MBCQ722D-Operations & Material Management

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)U
PE
S
Course Design
S
Advisory Council
Chairman
Mr. Utpal Ghosh
Members
PE
Dr. S J Chopra Dr. Deependra Kumar Jha
Chancellor Vice Chancellor
Dr D N Pandey Dr Kamal Bansal Dr Tabrez Ahmad

Dean-SoB Dean-SoE Dean-SoL
Mr Ashok Sahu
Head-CCE
SLM Development Team

Dr Raju Ganesh Sunder Mr. Aindril De
)U
Head-Academic Unit Head-Operations
Dr. Rajesh Gupta Dr. Meenakshi Sharma Dr. Rakhi Dawar
Mr. Rahul Sharma Mr. Shantanu Trivedi Ms. Aparna
Author
Dr. Rajesh Gupta
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from University of Petroleum & Energy Studies.
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Course Code: MBCQ722D
Course Name: Operations & Material Management
Version: January 2018

© University of Petroleum & Energy Studies
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Contents
Block–I
Unit 1: Introduction to Operations Management.......................................................................3

Unit 2: Decision Making.............................................................................................................11
Unit 3: Productivity....................................................................................................................17
Unit 4: Forecasting: Techniques and Errors.............................................................................27
Unit 5: Case Study......................................................................................................................41
Unit 6:
UP Block–II
Location Selection..........................................................................................................45
Unit 7: Layout Planning.............................................................................................................51
Unit 8: Capacity Planning..........................................................................................................57
Unit 9: Process Selection............................................................................................................63
Unit 10: Case Study......................................................................................................................69
Block–III
Unit 11: Product and Service Design...........................................................................................73

Unit 12: Aggregate Planning........................................................................................................83
Unit 13: Operations in Service Sectors........................................................................................89
Unit 14: Inventory Control...........................................................................................................95
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Unit 15: Case Study....................................................................................................................101
Block–IV
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Unit 16: Supply chain Management..........................................................................................105

Unit 17: Inspection......................................................................................................................115
Unit 18: Statistical Quality Control...........................................................................................121
Unit 19: Maintenance.................................................................................................................127
Unit 20: Case Study....................................................................................................................131
Operations & Material Management
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Block–V
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Unit 21: Materials Management................................................................................................137
Unit 22: Management of Projects...............................................................................................143
Unit 23: Stores Management.....................................................................................................165
Unit 24: Sustaining and Improving Operations........................................................................171
Unit 25: Case Study....................................................................................................................177
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BLOCK - I
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3
UNIT 1 Notes
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___________________
Introduction to Operations ___________________
Management ___________________
___________________
Learning Objectives ___________________
Post completion of this unit, the students will be able to:
___________________
\\ Discuss operation management
___________________
\\ Explain the objectives of operation management
\\ Describe the scope of operations management ___________________
\\ Discuss the importance of operation management in different functions ___________________

of the organization
\\
\\
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Discuss the responsibilities of operation manager
Explain differences in manufacturing and services
___________________
Introduction:
Operations management is the function of an organization that cre-
ates a product or offers a service. This function uses resources like
manpower, material, and machine for producing goods. Operations
management can be defined as the combinations of tools and tech-
niques to maximize operational efficiency and effectiveness through
optimum utilization of resources.
Goods
Goods are tangible physical items that can be touched, seen and ex-
perienced. They include raw materials, work in progress material,
assemblies, sub-assemblies such as Central Processing Unit (CPU)
)
that gets assembled into computers and final products such as cell
phones and automobiles.
Services are activities that are experience based and provide vari-
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ous combinations of time, place, characteristics, or psychological val-

ue. Psychological value and experience are achieved from whatever
we do, eat, travel, rest and wear. It is possible to have a different
perspective regarding operations function in a nosiness. Company’s
ability to compete with competitors and boost the national economy
is dependent on the success and failure of its operations function.
4
The optimum situation for any organization is to match supply and de-
Notes mand of goods or services. Having excess supply or excess capacity re-
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___________________ sults in wastage and high costs, whereas, having too less means losing
___________________ the battle in the marketplace and possible opportunity that results in
customer dissatisfaction. In both the situations, the organization loses
___________________
the market. The key functions on the supply side are, operations and
___________________ supply chains and on the demand side, there are sales and marketing.
___________________
Production is the use of raw material and other resources for pro-
___________________ ducing goods, which may involve several stages of processes.
___________________
Services
___________________
A service does not produce anything tangible but only provides a feel
___________________ or experience to the user. Customer must be physically present most
of the times and be a part of service delivery. It is completely expe-
___________________
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rience based and the customer will remember the experience after
using that service. The operations in services are different than in
the manufacturing sector.
Objectives of Operations Management

The objectives of operations management include performance ob-
jectives and cost objectives.
Performance objectives
● Efficiency: The measure of output versus capacity
● Effectiveness: To what extent operations are in alignment

with organization goals
● Quality: The output acceptability to the defined norms

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● Lead-time: The time taken in converting the input to output
● Capacity utilization: Extent of utilization of resources
● Flexibility: A measure of how responsive the operations are to

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changing customer requirements
Cost objectives
(Visible cost or direct cost)
● Raw material
● Rework
UNIT 1: Introduction to Operations Management
5
● Labor cost
Notes
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● Maintenance cost
___________________
(Invisible cost or indirect cost) ___________________
___________________
● Inventory
___________________
● Non-availability of goods
___________________
● Late delivery
___________________
● Material handling cost ___________________
● Appraisal cost ___________________
● Machine stoppage time ___________________

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The operations must work to achieve the above-mentioned objec-
tives. Operations mainly affect management and its functions. Man-
agement is a science of decision making hence decision making is a
___________________
basic process of operations management.
These decisions are affected by operations. Decisions can be catego-

rized into: -
● Periodic / strategic
The decisions that are taken occasionally and cannot be re-
versed easily are called periodic/strategic decisions.
● Continual / operational
The decisions that can be structured, are routine and can be
reversed are called continual or operational decisions.
Generally, strategic decisions are taken by top management
like location planning, layout decision, and capacity decisions.
The routine decisions are taken by functional managers like
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inventory levels and production plans.
The scope of Operations Management

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Different organizations have a different scope for operations man-

agement. Personnel engaged in Operations management handle
a vast array of tasks, which may sometimes overlap also, such as
quality control, inventory management, employee motivation, fore-
casting and planning, geographical location management and many
more. The scope of operations management can be better understood
with an example. Let’s take an example of a travel-based company
6
running its own buses. Following activities come under the purview
Notes of a travel company: -
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___________________
1. Forecasting: about various important factors such as weather
___________________ conditions, a seasonal spike in demand for tickets and growth
___________________ prospects for road travel.
___________________ 2. Capacity planning: it is imperative for a travel company to
___________________ have a smooth cash flow and decent profit margins because
having too many idle buses or selection of less busy routes will
___________________
ultimately have a bearing on profits
___________________
3. Facilities and layout: it is essential to ensure effective utili-
___________________
zation of personnel and equipment.
___________________
4. Scheduling: various schedules need to be managed properly
___________________
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nance; roster of drivers and co-drivers; and scheduling of main-
tenance staff, office staff, and counter staff.
5. Managing inventories: it is essential to ensure optimal in-

ventory levels for food and beverage, newspapers and maga-
zines, pillows and blankets, first aid equipment and other es-
sentials.
6. Assuring quality: Delivering high quality service every time

and in every aspect is essential for smooth operations over
an extended period. Attention to quality should be paid in
those areas where the emphasis is on quality, such as the
behavior of Drivers and Conductor, dealing with customers,
telephone and online reservations in flying and maintenance
operations.
7. Motivating and training: all employees shall be properly

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trained and highly motivated in various aspects of operations

management.
8. Locating facilities involves taking decisions by managers on

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the cities to serve, location for maintenance facilities, and ma-

jor and minor hubs.
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Importance of operations management in different functions of
an organization Notes
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___________________
___________________
Operations
___________________
___________________
Finance Marketing ___________________
___________________
___________________
Figure 1.1 Overlapping functions of an organization
___________________
Finance, Marketing, and Operations are three major functions of
___________________
any business organization, which overlap each other. All other func-
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tions—Public Relation, Legal, Information Technology, Purchasing,
and Human Resource and so on – support the main functions. Among
the service jobs that are closely related to operations are financial
___________________
services (e.g., stock market analyst, broker and investment banker),

marketing services (e.g., market analyst, marketing researcher, ad-
vertising manager, and product manager), accounting services (e.g.
corporate accountant, public accountant, and budget analyst), and in-
formation services.
Operations function is the backbone of every manufacturing and

services based business and is an intrinsic part of organizational
culture.
The study of operations management is necessary for all managers

because;
● Operations are the backbone of the organization, which con-

verts customers’ requirement into deliveries.
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● The activities in all other areas of business organizations such

as finance, accounting, human resource, marketing and others
are all interrelated with operations management.
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● The activities under operations are repetitive and non-repeti-

tive. The main part is the flawless execution of the activities.
Responsibilities of an Operations Manager

Operations managers are responsible for:
● It helps in the identifying and categorizing the types of problems.

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● It ensures more precise demand forecasting for the product or
Notes services offered.
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___________________
● It helps in understanding the sequencing and prioritizing pro-
___________________ cesses.
___________________
● It helps in inventory control and quality control. It ensures the
___________________ best use of resources and thereby effective capacity utilization.
___________________
● It plays a significant role in queuing management and absorb-
___________________ ing the feedbacks in the processes.
___________________
For the purpose of fulfilling the responsibilities, the operations
___________________ manager has to be involved in different areas of decision mak-
ing, which include:
___________________
● The decision about the use of resources
___________________
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● Establishing rational for processes
● Deciding suitable location for the organization
● Establishing schedules for operations
● Deciding the quantity of production to match demand
● Establishing responsibilities for work
● Taking corrective actions
● Tightening control measures
Operations as a value-added process or transformation pro-

cess
Operations can be understood as a value-adding process or transfor-
mation process. A process has an input, an output and a conversion
system, which converts the input into output. All processes consume
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resources. It is important that processes add value. The formula has

been transformed from input to output.
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Consumes Resources
Input Output
Conversion System
Figure 1.2 Process of conversion

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The processes must ensure the value addition, i.e. value of inputs
should be lower than the value of output. Notes
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___________________
Manufacturing and Services Industries ___________________
Operations can be broadly divided into two categories ___________________
● Manufacturing ___________________
___________________
● Services
___________________
The difference between manufacturing and services has been clas-
sified below ___________________
___________________
System Characteristics Production Services
Output Tangible Intangible ___________________
Inventory
Work
Customer contact
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More equipment
Low
Immediate
More labor
High
___________________
Participation of customer Low High

Performance measurement Complicated Simple
Location Ease of manufacturing Location of users
Summary
Operations Management is an important aspect of management
which involves optimum designing and management of production
processes and restructuring business functioning related to the pro-
duction of goods and services. It influences a vast array of sectors
like banking, hospitality, travel, hospitals, etc. Operations Manage-
ment is an essential function of every organization as it involves
management of long-term as well as the daily production of goods
and services.
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Review Questions
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1. Differentiate between manufacturing and services.
2. Discuss various objectives of operations management.
3. Describe the process of management.
4. What are the performance criteria for operations manager?
5. Explain the different areas in which an operation manager has

to be involved in decision making.
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UNIT 2 Notes
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___________________
Decision Making ___________________
___________________
After completion of this unit, the students will be able to:
___________________
\\ Appreciate various decision environments
___________________
\\ Understand various decision-making techniques
\\ Practice rational decision making ___________________
___________________
Operations Management and Decision Making ___________________

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As a key decision maker and planner in an organization, the Opera-
tions Manager has a significant role to play in ensuring the achieve-
ment of company goals and objectives. Most of the decisions involve
___________________
selection of the optimum solution from many options that may have
an impact on costs, profits, and output. But it must be made sure
that decisions are made post due diligence.
The types of decisions that are taken by operations managers are as

below:
● What: What quantities of which resources are required?
● When: When to replenish inventory? When to schedule work?

When to take corrective actions? When are specific resources
required?
● Where: Where is the work to be done (place)?
● How: How to do the work? How to design products and services?

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How to allocate resources?
● Who: Who will complete the work?

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Management is all about making right decisions at the right time.

Whether decision making is an art or science has been a debate since
long. Decision making is an art which is supported by the science of
decision making.
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Steps in decision-making process
Notes
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___________________ The process of decision making involves following steps
___________________ 1. Identify problem requiring a decision

___________________ 2. Define criteria for choosing an alternative
___________________
3. Identify all alternatives
___________________
4. Analyze and compare alternatives on the basis of defined
___________________
criteria
___________________
5. Select the best alternative as per defined criteria
___________________
Decision Environments
___________________
The environments in which managers make the decision are as under:
___________________
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● Certainty – A condition in which certainty of outcomes of all
alternatives is known
● Risk – A condition in which probability of all possible outcomes

is known
● Uncertainty – A condition in which the probability of out-

comes is not known
Decision making under certainty

A condition is certain when the outcomes of all alternatives are cer-
tain in nature.
Decision making under risk

A condition where the probability of various outcomes of all alterna-
tives is known.
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Consider the example below for decision making under certainty

when the outcomes of three alternatives are not known.
Example 2.1
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Following is the example of a payoff table. The values in brackets

indicate the probability of a future condition to happen.
Alternative / Payoff
market High (0.4) Moderate (0.1) Low (0.5)
1 50 40 10
UNIT 2: Decision Making
13
2 20 60 20
Notes
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3 30 40 5 ___________________
Expected payoff = ∑ px ___________________
Where p is probability and x is a payoff ___________________
___________________
So expected payoff for alternative 1 = 0.4 × 50 + 0.1 × 40 + 0.5 × 10
= 29 ___________________
Alternative 2 = 0.4 × 20 + 0.1 × 60 + 0.5 × 20 = 24 ___________________
Alternative 3 = 0.4 × 30 + 0.1 × 40 + 0.5 × 5 = 18.5
___________________
So decision is in favor of alternative 1, which gives the highest payoff
___________________
that is expected.
___________________
Decision making under uncertainty

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Maximin – The substitute with the best out of the worst payoffs is
selected.
___________________
Maximax – The substitute with the maximum out of highest pay-

offs is selected.
Laplace – The substitute with the best average payoff out of any of
the Alternatives is selected.
Minimax regret – The substitute that has the smallest out of the
highest Regrets is selected.
The principle of insufficient reason – Equal probability is allo-

cated to all conditions and the alternative with maximum expected
value is selected.
Example 2.2
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Check the payoff table below
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market High Moderate Low

1 50 40 10
2 20 60 20
3 30 40 5
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Maximin
Notes
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___________________ Identify the minimum payoff for each alternative
___________________ Alternative / Payoff Minimum

___________________ market High Moderate Low payoff
1 50 40 10 10
___________________
2 20 60 20 20
___________________
3 30 40 5 5
___________________
Identify the maximum out of minimum payoff, which is 20 for alterna-
___________________
tive 2. So on the basis of maximin principle, alternative 2 is preferable.
___________________
___________________ Maximax
___________________
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Identify the maximum payoff for each alternative
Alternative /
market
Payoff
High Moderate Low
Maximum
Payoff
1 50 40 10 50
2 20 60 20 60
3 30 40 5 40
Maximum out of maximum payoff is 60 for alternative 2. So, on the

basis of maximax principle, alternative 2 is preferable.
Laplace
Calculate average expected payoff for each alternative
Alternative / Payoff Average

market High Moderate Low payoff
1 50 40 10 33.3
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2 20 60 20 33.3
3 30 40 5 25
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Identify the maximum of average payoff which is 33.3 for alterna-

tive 1 and 2. So based on Laplace principle, alternative 1 and 2 are
equally preferable.
The principle of insufficient reason

Allot equal probability to each future state of nature and calculate
an expected value for each alternative. Since there are 3 possible
states of nature, so a probability of 1 / 3 is allotted to each
UNIT 2: Decision Making
15
Alternative Payoff Expected
Notes
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/ market High 1/3 Moderate 1 / 3 Low 1 / 3 value
___________________
1 50 40 10 33.3
___________________
2 20 60 20 33.3
3 30 40 5 25 ___________________
___________________
Expected value for alternative 1 = 1 / 3 × 50 + 1 / 3 × 40 + 1 / 3 × 10 = 33.3
Expected value for alternative 2 = 1 / 3 × 20 + 1 / 3 × 60 + 1 / 3 × 20 = 33.3 ___________________
Expected value for alternative 3 = 1 / 3 × 30 + 1 / 3 × 40 + 1 / 3 × 5 = 25 ___________________
Identify the maximum of expected value which is 33.3 for alterna- ___________________
tive 1 and 2. So based on principle of Insufficient Reason; alternative
___________________
1 and 2 are equally preferable.
___________________
Minimax regret
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In this method, the regret for each alternative for each future state
of nature is determined. Regret for each pair is equal to the dif-
___________________
ference of payoff of that combination and the combination with the

highest payoff or that state of nature
market High Moderate Low
1 50 40 10
2 20 60 20
3 30 40 5
The regret for alternative 1 will be

50 – 50 = 0 for high market
60 – 40 = 20 for moderate market
20 – 10 = 10 for low market
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The regret table is then created, and maximum regret for each alter-
native is identified.
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Alternative / REGRET Maximum
Notes
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market High Moderate Low regret
___________________
1 0 20 10 20
___________________
2 30 0 10 30
___________________
3 20 20 15 20
___________________
The decision is made based on a minimum of maximum regret. So,
___________________
alternatives 1 and 3 are equally preferable as they have the lowest
___________________ regret of 20.
___________________
Summary
___________________
Decision-making is the process of identifying and choosing alter-
___________________
natives based on the values, preferences, and beliefs of the deci-
___________________
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sion-maker. It is required in all phases of life and in all fields. Every
single action that we make is the result of a decision. Moreover,
decision-making plays an important role in various fields of man-
agement. It is a significant tool for all businesses as it helps make
efficient decisions during planning thereby reducing risks.
Review Questions
1. Consider the following payoff table:
Alternatives Profit if future demand is

Low Medium High
X 10 50 70
Y –10 44 120
Z 0 20 140
Which alternative would you choose based on

)
a. Maximin
b. Maximax
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c. Minimax Regret
2. Consider the following payoff table:
Future Conditions
Alternative
Low Moderate High Very high
A 100 100 100 100
B 90 130 150 140
C (–100) 150 300 160
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UNIT 3 Notes
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___________________
Productivity ___________________
___________________
Learning Objectives
___________________
___________________
\\ Appreciate the importance of productivity
\\ Calculate partial and multifactor productivity ___________________
\\ Identify scope of productivity improvement ___________________

\\ Understand the concept of competitiveness
___________________
\\ Describe the various aspects of operations strategy
___________________
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Productivity can be described as the degree of efficient utilization of
resources and is normally described as an output to input ratio. It
measures output per unit of input in monetary terms. All the pro-
___________________
cesses consume resources. The resources could be manpower, ma-

terial, machine, energy, money or any other resources, which are
consumed for producing output.
Productivity collectively measures the trends in labor growth, tech-

nology improvement, and how effectively the resources are utilized.
Productivity = output / input

Example 3.1
Consider the following data:
A manufacturing company produces 100 units of a product in 10

hours shift. The resources consumed are as under:
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No of Labor 10
Machines 5
Raw material 100 kg
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Energy 500 KW
Now, the productivity with respect to labour = output / labour hours

Labour hours = 10 × 10 = 100 (no of labour × no of hours in a shift)
So productivity = 100 / 100 = 1 unit per labour hour
The productivity with respect to machine = output / machine hours

Machine hours = 5 × 10 = 50
So productivity = 100 / 50 = 2 unit per machine hour
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The productivity with respect to material = output / raw material
Notes So productivity = 100 / 100 = 1 unit per KG of material
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___________________
The productivity with respect to energy = output / energy
___________________ So productivity = 100 / 500 = 0.2 unit per KW
___________________
You can see that only one input has been considered at a time for
___________________ calculating productivity. These are called partial measures of pro-
___________________ ductivity. So partial measures of productivity are as under:
___________________
Partial measures
___________________
Output Output Output Output
___________________
labour machine capital energy
___________________
Multifactor measures
___________________
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If more than one input is used for calculation of productivity, it is
called multifactor productivity.
For example,
Output = Output
labour + machine labour + capital + energy
However, since the inputs have different units, so they have to be

converted into monetary value for calculating productivity. It is ex-
plained below with an example.
Example 3.2
A manufacturing company produces 100 units of a product in 10
hours shift. The resources consumed are as under:
Labour 10
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Rs. 10 per labour hour

Machines 5
Operating cost Rs. 50 per machine hour
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Raw material 100 kg @Rs. 20 per KG

Energy 500 KW @Rs. 20 per KW
Labour hours = 10 × 10 =100

Labour cost = 100 × 10 = 1000
Machine hours = 5 × 10 = 50
So operating cost = 50 × 50 = 2500
UNIT 3: Productivity
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Material cost = 100 × 20 =
Energy cost = 500 × 20 = 10000 Notes
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Total cost = 1000 + 2500 + 2000 + 10000 = 15500 ___________________
Multifactor productivity = 100 / 15500 units per Rupee spent ___________________
___________________
The scope of Improvement in Productivity
___________________
There are the many areas, on the identification of which results in
___________________
the improvement of productivity. Few of the examples are:
___________________
● Identify measures of productivity for all processes
___________________
● Identify processes restricting the capacity of whole operations
___________________
system
___________________
● Improves the productivity of the processes by using improve-
ment tools
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The main objective of any organization is to sell competitive prod-
___________________
ucts in the market. Competitiveness has an important role in de-

termining whether an organization would grow, barely get-by or
would fail. Different business organizations compete on the basis
of a combination of key factors such as price, delivery time, quality,
differentiation points.
Competitiveness is affected by marketing in various ways such as

pricing, promotion, advertising and identification of customer wants.
1. Identification of consumer wants or needs: plays a vital

role in establishing competitiveness of business and plays a vi-
tal role in the decision-making process. Every company strives
to achieve the perfect balance between customer needs and
company offerings.
)
2. Price and quality: it is essential to comprehend the trade-off

decisions made by the consumers amongst quality and price as
it plays a crucial role in the final purchase decision.
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3. Promotions and advertising are used by companies to in-

form consumers about the features and benefits of their prod-
ucts and develop a special place in their minds.
Operations of a company are influenced by a host of co-related pa-

rameters such as cost, quality, inventory, supply chain, product/ser-
vice, post-sales service, location, and various others.
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1. Product and service design- a key factor that consumers
Notes consider while making a purchase decision is unique features
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___________________ and characteristics of a product or service. In order to ensure
___________________ the presence of such unique characteristics, it is essential that
the various departments of the firm work together and estab-
___________________
lishes harmony between consumer wants, financial capabilities,
___________________ operations capability and supply chain capacities. Innovation
___________________ and time-to-market are two other critical factors affecting
consumer decision making.
___________________
___________________ 2. Cost: Efforts to reduce the cost of products and services, is an

ongoing process in every organization as it has a direct bearing
___________________
on pricing policies and profit margins. Firms who possess high-
___________________ er productivity rates have a distinct competitive advantage
over its competitors. To reduce costs and boost output, compa-
___________________
UP nies adopt the outsourcing strategy for some of its operations.
3. Location: having a strategically important location is half the

battle won for firms as it provides numerous benefits, for in-
stance, location near raw material helps reduce transportation
costs and delivery lead times. Location is also important as
it is directly associated with customer convenience as well as
establish competitive superiority in terms of cost, visibility and
distribution costs. It assumes even greater importance in retail
sectors.
4. Quality has a very important role to play in a consumer pur-

chase decision as consumers analyze any product or service
they buy based on the perception if it satisfies their require-
ment. If a product or service is able to establish superior quali-
ty competitiveness in the mind of the customers, customers are
willing to pay more for that.
)
5. Quick response: This parameter has very serious implica-

tions for a company and if handled correctly can establish com-
petitive superiority. Companies should try and introduce new
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products in the market quickly and also try to deliver the prod-
ucts and services to customers as quickly as possible. Another
important aspect is to quickly redress customer grievances.
6. Flexibility: Highly flexible companies enjoy a competitive ad-

vantage in a dynamic environment as they are able to incorpo-
rate changes in their products and services quickly and estab-
lish a unique place in the customers mind.
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7. Inventory management: if a company is able to ensure a
steady supply of goods without enhancing its dead stocks, it Notes
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has a distinct competitive advantage over its competitors. ___________________
8. Supply chain management: efficient management of the ___________________
supply chain ensures timely and cost-effective distribution and ___________________

delivery services in co-ordination with buyers and suppliers.
___________________
9. After sale service: are value addition activities that enhance ___________________
the user experience such as delivery, warranty, repair and re-
___________________
placement and technical support. It also is effective during the
sales process which helps grab the customer attention such as ___________________
attention to detail, regular flow of information, etc. ___________________
10. Service quality: a highly critical key differentiator, it ensures ___________________
that businesses which are more careful towards extending su-

UP
perior service quality to the customer are ensured more profits
and faster growth as compared to others who lack in it.
___________________
11. Most importantly the human resources that are manag-

ers, workers, and labors: highly skilled and knowledgeable
manpower greatly enhances the company products and pro-
vides a unique advantage over competitors with their skills.
Strategies and Tactics

Strategies and tactics lay the roadmap for an organization to achieve
its goals through highly efficient decision making. Organizational
strategies encompass most of the activities of an organization but
vary from business to business. For, eg: - For a company like Tata,
its organizational strategies could be divided on the basis of its busi-
ness verticals such as Auto, Software, IT, Power, etc. These organi-
zational strategies are themselves developed from functional strat-
)
egies that cover every possible functional area of the organization.

