3.
Lesson Proper:
PRODUCTIVITY
One of the primary responsibilities of a manager is to
achieve productive use of an organization’s resources. The term
productivity is used to describe this. Productivity is an index
that measures output (goods and services) relative to the input
(labor, materials, energy, and other resources) used to produce
it. It is usually expressed as the ratio of output to input.
Although productivity is important for all business
organizations, it is particularly important for organizations that
use a strategy of low cost because the higher the productivity,
the lower the cost of the output.
A productivity ratio can be computed for a single
operation, a department, an organization, or an entire country.
In business organizations, productivity ratios are used for
planning workforce requirements, scheduling equipment,
financial analysis, and other important tasks.
Productivity has important implications for business
organizations and for entire nations. For non-profit
organizations, higher productivity means lower costs; for profit-
based organizations, productivity is an important factor in
determining how competitive a company is. For a nation, the
rate of productivity growth is of‘ great importance. Productivity
growth is the increase in productivity from one period to the
next relative to the productivity in the preceding period.
Productivity is a measure of the effective use of
resources, usually expressed as the ratio of output to input. It is
a common measure of how well a country, industry, or business
unit is using its resources (factors of productions). Moreover, it
0MGT 1013 CODE:608
is an index that measures output (g/s) relative to input (labor,
materials, energy and other resources) used to produce them.
 Note: It is a relative measure -   it needs to be compared with
something else.
 
The operations manager’s job is to enhance (improve)
the ratio of outputs to inputs.
Improving productivity means improving efficiency.
 
2 ways to achieve improvement:
Reduction in inputs while outputs remain constant
Increase in output while input remains constant.
 Importance of Productivity
Product measures can be used to track performance
overtime w/c allows managers to judge performance and to
decide where improvements are needed.
Product measure can also be used to judge the
performance of an entire industry or the national product of a
country as a whole.
Serve as scorecard of the effective use of resources
because business leaders are concerned with productivity as it
relates to productivity
Some measurement problems:
1. Quality- may change while quality of inputs or outputs
remains constant.
Eg. Radio
2. External elements- may cause an increase or decrease
in product for w/c the system under study            may not
be directly responsible.
Eg. Improvements of firms products bought by
more reliable electric power service rather than       
managerial decision made w/in the firm.
3.      Precise units of measure may be lacking
Eg. Not all automobiles require the same units.
 
2 ways to make productivity comparisons:
1. A company can compare itself with similar
operations w/in its industry or it can use industry data when
such data is available.
2. To measure productivity in overtime w/in the
same operation.
 
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Computing Productivity  Indicates the ratio of many or all
resources (input) to the g/s produced.
Types of Productivity Measures:
 Index of the output provided by more
Partial Measures                     Output/ Labor  Output/
than one of the resources used in
Machine         Output/ Capital            Output/Energy
production.
Multifactor Measures              Output/ Labor + Machine       
 Ratio of output to a group of inputs (but
Output/ Labor + Capital + Energy
not all)
Total Measures                       Goods or Services Produced/ All
3. Total Factor Measure of Product
inputs used to produce them
 Ratio of all outputs to inputs
 
 Describe the productivity of an entire
Examples of Partial Productivity Measures
organization or even a nation
Labor Productivity                            Units of output per labor
 
hour
Examples:
                                                            Units of output per shift
1. Determine the productivity for these cases:
                                                            Value-added per labor
hour 2. Four workers installed 720 square yards of carpeting in 8
hours.
                                                            Peso value of output per
labor hour 3. A machine produced 68 usable pieces in 2 hours.

  Solutions:
1. Productivity = Yards of carpet installed/ Labor hours worked
Machine Productivity                       Units of output per
machine hour        = 720 square yards/ 4 workers x 8 hrs. /
worker
                                                            Peso value of output per
machine hour        = 720 yards/ 32 hrs.
         = 22.5 yards/ hour
Capital Productivity                          Units of output per dollar 1. Productivity = Usable Pieces/ Product time
input
      = 68 pieces/ 2 hours
                                                            Peso value of output per      = 34 pieces/ hour
dollar input  
  2. A company that processes fruits and vegetables is able to
produce 400 cases of canned peaches in one half hour with four
Energy Productivity                         Units of output per
workers. What is the labor productivity?
kilowatt-hour
Solution:
                                                            Peso value of output per
kilowatt-hour  
Labor productivity = Quality Produced /
  Labors Hours
      = 400 cases (4 workers
x 1/2 hours / workers)
Types of Productivity Measurement
                                         = 200 cases per labor hour
1. Single- Factor Productivity (Partial Productivity
 
Measure)
3. Mance Fraily, the Production Manager at Ralts Mills, can
 Indicate the ratio of one resource (input) currently expect his operation to produce 1000 square yards of
to the g/s produce (output) fabric for each ton of raw cotton. Each ton of raw cotton
 Ratio of output to a single input requires 5 labor hours to process. He believes that he can buy a
better quality raw cotton, which will enable him to produce
2. Multifactor Productivity

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
1200 square yards per ton of raw cotton with the same labor                         New Workers
hours.
                        Safety
What will be the impact on productivity (measured in square
yards per labor-hour) if he purchases the higher quality raw  A shortage of information technology workers and other
cotton? technical workers

                          Layoffs

Solution:                         Labor Turnover

                          Design of Workspace

Labor Productivity = Units Produced (output)                         Incentive plans that reward productivity
Labor hours used increases

                          Equipment Breakdowns

Output = 1000 sq yards                         Shortages of Parts and Materials

Labor = 5 hours                         Inadequate training of employees

   
Current quality of raw cotton (A):      Ways of Improving Productivity:
Labor Productivity = 1000  =  200 sq yards/hr 1. Develop productivity measures for all operations.
   5 2. Look at the system as a whole in deciding which operations
  are most critical; it is overall productivity that is important.

New/better quality of raw cotton (B):
Labor Productivity = 1200  =  240 sq yards/hr
   5
Note: The purchase of the better quality of raw cotton yielded
a greater productivity compared with the current quality of
raw cotton, that is 240 sq yards per hour versus 200 sq yards
per hour respectively.
To compute for the percentage change in productivity, we have:
% Change = B - A               A = 200 sq yards/hr
                                    A                      B = 240 sq yards/hr
 
Note: Productivity change (improvement) = ( 240 - 200 ) / 200
= 0.2 or 20% improvement in productivity
Factors That Affect Productivity
3. Develop methods for achieving productivity improvements
and reexamining the way work is done.
4. Establish reasonable goals for improvement.
5. Make it clear that management supports and encourages
productivity improvement.
6. Measure improvements and publicize them.
 
DIFFERENCES BETWEEN GOODS & SERVICES
Services = those economic activities that typically produce an
intangible product, e.g. education, entertainment, lodging,
government, financial services & health services, repair &
maintenance, food, transportation, insurance, trade, real estate,
legal & entertainment.

General Factors:       Methods, Capital, Quality, Technology,

and Management

Other Factors:           Standardizing processes and procedures

                        Quality Differences

                        Use of the Internet

                        Computer viruses

                        Searching for lost or misplaced items

                        Scrap Rates

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
These inputs must undergo further transformations during
provision of the service

e.g. hospitals– must maintain on adequate supply of

medications.  Manufacturing firms that make customized
products or limited shelf-life products can’t inventory their
outputs

    Everyone in an organization has some customers––

outside or inside––whether in services or in manufacturing

Note ‫ ٭‬Manufacturing & service are often similar in terms of

what is done but different in terms of how it is done, i.e. both
involve design & operating decisions

            e.g. manufacturing- decide what size factory is needed

                   service(hospitals)- decide what size building is

needed

            --both must decide on:

CHARACTERISTICS OF MANUFACTURING &                         location            control operating

SERVICES OPERATIONS
                        schedule          allocate scarce resources

More like a service  

More like a manufacturing
organization
organization
 
  DIFFERENCES
 
1.    physical, durable  Customer Contact
product •intangible, perishable
product Service- by nature; involves a much higher degree of
2.    output can be
customer contact; performance of service typically occurs
inventoried •output cannot be
at the pt. of consumption e.g. surgery requires the presence
inventoried
3.    low customer contact of surgeon and patient; cant build up inventories of time
•high customer contact and are much more sensitive to demand viability (bank,
4.    long response time
•short response time supermarket alternate between lines and customer waiting
5.    regional, national, or for service and idle sellers or cashiers waiting for
international markets •local markets customers.
6.    large facilities    
7.    capital intensive •small facilities
 Mftg-allows a separation between production and
8.    quality easily •labor intensive consumption so that mftg may occur away from the
measured consumer; this permits a fair degree of latitude in selecting
•quality not easily measured
work methods, assigning jobs, scheduling work and
exercising control over operations.

SIMILARITIES BETWEEN MANUFACTURING
SERVICES  enabling them to absorbs some of the stocks caused by
    both normally provide a package of g/s
e.g. customers expect both good service & good food at a
restaurant & both good service & quality goods from a
retailer
    Despite that service provides can’t inventory their
outputs, they must inventory the inputs for their products.
&  can build inventories of finished goods ( cars, nags)
varying demand.
    Service –subject to greater variability of inputs; each
patient, each lawn, and each lawn and each auto repair
presents a specific problem that often must be diagnosed
before it can be remedied.
 

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Mftg- often have the ability to carefully control the amount
of variability of inputs and achieve low variability in Measurement of
Easy Difficult
outputs; consequently; job regents for mftg are generally productivity
more uniform than those for services.     
 
   
 Services- require a higher labor content because of the Opportunity to
on the consumption of services & high degree of variation correct quality High Low
of inputs problem before
   
delivery to customer
Mftg- with exceptions, can be more capital-intensive

    Services- sometimes appear to be slow &

awkward & output is more variable

Mftg- tends to be smooth & efficient because of high

mechanization & such would generate low variability

    Service- variations in demand intensity & in

requirements from job to job make productivity
measurement considerably more difficulties e.g. compare
productivity of two doctors-one may have  large number of
routine cases while the other does not—their productivity
appears to differ unless a very careful analysis is made.

Mftg- measurement of productivity is more straight

forward due to high degree of uniformity of most
manufactured items

 Quality at the point of creation is typically more

important for services than for manufacturing, where errors
can be corrected before the customer receives the output

Characteristics Manufacturing Service

     

Output Tangible Intangible

     

Customer contact Low High

     

Uniformity of input High Low

     

Labor content Low High

     

Uniformity of High Low

output
   
 

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
WEEK 7 – FORECASTING
LEARNING CONTENT
Introduction:
STORY
Henredon produces low volumes of intricate,
handcrafted, household furniture that is sold in 600 retail
outlets. Because the demand for high-quality furniture is low,
holding it in inventory is very expensive for retailers.
Nonetheless, before the recession of the 19803, Henredon’s
retailers carried large inventories to attract customers who
demanded both high quality and timely service. The recession,
however, changed the way retailers dealt with Henredon. They
cut inventories to remain price competitive while pressuring
Henredon to maintain quality levels and reduce delivery lead
times to less than two months.
The average time required to manufacture and ship an
order was 11 weeks before the recession. To meet the demand
for faster delivery, Henredon needed to reduce the amount of
time required to manufacture and ship orders. Accurate
forecasts of demand were essential for meeting this competitive
priority. The forecasting system in use before the recession
based production and inventory schedules on the average of the
last four months’ demand for a product. This approach wasn’t
effective because more than 10 percent of Henredon’s products
were new each year and had no prior order history.
The new forecasting system treats new products
differently from mature products. Forecasts for new products
are based on a curve created from orders from semi-annual
furniture shows and Henredon’s past experiences with similar
products. The curve is used for the first 12 months of a
product’s life, after which traditional statistical forecasting
techniques are used. Middle managers, as well as top
management, provide inputs to the forecasts. More accurate
forecasts provided by the system have helped cut the amount of
time needed to manufacture and ship ' orders to about five
weeks. This improvement increased customer service and
reduced inventories. Henredon’s orders during the recession
increased 3 percent over the pre-recessionary period even
though, industry wide, sales declined.
Lesson Proper:
Henredon’s success demonstrates the value of
forecasting. A forecast is a prediction of future events used for
planning purposes. At Henredon, management needed accurate
forecasts of retailer demand to reduce lead times and inventory
levels. Changing business conditions resulting from global
competition, rapid technological change, and increasing
environmental concerns exert pressure on a firm’s capability to
generate accurate forecasts. Forecasts are needed to aid in
determining what resources are needed, scheduling existing
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resources, and acquiring additional resources. Accurate
forecasts allow schedulers to use machine capacity efficiently,
reduce production times, and cut inventories. The manager of a
fast-food restaurant needs to forecast the number of customers
at various times of the day, along with the products they will
want, in order to schedule the correct number of cooks and
counter clerks. Managers may need forecasts to anticipate
changes in prices or costs or to prepare for new laws or
regulations, competitors, resource shortages, or technologies.
Forecasting methods may be based on mathematical
models using historical data available, qualitative methods
drawing on managerial experience, or a combination of both. In
this module we explore several forecasting methods commonly
used today and their advantages and limitations. We also
identify the decisions that managers should make in designing a
forecasting system.
DEMAND CHARACTERISTICS
At the root of most business decisions is the challenge
of forecasting customer demand. It is a difficult task because
the demand for goods and services can vary greatly. For
example, demand for lawn fertilizer predictably increases in the
spring and summer months; however, the particular weekends
when demand is heaviest may depend on uncontrollable factors
such as the weather. Sometimes patterns are more predictable.
Thus, weekly demand for haircuts at a local barbershop may be
quite stable from week to week, with daily demand being
heaviest on Saturday mornings and lightest on Mondays and
Tuesdays. Forecasting demand in such situations requires
uncovering the underlying patterns from available information.
In this section, we first discuss the basic patterns of demand and
then address the factors that affect demand in a particular
situation.
Patterns of Demand
The repeated observations of demand for a product or
service in their order of occurrence form a pattern known as
time series. The five basic patterns of most demand time series
are horizontal, or the fluctuation of data around a constant
mean; trend, or systematic increase or decrease in the mean of
the series over time; seasonal, or a repeatable pattern of
increases or decreases in demand, depending on the time of
day, week, month, or season; cyclical, or less predictable
gradual increases or decreases in demand over longer periods of
time (years or decades); and random, or unforecastable,
variation in demand.
Cyclical patterns arise from two influences. The first is
the business cycle, which includes factors that cause the
economy to go from recession to expansion over a number of
years. The other influence is the product or service life cycle,
which reflects the stages of demand from development through
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
decline. Business cycle movement is difficult to predict because
it is affected by national or international events, such as
presidential elections or political turmoil in other countries.
Predicting the rate of demand build-up or decline in the life
cycle also is difficult. Sometimes firms estimate demand for a
new product by starting with the demand history for the product
it is replacing. For example, the demand rate for digital
audiotapes might emulate the demand build-up for stereo
cassette tapes in the early stages of that product’s life cycle.
The ability to make intelligent long-range forecasts depends on
accurate estimates of cyclical patterns.
Four of the patterns of demand-horizontal, trend,
seasonal, and cyclical- combine in varying degrees to define the
underlying time pattern of demand for a product or service. The
fifth pattern, random variation, results from chance causes and
thus cannot be predicted. Random variation is an aspect of
demand that makes every forecast wrong.
Factors Affecting Demand
What factors cause changes in the demand for a
particular product or service over time? Generally, such factors
can be divided into two main categories: external and internal.
External Factors.  Davidson’s success in that area.
External factors that affect demand for a firm’s
products or services are beyond management’s control. A
booming economy may positively influence demand, although
the effect may not be the same for all products and services.
Furthermore, certain economic activities, such as changes in
government regulations, affect some products and services but
not others. For example, a state law limiting the sulfur content
of coal used in steam-powered electric generating plants
reduces the demand for high-sulfur coal but doesn’t affect the
demand for electricity.
Certain government agencies and private firms compile
statistics on general economic time series to help organizations
predict the direction of change in demand for their products or
services. Of prime importance is the turning point-that is, the
period when the long-term rate of growth in demand for a
firm’s products or services will change. Although predicting the
exact timing of turning points is impossible, some general
economic time series have turning points that can be useful in
estimating the timing of the turning points in a firm’s demands.
Leading indicators, such as the rate of business failures, are
external factors with turning points that typically precede the
peaks and troughs of the general business cycle. For example,
an upswing in residential building contracts might precede an
increase in the demand for plywood by several weeks, for
homeowners’ insurance by several months, and for furniture by
one year. This indicator gives some advance warning to
plywood manufacturers, insurance companies, and furniture
manufacturers about possible demand increases. Coincident
0MGT 1013 CODE:608
indicators, such as unemployment figures, are time series with
turning points that generally match those of the general
business cycle. Lagging indicators, such as retail sales, follow
those turning points, typically by several weeks or months.
Knowing that a series is a lagging indicator can be useful. For
example, a firm needing a business loan for expansion should
realize that interest rates will drop to a low point several weeks
after the business cycle reaches its trough.
Let’s look briefly at other external factors that affect demand.
Consumer tastes can change quickly, as they often do in
clothing fashions. The consumer’s image of a product can be
another big factor in changing demand. For example, in the last
decade sales of tobacco products in the United States have
dropped significantly because many people believe that those
products can be hazardous to their health. In addition,
competitors’ actions regarding, advertising promotions, and
new products also affect sales. For example, a United Parcel
Service commercial showing the speedy delivery of a parcel
reduces the demand for the services of competitors, such as
FedEx or DHL. Finally, the success of one product or service
affects the demand for complementary products or services.
The Milwaukee plant of Harley Davidson stimulates the sales
of many motorcycle parts and components locally. Future
demand for parts and components there depends on Harley-
Internal Factors. 
Internal decisions about product or service design,
price and advertising promotions, packaging design,
salesperson quotas or incentives, and expansion or contraction
of geographic market target areas all contribute to changes in
demand volume. The term demand management describes the
process of influencing the timing and, volume of demand or
adapting to the undesirable effects of unchangeable demand
patterns. For example, automobile manufacturers use rebates to
boost car sales.
Management must carefully consider the timing of demand, an
extremely important factor in efficiently utilizing resources and
production capacity. Trying to produce for peak customer
demand during the peak demand period can be very costly. To
avoid this situation, firms often use price incentives or
advertising promotions to encourage customers to make
purchases before or after traditional times of peak demand. For
example, telephone companies encourage customers to make
long distance calls after normal business hours by offering
lower evening and weekend rates. This practice helps spread
demand more evenly over the day. Another tactic is to produce
two products that have different heavy seasonal demand
periods. A producer of engines for tractor lawn mowers, for
instance, might also make engines for snowmobiles to even out
resource and production requirements over the year. In this way
costly changes in work-force level and inventory can be
minimized.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Finally, some companies schedule delivery dates for products Time Horizon- a key factor in choosing the proper forecasting
or services according to the current workload and capacity. approach
Doctors, dentists, and other professionals use this approach by
 
asking patients to make appointments for their services.
Manufacturers of custom-built products also work to backlogs 1. Short-term (0-3 months)- managers typically are interested in
of demand. forecasts of demand for individual products


o There is a little time to correct errors in
Designing the Forecasting System 
demand forecast, so forecasts should be as accurate as
3 Decisions involved: possible
o Time Series Analysis is the method used
1. What to forecast?
often
2. What type of forecast technique to use?  

