E Book MS 53 - Production and Operations Management

Production and Operations
Management: An Overview
UNIT 1 PRODUCTION AND OPERATIONS

MANAGEMENT: AN OVERVIEW
Objectives
Perusal of this unit will impart to the students an understanding of the.

• scope and significance of the specialist function of operations management
• impact of encompassing management of services operations which are
expanding in terms of potential employment
• paradigm shift as operations management became more focussed as the vital
link in delighting and surprising the customer
• appreciation that operations management capabilities can be significantly
enhanced by building long-term relationship with the suppliers
• role of manufacturing and service operations as a responsible corporate citizen
in combating pollution
• social issues involved and the need to reorient social values in favour of the
profession of operations management if it has to provide the cutting edge in
competitive strategies
Structure
1.1 Scope and Significance
1.2 Systemic View of Operations Management
1.3 Factors of Production
1.4 Productive Use of Resources
1.5 Environmental Concerns of Operations
1.6 Social Concerns of Operations
1.7 Multidisciplinery Nature of Operations
1.8 Whither Operations Management in India
1.9 Summary
1.10 Self-Assessment Exercises
1.11 Further Readings
1.1 SCOPE AND SIGNIFICANCE

The study of this functional area, originally known as production or manufacturing
management, was changed when it was re-christened as operations management
arising from the compelling need to encompass the rapidly expanding service sector.
If the entire economy, of the nation is divided into agriculture and agriculture based
industry, manufacturing of tangible goods and service industry, service sector is
growing at much faster rate. In USA it has already emerged as the largest employer.
During the recent recession in USA (1989-1993), the employment level in the
manufacturing industries shrank. However, number of persons working in service
sector increased, although at a lower rate. In India also, entrepreneurs with new,
innovative and untried ideas, are entering the service sector to cater to the unmet
needs of the population. It is therefore, more appropriate to describe it as
"Management of Manufacturing and, Service Operations" - distinct from other
functional areas of marketing, finance, human resources, information & systems,
public relations, corporate communications, legal etc., but more basic because a lot of
learning has originated from it and transcended into other functional areas. Some of
the functional sub areas have achieved such eminence that they are being explored as
full-fledged subjects of study, viz. quality management, technology management,
project management, purchasing and materials management, productivity
management and ergonomics, safety, health and environment management. 5
Issues in Production/
Operations Management 1.2 SYSTEMIC VIEW OF OPERATIONS
There has been a sea-change in the scenario of operations management.
Manufacturing facilities of producing tangible goods were far removed from the
customer; this impacted adversely on the customer - orientation of production
personnel. Thanks to the primacy given to the customer focus, operations managers
had to re-orient their thinking and learning the true meaning of customizing their
work processes. Conversion of raw materials into finished products and delivering
services to transform an unsatisfied customer into a satisfied one. has been identified
as the vital link in the primary value chain of an enterprise. The new focus is
illustrated below:
In a generic way, conversion process adds value to raw materials by changing its shape,
size or weight and transformation process entails changes in form, location or time.
1.3 FACTORS OF PRODUCTION

In economics theory we are told about the following four factors of production viz.
• Land
• Labour
• Capital
• Enterprise or Entrepreneurship.
With the increasing fluidity of money, land has become interchangeable with money
.Industrial managers are also engaged in effective and efficient utilization of a huge
variety of resources as below:
1) Men
2) Money
3) Machines
4) Materials
5) Methods
6) Management
7) Measurement
8) Message (information and communication)
6 9) Motive power (energy).
Production and Operations
Excepting perhaps men (workmen) and money, all other resources are knowledge- Management: An Overview
based and technology-oriented. In the knowledge society we have already entered
(Peter Drucker), we are Witnessing increasing ingress of knowledge inputs in every
work process. Already, the whole world is busy unraveling the possibilities of
integrating information technology with every work process of homo sapien society.
1.4 PRODUCTIVE USE OF RESOURCES