In a nutshell, functional strategies should complement the organiza-
tional strategies, and organizational strategies should support over-
(C
all goals and missions of the company.
Business strategies can be divided into three categories: -
• Low cost: The organization may decide to penetrate the mar-

ket by keeping the cost of their product or service lowest among
its competitive products in order to differentiate their products
or services
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• Responsiveness: The organization responding quickly to
Notes
market demand and customer needs or complaints can have
ES
___________________ a competitive advantage. A great responsive strategy should
___________________ include the following three actions: -
___________________ – Introducing new and improved products and services

___________________
quickly
___________________ – Ensuring prompt deliveries of existing products
___________________ – Responding quickly to customer complaints and grievances

___________________ • Differentiation from competitors: The organization at times
___________________ differentiates their product or service from competitors by price,
___________________
features, after sakes services, quality, or by its design. They may
offer the competitive products or service at a lower price with more
___________________
UP upgraded features, or they can provide free after sales service for
more period of time than by their competitors.
Tactics can be defined as the actions and techniques used for suc-
cessful implementation and execution of strategies. They are more
specific than strategies, and they provide guidance and direction for
carrying out actual operations, which need the most specific and de-
tailed plans and decision making in an organization. For a process,
the tactics would include “how to” such as how to increase sales,
how to ensure customer satisfaction. In case of operations, tactics
include the actual doing part of the process.”
Strategies and Fundamental capabilities need to be in sync to en-

sure effective implementation. Table 2.1 enlists various instances
where organizations have successfully deployed strategic tactics.
Table 3.1 Organizations and applied Strategies

)
Types of Strat- Operations Organizational Examples

egies Strategy
Low price Low cost U.S. first-class postage
(C
Wal-Mart
Southwest Airlines
Responsiveness Short processing McDonald’s restaurants

time
Express Mail, UPS, FedEx
One-hour photo
On-time delivery Domino’s Pizza
FedEx
23
Differentiation High-performance Sony TV
Notes
ES
design
Performance ___________________
Differentiation: High-Quality Pro- Lexus
___________________
cessing
High quality
Disneyland ___________________
Five-star restaurants or hotels ___________________

Consistent quality Coca-Cola, PepsiCo ___________________
Wegmans ___________________
Electrical power ___________________
Differentiation: Innovation 3M, Apple
___________________
Newness Google
___________________
Differentiation: Flexibility Burger King (“Have it your
Variety Volume
UP way”)
Hospital emergency room
McDonald’s (“Buses welcome”)

___________________
Toyota
Supermarkets (additional
checkouts)
Differentiation: Superior customer Disneyland
service
Service Amazon
IBM
Nordstrom
Differentiation: Convenience Supermarkets, dry cleaners
Location Mall stores
Service stations
Banks, ATMs
)
Operations Strategy
Organizational strategy has a broad scope and encompasses the
(C
whole organization and provides the overall direction whereas Oper-

ations strategy is narrower in scope as it deals with the operational
aspects of the organization. It deals with key issues such as quality,
costs, processes, products, resources, lead times and scheduling, etc.
But in order to ensure the effectiveness of a operations strategy, it
is imperative to link it to Organizational strategies as they both go
hand in hand and complement each other.
24
While formulating organizational strategy, competitors strengths
Notes
and weaknesses should be taken into account to ensures that orga-
ES
___________________ nizations strengths are capitalized, and weaknesses are addressed
___________________ to. Likewise, Operations strategy should be in sync with the func-
tional units of the organization as well as with the organizational
___________________
strategy. It is required on the part of senior managers to work in co-
___________________ ordination with the functional units to ensure that each individual
___________________ strategy complements the organizational strategy. This will foster
a feeling of co-operation amongst the various functional units of an
___________________
organization to ensure the benefits of synergy and co-operation.
___________________
Table 3.1 provides a comparison of an organization’s mission, its
___________________
overall strategy, and its operations strategy, tactics, and operations.
___________________
Table 3.2 Comparison of an organization’s mission
___________________
UP Manage-
ment
Level
Time
Horizon
Scope
Level
of
Detail
Relates to
The
overall Mission Survival,
Top Long Broad Low
organiza- Strategy profitability
tion
Growth rate,
Senior Long Broad Low
market share
Product design,
Opera- Moderate choice of location,
Strategic Senior Broad Low
tions to long choice of technolo-
gy, new facilities
Employment
levels, output
Moder- Moder-
Tactical Middle Moderate levels, equipment,
ate ate
selection, facility
layout
Scheduling per-
sonnel, adjusting
Opera-
)
Low Short Narrow High output, rates,

tional
inventory manage-
ment, purchasing
Summary
(C
Productivity encompasses the various parameters to measure the

efficiency of an organization and plays a vital role in enhancing pro-
duction performance of the company as well as the nation.
An increase in the national productivity ensures improvement in

the standard of living of the people and improves their purchasing
power to afford important products and services including better
25
housing, good education, nutritious food, and leisure, etc. Growth in
productivity assists business in enhancing their profitability. Notes
ES
___________________
Review Questions ___________________
1. Define productivity. ___________________
2. Differentiate between partial and multifactor measures of pro- ___________________
ductivity. ___________________
3. What are the various factors affecting productivity? ___________________
4. Explain measures of improving productivity. ___________________
___________________
5. Explain various competition strategies.
___________________
6. If a plant produces 350 units in 700 man hours and consumes
500 kg steel, determine
UP
a) Labor productivity
___________________
b) Material productivity
7. Differentiate between organizational strategies and operations

strategies.
8. Why is mission statement important and what is its contribu-

tion to the growth of any organization?
9. List ten operational strategies that a bank requires to attract

customers.
)
(C
(C
) UP
ES
27
UNIT 4 Notes
ES
___________________
Forecasting: Techniques and ___________________
Errors ___________________
___________________
___________________
\\ Discuss the importance of forecasting in operations management
___________________
\\ Select a suitable forecasting technique
\\ Apply forecasting technique ___________________
\\ Monitor and control various types of forecasting techniques ___________________

UP
The success of an organization depends on its capability to anticipate
the future conditions and align the operations accordingly. Hence,
___________________
forecasting of future markets and demand becomes important to the

effectiveness of an organization. In this lesson, we will understand
the significance of forecasting and methods used for forecasting.
Forecasts form a major component of every decision-making process

under operations management, and their importance is paramount
as they offer vital inputs regarding future demands. The anticipation
of demand is necessary for every organization to plan accordingly to
fulfill that demand and this is where Forecasting comes in handy as
it helps determine the future requirements. For instance, Operation
Department needs the forecasts about the expected demand to for-
mulate budgets, purchase additional equipment, recruit necessary
personnel, prepare purchase requirements and share them with the
vendors and help supply chain partners with the planning process.
)
Forecast encompasses two important aspects – “expected demand

and relative degree of accuracy that could be assigned to the fore-
cast (potential size of forecast error). Estimated demand levels can
(C
be a function of some structural variations, such as seasonal varia-

tion and Forecast Accuracy is a function of forecasters which enables
them to correctly model various parameters such as demand, chance
variations in demand and unexpected situations that might impact
demand.”
Forecasting plays a critical role in the planning process as they en-

able the managers to predict future trends and plan accordingly.
28
Forecasts are regularly used while handling various essential func-
Notes tions of an organization such as sales, production, budgeting, in-
ES
___________________ ventory, purchase and capacity planning. The unique aspect about
___________________ forecasts is that they are made according to time horizons, i.e.: -
___________________ – Short Term Forecasts (hourly, daily, weekly or monthly)

___________________ – Long-Term Forecasts (half-yearly, yearly or five yearly)
___________________
Short-term forecasts relate to ongoing operations whereas long-
___________________ term forecasts are essential tools for strategic planning. Long-term
___________________ forecasts are useful in the development of new products, equipment,
facilities and services which will take a long time to develop and
___________________
implement.
___________________
We come across two terms in this context:
___________________
UP
Prediction anticipating a future event
Projection anticipating variables
Forward projection of variables is called forecasting.
Types of Forecasting
Forecasting could be categorized on various criteria as under
● Economic has economic relevance like demand
● Noneconomic has no economic relevance, e.g., political and

weather.
● Macro industry or economy level forecasting
● Micro firm level forecasting
● Active forecast for planned actions
● Passive extrapolation of previous year’s data

)
● Conditional impact of the change in independent vari-

able upon dependent variable. The change
in an independent variable may bring
(C
changes in the dependent variable.
● Non conditional estimation of change in independent vari-

able
● Long run strategic
● Short run operational

UNIT 4: Forecasting: Techniques and Errors
29
All forecasts have some common characteristics
Notes
ES
● They are not perfect.
___________________
● It assumes that the conditions that prevailed in the past will ___________________
continue to prevail.
___________________
● Forecast accuracy for shorter time periods is less accurate as
___________________
compared to forecast of longer.
___________________
● Forecasts will be more accurate if made for groups of items,
___________________
rather than a single item.
___________________
Forecasting in Operations ___________________
Forecasting is important during all phases of operations. The need ___________________

of forecasting at various phases of operations is as under:
Planning
Demand forecasting to decide
UP ___________________
● The degree of automation
● Product design
● Capacity decisions
Organising
● Workforce required
● Production volumes
Controlling
)
● Inventory levels
● Production volumes
(C
● Work force
Steps in demand forecasting

The steps involved in forecasting are as under
1. Identifying the nature of the product
2. Deciding the nature of the forecast

30
3. Enlisting the factors affecting demand
Notes
ES
4. Analysing the factors affecting demand
___________________
___________________ 5. Selecting the forecasting technique
___________________ 6. Verifying the accuracy of forecasting

___________________ Components of demand
___________________
There are 5 components of demand
___________________
● Average – The average of all past demands
___________________
● Trend – a continuous increase or decrease in demand over time
___________________
● Seasonal influence – an increase or decrease in demand
___________________
during different identifiable phases of time
___________________
UP
● Cyclical movements – change in demand pattern over a long
span of time
● Random error – chance variations in demand
It is necessary to understand the types of demand because the de-

mands of certain products are dependent on the demand for its
complementary product. Consider an example of razors and blades.
Both are complementary products to each other. So, to be able to
predict the demand for razors it has become imperative to predict
the requirements for blades.
Now, we will discuss the types of demand for which forecasting

is done.
Dependent and independent demand
● If demand for a product depends on some other variables, it is
called dependent demand.
)
● If demand for a product does not depend on other variables, it

is termed as independent demand.
(C
Techniques of Forecasting
The techniques of forecasting can be broadly divided into three cat-
egories:
● Based on judgments
● Based on time series
● Associative forecast
31
Techniques based on the judgment
Notes
ES
Executive opinion
___________________
A group of senior-level managers meets and develop a forecast. It is ___________________
used for long-term planning and new product development.
___________________
Advantage ___________________
● Knowledge sharing among various managers ___________________
Risk ___________________
● The opinion of one person may dominate. ___________________
___________________
● No individual is responsible for the forecast.
___________________
Direct consumer contact composites
UP
Forecasting based on views of direct sales staff or customer service
staff.
___________________
Drawback
● Failure to differentiate amid what consumers want to do and
what they would actually do
● Influenced by recent experience
● Salesmen have an advantage in providing low sales estimates
Consumer surveys
Advantages
● Direct information
● Drawback
)
● Expensive and time-consuming
● Low response rate
Delphi
(C
Delphi involves forecasting based on questionnaires to a group of

managers and experts. The questionnaires are modified, and re-
sponses sought till the consensus arrives.
Drawbacks
● It is a time taking process.
32
● Evidence of high degree of accuracy does not exist.
Notes
ES
● The poorly designed questionnaire may result in false conclu-
___________________
sions.
___________________
Nominal group
___________________
It involves sharing of ideas by the experts. The ideas are ranked by
___________________
the experts and rankings are subject to mathematical derivations.
___________________
___________________ Techniques based on time series

___________________
Naïve forecast
___________________
The actual demand for any period is considered as a forecast of suc-
___________________
ceeding period.
___________________
UP
Example 4.1
Consider the following data, which is available for the past 6 periods
for a manufacturing firm.
Period Actual demand D

1 55
2 37
3 62
4 31
5 33
6 48
The forecast for period 7 on the basis of the naïve forecast would be
48 as it is the actual demand for the last period.
Simple average
“A simple average is the average of demands / prices incurring in all
)
given periods.
sum of demands for all time periods

SA =
Number of periods”
(C
The major benefit that simple average extends is in the form of a re-
duction in chances of being swayed by gross fluctuation which may
take place in a fixed period. The disadvantage is that in case, the
defined pattern changes over time, the simple average method will
not be able to find out this change.
33
Example 4.2
Notes
ES
Period Actual demand D ___________________
1 100
___________________
2 120
3 80 ___________________
4 90
___________________
5 110
6 70 ___________________
___________________
The forecast for period 7 based on simple average will be
100 + 120 + 80 + 90 + 110 + 70 / 6 ___________________
= 570 / 6 = 95 ___________________
Simple moving average ___________________

UP
A simple moving average is a basic type of moving average. It is
derived by considering a series of prices or demands, then adding
these prices or demands and then dividing the total by the total data
___________________
points
sum of demands for periods

MA =
The chosen number of periods
Example 4.3
Period Actual demand D

1 50
2 60
3 40
4 45
5 55
6 50
)
The forecast for period 7 based on 5 period simple moving averages

will be
60 + 40 + 45 + 55 + 50 / 5
= 250 / 5 = 50
(C
The forecast for period 7 based on 3 periods simple moving average

will be
45 + 55 + 50 / 3
= 150 / 3 = 50
34
Weighted moving average
Notes
ES
A moving average forecast makes use of a set of most current and
___________________
real data figures for generation of a forecast while the recent fore-
___________________ casts are allotted the weights
___________________
Example 4.4
___________________
___________________ Period Actual demand D

1 100
___________________
2 120
___________________ 3 80
___________________ 4 90
5 110
___________________
6 70
___________________
UP
Calculate the 3-period weighted moving average if weights are 0.3,
0.2 and 0.5 (0.3 being the weight of most recent period).
Weighted moving average will be:
0.3 × 70 + 0.2 × 110 + 0.5 × 90
= 21 + 22 + 45 = 88
Exponential smoothing
Exponential smoothing uses a part of past period demand and a part
of the past period forecast to predict demand for succeeding period.
Next forecast = previous forecast + α (actual demand – previous
forecast)
Ft = F t-1 + α (Dt-1 − Ft-1)
Or Ft = α Dt-1 + (1− α) Ft-1
α = smoothing constant that represents a percentage of forecast er-
)
ror
0 <α< 1
Example 4.5
(C
Period Actual demand D Forecast

1 100 120
2 120 100
3 80 95
4 90 100
5 110 135
6 70 80
35
Calculate demand for period 7 if smoothing coefficient = 0.2.
Forecast for period 7 Notes
ES
= α Dt-1 + (1 − α) Ft-1 ___________________
= 0.2 × 70 + 0.8 × 80 ___________________
= 14 + 64 = 78
___________________
Selecting the value of smoothing coefficient ___________________
Smoothing coefficient is ___________________

High for new products for which demand is shifting
___________________
Low if the demand is stable
Moderate if the demand is moderately unstable ___________________
___________________
Incorporating trend
___________________
The trend is the effect of long-term factors in the series.
Trend equation
“Y = a + bt”
UP ___________________
“t = specified number of periods

Y = forecast for period t
a = value of Y at t =0
b = slope of line”
n ∑ ty − ∑ t ∑ y
b=
n ∑ t2 – (∑ t)2
y–b∑t
a=
n
Example 4.6
Consider the following data
Period t Demand D
)
1 5
2 8
3 9
4 12
(C
5 16
As we can see the demand is an increasing trend,trend equation will

be used to forecast for period 6.
36
Period t Demand D ty T2
Notes
ES
1 5 5 1
___________________ 2 8 16 4
3 9 27 9
___________________
4 12 48 16
___________________ 5 16 80 25
___________________
∑ t = 15
___________________ ∑ y = 50
___________________ ∑ ty = 176
∑ t2 = 55
___________________
N=5
___________________ n ∑ ty − ∑ t ∑ y
b=
___________________ n ∑ t2 – (∑ t)2
= 880 – 750 / 275 – 225
___________________
UP
= 130 / 50 = 2.6
a=
n
∑y – b ∑ t
= 50 – 39 / 5 = 11 / 5
= 2.2
So D = a + bt
D = 2.2 + 2.6 t
For t = 6,
D = 2.2 + 2.6 × 6
= 2.2 + 15.6 = 17.8
= 18 (approx.)
Forecasting Error
forecast error
MAD =
n
)
forecasted demand – actual demand

=
n
forecast error
BIAS =
(C
n
= (forecast demand – actual demand)
n
(actual demand – forecast)2
MSE =
n
Sources of forecast errors

37
● The omission of an important variable
Notes
ES
● Irregular variations due to unpredictable circumstances
___________________
● Incorrect use of forecasting technique ___________________
● Misinterpretation of results ___________________
Tracking signal (TS) ___________________
___________________
Tracking signals are used to monitor forecast accuracy.
___________________
(actual demand – forecast)
TS =
MAD ___________________
___________________
When the specified characteristics of demand vary from the original
one but the forecasting model doesn’t do the tracking, the signal ___________________
goes out of control.

UP
Normally tracking signal should be within ± 4
If the forecasting model is working accurately, the tracking signal
___________________
will be close to zero.
Example 4.7
Following is the data of actual and forecasted demand:
Period Forecast Actual demand

1 170 155
2 140 160
3 165 130
4 170 185
5 180 170
6 155 125
Comment on the suitability of the forecasting technique being used.
Peri- Actual Forecast A− RSFE Bias IA− MAD TS

)
od Demand F ∑ (A−F) ∑ (A−F) FI IA−FI RSFE /

/n /n MAD
1 170 155 15 15 15 15 15 1
(C
2 140 160 −20 −5 −5 / 2 = 20 10 −2

2.5
3 165 130 35 30 10 35 11.7 2.56
4 170 185 −15 15 3.75 15 3.75 4
5 180 170 10 25 5 10 2 12.5
6 155 125 30 55 9.1 30 5 11

38
Since the value of TS exceeds 4 in period 5 and 6, the forecasting
Notes technique is no more suitable.
ES
___________________
___________________
Summary
___________________ Forecasting is the technique of giving estimates regarding the fu-
ture based on analysis of past and present data along with ana-
___________________
lyzing various trends. With markets becoming highly competitive
___________________
Forecasting has found a wide range of applications in multiple fields
___________________ which are highly competitive. Forecasting comes handy in various
___________________ situations where analysis of future data is essential: -
___________________ – Product Forecasting

___________________ – Political Forecasting
___________________
UP
– Credit Score Forecasting
– Weather Forecasting
– Economic Forecasting
– Outcome Forecasting and
– Supply Chain Management
But it should be remembered that not everything can be forecasted

reliably if the factors that relate to what is being forecast are known
and well understood and there is a significant amount of data that
can be used very reliable forecasts can often be obtained.
Review Questions
1. What are the mutual features shared by all types of forecasts?
2. What is the relevance of forecasting in operations manage-

)
ment?
3. Differentiate between Delphi and nominal group.

(C
4. What is forecasting error? What are the measures of forecast-

ing error?
5. Explain the use of tracking signal in forecasting.
6. Forecast demand for April was recorded as 350 units, but actu-
al demand happened to be only 290. If the firm is using a single
exponential smoothing technique, with α = 0.3, what would be
the forecast for the month of May?
39
7. Given the following
Σ X =80 Σ Y = 1200 n = 20 Notes
ES
Σ X = 340 Σ Y = 74800 Σ XY = 5000 ___________________
Calculate the value of Y, for X equal to 50, using linear regression. ___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
) UP ___________________
(C
(C
) UP
ES
41
Unit 5 Notes
ES
___________________
Case Study ___________________
___________________
Why does Productivity Matter?
___________________
It is important to emphasize the significance of productivity for an ___________________
economy. There are declared as well as reported figures of every na-
___________________
tion in terms of GDP, income, and Balance of Payments. They may
give a different opinion; sometimes good, sometimes negative, but ___________________
they cannot be always taken into consideration. Do these key eco- ___________________
nomic indicators affect anyone?
___________________
High levels of productivity and high living standard go parallel to-
gether.
UP
As is the case with a few of the developed nations, some of the
___________________
high-productivity manufacturing sector jobs are replaced by low-

er-productivity service sector jobs, due to the economy of the said
countries becoming more service oriented. Due to this shift, it be-
comes difficult to support higher living standards as consistently
high productivity levels are essential for the industrial sector. In
most of the sectors in an economy higher productivity gives them a
distinct competitive advantage in the market.
Advanced levels of productivity allow the companies the flexibility

to realize higher profits by charging the market price and also chal-
lenge the competitors pricing strategy to increase their own market
share. High levels of comparative productivity put the industry in a
strong position where it becomes difficult for any MNC to displace it.
)
Review Questions
1. Explain the importance of high productivity for a nation?
(C
2. Comment on the general notion that manufacturing jobs have

higher productivity and service jobs have lower productivity.
3. By having higher productivity than competitors how can an or-

ganization gain a competitive advantage?
(C
) UP
ES
ES
UP
BLOCK -II
)
(C
(C
) UP
ES
45
Unit 6 Notes
ES
___________________
Location Selection ___________________
___________________
Learning Objectives
___________________
___________________
\\ Explain strategic importance of location decision
\\ Discuss the factors affecting the location ___________________
\\ Explain various sites for understanding location selection models ___________________
___________________
Location planning is one of the strategic decisions, which an oper- ___________________

ations manager makes. Deciding location is important because this
UP
decision is very difficult to reverse. The main factors that affect lo-
cation decisions are geographic factors, regional factors, different
group considerations, and site-related factors. Group factors are re-
___________________
lated to the community that consists of quality of life, services, and

perceptions, various types of taxes, environmental regulations and
development support system.
Location decisions are taken under following circumstances:
● The new facility is established
● Growing volume of business
● Expansion of existing facility
● Dispersal of industry
● Economic, political, legal or social change

)
● Change in the geography of demand
Factors Affecting Location

Following is a list of factors that affect decisions related to territo-
(C
ry and site selection. The territory is the broad geographical area

whereas site is a specific piece of land in a given geographical area.
Territory selection
● Markets
● Raw materials & supplies

46
● Transportation facility
Notes
ES
● Manpower supply
___________________
___________________ ● Infrastructure
___________________ ● Legislation and taxation

___________________ ● Climate
___________________
● Political and social landscape
___________________
___________________
Site selection
___________________ ● Community facilities
___________________ ● Community attitude
___________________
UP
● Waste disposal
● Ecology and pollution
● Size of site
● Topography
● Transportation facilities
● Supporting industries and services
● Cost of land
Selection Decision Based on Subjective Factors

Some decisions are based on subjective factors. These factors are
discussed below.
Factor point rating

)
● The factors affecting location are identified
● A common scale is established for comparison
● Factor points are allocated to each site for each factor

(C
● The total points are determined
● Site with the highest total is selected

UNIT 6: Location Selection
47
Example 6.1
Notes
ES
Poor Fair Ade- Good Excel- ___________________
quate lent ___________________
F1 Supply of −15 −12 0 6 10
___________________
Water
F2 Facility −3 −1 0 1 2 ___________________
provided to ___________________
community
___________________
F3 Attitude of a −6 −3 0 3 6
community ___________________
___________________
S1 S2 S3 S4
___________________
F1 Adequate Fair Good Adequate
F2
0
Adequate
0
UP−12
Poor
−3
6
Excellent
3
0
Fair
1
___________________
F3 Adequate Adequate Adequate Adequate

0 0 0 0
Rating of sites 0 −15 9 −1
Site S 3 is selected as it has the maximum total rating
Equal weight method

● All factors affecting location are evaluated as being equally im-
portant
Example 6.2
S1 S2 S3 S4
F1 2 5 9 2
F2 3 3 8 3
)
F3 6 2 7 3
Rating of sites 11 10 24 8
Hence, Site S 3 is selected as it has the maximum total rating.