3. What type of computer hardware or software to use?  2. Medium-term (3 months- 2 years)- managers typically
1. Deciding What to Forecast
    Level of Aggregation
            Aggregation- clustering several similar products or
services
     Units of Measurement
o    Most useful forecasts for planning and analyzing
operations problems are those based on product or 
service units.
o    If forecasting the number of units of demand for a
product or service isn’t possible, forecast the
standard labor or machine hours required for each
critical resources.
forecast total sales demand in dollars or in the number of units
of the group of similar products or services

o Causal methods are commonly used
3. Long-term (2 years and above)- for time horizons exceeding
two years, forecasts usually are developed for total sales
demand in dollars or some other common unit of measurement
o Three types of decisions- facility location,
capacity planning and process choice- require market
demand estimates for an extended period into the future
o Causal and judgment methods are the primary
techniques used

2. Choosing the Forecasting Technique

3.Forecasting with Computers
2 General Types:
1. Qualitative Methods- include judgment methods  
which translate the opinions of managers, expert
opinions, consumer surveys  and sales force Categories of Forecasting
Parameters will
estimates into quantitative estimates Software Technique will
be specified by:
2. Quantitative Methods- includes causal methods Packages be chosen by:
and time series analysis Manual User User
a. Causal Methods Semi-automatic User Software
- use historical data on independent variables such as
promotional campaigns, economic conditions, and Automatic Software Software
competitors’                                      actions to predict
demand
b. Time Series Analysis
- a statistical approach that relies heavily on historical data
-used to project future size of demand and recognizes
trends and seasonal patterns

- this will be the focus of the topic for this week

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
METHODS OF FORECASTING
JUDGMENT METHODS
Sales Force Estimates-forecasts compiled from estimates of
future demands made periodically by members of a company’s
sales force
Advantage
The sales force is the group
most likely to know which
products or services
customers will be buying in
the near future, and in what
quantities.
Sales territories often are
divided by district or region.
Information broken down in
this manner can be useful for
inventory management,
distribution, and sales force
staffing purposes.
The forecast of individual
sales force members can be
combined easily to get
regional or national sales.
Executive Opinion- a forecasting method in which the opinions,
experience and technical knowledge of one or more managers
are summarized to arrive at a single forecasts.
Advantage
Can be used to modify
existing sales forecast to
account for unusual
circumstances.
Can be used for technological
forecasting.
 
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Disadvantage
Individual biases of the
salesperson may taint the
forecast.
Salesperson may not always
be able to detect the difference
between what a customer
“wants” and “needs”.
If the firm uses individual
sales as a performance
measure, salesperson may
underestimate their forecasts.
Disadvantage
It can be costly because it
takes valuable executive time.
Although that may be
warranted under
circumstances, it sometimes
gets out of control.
If executives are allowed to
modify a forecast without
collectively agreeing to the
changes, the resulting will not
be useful.
Market Research- a systematic approach to determine
consumer interest in a product or service by creating and testing
hypotheses through data-gathering surveys.
Advantage Disadvantage
May be used to forecasts Numerous classifications and
demand for the short, hedges typically included in
medium and long term. the findings.
The survey results may not
Yields important information. reflect the opinions of the
market.
The survey might produce
imitative, rather than
  innovative ideas because the
customer’s reference point is
often limited.
Delphi Method- a process of gaining consensus from a group of
experts while maintaining their anonymity
Advantage Disadvantage
Useful when there are no
The process can take a long
historical data from which to
time.
develop statistical models.
Can be used to develop long- Responses may be less
range forecasts of product meaningful than if experts
demand and new product were accountable for their
sales projections. responses.
There is little evidence that
Can also be used for
Delphi forecasts achieve high
technological forecasting.
degrees of accuracy.
Poorly designed
The results can provide
questionnaires will result in
direction for a firm’s research
ambiguous or false
and development staff.
conclusions.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Guidelines for Using Judgment Forecasts
 Adjust quantitative forecasts when their track record is
poor and the decision maker has important contextual
knowledge.
 Make adjustments to quantitative forecasts
compensate for specific events.
TIME SERIES METHODS ( Please concentrate on this
specially on the computations)
a. Naive Forecast – This approach uses two(2) patterns which
include the following:
            First: the forecast for the next period equals the demand
for the current period. So if the actual demand for Wednesday
is 35 customers, the forecasted demand for Thursday is 35
customers.
            Second: the increase or decrease in demand observed
between the last two periods is used to adjust the current
demand to arrive at a forecast. Suppose that last week the
demand was 120 units and the week before it was 108 units.
Demand was increased to 12 units in one week, so the forecast
for next week would be 132 units.
b. Simple moving average- used to estimate the average of a
demand time series and thereby remove the effects of random
fluctuation.
            Specifically, the forecast for period t+1, can be
calculated as:
Ft+1= sum of the last n demands/ n=  Dt+Dt-1+Dt-2..../ n
Where:
Dt = actual demand in period t
n= total number of periods in the average
Ft+1= forecast for period t+1
Example:
Compute a three-week moving average forecast for the
arrival of medical clinic patients in week 4. The number of
arrivals for the past three weeks was
Week                           patient arrivals
1                                              400
2                                              380
3                                              411
If the actual number of patient arrivals in week 4 is 415, what is
the forecast for week 5?
Solution:
The moving average forecast at the end of week three is
F4= (411+380+400)/3= 397.8
Thus the forecast for week 4 is 398 patients
Note: Always follow the rule in “rounding off”.
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The forecast for week 5 requires actual arrivals from week 2-4,
the three most recent weeks of data.
F5= (415+411+380)/3= 402
The forecast for week 5 is 402 patients.
to
c. Weighted moving average- each historical demand in the
average can have its own weight. The sum of the weights
equals 1.
Example:
The analyst for medical clinic has assigned weights of 0.70
to most recent demand, 0.20 to the demand 1 week ago, and
0.10 to demand 2 weeks ago.
Solution:
The average demand for week 3 is
            F4= 0.70(411)+ 0.20(380)+ 0.10(400)= 403.7 or 404
patients. Thus forecast for week 4 is 404 patients.
Suppose actual demand for week 4 is 415 patients. The
forecast for week 5 would be
            F5= 0.70(415)+0.20(411)+0.10(380)=410.7 or 411
patients
d. Exponential smoothing- a sophisticated weighted moving
average method that calculates the average of time series by
giving recent demands more weight than earlier demands.
Ft+1= a(demand this period)+(1-alpha)(forecast
calculated last period)
                    = aDt + (1-a) Ft
Ft+1= Ft + a(Dt- Ft)
 where: a = means value of alpha
             D = demand this period
             Ft = forecast calculated last period
Example:
Again consider the patient arrival data in previous
example. It is now end of week 3. Using alpha= 0.10, calculate
the exponential smoothing forecast for week 4.
 Solution:
  The exponential smoothing method requires an initial
forecast. In that case, we take demand data for past two weeks
and average them, (400+380)/2=390 as an initial forecast. To
obtain forecast for week 4, we calculate the average at end of
week three as
F4= 0.10(411)+0.90(390)=392.1  patients
Forecast for week 4 would be 392 patients. If the actual demand
for week 4 proved to be 415, the forecast for week 5  would be
 F5= 0.10(415)+ 0.90(392)=394.4 or 394 patients
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
WEEK 8 STRATEGIC CAPACITY PLANNING
LEARNING CONTENT
Introduction:
After deciding what products or services should be
offered and how they should be made, management must plan
the system’s capacity. Capacity is the maximum rate of output
for a facility. The facility can be a workstation or an entire
organization. The Operations manager must provide the
capacity to meet current and future demand; otherwise, the
organization will miss opportunities for growth and profits.
Capacity plans are made at two levels. Long-term
capacity plans, which we describe in this chapter, deal with
investments in new facilities and equipment. These plans cover
at least two years into the future, but construction lead times
alone can force much longer time horizons. Currently, US firms
invest more than $600 billion annually in new plant and
equipment. Service industries account for more than 68 percent
of the total. Such sizable investments require top-management
participation and approval because they are not easily reversed. 1.
Short-term capacity plans focus on work-force size, overtime 2.
budgets, inventories, and other types of decisions that we 3.
explore later.
Lesson Proper:
STRATEGIC CAPACITY PLANNING
Capacity planning is central to the Iong-term success
of an organization. Too much capacity can be as agonizing as
too little. When choosing a capacity strategy, managers have to
consider questions such as the following: How much of a
cushion is needed to handle variable, uncertain demand?
Should we expand capacity before the demand is there or wait
until demand is more certain? A systematic approach is needed
to answer these and similar questions and to deveIop a capacity
strategy appropriate for each situation.
CAPACITY
 Maximum rate of output for a facility; refers to an
upper limit or ceiling on the load that an operation unit
can handle (operating unit might be a plant,
department, machine store or worker). The load can be
specified in terms of either inputs or outputs
 According to the dictionary, the ability to hold,
receive, store or accommodate
 In general business sense, it is the amount of output
that a system is capable of achieving over a specific
period of time
 
1.
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TWO LEVELS OF CAPACITY PLANS
1. LONG TERM CAPACITY PLANS- deal with investments
in new facilities and equipment.
Cover at least two years into the future but
construction lead times alone can force much longer time
horizons
 
2. SHORT TERM CAPACITY PLANS- focus on work-force
size, overtime budgets, inventories and other types   of
decisions
 Note: The capacity of an operation unit is an important piece of
information for planning purposes. It enables managers to
quantify production in terms of inputs or outputs and thereby
make other decisions or plans related to those qualities.
 
The basic questions in capacity plans are:
What kind of capacity is needed?
How much is needed?
When is it needed?
 
*the question of what kind of capacity is needed
relates to the products and services that management
intends to produce or provide.
 
 
MEASURES OF CAPACITY
 
OUTPUT MEASURES
 Usual choice for line flow processes
 As the amount of customization and the variety in the
product mix becomes excessive, output-based capacity
measures become less useful
 Best utilized when the firm provides a relatively small
number of standardized products and services
 ex: produce one product
INPUT MEASURES
 Usual choice for flexible flow processes
 Demand (can complicate input measures), which
invariably is expressed as an output rate, must be
converted to an input measure. Only after making the
conversion can a manager compare demand
requirement and capacity on an equivalent basis
 ex: manager of a copy contest must convert its annual
demand for copies from different clients to the number
of machines required.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
2. UTILIZATION
-Degree to which equipment, space or labor is currently
being used
*average output rate and capacity must be measured in the
same terms
*utilization rate indicates the need for adding extra
capacity or eliminating unneeded capacity
2. PEAK CAPACITY
     Maximum output that a process or facility
can achieve under ideal conditions
     When capacity is measured relative to
equipment alone, the appropriate measure is rated
capacity: an engineering assessment of maximum annual
output, assuming continuous operation except for an
allowance for normal maintenance and repair downtime.
     Can be sustained for only a short time (few
hours in a day or few days in a month)
3. EFFECTIVE CAPACITY
     Maximum output that a process or firm can
economically sustain under normal conditions
     CAPACITY- greatest level of output the firm can
reasonably sustain by using realistic employee work
schedules and the equipment currently in place
Example:
If operated around the clock under ideal conditions,
the fabrication department of an engine manufacturer can make
100 engines per day. Management believes that a maximum
output rate of only 45 engines per day can be sustained
economically over a long period of time. Currently the
department is producing an average of 50 engines per day.
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BOTTLENECK- An operation that has the lowest effective
capacity of any operation in the facility and thus limits the
system’s output
ECONOMIES OF SCALE
 The average unit cost of a good or service can be
reduced by increasing its output rate
 
 Deciding on the best level of capacity involves
consideration for the efficiency of the operations. A
concept known as economies of scale states that the
average unit cost of a service or good can be reduced
by increasing its output rate.
4 PRINCIPAL REASONS why it can drive costs down when
output increases:
1. Spreading fixed costs
 When the output rate - and therefore the
facility’s utilization rate – increases, the
average unit cost drops because fixed costs
are spread over more units
2. Reducing construction costs
 Doubling the size of the facility usually
doesn’t double construction cost
3. Cutting costs of purchased materials
 Higher volumes can reduce the costs of
purchased materials and services. They give
the purchaser a better bargaining position and
the opportunity to take advantage of quantity
discounts
4. Finding process advantages
 Firms may be able to justify the expense of
more efficient technology or more specialized
equipment
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
DISECONOMIES OF SCALE
 The average cost per unit increases as the
facility’s size increases
 Reason is that excessive size can bring
complexity, loss focus and inefficiencies that
raise the average unit cost of a product or
service
CAPACITY STRATEGIES
1. Sizing Capacity Cushion
 Average utilization rates should not get too close to
100 percent. That usually is a signal to increase
capacity or decrease order acceptance so as to avoid
declining productivity
 Capacity cushion- amount of reserve capacity that a
firm maintains to handle sudden increases in demand
or temporary losses of production capacity; it measures
the amount by which the average utilization (in terms
of effective capacity) falls below 100%
Capacity cushion = 100% - utilization rate (%)
 business find large cushions when demand varies and
when future demand is uncertain, particularly if
resource flexibility is low
 
2. Timing and Sizing Expansion
 When to expand and by how much
 If demand is increasing and the time between
increments increases, the size of the increments must
also increase 
a. Expansionist strategy
 involves large, infrequent jumps in capacity
 stays ahead of demand, minimizes the chance
of sales lost to insufficient capacity
b. Wait-and-see strategy
 involves smaller, more frequent jumps
 lags behind demand, relying on short-term
options (overtime, temporary workers,
subcontractors, stock outs) and postponement
of preventive maintenance to meet any
shortfalls 
c. Follow-the-leader
 intermediate strategy, expanding when others
do
 if others are right, so are you, and nobody gains
a competitive advantage
 if they make a mistake and over expand, so
have you, but everyone shares in the agony of
over capacity
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Linking capacity and other decisions
 When managers make decisions about location,
resource flexibility, and inventory, they must consider the
impact on capacity cushions
capacity cushions- buffer the organization against uncertainty
 Examples of links with capacity:
1. Competitive priorities- a change in competitive
priorities that emphasizes faster deliveries requires a
larger capacity cushion to allow for quick response
and uneven demand, if holding finished goods
inventory is infeasible or uneconomical
2. Quality management- a drive that has obtained
higher levels of quality allows for a smaller capacity
cushion because there will be less uncertainty caused
by yield losses
3. Capital intensity- an investment in expensive new
technologies makes a process more capital intensive
and increases pressure to have a smaller capacity
cushion to get an acceptable return on investment
4. Resource flexibility- a change to less worker
flexibility requires a larger capacity cushion to
compensate for the operation overloads that are more
likely to occur with a less flexible workforce
5. Inventory- a change to less reliance on inventory in
order to smooth the output rate requires a larger
capacity cushion to meet increased demands during
peak periods
6. Scheduling- a change to more stable environment
allows a smaller cushion because products or
services can be scheduled with more assurance
STEPS IN CAPACITY PLANNING
1. ESTIMATE CAPACITY REQUIREMENTS
When one product/service is being processed
Where:D= number of units (customers) forecast per year
            p= processing time
            N= total number of hours per year during which the
process operates
            C= desired capacity cushion
When multiple products/services are involved, extra time
needed to change over from one product or service to the
next
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
   *Set up time- time required to change a machine from
making one product or service to making another
Where: Q= number of units in each lot
Example: Say that the copy center currently has 3
machines, so
                                                      Capacity Gap    = 4 – 3
                                                                                 = 1 machine
This means that the copy center will need 1 more machine to be
able to fully serve its 2 clients. The copy center may either opt
to buy a new one or rent from another.

            s= set up time (in hours) per lot  

  NOTE: Capacity gap may either be positive or negative

*ALWAYS round up the fractional part unless it is cost 3. DEVELOP ALTERNATIVES

efficient to use short-term options such as overtime or stockouts
to cover any shortfalls             *BASE CASE- to do nothing and simply lose orders
from any demand
 
 
Example:

A copy center in an office building prepares bound reports for 4. EVALUATE THE ALTERNATIVES
two clients. The center makes multiple copies (the lot size) of *QUALITATIVE CONCERNS- manager has to look at how
each report. The processing time to run, collate, and bind each each alternative fits the overall capacity strategy and other
copy depends on, among other factors, the number of pages. aspects of the business not covered by the financial analysis
The center operates 250 days per year, with one eight-hour
shift. Management believes that a capacity cushion of 15% is *QUANTITATIVE CONCERNS- manager estimates the
best. Based on the following table of information, determine change in cash flows for each alternative
how many machines are needed at the copy center. *Cash flows- difference between the flow of
funds into and out of an organization over a
 
period of time
Item Client X Client Y
 
Annual demand forecast
2000 6000
(copies) TOOLS FOR CAPACITY PLANNING
Standard processing time
0.50 0.70
(hour/copy) 1. WAITING LINE MODELS- use probability
Average lot size (copies distributions to provide estimates of average customer time,
20 30
per report) average length of waiting lines, and utilization of the work
Standard set up time center
0.25 0.40
(hours) 2. DECISION TREES- can be particularly valuable for
evaluating different capacity expansion  alternatives when
demand is uncertain and sequential decisions are involved