Operations personnel usually have a large volume and variety of resources at their
command - they should endeavour to make effective and efficient use of these
resources to achieve the target outputs. In general
Input= Output + Waste
Dividing both sides by input. we obtain
= Productivity + Wastivity
There are two approaches for enhancing utilization of resources viz.
a) Increasing productivity
Productivity like efficiency is the ratio of output to input
This ratio can be increased/improved in the following ways:

i) Increasing output while keeping inputs constant
ii) Decreasing inputs while keeping output constant
iii) Increasing output in greater proportion than the increase in input.
b) Decreasing Wastivity
Reduction of waste or scrap is another way of enhancing productivity. If we work out

the material balance of a work process, we become aware of this intimate
relationship. One surest and best way to reduce wastivity is to minimize generation of
waste at the source itself. This is a whole new and latest concept in combating waste
and pollution, i.e., going in for "cleaner technologies". The emphasis is shifting to
tackling the problems at the source of generation of pollution rather than doing fire
fighting, control and management subsequently. For example, emissions from
automobiles are adding to the atmospheric pollution at such alarming rate that most
large cities are becoming “asthemic”. Although there is in urgent need in cities like
Dellu of combating and controlling air pollution, the need of a long-term policy of
switching over to automobiles with cleaner technologies, where emissions are way
below the-permissible norms cannot be fault. It must appear to be the only
sustainable solution to this menacing problem on a long term basis.
1.5 ENVIRONMENTAL CONCERNS OF OPERATIONS

Although there is much to commend for operations management which has served
rather %yell as the main vehicle of material progress of mankind, we have, in the
process administered a severe blow to the environments and ecology. In our pursuit
of insatiable thrust of “getting and begetting”, we have damaged our environment to
such an extent 7
Production System: issues and
Environment
UNIT 2 PRODUCTION SYSTEM:
ISSUES AND ENVIRONMENT
Objectives
Upon completion of this unit you should be able to:

• Appreciate the role of Production Management in the organisational setting
• Understand the systems approach to production
• Have a brief idea about the characteristics of a production system and types of
production control systems
• Comprehend the procedure of designing a production system
• Appreciate why productivity improvement should be emphasised in a
production system
• Take stock of the upcoming issues of production system viz. Group Technology
(GT) and Optimised Production Technology (OPT)
• Assess the impact of changes in the field of Information Technology (IT) on
production Systems
Structure
2.1 Introduction
2.2 Role of Production Management
23 Production/Operations Management: A Systems View Point
2.4 Production System Design
2.5 Productivity Improvement
2.6 Upcoming Issues of Production Systems
2.7 Production Systems and Information Technology
2.8 Summary
2.9 Key Words
2.1 INTRODUCTION
In this unit we will be able to learn about various aspects of production/operation
systems. The collection of all interrelated activities involved in producing goods and
services is called a Production system. A production system consists of five principal
components: Inputs, Conversion/Creation process, outputs, Feedback and Managers.
The inputs to a production system consist of the resources that are transformed into
the desired outputs (goods and services) as well as the resources needed to support
the overall production process. The major output of a service system is customer
satisfaction. Conversion process in the production system typically changes the shape
and/or composition of raw material and other inputs. In a service organisation the
service is created.
One of the important aspect of managing a production system is to determine the
relative roles of people and machines. With rapid changes in technology, now a days
machines are capable of performing more tasks as compared to the people. Robots
for example can performed more menial and dangerous tasks. The biggest challenge
before a production operations manager is to manage this Human-Machine
Interface.
In this unit we will be dealing with such important issues as: What role and especially
reactive role is being played by production system in the context of organisational
setting?, Why it is essential to view the production system It - the systems view
point?, What is the procedure of designing a production system'?, Why it is important
to achieve 11
Operations Management productivity improvement in order for production system?, Why it Is important to
achieve productivity improvement in order for production system to be both efficient
and effective?, What contributions are made by upcoming issues of production
system such as GT and OPT to the overall cost effectiveness of the production-
system. In What ways the recent developments in the field of IT are influencing the
production systems and what resultant economic benefits can be reaped?
Comprehension of these aspects shall puts you in good stead when confronted with
such issues in your working situations.
2.2 ROLE OF PRODUCTION MANAGEMENT