(C
Variable weight method

● Each factor is allocated a weight as per its importance
● The scale is established as per weight
● Total of weights are calculated

48
Example 6.3
Notes
ES
___________________ Maximum S1 S2 S3 S4
___________________ points
F1 300 200 250 250 50
___________________
F2 100 50 70 80 100
___________________
F3 150 5 50 10 40
___________________ Rating of sites 255 370 340 190
___________________
___________________
Weight cum rating method
___________________
● Weight is allocated as per importance of factors
___________________
● A common scale is established for comparison
___________________
UP
● Weighted total is calculated for factor point ratings
Example 6.4
Weights S1 S2 S3 S4
F1 5 2 5 9 2
F2 3 3 3 8 3
F3 2 6 2 7 3
Site rating 31 38 83 25
Selection Decision Based on Cost

Cost Volume Profit (breakeven) analysis
F = fixed cost
V = variable cost per piece
)
R = revenue per piece

Total cost = fixed cost + variable cost
= F + VQ
(C
Where Q = quantity produced

Total revenue = RQ
Break-even is the point where total cost equals total revenue.

RQ = F + VQ
Or
UNIT 6: Location Selection
49
F
Q= Notes
R−V
ES
___________________
Example 6.5
___________________
The fixed and variable costs for various plants of a manufacturing
___________________
company are shown below:
___________________
Site Fixed Cost per Year Variable Cost per Unit
___________________
Karnataka 1,25,000 6
___________________
Andhra Pradesh 75,000 5
Tamil Nadu 1,00,000 4 ___________________
Kerala 50,000 12 ___________________

Sale price 20 ___________________
For Karnataka,
BEQ = 125000 / 20 – 6
= 125000 / 14 = 8928
UP ___________________
For Andhra Pradesh, 75000 / 15 = 5000
For Tamil Nadu, 100000 / 16 = 6250
For Kerala, 50000 / 8 = 6250
So, Andhra Pradesh is a preferable location as it has the lowest

break-even quantity of 5000.
Summary
Whether it be the government or businesses, site selection involves
carrying out of new location facilities and is in extensive use now-
adays. Post completion of internal site selection procedures, the In-
dian Government needs development of new facilities. Though the
)
practice is not widespread, most of the state governments and their

agencies have published their personalized site selection guides.
Services of independent advisors or in-house staff can be employed
(C
for the purpose by the businesses as well as the Government. Most

of the big corporations take services of internal site selection teams
for ongoing new facility needs.
50
Review Questions
Notes
ES
1. Explain the importance of location in operations management.
___________________
___________________ 2. Explain multiple factors that have a bearing on location deci-

sions?
___________________
3. What important parameters are considered before selecting a
___________________
site?
___________________
4. Which method, according to you, is the best method facilitating
___________________
decision making for location in a business?
___________________
___________________
___________________
___________________
) UP
(C
51
UNIT 7 Notes
ES
___________________
Layout Planning ___________________
___________________
Learning Objectives
___________________
After completion of this unit, the students will be able to understand and
explain: ___________________
\\ Meaning of layout planning ___________________
\\ Objectives of layout planning
___________________
\\ Different types of layouts
___________________
\\ How to select a suitable process layout
\\ Compare between process and product layout ___________________
\\
\\
\\
UP
Importance of layout decisions
Criteria for a good layout
Reliability (REL) charts
___________________
Introduction
Layout refers to the arrangement of equipment, departments and
work centers to ensure smooth movement of customers and materi-
als within the system.
It describes the main types of layout selections and the models used
to evaluate selection alternatives. Plant layout is the selection of
a production or service facility, which includes an arrangement of
various machines, storage space, etc. However, only knowing the
concept of layout planning is not sufficient. You also need to know
the objectives of layout planning. The primary objectives of layout
planning are discussed further.
)
Objectives of Layout Planning

The primary objectives of layout planning are listed below:
(C
● Highest equipment utilization
● Delay is minimized
● Low manufacturing time
● Minimum material handling the cost
● Effective space utilization

52
● Fewer inventories in process
Notes
ES
● Effective supervision and control
___________________
___________________ ● Worker convenience and satisfaction
___________________ ● Safety
___________________ ● Minimum waste
___________________
The layout can be of different types depending on various factors.
___________________ Some of these types are discussed below.
___________________
Types of Layout
___________________
The different types of layout are product layout, process layout, hy-
___________________
brid layout, cellular layouts, and fixed position layout. Indeed, all
___________________
UP
types of process layout are important for an organization. However,
as an Operations Manager, you mostly need to deal with Process
layout and Product layout.
Product layout
● One type of product in one area
● Work centers in sequence of operations
● High production volume
● Standardization
● Stable product demand
Raw material
Station 1
)
Storage
Station 1
Storage
(C
Station 1
Storage
Station 1
Finished product
Figure 7.1 Product layout

UNIT 7: Layout Planning
53
Figure 7.1 shows raw material delivered to Station 1 for storage,
which is then delivered to Station 2 for storage. It is further deliv- Notes
ES
ered to Station 3 for storage and then, finally to Station 4 where the ___________________
finished product is produced. ___________________
Process Layout ___________________
● Layout defined by functions of the departments ___________________
___________________
● Similar equipment’s are kept in each area
___________________
● Low volume of production
___________________
Non-standardized products, which the organization produces with-
___________________
out standard specifications.
___________________
Selecting Process Layout
UP
The process layout selection is a process in which the information
is acquired, and layout is formed. The following information is re-
___________________
quired for process layout.

● Requirement of space – There must be adequate information
regarding the amount of space required to construct the layout.
● Space availability – Information on the space that is available
for layout should also be taken into consideration.
● Closeness factors – Information on all the activities among all
sets of groups or departments.
● Other restraints –Other restraints such as a specific depart-
ment must be located at a specific suitable place. For example,
reception must be near the entry.
Comparison between Product and Process Layout:

)
The comparison between product and process layout can be under-

stood with the help of the flowchart given below: -
(C
Process Layout Product Layout

(functional) (sequential)
Used for Intermittent Processing Used for Repetitive Processing
Job Shop and Batch Processes Repetitive and Continuous Processes
Dept. A Dept. C Dept. E

Workstation 1 Workstation 2 Workstation 3
Dept. B Dept. D Dept. F
Figure 7.2 Comparison between product and process layout

54
Hybrid layout
Notes
ES
___________________ ● Combination of product and process layouts
___________________
Cellular layouts
___________________
● Facilities clubbed together in cells
___________________
● High flexibility
___________________
___________________ ● Each cell performs similar types of functions for a group of

products
___________________
___________________ Fixed position layout

___________________
● Project like systems
___________________
UP
● Major components kept fixed
Now that you understand the basic concept, objectives, and types of
layout, it’s time to understand the necessity of layout decisions for
an organization.
Importance of Layout Decisions

The layout decisions are important for three basic reasons:
(1) Significant amount of money and efforts are to be invested.
(2) They involve long-term commitments; hence mistakes are diffi-
cult to reverse.
(3) They have a significant impact on the cost and efficiency of op-
erations.
The need for layout planning arises both in the process of selecting
the new facilities and in resectioning the existing facilities. Follow-
ing are some of the major causes of reselection of layouts: -
)
– Operational Inefficiency
– Introduction of new products and services

(C
– Modification of output volumes
– Changes in methods and equipment
– Environmental and Legal Changes
– Accidental hazards
– Changes in product and service selection

UNIT 7: Layout Planning
55
However, only taking the right decisions for the formation of a lay-
out does not make it a good one. There are many other factors, which Notes
ES
affect a layout. The other criteria that make a good layout are dis- ___________________
cussed below. ___________________
___________________
Criteria for A Good Layout
___________________
The list below provides the various criteria that make a good layout.
___________________
It is important for you to consider each factor as an important requi-
site while forming a layout. ___________________
● Maximum coordination ___________________
___________________
● Maximum accessibility
___________________
● Maximum flexibility
● Minimum distance
● Minimum handling
UP ___________________
● Minimum discomfort
● Maximum visibility
● Inherent safety
● Efficient process flow
The REL chart or the Reliability chart is an important tool in the

process of layout planning.
REL chart
The REL indicates the relation between pairs of departments in
terms of closeness depending upon the activities of the department
)
as:
An absolutely necessary
E essential
(C
I important
O ordinary
U unimportant
X undesirable
56
REL CHART
Notes
ES
___________________
___________________
___________________
___________________
___________________
___________________
Figure 7.3 Rel chart
___________________
___________________ Summary
___________________
Layout planning is planning on the most efficient physical arrange-
___________________
UP
ment of resources consuming space in a facility. Layout planning is
a critical part of overall organizational planning as it helps enhance
the effectiveness of production process and meeting the employee
needs. The importance of a layout would be better appreciated if one
understands the influence of an efficient layout on the manufactur-
ing function: it makes it smooth and efficient.
Review Questions
1. What are the objectives of plant layout?
2. Explain the layout that will be suitable for an FMCG product

(Chips) manufacturing plant.
3. Differentiate between product layout and process layout.
4. Explain the importance of process selection in system selection.
5. Explain the types of layout suitable for offices.

)
(C
57
Unit 8 Notes
ES
___________________
Capacity Planning ___________________
___________________
Learning Objectives
___________________
Upon completion of this chapter, the students will be able to understand and
explain: ___________________
\\ Meaning of capacity utilization ___________________
\\ Efficiency and utilization
___________________
\\ The concept of utilization capacity
___________________
\\ Determine utilization capacity
\\ Factors affecting capacity planning ___________________
\\
\\
\\
UP
Classify capacity planning
Steps in capacity planning
Strategies for capacity planning
___________________
Introduction
The quantity that a plant can produce at a specified time is called its
capacity. The two most important functions of capacity planning are
selection capacity and effective capacity.
– Selection capacity – an organization’s maximum service ca-

pacity or output rate
– Effective capacity – an organization’s selection capacity mi-

nus personal and other allowances.
– These two functions of capacity can be used to find the efficien-

cy and utilization. The formulae for calculating these are given
)
below:
Actual Output
Efficiency = × 100%
Effective Capacity
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Actual Output
Utilisation = × 100%
Design Capacity
Selection
With the following information, calculate the efficiency and utiliza-
tion of vehicle maintenance department:
Selection capacity is 50 trucks per day.
Effective capacity is 40 trucks per day.
Actual output is 36 trucks per day.
58
Using the above formulae, the efficiency and utilization can be com-
Notes
puted. The efficiency is 90%, and the utilization is 72%.
ES
___________________
In the above example, the actual output of 36 units per day looks
___________________ efficient in comparison with the effective capacity of 40 units per
___________________ day. But when actual output of 36 units is compared with the selec-
___________________
tion capacity of 50 units per day, it might look less impressive but is
more meaningful.
___________________
The real key to improve capacity utilization, with effective capacity
___________________
acting as a ceiling on actual output, is through: -
___________________
– Maintaining equipment in good condition
___________________
___________________
– Training Employees
– Correction of quality problems

___________________
UP
– Using redundant equipment
It is necessary to understand what factors are constraining effective

capacity to improve the effective capacity as maximization of utili-
zation depends on it.
The purpose of studying about capacity is fruitful, only when the

capacity of utilization is clear to you. So, first, let us know what ca-
pacity utilization is.
Capacity Utilization (CU)

As the name suggests, capacity utilization is the degree to which
resources are being used. The formula used to find the capacity uti-
lization is given below.
Average Output Rate
Capacity Utilisation = × 100%
Maximum Capacity
)
Capacity Planning
As an Operations Manager, it is important for you to know that an
operation may have different levels of capacity. However, when an
(C
operation has the lowest capacity, it’s worth analyzing. When an

operation has the lowest capacity, it is called a bottleneck operation.
An operation that has the lowest capacity of any sequence of opera-
tions or the operation that takes the maximum time in a facility and
limits the system’s output is called bottleneck operation. To consider
that an operation has the highest and efficient capacity, it is import-
ant to fulfill the necessary steps in the process of capacity planning.
Let us quickly study the steps in capacity planning.
UNIT 8: Capacity Planningv
59
Factors affecting capacity planning decision
Notes
ES
The factors that affect capacity planning decisions are as follows:
___________________
1. Product/service market demand ___________________
2. Capital to be invested ___________________
3. Desired levels of automation ___________________
4. Level of integration (i.e., vertical integration) ___________________
___________________
5. Type of technology selected
___________________
6. Dynamic nature of all factors affecting the determination
___________________
of plant capacity, such as changes in the product selection, pro-
cess technology, market conditions and product life cycle, etc. ___________________
UP
Capacity Planning Classification
Based on the timeline, capacity planning can be categorized into

___________________
three major divisions : -
Long-Term Capacity: production capacity, sustainable capacity, and effective

capacity determine the long-term capacity of an organization : -
● Selection capacity defines the maximum possible output un-

der ideal working conditions as described by the manufacturer
of the equipment.
● Production capacity defines the maximum possible output

from the equipment in a day under normal working conditions.
● Sustainable capacity defines the maximum possible output

achievable in realistic work conditions after making provision
for normal hiccups.
)
● Effective capacity defines the optimal output levels under

pre-defined work-schedules and making provisions for machin-
ery breakdown, maintenance schedules, etc.
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Medium Term Capacity: strategic capacity planning with a time

frame of two to three years is covered under medium-term capacity
planning.
Short-Term Capacity: strategic capacity planning with a short

time frame such as hours, days or weeks falls under the purview of
short-term capacity planning.
60
Steps in capacity planning
Notes
ES
The steps in capacity planning are listed below:
___________________
___________________
1. Selection of a suitable process owner for capacity plan-
ning: Selection of an adequately suitable individual is the initial
___________________
step towards the development of a strong capacity planning pro-
___________________ cess. This person would act as the process and owner and would be
___________________ responsible for selection, implementation, and maintenance of the
process. His powers also include carrying out negotiations with de-
___________________
velopers and relevant support groups.
___________________
2. Identify the key resources to be measured: After the selec-
___________________
tion, the process owner’s primary task is the identification of in-
___________________ frastructural resources whose performance needs to be measured.
This decision is based on the knowledge of which resources are most
___________________
UP
critical for meeting future capacity requirements.
3. Measure the utilization or performance of the resources:

Performance of resources which have been previously identified
would now be measured. Two important bits of information are de-
rived from this information: -
- Utilization Capacity -is used a baseline for analysis and predic-

tion of future trends.
- Excess Capacity – available for every component
4. Compare utilizations to maximum capacities: this step is

used to determine the available excess capacity for selected com-
ponents. The performance of every component has to be compared
with the maximum practical capacity of that component. It should
be remembered that maximum usable capacity is always going to be
less than maximum possible.
)
5. Collect workload forecasts from developers and users:

This is one of the most critical steps in the entire capacity planning
process, and it is the one over which you have the least control.
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6. Update forecasts and utilization: capacity planning is an on-

going process, and in order to derive its maximum benefits there is
always a need to update, at least once a year, continuously to keep
it up to date.
The complexity of market forces and technology, makes capacity

planning a difficult task as it involves both short-term and long-
UNIT 8: Capacity Planningv
61
term deliberations. Long-term deliberations affect the whole capaci-
Notes
ty levels of the organization, such as facility size; Short-term deliber-
ES
ations relate to possible disparities in capacity requirements caused ___________________
by seasonal, irregular or random fluctuations in demand. Due to the ___________________
difference in nature of various industries, time interval covered by
___________________
these considerations can vary significantly as such it would be not
wise to put time on intervals. ___________________
___________________
Strategies for Capacity Planning:
Capacity planning can be classified into the following major catego- ___________________
ries: - ___________________
● The lead strategy it is an aggressive approach wherein the ___________________

capacity is enhanced in anticipation of an increase in demand.
___________________
This is done to attract customers from competitors through im-
UP
proved service and reduced lead times as it eliminates situa-
tions of stock out. The excess capacity thus generated can be
rented out to other organizations.
___________________
● The lag strategy it is an exact opposite of lead strategy and

is highly conservative in approach and includes the addition
of capacity only after the existing capacity has been fully uti-
lized due to increase in demand. Though it reduces the risk of
wastage, it presents a far greater risk in the form of stock-out
situations and losing out on customers.
● Match strategy is a moderate strategy wherein capacity is

changed in response to the present demand in the market.
● Adjustment strategy under this strategy capacity is adjusted

in small or large amounts due to consumer demand or major
changes in product or organizational changes.
)
Summary
Capacity planning involves planning for the optimum quantity at
optimal time as per business requirements for lower is the capacity,
(C
poorer would be the response time and severe would be issues with
performance. On the other hand, higher is the capacity, higher is
the cost of production and wastage of resources. Therefore, optimal
capacity is quintessential for optimum usage of resources. Capacity
planning is an integral part of planning related to development of
infrastructure.
62
To conclude, Capacity planning must ensure that:
Notes
ES
● All functions can be perfectly performed by infrastructure com-
___________________
ponents and can be accommodated.
___________________
● Growth forecast is nether exaggerated nor uneconomical.
___________________
● Efficient functioning of components.
___________________
___________________ Review Questions

___________________
1. Define capacity. How can you measure the capacity? Give for-
___________________ mula also.
___________________
2. Why is capacity planning important for any organization?
___________________
3. Differentiate between selection capacity and effective capacity.
___________________
) UP
4. What are various steps involved in capacity planning?
5. What are different strategies involved in capacity planning?

(C
63
Unit 9 Notes
ES
___________________
Process Selection ___________________
___________________
Learning Objectives
___________________
At the completion of this unit, the students will be able to understand and
explain: ___________________
\\ The concept of process selection ___________________
\\ Factors affecting process selection
___________________
\\ Considerations in process selection
___________________
\\ Different types of processes
\\ Different characteristics of different types of processes ___________________
\\
Introduction
UP
Tools used in process analysis ___________________
Process Selection is a method through which goods and services

that have been produced are delivered affecting various organiza-
tional aspects such as capacity planning, facilities layout, equipment
selection, work system selection and capacity layout. Process selec-
tion is used for planning of new products or services that is related
to technological advancements and competition. Process selection is
dependent on the strategies in process, which has two main compo-
nents: capital intensity and process flexibility.
Inputs Outputs
Facilities and
Forecasting equipment
Capacity
)
Planning
Product and Layout
service design
Process
(C
Selection
Technological Work
change design
Figure 9.1 Process selection and capacity planning
Figure 9.1 shows the process of capacity planning and process selec-
tion as interrelated to each other. The inputs of an organization that
affect them are forecasting, product and service selection and tech-
64
nological changes. The outputs of an organization that affect them
Notes are facilities and equipment, layout and work selection.
ES
___________________
However, there are certain factors that affect the process of selection.
___________________
___________________ Factors affecting process selection

___________________ The factors that affect process selection are listed below:
___________________
● Customer requirements
___________________
● The degree of vertical integration
___________________
● Flexibility needs in the process
___________________
● level of automation required
___________________
● Level of quality required

___________________
UP
Not only these, but there are also certain other considerations in-
volved in process selection.
Considerations in process selection

The considerations in process selections are as follows:
● Volume and variety: It involves considering the volume of stock

available in hand and the volume of stock required.
● Produce to stock or produce to order: It is important to consider

whether goods are to be produced for fulfilling customer needs
or for own use.
● Resource flexibility: It considers how flexible the process of se-

lection of resources is.
● Capital intensity: The amount of capital required for success-

)
fully accomplishing the selection process is also considered.
Process selection is further classified into different types. They are

listed below.
(C
Types of Processes
● Continuous process: A process for production of a standard
product. Examples: Petroleum products, steel, sugar flour etc.
● Batch process: A process for producing a variety of standard prod-

ucts. Examples: Bakeries, dairy, paints, ice creams, magazines,
etc.
UNIT 9: Process Selection
65
● Assembly line related process: A process for a small range
of standard products in high volume, which are produced by Notes
ES
assembly of components. Examples: Automobiles, household ___________________
appliances, electronic goods, etc. ___________________
● Job shop related process: A process for a variety of products ___________________

customized for specific customers in small volume. It operates
___________________
on a relatively small scale and is used when a low volume is
___________________
needed. It involves a high variety of goods and services. Exam-
ples: Dress designing, medical services by doctors, etc. ___________________
● Project related process: A process suitable for producing a ___________________
unique product. Example: Construction of a building, roads, ___________________

hospital, etc.
___________________
Low or very
low volume
High
Job Shop
repair shop
emergency room
UP Moderate Low Very low ___________________
Batch
Moderate commercial bakery
volume classroom lecture
Repetitive
High volume assembly line
automatic car wash
Continuous Flow
Very high petroleum refining
volume water treatment
Figure 9.2 Product or service flexibility variety and equipment flexibility
Characteristics of different types of processes

The characteristics of different types of processes are mentioned be-
)
low on the basis of different parameters. Consider the chart given

below.
Table 9.1 Characteristics of different types of processes
(C
Project Job shop Batch Assembly Continuous

line
Size Variable Small Moderate Large Large
Process No pattern Several Few Rigid Rigid
flow
Speed Variable Slow Moderate Fast Fast
66
Run Short Short Moderate Long Long
Notes
ES
length
___________________
Rate of Slow Slow Moderate High High
___________________ change
Labor High High Variable Low Low
___________________
Skill High High Mixed Low Variable
___________________
___________________
While studying the process of selection, having an idea about the
terms process re-engineering and process improvement is quite im-
___________________
portant.
___________________
___________________
Process re-engineering and process improvement
___________________ Reengineering refers to creating new systems and methods in the
process and bringing a dramatic change in performance.
___________________
UP
Process improvement refers to the use of tools and techniques for
enhancing the current level of quality.
Now let us study the tools of process analysis.
Tools of Process Analysis:

The tools used for process analysis are as follows:
Flow diagrams: “A diagrammatic representation of the sequential

flow of processes showing the flow of material and information.”
Flow charts: “A pictorial representation of separate steps of a

process in sequential order, including inputs and outputs, key de-
cisions, involved people, time involved and process measurements.”
Process charts: A systematic method of recording activities under-

taken by workers for carrying out the operations.
)
There are few symbols used in making a flow chart. These symbols
are shown below:
Operation
(C
Transportation
Inspection
Delay
Storage
UNIT 9: Process Selection
67
Summary
Notes
ES
Operations management can be described as tactical overlooking of ___________________
production methods and human resources to ensure maximization
___________________
of output, minimization of errors and continuous enhancement in
product quality. ___________________
___________________
Facility layout covers the aspects as to how organizations work
equipment such as machinery, workstations, machinery, etc. and ___________________
human resources are positioned at the work facility. ___________________
Process selection encompasses tactical choice of work processes to be ___________________

included in the production process. ___________________
Process selection and facility layout form a critical part of operations ___________________
management.
UP
A thorough understanding of each of them, as well as their inter-re-
lation, helps ensure improved efficiency of production processes.
___________________
Review Questions
1. What do you mean by process selection?
2. What are the factors affecting process selection?
3. Differentiate between job shop and batch process.
4. Explain the relationship between capacity planning and pro-

cess selection.
5. What is the difference between process re-engineering and pro-

cess improvement?
6. What are the tools of process analysis?