2. IDENTIFY GAPS
            *CAPACITY GAPS- any difference (positive or
negative) between projected demand and current capacity
 

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
WEEK 9 LOCATION PLANNING PART 1
LEARNING CONTENT
Introduction:
Existing organizations may need to make location
decisions for a variety of reasons.  Firms such as banks, fast-
food chains, supermarkets, and retail stores view locations as
part of marketing strategy, and they look for locations that will
help them to expand their markets. Basically, the location
decisions in those cases reflect the addition of new locations to
an existing system.
A similar situation occurs when an organization
experiences a growth in demand for its products or services that
cannot be satisfied by expansion at an existing location. The
addition of a new location to complement an existing system is
often a realistic alternative.
Some firms face location decisions through depletion
of basic inputs. For example, fishing and logging operations are
often forced to relocate due to the temporary exhaustion of fish
or forests at a given location. Mining and petroleum operations
face the same sort of situation, although usually with a longer
time horizon.
Lesson Proper:
THE NATURE OF LOCATION DECISIONS
Location decisions for many types of businesses are
made infrequently, but they tend to have a significant impact on
the organization In this section we look at the importance of
location decisions the usual objectives managers have when
making location choices, and some of the options that are
available to them.
Strategic Importance of Location Decisions
Location decisions are closely tied to an organization’s
strategies. For example, a strategy of being a low-cost producer
might result in locating where labor or material costs are low,
or locating near markets or raw materials to reduce
transportation costs. A strategy of increasing profits by
increasing market share might result in locating in high-traffic
areas, and a strategy that emphasizes convenience for the
customer might result in having many locations where
Customers can transact their business or make purchases (e.g.,
branch banks, ATMs, service stations, fast-food outlets). .
0MGT 1013 CODE:608
Location choices can impact capacity and flexibility. Certain
locations may be subject to space constraints that limit future
expansion options. Moreover, local restrictions may restrict the
types of products or services that can be offered, thus limiting
future options for new products or services.
Location decisions are strategically important for other reasons
as well. One is that they entail a long-term commitment, which
makes mistakes difficult to overcome. Another is that location
decisions often have an impact on investment requirements,
operating costs and revenues, and operations. A poor choice of
location might result in excessive transportation costs, a
shortage of qualified labor, loss of competitive advantage,
inadequate supplies of raw materials, or some similar condition
that is detrimental to operations. For services, a poor location
could result in lack of customers and/or high operating costs.
For both manufacturing and services location decisions can
have a significant impact on competitive advantage. And
another reason for the importance of location decisions is their
strategic importance to supply chains
Objectives of Location Decisions
As a general rule, profit-oriented organizations base
their decisions on profit potential, whereas non-profit
organizations strive to achieve a balance between cost and the
level of customer service they provide. It would seem to follow
that all organizations attempt to identify the “best" location
available. However, this is not necessarily the case.
In many instances, no single location may be significantly
better than the others. There may be numerous acceptable
locations from which to choose, as shown by the wide variety
of locations where successful organizations can be found.
Furthermore, the number of possible locations that would have
to be examined to find the best location may be too large to
make an exhaustive search practical. Consequently, most
organizations do not set out with the intention of identifying the
one best location; rather, they hope to find a number of
acceptable locations from which to choose.
Location criteria can depend on where a business is in
the supply chain. For instance, at the retail end of a chain, site
selection tends to focus more on accessibility, consumer
demographics (population density, age distribution, average
buyer income), traffic patterns, and local customs. Businesses
at the beginning of a supply chain, if they are involved in
supplying raw materials, are often located near the source of the
raw materials. Businesses in the middle of the chain may locate
near suppliers or near their markets, depending on a variety of
circumstances. For example, businesses involved in storing and
distributing goods often choose a central location to minimize
distribution costs.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Web-based retail businesses are much less dependent on
location decisions; they can exist just about anywhere.
Supply Chain Considerations
Supply chain management must address supply chain
configuration. This includes determining the number and
location of suppliers, production facilities, warehouses, and
distribution centers. The location of these facilities can involve
a long-term commitment of resources. so known risks and
benefits should be considered carefully. A related issue is
whether to have centralized or decentralized distribution.
Centralized distribution generally yields scale economies as
well as tighter control than decentralized distribution, but it
sometimes incurs higher transportation costs. Decentralized
distribution tends to be more responsive to local needs. The
importance of these decisions is underscored by the fact that
they reflect the basic strategy for accessing customer markets,
and the decisions will have a significant impact on costs,
revenues, and responsiveness. The quantitative techniques
described in this chapter can be helpful in evaluating alternative
supply chain configurations.
Location Options
Managers of existing companies generally consider
four options in location planning which include the following:
1. Expand an existing facility. This option can be attractive if
there is adequate room for expansion, especially if the location
has desirable features that are not readily available elsewhere.
Expansion costs are often less than those of other alternatives.
2. Add new locations while retaining existing ones. This is
done in many retail operations. In such cases, it is essential to
take into account what the impact will be on the total system.
Opening a new store in a shopping mall may simply draw
customers who already patronize an existing store in the same
chain, rather than expand the market. On the other hand adding
locations can be a defensive strategy designed to maintain a
market share or to prevent competitors from entering a market.
3. Shut down at one location and move to another. An
organization must weigh the costs of a move and the resulting
benefits against the costs and benefits of remaining in an
existing location. A shift in markets, exhaustion of raw
materials, and the cost of operations often cause firms to
consider this option seriously.
4. Do nothing. If a detailed analysis of potential locations fails
to uncover benefits that make one of the previous three
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alternatives attractive, a firm may decide to maintain the status
quo at least for the time being.
GLOBAL LOCATIONS
Globalization has opened new markets, and it has
meant increasing dispersion of manufacturing and service
operations around the world. In addition, many companies are
outsourcing operations to other companies in foreign locations.
In the past, companies tended to operate from a “home base”
that was located in a single country. Now, companies are
finding strategic and tactical reasons to globalize their
operations. As they do, some companies are profiting from their
efforts, while others are finding the going tough, and all must
contend with issues involved in managing global operations. In
this section, we examine some of the reasons for globalization,
the benefits, disadvantages, risks, and issues related to
managing global operations.
Facilitating Factors - There are a number of factors that have
made globalization attractive and feasible for business
organizations. Two key factors are trade agreements and
technological advances.
1. Trade Agreements - Barriers to international trade such as
tariffs and quotas have been reduced or eliminated with trade
agreements such as the North American Free Trade Agreement
(NAFTA), the General Agreement on Tariffs and Trade
(GATT), and the U.S.-China Trade Relations Act. Also, the
European Union has dropped many trade barriers; and the
World Trade Organization is helping to facilitate ‘free trade.
2. Technology -Technological advances in communication and
information sharing have been very helpful. These include
faxing capability, e-mail, cell phones, teleconferencing, and the
Internet.
Benefits
Companies are discovering a wide range of benefits in
globalizing their operations. Here is a list of some of the
benefits, although it is important to recognize that not all
benefits apply to every situation:
1. Companies often seek opportunities for expanding markets
for their goods and services, as well as better serving existing
customers by being more attuned to local needs and having a
quicker response time when problems occur.
2. Cost savings. Among the areas for potential cost saving are
transportation costs, labor costs, raw material costs, and taxes.
High production costs in Germany have contributed to a
number of German companies locating some of their
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
production facilities in lower cost countries. Among them are
industrial products giant Siemens, AG (a semiconductor 'plant
in Britain), drug makers Bayer, A6 (a plant in Texas), and
Hoechst, AG (a plant in China), and automakers Mercedes
(plants in Spain, France, and Alabama) and BMW (a plant in
Spartanburg, South Carolina).
3. Legal and regulatory. There may be more favorable liability
and labor laws, and less restrictive environmental and other
regulations.
4. Companies can avoid the impact of currency changes that
can occur when goods are produced in one country and sold in
other countries. Also, a variety of incentives may be offered by
national, regional, or local governments to attract businesses
that will create jobs and boost  the local economy. For example,
state incentives, and workforce and land availability and cost,
helped convince Nissan to build a huge assembly plant in
Canton, Mississippi, and Mercedes to build an assembly plant
in Vance, Alabama. An added benefit came when suppliers for
these plants also set up facilities in the region.
Globalization may provide new sources of ideas for products
and services, new perspectives on operations, and solutions to
problems.
Disadvantages
There are a number of disadvantages of having global
operations. These can include the following:
1. Transportation costs. High transportation costs can occur due
to poor infrastructure or having to ship over great distances, and
the resulting costs can offset savings in labor and materials
costs.
2. Security costs. Increased security risks and theft can increase
costs. Also, security at international borders can slow shipments
to other countries.
3. Unskilled labor. Low labor skills may negatively impact
quality and productivity, and the work ethic may differ from
that' in the home country. Additional 3. employee training may
be required.
4.Import restrictions. Some countries place restrictions on the
importation of manufactured goods, so having local suppliers
avoids those issues.
5. Critics may argue that cost savings are being generated
through unfair practices such as using sweatshops, in which
employees are paid low wages and made to work in poor  Managers may have to deal with corruption and bribery as well
conditions; using child labor; and Operating in countries that
have less stringent environmental requirements.
6. Low labor productivity may offset low labor costs or other
advantages.
 Risks
0MGT 1013 CODE:608
Risks with global operations can be substantial.
Among the most troublesome are the following
1. Political instability and political unrest can create risks for
personnel safety and the safety of assets. Moreover, a
government might decide to nationalize facilities taking them
over.
2. Terrorism continues to be a threat in many parts of the world
putting personnel and assets at risk and decreasing the
willingness of domestic personnel to travel to or work in certain
areas.
3. Economic instability might create inflation or deflation either
of which can negatively impact profitability.
4. Laws and regulations may change, reducing or eliminating
what may have been key benefits.
5. Corruption and bribery, common in some countries, may be
illegal in a company’s home country (e.g . illegal in the United
States). This poses a number of issues. One is how to  maintain
operations without resorting to bribery.  Another is how to
prevent employees from doing this especially when they may
be of local origin and used to transacting business in this  way.
6. Cultural differences may he more real than apparent.
Walmart discovered that fact when it opened stores in Japan.
Although Walmart has thrived in many countries on its
reputation for low cost items, Japanese consumers associated
low cost with low quality, so Walmart had to  rethink its
strategy for the Japanese market.
7. Lax quality controls can lead to recalls and liability issues.
Managing Global Operations
Although global operations offer many benefits, these
operations often create new issues for management to deal with.
For example, language and cultural differences increase the risk
of miscommunication and may also interfere with developing
trust that is important in business relationships. Management
styles may be quite different, so tactics that work well in one
country may not work in another. Increased travel distances and
related travel times and costs may result in a decreased
tendency for face-to-face meetings and management site visits.
Also, coordination of far-flung operations can be more difficult.
as differences in work ethic. The level of technology may be
lower, and the resistance to technological change may be higher
than expected, making the integration of new technologies
more difficult. Domestic personnel may resist relocating. even
temporarily.
Automation
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Automation is having a major influence on the
decision of where to produce goods, particularly if the main
markets are domestic. Low labor costs in foreign locations have
long been cited as a key reason for using foreign locations for
production. However, rising labor costs in some developing
countries and poor safety records the benefits of short
transportation times with domestic locations, and advances m
automation are causing many companies to take a new look at
the question of where production should be done.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
WEEK 10 LOCATION PLANNING PART 2
LEARNING CONTENT
Introduction:
We will be dealing with other important information
regarding location decisions in this module. More so, some
methods will be discussed using quantitative analysis that could
be of help in determining location decisions among firms. The
Load Distance Method will be discussed with quantitative
analysis using the Euclidean distance and the Rectilinear
distance.
Lesson Proper:
IDENTIFYING A COUNTRY, REGION, COMMUNITY,
AND SITE
Many factors influence location decisions. However, it
often happens that one or a few factors are so important that
they dominate the decision. For example, in manufacturing, the
potentially dominating factors usually include availability of an
abundant energy and water supply and proximity to raw
materials. Thus, nuclear reactors require large amounts of water
for cooling, heavy industries such as steel and aluminum
production need large amounts of electricity, and so on.
Transportation costs can be a major factor. In service
organizations, possible dominating factors are market related
and include traffic patterns, convenience, and competitors’
locations, as well as proximity to the market. For example, car
rental agencies locate near airports and midcity, where their
customers are. Note, too, that many of the futon discussed
pertain to supply chain facilities as well as operations facilities.
Once an organization has determined the most important
factors, it will try to narrow search for suitable alternatives to
one geographic region. Then a small number of community site
alternatives are identified and subjected to detailed analysis.
Human factors can be ye important. as the following reading
reveals. These might include the “culture shock” that is often
experienced when employees are transferred to an environment
that differs significantly from the current location-for instance,
a move from a large city to a rural area, or from a rural area to a
large city, or a move to an area that has a dramatically different
climate.
Identifying a Country
Each country carries its own set of potential benefits
and risks, and decision makers need to be absolutely clear on
what those benefits and risks are as well as their likelihood of
occurrence so that they can make an informed judgment on
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whether locating in that country is desirable. Some important
issues have been noted in the previous section on global
operations. Table 8.1 provides a listing of factors to consider.
 
Identifying a Region
The primary regional factors involve raw materials,
markets, and labor considerations.
1. Location of Raw Materials. Firms locate near or at the source
of raw materials for three primary reasons: necessity,
perishability, and transportation costs. Mining operations,
farming, forestry, and fishing fall under necessity. Obviously,
such operations must locate close to the raw materials. Firms
involved in canning or freezing of fresh fruits and vegetables
processing of dairy products, baking, and so on, must consider
perishability when considering location. Transportation costs
are important in industries where processing eliminates much of
the bulk connected with a raw material, making it much less
expensive to transport the product or material after processing.
Examples include aluminum reduction, cheese making, and
paper production. When inputs come from different locations,
some firms choose to locate near the geographic center of the
sources. For instance, steel producers use large quantities of
both coal and iron ore, and many are located somewhere
between the Appalachian coal fields and iron ore mines.
Transportation costs are often the reason that vendors locate
near their major customers. Moreover, regional warehouses are
used by supermarkets and other retail operations 'to supply
multiple outlets. Often the choice of new locations and
additional warehouses reflects the locations of existing
warehouses or retail outlets.
2. Location of Markets. Profit-oriented firms frequently locate
near the markets they intend to serve as part of their
competitive strategy, whereas nonprofit organizations choose
locations relative to the needs of the users of their services.
Other factors include distribution costs or the perishability of a
finished product.
Competitive pressures for retail operations can be
extremely vital factors. In some cases, a market served
by a particular location may be too small to justify two
or more competitors (e.g., one hamburger franchise
per block), so that a search for potential locations
tends to Concentrate on locations without competitors.
The opposite also might be true; it could be desirable
to locate near competitors. Large department stores
often locate near each other, and Small stores like to
locate in shopping centers that have large department
stores as anchors. The large stores attract large
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
numbers of shoppers who become potential customers
in the smaller stores or in the other large stores. .
3. Labor Factors. Primary labor considerations are the cost and
availability of labor, wage rates in an area, labor productivity
and attitudes toward work, and whether unions area serious
potential problem. Labor costs are very important for labor-
intensive organizations. The shift of the textile industry from
the New England states to southern states was due partly to
labor costs.
Skills of potential employees may be a factor, although
some companies prefer to train new employees rather
than rely solely on previous experience. Increasing
specialization in m industries makes this possibility
even more likely than in the past. Although most
companie8 concentrate on the supply of blue-collar
workers, some firms are more interested in scientific
and technical people as potential employees, and they
look for areas with high concentrations of those types
of workers.
Worker attitudes toward turnover, absenteeism, and
similar factors may differ among potential locations-
workers in large urban centers may exhibit different
attitudes than workers in small towns or rural areas.
Furthermore, worker attitudes in different parts of the
country or in different countries may be markedly
different.
Some companies offer their current employees jobs if
they move to a new location. However, in many
instances, employees are reluctant to move, especially
when it means leaving families and friends.
Furthermore, in families with two wage earners,
relocation would require that one wage earner give up
a job and then attempt to find another job in the new
location.
4. Other Factors: Climate and taxes sometimes play a role in
location decisions. For example, a String of unusually severe
winters in northern states may cause some firms to seriously
consider moving to a milder climate, especially if delayed
deliveries and work disruptions caused by inability of
employees to get to work have been frequent. Similarly, the
business and personal income taxes in some states reduce their
attractiveness to companies seeking new locations. Many
companies have been attracted to some Sun Belt states by
ample sup plies of low-cost energy or labor, the climate, and
tax considerations. Also, tax and monetary incentives are major
factors in attracting or keeping professional sports franchises.
 
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Identifying a Community
 Many communities actively try to attract new
businesses, offering financial and other incentives, because they
are' viewed as potential sources of future tax revenues and new
job opportunities. However, communities do not, as a rule want
firms that will create pollution problems or otherwise lessen the
quality of life in the community. Local groups may actively
seek to exclude certain companies on such grounds, and a
company may have to go to great lengths to convince local
officials that it will be a “responsible citizen.” Furthermore,
some organizations discover that even though overall
community attitude is favorable, there may still be considerable
opposition to specific sites from nearby residents who object to
possible increased levels of noise, traffic; or pollution.
Examples of this include community resistance to airport
expansion changes in zoning, construction of nuclear facilities,
and highway construction.
From a company standpoint, a number of factors determine the
desirability of a community as a place for its workers and
managers to live. They include facilities for education,
shopping, recreation, transportation, religious worship, and
entertainment; the quality of police, fire, and medical services;
local attitudes toward the company; and the size of the
community. Community size can be particularly important if a
firm will be a major employer in the community; a future
decision to terminate or reduce operations in that location could
have a serious impact on the economy of a small community.
Other community-related factors are the cost and availability of
utilities, environmental regulations, taxes (state and local, direct
and indirect), and often a laundry list of enticements offered by
state or local governments that can include bond issues, tax
abatements, low-cost loans grants, and worker training.
 