)
(C
(C
) UP
ES
69
Unit 10 Notes
ES
___________________
Case Study ___________________
___________________
Capacity in Restaurants ___________________
The restaurant business is a kind of business where the inventory ___________________

and capacity have its own role. They are able to cater to different ___________________
varieties of customers with varied demands. Do these restaurants
___________________
have big stocking area to store perishable goods and keep them fresh
and hygienic? The business needs prompt service with minimum ___________________
preparation time. Are the chefs quick enough to do it? Do they pre- ___________________
pare these stuff beforehand and store it in a condition where it will
UP
not perish? One option is that some dishes are partially cooked and
kept ready for use. The other option is to get frozen food from other
suppliers and serve the dishes according to the requirements. The
___________________
big giants like Oberoi, Taj, and KFC food chains are some of the
followers.
They need to take care of the ordering, handling, and other cost and
maintain equilibrium in pricing.
Review Questions
1. What advantages of outsourcing in a restaurant?
2. List out major limitations of outsourcing for a restaurant.
3. Can outsourcing in a restaurant deemed unethical? Explain.
4. Elaborate the importance of capacity for any restaurant busi-

ness.
)
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(C
) UP
ES
ES
UP
BLOCK -III
)
(C
(C
) UP
ES
73
UNIT 11 Notes
ES
___________________
Product and Service Design ___________________
___________________
Learning Objectives
___________________
___________________
\\ Elaborate on the meaning of service and product design
\\ Discuss the reason for product and service design ___________________
\\ Describe product lifecycle ___________________

\\ Explain product reliability
___________________
\\ Discuss how to measure product reliability
___________________
\\ Discuss standardization and mass customization
\\
\\
UP
Explain product design and development
Elaborate the difference between product and service
___________________
Product and Service designs are the beginning points of customer

satisfaction process. The product or service produced in the market
should have added value for the consumer from a market point of
view. Product and service selection is a long-term decision that de-
cides strategic formulation and implementation in any organization.
Every functional area of an organization is involved in it, but mar-
keting and operations play a significant role in product and service
design development.
It is pertinent to understand the meaning of product design and ser-

vice design while if a deeper understanding is required.
Meaning of Product and Service Design

)
Product Design
Analytical processes are used to create effective product designs to
be sold to a customer. Various techniques and methods are utilized
(C
by organizations to create product and service designs to have a

competitive advantage in the market. They may opt to follow strat-
egies like standardization, mass customization, robust or modular
design, delayed differentiation, etc. The selection of strategy and
method plays a very crucial role in target market because opting
the right method results in higher productivity and efficient ways of
operations.
74
Service design
Notes
ES
___________________ Service design is an effort of organizing or planning of people, ma-
terial, and their communication to serve the customer with better
___________________
service quality. It involves the interaction of service provider, cus-
___________________ tomer, and the customers’ experience. The service design is greatly
___________________ affected by the degree of variations in requirements and customer
contacts, which determines the extent of standardization of the ser-
___________________
vice. The selling opportunity remains high until the degree of cus-
___________________
tomer contact is also high.
___________________
___________________
Reason for Product and Service Design
___________________ Implementation of strategies involves a significant role of service
and product design because there are direct consequences for prog-
___________________
UP
ress and success of a company.
The product and service designing decisions are not only fundamen-
tal but also create an impact on the future activities. Market Op-
portunities and threats are the chief forces that initiate a designing
process.
The following are the factors that give rise to market opportunities
and threats:
● Economic factor: It includes the factors like low demand, exces-

sive warranty claims, reduction in cost, etc.
● Social and Demographic factor: It includes the factors like

change in preferences, population shift, etc.
● Political or legal factors: It includes the factors like new reg-

ulations, government changes, safety issues, etc.
)
● Competitive factors: It includes the factors like new products

or services, a new advertisement, new promotion methods, etc.
● Cost factors; It includes the factors like availability of raw

(C
materials, components or labor, etc.
● Technological factor: It includes the factors like availability

of better technology for manufacturing, product’s components
processing, etc.
Each of these factors seems obvious and has strategic implications

for the success of products and services during their different stages
UNIT 11: Product and Service Design
75
of life cycle. Since the demand does not remain the same in all the
stages of a product’s lifecycle; different strategies should be taken Notes
ES
into consideration to attain optimum performance of products and ___________________
services during their useful life. ___________________
___________________
Product lifecycle
___________________
A product lifecycle encompasses various stages in a product or ser-
___________________
vice’s life. It explains various stages that a product goes through
from the initial introduction in the market till it completely disap- ___________________
pears from the market. Understanding the stage of a product in its ___________________
life cycle is vital for a manager to make rational decisions, as each
___________________
stage requires a unique and specific strategy.
___________________
Introduction
UP
Product Life Cycle
Growth Maturity Decline

___________________
Revenue
Profit
Time
Exhibit 11.1 Product Life Cycle
The product life cycle comprises of four stages that are discussed
below.
1. Product Introduction/Development Stage

)
It is the first stage of the product lifecycle. It includes idea genera-

tion, new product designing, re-engineering and the entire manu-
facturing process. In this stage, the product is given a name and a
(C
complete brand identity that differentiates it from competitors.
2. Product Growth Stage

In this stage, rapid growth in sales and revenue is observed. Growth
is attained when number of consumers appreciate the worth and ad-
vantages offered by a product. It takes several years to attain growth.
Sometimes, the product might even vanish from the market without
76
a rise in its demand. Therefore, it becomes essential to establish de-
Notes mand at the introductory stages with good marketing plans.
ES
___________________
3. Product Maturity and Saturation Stage
___________________
At this stage, the product attains full market potential, and the
___________________
business becomes highly profitable. It is observed that growth slows
___________________ down in the middle phases of this stage and new competitors enter
___________________ to control the market. Many businesses focus on marketing activi-
ties and lose huge amounts of money in this stage since they lose
___________________
loyal customers to their competitors.
___________________
4. Product Decline Stage
___________________
The product decline stage is the last stage of the product lifecycle.
___________________
This phase occurs when companies do not take necessary preventive
___________________
UP
measures in the late-maturity stage. Once this phase is reached,
the product would never recover again or grow and would slowly
be obsolete. Sometimes, the decline of a product is inevitable, espe-
cially in consumer technology goods. In such industries, the compa-
nies need to be very responsive and prompt in foreseeing changes or
shifts. Staying relevant, launching innovative products and being
at the forefront of change is more important for the leaders than
smaller players as they have made much bigger investments. CD
player makers have continued to launch innovative products like
Blue Ray players and UHD players to stay relevant, but more and
more people watch movies on their phones and tablets. TV industry
is in the maturity stage, and innovations like curved TV do not see
huge adoption.
Product Reliability
Product Reliability can be defined as the chances of a product per-
)
forming the desired functions during its useful life as described by

the manufacturers. In case of repairable products it can be quanti-
fied as Mean Time Between Failures (MTBF), and if the products
(C
are non-repairable, then it can be quantified as Mean Time To Fail-

ure (MTTF).
Now that you have learned the meaning of product reliability, we

will understand how it can be measured, or how it can be predicted.
77
How to Measure Product Reliability
Notes
ES
Figure 11.2 uses “The Bathtub Curve” to demonstrate the product ___________________
reliability through immediate failure rates vs. time from inception
___________________
till the end, which shall be observed if waiting period is long and a
record for given a set of items. ___________________
___________________
___________________
PRODUCT RELIABILITY
___________________
___________________
___________________
Failure ___________________
Rate
UP ___________________
Initial Failure Useful Life Wearout Failure
Exhibit 11.2 The Famous Bathtub Curve
Initial Failure
This is the first period, which is depicted by flatting out of the slope of
the curve on the left side. It marks decreasing failure rate in the first
period. It shows that during early stages of in a product or service’s life
it is more likely to fail against well-established products and services.
Useful Life
The second period of the graph is used to depict the “useful life” of
a product through the flat bottom curve which shows the random
occurrence of products and services over a period. Here it is a little
)
hard to predict which failure mode will occur, though the chances of
failure remain predictable.
(C
Wear out Failure

The third period, “wear out” is depicted by the rising slope of the
curve which is a result of product or service becoming outdated and
chances of failure are high.
So, these are the different periods that help in understanding the
failure rate of a product and service. The organization may opt to
78
follow any of the strategies like standardization, mass customiza-
Notes tion, robust or modular design, delayed differentiation, etc.; while
ES
___________________ keeping in mind the characteristics discussed in the curve.
___________________
Standardization
___________________
Standardization is one of the important strategies for an organiza-
___________________
tion, which helps in creating products. It is so because the manu-
___________________
facturers are not available with many options to make them unique
___________________ and lowering the price. Standardization offers many significant ad-
___________________ vantages along with a few disadvantages.
___________________
Advantages
___________________
● The parts and components of products are standard.
___________________
UP
● It keeps the cost of production low.
● It results in high productivity.
● Cost and Time taken for employee training are reduced
Disadvantages
● It provides less variety.
● There will be chances that the designs may be frozen with im-
perfections.
● If the design needs to be changed or modified, it will be an ex-

pensive task.
● It has low consumer appeal.
Mass Customization
)
Mass customization is a strategy widely used by companies to estab-

lish a harmony between standardization and customization, which
helps in cost reduction and at the same time adding to the variety.
(C
Mass customization is realized through differentiation and modu-

lar designing. In case customer preferences are ambiguous and un-
known, the company can opt for delayed differentiation in order to
finish off the product later on. In order to enable convenient replace-
ment or interchangeability, components are grouped into modular
designs, which is another form of standardization.
79
Product or services are customized to individual preferences and
may not have long lives. The life of a non-customized service may be Notes
ES
very small. Alternatively, a customized product may last for longer ___________________
time. Thus, the different phases of product development also play a ___________________
very important role in the designing of a product and service.
___________________
Product Design and Development ___________________
___________________
Product design and development generally follows a series of phases:
___________________
Feasibility Analysis ___________________
___________________
Product Speicification
___________________
UP
Process Specification
Prototype Development
___________________
Design Review
Market Test
Product Introduction
Follow-up
Exhibit 11.3 Stages in product design and development
● Feasibility analysis – warrants co-operation between various

)
organizational functions such as marketing, finance, operations,

accounting, etc. It includes demand analysis, cost analysis, and
technical analysis. It is also imperative to have knowledge of
company’s missions and requirements.
(C
● Product specifications – it specifies in-depth analysis to find

out about customer expectations from a product, and it warrants
collaboration between various organizational departments.
● Process specifications – after setting up product specifica-

tions, it is entirely up to the operations managers to suggest
the processes which will be required for the production of the
80
product. All possible alternatives should be listed and analyzed
Notes in terms of cost, resource availability, quality, and profitability.
ES
___________________ Close interaction between operations and accounting depart-
___________________ ments is required.
___________________ ● Prototype development – in order to find out any flaws in

the product a few units are prepared as samples so that any
___________________
shortcomings may be addressed.
___________________
● Design review – at this stage any required changes are in-
___________________
corporated into the product, or if that is not possible, then the
___________________ product is abandoned entirely. This decision is taken in con-
___________________ sultation with marketing, finance, operations, engineering, and
design
___________________
● Market test – a market test is used to gauge customer pref-

___________________
UP erences and get the required feedback. Once the feedback is
received, the product is re-sent to design review phase where
another session of brainstorming starts.
● Product introduction – marketing department introduces

the product into the market and conducts necessary promotion
activities.
● Follow-up evaluation – on the basis of feedback received

from customers, necessary changes are made, and forecasts are
adjusted.
Differences between Service Design and Product Design

Though a product and service perform the same function of satis-
faction of consumer needs, there are multiple differences between
them. So, it becomes quite essential for operations managers to un-
derstand the differences between them and then deals with the is-
)
sues related to products and services separately. Following are the

certain differences between a product and a service: -
1. Services are intangible and focus on factors such as ambiance

(C
and experience whereas products are tangible and focus on fac-

tor such as packaging and appearance of the product.
2. Services are generally created and delivered simultaneously

for, eg – a car wash, a haircut, etc. Whereas in case of products
prior planning and inventory management are required to en-
sure timely delivery to the consumers.
81
3. It is not possible to prepare an inventory of services. As a re-
sult, the flexibility and capacity are restricted whereas in case Notes
ES
of products a proper inventory can be easily managed. ___________________
4. Services should be developed with a consideration that they are ___________________
highly visible to the customers, which adds an additional di- ___________________

mension to the design process, which is generally not the case
___________________
with the product design.
___________________
5. As services have low entry and exit barriers which required in-
___________________
novation and cost-effectiveness for the service design to retain
competitive advantage. ___________________
___________________
6. Choice of location is highly relevant to service design, and Ser-
vice design and Location are intricately related to ensuring con- ___________________
venience for the customers.

UP
7. Product designs do not have significant customer contact
whereas in case of service design there is little to the very high
___________________
degree of customer contact. Service systems range from those

with little or no customer contact to those that have a very high
degree of customer contact. For, eg: - Insulated technical core,
Little customer contact (software development), Personalized
service (haircut, medical service), Consumer participation (diet
programs, dance classes), self-service (supermarkets). If there
is no customer contact than service design is almost similar to
product design.
8. Variability in demand can lead to extreme situations – either

waiting for lines or idle resources. If variability in demand is a
critical factor, process designers can take either of the following
approaches: -
)
– Cost and Efficiency (it is basically a product design ap-

proach)
– Customer Service (it is basically a service design ap-

(C
proach)
Designers try to limit customer participation during process design-

ing as it can lead to unpredictability in demand process.
Summary
Product and service design are the most important factors to be
considered during the introduction of a new product or service. It
82
is imperative to satisfy basic principles to accomplish a successful
Notes design, which includes: -
ES
___________________
– Identification of needs and wants of customers
___________________
– Refining existing Products and Services
___________________
– Development of new products and services
___________________
___________________ – Establish Quality Parameters
___________________ – Manage production and delivery costs

___________________ – Development of samples
___________________
– Formulation of Product Specification
___________________
As the designing process has a critical impact on an organization it
___________________
UP
is necessary that it is in line with organizational strategy and goals
(long term and short term). There are multiple levels in the design-
ing process including: -
– Motivation
– Improvement Scope
– Organizational capabilities and
– Forecasting
Review Questions
1. What are the various phases of the life cycle of a product?
2. Explain the necessity of R&D (research and development). List

its components.
3. Explain the term product reliability through an illustration.

)
4. Differentiate between standardization and customization.
5. What is mass customization?

(C
83
Unit 12 Notes
ES
___________________
Aggregate Planning ___________________
___________________
Learning Objectives
___________________
After completion of this unit, the students will be understood and explain
the concepts of: ___________________
\\ Aggregate planning and its types ___________________
\\ Dimensions of aggregate planning
___________________
\\ Objectives and significance of aggregate planning
___________________
\\ Strategies involved in aggregate planning
\\ The cost involved in aggregate planning ___________________
\\
UP
Factors affecting aggregate planning
Capacity decisions of an organization are made on three levels –

___________________
– Long Term: - these decisions are closely associated with prod-

uct and service selection and include determination of product
and service offering, Location and Layout of the facility, and
Equipment decisions. They determine the capacity constraints
within which intermediate planning functions.
– Intermediate Term: - these decisions are related to medium

term objectives such employment levels, Output levels and In-
ventory levels. These decisions layout the boundaries within
which short-term planning is to be done.
– Short Term: - these decisions are done within the constraints

specified by intermediate and long-term decisions and are con-
cerned with the best method to achieve desired results through
)
job scheduling, arranging for requisite equipment and workers.
Aggregate Planning
(C
Aggregate planning can be defined as the process of developing, an-

alyzing and maintaining the desired levels of organizational opera-
tions. It involves minimization of costs and balancing of capacity. As
the name suggests, it involves all the resources of an organization
such as raw material, personnel, machine hours, etc. It is essential-
ly a medium-term planning process ranging from a period of three
months to twelve months.
84
Dimensions of Planning
Notes
ES
Planning is the process of deciding and organizing organizational
___________________
activities to achieve the desired results. Certain dimensions are to
___________________
be taken into consideration while planning, such as: -
___________________
● Quantity and timing of production: Optimum capacity utilization
___________________
● Capacity balancing with production volumes
___________________
___________________ Objectives of Aggregate Planning

___________________
The goals of aggregate planning involve the production in line with
___________________ business plan, optimum utilization of capacity and consistency with
___________________
company’s policy regarding employees. These goals are made on an
aggregate level, and the planning of aggregate is done by summing
___________________
UP
up all the above-mentioned dimensions.
The significance of aggregate planning

● It helps in the minimization of production cost. It results in
better and maximized customer service experience.
● It helps in accomplishing financial objectives by diminishing

variable cost.
● It helps in the maximization of the available production facility.
Strategies for Aggregate Planning

● Vary a number of employees: The employees are hired and
laid off as per requirement in this strategy.
● Vary workforce utilization: The utilization of regular work-

force is done on overtime in this strategy.
)
● Vary the size of inventory: A constant production rate is ad-

opted so that inventory is accumulated when demand is less
and is consumed when demand is high.
(C
The cost involved in Aggregate Planning

● Regular time cost: The cost of wages to regular workers on
rolls.
● Overtime cost: The additional cost of utilizing regular em-

ployees on overtime.
UNIT 12: Aggregate Planning
85
● Hiring and layoff cost: The cost of hiring and laying off work-
Notes
ers as per requirement.
ES
___________________
● Inventory holding cost: The cost involved in storing and
maintenance of products in warehouses. ___________________
___________________
● Backorder and stockout cost: The cost incurred when an
organization is unable to fill an order and not being able to ___________________
meet an internal or external demand from the current in- ___________________

ventory.
___________________
Types of Aggregate Planning ___________________
___________________
Level output – A stable rate of output is sought throughout the
planning period which means ensuring stability in output rate while ___________________
handling variations in demand.

UP
OUTPUT PLANNING
___________________
Cumulative demand
Figure 12.1 Level of output planning

)
The figure 12.1 shows the relationship between the cumulative

demand and cumulative days. It shows the level output planning
(C
changes with respect to change in cumulative demand and cumula-

tive days.
Chase Plan – under this plan monthly demand is expected to be

met by the management of monthly output. In order to match the ca-
pacity with demand, the planned output is set at expected demand
levels for a specific period.
86
CHASE PLANNING
Notes
ES
___________________
Cumulative demand
___________________
___________________
___________________
___________________
___________________
Figure 12.2 Level of chase planning
___________________
___________________
The figure 12.2 shows the relationship between cumulative demand
___________________ and cumulative days for chase planning.
___________________
UP
Intermediate Plan – This type of aggregate planning focuses
changing output rates only as and when required, instead of chang-
ing the output rate every month.
Business Plan: A business plan involves analyzing data related to

the profit of a business. It considers forecast sale, product costs, and
labor costs. A business plan helps a business to be profitable in the
long run.
)
(C
(Source: Operations management by Adam and Ebert)
Factors Affecting Aggregate Planning

Aggregate planning aims to balance long-term strategic planning
with short-term production success and as such is a crucial opera-
tional activity for an organization.
UNIT 12: Aggregate Planning
87
Before beginning with the aggregate planning process following fac-
Notes
tors should be considered: -
ES
___________________
● Comprehensive knowledge of production facilities and raw ma-
terial availability ___________________
___________________
● Accurate Medium range demand forecasts
___________________
● Financial planning for production costs including labor, raw
___________________
materials, and inventory
___________________
● Organization policies for management of labour, quality assur-
ance, etc. ___________________
___________________
Following inputs are essential for successful aggregate planning: -
___________________
● Forecasts about the aggregate demand for the specific period.
UP
● Evaluating all resources for capacity planning (sub-contract-
ing, outsourcing, etc.)
___________________
● The operational status of the workforce, inventory levels, and

production efficiency
Aggregate planning ensures that organizational goals and objectives

can be fulfilled with the management of workforce levels, production
rates, and inventory levels.
Summary
Aggregate planning is a medium-term planning process for produc-
tion capacity and spans over a maximum period of twelve months
with an objective to keep the costs of operations low. Organisations
do aggregate planning to make decisions on their capacity because
the demands for seasonal variations are difficult to forecast precisely.
)
The primary objective of the organizations is to complete utilization

of available resources to meet the expected demand. This objective
can be accomplished by considering the factors such as employment
levels, inventory levels, decisions on output rates, overtime, back
(C
orders, and subcontracting work.

88
Review Questions
Notes
ES
___________________ 1. What is aggregate planning? Discuss with the help of an exam-
ple.
___________________
___________________ 2. Explain the production planning hierarchy.
___________________ 3. What is aggregation?

___________________ 4. What are the costs involved in aggregate planning?
___________________
5. Differentiate between level outputs and chase plan.
___________________
___________________
___________________
___________________
) UP
(C
89
UNIT 13 Notes
ES
___________________
Operations in Service Sectors ___________________
___________________
Learning Objectives
___________________
At the end of this chapter, students will be able to understand and explain:
___________________
\\ Role of operations in service sectors
\\ Meaning of service with the help of examples ___________________
\\ Characteristics of services ___________________

\\ Different types of services
___________________
\\ Service dimensions
___________________
\\ Importance of service quality
\\
UP
Useful models in the Service sector: GAP analysis and the augmented
service offering model
___________________
Introduction
Operations Management for Services
Operation Management under services perform the essential duty of
developing the services for an organization and thereafter delivering
them to the customers directly. It handles those decisions which an
operation manager needs in order to ensure side-by-side production
and consumption of the service. These decisions are affected by the
people, information, process and systems responsible for production
and delivery of a service. It is specifically differentiated from gen-
eral operations management due to the fact that processes under a
service organization are vastly different from those under manufac-
turing organization.
)
What is Service?
A service can be defined as an intangible economic activity that can-
(C
not be stored or measured and its ownership can’t be established as

it is produced right at the time of consumption. Some examples of
services include postal service, beauty salon, doctor, etc.
Characteristics of A Service
● Intangibility: it is the key characteristic of a service that dif-
ferentiates it from a product. As services do not have a physical
existence, they cannot be held, touched or smelled.
90
● Heterogeneity/Variability: unlike products, it is not possi-
Notes ble to mass produce homogenized services because services are
ES
___________________ unique and can not be reproduced even by the same provider.
___________________ ● Perishability: once a service is delivered to a customer, it is
___________________ completely consumed and cannot be delivered to any other cus-
tomer. As a result, it is not possible to store, save or resell ser-
___________________
vices post-consumption. For, eg, A patient can not ask a doctor
___________________
to refund the fees if his ailment has not been treated.
___________________
● Inseparability/Simultaneity of production and consump-
___________________ tion: a service cannot be generated earlier and stored, it must
___________________ be produced right at the time of consumption. For instance, a
barber delivering a haircut and a consumer getting one, all is
___________________
done at the same time.
___________________
UP
In order to complete the service process, it is necessary to consider
and accomplish some requirements which will establish the provi-
sion of a service to a consumer. Based on the client’s expectations
and specifications, an assessment is done to deliver service in a de-
sired manner defining the quality of service. It involves quick identi-
fication of business problems, customer satisfaction, and continuous
improvement in the services provided. Service quality is important
because the chance of a customer being dissatisfied is more with
services compared to production. The criteria on the basis of which
customer evaluate service quality are the reliability of the service,
Credibility, competence, assured guarantee and safe to use.
Services can broadly be classified into different types.
Types of Services
Services are broadly classified into two types, core services, and sup-
)
plementary services.
Core Services: wherein a particular service forms the crux of the

transaction. For, eg, a barber delivering a haircut.
(C
Supplementary Services: wherein the service is provided as a

valuable addition to the sale of a product. For, eg, Free home deliv-
ery options extended by a restaurant.
As the Operations Manager of an organization in the service sector,

you would often have to measure the measures of quality of services.
Service quality has five dimensions: - tangibility, reliability, respon-
siveness, assurance, and empathy.
UNIT 13: Operations in Service Sectors
91
Service dimensions
Notes
ES
● Tangibility: As services are intangible, in order to measure ___________________
the service quality, consumers compare the quality of the tan- ___________________
gibles associated with them. Such as appearance of the person-
___________________
nel, equipment used for the service and communication materi-
al shared. ___________________
● Reliability: reliability implies that the service provider can de- ___________________
liver on the promises they make, whether it be about the time ___________________
or quality or cost, it is necessary to walk the talk. Customers
___________________
want to avail services of only such providers who can keep their
core promises regarding the service attributes and their out- ___________________
comes. ___________________
● Responsiveness: this dimension of a service quality empha-

UP
sizes on promptness and attentiveness while dealing with re-
quests, complaints, questions or problems specified by the cus-
___________________
tomer. Customers judge responsiveness on the basis of time

taken to answer questions or resolution of problems.
● Assurance: it is defined as the ability of the service provider or
their employees to infuse confidence and trust in the consumer
through prompt service, knowledge of the work and courtesy.
This parameter comes in handy especially when the service in-
volved is expensive or carries high risk.
● Empathy: it involves providing personalized attention to the
customer because it infuses trust and confidence in consumer
and helps foster loyalty. In many countries, it is considered nec-
essary to show individual attention to a customer to show that
they hold extreme value to the customers.
)
Importance of Service Quality

In order to deliver superior service quality, it is necessary for the service
provider to first understand what does quality mean to their customers.
(C
In the service industry, quality of service is established by how well the

customer expectations are met with the delivery of service.
Service quality can be divided in the following ways: -
– Technical Quality: - focuses on what the consumer got from the

service
– Functional Quality: - focuses on the method through which ser-
vice was delivered
92
One of the major challenges faced by hospitality industry is delivery
Notes of high quality services as it is a vital necessity for success in highly
ES
___________________ competitive international hospitality markets. Quality is a dynamic
___________________ state associated with services, products, people, and environment
which meets or exceeds expectations. It is very essential to achieve
___________________
customer satisfaction. Quality defines how an organization is per-
___________________ ceived by the customers and determines its chances of success in the
___________________ highly competitive industries.
___________________ Service quality in terms of customers can be explained as the differ-

___________________ ence between what the customer expected and what was delivered
to them. The only way to ensure good service quality is exceeding
___________________
the customer expectations. When, where and how the service is de-
___________________ livered also has a bearing on the service quality perceived by the
customer.
___________________
UP
There are two models that make the process of operations in the
service sector possible thereby giving great results. These models
are termed as “GAP Analysis” and “The augmented service offering
model.”
GAP analysis is based on the evaluation of real performance with

anticipated performance. A company will fall behind its potential
in case it fails to make optimum use of resources or overlooks in-
vestment in capital or technology. This concept is very similar to
the situation where an economy’s level of productivity is under the
possible production levels.
Therefore, while studying the importance of operations in the

service sector, it is essential to appreciate the concept of GAP
Analysis.
)
Gap analysis model

Gap analysis model attempts to identify the aspects of service qual-
ity and the areas where service quality can be hampered. The gap
(C
analysis model presents 5 gaps that affect and reduce the perceived
quality of service.
Gap 1: Between the customer’s expectation and management’s per-

ception
Gap 2: Between management’s perception and service quality spec-
ifications
Gap 3: Between the specified quality of service and deliverable ser-
vices
UNIT 13: Operations in Service Sectors
93
Word of Mouth Past Experience Felt Need
Notes
ES
___________________
___________________
Expected Service
GAP 5
___________________
___________________
Perceived Service
___________________
GAP 1
Service ___________________
Service Delivery
GAP 4 Communication
___________________
GAP 3
___________________
Service Design
___________________
UP GAP 2
Management Perception of
Expected Service
___________________
Figure 13.1 Gap analysis model
Gap 4: Between delivery of service and external communication to

customers
Gap 5: Between estimated service based on expectations and service
based on various perceptions.
The augmented service offering model

The concept of an augmented service offering integrates three ele-
ments of the service process.
1. Accessibility
The accessibility of a service depends on the following factors
)
1. Quality of service staff
2. The quantity of service staff

(C
3. Opening and closing hours, schedules and efficiency of performance
4. Tangible aspects of service outlets and premises
5. Equipment and stationary documents
2. Interaction with the service organization

This includes communication between the customer and service
provider, contact between the service environment and customers
94
and physical resources, interactions between the customer and the
Notes systems involved in proving the service and interactions between
ES
___________________ customers. These interactions may take place before, during or after
___________________ the service process.
___________________
3. Customer participation
___________________
Customer participation takes into account the customer as a factor
___________________
that contributes service process in a qualitative manner and out-
___________________ come and thus the perception of customers towards the quality of
___________________ the service.
___________________ Just like benchmarking, a GAP analysis can be used to compare pro-
cesses performed at other places. For the analysis, each process is
___________________
compared step by step, and the differences are noted down, then each
___________________
UP
deviation is analyzed carefully to determine if any change of process
is required. The result can lead to three possible conclusions: -
– Continuance of the current process
– Completely changing to another process
– Fusion of best aspects of each process
Summary
Operations managers in the service sector make many decisions
that are similar to those made by manufacturers: they decide which
services to offer, how to provide these services, where to locate their
businesses, what their facilities will look like, and what the demand
will be for their services.
Service providers that produce goods can adopt either a make-to-or-

der approach (in which products are made to customer satisfaction)
)
or make-to-stock approach (in which products are made for invento-

ry) for manufacturing them.
(C
Review Questions
1. Explain the term Services.
2. What are the characteristics of services?
3. Enlist various types of services
4. Explain the service dimensions.
5. Explain the service gap analysis model.

95
Unit 14 Notes
ES
___________________
Inventory Control ___________________
___________________
Learning Outcomes
___________________
At the end of this chapter, students will be able to demonstrate knowledge
of the following: ___________________
\\ The concept of inventory control ___________________
\\ Characteristics of inventory
___________________
\\ Benefits of holding inventory
___________________
\\ Risks of holding inventories
\\ Objectives of inventory management ___________________
\\
\\
UP
Factors that affect the process of inventory control
Application of Economic Order Quantity in inventory control
___________________
Introduction
Inventory Control
Inventory serves a link to fill the gap between production and dis-
tribution process and as such ensures smooth functioning of organi-
zational activities. There is a time lag involved in the realization of
want, and its accomplishment, the greater is this time lag, higher is
the need for inventory. It is very crucial to have control over the level
of inventories as a large part of an organization’s working capital is
invested in inventories. The main purpose of inventory control is to
ensure enough stocks to meet periodic fluctuations in demand and if
required clear out the inventory levels. Generally, Inventory implies
stock of finished products only, but in certain cases, it may also in-
)
clude raw materials, work in process and store materials.
Characteristics of Inventory
(C
1. Raw Material: Raw material is essential to carry out the pro-

duction activities and constitute a major input for the organi-
zation. The quantity of raw material required depends on two
factors- the rate of consumption and time for replenishment.
2. Work in Progress: work in process is that stage of production

wherein the raw materials have been consumed in the process
of production but have not yet taken the shape of finished goods.
96
3. Consumables: these are supplementary material or catalysts,
Notes
which are not required in the production as a raw material, but
ES
___________________ they are essential for smoothening of the production process.
___________________ 4. Finished goods: when the production process is completed,
___________________ finished goods are obtained. It is necessary for companies to
___________________
have adequate stock of finished goods to cater to the market
requirements smoothly.
___________________
5. Spares: Spares are also an important part of inventory and
___________________
ensure smooth functioning of machines and equipment neces-
___________________ sary for production. Stocking policies for spares vary between
___________________ industries.
___________________ There are certain benefits of holding inventories. Let us discuss
these benefits in detail.
___________________
UP
Purpose/Benefits of Holding Inventors
There are three chief objectives of holding inventories, namely: -
(i) Transaction Motive – to assist with non-stop production and

timely completion of orders.
(ii) Precautionary Motive – holding adequate inventory levels

to meet seasonal variation in demand and avoid stockout prob-
lems.
(iii) Speculative Motive – encourages managing inventory levels

to take advantage of price fluctuations, quantity discounts and
save on re-ordering costs.
Risk and Costs of Holding Inventors
The holding of inventories involves blocking of a firm’s funds and

)
incurrence of capital and other costs and exposure to certain risks.

Different costs and risks involved in holding inventories have been
mentioned below: -
(C
● Capital costs: To maintain adequate inventory levels, it is

necessary for the firm to invest a significant portion of their fi-
nancial resources. This can lead to cash crunch for daily opera-
tions, and the firm must resort to arrange for additional funds,
either from own sources or from external sources.
● Cost of Ordering: Every time an order is placed with the sup-

pliers, a certain cost is involved, it could be in the form of paper-
UNIT 14: Inventory Control
97
work or communication with the supplier. It is a necessary cost
of maintaining inventory levels. Total annual cost of ordering Notes
ES
can be obtained by cost per order multiplied with a number of ___________________
orders placed. ___________________
● Cost of Stock-outs: Stock-out is a situation which occurs ___________________

when the firm does not have enough inventory for a product,
___________________
but there is a demand for it from the customers. There is a sig-
___________________
nificant cost of stock-outs because it results in loss of orders or
loss of customers. ___________________
● Risk of Price Decline: In uncertain market situations there ___________________
is an inherent risk of reduction in prices of inventories. This ___________________

reduction may be due to market conditions, stiff competition or
___________________
increased supplies in the market.
UP
● Risk of Obsolescence: there are certain risks involved in case
of technology related items such as obsolescence due to techno-
___________________
logical changes, changes in consumer tastes, etc.
● Risk of deterioration in Quality: Storing materials for lon-

ger periods can result in deterioration in the quality of invento-
ries.
Objectives of Inventory Management

Following are the major objectives of inventory management:
● Ensure smooth flow of goods into the market, so that customer

requirements are met, and there is no loss of sales.
● Control of inventory levels and short-term and long-term plan-

ning.
● Perpetual inventory control to ensure that material is reflected

)
in the stock registers tally with the actual material present in

the stores.
● Avoid overstocking and stock-out costs.

(C
● Minimize losses through wastage, pilferage, and damages.
● Ensure optimum investment in inventories as per sales and op-

erational activities
● To keep control material cost so that overall reduction in costs

of production can be achieved.
98
● Make sure that optimum quality goods at optimum prices.
Notes
ES
When inventory processes are being managed a wide variety of fac-
___________________
tors are to be considered including both internal as well as external
___________________ factors. It is very important to keep control of these factors as they
___________________ can have a huge impact on inventory management. Let’s have a look
at the major factors that affect inventory processes: -
___________________
___________________ Factors Affecting Inventory

___________________ Financial Factors: these are factors such as the cost of borrowing
___________________ money or cost of maintaining inventories that have a significant im-
pact on inventory management.
___________________
Suppliers: trustworthy suppliers are required for planning to spend
___________________
on materials and managing inventories efficiently.
___________________
UP
Lead Time: it is the time taken for material to arrive after orders
have been placed. Lead time varies according to industries as well
as nature of the product. Any changes in lead times require immedi-
ate changes in inventory management.
Product Type: Due consideration must be given to types of prod-

ucts that are required for production. Some products have a short
shelf life and should be ordered in limited quantities only.
Economic order quantity holds a lot of importance in inventory man-

agement as it defines that quantity at which holding and ordering
costs are minimized.
Economic order quantity

In order to get better control of inventory, a model has been developed
to find out the desired or optimum quantity or levels of materials to
be maintained and purchased at the time of every purchase. The
)
model determines the required working stock level to be maintained.

Every time an order is placed, the company incurs several costs. In
order to minimize the costs of purchasing or ordering cost, the com-
(C
pany can buy in bulk quantity to meet the complete need for the due
course year at one time, resulting into only the cost of one order.
● D is constant
● L is constant
● C is constant
● No stock out is allowed, Q is the quantity

UNIT 14: Inventory Control
99
Number of orders D/Q
Notes
ES
Average inventory Q + 0
___________________
2
Total Cost = SD / Q + IC Q / 2 ___________________
Where SD = set up cost * Demand ___________________

IC =carrying cost
___________________
d TC / D Q = –SD / Q 2 + IC / 2 ___________________
TC is minimum when dTC / dQ =0 ___________________

2 ___________________
–SD / Q + IC / 2 = 0 ___________________
OR Q* = 2DS / IC R=0 ___________________
If lead time is L
UP
R = buffer stock + lead time demand
___________________
= 0 + Dl
= L dl
Hence, EOQ can be considered as an important tool for management

to minimize the cost of inventory and the amount of cash tied up in
the inventory balance.
Example 14.1
Calculate Economic Order Quantity (EOQ) and Reorder point
for the following data
Annual total demand = 10,000 units
Ordering cost = 500 per order
Holding cost = 10%
)
Unit cost = 200

Lead time = 3 days
Working days in a year = 250
(C
EOQ = √2SD/iC
= √2 × 500 × 10000 / 0.1 × 200
= 707
Daily demand = 10000 / 250 = 40
ROP = L dl = 3 × 40 = 120
100
Summary
Notes
ES
___________________ Inventory control is an important aspect of the growth of the compa-
ny as it ensures smooth functioning of company operations. Inven-
___________________
tory control is necessary to ensure that the stocks of all the prod-
___________________ ucts are maintained at optimum levels. In operations management,
___________________ logistics and supply chain management, software programmes are
necessary for inventory management. Inventory control also helps
___________________
in reduction of overall costs without hurting sales.
___________________
___________________ Review Questions

___________________ 1. Define inventory. What are the objectives of inventory?
___________________
2. What are the characteristics of inventory?
___________________
UP
3. Inventory is a necessary evil. Comment.
4. What are the pros and cons of holding inventory?
5. What are the few factors that affect the process of inventory
control?
6. What is economic order quantity?
7. Following is data for an inventory item.

Monthly demand: 1,000 units
Ordering cost: Rs. 4,000 per order
Cost of unit: Rs. 500
Holding cost 20%
a. Calculate EOQ.
b. If the EOQ has to be reduced to 200, how much the order-

)
ing cost per order has to be reduced?
8. An online boutique store sells 1,000 branded kurtas and pants

per month and maintains the inventory turnover rate at 15
(C
per year. Once a customer places an order, the shopped Kurta/

Pants will be shipped directly from a warehouse to customer.
Each warehouse worker can ship 2 Kurtas/Pants per hour, and
works 8 hours / day, 250days / year.
a) What is the average time a Kurta / Pants spends at the

warehouse?
b) How many workers are required for shipping?

101
Unit 15 Notes
ES
___________________
Case Studies ___________________
1. Azibuck is a manufacturing firm that uses approximately 4,500 ___________________

pounds of the coloring material in a year. Presently the firm ___________________
purchases 250 pounds per order and pays $2 per pound. The
___________________
supplier has just announced that orders of 1,200 pounds or
more will be filled at a price of $2 per pound. The manufactur- ___________________
ing firm incurs a cost of $100 each time it submits an order and ___________________
assigns an annual holding cost of 17 percent of the purchase
___________________
price per pound.
___________________
a. Determine the order size that will minimize the total cost.
UP
b. If the supplier had offered the discount at 1,500 pounds
instead of 1,200 pounds, what order size would minimize
___________________
the total cost?
2. A lab orders a variety of chemicals from the same supplier in

every 60 days. Lead time is six days. The manager of the lab
must determine how much of these chemicals to order. A check
of stock revealed that twelve 25-milliliter (ml) jars are on hand.
Daily usage of the chemical is approximately normal with a
mean of 15.2 ml per day and a standard deviation of 1.8 ml per
day. The desired service level for this chemical is 95 percent.
a. How many jars of the chemicals should be ordered?
b. What is the average amount of safety stock of the chemical?
3. The manager of an automobile repair shop hopes to achieve

a better allocation of inventory control efforts by adopting an
)
A-B-C approach to inventory control. Given the monthly usages

in the following table, classify the items in A, B, and C catego-
ries according to dollar usage. After reviewing your classifica-
(C
tion scheme, suppose the manager decides to place item P05

into the A category. What are some possible explanations for
this decision?

Item Usage Unit
K34 90 $1,400
K35 500 12
K36 30 700
102
M10 100 20
Notes
ES
M20 10 1,020
___________________ Z45 80 140
___________________ F14 1,500 10
F95 300 20
___________________
F65 4,800 5
___________________
___________________
___________________
___________________
___________________
___________________
___________________
) UP
(C
ES
UP
BLOCK - IV
)
(C
(C
) UP
ES
105
Unit 16 Notes
ES
___________________
Supply Chain Management ___________________
___________________
Learning Outcomes
___________________
At the end of this chapter, students will be able to:
___________________
\\ Understand the concept of supply chain management
\\ Identify the objectives of supply chain management ___________________
\\ Explain the concept of purchasing cycle ___________________

\\ Understand the role of logistics in supply chain management
___________________
\\ Evaluate the performance of a supply chain management
___________________
\\ Identify the challenges in supply chain management
Introduction
UP ___________________
Supply Chains have been brought to attention because of stiff com-

petition in the global markets, the introduction of products with
short life cycles and increased customer expectation. This has forced
businesses to invest in supply chain management. This investment
from businesses, when combined with upgradation of communica-
tion and transportation technologies, has led to a continuous evo-
lution of supply chain and techniques for its efficient management.
A typical supply chain involves the following steps –
– Procurement of raw materials
– Production of Goods
– Goods sent to Warehouses for storage

)
– Goods shipped to retailers and customers
Interactions going on at various levels of the supply chain must be

taken into account while formulating supply chain management
(C
strategies to help with reduction of costs and improvement of ser-

vice levels.
Definition
“A supply chain consists of all parties involved, directly or indirect-
ly, in fulfilling the customer request. The supply chain includes not
106
only the manufacturer and suppliers, but also transporters, ware-
Notes houses, retailers, and even customers themselves. Within each or-
ES
___________________ ganization, such as a manufacturer, the supply chain includes all
___________________ functions involved in receiving and filling a customer request. These
functions include, but are not limited to, new product development,
___________________
marketing, operations, distribution, finance, and customer service.”
___________________ Chopra and Meindl (2012).
___________________
Refer to Exhibit 16.1, a mini case that describes the role of supply
___________________ chain in the business.
___________________
___________________
___________________
___________________
UP
Exhibit 16.1 Role of Supply Chain
Objectives of Supply Chain Management

It is the primary objective of supply chain management to control
the total cost of the supply chain to meet given demands. This total
cost may be comprised of a number of terms including:
● Raw material and other acquisition costs
● In-bound transportation costs
● Facility investment costs

)
● Direct and indirect manufacturing costs
● Direct and indirect distribution center costs

(C
● Inventory holding costs
● Inter-facility transportation costs
● Outbound transportation costs
These objectives can be attained only when a supply chain consti-

tutes the major elements in it. There are five elements in a supply
chain.
UNIT 16: Supply Chain Management
107
Elements of Supply Chain
Notes
ES
The elements of a supply chain are a supplier, manufacturer, distribu- ___________________
tor, retailer, and customer. The flow of goods in a supply chain occurs
___________________
when a manufacturer sells his goods to the distributors who further
sell the goods to the retailers and customers. The distributor distrib- ___________________
utes the goods to various retailers. Retailers directly connect with cus- ___________________
tomers and provide the goods to them for a cost. The flow of information
___________________
and the flow of funds occur inversely from the customer to the supplier.
___________________
___________________
___________________
___________________
UP ___________________
Figure 16.1 Elements of Supply Chain
In the process of the supply chain, the purchasing cycle plays an

important role. It involves the purchase of raw materials for an or-
ganization.
The Purchasing Cycle

The purchasing cycle starts with a request from within the orga-
)
nization to purchase material, machines, equipment, suppliers, or

other items from outside the organization, and the cycle ends when
the purchasing department is notified that a shipment has been re-
(C
ceived in satisfactory condition.
Figure 16.2 explains the purchasing cycle steps.
Receive Select Monitor Receive

Place order
acquistion supplier order order
Figure 16.2 The Purchasing Cycle

108
1. Receiving the requisition: The requisition includes
Notes
ES
● A description of the item or material required
___________________
___________________ ● The quantity and quality needed
___________________ ● The desired delivery schedules

___________________ ● The team/department(name) requesting the purchase
___________________
2. Selecting a supplier: It is the duty of purchase department to
___________________ shortlist those suppliers who can supply the required goods at
___________________ minimum costs. In case no existing supplier meets the criteria,
it is advisable to look out for new ones. Vendor ratings may be
___________________
referred with respect to selecting vendors, or perhaps rating
___________________ information can be relayed to the vendor for upgrading future
performance.
___________________
UP
3. Placing the order: If the order value is high, like in case of cap-
ital equipment, vendors may be asked to join a bidding process
in which personnel from operations and designs will also join in
for the negotiation process.
Large Volume items which are required on a continuous ba-

sis shall be procured through blanket purchase orders, which
involves annual negotiations of prices and deliveries scheduled
throughout the year periodically.
Moderate Volume items can either be covered through blan-

ket purchase orders or small orders on an individual basis, as
suitable to the enterprise.

Small Volume items are handled directly between the unit re-
quiring it and the supplier. But there should be some controlling
mechanism in place to avoid any unnecessary purchases.
)
4. Monitoring orders: It is necessary to ensure regular follow-up

of orders especially in case of orders requiring longer lead times
so that planning could be done for potential delays and infor-
(C
mation can be passed on to operating units in time. It is neces-

sary for purchase department to relay the messages regarding
any changes in quantities or delivery guidelines to suppliers to
give them enough time to manage their schedules.
5. Receiving orders: Team responsible for receipt of orders

should thoroughly check incoming shipments regarding qual-
ity and quantity. If the goods received are in order proper
109
otification should be sent to purchase, accounts and operations
n
department. In case the goods are not as per specifications they Notes
ES
shall be returned to the suppliers. ___________________
However, the elements in a supply chain and the purchase cy-

___________________
cle are all possible due to a common aspect of managing them ___________________
smoothly. Logistics is such an aspect of the supply chain that
___________________
manages the flow of materials in a production area and layout.
___________________
Logistics in Supply Chain Management ___________________
Logistics is the aspect of managing the flow of materials within a ___________________
production area and layout including monitoring, facilitating, track- ___________________

ing and managing all aspects of movement of incoming and outgoing
___________________
consignments of various goods, raw material, and other things.
UP
● Movement within a facility
1. From incoming vehicles to receiving

___________________
2. From the last operation to the final storage
3. From storage to the point of use
4. From shipping to outgoing vehicles
5. From one work center to the next, or to temporary storage
6. From receiving to storage
7. From storage to packaging / shipping
Coordination of movement of materials must take place to

arrive at the appropriate destinations in desired or required
times. Care must be taken to ensure that the items are not lost,
stolen or damaged during transportation.
)
● Incoming and outgoing shipments traffic management

refers to supervising the shipments and inspecting and manag-
ing the inflow and outflow of various goods.
(C
The traffic management handles
1. Schedules
2. Shipping methods
3. Shipping times
110
Factors affecting the choice of shipping methods
Notes
ES
1. Costs of various alternatives
___________________
___________________
2. Government regulations
___________________ 3. The need of organization relative to the quantity to be shipped

and time to market targets
___________________
___________________ 4. Potential shipping delays / disruptions
___________________ Evaluating shipping alternatives

___________________ This decision compares the cost saving by using the slower alterna-
___________________ tives for movement with the cost incurred as a result of slow alter-
natives.
___________________
Incremental holding cost = H (demand / D)
___________________
UP

Where H = Annual holding cost for a product
D = Time in days
Bar Coding
Bar Codes are the patterns of alternating wide and narrow black
lines and white spaces, and numbers and symbols that provide spe-
cific information about the product carrying the Bar Code.
Use in distribution
1. To track items in warehouses and en route to customers
2. To determine the location of any item in the system and its status
Use in manufacturing
1. Tracking the progress of jobs as they move through the produc-
tion process
)
2. Providing processing instructions to operators

3. Updating inventory records
4. Monitoring quality losses
(C
5. Monitoring productivity
6. Enabling automatic sorting and packing
Electronic Data Exchange

Electronic data exchange is a computer-based system for sharing of
data within various functions of the firm automatically on the basis
of pre-decided data flow and data processing.
111
The benefits of such systems include:
Notes
ES
● Increased productivity
___________________
● Elimination of paperwork ___________________
● Reduced lead-time through profit ___________________
● Facilitation of just in time systems ___________________
___________________
● Electronic transfer of funds done by departments
___________________
● Improved control of operations
___________________
● Reduced nonskilled labor
___________________
● Increased accuracy
___________________
UP
Problems in Just in Time Deliveries
Just in time or JIT is a methodology aimed primarily at reducing
flow times within production system as well as response times from
___________________
suppliers and to customers.
● Frequent deliveries of small shipments
● Increased traffic
● Increase in transportation cost
● Unexpected disruption in transportation
Evaluation of Supply Chain Performance

● Storage Space Utilization: it refers to the average amount of
storage capacity used over a period of time. It helps the manag-
ers with an assessment of the fact if there is any need to change
the layout of the storage area and identify obsolete products
)
that should be junked.
● Order Fill Rate describes the orders that can be filled on the
basis of inventory at hand in terms of percentage. It helps in
(C
determining the balance of the inventory and forecasting the

sales figures that could be achieved with the present inventory.
● On time delivery/shipments: On time delivery and on time

shipments are very important for every business as they ensure
that the material is being received on time and are being deliv-
ered as per schedule.
112
● Perfect order metric: it is a higher-level performance mea-
Notes sure that is formed by a combination of performance markers
ES
___________________ and is essential to this list.
___________________
Challenges in Supply Chain Management
___________________
The challenges in supply chain management are as follows:
___________________
___________________ Globalization:
___________________ One of the greatest difficulties in the supply chain is the manner
___________________ by which to limit the cost of inventory network. To fulfill the expec-
tations of customers, firms have restored their assembling to min-
___________________
imal effort countries over the globe in order to diminish the imme-
___________________ diate and backhanded expenses and to cut duties. However, having
worldwide providers contributes altogether to the many-sided quali-
___________________
UP
ty that originates from extended delivery lead times. Customers not
only want low priced goods, but they also want that those goods are
delivered on time.
Customer Preferences:
By now we already know that global supply chains are very com-
plex. This includes product characteristics that are rapidly chang-
ing, where the challenge is even more. As soon as a new product is
announced, customers start pressing the companies to up the ante
and come up with the next big thing. This where Innovation comes
into the picture as it helps the companies retain competitive ad-
vantage. But it also poses a serious challenge because, in order to
improve upon a product, companies need to redesign their supply
network and fulfill market demand in a customer friendly way.
Market Growth:
)
The ever-going pursuit to acquire new customers poses a serious

challenge to the supply chain. It is important to keep the cost of
development of a product low, so the companies look to expand into
(C
new markets to grow their market share and expand their revenue.
Nowadays, companies all around the world are expected to expand
their network in the home as well as overseas market.
Summary
Importance of product design has assumed great importance in pres-
ent times due to globalization and ease of access to alternative prod-
113
ucts. As a result, the markets are limited, but the expansion plans of
companies are on the rise. In such a situation pricing decisions take Notes
ES
a back seat, and product design plays the role of a differentiator by ___________________
adding attractive features to push the demand further. ___________________
___________________
Review Questions
___________________
1. Explain the term “supply chain management.”
___________________
2. What is logistics?
___________________
3. What are the factors affecting the choice of shipping methods? ___________________
4. What is bar-coding? What is its application in distribution and ___________________

manufacturing?
___________________
5. What are the factors for evaluation of supply chain perfor-

)
mance?
UP ___________________
(C
(C
) UP
ES
115
Unit 17 Notes
ES
___________________
Inspection ___________________
___________________
Learning Outcomes
___________________
___________________
\\ The concept of sample inspection
\\ Aspects of sampling inspection ___________________
\\ The process of sample inspection ___________________

\\ Importance of sampling inspection
___________________
\\ Sample size and frequency of inspection
___________________
\\ Advantages of sampling inspection
\\
UP
The concept of acceptance sampling and sample plan
Introduction
___________________
Sampling inspection is a tool to analyze if a part of the sample size

(Lot) should be accepted or rejected depending on the number of de-
fective parts found in a sample drawn from that lot. In case the de-
fective part is below the specified limit, the lot is accepted otherwise
rejected.
In Industrial usage, a random sample is drawn from a big lot of fin-

ished goods or work in process. If the defects in the sample are above
the specified limit, then the entire lot is rejected.
Inspection establishes the level to which the product meets quali-

ty specifications. The method of sampling involves certain aspects
which make the process of inspecting easy and effective.
)
The aspects of inspection are as follows:
● Sample size and frequency of inspection

(C
● Stages of inspection
● Self-inspection by operators or a separate quality function
● Whether to inspect for visual aspects or measure the character-

istics
116
Process of Sample Inspection
Notes
ES
___________________ In a production process, products are inspected at three stages
___________________ ● Raw material

___________________ ● In process
___________________
● Finished product
___________________
The purpose of inspecting raw materials before production is to make
___________________
sure that inputs are of acceptable quality. The reason for inspection
___________________ during production is to check if the process of converting inputs to
___________________
outputs conforms to the estimations made earlier. The purpose of
inspecting conformance of finished product is to make a final veri-
___________________
fication of product quality before delivering products to customers.
___________________
UP
As an Operations Manager, it is very important to know the impor-
tance of inspecting samples. Sample inspection plays an important
role in the production process. The importance of sample inspection
is discussed further.
Importance of Sample Inspection

● It involves inspection of lesser quantity to derive at a decision
about the quality of a product.
● Economical in terms of time and cost
● As all units of a lot are to be checked before dispatch, the qual-

ity inspectors can be fatigued by the repetitive work and might
end up passing some defective pieces, but with sample selec-
tion, those errors could be identified as there is a thorough in-
spection.
)
● As only a few samples are checked, there is no harm caused to

rest of the units of the lot.
● In a few cases, checking the quality of the product involves de-

(C
stroying the product during tests or in case of certain products

chemical analysis is required, it is not possible to employ 100%
inspection.
Sample size and frequency of inspection

It depends on the inspection cost and the cost of any flaws processed
further. The sample size is an important feature of any empiri-
cal study in which the goal is to make inferences about a popula-
UNIT 17: Inspection
117
tion from a sample. In practice, the sample size used in a study is
determined based on the expense of data collection, and the need to Notes
ES
have sufficient statistical power. ___________________
___________________
Stages of inspection
___________________
In manufacturing, inspection is usually carried out at the following
stages ___________________
___________________
● Raw materials
___________________
● In the processing of products
___________________
● Finished products
___________________
● Spares and consumables
___________________
Self-inspection
UP
Self-inspection and a quality function ___________________
● Decisions are faster
● Workers are responsible for producing a quality product
● Lower cost
Quality function
● Separate specialized function
● More systematic inspection
● Better quality and fewer defects
● Incurs additional costs
Now let us look at the advantages of sampling inspection.