Identifying a Site
The primary considerations related to sites are land,
transportation, and zoning or other restrictions.
Evaluation of potential sites may require consulting with
engineers or architects, especially in the case of heavy
manufacturing or the erection of large buildings or facilities
with special requirements. Soil conditions, load factors, and
drainage rates can be critical and often necessitate certain kinds
of expertise in evaluation.  
Because of the long-term commitment usually required, land
costs may be secondary to other site-related factors, such as
room for future expansion, current utility and sewer capacities-
and any limitations on these that could hinder future growth-
and sufficient parking space for employees and customers. In
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
addition, for many firms access roads to trucks or rail spurs are
important.
 
Industrial parks may be worthy alternatives for firms involved
in light manufacturing or assembly, warehouse operations, and
customer service facilities. Typically, the land is already
developed-power, water and sewer hookups have been attended
to, and zoning restrictions do not require special attention. On
the negative side, industrial parks may place restrictions on the
kinds of activities that a company can conduct, which can limit
options for future development of a firm’s products and
services as well as the processes it may consider. Sometimes
stringent regulations governing the size, shape, and
architectural features of buildings limit managerial choice in
these matters. Also, there may not be an adequate allowance for
possible future expansion.
 
SERVICE AND RETAIL LOCATIONS
Service and retail are typically governed by somewhat
different considerations than manufacturing organizations in
making location decisions. For one thing, nearness to raw
materials is usually not a factor nor is concern about processing
requirements. Customer access is 30% times a prime
consideration, as it is with banks and supermarkets, but not a
consideration in others, such as call centers, catalogue sales,
and online services. Manufacturers tend to cost-focused,
concerned with labor, energy, and material costs and
availability, as well as distribution costs service and retail
businesses tend to be profit or revenue focused, ,concerned with
demographics such as age, income, and education,
population/drawing area, competition, traffic volume/patterns,
and customer access/parking.
Retail sales and services are usually found near the center of the
markets they serve. Examples include fast-food restaurants,
service stations, dry cleaners, and supermarkets. Quite often
their products and those of their competitors are so similar that
they rely on convenience to attract customers. Hence, these
businesses seek locations with high population densities or high
traffic. The competition/convenience factor is also important in
locating banks, hotels and motels, auto repair shops, drugstores,
newspaper kiosks, and shopping centers. Similarly, doctors,
dentists, lawyers, barbers and beauticians typically serve clients
who reside within a limited area.
Retail and service organizations typically place traffic volume
and convenience high on the list of important factors. Specific
types of retail or service businesses may pay more attention to
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certain factors due to the nature of their business or their
customers. If a business is unique, and has its own drawing
power, nearness to competitors may not be a factor. However,
retail businesses generally prefer locations that are near other
retailers because. of the higher traffic volumes and convenience
to customers.‘ For example, automobile dealerships often tend
to locate near each other, and restaurants and specialty stores
often locate in and around malls. When businesses locate near
similar businesses it is referred to as clustering.
Medical services are often located near hospitals for the
convenience of patients. Doctors’ offices may be located near-
hospitals, or grouped in other, centralized areas with other
doctors’ offices. Available public transportation is often a
consideration.
Good transportation and/or parking facilities can be vital to
retail establishments. Downtown areas have a competitive
disadvantage in attracting shoppers compared to malls because
malls offer ample free parking and nearness to residential areas.
Customer safety and security can be key factors, particularly in
urban settings, for all types of services that involve customers
coming to the service location (as Opposed, say, to in-home
services such as home repair and rug cleaning).
 Many retail firms have multiple outlets (locations). Among the
questions that should be considered in such cases are the
following:
1. How can sales, market share, and profit be optimized for the
entire set of locations? Solutions might include some
combination of upgrading facilities, expanding some sites,
adding new outlets, and closing or changing the locations of
some outlets.
2. What are the potential sales to be realized from each
potential solution?
3. Where should outlets be located to maximize market share,
sales, and profits without negatively impacting other outlets?
This can be a key cause of friction between the operator of a
franchise store and the franchising company.
4. What probable effects would there be on market share, sales,
and profits if a competitor located nearby?
 
EVALUATING LOCATION ALTERNATIVES
There are a number of techniques that are helpful in
evaluating location alternatives: locational cost-profit-volume
analysis, factor rating, and the center of gravity method.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Locational Cost-Profit-Volume Analysis
The economic comparison of location alternatives is
facilitated by the use of cost-profit volume analysis. The
analysis can be done numerically or graphically. The graphical
approach will be demonstrated here because it enhances
understanding of the concept and indicates the ranges over
which one of the alternatives is superior to the others.
This method assumes the following:
1. Fixed costs are constant for the range of probable output.
2. Variable costs are linear for the range of probable output.
3. The required level of output can be closely estimated.
4. Only one product is involved.
The Transportation Model
Transportation costs sometimes play an important role
in location decisions. These can stem from the movement of
either raw materials or finished goods. If a facility will be the
sole source or destination of shipments, the company can
include the transportation costs in a locational cost-volume
analysis by incorporating the transportation cost per unit being
shipped into the variable cost per unit. (If raw materials are
involved, the transportation cost must be converted into cost per
unit of output in order to correspond to other variable costs.) .
When a problem involves shipment of goods from multiple
sending points to multiple receiving points, and a new location
(sending or receiving point) is to be added to the system, the
company should undertake a separate analysis of transportation.
In such instances the transportation model of linear
programming is very helpful. It is a Special-purpose algorithm
used to determine the minimum transportation cost that would
result if a potential new location were to be added to an existing
system. It also can be used if a number of new facilities are to
be added or if an entire new system is being developed. The
model is used to analyze each of the configurations considered,
and it reveals the minimum costs each would provide. This
information can then be included in the evaluation of location
alternatives.
Factor Rating
Factor rating is a technique that can be applied to a
wide range of decisions ranging from personal (buying a car,
0MGT 1013 CODE:608
deciding where to live) to professional (choosing a career,
choosing among job offers). Here it is used for location
analysis.
A typical location decision involves both qualitative and
quantitative inputs, which tend to vary from situation to
situation depending on the needs of each organization. Faster
rating is a general approach that is useful for evaluating a given
alternative and comparing alternatives. The value of factor
rating is that it provides a rational basis for evaluation and
facilitates comparison among alternatives by establishing a
composite value for each alternative that summarizes all related
factors. Factor rating enables decision makers to incorporate
their personal opinions and quantitative information in the
decision process.
The Center of Gravity Method
The center of gravity method is a method to determine
the location of a facility that will minimize shipping costs or
travel time to various destinations. For example, community
planners use the method to determine the location of fire and
public safety centers; schools, community centers, and such,
taking into consideration locations of hospitals, senior living
centers, population density, highways, airports, and retail
businesses. The goal for police and firefighters is often to
minimize travel time to answer emergency calls. The center of
gravity method is also used for location planning for
distribution centers, where the goal is typically to minimize
distribution costs. The method treats distribution cost as a linear
function of the distance and the quantity shipped. The quantity
to be shipped to each destination is assumed to be fixed (i.e.,
will not change over time). An acceptable variation is that
quantities are allowed to change, as long as their relative
amounts remain the same (e.g., seasonal variations).
The method includes the use of a map that shows the locations
of destinations. The map must be accurate and drawn to scale.
A coordinate system is overlaid on the map to determine
relative locations. The location of the (0,0) point of the
coordinate system, and its scale, is unimportant Once the
coordinate system is in place, you can determine the
coordinates of each destination.
The Load-Distance Method
In the systematic selection process, the analyst must identify
attractive candidate locations and compare them on the basis of
quantitative factors. The load distance method can facilitate this
step. Several location factors relate directly to distance:
proximity to markets, average distance to target customers,
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
proximity to suppliers and resources, and proximity to other d AB = distance between points A and B
company facilities. The load distance method is a mathematical
model used to evaluate locations based on proximity factors. X A = x-coordinate of point A
The objective is to select a location that minimizes the total
weighted loads moving into and out of the facility. The distance Y A = y-coordinate of point A
between two points is expressed by assigning the points to grid
coordinates on a map. X B = x-coordinate of point B

Distance Measures. Suppose that a new warehouse is Y B = y-coordinate of point B

to be located to serve Pennsylvania. It will receive
inbound shipments from several suppliers, including
one in Erie. If the new warehouse were located at State
College, what would be the distance between the two
facilities? If shipments travel by truck, the distance
depends on the highway system and the specific route
taken. Computer software is available for calculating
the actual mileage between any two locations in the
same country. However, for a rough calculation, which
is all that is needed for the load—distance method,
either a Euclidean or rectilinear distance measure may
be used.
Rectilinear distance measures distance between two points
with a series of 90° turns, as along city blocks. Essentially, this
distance is the sum of the two dashed lines representing the
base and side of the triangle in Fig. 9.2. The distance traveled in
the x-direction is the absolute value of the difference in x-
coordinates. Adding this result to the absolute value of the
difference in the y-coordinates gives
d AB = l X A - X B l  +  I YA - Y B l

Example: Using information at Figure 9.2

Figure 9.2 Distance between Erie (Point a) and State College

(Point B)

Euclidean distance is the straight-line distance, or shortest

possible path, between two points. To calculate this distance,
we create a graph. We place point A on the grid to represent the
supplier’s location in Erie. Then we place point B on the grid to
represent the possible warehouse location at: State College. In
Fig. 9.2 the distance between points A and B is the length of the
hypotenuse of a right triangle, or :  

WEEK 11 FACILITY LAYOUT PART 1

LEARNING CONTENT
Introduction:
Layout refers to the configuration of departments,
work centers, and equipment, with particular emphasis on
where :

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
movement of work (customers or materials) through the
system. This section describes the main types of layout designs
and the models used to evaluate design alternatives.
As in other areas of system design, layout decisions
are important for three basic reasons: (1) they require
substantial investments of money and effort; (2) they involve
long-term commitments which makes mistakes difficult to
overcome; and (3) they have a significant impact on the cost
and efficiency of operations.
Before we proceed further, please watch a simple
video of the nature of product and process layout by going to
the link provided below.
https://www.youtube.com/watch?v=WYqMh5cf8fY
Lesson Proper:
The need for layout planning arises both in the process
of designing new facilities and in redesigning existing facilities.
The most common reasons for redesign of layouts include
inefficient operations (e.g., high cost, bottlenecks), accidents or
safety hazards, changes in the design of products or services,
introduction of new products or services, changes in the volume
of output or mix of outputs, changes in methods or equipment,
changes in environmental or other legal requirements, and
morale problems (e.g., lack of face-to-face contact).
Poor layout design can adversely affect system
performance. For example, a change in the layout at the
Minneapolis-St. Paul International Airport solved a problem
that had plagued travelers. In the former layout, security
checkpoints were located in the boarding area. That meant that
arriving passengers who were simply changing planes had to
pass through a security checkpoint before being able to board
their connecting flight along with other passengers whose
journeys were originating at Minneapolis-St. Paul. This created
excessive waiting times for both sets of passengers. The new
layout relocated the security checkpoints moving them from the
boarding area to a position close to the ticket counters. Thus,
the need for passengers who were making connecting flights to
pass through security was eliminated, and in the process, the
waiting time for passengers departing from Minneapolis-St.
Paul was considerably reduced.
The basic objective of layout design is to facilitate a smooth
flow of work, material, and information through the system.
Supporting objectives generally involve the following:
1. To facilitate attainment of product or service quality.
2. To use workers and space efficiently.
3. To avoid bottlenecks.
4. To minimize material handling costs.
5. To eliminate unnecessary movements of workers or
materials.
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6. To minimize production time or customer service
time.
7. To design for safety.
The three basic types of layout are product, process,
and fixed-position. Product layouts are most conducive to
repetitive processing, process layouts are used for intermittent
processing and fixed-position layouts are used when projects
require layouts. The characteristics, advantages, and
disadvantages of each layout type are described in this section,
along with hybrid layouts, which are combinations of these
pure types. These include cellular layouts and flexible
manufacturing systems.
Repetitive Processing: Product Layouts
Product layouts are used to achieve a smooth and rapid
flow of large volumes of goods or customers through a system.
This is made possible by highly standardized goods or services
that allow highly standardized, repetitive processing. The work
is divided into a series of standardized tasks, permitting
specialization of equipment and division of labor. The large
volumes handled by these systems usually make it economical
to invest substantial sums of money in equipment and job
design. Because only one or a few very similar items are
involved, it is feasible to arrange an entire layout to correspond
to the technological processing requirements of the product or
service. For instance, if a portion of a manufacturing operation
required the sequence of cutting, sanding, and painting, the
appropriate pieces of equipment would be arranged in that same
sequence. And because each item follows the same sequence of
operations, it is often possible to utilize fixed-path material-
handling equipment such as conveyors to transport items
between operations. The resulting arrangement forms a line like
the one depicted in Figure 6.3. In manufacturing environments,
the lines are referred to as production lines or assembly lines,
depending on the type of activity.
Involved. In service processes, the term line may or
may not be used. It is common to refer to a cafeteria line as
such but not a car wash, although from a conceptual standpoint
the two are nearly identical. Figure 6.4 illustrates the layout of a
typical cafeteria serving line. Examples of this type of layout
are less plentiful in service environments because processing
requirements usually exhibit too much variability to make
standardization feasible. Without high standardization, many of
the benefits of repetitive processing are lost. When lines are
used, certain compromises may be mad for instance, an
automatic car wash provides equal treatment to all cars-the
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
same mom of soap, water, and scrubbing-even though cars may
differ considerably in cleaning needs.
Product layouts achieve a high degree of labor and
equipment utilization, which tend to offset their high equipment
costs. Because items move quickly from operation to operation,
the amount of work-in-process is often minimal. Consequently,
operations are so closely tied to each other that the entire
system is highly vulnerable to being shut down because of
mechanical failure or high absenteeism. Maintenance
procedures are geared to this. Preventive maintenance-periodic
inspection and replacement of worn pans or those with high
failure rates-reduces the probability of breakdowns during the
operations. Of course, no amount of preventive activity can
completely eliminate failures, so management must take
measures to provide quick repair. These include maintaining an
inventory of spare parts and having repair personnel available
to quickly restore equipment to normal operation. These
procedures are fairly expensive; because of the specialized
nature of equipment, problems become more difficult to
diagnose and resolve, and spare-part inventories can be
extensive.
Repetitive processing can be machine paced (e.g.,
automatic car wash, automobile assembly), worker paced (e.g.,
fast-food restaurants such as McDonald’s, Burger King), or
even customer paced (e.g., cafeteria line).
The main advantages of product layouts are:
1. A high rate of output.
2. Low unit cost due to high volume.
3. The high cost of specialized equipment is spread over
many units.
4. Low material-handling cost per unit. Material handling
is simplified because units follow the same sequence of
operations. Material handling is often automated.
5. A high utilization of labor and equipment.
6. The establishment of routing and scheduling in the
initial design of the system. These activities do not require
much attention once the system is operating.
7. Fairly routine accounting, purchasing, and inventory
control.
The primary disadvantages of product layouts include the
following:
1. The intensive division of labor usually creates dull,
repetitive jobs that provide little opportunity for advancement
and may lead to morale problems and to repetitive stress
injuries.
2. Poorly skilled workers may exhibit little interest in
maintaining equipment or in the quality of output.
3. The system is fairly inflexible in response to changes in the
volume of output or changes in product or process design.
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4. The system is highly susceptible to shutdowns caused by
equipment breakdowns or excessive absenteeism because
workstations are highly interdependent.
5. Preventive maintenance; the capacity for quick repairs, and
spare-parts inventories are necessary expenses.
6. Incentive plans tied to individual output are impractical
since they would cause variations among outputs of
individual workers, which would adversely affect the
smooth flow of work through the system.
Non-repetitive Processing: Process Layouts
Process lay outs (functional layouts) are designed to
process items or provide services that involve a variety of
processing requirements The variety of jobs that are processed
requires frequent adjustments to equipment. This causes a
discontinuous work flow, which is referred to as intermittent
processing. The layouts feature departments or other functional
groupings in which similar kinds of activities are performed. A
manufacturing example of a process layout is the machine shop
which has separate departments for milling, grinding, drilling,
and so on. Items that require those operations are frequently
moved in lots or batches to the departments in a sequence that
varies from job to job. Consequently, variable-path material;
handling equipment (forklift trucks, jeeps, tote boxes) is needed
to handle the variety of routes and items. The use of general-
purpose equipment provides the flexibility necessary to handle
a wide range of processing requirements. Workers who operate
the equipment are usually skilled or semiskilled.
Process layouts are quite common in service
environments. Examples include hospitals, colleges and
universities, banks, auto repair shops, airlines, and public
libraries For instance, hospitals have departments or other units
that specifically handle surgery, maternity, pediatrics,
psychiatric, emergency, and geriatric care. And universities
have separate schools or departments that concentrate on one
area of study such as business, engineering, science, or math.
Because equipment in a process layout is arranged by
type rather than by processing sequence, the system is much
less vulnerable to shutdown caused by mechanical failure or
absenteeism. In manufacturing systems especially, idle
equipment is usually available to replace machines that are
temporarily out of service. Moreover, because items are often
processed in lots (batches), there is considerably less
interdependence between successive Operations than with a
product layout. Maintenance costs tend to be lower because the
equipment is less specialized than that of product layouts, and
the grouping of machinery permits repair personnel to become
skilled in handling that type of equipment. Machine similarity
reduces the necessary investment in spare parts. On the
negative side, routing and scheduling must be done on a
continual basis to accommodate the variety of processing
demands typically imposed on these systems. Material handling
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
is inefficient, and unit handling costs are generally much higher
than in product layouts. ln-process inventories can be
substantial due to batch processing and capacity mismatches.
Furthermore, it is not uncommon for such systems to have
equipment utilization rates under 50 percent because of routing
and scheduling complexities related to the variety of processing
demands being handled.
In sum, process layouts have both advantages and
disadvantages.