)
Advantages of Sampling Inspection:

1. Sampling is the inspection of a relatively smaller quantity that
requires less effort to ensure quality for a required degree of
(C
certainty.
2. This method is relatively less expensive and consumes less

time.
3. Since only a sample is being inspected, all the remaining units

of the lot are untouched and are not affected in any way.
4. Rejection of a complete lot based on a sample creates positive

pressure for betterment in quality and control processes.
118
Acceptance Sampling
Notes
ES
Acceptance sampling is a form of inspection which involves the deci-
___________________
sion if a lot is to accepted or rejected on the basis of a sample drawn
___________________ from the lot. The purpose of this technique is to evaluate the quality
___________________ compliance of the entire lot. Lots that meet quality standards are
passed or accepted, and those that do not meet the quality stan-
___________________
dards are rejected.
___________________
Acceptance sampling becomes necessary when
___________________
___________________
● Large volumes of products need to be inspected.
___________________ ● The cost of inspection is high.
___________________ ● Destructive testing is involved.

___________________
UP
While studying acceptance sampling, it is also important to study
about sampling plan.
Sampling plan
A sampling plan is the basis of sampling inspection. Sampling plans
specify the lot size (N), the sample size (n), and the acceptance / re-
jection criteria. For example: If there are 1 lakh customers, it is not
possible to conduct an interview with 1 lakh customers. Instead, it
will be required to take a sample population of 1000 customers (1 %
of your total population). This sample gives primary data, and this
is assumed to suit 99% of the customers. Naturally, the 1% of the
people interviewed need to be important to the company. And hence
the need for a sampling plan arises.
Acceptable quality level (AQL)

AQL defines the difference between a good and a bad lot. An AQL
)
of 2% means that the probability of a lot, with more than 2% defec-

tives, is being accepted and a lot with up to 2% defectives getting
rejected is very low.
(C
Lot tolerance percent defective (LTPD)

LTPD is the highest limit of the defective percentage that the con-
sumer is willing to accept.
Although customers want a quality equal to AQL but are willing to

accept up to LTPD sometimes.
UNIT 17: Inspection
119
Summary
Notes
ES
An inspection is, most generally, an organized examination or for- ___________________
mal evaluation exercise. It is applicable in various fields, such as
___________________
the process of manufacturing, business, government administration,
road vehicles, engineering and mechanics, medical sciences, mili- ___________________
tary, railroad, real estate, software engineering and so on. ___________________
___________________
Review Questions
___________________
1. Explain the stages in production where inspection is required. ___________________
2. Explain the process of sample inspection? ___________________
___________________
3. What are the various advantages of sampling inspection?
UP
4. What is the importance of sample inspection?
5. What do you understand by sampling plan?

___________________
6. Explain the concept of OC Curve.

)
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(C
) UP
ES
121
Unit 18 Notes
ES
___________________
Statistical Quality Control ___________________
___________________
___________________
Learning Outcomes ___________________
___________________
\\ Understand the concept of statistical control
___________________
\\ Identifying the steps in the control process
\\ Identify the tools of statistical quality control ___________________
\\ Identify the objectives of the statistical quality control ___________________

\\
\\
\\
UP
Identify the applications of statistical quality control
Understanding the use of statistics in process control
Applying variable and attribute control charts
___________________
Introduction
Statistical Quality Control (SQC) is used for analysis of quality re-
lated problems and their solution through a set of statistical tools by
professionals for monitoring and maintaining the quality of products
and services. Quality control is checking the product at any stage to
decide its conformance to acceptable standards and segregating the
good from bad. Quality assurance is ensuring that defectives are not
produced by controlling the process. It involves process control in
place of quality control
Steps in The Control Process

)
The steps in the control process are as follows:
1. Setting Performance Standards: Performance standards

are required to be set up to start the controlling process as the
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actual performance is measured against these standards. Ex-

ample: Revenues to be earned, Costs to be incurred.
2. Measurement of Actual Performance: after setting the

standards, the next step involves the use of various techniques,
such as sample checking and personal observation, for measur-
ing the actual performance. For e.g., Appraisal reports.
122
3. Comparing Actual Performance with Standards: this
Notes step involves comparison of actual performance with the speci-
ES
___________________ fied standards.
___________________ 4. Analyzing Deviations: This step involves analysis of any de-
___________________ viations present. In order to ensure the longevity of the busi-
ness, it is important to address any deviations in key areas.
___________________
___________________ 5. Taking Corrective Action: This is the last but also the most
important steps. If deviations are within the prescribed limits,
___________________
no corrective actions are required but if they are beyond the
___________________ prescribed limits, they should be brought to the notice of man-
___________________ agement and immediate corrective action should be taken.
___________________
Tools of Statistical Process Control
___________________
UP
All SQC tools are really helpful in evaluating the service quality,
and it uses diverse tools for analysis of the quality problem.
1. Descriptive Statistics: are used to explain quality charac-

teristics and relationships and includes statistics such as the
mean, standard deviation, range, etc.
2. Statistical Process Control (SPC): it answers the question

if a process is functioning properly or not. It involves checking a
random sample of output and decide if the process is producing
products with all the required specifications that fall within a
specified range.
3. Acceptance Sampling: this process involves random inspec-

tion of a small lot of goods and taking a decision if the lot is
acceptable or not based on the results.
Now let us look at the objectives of statistical quality control.

)
Objective of Statistical Quality Control

Quality Control is a significant tool for every company, comprising
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of the following parameters: -
– Service Quality
– Employee Participation
– Management leadership,
– Continuous improvement
UNIT 18: Statistical Quality Control
123
– Prompt response
Notes
ES
– Fact-based actions
___________________
– Management Commitment and ___________________
– Quality driven culture. ___________________
The primary objectives of the quality control module are to control: ___________________
___________________
● Receiving Materials
___________________
● Rejecting Materials
___________________
● Customers
___________________
● Claims
___________________
● Providers
● Evaluations
UP ___________________
The development and use of performance pointers are associated ei-

ther directly or indirectly, to buyer requirements and gratification,
as well as to the management.
Application of SPC
There are three main phases of activity for the application of SPC: -
1. Knowledge of the process and the specified limits
2. Removing the desired sources of variations so that the process

can be smooth and stable
3. Checking and observing the current production process (using

control charts) to find out significant changes of mean or varia-
tion
)
Control Charts
Statistical Process Control commonly makes use of control charts, to
(C
measure any characteristic of a product such as weigh of a packet of

chips, number of cigarettes in a pack. The characteristics that can
be measured using control charts can be divided into two groups,
Variables, and Attributes. Control chart for variables monitors mea-
surable characteristics with a continuum of values such as weight,
height, or volume, etc.
A control chart is a graphical technique that records process vari-

ation and gives a signal when the variation exceeds natural limits.
124
The general layout of a control chart
Notes
ES
___________________ Upper Control limit
___________________
___________________ Control limit L
___________________
___________________ Lower control limit

___________________
___________________
___________________ There are certain attributes and variables for which control charts
___________________ are prepared.
___________________
UP
Variables: A product property that can be measured and possesses
a continuum of values. Example: area, volume, density, etc.
Attributes: A product characteristic with a distinct value and

non-countable. Example: Colour, weight.
Control chart for attributes

P chart
P-charts help with measurement of defective proportion from a sam-
ple. The calculation of centerline along with the upper and lower
control limits is like computation in other types of control charts.
Centre line is obtained by taking random observation samples and
computing the value of p across all samples, and it reflects the aver-
age defective proportion of the population.
C chart
C-charts are employed for calculating a number of defects per unit
)
such as meals returned in a restaurant, bacteria per ml of water,

etc.
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Summary
Using statistical methods for monitoring and controlling a process ,
Statistical Process Control (SPC) is an efficient method for quality
control. It lowers wastage percentage by ensuring efficient opera-
tion of a process and more specification compliant products being
manufactured. SPC can be applied to any process where specifica-
tion compliant products can be measured. SPC makes use of certain
UNIT 18: Statistical Quality Control
125
tools such as control charts, run charts, focus on improvement and
design of experiments. Notes
ES
___________________
1. Differentiate between quality control and quality assurance. ___________________
2. What is a control chart? What are the types of control charts? ___________________
___________________
3. Differentiate between random variation and assignable varia-
tion. ___________________
4. Explain the characteristics of the normal distribution. ___________________
___________________
5. Explain the method of determining control limits for p chart
and c chart. ___________________
) UP ___________________
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127
Unit 19 Notes
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___________________
Maintenance ___________________
___________________
Learning Outcomes
___________________
___________________
\\ Understand the importance of maintenance
\\ Identify the results of breakdowns ___________________
\\ Understand the types and importance of maintenance ___________________

\\ Explain the approaches used to deal with breakdowns ___________________
___________________
Introduction
UP
Maintenance is the set of those activities that keep facilities and
equipment in normal order of working and making necessary re-
___________________
pairs when breakdowns occur so that the process can run without
any hindrance or disruptions.
Let us now look at the importance of maintenance.
Importance of Maintenance
● Effective maintenance can improve profits and decrease cost.
● Efficient maintenance adds value through better utilization of

resources.
● Maintenance should be considered as an organizational func-

tion that functions in parallel with production.
● Maintenance significantly affects multiple aspects of produc-

)
tion costs.
● Implementing effective maintenance into production is an in-

vestment, not a limiting constraint.
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Results of Breakdowns
The breakdowns in the production process lead to the following:
● Reduced production and delayed deliveries
● The increased cost of production

128
● There are quality issues; product may be defective
Notes
ES
● Adverse impact on product quality
___________________
___________________ ● Safety threats for workers
___________________
Types of Maintenance
___________________
The different types of maintenance are as follows:
___________________
___________________
Breakdown maintenance
___________________ It is the repair of equipment in the event of a failure while in oper-

ation.
___________________
___________________ Preventive maintenance

It is the periodic check of the equipment as per a predetermined
___________________
UP
schedule. The preventive maintenance reduces the chances of fail-
ures of equipment in the plant.
Preventive maintenance makes use of
● Routine inspection of equipment to identify the status
● Scheduled checks of the machines and equipment
● Replacing parts and consumables after a specified number of

hours
Predictive maintenance
Predictive maintenance identifies the need for machine repair on
the basis of signals before the damage gets bigger. It uses historical
information and technical data analysis to predict when equipment
or part is about to fail. If failures are estimated in a predictive mod-
el, there will be more effective preventive maintenance.
)
Approaches used to deal with breakdowns

● Spare equipment to ensure continued production in the event
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of equipment failure
● Inventories of spare parts
● Operators skilled in minor repairs of the equipment
Some organizations have workers perform preventive maintenance

on the machines they work on, rather than use separate m aintenance
personnel for that task. This is called total productive maintenance;
UNIT 19: Maintenance
129
this approach is consistent with Just in Time (JIT) systems and
lean operations, where employees are given greater responsibility Notes
ES
for quality, productivity, and the general functioning of the system. ___________________
JIT is a concept that believes the work to be done just before the due ___________________
time to avoid any undue gap between tasks. There are a variety of
___________________
derived concepts like JIT purchasing, JIT assembling and execution
are associated to remove the gaps between a variety of tasks within ___________________
one function and between various functions. ___________________
The risk of a breakdown can be reduced by an effective preventive ___________________

maintenance program. But sometimes breakdowns still occur. Or- ___________________
ganizations with good preventive practices have a lesser need for
___________________
breakdown programs. However, organizations that rely less on pre-
ventive maintenance have a greater need for effective ways of deal- ___________________
ing with breakdowns.

UP
In preventive maintenance, management cannot schedule break-
downs but must deal with them on an irregular basis, whenever
___________________
they occur.
The main approaches used to deal with breakdowns are the

following:
1. Standby or backup equipment that can be quickly pressed into
service
2. Inventories of spare parts that can be installed as needed,

thereby avoiding lead times involved in ordering parts, and
buffer inventories, so that other equipment will be less likely
to be affected by short-term downtime of a particular piece of
equipment
3. Operators who are able to perform at least minor repairs on

)
their equipment
4. Repair people who are well trained and readily available to di-
agnose and correct problems with equipment
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The degree to which an organization pursues any or all of these ap-

proaches depends on how important a particular piece of equipment
is to the overall operations system. At one extreme, it could be equip-
ment that is the focal point of a system (e.g., printing presses for a
newspaper, or vital operating parts of a car, such as brakes, steer-
ing, transmission, ignition, and engine). At the other extreme, it
could be equipment that is seldom used, because it does not perform
130
an important function in the system and also equipment for which
Notes substitutes are readily available.
ES
___________________
___________________
Summary
___________________ Maintenance is a system of maintaining and improving the in-
tegrity of production and quality systems through the machines,
___________________
equipment, processes, and employees that add business value to an
___________________
organization. It focuses on keeping all equipment in top working
___________________ condition to avoid breakdowns and delays in manufacturing pro-
___________________ cesses. It is an important factor that is required in several fields,
such as maintenance of an organism, aircraft maintenance, car
___________________
maintenance, railroad track maintenance, software maintenance
___________________ and property maintenance.
___________________
UP
Review Questions
1. What is maintenance? What are the reasons for maintenance?
2. What are the adverse impacts of machine breakdowns?
3. Differentiate between predictive and preventive maintenance.
4. What are the different strategies to deal with breakdowns?
5. What are the considerations in deciding preventive mainte-

nance schedule?
)
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131
Unit 20 Notes
ES
___________________
Case Study ___________________
___________________
___________________
Case Study 1 – Arrow Electronics – Qualitative
Assessment ___________________
___________________
10 guidelines were offered by William E. Mitchell, President, and
CEO of Arrow Electronics regarding the reduction of product quality ___________________
issues and associated risks in an offshore supply chain. Although ___________________

the guidelines were aimed at electronics suppliers, they did offer a
___________________
great beginning point for a lot of companies striving for reduction of
UP
risk and probable quality problems.
1. Electronics should be sourced from companies with a well-es-

___________________
tablished reputation and having robust internal controls.
2. Before getting into business with any potential supply chain

partners, carry out a comprehensive background check includ-
ing trade references and business history.
3. In order to check quality control systems installed by supply

chain partners, site inspections should be conducted.
4. Communications with the supply chain partners shall be con-

tinually engaged with along with ongoing performance reviews,
to check performance against pre-set goals and find out the
scope for improvement.
5. Sourcing should only be done from companies willing to provide

a written guarantee for their products.
)
6. To avoid the risk of counterfeit products caution should be exer-

cised while buying from companies not having franchised rela-
tionships.
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7. Unusually low prices are a red flag.
8. Always seek supply chain partners with ISO or other globally

recognized quality certifications.
9. Relationships shall be established with third-party organiza-

tions.
132
10. Convert quality into measurable and well-defined targets.
Notes Communicate them clearly with the supply chain partners as
ES
___________________ well as with company employees. As the Supply Chain Digest
___________________ notes “to do this right will involve greater costs, reducing the
relative price advantage of offshore strategies to a degree, and
___________________
certainly requiring companies to build a substantial infrastruc-
___________________ ture to develop and maintain these monitoring programs.”
___________________
Review Questions
___________________
___________________ Q1. What are the challenges before Mr. Mitchell for maintaining
the qualitative parameters?
___________________
Q2. What would be your suggestion to Mr. Mitchell?
___________________
___________________
UP
Case Study 2 –
Alpha Chemicals is in the business of manufacturing welding acces-
sories since 1992. The company is quite cautious about the quality of
its products and views any quality problem very seriously.
In August 2015, a major client of alpha chemicals called the repre-

sentative of the company for discussing a serious quality issue. The
client was a major client for welding electrodes manufactured by
the company. The electrodes apart from physical defects also have
weight as an important parameter.
Mr. Rohit Pant, the quality manager, was assigned the task of meet-
ing the customer and resolving the issue. During the meeting, the
client’s management informed Mr. Rohit of the high variation in
the weight of units. This variation was causing a lot of trouble in
production at the client’s plant. Mr. Rohit assured to look into the
matter and get back soon with the solution. As a first step, the data
)
of weights of products for the last 15 days (1st July to 15th July) was
compiled as follows:
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Date Weight
1 2 3 4 5
1 2.4 2.2 2.2 2.1 2.2
2 2.3 2.1 2.1 2.2 2.1
3 2.1 2.3 2.1 2.3 2.4
4 2.3 2.2 2.1 2.4 2.4
5 2.4 2.5 2.3 2.2 2.4
6 2.2 2.2 2.1 2.2 2.5
UNIT 20: Case Study
133
7 2.3 2.1 2.4 2.5 2.2
Notes
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8 2.4 2.3 2.4 2.3 2.3
9 2.4 2.4 2.2 2.1 2.5 ___________________
10 2.1 2.2 2.5 2.3 2.3
___________________
11 2.5 2.4 2.1 2.2 2.1
12 2.2 2.2 2.2 2.4 2.2 ___________________
13 2.1 2.1 2.3 2.4 2.4 ___________________
14 2.3 2.3 2.5 2.3 2.5
___________________
15 2.3 2.4 2.2 2.2 2.1
___________________
___________________
Review Questions
___________________
1. What is your analysis of the weight problem?
___________________
2. Construct a suitable control chart.
UP
3. What procedures would you recommend to maintain proper
)
quality control?
___________________
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BLOCK - V
)
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137
Unit 21 Notes
ES
___________________
Materials Management ___________________
___________________
Learning Outcomes
___________________
At the end of this chapter students will be able to understand and explain:
___________________
\\ The concept of materials management
\\ Materials management cycle ___________________
\\ Objectives of materials management ___________________

\\ Tasks of materials management
___________________
\\ Concept of outsourcing
___________________
\\ Vendor rating and evaluation
\\
UP
Concept of vendor management
Introduction
___________________
The material can be defined as a tangible object that goes into the
making of a physical object.
Materials management deals with: -
– Planning for the company campus.
– Developing building designs for smooth movement of materials
– Logistics handling material movement
– Acquisition of spare parts and replacements, their quality con-

trol and managing orders, shipping and warehousing standards
of such parts.
)
Materials management is responsible for the coordination of plan-

ning, sourcing, purchasing, moving, storing and controlling mate-
rials in an optimum manner to efficiently provide a service to the
consumers at lowest possible cost.
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Materials management process involves short-range decisions about

supplies, inventories production levels, schedules, and distribution.
Let us have a look at the materials management cycle in Figure 21.1.
Materials management cycle

The materials management cycle involves purchasing raw mate-
rials, storing them for future, converting them finished goods and
then distributing the finished goods to the end users.
138
Acquisition of raw materials
Notes
ES
___________________
___________________
Distribution Storage
___________________
___________________
___________________
___________________
Storage Conversion
___________________
Figure 21.1 Material management cycle
___________________
___________________ Acquisition of raw materials: This involves acquiring or buying

raw materials to be used for the manufacturing of finished products.
___________________
UP
Example: A cloth manufacturer would acquire raw materials such
as fabric, threads, dye, etc.
● Storage: Once the raw materials are purchased they need to be

stored in a manner that it does not get damaged until the time
of production, Example: An ice-cream manufacturer would buy
fruits in advance. So, it will be important for him to store and
refrigerate them such that they do not get destroyed.
● Conversion: This involves the actual process of production

wherein goods are transformed from raw materials to finished
products.
● Storage: Once the finished goods are manufactured, it is im-

portant that the manufacturer stores and packs them properly
until they are delivered to the end user.
● Distributor: The manufacturer is ought to find distributors

)
who would deliver the goods to the retailers who in turn would
deliver the finished goods to end users or customers.
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Objectives of Materials Management

The main objectives of material management are:
1. Minimising material costs
2. Reducing the cost of purchasing, receiving, logistics and stor-

age of materials in an efficient way
UNIT 21: Materials Management
139
3. Using simplification, standardization, value analysis, import
substitution and related aspects to cut down the costs Notes
ES
___________________
4. Maintaining continuous supply at reasonable and durable rates
(by identifying new sources of supply and establishing an ami- ___________________
cable relation with the suppliers) ___________________
5. Developing and maintaining high inventory turnover ratios by ___________________
reducing more investments into inventories ___________________
___________________
Tasks of Materials Management
___________________
The various tasks in materials management are listed below:
___________________
● Supplier selection
___________________
● Issuing purchase releases
● Inbound transportation
UP ___________________
● Initiating purchase request
● Inventory control on sight
● Assigning priorities to work
● Outbound transportation
● Inventory control at distribution centers
Outsourcing
Outsourcing refers to acquiring the products or services from exter-
nal sources rather than producing in-house.
Importance of outsourcing
)
● External suppliers provide materials better, cheaper and more

efficiently because of their expertise and economy of scale
● Expertise and knowledge of vendor becomes available to the

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organization
● Production of the part may be restricted by a patent
● Outsourcing offers added flexibility
● The organization can focus on the core activity

140
Risks in outsourcing
Notes
ES
● The control on production and quality is lost
___________________
___________________
● Greater dependency on suppliers may lead to production plan
disruptions
___________________
___________________
Vendor Rating and Evaluation
___________________ It is necessary that supplies are obtained from the vendor after deep
evaluation and recognizing their overall capabilities.
___________________
___________________
There are two different scenarios in front of a buyer.
___________________ 1. The performance of the vendor has to be evaluated before the

delivery. This concept is known as vendor evaluation.
___________________
2. The performance should be evaluated after the delivery of the
___________________
UP products. This is known as vendor rating.
Factors for vendor evaluation

● Reliability
● Technical capabilities
● Availability
● Sales assistance
● After sales service
● Convenience
Vendor Development
Vendor development is one of the popular techniques of strategic
sourcing, which improves the value we receive from suppliers. Ven-
)
dor Development can be defined as any activity that a Buying Firm

undertakes to improve a Supplier’s performance and capabilities to
meet the Buying Firms’ supply needs.
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The main features of vendor management are mentioned below:
● Communication of essential and helpful information like de-

sign, specifications, standards, practices, etc.
● Communication of engineering changes
● Developing methods for detecting deviations from standard

promptly
UNIT 21: Materials Management
141
● Helping the vendors in resolving quality problems
Notes
ES
● Rendering necessary technical assistance
___________________
● Providing quality data in lieu of incoming inspection ___________________
● Review vendor’s performance periodically and providing feed- ___________________

back
___________________
Summary ___________________
___________________
Materials management involves planning and designing for deliv-
ery, distribution, storage, collection, and removal of materials and ___________________
services. It is usually an additional service that is offered as part of ___________________

a campus planning process or a building design project. It is highly
___________________
useful for educational, healthcare, and corporate environments. Ma-
UP
terials management takes care of the planning and designing con-
siderations required to support effective delivery and movement of
goods and services that support occupant activity.
___________________
Review Questions
1. Explain materials management cycle with the help of an exam-
ple.
2. What are the tasks of materials management?
3. Explain acquisition process.
4. What is outsourcing? What are the reasons for outsourcing?
5. What are the factors affecting supplier selection?

)
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143
Unit 22 Notes
ES
___________________
Management of Projects ___________________
___________________
Learning Outcomes
___________________
At the end of this chapter students will be able to understand and explain:
___________________
\\ Importance and characteristics of projects in an organization
\\ Project life cycle concept in various organizations ___________________
\\ Network analysis and Critical Path Method ___________________

\\ Program Evaluation and Review Technique
___________________
\\ Various intricacies related to project management
___________________
UP
Consider the following activities
● An underpass is constructed in a city

___________________
● Metro rail is built in Hyderabad
● A plane is built for Airforce
● A new hospital is being constructed
Do you see anything common in all these activities?
Now consider some more activities
● A company launches a new product development program
● A manufacturing organization launches a survey for assessing

customer satisfaction with its products
● A manufacturing organization constructs a new warehouse

)
● A new machine is procured and installed
Do you see anything common in all these activities? Do you see any-
thing common in first set and second set of activities?
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You can observe that although these activities are entirely different
from each other, they are temporary in nature, that is, they have a
start and a finished timeline, unlike the mass manufacturing oper-
ations, which are perpetual.
All the activities described above fall in the category of projects.

144
A project can be defined as a temporary endeavor to achieve a spe-
Notes cific well-defined objective.
ES
___________________
Projects in contemporary organizations
___________________
Initially, the projects were considered different to the conventional
___________________
manufacturing systems. The word project was associated with large
___________________ projects like infrastructure, shipbuilding, construction, etc. But in
___________________ due course of time, it was realized that if conventional manufac-
turing systems could adopt project methodology, it would result in
___________________
higher efficiency for the organization.
___________________
So the project method comprises of three major entities
___________________
___________________ Parentt Organization Proj

o ect Team Customer
___________________
UP Figure 22.1 Projects in contemporary organizations
The parent organization selects the team leader and the team mem-
bers from its different divisions as per requirement of skills and
qualifications for the project. The project team is responsible for in-
teracting with customer and ensure that the outcome must meet the
requirements of the customer for that project.
Note that the customer for the product may be the parent organiza-
tion itself; for example, development of IT system for a company’s
operations or construction of a new warehouse or installation of new
technology.
Characteristics of projects
The projects differ from traditional forms of production and are
characterized by some unique features as follows
)
The projects have a purpose: Each project has a well-defined pur-

pose or objective. For example, the project of new product develop-
ment may have the objective of achieving a competitive edge. The
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construction of a flyover on the road may have a purpose of reducing

traffic congestion. The purpose of constructing an underpass on the
road may be to provide a safe road for the pedestrians to cross.
The projects have a life cycle: The projects, as already discussed,

are temporary endeavors. While the projects are in progress, they
pass through some well-defined stages of life cycle.
Each project produces a unique product: The projects are

not repetitive manufacturing activities. The product of a project is
UNIT 22: Management of Projects
145
unique. The same specifications of a product will never be created by
future projects. Notes
ES
___________________
Interdependence: Each project is comprised of a number of tasks.
All the tasks involved in a project are independent, unique entities, ___________________
but they depend on each other for their performance. For example, a ___________________
specific task might not start unless some of the preceding tasks have
___________________
been completed.
___________________
Project life cycle ___________________
One of the characteristics of projects that we discussed in the last ___________________
section is that the projects are temporary endeavors and charac-
___________________
terized by a life cycle. Although the projects differ in size, nature,
product, and requirements, the life cycle of all projects is typically ___________________
similar. The phases in the life cycle of projects are shown in the form
UP
of a graph below. The X-axis of the graph indicates the time and the
Y-axis indicates the level of effort required during various stages.
___________________
Conception Planning Scheduling Evaluation and

)
Monitoring & Control Termination

Selection
Figure 22.3 Stages in the life cycle of a project

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Conception: During this stage, the management of the parent or-

ganization comes across various ideas of projects, each project hav-
ing its own necessity and significance. The project ideas are general-
ly the outcome of brainstorming or other means of idea generation.
The ideas so generated are subjected to the screening on the basis
of management’s priorities, organizational needs, and importance of
the project to achieve organizational goals.
146
Selection: The scarcity of resources may prohibit the management
Notes to launch all screened projects simultaneously. The projects to be
ES
___________________ undertaken are then selected by the management on various criteria
___________________ like management priorities, competitive necessity, the significance
of the project, etc. For example, the management may consider a
___________________
project for new product development more significant than the con-
___________________ struction of a new warehouse. A number of numeric and non-numer-
___________________ ic techniques are used by the management for the purpose of project
selection. The numeric techniques include the financial assessment
___________________
of projects and also the comparative scoring.
___________________
Planning: The selection phase is followed by planning for the
___________________
project. During this phase, various aspects relating to the project
___________________ are planned, which include scope definition, resource requirement
planning, skills required for the project, manpower requirement,
___________________
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procurement requirement, financial planning, and specification
definition. The outcome of this process is a project plan, which is
a roadmap to the project. The project plan is also used as a tool for
project control. Another important aspect of this phase is identifying
the risks involved during the project life and planning to counter
these risks in the event of them becoming a reality.
Scheduling: The project time schedules are developed during this

phase. The project is broken into smaller tasks and work packages
and time required for the individual task is assessed. The breaking
of the project into smaller tasks and work packages is called work
breakdown structure (WBS). The interdependence of the tasks is
also established during this phase. The time required to complete
the project is then assessed using the compiled information of tasks
interdependence and task time requirements.
Monitoring and control: Once the project is in the process, it

)
is essential to ensure that the various activities are completed in

scheduled time and within decided budget. Exceeding time or cost
will lead to schedule overrun or cost overrun. Since the projects are
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also characterized by scarcity of resources and the simultaneous de-

mand for resources by different tasks and work packages, it becomes
essential to apply techniques for rational and optimum utilization
and allocation of the resources in such a manner that the impact on
project objectives is minimum. The process of comparing the project
progress with plans refers to monitoring. Control refers to identify-
ing deviations and acting to minimize the impact of deviations.
147
Evaluation: Evaluation refers to Analyzing the project performance
and making sure that the objectives are fulfilled for the project. Eval- Notes
ES
uation involves schedule performance, cost performance, specifica- ___________________
tions achievement, actions taken to respond to risks, resource use ___________________
and allocation and management of outsourcing and contracting. The
___________________
evaluation is carried out after completion of the project and during
different stages of project progress. ___________________
___________________
The during project progress evaluation provides the basis for taking
corrective actions if needed and the end of project evaluation is car- ___________________
ried out to learn from the completed project so as to perform the fu- ___________________
ture projects in a more efficient and effective manner. The technique
___________________
generally used for evaluation is called project audit.
___________________
Termination: The project comes to the finishing part at this stage.
UP
This phase identifies the need of terminating a project. Please note
that termination does not always mean successful completion of the
project. Termination of the project may be a result of project failure
___________________
or changed management priorities or lack of funds and resources.

A final accounting of project is carried out in this phase and project
is closed. The project assets are distributed among different divi-
sions, and the project team members are returned to their parent
divisions. If the termination is due to successful completion of the
project, the product is handed over to the customer.
It is also important to understand the life cycle of the project with

reference to the speed of the project. Typically the projects have a
slow beginning followed by quick momentum and finally a slow fin-
ish. It can be explained by the graph given in the Figure 22.4.
)
100
Slow finish
Quick
momentum
% Project
(C
Completion
Slow start
Time
0
Beginning Middle End
Figure 22.4 Project life cycle

148
(Source Meredith and Mantel – Project Management – A mana-
Notes gerial approach)
ES
___________________
Slow Beginning: The projects typically begin slowly. The specifi-
___________________
cations are under development and negotiations, and changes are
___________________
being incorporated at this time. The project is a new one, the re-
___________________ quirement of resources is being assessed. Since the team members
___________________
are drawn from different divisions of the organization, there is a
lot of confusion and conflict regarding the authority and reporting
___________________
hierarchy.
___________________
Quick Momentum: As the aspects related to project become clear,
___________________
and direction is established, and the project gains speed. This is the
___________________ phase of quick momentum. The speed increases fast and reaches a
peak. This is the phase when monitoring and control of the project
___________________
UP
are in existence.
Slow Finish: As the project approaches the finish, the various parts
of project output now need integration. The integration may require
careful analysis and inspection of each part before it is integrated.
This phase may also require minor changes to the parts of the proj-
ect outcomes.
Project Objectives
A project will be called successful if it is able to achieve the project
objectives. There are three criteria for defining and evaluating the
success of a project.
● Performance
● Cost
)
● Time
The planned measures of the three criteria make the target for the
project.
(C
Performance: The product of project must perform what it was

intended for. The specifications of project output must meet the
planned and agreed specifications. Performance is generally one
of the aspects leading to conflict between client and project team
leader. It is essential to clearly define the project objectives in the
planning phase leaving no scope of the dispute. Performance is the
essential criteria for the successful completion of a project.
149
Notes
ES
Performance
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Time Cost
___________________
___________________
UP
Figure 22.5 Project success criteria
___________________
Cost: No project can be provided with unlimited resources. Each

project is associated with a budget in totality and a budget for each
part of the project. For a project to be termed as successful, it is es-
sential that the project is completed within defined budget. The rea-
sons causing cost overrun need to be identified at the planning stage
and controls need to be applied to avoid such circumstances to arise.
Time: Finishing in scheduled time is an important aspect of proj-

ects. Schedule overruns not only cause intangible losses like loss
of reputation and trust and customer dissatisfaction but also leads
to cost overrun. Many times the schedule overruns lead to finan-
cial compensations to the customer apart from additional expense
in resources. A project for being termed as successful needs to be
completed in scheduled time.
)
So a project is successful if it is able to achieve its performance

objectives within scheduled time and allotted budget or cost.
(C
Let us now have a look at the network analysis which also plays an
important role in project management.
Network analysis
Network analysis is the most widely used technique for project
scheduling. The technique involves identifying the precedence rela-
tion between various activities of the project and drawing a network
150
of the activities in accordance with their precedence relationship.
Notes An Activity A is the predecessor to another Activity B if Activity B
ES
___________________ cannot be started unless A is complete.
___________________ Two notations are used for drawing of the network
___________________
A circle denotes an event
___________________
An arrow denotes an activity
___________________
An event is a specific moment in time when something has been ac-
___________________
complished. Completion of each activity leads to an event. The proj-
___________________ ect network starts with an event denoting that nothingng has been
___________________ accomplished so far. The network ends with a single event denoting
that all activities involved in the project have been finished and the
___________________
project is completed.
___________________
UP
Let us understand the use of circle and arrow for drawing the net-
work of the project.
We need to follow some basic rules for developing the network.
● The network typically flows from left to right.
● An activity cannot begin unless all immediately preceding ac-

tivities are completed.
● It’s not allowed to loop in.
● Conditional activities are not allowed.
● An activity is represented by a single arrow.
● A pair of events cannot be connected by more than one activity.
● There must be a single start and single end to the project net-
work.
)
The length of the arrow is NOT proportional to activity time.

(C
Activity A is the predecessor to Activity B
A BB
1 2
This is a simple event that does not involve multiple steps.
A
A BB
151
1 2
Activity A is the predecessor to Activity B and Activity C Notes
ES
A BB ___________________
1 2 ___________________
___________________
___________________
This is a burst event. ___________________
A ___________________
1 C
Activity A and B
3 are the predecessor to Activity C ___________________
2 B
___________________
A
C ___________________
1
3
2 B
UP ___________________
This is a merge event that leads to result C by merging of two

other activities, A and B.
Activity A and B are the predecessor to Activity C and Activity

D
A
C
B D
This is a hybrid event that leads to two results C and D by the

)
merging of two activities, A and B.

(C
152
Example 22.1
Notes
ES
Following is the information related to a software develop-
___________________
ment project.
___________________
S. Task Task Predeces-
___________________ No. code sors
___________________ 1 Specification development A -
2 Process mapping B -
___________________
3 Developing software for process components C A, B
___________________ 4 Testing of software D C
5 Developing hardware specifications E B
___________________
6 Procurement of hardware F E
___________________ 7 Integration of software components G C
___________________
8 Installation of software on hardware H F, G
9 Pilot test I H
___________________
UP
10 Training of users
Develop a network for the project.

J I
Solution
Example 22.2
Following is the information related to a construction project.
S. Task Task code Predecessors

No.
)
1 Design development A -
2 Design approval B A
3 Vendor identification C A
4 Procurement of construction D B, C
(C
material
5 Laying foundation E D
6 Raising pillars F E
7 Structure development G F
8 Finishing H G
9 Electrical work I G
10 Inspection J I
153
Develop a network for the project.
Notes
ES
___________________
___________________
___________________
___________________
___________________
Critical Path Method (CPM) ___________________
After the development of the network, the interrelation of the various ___________________
activities involved in the project is established. The next process is ___________________
establishing a time for the activities. The time estimation has already
___________________
been discussed in previous sections. The establishment of time taken
UP
by activities becomes the basis of the further analysis, which involves
determination time for competing for project and lack of activities.
Critical path method is the technique of analyzing and determining

___________________
the project work and its completion time.
CPM involves the following steps
● Making a drawing of the project network
● Identifying the paths leading from the first stage to finish
● Calculating the total time elapsed along each path
● The path with maximum total took time is called as the critical
path
● The activities those are done during this path are known as
critical activities
)
Example 22.3
Apply CPM to identify the project completion time for the following data:
Activity Predecessor Activity time

(C
A – 3
B – 5
C – 7
D C 3
E A, B 7
F E, D 3
G D 2
H F, G 2
154
Let us see a network development in a project:-
Notes
ES
___________________
A3
___________________
B5 E7
F3 H2
___________________
C7
___________________ D3
G2
___________________
___________________ Let us try to identify all paths on the network for reaching the finish
from the start. The direction of arrows should be taken care of.
___________________
We can identify four paths along this network.
___________________
A–E–F–H
___________________
B–E–F–H
___________________
UP
C–D–G–H
C – D – F – H

Calculate the time taken by each path by adding the time taken by
an activity.
A – E – F – H 15
B – E – F – H 17
C – D – G – H 14
C – D – F – H 15
The critical path is the longest path in the network.
BEFH with a time requirement of 17 days is the critical path as it

has taken the maximum time. The time required by critical path
is called as project completion time and is equal to 17 days for this
project.
However, the method requires physically identifying all paths and

calculating the time required by each path. If the number of activ-
)
ities is more, the network gets complicated, and it becomes almost

impractical to identify each path by observation. So a more scientific
technique is required to identify a critical path on the network.
(C
The technique involves identifying 4 values for each activity:
Early start: The earliest time to start an activity. It depends upon

earliest accomplishment time of all predecessor activities.
Early finish: The earliest time for finishing the activity is obtained
by adding the activity time to the earliest start. For example, if the
155
earliest start of activity is 32, and time required by activity is 4, the
early finish will be 32 + 4 = 36. Notes
ES
___________________
Late start: The latest time by which an activity must start to com-
plete the project in time. To calculate it, the activity time is subtract- ___________________
ed from the late finish time of the activity. ___________________
Late finish: The latest time by which an activity must finish. It ___________________
depends on the late start of all succeeding activities. Each activity ___________________
must finish latest by the time of late start of the succeeding activi-
___________________
ties to ensure that project is completed in time.
___________________
Let us try to determine early start (ES), early finish (EF), late start
___________________
(LS) and late finish (LF) for the activities in above network.
___________________
Activities A, B and C have no predecessor, so they can start at time
UP
zero. The activity time is 3, 5 and 7 respectively, so early finish for
these activities is 3, 5 and 7.
___________________
D can start after C is completed, so D cannot start before 7, that is

ES of D is 7 and its activity time being 3, its EF is 7 + 3 = 10.
Activity ES EF LS LF
A 0 3
B 0 5
C 0 7
D 7 10
E 5 12
F 12 15
G 10 12
H 15 17
Activity E can start after both activities A and B are completed. So

E can start earliest at 5 and its activity time being 7, its EF is 5 +
)
7 = 12
F can start after completion of D and E, so it starts at 12 (ES) and

finishes at 12 + 3 = 15
(C
G can start after completion of D, so it’s ES is 10 and EF is 12
The last activity H can start after F and G that is at 15 (ES) and
finishes at 17.
As the time of last activity for the early finish is 17, the project can-
not be completed in less than 17 time periods. Hence, 17 is the proj-
ect completion time.
156
Let us now find out the LS and LF for all activities.
Notes
ES
Since we would like to finish the project at the earliest, the LF of last
___________________
activity is equal to its EF. So LF for H is 17. Since H has to finish at
___________________ 17, it must start at 17 – 2 = 15 (LS).
___________________
F and G must be completed before H starts, so both F and G must
___________________ finish at 15. LS of succeeding activity is equal to LF of all earlier
___________________ activities. The LS of F and G is therefore 12 and 13 respectively.
___________________ The LF of E is equal to LS of F that is 12, and therefore its LS is

___________________ 12 – 7 = 5.
___________________ Activity ES EF LS LF
A 0 3 2 5
___________________
B 0 5 0 5
___________________
UP C
D
E
0
7
5
7
10
12
2
9
5
9
12
12
F 12 15 12 15
G 10 12 13 15
H 15 17 15 17
Now consider Activity D. the start of Activity F and G depends on

completion of Activity D. LS of F and G is 12 and 13 respectively. To
allow both F and G to start at their LS, D must finish by 12 and so
must start by 9.
The LF of Activities A and B are equal to LS of E that is 5. So their

LS are 2 and 0 respectively. Similarly, LF of C is 9 (LF of D), and its
LS is 9 – 7 = 2.
Observe the ES and LS of all activities. The Activities B, E, F, and G

have equal LS and ES. They are critical activities, and so BEFH
)
is the critical path. LS and ES of Activities A, C, D, and G are not

equal, so they are non-critical activities. The non-critical activities
can be deferred to some extent so that they should not affect the
(C
accomplishment time of the project but the delay in any critical ac-
tivities leads to project delay.
157
Example 22.4
Notes
ES
The time required for completion of activities for the Example 5.1 is
___________________
as under.
___________________
S. No. Task Task Predeces- Time (in
___________________
code sors days)
1 Specification development A - 20 ___________________
2 Process mapping B - 15
___________________
3 Developing software for C A, B 90
process components ___________________
4 Testing of software D C 5 ___________________

5 Developing hardware speci- E B 5
___________________
fications
6 Procurement of hardware F E 25 ___________________
7 Integration of software com- G C 30
8
ponents
UP
Installation of software on
hardware
H F, G 10
___________________
9 Pilot test I H 10
10 Training of users J I 30
Determine the project completion time.
Solution
Let us start with developing the project network.
C 90
D5
A 20
G 30
J
B 15 I
H
Y5
)
Z 25
Let us now determine ES, EF, LS, and LF for all activities.
S. No. Task code ES EF LS LF

(C
1 A 0 20 0 20
2 B 0 15 5 20
3 C 20 110 20 110
4 D 110 115 165 170
5 E 15 20 110 115
6 F 20 45 115 140
7 G 110 140 110 140
8 H 140 150 140 150
158
S. No. Task code ES EF LS LF
Notes
ES
9 I 150 160 150 160
___________________ 10 J 160 170 160 170
___________________
So the critical path is ACGHIJ and project completion time is 170
___________________ days.
___________________
Project evaluation and review technique (PERT)
___________________
The estimate of time used in CPM is deterministic. However, in real
___________________ time projects, deterministic time for all activities is least expected.
___________________ There are various factors which affect the time taken by each ac-
tivity. The time of activities is dependent on several uncertainties,
___________________
which cannot be ascertained precisely. For example, a construction
___________________
project may have uncertainties related to weather, transport time,
___________________
UP
manpower availability, etc. A software development project may
need redesigning because of unacceptable test results, leading to
increasing in time. On the contrary, if the situations governing the
activity time are highly favorable, the activity may even take less
time than expected.
So the time estimates of various activities in a project are in general

probabilistic rather than deterministic. The technique used for net-
work analysis when activity time is probabilistic is called PERT.
Three different time estimates are determined for each activity of

the project viz. pessimistic time (PT), optimistic time (OT) and most
likely time (MLT).
● PT: The time activity will take under adverse conditions
● OT: The time activity will take if conditions are favorable
● MLT: The time activity will take with the highest probability
)
The probable time and standard deviation of the events are calcu-
lated, which is then used to derive the completion time, which is
expected of the project and standard deviation of the project. This
(C
information helps in anticipating probability of the project being

completed in a specific time.
(PT + 4 MLT + OT)
Expected time =
6
Standard Deviation= (PT – OT)
6
Variance =
(PT – OT) 2
(
6
)
159
Example 22.5
Notes
ES
The time estimates and precedence requirements of activities in-
___________________
volved in a project are as under.
___________________
Immediate Time estimate (days)
S. Task predeces- ___________________
Optimistic Most like- Pessimistic
No. code sors ___________________
time ly time time
___________________
1 A - 1 3 5
2 B - 1 3 11 ___________________
3 C A, B 2 5 8
___________________
4 D C 3 4 11
___________________
5 E C 4 7 16
6 F D 1 2 3 ___________________
7 G E 4 6 14
8 H F, G
UP 1
Determine the expected completion time, standard deviation and

1 1
___________________
variance for all activities.
Task Standard
code Time estimate (days) ET Variance
Deviation
S.
No. Opti- Most Pessi-
mistic likely mistic (PT + 4 MLT + OT) (PT – OT) (PT – OT) 2
( )
time time time 6 6 6
1 A 1 3 5 3 4/6=1/3 1/9
2 B 1 3 11 4 10 / 6 = 5 / 3 25 / 9
3 C 2 5 8 5 6/6=1 1
4 D 3 4 11 5 8/6=4/3 16 / 9
5 E 4 7 16 8 12 / 6 = 2 4
6 F 1 2 3 2 2 / 6 =1 / 3 1/9
7 G 4 6 14 7 10 / 6 = 5 / 3 25 / 9
8 H 1 1 1 1 0/6=0 0
The expected time estimates can now be used to estimate the ex-
)
pected completion time of the project on the same lines as in case of

CPM. With the above-mentioned data, the standard deviation can
also be calculated for the completion time of the project. The stan-
(C
dard deviation of the project completion will depend upon the stan-
dard deviation of critical activities.
To estimate project completion standard deviation:
● Draw a network for the project
● Identify critical activities
● Calculate variance for all the critical activities

160
● Calculate the summation of it
Notes
ES
● Calculate the standard deviation of the completion time of the
___________________
project
___________________
Example 22.6
___________________
Determine the approximate time for project completion and stan-
___________________
dard deviation for example 22.5
___________________
___________________
Solution:
___________________ Standard
Immediate ET Variance
Task Deviation
___________________ S. No. Predeces-
code (PT + 4 MLT + OT) (PT – OT) (PT – OT) 2
sors ( )
___________________ 6 6 6
1 A - 3 4/6=1/3 1/9
___________________
UP 2
3
4
5
B
C
D
E
-
A, B
C
C
4
5
5
8
10 / 6 = 5 / 3
6/6=1
8/6=4/3
12 / 6 = 2
25 / 9
1
16 / 9
4
6 F D 2 2 / 6 =1 / 3 1/9
7 G E 7 10 / 6 = 5/3 25 / 9
8 H F, G 1 0/6=0 0
Let us draw the network for the project. The time indicated for each
activity is the Expected time for the activity.
A3
F2
D5
C5
B4
H1
E8 G7
The paths from start to finish in the network and the time required
)
on each path can be identified as
● A – C – D – F – H (3 + 5 + 5 + 2 + 1 = 16)
(C
● A – C – E – G – H (3 + 5 + 8 + 2 + 1 = 19)
● B – C – D – F – H (4 + 5 + 5 + 2 + 1 = 17)
● B – C – E – G – H (4 + 5 + 8 + 2 + 1 = 20)
BCEGH being the longest path, becomes the critical path for the
above network and activities are critical activities for this path. The
project completion time is equal to the time required by longest path
that is 20 days.
161
Sum of variances of the critical activities
Notes
ES
= 25 / 9 + 1 + 4 + 25 / 9 + 0
___________________
= 95 / 9 = 10.56 ___________________
Standard deviation is equal to square root of the variance of ___________________

project completion time
___________________
Standard deviation =√10.56 = 3.25 ___________________
The project completion time determined in the above example is Ex- ___________________
pected Time and actual time taken by the project may vary. The ___________________
extent of variation will be determined after finding the standard de-
___________________
viation. If the standard deviation is high for the project time, the
variation can be high as well in the actual project completion time. ___________________
UP
Now let’s look at the calculation of probability for the project comple-
tion time. The variation in the project completion time is expected
to follow a normal distribution. For determining the probability of
___________________
project completion in a specific time T, normal variant Z needs to be

calculated
T – Te
Z=
σ
Where T is the time period
This the approximate completion time of the project
σ is the SD (Standard Deviation) of completion time of the project
To find out the relevant area under the curve for the probable com-
pletion time of a project.
The area indicates the probability of project completion in a specific

time period.
)
(C
Probability of project
Completion in time T
162
Example 22.7
Notes
ES
What is the probability of completing the project in 17 days consid-
___________________
ering the information is given in Example 22.5?
___________________
Solution:
___________________
___________________
___________________
___________________ completion in 17 days
___________________
___________________
___________________
Te = 20 days
___________________
UP
T = 17 days
T Te
Standard deviation = 3.25 days

T – Te
Z=
σ
17 – 20
Z= = 0.92
3.25
The value of the area under the curve for Z = 0.92 (From normal
distribution table) is 0.3212. This is the area between Teand T. The
area on the left side of Te is 0.5 (The normal curve being the symmet-
rical and total area under the curve is 1.0)
So the total shaded area = 0.5 – 0.3907 = 0.1093
The probability of the project being completed in 24 days is thus

)
0.1093.
Example 22.9
Calculate the probability of completion of the project in 19 days to
(C
22 days considering the information is given in Example 22.5?