The advantages of process layouts include the following:

1. The systems can handle a variety of processing

requirements.
2. The systems are not particularly vulnerable to
equipment failures.
3. General-purpose equipment is often less costly than
the specialized equipment used in product layouts and is
easier and less costly to maintain.
4. It is possible to use individual incentive systems.

The disadvantages of process layouts include the following:

1. ln-process Inventory costs can be high if butch processing
is used in manufacturing systems.
2. Routing and scheduling pose continual challenges.
3. Equipment utilization rates are low.
4. Material handling is slow and inefficient and more costly
per unit than in product layouts.
6. Job complexities often reduce the span of supervision and
result in higher supervisory costs than with product
layouts.
7. Special attention necessary for each product or customer
and low volumes result in higher unit costs than with
product layouts.
8. Accounting, inventory control, and purchasing are much
more involved than with product layouts.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
WEEK 12 FACILITY LAYOUT PART 2
EARNING CONTENT
Introduction:
            This module is a continuation of lesson 11. More types
of layout will be discussed such as fixed position layout,
combination layout, cellular layout, and service layout.
Lesson Proper:
 
Fixed-Position Layouts
In fixed-position layouts the item being worked on
remains stationary, and workers, materials and equipment are
moved about as needed. This is in marked contrast to product
and process layouts. Almost always the nature of the product
dictates this kind of arrangement: Weight, size, bulk or some
other factor makes it undesirable or extremely difficult to move
the product. Fixed-position layouts are used in large
construction projects (buildings, power plants. dams)
shipbuilding, and production of large aircraft and space mission
rockets. In those instances attention is focused on timing of
material and equipment deliveries so as not to clog up the work
site and to avoid having to relocate materials and equipment
around the work site. Lack of storage space can present
significant problems, for example, at construction sites in
crowded urban locations. Because of the many diverse
activities carried out on large projects and because of the wide
range of skills required, special efforts are needed to coordinate
the activities, and the span of control can be quite narrow. For
these reasons, the administrative burden is often much higher
than it would be under either of the other layout types. Material
handling may or may not be a factor; in many cases, there is no
tangible product involved (e.g., designing a computerized
inventory system). When goods and materials are involved,
material handling often resembles process-type, variable-path,
general-purpose equipment. Projects might require use of earth-
moving equipment and trucks to haul materials to from, and
around the work site, for example.  variations (e. g., skipping an operation) are possible. In
Fixed-position layouts are widely used in farming,
firefighting, road building, home building, remodeling and
repair, and drilling for oil. In each case, compelling reasons
bring workers materials, and equipment to the product’s
location instead of the other way around.
Combination Layouts
0MGT 1013 CODE:608
The three basic layout types are ideal models, which
may be altered to satisfy the needs of a particular situation. It is
not hard to find layouts that represent some combination of
these pure types. For instance, supermarket layouts are,
essentially process layouts, yet we find that most use fixed-path
material-handling devices such" as roller-type conveyors in the
stockroom and belt-type conveyors at the cash registers.
Hospitals also use the basic process arrangement, although
frequently patient care involves more of a fixed-position
approach, in which nurses, doctors, medicines, and special
equipment are brought to the patient. By the same token, faulty
parts made in a product layout may require off-line reworking,
which involves customized processing. Moreover, conveyors
are frequently observed in both farming ‘and construction
activities.
Process layouts and product layouts represent two ends
of a continuum from small jobs to continuous production.
Process layouts are conducive to the production of a wider
range of products or services than product layouts, which is
desirable from a customer standpoint where customized
products are often in demand. However, process layouts tend to
be less efficient and have higher unit production costs than
product layouts. Some manufacturers are moving away from
process layouts in an effort to capture some of the benefits of
product layouts. Ideally a system is flexible and yet efficient,
with low unit production costs. Cellular manufacturing group
technology, and flexible manufacturing systems represent
efforts to move toward this ideal.
Cellular Layouts
Cellular Production. Cellular production is a type of
layout in which workstations are grouped into what is referred
to as a cell. Groupings are determined by the operations needed
to perform work for a set of similar items, or part families that
require similar processing. The cells become, in effect,
miniature versions of product layouts. The cells may have no
conveyorized movement of parts between machines, or they
may have a flow line connected by a conveyor (automatic
transfer). All pans follow the same route, although minor
contrast, the functional layout involves multiple paths for parts.
Moreover, there is little effort or need to identify part families.
Cellular manufacturing enables companies to produce a variety
of products with as little waste as possible. A cell layout
provides a smooth flow of work through the process with
minimal transport or delay. Benefits frequently associated with
cellular manufacturing include minimal work in process,
reduced space requirements and lead times productivity and
quality improvement, and increased flexibility.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Service Layouts
As is the case with manufacturing, service layouts can
often be categorized as product, process, or fixed-position
layouts. In a fixed-position service layout (e.g., appliance
repair, roofing, landscaping, home remodeling, copier service),
materials, labor, and equipment are brought to the customer’s
residence or office. Process layouts are common in services due
mainly to the high degree of variety in customer processing
requirements. Examples include hospitals, supermarkets and
department stores, vehicle repair centers, and banks. If the
service « is organized sequentially, with all customers or work
following the same or similar sequence, as it is in a car wash or
a cafeteria line, a product layout is used.
However, service layout requirements are somewhat
different from manufacturing layout requirements. The degree
of customer contact and the degree of customization are two
key factors in service layout design. If contact and
customization are both high, as in health care and personal care,
the service environment is a job shop, usually with high labor
content and flexible equipment, and a layout that supports this.
If customization is high but contact low (e.g., picture framing,
tailoring), the layout can be arranged to facilitate workers and
equipment. If contact is high but customization is low (e.g.,
supermarkets, gas stations), self-service is a possibility, in
which case layout must take into account ease of obtaining the
service as well as customer safety. If the degree of contact and
the need for customization are low, the core service and the
customer can be separated, making it easier to achieve a high
degree of efficiency in operations. Highly standardized services
may lend themselves to automation (e.g., Web services, online
banking, ATM machines).
Let’s consider some of these layouts
Warehouse and Storage Layouts. The design of
storage facilities presents a different set of factors than the
design of factory layouts. Frequency of order is an important
consideration; items that are ordered frequently should be
placed near the entrance to the facility, and those ordered
infrequently should be placed toward the rear of the facility.
Any correlations between items are also significant (i.e., item A
is usually ordered with item B), suggesting that placing those
two items close together would reduce the cost and time of
picking (retrieving) those items.
Retail Layouts. The objectives that guide design of
manufacturing layouts often pertain to cost minimization and
product flow. However, with retail layouts such as department
stores supermarkets, and specialty stores, designers must take
0MGT 1013 CODE:608
into account the presence of customers and the opportunity to
influence sales volume and customer attitudes through carefully
designed layouts. Traffic patterns and traffic flow are important
factors to consider. Some large retail chains use standard
layouts for all or most of their stores. This has several
advantages. Most obvious is the ability to save time and money
by using one layout instead of custom designing one for each
store. Another advantage is to avoid confusing consumers who
visit more than one store. In the case of service retail outlets,
especially small ones such as dry cleaners, shoe repair, and auto
service centers, layout design is much simpler.
Office Layouts. Office layouts are undergoing
transformations as the flow of paperwork is replaced with the
increasing use of electronic communications. This lessens the
need to place office workers in a layout that optimizes the
physical transfer of information or paperwork. Another  trend is
to create an image of openness; office walls are giving way to
low-rise partitions, which also facilitate communication among
workers.
Restaurant Layouts. There are many different types of
restaurants, ranging from food trucks to posh establishments.
Many belong to chains, and some of those are franchises. That
type of restaurant typically adheres to a floor plan established
by the company. Independent restaurants and bars have their
own floor plans. Some have what could be considered very
good designs, while others do not.
Hospital Layouts. Key elements of hospital layout
design are patient care and safety, with easy access to critical
resources such as X-ray, CAT scan, and MRI equipment.
General layout of the hospital is one aspect of layout, while
layout of patient rooms is another. The following reading
illustrates a safe hospital room of the future.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
INVENTORY MANAGEMENT  Maintenance and repairs (MRO) inventory.

THE NATURE AND IMPORTANCE OF INVENTORIES  Goods-in-transit to warehouses, distributors, or

customers (pipeline inventory).
Inventories are a vital part of business. Not only are they
necessary for operations, but they also contribute to customer Both manufacturing and service organizations have to take into
consideration the space requirements of inventory. In some
satisfaction. To get a sense of the significance of inventories,
consider the following: Some very large firms have tremendous cases, space limitations may pose restrictions on inventory
storage capability, thereby adding another dimension to
amounts of inventory. For example, General Motors was at one
point reported to have as much as $40 billion worth of inventory decisions.
materials, parts, cars, and trucks in its supply chain! Although To understand why firms have inventories at all, you need to be
the amounts and dollar values of inventories carried by
aware of the various functions of inventory.
different types of firms vary widely, a typical firm probably has
about 30 percent of its current assets and perhaps as much as 90  
percent of its working capital invested in inventory. One widely
used measure of managerial performance relates to return on Functions of Inventory
investment (ROI), which is profit after taxes divided by total
assets. Because inventories may represent a significant portion Inventories serve a number of functions. Among the most
of total assets, a reduction of inventories can result in a important are the following.
significant increase in ROI, although that benefit has to be
1. To meet anticipated customer demand. A customer can be
weighed against a possible risk of a decrease in customer
a person who walks in off the street to buy a new stereo system,
service. It is interesting to note that the ratio of inventories to
a mechanic who requests a tool at a tool crib, or a
sales in the manufacturing, wholesale, and retail sectors is one
manufacturing operation. These inventories are referred to as
measure that is used to gauge the health of the U. S. economy.
anticipation stocks because they are held to satisfy expected
Inventory decisions in service organizations can be especially (i.e., average) demand.
critical. Hospitals, for example, carry an array of drugs and
2. To smooth production requirements. Firms that experience
blood supplies that might be needed on short notice. Being out
seasonal patterns in demand often build up inventories during
of stock on some of these could imperil the well-being of a
preseason periods to meet overly high requirements during
patient. However, many of these items have a limited shelf life,
seasonal periods. These inventories are aptly named seasonal
so carrying large quantities would mean having to dispose of
inventories; Companies that process fresh fruits and vegetables
unused, costly supplies. On-site repair services for computers,
deal with seasonal inventories. So do stores that sell greeting
printers, copiers, and fax machines also have to carefully
cards, skis, snowmobiles, or Christmas trees.
consider which parts to bring to the site to avoid having to
make an extra trip to obtain parts. The same goes for home 3. To decouple operations. Historically, manufacturing firms
repair services such as electricians, appliance repairers, and have used inventories as buffers between successive operations
plumbers. to maintain continuity of production that would otherwise be
disrupted by events such as breakdowns of equipment and
The major source of revenues for retail and wholesale
accidents that cause a portion of the operation to shut down
businesses is the sale of merchandise (i.e., inventory). In fact
temporarily. The buffers permit other operations to continue
in terms of dollars, the inventory of goods held for sale is one
temporarily while the problem is resolved. Similarly, firms
of the largest assets of a merchandising business. Retail stores
have used buffers of raw materials to insulate production from
that sell clothing wrestle with decisions about which styles to
disruptions in deliveries from suppliers, and finished goods
carry, and how much of each to carry, knowing full well that
inventory to buffer sales operations from manufacturing
fast' Selling items will mean greater profits than having to
disruptions. More recently, companies have taken a closer look
heavily discount goods that didn’t sell:
at buffer inventories recognizing the cost and space they
The different kinds of inventories include the following: require, and realizing that finding and eliminating sources of
disruptions can greatly decrease the need for decoupling
 Raw materials and purchased parts. operations. Inventory buffers are also important in supply
chains. Careful analysis can reveal both points where buffers
 Partially completed goods, called work-in-process would be most useful and points where they would merely
(WIP) increase costs without adding value.
 Finished-goods inventories (manufacturing firms) or
1. To reduce the risk of stock outs. Delayed deliveries
merchandise (retail stores).
and unexpected increases in demand increase the risk
 Tools and supplies. of shortages. Delays can occur because of weather

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
conditions, supplier stock outs, deliveries of wrong
materials, quality problems, and so on. The risk of
shortages can be reduced by holding safety stocks,
which are stocks in excess of expected demand to
compensate for variability in demand and lead time.
2. To take advantage of order cycles. To minimize
purchasing and inventory costs, a firm often buys in
quantities that exceed immediate requirements. This
necessitates storing some or all of the purchased
amount for later use. Similarly, it is usually
economical to produce in large rather than small
quantities. Again the excess output must be stored
for later use. Thus, inventory storage enables a firm to
buy and produce in economic lot sizes without having
to try to match purchases or production with demand
requirements in the short run. This results in periodic
orders or order cycles.
3. To hedge against price increases. Occasionally a
firm will suspect that a substantial price increase is
about to occur and purchase larger-than-normal
amounts to beat the increase.
4. To permit operations. The fact that production
operations take a certain amount of time (i.e., they are
not instantaneous) means that there will generally be
some work-in-process inventory. In addition,
intermediate stocking of goods-including raw
materials, semi-finished items, and finished goods at
production sites, as well as goods stored in
warehouses-leads to pipeline inventories throughout a
production-distribution system. Little’s Law can be
useful in quantifying pipeline inventory. It states that
the average amount of inventory in a system is equal
to the product of the average rate at which inventory
units leave the system (i.e., the average demand rate)
and the average time a unit is in the system. Thus, if
units are in the system for an average of 10 days, and
the demand rate is 5 units per day, the average
inventory is 50 units: 5 units/day x 10 days = 50 units.
5. To take advantage of quantity discounts. Suppliers
may give discounts on large orders.
Objective of Inventory Management
Inadequate control of inventories can result in both understand
overstocking of items. Understocking results in missed
deliveries, lost sales, dissatisfied customers, and production
bottlenecks; overstocking unnecessarily takes up space and ties
up funds that might be more productive elsewhere. Although
overstocking may appear to be the lesser of the two evils the
price tag for excessive overstocking can be staggering when
inventory holding costs are high.
The overall objective of inventory management is to achieve
satisfactory levels of customer service while keeping inventory
0MGT 1013 CODE:608
costs within reasonable bounds. The two basic issues
(decisions) for inventory management are when to order and
how much to order. The greater part of this chapter is devoted
to models that can be applied to assist in making those
decisions.
Managers have a number of performance measures they can use
to judge the effectiveness of inventory management. The most
obvious, of course, are costs and customer satisfaction which
they might measure by the number and quantity of backorders
and/or customer complaints. A widely used measure is
inventory turnover, which is the ratio of annual cost of goods
sold to average inventory investment. The turnover ratio
indicates how many times a year the inventory is sold.
Generally, the higher the ratio, the better, because that
implies more efficient use of inventories. However, the
desirable number of turns depends on the industry and what the
profit margins are. The higher the profit margins, the lower
the acceptable number of inventory turns, and vice versa.
Also, a product that takes a long time to manufacture, or a long
time to sell, will have a low turnover rate. This is often the case
with high-end retailers (high profit margins). Conversely,
supermarkets (low profit margins) have a fairly high turnover
rate. Note, though, that there should be a balance between
inventory investment and maintaining good customer service.
Managers often use inventory turnover to evaluate inventory
management performance; monitoring this metric over time can
yield insights into changes in performance. Another useful
measure is days of inventory on hand, a number that indicates
the expected number of days of sales that can be supplied from
existing inventory. Here, a balance is desirable; a high number
of days might imply excess inventory, while a low number
might imply a risk of running out of stock.
 
Requirements for Effective Inventory Management
Management has two basic functions concerning inventory.
One is to establish a system to keep track of items in
inventory, and the other is to make decisions about how much
and when to order. To be effective, management must have the
following:
1. A system to keep track of the inventory on hand and
on order.
2. A reliable forecast of demand that includes an
indication of possible forecast error.
3. Knowledge of lead times and lead time variability.
4. Reasonable estimates of inventory holding costs,
ordering costs, and shortage costs.
5. A classification system for inventory items.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Inventory Counting Systems

Inventory counting systems can be periodic or perpetual.