163
Solution:
Notes
ES
___________________
___________________
___________________
___________________
___________________
Completion between times
T1 and T2 ___________________
___________________
T1 Te T2
___________________
___________________
Te= 20 days
T1 = 19 days
T2 = 22 days
UP ___________________
Standard deviation = 3.25 days

T – Te
Z=
σ
22 – 20
Z1= = 0.62
3.25
19 – 20
Z2= = 0.31
3.25
The value of area under the curve for Z = 0.62 (From normal distri-
bution table) is 0.2324 and for Z = 0.31, the value is 0.1217. So area
between 20 and 22 is 0.2324 and area between 19 and 20 is 0.1217.
The total shaded area is 0.2324 + 0.1217 = 0.3541
The probability of project being completed in 19 days to 22 days is

)
thus 0.3541.
Summary
(C
Project management involves planning and organization of a compa-

ny’s resources to move a specific task, event or duty toward comple-
tion. It typically involves a one-time project rather than an ongoing
activity, and resources managed include personnel, finances, tech-
nology and intellectual property. A project manager helps to define
the goals and objectives of the project and determines when the var-
ious project components are to be completed and by whom; he also
164
creates quality control checks to ensure completed components meet
Notes a certain standard.
ES
___________________
Review Questions
___________________
1. Define a project. How is a project different from conventional
___________________
forms of manufacturing?
___________________
2. “The project approach leads to higher efficiency and effective-
___________________
ness.” Comment
___________________
3. “The tasks involved in a project are independent entities but
___________________ interdependent.” Elaborate.
___________________
4. Explain the stages involved in a project’s lifecycle with the help
___________________ of a diagram.
___________________
) UP
5. What are the criteria for assessing the success of a project?
(C
165
Unit 23 Notes
ES
___________________
Stores Management ___________________
___________________
Learning Outcomes
___________________
___________________
\\ The concept of stores management
\\ The objectives of store management ___________________
\\ The functions of store management ___________________

\\ The types of stores
___________________
\\ The layout and design of stores
___________________
\\ Storage systems
\\
UP
Stores accounting systems
Introduction
___________________
The store is a crucial component for management of materials as it

is the place where materials are maintained safely, properly inven-
toried and readily available for usage. Storage form a crucial part of
the economic cycle. Being a specialized function, store management
lends a high degree of efficiency and effectiveness to material func-
tions.
Objectives of store management

Effective store management has the following key objectives.
● Ensure a smooth supply of required materials to various orga-

nizational users on time
)
● To prevent instances of overstocking and understocking
● Handle materials safely and save them from damage

(C
● Save material against theft, fire or pilferage
● To reduce storage costs to a minimum level
● Maintain proper control over materials
● Effective utilization of space available
● Enhance efficiency of store personnel

166
Functions of a store
Notes
ES
Store personnel is responsible for carrying out the following func-
___________________
tions.
___________________
● Receiving inward material
___________________
● Supervise unloading of material and tally with the list
___________________
___________________ ● Preparing reports for any damaged goods or short receipts
___________________ ● Preparing ‘goods rejection memo.’

___________________ ● Distribution of received supplies to the respective units
___________________
● Dispatching relevant documents to the respective departments
___________________
● Ensuring cleanliness and orderliness in the storage space
___________________
UP
● Making sure all inward and outward documentation is done
properly
● Safe and suitable management of supplies to save from damage
● Proper record keeping and accurate accounting of materials
Types of Stores
Closed store system
In this system, the supplies are stored in a closed area. Physical
control is exercised by locking of stores. Only authorized personnel
can enter the store’s area. Authorizing documents are required for
entry and exit of the material from the area.
Open stores system

In this system, material is stored near users to ensure easy accessi-
)
bility. No closed storeroom exists. The material is stored close to the

point of use. The storage is done at each workplace as per require-
ment and availability of space. The storage facilities are open, and
workers have open access to it.
(C
Random access stores system

This is a kind of closed stores in which no part has a defined loca-
tion. Location is allocated on a random basis. Care is taken to keep
the parts in the same family as near as possible. Whenever a new
part arrives, location is allocated randomly on the basis of avail-
able slots. Example: A salon where hairbrushes, scissors, and other
UNIT 23: Stores Management
167
beauty and facial products are stored on a random basis. However,
they try to keep similar products together, such as shampoos, facial Notes
ES
packs, combs, etc. ___________________
Let us now have a look at the methods by which we can keep records ___________________
for controlling stores. ___________________
Records for Controlling Store ___________________
___________________
Two types of records are generally maintained for all materials re-
ceived, issued or transferred. ___________________
● Bin card ___________________
Bin card is attached to the individual bin, and it keeps track ___________________
of the quantity of material coming in the bin and going out of
___________________
the bin. It also keeps indicating the balance available. It also
UP
sometimes specifies the desired inventory levels. One card is
attached to each bin on the shelf containing the material and
record remains with the storekeeper for reference. The follow-
___________________
ing is a format of a bin card.

)
● Stores ledger
Store ledger along with the quantities incoming and outgoing
also records the financial value of the parts. While bin card is
one for each bin, the ledger contains information about many
(C
items. The following is a format of a stores ledger.

168
Notes
ES
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Layout and Design of Stores
___________________
While planning the layout and design of stores, the following factors
___________________
UP
should be considered:
● The space for receipt and inspection should be provided adja-

cent to the main stores.
● Different storage facilities should be situated in clearly defined

lanes so that items are quickly stored and located.
● Main lanes should usually be 1.5 – 3 meters wide, depending

upon the type of material and the amount of traffic involved.
● Clear markings should be made at storage space to facilitate

location and identification.
● The fast-moving items should be stored near the dispensing

window.
● The layout should permit the use of modern material handling

equipment.
)
● Stores layout should encourage FIFO.
● Due space should be left for expansion purposes.

(C
● A pleasing and hygienic environment must be provided within

storeroom.
● Adequate lighting arrangement should be provided.
● Adequate safety arrangement should be provided.

UNIT 23: Stores Management
169
Summary
Notes
ES
___________________
A professionally managed store has a clearly defined process
and space, for receiving incoming materials (Receiving Bay), ___________________
storing them safely until they are required (Custody) and send ___________________
them out to relevant departments as and when required (Issue).
___________________
In case of a manufacturing unit, this is a continuous process and
forms a cycle which is essential for smooth functioning of daily op- ___________________
erations. The elementary task of the stores is to act as overseer and ___________________
supervisory manager for parts, supplies, and materials, and to as-
___________________
sist the departments with their requirements.
___________________
UP
1. What are the functions of stores?
2. Differentiate between closed and open stores system.

___________________
3. Explain random access stores system.
4. Explain different stores accounting systems.
5. What factors should be considered for design and layout of

stores?
)
(C
(C
) UP
ES
171
UNIT 24 Notes
ES
___________________
Sustaining and Improving ___________________
Operations ___________________
___________________
___________________
\\ Explain the objectives of process improvement
___________________
\\ Discuss the importance of:
o PDCA Cycle ___________________
o Fishbone Diagram ___________________

o
o Kaizen
o
Value Analysis
UP
Business Process Reengineering (BPR)
___________________
o Six Sigma
Improvement
Improvement is an effort towards making the processes better in
terms of performance. An improvement process involves studying
the current process, measuring its performance and analyzing im-
provement opportunities.
Objectives of Process Improvement

● Achievement of higher quality
● Faster process
)
● Cost reduction
● Higher productivity
(C
● Less waste
● Increased customer satisfaction
The objective of improving the various operational activities can be

achieved by several methods, which are discussed as follows.
PDCA cycle
PDCA implies “Plan Do Check Act”. It is one of the most straightfor-
ward and unassuming techniques for process control and ongoing
172
improvement. It helps in improving the process and performance of
Notes operational activities in a staged and steady manner. It is primarily
ES
___________________ used in manufacturing and service industries for development of
___________________ latest products and is used in software development lifecycle.
___________________ Add 1-2 sentences to explain what PDCA cycle is or what it

___________________
stands for. Explain why this cycle is used.
___________________
___________________
___________________
Act Plan
___________________
Check Do
___________________
___________________
UP Figure 24.1 PDCA cycle
There are four steps in the cycle
Plan – Identify need for improvement and establish the improve-

ment plan specifying objectives.
Do – Carry out the improvement plan. Collect data to analyze the

extent of improvement.
Check – Carry out an evaluation of data and verify that the im-
provement results are as per the plan.
Act – If results are not achieved, analyze the plan and make the
necessary changes
Fishbone Diagram (Cause and Effect Diagram)

)
A cause and effect diagram offers a pictorial technique of identifying

the root cause of a problem. Because of its shape, it is also called
fishbone diagram. It was developed by Ishikawa, so it is also called
(C
as Ishikawa diagram. It systematically categorizes the reasons of

problems and investigates deeper into all reasons that cause the
problem, till it reaches the root cause.
The figure 24.2 shows the Fishbone diagram with all the possible
reasons marked on different branches, collectively proceeding to-
wards the root cause. The diagram investigates the causes of the
UNIT 24: Sustaining and Improving Operations
173
reason for material, method, machine, manpower, measurement,
and environment. Notes
ES
___________________
Cause Effect
___________________
___________________
Material Method Machine ___________________
___________________
Problem ___________________
___________________
___________________
Manpower Measurement Environment
___________________
Value Analysis
UP
Figure 24.2 Fishbone diagram ___________________
Value analysis refers to the critical investigation of the function of

components and materials of a product with an objective to reduce
the cost and enhance the performance of the product.
Steps for value analysis

● Identify a product whose cost is high and needs to be reduced.
● Identify all parts and components of the product.
● The question each part and component.
1. Does the component add value or can it be eliminated?
2. Can the component be replaced by some other cheaper

)
alternative?
3. Can the part be manufactured instead of purchasing the

same?
(C
4. Can specifications be changed to save cost or time?
5. Is a combination of two parts possible?
6. Seek suggestions from employees to reduce cost.
● Analyse the answers to the above questions and plan for im-
provement change.
174
Kaizen
Notes
ES
Kaizen is a philosophy of continuous improvement.
___________________
___________________
It is reiterates the fact that “Improvement is always possible and
work can always be done in a better manner tomorrow than it is
___________________
being done today.” It involves all personnel of the organization to
___________________ strive for small changes in the process without going for large in-
___________________ vestments and make the process better and more efficient with pres-
ent resources.
___________________
___________________ If it is not broken, do not fix it
___________________ Changes to
___________________ Just because it is not broken does not mean it cannot be

fixed...
___________________
UP
There are 5 S of Kaizen
1. SEIRI – SEIRI means Sort Out. It is the sorting out and dis-
carding of unnecessary items in the workplace.
2. SEITION – Seition means to organize. After sorting, they

should organize.
3. SEISO – The word “SEISO” means to shine the workplace.

Keep your belongings neat and clean.
4. SEIKETSU-SEIKETSU – refers to Standardization. There

should be standard rules and regulations related to the usage
of the things.
5. SHITSUKE or Self Discipline – Self-discipline is the most

crucial factor to achieve success. Individual self-discipline can
create wonders.
)
Business Process Reengineering (BPR)

Dramatic improvement in performance by fundamental rethinking
(C
and radical redesign of business processes is termed as BPR. BPR

is based on innovative thinking and creation rather than small im-
provement.
A process subjected to re-engineering should be a core business pro-

cess of the firm. Reengineering focuses on the complete process in
totality rather than focusing on the part of the process.
UNIT 24: Sustaining and Improving Operations
175
Some aspects of BPR are as under:
Notes
ES
● Cross-functional teams – BPR is a team work, which requires
___________________
personnel from various cross-functional departments.
___________________
● Critical processes – The focus should be on improving the
___________________
core and critical processes in totality.
___________________
● Information technology – Use of IT plays a vital role in BPR
___________________
efforts.
___________________
● Strong leadership – Strong leadership and motivation are
necessary for BPR effort. ___________________
___________________
Six Sigma
___________________
Six Sigma is a business process that aims to improve quality, reduce

UP
costs and enhance customer satisfaction. Statistically, six sigma
means reducing the number of defects during any process, product,
___________________
or service per million opportunities to less 3.4 .
Conceptually, the term is much broader; it aims to reduce the in-

stances of defects so that lower costing is achieved and customer
satisfaction is improved, through a well-developed program based
on usage of specific tools and techniques, to accomplish key business
objectives with specific projects. In the business world, six-sigma
programmes have become a key way to improve quality, save time,
cut costs, and improve customer satisfaction.
Six-sigma programmes can be employed in design, production, ser-

vice, inventory management, and delivery. It is important for six-sig-
ma projects to be aligned with organizational strategy.
It includes the following points:

)
● Designing the processes and strategies related to it.
● Measuring the parameters that are important for quality.

(C
● Analysing and developing substitute of superior quality.
● Designing the processes and its complete detailing.
● Verifying the process and implementing the same.
● Controlling the process at the same time so that they should not
surpass the limitations.
176
Summary
Notes
ES
___________________ The success of the business will become more efficient if they can
improve their operations management. If any organization wants
___________________
to achieve success in modern day highly competitive environment,
___________________ it has to pursue Operational Improvement. In addition, it plays an
___________________ enormous role in driving growth and profitability. The organization
always tends to decrease waste, reduce costs, and set up maintain-
___________________
able programs for achievement of reliable results. For this, Overall
___________________
equipment effectiveness (OEE) is used by organizations as it is a
___________________ key performance indicator, for analyzing operational efficiency.
___________________
Review Questions
___________________
1. What is productivity?
___________________
UP
2. What is the significance of measuring productivity?
3. What are the various objectives of process improvement?
4. Explain the term “kaizen.” What are the important aspects of

Six Sigma?
5. Write a short note:
o PDCA Cycle
o BPR
o Value Analysis
)
(C
177
Unit 25 Notes
ES
___________________
Case Study ___________________
Initiatives in an Industry and ___________________
Sustainability
___________________
___________________
___________________
Case 1
___________________
There is a retail company that has released their international re-
___________________
sponsibility report. The report continues to evolve from major sus-
tainability efforts to aggressive, full-blown Corporate Social Respon- ___________________
UP
sibility under current leadership.
For example, here is a phrase from the chief whose opening letter
says: “What was once largely about our own operations has expand-
___________________
ed and shifted into helping rewire whole social and environmental

systems.” Wow.
Many of the company’s initiatives involve working with salesper-

sons to make sustainability and other improvements. A summary of
)
(C
178
some of those by product category from the report is provided below,
Notes as the Supply Chain Graphic of the Week.
ES
___________________
That is a lot of activity but hardly tells the whole story. From a more
___________________ overall perspective, for instance in early months of 2017 “Project
___________________ Gigaton” was declared by the company wherein it would work with
its vendors to reduce 1 Gigaton of emission between 2015-2030.
___________________
___________________ Initially announced in 2009, the Sustainability Index for Suppliers

has witnessed significant progress.
___________________
___________________ The company also cites progress with its Sustainability Index for
suppliers, first announced in 2009. In FY2017, the categories which
___________________
are covered in the index, company achieved the goal of buying 70%
___________________ of goods sourced from US from suppliers participating in the index.
___________________
UP
Last year, 60% growth was registered in the number of suppliers
who completed the data survey with around 2,000 suppliers com-
pleting 5,300 surveys. It also says that more than 300 of its clients
now have the scorecards for their suppliers.
The bottom line: if you are part of its supply chain, you will be part
of its Social Responsibility efforts – big time.
Review Questions
1. What is your take away from the case?
2. Do you think any area that the company has left for achieving
sustainability?
Case 2
New Delhi Laboratories Private limited [NDL] is a company en-
)
gaged infiltration of transformers oil, transformer troubleshooting

and testing of transformer oil for different performance character-
istics. The company is based in Delhi with its laboratory at Baha-
durgarh. The laboratory of the company is accredited for its quality
(C
management system by National Accreditation Board for Labora-

tories. NDL was founded in the year 1988 and since then has come
to known as one point service center for all transformer related re-
quirements.
Recently, managing director of the company, Mr. Anil Kohli has been
in a dilemma, not sure whether to continue with a new product in
which already a lot of money has been invested or not. The product
UNIT 25: Case Study
179
has not found acceptance in the market to the level, anticipated by
Mr. Kohli in the beginning. Mr. Kohli has to decide urgently, wheth- Notes
ES
er to renew the contract or not. ___________________
Mr. Anil Kohli, Managing Director of the company recently came to ___________________
know about a new sensor developed by electronic research and de- ___________________
velopment association [ERDA], Vadodara. The new sensor was able
___________________
to detect a fault in the transformer at its origin and as such was
___________________
able to save high transformer repair costs later on. Mr. Kohli saw
a bright business prospect in the sensor. But the actual conditions ___________________
were much different than anticipated. ___________________
When Mr.Kohli first came to know about the fault sensor developed ___________________
by ERDA, Vadodara, the concept immediately fascinated him. His
___________________
company NDL, which was already in the field of transformer ser-
UP
vice, enjoyed a reputation of one point service center for transform-
er troubleshooting in the industry. He had realized how the minor
problems in the transformers could become giant and lead to high
___________________
costs of repair, apart from disrupting the production operation in

the industry. The new sensor was supposed to detect faults at the
initiation of the problem and thereby offered a preventive measure
rather than costly corrective measures.
He returned to ERDA with his technical manager and a lot of techni-

cal discussions followed. A number of meetings with ERDA and with
own staff followed. A month later, it was decided to proceed ahead
with the project. But Mr. Kohli decided to carry out some market
survey before initiating the project. A vigorous market study fol-
lowed, and sale projections were made for the next 5 years.
The market survey indicated an encouraging response from the mar-

ket and Mr. Kohli decided to launch the project. Discussions with
)
ERDA personal were held, and a technology transfer fee of Rs. 1,

50,000 was decided, along with Rs. 3,000 per piece sold, like royalty.
He also realized that ERDA only had a laboratory prototype, which
will have to be converted into commercial product.
(C
Mr. Anil Kohli had further discussions with his technical personnel
and assessment was done for the preliminary expenses which in-
cluded technology transfer fee, product development, infrastructure,
and consultancy, etc. The total preliminary expenses were anticipat-
ed as Rs. 10,53,000
In August 2012, the technology transfer deal was finalized. Although

the agreement was for a period of 2 years, Anil Kohli expected to
180
r enew it at least for the 3 more years later on. NDL witch was in the
Notes service sector, entered into product manufacturing. The trade name
ES
___________________ of the product was proudly decided as Sensofast.
___________________ The commercialization of Sensofast began soon, and product devel-
___________________ opment was initiated to make it suitable for industries. Side by side,
vigorous marketing also was initiated. It took 3 months to convert
___________________
the laboratory prototype into product prototype. The sales personnel
___________________
were very enthusiastic about the response from industry.
___________________
The financial estimates were made with respect to annual fixed ex-
___________________ penses and variable expenses per product, which were Rs. 5,75,000
___________________ and Rs. 1,11,000 respectively.
___________________ The final commercial prototype was ready in December 2013. Anil
Kohli decided to launch the product in a seminar. A seminar was or-
___________________
UP
ganized, and invitations were sent to senior personnel of the indus-
try. The attendance at the seminar was encouraging. The technical
experts from ERDA explained the fundamentals of Sensofast and a
practical demonstration was also arranged. The product was priced
at Rs. 1,35,000.
The marketing team started enthusiastically on the new product,

with Managing Director leading and monitoring the programme
daily. However, as the time passed, he realized that the potential
was not as high as he had anticipated. During the years 2014 and
2015, against an anticipated sale of 100 pieces, he was able to ma-
ture sales of 10 pieces only. Although a lot of enquires were flowing
in, they did not seem to materialize into sales.
The sales force started getting frustrated because even after their
best efforts, they were not able to generate sales. Anil Kohli also
started reviewing his decision. While he was still in a dilemma, a
)
letter was received from ERDA, extending the contract for another
3 years as initially requested by NDL.
(C
Review Questions
1. Was NDL right in venturing into Sensofast?
2. What decision should the managing director of the company

take now?
(C
)U
PE
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(C

Mr. Utpal Ghosh

Dr D N Pandey Dr Kamal Bansal Dr Tabrez Ahmad

SLM Development Team

Dr. Rajesh Gupta Dr. Meenakshi Sharma Dr. Rakhi Dawar

Mr. Rahul Sharma Mr. Shantanu Trivedi Ms. Aparna

Dr. Rajesh Gupta

Course Code: MBCQ722D

Course Name: Operations & Material Management

Version: January 2018

Unit 1: Introduction to Operations Management.......................................................................3

Unit 11: Product and Service Design...........................................................................................73

Unit 15: Case Study....................................................................................................................101

Unit 16: Supply chain Management..........................................................................................105

\\ Discuss the importance of operation management in different functions ___________________

ous combinations of time, place, characteristics, or psychological val-

Objectives of Operations Management

● Efficiency: The measure of output versus capacity

● Effectiveness: To what extent operations are in alignment

● Quality: The output acceptability to the defined norms

● Lead-time: The time taken in converting the input to output

● Capacity utilization: Extent of utilization of resources

● Flexibility: A measure of how responsive the operations are to

changing customer requirements

(Invisible cost or indirect cost) ___________________

● Appraisal cost ___________________

● Machine stoppage time ___________________

basic process of operations management.

These decisions are affected by operations. Decisions can be catego-

inventory levels and production plans.

The scope of Operations Management

Different organizations have a different scope for operations man-

5. Managing inventories: it is essential to ensure optimal in-

6. Assuring quality: Delivering high quality service every time

7. Motivating and training: all employees shall be properly

trained and highly motivated in various aspects of operations

8. Locating facilities involves taking decisions by managers on

the cities to serve, location for maintenance facilities, and ma-

Finance Marketing ___________________

services (e.g., stock market analyst, broker and investment banker),

Operations function is the backbone of every manufacturing and

The study of operations management is necessary for all managers

● Operations are the backbone of the organization, which con-

● The activities in all other areas of business organizations such

● The activities under operations are repetitive and non-repeti-

Responsibilities of an Operations Manager

● It helps in the identifying and categorizing the types of problems.

● Deciding suitable location for the organization

● Establishing schedules for operations

● Deciding the quantity of production to match demand

● Establishing responsibilities for work

● Taking corrective actions

● Tightening control measures

Operations as a value-added process or transformation pro-

resources. It is important that processes add value. The formula has

Figure 1.2 Process of conversion

Operations can be broadly divided into two categories ___________________

Participation of customer Low High

1. Differentiate between manufacturing and services.

2. Discuss various objectives of operations management.

3. Describe the process of management.

4. What are the performance criteria for operations manager?

5. Explain the different areas in which an operation manager has

Operations Management and Decision Making ___________________

MBCQ722D-Operations & Material Management

MBCQ722D-Operations & Material Management