Under a periodic system, a physical count of items in
inventory is made at periodic, fixed intervals (e.g., weekly,
monthly) in order to decide how much to order of each item.
Many small retailers use this approach: A manager periodically
checks the shelves and stockroom to determine the quantity on
hand. Then the manager estimates how much will be demanded
prior to the next delivery period and bases the order quantity on
that information. An advantage of this type of system is that
orders for many items occur at the same time; which can result
The zero on the left of the bar code identifies this as a grocery
in economies in processing and ship ping orders. There are also
item, the first six numbers (712345) indicate the
several disadvantages of periodic reviews. One is a lack of
manufacturer (Mott’s), and the last six numbers (678911)
control between reviews. Another is the need to protect against
indicate the specific item (natural-style applesauce). Items in
shortages between review periods by carrying extra stock.
small packages, such as candy and gum, use a six-digit number.
A perpetual inventory system (also known as a continuous
Point-of-sale (POS) systems electronically record actual sales.
review system) keeps track of removals from inventory on a
Knowledge of actual sales can greatly enhance forecasting and
continuous basis, so the system can provide information on the
inventory management: By relaying information about actual
current level of inventory for each item. When the amount on
demand in real time, these systems enable management to
hand reaches a predetermined minimum, a fixed quantity, Q, is
make any necessary changes to restocking decisions. These
ordered. An obvious advantage of this system is the control
systems are being increasingly emphasized as an important
provided by the continuous monitoring of inventory
input to effective supply chain management by making this
withdrawals. Another advantage is the fixed-order quantity;
information available to suppliers. UPC scanners represent
management can determine an optimal order quantity. One
major benefits to supermarkets. In addition to their increase in
disadvantage of this approach is the added cost of record
speed and accuracy, these systems give managers continuous
keeping. Moreover, a physical count of inventories must still
information on inventories, reduce the need for periodic review
be performed periodically to verify records because of
and order-size determinations, and improve the level of
possible errors, pilferage, spoilage, and other factors that can
customer service by indicating the price and quantity of each
reduce the effective amount of inventory.
item on the customer’s receipt.
Bank transactions such as customer deposits and withdrawals
Bar coding is important for other sectors of business besides
are examples of continuous recording of inventory changes.
retailing. Manufacturing and service industries benefit from
Perpetual systems range from very simple to very sophisticated. the simplified production and inventory control it provides. In
A two-bin system, a very elementary system, uses two manufacturing, bar codes attached to parts, subassemblies, and
containers for inventory. Items are withdrawn from the first finished goods greatly facilitate counting and monitoring
bin, until its contents are exhausted. It is then time to reorder. activities. Automatic routing, scheduling, sorting, and
Sometimes an Order card is placed at the bottom of the first packaging can also be done using bar codes. In health care, the
bin. The second bin contains enough stock to satisfy expected use of bar codes can help to reduce drug dispensing errors.
demand until the order is filled, plus an extra cushion of stock
Radio frequency identification (RFID) tags are also used to
that will reduce the chance of a stock out if the order is late or if
keep track of inventory in certain applications.
usage is greater than expected. The advantage of this system is
that there is no need to record each withdrawal from inventory; Demand Forecasts and Lead Time information
the disadvantage is that the reorder card may not be turned in
for a variety of reasons (e.g., misplaced, the person responsible Inventories are used to satisfy demand requirements, so it is
forgets to turn it in). essential to have reliable estimates of the amount and timing of
demand. Similarly, it is essential to know how long it will take
Supermarkets, discount stores, and department stores have for orders to be delivered; In addition, managers need to know
always been major users of periodic counting systems. Today, the extent to which demand and lead time (the time between
most have switched to computerized checkout systems using a submitting an order and receiving it) might vary; the greater the
laser scanning device that reads a universal product code potential variability, the greater the need for additional stock to
(UPC), or bar code, printed on an item tag or on packaging. A reduce the risk of a shortage between deliveries. Thus, there is a
typical grocery product code is illustrated here: crucial link between forecasting and inventory management.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Inventory Costs
Four basic costs are associated with inventories: purchase,
holding, ordering, and shortage costs.
into hundreds of dollars a minute or more. Shortage
costs are sometimes difficult to measure, and they may
be subjectively estimated.

 Purchase cost is the amount paid to a vendor or

supplier to buy the inventory. It is typically the largest
of all inventory costs.
 Holding, or carrying, costs relate to physically having
items in storage. Costs include interest, insurance,
taxes (in some states), depreciation, obsolescence,
deterioration, spoilage, pilferage, breakage, tracking,
picking, and warehousing costs (heat, light, rent,
workers, equipment, security). They also include
opportunity costs associated with having funds that
could be used elsewhere tied up in inventory. Note that
it is the variable portion of these costs that is pertinent.
The significance of the various components of holding cost
depends on the type of item involved, although taxes, interest,
and insurance are generally based on the dollar value of an
inventory. Items that are easily concealed (e.g., pocket cameras,
transistor radios, calculators) or fairly expensive (cars, TVs) are
prone to theft. Fresh seafood, meats and poultry, produce, are
baked goods are subject to rapid deterioration and spoilage.
Dairy products, salad dressings, medicines, and batteries also
have limited shelf lives.          when a firm rents space on either a long-term
Holding costs are stated in either of two ways: as a percentage
of unit price or as a dollar amount per unit. Typical annual
holding costs range from 20 percent to 40 percent or more of
the Value of an item. In other words, to hold a [Math
Processing Error]20 to $40.
 Ordering costs are the costs of ordering and receiving
inventory. They are the costs that occur with the actual
placement of an order. They include determining how
much is needed, preparing invoices, inspecting goods
upon arrival for quality and quantity, and moving the
goods to temporary storage. Ordering costs are
generally expressed as a fixed dollar amount per order,
regardless of order size.
When a firm produces its own inventory instead of ordering
it from a supplier, machine setup costs (e. g., preparing
equipment for the job by adjusting the machine, changing
cutting tools) are analogous to ordering costs; that is, they are
expressed as a fixed charge per production run, regardless of
the size of the run.
INVENTORY CONCEPTS
INVENTORY is created when the receipt of materials, parts,
or finished goods exceeds their disbursement; it
is depleted when their disbursement exceeds their receipt.
 
Pressures for Low Inventories
 INVENTORY HOLDING (OR CARRYING)
COST is the variable cost of keeping items on
hand, including interest, storage and handling, taxes,
insurance, and shrinkage.
o Interest or Opportunity Cost whichever is
greater, usually is the largest component of
holding cost.
o Storage and Handling Costs may be incurred
or short-term basis.
o Taxes, Insurance, and Shrinkage.
                                                                                          - More
taxes are paid if end-of-year inventories are high.
                                             -
Insurance on assets increases when there is more to insure.
                                             -
Shrinkage takes three forms:
 1. PILFERAGE - theft of inventory by customers or
employees.
2. OBSOLESCENCE – occurs when inventory cannot be used
or sold at full value, owing to model changes, engineering
modifications, or unexpectedly low demand.
3. DETERIORATION – physical spoilage or damage
 

Pressures for High Inventories

 Shortage costs result when demand exceeds the
supply of inventory on hand. These costs can include
Why are inventories necessary?
the opportunity cost of not making a sale, loss of
customer goodwill, late charges, backorder costs, and  CUSTOMER SERVICE
similar costs. Furthermore, if the shortage occurs in an
item carried for internal use (e.g., to supply an o      Creating inventory can speed delivery and
assembly line), the cost of lost production or downtime improve on-time-delivery.
is considered a shortage cost. Such costs can easily run

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
o     STOCKOUT – occurs when an item that is 2. The longer the time between orders for a given time,
typically stocked isn’t available to satisfy a the greater the cycle inventory must be.
demand the moment it occurs, resulting  in loss of
the sale.

o     BACKORDER – is a customer order that can’t

be filled when promised or demanded but is filled
later.

 ORDERING COST

o    For the same item, the ordering cost is the same

regardless of the order size.

o    ORDERING COST - Cost of preparing a

purchase order for a supplier or a production order
for the shop
 SETUP COST
o     It is also independent of the order size.
o     It is the cost involved in changing in changing
over a machine to produce a different component
or item
Average Cycle Inventory (ACI) is the average of the maximum
and minimum cycle inventory level at the beginning and end of
the interval respectively. At the beginning of the interval, the
cycle inventory is at its maximum or Q. At the end of the
interval, just before a new lot arrives, cycle inventory drops to
its minimum or 0.
B. SAFETY STOCK INVENTORY – protects against
uncertainties in demand, lead time, and supply

 LABOR AND EQUIPMENT UTILIZATION C. ANTICIPATION INVENTORY – used to absorb uneven

o    By creating more inventory, management can
increase work-force productivity and facility
utilization.
 TRANSPORTATION COSTS
rates of demand or supply, which businesses often face
D. PIPELINE INVENTORY – inventory moving from point to
point in the materials flow system. It consists of orders that
have been placed but not yet received.

o     Outbound and inbound transportation cost can

be reduced by increasing inventory levels.

 PAYMENT TO SUPPLIERS

o    A firm often can reduce total payment to

suppliers if it can tolerate higher inventory levels.

o    QUANTITY DISCOUNT – price per unit

drops when the order is sufficiently large. It is an
incentive to order larger quantities.
TYPES OF INVENTORY
A. CYCLE INVENTORY – the portion of total inventory that
varies directly with lot size
o     LOT SIZING – determining how frequent to
order, and in what quantity
ESTIMATING INVENTORY LEVEL
Example
A plant makes monthly shipments of electric drills to a
wholesaler in average lot sizes of 280 drills. The
wholesaler’s average demand is 70 drills per week, and
the lead time from the plant is three weeks. On average, how
much cycle inventory and pipeline inventory does the
wholesaler carry?

 
2 Principles of Lot Sizing ANSWER:
1. The lot size, Q, varies directly with the elapsed time The wholesaler’s cycle inventory is 140 drills, whereas the
(or cycle) between orders.
pipeline inventory (inventory  in transit)  averages 210 drills.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
INVENTORY REDUCTION TACTICS 1. Basic Economic Order Quantity (EOQ

LEVERS – basic tactics for reducing inventory
     PRIMARY LEVER is one that must be activated if
inventory is reduced.
     SECONDARY LEVER reduces the penalty cost of
applying the primary lever and the need for having
inventory in the first place.
     ABC ANALYSIS - It is the process of dividing items into
three classes according to their dollar usage so that the manager
can focus on the items that have the highest dollar value.
ECONOMIC ORDER QUANTITY (EOQ) is the lot size
that minimizes total annual inventory holding and ordering
costs
 The approach to determining the EOQ is based on
the following assumptions:
o The demand rate for the item is constant and
known with certainty.
o There are no constraints on the size of each
lot.
o The only two relevant costs are the inventory
holding cost and fixed cost per lot for
ordering or setup.

o Decisions for one item can be made

independently of decisions for other items.

o There is no uncertainty in lead time or supply

CALCULATING THE EOQ

Control of Service Inventories can be a critical component of

profitability. Losses may come from Where: D = annual demand
shrinkage or pilferage. Applicable techniques include:
             S = Annual Ordering/Set-up cost
1.      Good personnel selection, training, and discipline
             H = Annual Holding Cost
2.      Tight control on incoming shipments

3.       Effective control on all goods leaving facility  

       Annual Holding Cost

Independent versus Dependent Demand = (Average cycle inventory)(Unit holding cost)

    Independent demand - the demand for item is      Annual Ordering Cost

independent of the demand for any other item in
 = (Number of orders/year)(Ordering or setup cost)
inventory

    Dependent demand - the demand for item is      Average Number of Orders Per Year
dependent upon the demand for some other item in =  Annual demand
the inventory
         Lot size
 
     Total Cost

 = Annual holding cost + Annual ordering or set up cost

Inventory Models for Independent Demand
             or  C = Q (H) + D (S)
 
                          2           Q

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Where             C = total cost per year  

                        Q = lot size, in units SOLUTION:

                        H = cost of holding one unit in inventory for a

year, often calculated as the proportion of the item’s value

                        D = annual demand, in units per year

                        S = cost of ordering or setting up one lot, in  

dollars per lot

 TIME BETWEEN ORDERS (TBO) for

a particular lot size is the average elapsed time
between receiving (or placing) replenishment orders of
Q units
o When we use EOQ the TBO can be expressed
in various ways for the same time period:
Formula for determining TBO in years:
For the birdfeeder in the previous example, calculate the EOQ
and its total cost. How frequently will orders be placed if the
EOQ is used?
First, compute the EOQ......then the Annual cost which is as
follows:

Formula in determining TBO in months, weeks and days:

Now, to compute how frequent orders will be made, we first

determine the time between orders which is as follows:

Example:

A museum of natural history opened a gift shop two years ago.

Managing inventories has become a problem. Low inventory
turnover is squeezing profit margins and causing cash-flow So, given those TBOs in year, month, weeks and days, how
problems. frequent will the museum order birdfeeders? Answer :
Approximately 12 times a year.
            One of the top selling items in the container group at the
museum’s gift shop is a birdfeeder. Sales are 18 units per 2. Production order quantity
week, and the supplier charges $60 per unit. The cost of
placing an order with the supplier is $45. Annual holding 3. Quantity discount model
cost is 25% of a feeder’s value, and the museum operates 52
 
weeks per year.  Management chose 390-unit lot size so that
new orders could be placed less frequently. What is the annual UNDERSTANDING THE EFFECT OF CHANGES
cost of the current policy of using 390-unit lot size?

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
    A change in the Demand Rate. Because D is in the cases. There are no backorders, but there is one open order
numerator, the EOQ increases in proportion to the for 200 cases. Should a new order be placed?
square root of the annual demand.

   A change in the Setup Costs. Because S is in the

numerator, increasing S increases the EOQ and,
consequently, the average cycle inventory.
Conversely, reducing S reduces the EOQ, allowing
smaller lot sizes to be produced economically.

    A Change in the Holding Costs. Because H is in

the denominator, the EOQ declines
when H Conversely, when H declines, the EOQ B. Selecting the Reorder Point When the Demand
increases. is Uncertain
    Errors in Estimating D, H, and S. Total cost is

fairly insensitive to errors even when estimates are
wrong by a large margin. o This approach will create a safety stock, or
Inventory Control Systems stock held in excess of expected demand to
buffer against uncertain demand
 Continuous Review (Q) System  
o     sometimes called a reorder point (ROP)
R = Average demand during lead time + Safety stock
system or fixed order quantity system

o     tracks the remaining inventory of an item  Finding the Safety Stock

each time a withdrawal is made to determine o    We compute the safety stock by multiplying
whether it is time to reorder.
the number of standard deviations from the
o     reviews are done frequently or mean needed to implement the cycle-service
continuously level, z, by the standard deviation of demand
during lead time probability distribution, σL
INVENTORY POSITION (IP) -  measures the item’s ability
to satisfy future demand. It includes scheduled receipts
(SR), which are orders that have been placed but not yet
received (also called open orders), plus on-hand inventory 
(OH) minus backorders (BO).

Inventory Position = On-hand inventory + Scheduled receipts

– Backorders

IP = OH + SR - BO Example:

A. Selecting the Reorder Point When Demand is Certain Records show that the demand for dishwasher detergent during
the lead time is normally distributed, with an average of 250
Reorder point , R boxes and σL = 22. What safety stock should be carried for a
99 percent cycle-service level? What is R?
predetermined minimum level
 Solution:
R equals demand during lead time, with no added
allowance for safety stock

R = Average demand during lead time

Example:
 Periodic Review (P) System
Demand for chicken soup at a supermarket is 25 cases a day
o    sometimes called a fixed interval reorder
and the lead time is four days. The shelves were just restocked
system or periodic reorder system in which
with chicken soup, leaving an on-hand inventory of only 10

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
an item’s inventory position is reviewed
periodically rather than continuously.
 Hybrid System
a. Optional Replenishment System
     Sometimes called the optional review, min-max, or
(s, S) system
     Much like the P system
    It is used to review the inventory position at fixed
time intervals and, if the position has dropped to (or
below) a predetermined level, to place a variable-
sized order to cover expected needs  Projects can have strategic importance for organizations. For
b. Base-Stock System
     Issues a replenishment order, Q, each time a
withdrawal is made, for the same amount as the
withdrawal
 
Project Management
Managing Project is Important to:
 Finance- which use project management techniques
for financing new business acquisitions.
 Human resources – which uses project management
techniques for initiating new training and development
programs
 Management Information System – which uses
project management techniques for designing new
information systems to support reengineering process.
 Marketing – which uses project management
techniques to design execute new product advertising
campaigns.
 Operations – which uses project to design techniques
to manage the introduction of new process for the
production of goods and services.
 
Projects may involve considerable cost. Some have a long time
horizon, and some involve a large number of activities that
must be carefully planned and coordinated. Most are expected
to be completed based on time, cost, and performance targets.
To accomplish this, goals must be established and priorities set.
Tasks must be identified and time estimates made. Resource
requirements also must be projected and budgets prepared.
Once under way, progress must be monitored to assure that
project goals and objectives will be achieved.
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The project approach enables an organization to focus attention
and concentrate efforts on accomplishing a narrow set of
performance objectives within a limited time and budget
framework. This can produce significant benefits compared
with other approaches that might be considered. Even so,
projects present managers with a host of problems that differ in
many respects from those encountered with more routine
activities. The problems of planning and coordinating project
activities can be formidable for large projects, which typically
have thousands of activities that must be carefully planned and
monitored if the project is to proceed according to schedule and
at a reasonable cost.
example, good project management can be instrumental in
successfully implementing an enterprise resource planning
(ERP) system or converting a traditional operation to a lean
operation. And good project management is very important
when virtual teams are used.
PROJECT LIFE CYCLE
The size, length, and scope of projects vary widely according to
the nature and purpose of the project. Nevertheless all projects
have something in common: They go through a life cycle,
which typically consists of five phases.
1. Initiating. This begins the process by outlining the
expected costs, benefits, and risks associated with a
project. It includes defining the major project goals
and choosing a project manager
2. Planning. This phase provides details on deliverables,
scope of the project, budget, schedule and milestones,
performance objectives, resources needed, a quality
plan, and a plan for handling risks. The accompanying
documents generated in the planning phase will be
used in the executing and monitoring phases to guide
activities and monitor progress. Members of the
project team are chosen.
3. Executing. In this phase the actual work of the project
is carried out. The project is managed as activities are
completed, resources are consumed, and milestones
are reached. Management involves what the Project
Management Institute (www.pmi.org) refers to as the
nine management areas: project integration, scope,
human resources, communications, time, risk, quality,
cost, and procurement.
4. Monitoring and Controlling. This phase occurs at the
same time as project execution. It involves comparing
actual progress with planned progress and undertakes
corrective action if needed, and monitoring any
corrective action to make sure it achieves the desired
effect.
5. Closing. This phase ends the project. It involves
handing off the project deliverables, obtaining
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
customer acceptance, documenting lessons learned,
and releasing resources.
It should be noted that the phases can overlap, so that one phase
may not be fully complete before the next phase begins. This
can reduce the time necessary to move through the life cycle,
perhaps generating some competitive advantage and cost
saving. Although subsequent decisions in an earlier phase may
result in waste for some portion of the activity in a following
phase, careful coordination of activities can minimize that risk.
Figure 17.1 illustrates the phases in a project life cycle.
BEHAVIORAL ASPECTS OF PROJECT
MANAGEMENT
Project management differs from management of more
traditional activities mainly because of its limited time
framework and the unique set of activities involved, which
gives rise to a cost of unique problems. This section describes
more fully the nature of projects and their behavioral
implications. Special attention is given to the role of the project
manager.
The Nature of Projects
As projects go through their life cycle, a variety of skill
requirements are involved. The circumstances are analogous to
constructing a house. Initially an idea is presented and its
feasibility is assessed, then plans must be drawn up and
approved by the owner and possibly a town building
commission or other regulatory agency. Then a succession of
activities occurs each with its own skill requirements, starting
with the site preparation, then laying the foundation, erecting
the frame, roofing, constructing exterior walls, wiring and
plumbing, installing kitchen and bathroom fixtures and
appliances, interior finishing work, and painting and carpeting
work. Similar sequences occur on large construction projects, in
R&D work in the aerospace industry, and in virtually every
other instance where projects are being carried out.
Projects typically bring together people with diverse knowledge
and skills, most of whom remain associated with the project for
less than its full life. Some people go' from project to project as
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their contributions become needed, and others are “on loan,”
either on a full-time or part-time basis, from their regular jobs.
The latter is usually the case when a special project exists
within the framework of a more traditional organization.
However, some organizations are involved with projects on a
regular basis, examples include consulting firms, architects,
writers and publishers, and construction firms. In those
organizations, it is not uncommon 'for some individuals to
spend virtually all of their time on projects.
Some organizations use a matrix organization that allows them
to integrate the activities of a variety of specialists within a
functional framework. For instance, they have certain people
who prepare proposals, others who concentrate exclusively on
engineering, others who devote their efforts to marketing, and
so on.
In a matrix organization functional and project managers share
workers and facilities Project managers negotiate with
functional managers for people to work on a project. Those
selected will be temporarily assigned to the project manager.
However, they are still responsible to their functional manager.
They may work part-time or full-time on the project. When
their work is done, they return to their functional department.
A matrix organization works quite well with people who can
function with two managers. It can create synergy when people
from various functional areas are brought together to work on a
project. However, some people do not function well under such
a. structure and may be stressed working in that environment.
Matrix organizations typically do not allow long-term working
relationships to develop. Furthermore, using multiple managers
for one employee may result in uncertainty regarding employee
evaluation and accountability.
Key Decisions in Project Management
 Much of the success of projects depends on key managerial
decisions over a sequence of steps;
1. Deciding which projects to implement.
2. Selecting the project manager.
3. Selecting the project team.
4. Planning and designing the project.
5. Managing and controlling project resources:
6. Deciding if and when a project should be terminated.
Deciding Which Projects to Implement. This involves
determining the criteria that will be used to decide which
projects to pursue. Typical factors include budget, availability
of appropriate knowledge and skill personnel, and cost-benefit
considerations. Of course, other factors may override these
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criteria, factors such as availability of funds, safety issues, Project Management System – it consist of an organizational
government-mandated actions, and so on. structure and information system.

Selecting the Project Manager. The project manager is the Organizational Structures –this specified by top management
central person in the project. The following section on project and defines the relationship of the project team member to the
managers discusses this topic. project manager.

Selecting the Project Team. The team can greatly influence the Functional Organization – is the traditional structure whereby
ultimate success or failure of a project. Important the project is housed in a specific functional area, presumably
considerations include not only a person’s knowledge and skill the one with the most interest in the project.
base, but also how well the person works with others
(particularly those who have already been chosen for the  Pure Project structure – team member’s work
project), enthusiasm for the project, other projects the person is exclusively for the project manager on a particular
involved in, and how likely, those other projects might be to project.
interfere with work on this project.  Matrix Structure – each functional area maintains
authority over who will work on the project and the
Planning and Designing the Project. Project planning and
technology to be used.
design require decisions on project performance goals, a
timetable for project completion, the scope of the project, What  
work needs to be done, how it will be done, if some portions
will be outsourced, what resources will be needed, a budget, Networking Planning Methods
and when and how long resources will be needed.
 Can help project managers monitor and control
Managing and Controlling Project Resources. This involves projects.
managing personnel, equipment, and the budget; establishing o This methods threat a project as a set of
appropriate metrics for evaluating the project; monitoring interrelated activities that can be visually
progress; and taking corrective action when needed. Also displayed in a network diagram which
necessary are designing an information system and deciding consists of nodes and circles that depict the
what project documents should be generated, their contents and relationship between activities
format, when and by whom they will be needed, and how often
 Nodes - represented by a circle
they should be updated. Deciding if and when a project should
be terminated. Sometimes it is better to terminate a project than  Arcs - represented by an arrow
to invest any more resources. Important considerations here are
the likelihood of success, termination costs, and whether  
resources could be better used elsewhere.
Two Network Planning Method
                                                                                                       
 PERT (program evaluation and review technique) was
                                                            
created for the U.S. navy’s Polaris missile project,
which involved 3,000 separate contractors and
Basic Terminologies:
suppliers.
 
 CPM (critical path method) was developed by J.E.
Kelly of Remington- Rand and M.R. Walker of DU
Project – is an interrelated set of activities that has definite
Pont as a means of scheduling maintenance shutdown
starting and ending point that results in a unique product or
of chemical processing plants.
services.
Four Steps in Managing a Project with Network Planning
  Methods
Three major elements of project management: A. Describing the projects
Project Manager- has the responsibility to integrate the efforts
of the people from various functional areas to achieve specified
project.

Project Team – group of people, often representing different

functional areas or organizations, led by the project manager.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
AON – Activity-on-Node Network it uses nodes to represents
activities and arcs indicate the precedent relationships between
them.

It is an activity oriented.

Dummy Activity– use to clarify the precedence relationships

between two activities.

C. Estimating time of Completion

Describing the project involves identifying the following:

Activity – is the smallest unit of work effort consuming both

time and resources that the project manager can schedule and
control

Precedence Relationships– it determines a sequence for

undertaking activities.
   Deterministic Estimates – when same type of
It specifies that one activity cannot start until a preceding
project has been done many times before, time
activity has been completed. estimates involve uncertainty and are
called Probabilistic Estimates.

 
B. Diagramming the Network
1.     Optimistictime(a) – is the shortest time in which
the activity can be completed, if all goes exceptionally
well.

2.       MostLikelyTime (m) – is the probable time

required to perform the activity.

3.       PessimisticTime(b) – is the longest estimated time

required to perform an activity.

Precedence Relationships – are represented by a network

diagram.

Two approaches to create a network diagram:

AOA – Activity-on-Arc Network, it uses arcs to represent

activities and nodes to represents events.

Since it emphasizes activity connection point, we say that it is

event oriented.
Sometimes this approach requires the addition of dummy
activity to clarify the precedence relationships between two
activities.
Critical Path – is the sequence of activities between a
project’s start and finish that takes the longest time to complete.
Activity Slack – is the maximum length of time that an
activity can be delayed without delaying the entire project.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Formula: Slack= LS-ES or Slack= LF-EF
Activity on the critical path have zero slack.
Activity slack is calculated from four ties for each activity;
earliest start time; earliest finished time; latest start time for
each and latest finish time.
Earliest Finish Time (EF) of an activity equals its earliest start
time plus its expected duration, t, or EF=ES+t.
Earliest Start Time (ES) for an activity is the earliest finish
time of the immediately preceding activity. For activities with
more than one preceding activity. ES is the latest of the earliest
finish times of the preceding activities.
Latest Finished Time – for an activity is the latest start time
of the activity immediately following it. For activities with
more than one activity immediately following, LF is the earliest
for the latest start times of those activities.
Latest Start Time – for an activity equals its latest finish time
minus its expected duration, t, or LS=LF –
D. Monitoring project progress
Introduction to Total Quality Management
\Total Quality Management (TQM) is customer oriented
management philosophy and strategy. It is centered on quality
so as to result in customer delight. The word “Total” implies
that all members of the organization make consistent efforts to
achieve the objective of customer delight through systematic
efforts for improvement of the organization.
The TQM philosophy was evolved in Japan after World War II
Edwards Deming, an American quality expert helped the
Japanese to apply concepts of TQM. They concentrated on
customer satisfaction and focused on understanding customer
needs and expectations. However, the American industry
ignored this development as it was still riding high because of
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lack of competition. During the 1980s they were forced to look
for new ways to survive in an environment of deregulation, a
growing trade deficit, low productivity, recession, downsizing
and increasing consumer awakening. Ford Motor Company lost
more than US $ 3 billion during 1980-82. The US market share
of Xerox Corporation which had pioneered the photocopier,
dropped from 93 per cent in 1971 to 40 per cent in 1981. The
American industry now realized the importance of Deming’s
teachings and started applying them. This helped Xerox to
regain market share from the Japanese, Ford to come out of the
red, Florida Light and Power, USA reduced customer
complaints by 60 per cent in 1983. In 1985, the American Navy
coined the term TQM to represent broadly the Japanese way of
quality management.
The need for quality was felt, during World War II, due to the
unprecedented need for manufactured goods. From then on,
methodologies for assuring quality in products and services
evolved continuously, finally leading to TQM. Experts from
many countries spearheaded this evolution, with Deming
playing an important role. They are popularly called the Quality
Gurus. Since TQM IS the culmination of the teachings of the
Quality Gurus, understanding the teachings of the gurus will
give the right perspective for TQM.
This module will therefore highlight the contributions of the
Quality Gurus for the evolution of quality control techniques
and finally TQM.
TQM addresses the concepts of product quality, process
control, quality assurance and quality improvement, all of
which are aimed at customer delight. Therefore, it is important
to get the right meaning, interpretation and understanding of the
term quality and related terms. This will provide a strong
foundation for TQM. We will discuss various dimensions of
quality in the following paragraphs.
DEFINITION OF QUALITY
Juran, one of the quality gurus, defined quality as fitness for
use. A very concise definition indeed, for a term that has so
many dimensions! Quality of a product or service in simple
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terms is its suitability for use by the customer. Quality has to be
perceived by the customer. Perception of the supplier is also
important, but the customer experience of quality of a product
or service is more important. Quality does not mean an
expensive product; on the contrary, it is fitness for use of the
customer.
International Organization for Standardization (ISO), the world
body for standards formulation was founded in the year 1946
and has its headquarters in Geneva, Switzerland. Most countries
in the world are members of ISO. The national standardization
bodies of various countries represent their countries in ISO.
ISO is known all over the world because of its path breaking
standard ISO 9000, released for the first time in the year 1987.
The definition of quality as per the ISO 9000 standard is: “The
totality of features and characteristics of a product or service,
that bear on its ability to satisfy a given or implied need”.
Thus, the standard definition of quality is common both to
products and services. It is essentially satisfying the customer
needs, both stated and unstated (implied). The latter is more
dominant in a service. When there is a contract for supply of a
product or service, the needs will be specified clearly. In other
situations, it is the responsibility of the supplier to identify and
define them.
 
CHAIN REACTION
The importance of quality will be clear from the chain reaction
on account of quality envisaged in Japan in the 1950s. The
‘chain reaction’ is depicted in Fig. 2 as follows:
Figure 2
Quality improvement results in improved productivity, as is
clear from Figure 2. By eliminating defects, non-value adding
activities and rework, additional resource capacity is created.
Improved quality also reduces the production cycle time and
machine time. Less material is required due to reduction of
scrap and rework. All this leads to improved productivity and
increased capacity. If this is used to expand markets with lower
prices, the company prospers and stays in business. Deming
noted that this chain reaction was on the black board of every
board meeting in Japan from July 1950 onwards. The Japanese
success is the best case study for TQM. Understanding the
chain reaction transformed them from a shattered economy to a
successful nation challenging the USA after World War II.
DIMENSIONS OF QUALITY
Quality has many dimensions. The dimensions of quality are
nothing but the various features of a product or service. We will
discuss some of them briefly:
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Product Quality
1. Functionality - Functionality refers to the core features
and characteristics of a product. The definition of
functionality as per ISO / EC 9126: 1991:
“A set of attributes that bear on the existence of a set of
functions and their specified properties. The functions are those
that satisfy stated or implied needs”.
For instance, a car has to have a seating capacity for five
persons; a steering wheel an accelerator, a break, a clutch, head
lights, gears, four wheels, etc. The functionality of a car
represents each one of the functions mentioned above and many
others not listed above.
2. Reliability. A car should not breakdown often. This is
the reliability attribute to quality. Reliability is
measured by mean (average) time between failures
(MTBF) Reliability IS an indicator of durability of
products. For instance, the MTBF of a car can be
specified as 1000 hours of running or 10000
kilometers.
3. Usability. A product should be easily usable. The
customer should be able to use the product easily
without the help of experts. For instance, repairing a
car may need the help of a mechanic, but the car can
be driven by the owner himself, it he is trained
accordingly. Thus, each product should be made so
that a person can use it with minimum training.
Usability can also be measured by the time taken for
training an operator for error-free operation of a
system.
4. Maintainability. Maintainability refers to the ease with
which a product can be maintained in the original
condition. Products may become defective while in
use or in transit. It should be repairable so as to retain
the original quality of the product at the lowest cost at
the earliest possible time. This applies to software,
automobiles, household items such as refrigerator, air
conditioners, personal computer, etc. For instance,
when we use a Walkman we may need to change the
batteries periodically. For software, maintainability is
defined in the Standard ISO 9126: 1991 as “A set of
attributes that bear on the effort needed to make
specified modifications”.
Maintainability is measured as Mean Time To Repair (MTTR).
For instance, the MTTR of a street light controller is 15
minutes.
5. Efficiency This Is applicable to most products.
Efficiency is the ratio of output to input. If a car gives
a mileage of 20 kms per litre of gasoline and another
car with identical features gives 15 kms per litre, then
the former is more efficient than the latter. Another
example is the brightness of a lamp at a given input
voltage.
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6. Portability This is more important in the context of
software. Portability is defined as a set of attributes
that bear on the ability of software to be transferred
from one environment to another. The environment
may be organizational, hardware or software
environment. Any program purchased, such as an
accounting software, should be usable in many
different machines without any problem. This is
portability. This feature is applicable even to consumer
goods such as bulbs, razors etc.
Service Quality
Unlike products, every service is made to order. Therefore, the
service quality has additional features. In availing a service, the
customer interacts more with the service provider. The quality
of service depends to a large extent on understanding the
correct requirements of the customer through such interactions.
Each service has to be designed specifically for the customer.
Hence, quality of service design is an important feature Service
delivery is another feature of service quality Thus, the
additional features of service quality are:
 Quality of customer service
 Quality of service design
 Quality of service delivery
Each one of the above may have further dimensions. For
instance, quality of service delivery includes timeliness of
service and the number of defects on delivery.
1. Quality of Customer Service Customer service is
important in every business. In a service industry,
meeting customers and finding out their implied
requirements is more challenging. Therefore, ability to
satisfy customer depends on the quality of customer
service. This includes but is not limited to:
 How well the customer is received?
 How well the implied requirements are elucidated?
 How well the customer is treated/handled/satisfied?
2. Quality of Service Design Since services are usually
made to order, it is important that the service is
designed as per the requirements of the specific
customer. For instance, a software product developed
for a specific bank takes into account the unique
requirements of the bank. Quality of service design in
turn depends on the quality of customer service.
3. Quality of Delivery Quality of delivery is important in
any sector, but more crucial in case of services.
Defects on delivery should be zero to satisfy the
customers. Additional attributes of quality, which are
applicable to both products and services, are given
below:
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4. Timeliness Delivery on schedule as per requirements
of the customer is a must both in the product sector as
well as in service sector. No customer likes waiting.
Any anticipated delay in schedule should be
communicated to customer well in advance.
Timeliness is critical for many products and services.
Delay in arrival of aircrafts or trains are instances of
poor quality of the services encountered in day-to-day
life.
5. Aesthetics A product or service should not only
perform well but also appear attractive. Therefore,
aesthetics is an important element of quality.
Aesthetics may include, but not limited to the
appearance of the product, the finish, colour, etc.
Customers will buy only those refrigerators or TV
receivers or music systems, which look good. '
6. Regulatory Requirements Regulatory requirements as
stipulated by the local and federal governments should
be fulfilled by the product or service. For instance, an
automobile has to meet Euro 11 Standards in respect
of emission to minimize environmental pollution.
Similarly, there are regulatory requirements in respect
of safety of electro-medical products.
7. Requirements of Society The products should fulfil
both the stated and implied requirements imposed by
society. The customer requirement should not violate
society or regulatory requirements. Thus to satisfy a
customer, a product cannot be built in such a way as to
violate the requirements of society of a safe and
healthy product. For instance, providing belts for
persons sitting in the front seat in a car is a
requirement of the society. Hence, the car
manufacturers should provide belts for the passengers
travelling in the front seat.
8. Conformance to Standards Product or service should
conform to the stated and implied requirements if
customers. Where applicable, they should conform to
applicable standards such as national standards.
International standards and industry standards. For
instance, Electro-Magnetic Interference (EMI) from a
PC should be within the limits prescribed by the
corresponding standard.
EVOLUTION OF QUALITY
Quality has been evolving for decades. The contribution of
American Quality Gurus to this evolution is quite impressive.
The concepts were initially experimented successfully in Japan
by the American Quality Gurus. In this section, we will look at
the contributions of some of them.
1. Dr Walter A Shewhart (1891-1967) worked in Western
Electric Company and AT&T, USA. He advocated Statistical
Quality Control (SQC) and Acceptable Quality Level (AQL).
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
AQL is the foundation of today’s Six Sigma. He is considered
to be the father figure of SQC, who developed control charts for
quality assessment and improvement. Dr Shewhart also
developed the Plan, Do, Check, Act (PDCA) cycle for
continuous improvement, which is in use even today. He is the
author of the following books:
 Economic Control of Quality of Manufactured
Products
  Statistical Method from the view Point of Quality
Control
2. Deming W. Edwards (1900-1993) An associate of
Shewhart, worked in Western Electric Company as a
statistician. He was invited to Japan to lead the quality
movement. He modified PDCA cycle of Shewhart to the Plan,
Do, Study and Act (PDSA) cycle. He also advocated extensive
use of statistics and control charts and focused on product
improvement and service conformance by reducing variations
in the process. He joined the US Census Bureau in the year
1939 and proved that quality control methods could lower costs
even in an exclusive service organization.
Deming stressed on the importance of suppliers and customers
for the business development and       improvement. He
believed that people do their best and it is the system that must
change to improve       quality. His 14 points formed the basis
for his advise to Japanese top management. The 14 points are
applicable to every industry in product and service sector.
3. Joseph M. Juran (1904) Juran also joined Western Electric
Company and developed Western Electric Statistical Quality
Control Handbook. JUSE invited him to Japan in 1954. He
identified fitness of quality and popularized the same.
Juran's Quality Planning Roadmap
1. ldentify your customers.
2. Determine their needs.
3. Translate them into your language.
4. Develop a product that can respond to the needs.
5. Develop processes, which are able to produce those
product features.
6. Prove that the process can produce the product.
7. Transfer the resulting plans to the operating forces.
4. Philip B. Crosby (1926) Crosby was Vice President of
International Telephone & Telegraph (ITT) His 4 absolutes of
Quality4 are very relevant to TQM.
Crosby’s four absolutes of quality
1. Quality is conformance to requirements, nothing more
or nothing less and certainly not goodness or elegance.
0MGT 1013 CODE:608
2.  Quality has to be achieved by prevention and not by
appraisal.
3.  The performance standard must be zero defect and not
something close to it.
4. The measurement of quality is the price of non-
conformance, i.e. how much the defects in design,
manufacture, installation and service cost the
company. It is not indexes, grade one or grade two.
5.Armand V. Feigenbaum He was President of American
Society of Quality Control (1961-1963). He said, Quality is in
its essence a way of managing the organization.” He suggested
the following:
Feigenbaum’s cycle time reduction methodology
1. Define process.
2. List all activities.
3. Flowchart the process.
4. List the elapsed time for each activity.
5. Identify non-value adding tasks.
6. Eliminate all possible non-value adding tasks.
6.Kaoru Ishikawa (1915-1989) A Quality Guru from Japan, he
strongly advocated the use of cause and effect diagrams to
provide a true representation of the organizational impacts and
procedures. He developed Fishbone or Ishikawa diagram for
cause and effect analysis.
Other Quality Gurus include James Harrington, Taguchi and
Shingo.
The reader should be familiar with some of the basic terms
related to quality to understand TQM.
QUALITY CONTROL (QC)
Quality Control or QC may be defined as: The operational
techniques and activities that are used to fulfil the requirements
for quality. Juran gives 3 steps of QC:
1. Evaluate actual operating performance.
2. Compare actual performance to goals.
3. Act on the difference
In simple terms, QC is inspection or appraisal of products and
services to ensure that the stated requirements are fulfilled. This
was the only technique practiced during World War II. Since it
was found that QC was essential but not sufficient, Quality
Assurance techniques were developed after the war.
QUALITY ASSURANCE (QA)
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
The definition of quality assurance is: All the planned and
systematic activities implemented within the quality system and
demonstrated as needed, to provide adequate confidence that an
entity will fulfil the requirements for quality.
The purpose of QA is to fulfil the quality requirements of an
entity, i. e. product or service, with adequate confidence by the
supplier. This requires implementation of all the activities
planned for building quality into the product. Such planned
activities are to be implemented systematically within the
purview of a documented quality system. Building quality into
the products requires the following:
 Quality of Design
 Quality of Conformance
 Quality of Performance
 Quality of Service
Thus Quality Assurance, is much more involved activity than
mere inspection or QC. In fact QC is one of the activities of
QA.
QUALITY PLANNING (QP)
In order to consistently meet customer requirements, the quality
of 4 Ms-namely Man, Machine, Material and Methods need to
be ensured. The requirements of the 4 Ms are to be identified in
the form of quality objectives. The objectives should be
established for all the functions. The functions include
suppliers, purchase, product design, engineering, production, in
process inspection, final inspection, after sales service, etc.
Quality planning refers to the activities that establish the
objectives and requirements for quality. QP involves planning
for the following with regard to a product or service or project
or a contract:

    Quality objectives to be met

 Quality of Design It refers to how well the product or  Specific of QA/QC practices
service has been designed to meet the current and
future requirements of customers and add value to all  Resources needed
the stakeholders. The stakeholders for any
 Sequence of QA/QC activities.
organization are:
The QC activities include testing, inspection, examination and
 Customers
audit at various stages of product or service life cycle.
 Employees Therefore, quality has to be planned for every product or
service and documented in the form of a quality plan.
 Suppliers
 
 Owners
QUALITY IMPROVEMENT
 Society  

 Quality of design involves all activities that will result This process aims at attaining unprecedented levels of
in a successful design. It necessarily includes finding performance, which are significantly better than the past level.
out the customer’s requirements.
 
 Quality of Conformance This indicates the consistency
in delivering the designed product. Product quality in STRATEGIC PLANNING
tum depends on the quality of all processes in the
organization. Therefore, it involves all activities that Strategic planning is important for any business. It involves
will ensure the conformance of the products to its making plans for the following, in particular:
requirements consistently.
 Business value
 Quality of Performance It is an indicator of the
performance of the end product. This in turn depends  Investment in machinery and equipment
on the quality of design (including the reliability of the
 Manpower to be hired
product) and quality of conformance.
 Budget
  
 Product diversification
 Quality of Service Selling a product is not the end of
the business. It is the quality of associated services  Markets to be served
rendered that adds value to the product. Quality of
service involves all activities that will enable the  Strategies for improving profits, etc
customer to procure and use the product without any
 
hassles.

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
Strategic planning is carried out generally at annual intervals
and is carried out using a formal structured approach. The
strategic planning is kept confidential due to obvious reasons.
Usually organizations treat strategic planning and quality
planning as separate and isolated activities. However, Malcolm
Baldrige National Quality Awards (MBNQA) -the prestigious
quality award in USA calls for the integration of both. It means
that quality planning and improvement planning should be
carried out as part of strategic planning. The quality
improvement planning should focus on the needs of current and
future customers and support the strategic and business goals of
the organization.
 
QUALITY MANAGEMENT (QM)
According to ISO 9000 standards, Quality management
comprises “All activities of the overall management function
that determine the quality policy, objectives and responsibilities
and implement them by means such as quality planning, quality
control, quality assurance and quality improvement within the
quality system.”
The quality system consists of the organizational structure,
procedures, processes and resources needed to implement
quality management.
The above brings out the following:
 The company must have an objective and policy for
quality of the products and services
 The organization should plan for meeting the
objective.
 The plan should include QA, QC and methodology for
improvement.
 There must be a clear organizational structure for
building quality into the products with necessary
resources.
 The quality management should be implemented
formally with well-defined processes and procedures
and trained resources.
 
TOTAL QUALITY MANAGEMENT (TQM)
It was Feigenbaum who coined the phrase “Total Quality
Control” . The concept is known in Japan as Company Wide
Quality Control (CWQC). In 1985, the Americans came up
with the term Total Quality Management (TQM) to represent
essentially the Japanese way of Quality Management.
Just-In-Time (JIT)
0MGT 1013 CODE:608
Tai-ichi Ohno of Toyota motors refined an idea for Just-In-
Time. This means that at no stage of manufacturing nobody or
nothing waits for anything. This is to ensure that there is no
wastage of machinery, materials and manpower. JIT focuses on
right scheduling so as to keep inventory as low as possible. This
requires perfect partnership between supplier and customer.  
ISO 9000 Standards
ISO 9000 Standards were released for the first time in the year
1987 to bring in system for quality in every organization. The
standard was revised in 1994 and later in the year 2000. The
standard version advocates TQM and continuous process
improvement.
Deming Award for Quality
To express their gratefulness, Japanese instituted a Quality
Award in the name of Deming in the year 1951. The award is
now given not only to companies in Japan but even overseas
who excel in quality.
AIMS OF TQM
 Customer satisfaction
 Employee involvement
 Continous improvement (KAIZEN)
Quality Cost
The top management looks at every activity in the organization
in terms of return on direct and indirect investment. However,
this does not mean that they are looking for short-term gains
only. They don’t mind waiting for years, if ultimately the
efforts are going to pay out. Top management will adopt ISO
9000 or TQM if it is going to help the organization. In fact,
many companies have adopted ISO 9000, TQM Six Sigma, etc.
for growth coupled with profits.
TQM was evolved to satisfy customers in the most economical
way Quality means cost effectiveness. It means reducing
expenditure by eliminating wastes through systematic quality
management approach. Therefore it is important to compute
expenditure incurred on account of poor quality, and prevent it.
TQM should result in the progressive reduction of inferior
quality goods. Quality cost is a tool to demonstrate cost of poor
quality to the top management as well as the entire
organization. It will also highlight the importance of TQM
activities to the top management clearly. Above all it will help
the organization to know the effectiveness of the organization
and the areas where the efforts are wasted.
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
TQM aims at gradual reduction of wasteful expenditure and
eventually their total elimination. Quality costs should be
accounted separately so as to know how much the organization
is losing on account of poor quality. Decreasing cost of
production should indicate quality improvement. Accounting
and analyzing quality costs hasgiven innumerable benefits to
the organizations. Thus quality costs is an important tool for
TQM.
COST OF QUALITY
Cost of Quality (COQ) is the sum of costs incurred by an
organization in preventing poor quality. There are essentially
three types of Quality Costs as given below:
1. Prevention Costs
2. Appraisal Costs
3. Failure Costs
Thus, the COQ can be classified into 3 categories as given in
Figure 2.1.
\ accrues due to defective processes. The following accounts for
This is called PAF model, name abbreviated from the first
letters of the three categories: Any quality cost which arises in
an industry can be classified into one of the above three
categories.
The prevention costs are the planned costs incurred by an
organization to ensure that no defects occur in any of the stages
such as design, development, production and delivery of a
product or service. They are incurred to reduce the inspection
as well as the failure costs. The expenditure on account of TQM
implementation is a prevention cost. Prevention costs include
education and training of employees, process improvement
efforts, process control, market research, product qualification,
field testing, preventive maintenance, calibration of
instruments, audits, quality assurance staff, etc.
The appraisal costs are incurred in verifying, checking or
evaluating a product or service at various stages during
0MGT 1013 CODE:608
manufacturing or delivering. They are incurred due to lack of
confidence in the quality of the product or service either due to
the incoming material or due to the process. For instance, the
incoming materials are inspected, because, the receiver is not
sure about the 'quality of the incoming goods. During the
process, a number of inspections take place, since the quality of
the process is in doubt. Therefore, if quality improves in the
organization as well as among the vendors, inspection cost can
be reduced. Appraisal costs include incoming inspection,
internal product audit, supplier evaluation and audit, inspection
during process and final inspection, etc.
The failure costs are incurred by an organization because the
product or service did not meet the expected requirements and
the product had to be fixed or replaced or the service had to be
repeated. The failure costs are due to the incurred failure of the
organization to control defects in the product.
Defective products in the market can lead to the loss of
reputation and customer loyalty. One dissatisfied customer will
tell 100 others, which means the loss of both present and future
customers. It will also affect the brand image, leading to loss of
good will and customer loyalty. If the trend is not corrected,
and the quality is not restored, the company will have to close
down.
Thus the organization should start accounting separately the
costs of quality, preferably under these three heads.
CLASSIFICATION OF FAILURE COST
The failure costs can be classified into:
Internal Failure Costs Includes costs of every failure that takes
place before the product is delivered to the customers. It
internal failures:
 
1. Rejected material, supplied by vendor
2. Rejected pieces of sub-assemblies
3. Rejected products at final inspection
4. Scrap on account of poor workmanship
5. Overtime due to non-conforming products
 
External Failure Costs These are on cost of failure of the
product after its delivery to the customers.
Examples of external failure are:
1. Warranty costs
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
2. Free replacements given due to failure of items
supplied
3. Cost incurred to travel to customer’s site for repair
4. Cost of products returned.
5. Cost of customer complaint administration
6. Cost of customer follow up and field service
department.
7.  
The aim of strategic planning and quality planning is the total
elimination of wastes. This elimination leads to meeting
customer requirements, at the lowest possible cost. Any
defective component only adds to the cost of product. A sub-
assembly that contains defective components is a waste as is the
case with any product that does not work for the first time after
assembly. Any defective part supplied by the vendor is a waste.
Also problems encountered in the field, in the product causes a
lot of unnecessary expenditure. Such causes of waste are too
many. Therefore, Juran introduced the concept of Cost of
Quality (COQ) in the year 1951 in his Quality Control
Handbook. The other Gurus such as Philip Crosby, Harrington
also advocated due emphasis on COQ.
 
REDUCING COSTS
Reduction of Prevention Cost
Prevention cost has to be incurred. Every preventive activity
should have been pre-planned to avoid wastes during the
process. Periodically, the senior management should devote
time to prevent problems from occurring. The establishment of
a Quality System in every organization calls for the preparation
of a quality manual and a set of procedures. Even the
documented quality system should have been planned with a
vision. If a documented set of policies and procedures already
exist for an organization, the employees should strictly adhere
to the same. Prevention cost means expenditure. While the
organization should not hesitate to improve the processes and
reduce the waste through prevention, the prevention activity
itself should be carried out without wastes.
Progressive Reduction of Appraisal Costs
Inspection is essential before assessing a new vendor, a new
process or a new product line. Inspection generates a lot of
information. This information should be utilized skillfully by
the organization to reduce future costs. For instance, for a new
vendor who is already qualified, the organization may start with
100 per cent inspection; with experience this could be reduced
to a sampling inspection. With the increase in confidence level,
the responsibility of the inspection could be totally left to the
vendor. Soon, the organization should be looking forward to
0MGT 1013 CODE:608
reducing the cost of inspection, at the same time encouraging
the vendor to maintain and improve the quality of his processes.
The organization should try to make best use of the data
available within the organization in the form of inspection
records to improve quality and reduce the need for inspection.
The inspection costs should also be reduced with the maturity
of the processes.
 
Reduction of Failure Costs
Manufacturing or delivery of a product or a service with defects
is a total waste. Everything should be done right the first time
and every time. There should be no occasion to reject a product
or a service either at the initial stage, the intermediate stages or,
at the final stages. Right the first time will happen only if the
processes are streamlined and made effective and efficient.
Every cause, which may lead to the immediate or gradual
failure of the product, should be identified and eliminated. If a
system is established to measure the process parameters and
study their variations, the confidence level should go up to an
extent that inspection may be forgone. Therefore, a lot of
emphasis should be given to establishing a proper system to
control the processes. Efforts should be made to control the
process, which would lead to automatic control of the quality of
the output. Scraps and reworks are the biggest wastes in any
organization. Any rework reduces the value of the output. It
only increases hassles and scraps, accounting and storage of
which is a problem. Therefore, systematic action should be
taken to reduce the rework and the scrap by following TQM
principles.
Hidden Costs
There are many costs, which cannot be identified easily. They
may be defined as hidden costs. These include customer-
incurred costs, lost reputation costs and customer dissatisfaction
costs. These costs can vary and sometimes affect business.
Hidden costs can be eliminated only by eliminating external
failures.
 
JURAN’S MODEL OF OPTIMUM QUALITY COSTS
Juran’s model for quality costs is illustrated in Fig. 2.2, the
quality level increases, when the number of defects in the
product or service reduces. The cost of non-conformance
(failure cost) decreases as quality level improves. The quality
level increases when the cost of conformance (sum of
prevention and appraisal )
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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
-          Testing

-          Checking
labor

-          Set-up for
test or inspection

-          Quality
audits

-          Field
Additional Information: testing

The concept of quality costs is a means to quantify the total cost Arise from
of quality-related defects and deficiencies. It was first described defects
by Armand V. Feigenbaum in a 1956 Harvard Business Article. caught
internally -          Scrap
Feigenbaum defined the following quality cost areas:
Internal and dealt
-          Rework
Failure with by
Descriptio
Cost of Area Examples Costs discarding -          Material
n
or repairing procurement cost
Costs of -          Quality the
Control             planning defective
( Cost of items
Conformance ) -          Statistical
Costs of
process control -          Complaint
Failure of
s in warranty
-          Investmen Control ( Cost
t in quality- of Non- -          Complaint
related Conformance) s out of warranty
Arise from
information
efforts to Arise from -          Product
systems
keep External defects that service
Preventio
defects Failure actually
n Costs -          Quality
from Costs reach -          Product
training and
occurring at customer liability
workforce
all development
-          Product
-          Product recall
design
-          Loss of
verification
reputation
-          Systems
Variants of the concept of quality costs include cost of poor
development and
quality and categorization based on account type. Joseph M.
management
Juran described quality costs as follows:
Appraisal Arise from -          Test and
Cost Area Examples
Costs detecting inspection of
defects via purchased Tangible Costs- -          Materials scrapped or junked
inspection, materials Factory Accounts
test, audit -          Labor and burden on product
-          Acceptanc scrapped or junked
e testing
-          Labor, materials, and burden
-          Inspection necessary to effect repairs on
salvageable product

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 OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT
-          Extra operations added because
of presence of defectives

-          Burden arising from excess

production capacity necessitated by
defectives

-          Excess inspection costs

-          Investigation of causes of defects

-          Discount

Tangible Costs- -          Customer complaints

Sales Accounts
-          Charges to quality guarantee
account

-          Delays and stoppages caused by

defectives

Intangible Costs -          Customer goodwill

-          Loss in morale due to friction

between departments

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