Production Operations Management is concerned with proper management and
utilisation of those enterprisse resources which are required to produce goods and/or
services. With the growth of service industries the term Operations Management has
come to be used which emphasises production of both goods and services. In the
wake of increased competition the business organisations are compelled to develop
their overall corporate strategies to remain viable, For achieving this the functional
level strategies should contribute to the coherent strategy of the organisation. It is
often seen that individual functions dominate the corporate strategies. The following
table (2.1) shows the relative dominance of one or the other functional area in the
corporate strategy.
2.2:.1 The reactive role of Production/Operations Management
Many companies do not find it necessary to incorporate the functional area

perspectives while formulating corporate strategies. Most companies embrace the
marketing and financial constraints in their strategic response but fad lo incorporate
the critical aspects of Production/Operations Management. One reason for this is the
typical characteristics traits of Production/Operations Manager. A
Production/Operations Manager should have the ability to handle the strategic
aspects of Production/Operations Management consistently. The second trait of
Production/Operations Manager is their disdain for the written word, because they
rely more on verbal communication. The need of the hour is to document all the
activities so that it may be possible to systematically review the
Production/Operations Problems and to incorporate them into the strategies. Even the
Production/Operations Mangagers also have a tendency to view themselves as
holding a reactive corporate brief and rarely they feel the need to take part in strategic
debates. Companies also view the role of Production/Operations Management as a
12 short term and. reactive and do not stress the long term nature of this task.
2.3 PRODUCTION/OPERATIONS MANAGEMENT. A Environment
SYSTEMS VIEW POINT
Production operations management is greatly influenced by the rapid economic
change and the technological advancements. The classical management cycle of
planning implementation and control is very much applicable in the production
management. According to Ogawa "Production of management may be defined as
the planning, implementation and control of production activities conducted by an
organisational entity with define performance objectives subject to modifications
according to ambient conditions."
Today's production management is not confined to the plant level manufacturing

activities only. But it encompasses all other preceding activities such as preparation,
product planning and design, as well as R & D. It takes into consideration, socio-
economic changes. Forecasts about future technologies are the fountainhead
activities, which are followed by market surveys and technology assessment (for
example in terms of pollution control studies). The socio-economic factors provide
the foundations to R & D activity of an organisation which yields product planning
and design. It is followed by the preparation stage which includes planning,
sequencing, scheduling, equipment selection, materials procurement, personnel
mobilisation etc, Hence Production Management calls for integrated actions which
cover the whole spectrum as depicted in figure 2.1.
The production systems which are responsive to rapid changes in the market place
are capable of reducing the lead time between product development and
manufacturing which is also known as the startup period between product design and
actual production.
2.3.1 Production System Model
A production process consists of 1) objective, 2) input, 3) processing, 4) output, and

5) control and adjustment (the word "control" is used hereafter to mean both control
and adjustment).
1) A clear-cut objective should be established for any production activity.

Characteristics of the finished product should be defined together with applicabel
Production techniques. For example, in the case of canned crab meat; the should not
be defective and should contain a specified a tuna or beef
13
Operations Management 2) “Input” refers to resources used in the production of canned crab meat, such as
crab meat, wrapping paper, can, human labour, utilities, and data.
3) "Processing" means the transformation of the resources into a product which in
this case is canned crab treat. Production equipment is utilized for processing.
4) “Output” is the product itself.
5) “control” refers to the evaluation of the output with reference to the objective
and to the subsequent adjustment or modification when required. All these
principal elements and their interrelationships are depicted in the following
figure (2.2).
For smooth production it is essential that proper coordination should be achieved

between the production function and preparation stage.
A favourable relationship should be maintained between input and output throughout
the entire production process. This relationship should realise the fixed objectives
with the use of minimum resources.
2.3.2 Characteristics of Production Systems
A production system is characterised by the following:

a) System discrimination
b) Interrelationship among systems
c) Stratum formulations
d) Specialisation of functions
e) Increase of entropy
f) Isofinality
a) System Discrimination: A production system consisting primarily of input and
output does not have the wider connotations involving all phases from
technology forecasting to manufacturing all these other phases arc considered as
pant of the production environment. This definition process is called system
discrimination.
b) Interrelationship Among System: The closed relationships that exist between
production and pre-production arrangements is known as the interrelationships
between systems. Similarly the relationships among production systems and
other systems also exist.
c) Stratum Formulation: A production system consisting of various strata of
corporate hierarchy wherein each stratum has a role to play depending on the
size of the firm. It enjoys benefits as a result of the stratum performance.
Examples of strata are: headquarters, administrative departments, factory and
production field.
14
d) Specialisation of Functions: As the production system expands it trends to Environment
have large number of hierarchical strata each performing specialised functions.
According to Adam Smith the integration of specialised functions produces
maximum results,,
e) Increase of Entropy: According to Ogawa entropy is a measure of the
degradation of the matter and the energy in the universe to an ultimate state of
inert uniformity. To check this deterioration process fresh blod must be infused
in every production system e.g. old employees should be replaced by new once
and old machines should be replaced by new machines employing new
technologies. Otherwise the organistion and equipments may become obsolete.
To cope up with rapid change of technological innovation the organistion as
well as production system needs to be rejuvenated.
f) Isofinality: Isofinality is the process of reaching the same goals by different routes.
There are different approaches to converting the inputs to outputs. For example
some organisations may heavily rely on buying required parts from outside
suppliers while others may insist on in-house production of parts. Although both
the organisations have an identical objective of efficient production.
2.3.3 Production Systems-Two Types of Control
Control is the basis for production management. The ìnput-process-output'
relationship should be controlled irrespective of size of the production system. There
are two types of production system controls: a) Feedback control b) Feedforward
control
a) Feedback Control: In this type of control mechanism first the output is obtained
as a result of input and processing. Then it is measured using some measuring
instruments. The result of the measurement is seldom in agreement with the goal.
Therefore specifications normally have tolerances. Adjustments are made in
processing and/or inputs if statistically significant number of products fall outside
the tolerance range. In common parlance of production management, it is called
"the principle of exception". In these situations control charts which are based on
the Statistical Quality Control (SQC) are used as a control tool.
b) Feedforward Control: In this type of control mechanism, input is checked
against pre-specified standards, prior to processing as well as output phases. For
example at Toyota Production System, every work station is equipped with
‘Bakayoke’ which detects and physically removes defects in an automated
fashion. Preventive maintenance of machines is another example of feedforward
control, wherein the life of each critical machine component is determined first
and it is replaced just before it breaks down. The feedforward control system
collects measurement data, compares them against the specifications and
initiates modifications on input if and when the need arises.
For attaining economic efficiency, both types of control must be simultaneously used
in a production system. The role of production management is two folds:
1) First is to ensure that the performance satisfies the production goal
2) The second one is to modify the production goal to suite the changes in
technology and demand in the market place.
A production system can acquire its competitiveness through the simultaneous
application of these two types of production control system.
2.4 PRODUCTION SYSTEM DESIGN
Various machines and processes in the factory must be organised to snake the most
effective use of their capabilities. A production system consist of three elements of
‘input transformation –output’. Design of a production system aims to achieve the right
mix of varying proportions of these elements. The production system design must be
effective in its overall context, e.g. a production system may be very efficient and
effective but there may not be adequate demand in the market place for its products.
Such holistic approach requires that both internal and external factors must be identified
and their impact on the organisational effectiveness is assessed. Some of the external
factors are: Competition, supply demand trade unions, financial institutions and
government policies. The 15
Total Quality Management
UNIT 3 TOTAL QUALITY MANAGEMENT

Objectives
After going through this unit, you should be able to understand:
• Quality is a qualifier
• How TQM emerged
• Difference between QC, QA, TQC and TQM
• The various terms and their relationships
• Voice of the customer
• Quality function deployment (QFD)
• House of quality (HOQ) • Identifying the process
• Measuring processes • Cost of quality
• Organized problem solving • Improving the process
• Process capability studies o Importance of employee participation and
empowered decision making in TQM
• What a quality systems standard means
Structure
3.1 Introduction
3.2 TQM: A Historical Perspective
3.3 Quality Terminology
3.4 Understanding the Customer
3.5 Understanding and Improving the Process
3.6 Employee Involvement and Empowerment
3.7 ISO 9000: The International Quality System Standard
3.8 Summary
3.10 Further Reading
3.11 Appendix: ISO 9000 Quality System Standards
3.1 INTRODUCTION
Total Quality Management (TQM) is a systems approach to ensuring quality in an
organization. TQM is not just quality control or quality assurance. Nor is it limited to
the boundaries of a Total Quality Control system. It is a dynamic process with a
strong philosophical base which incorporates many of the concepts upon which Total
Quality Control Systems are based. The emphasis is on involving everyone in the
organization in activities which provide for continuous never-ending improvements.
Quality activities are planned and managed into the system and are oriented towards
the achievement of complete customer satisfaction. The liberalized economy is
forcing Indian companies to establish Total Quality Management Systems. It is a
struggle which has just begun and Indian companies will continue to do so just to be
in the race - lest they perish. Quality will be just a qualifier, not a competitive
advantage anymore.
21
Operations Management TQM ettorts are led by top management by involving everyone in the company with
the prime objective of satisfying the external customer. This focuses the
organizational efforts towards satisfying the internal customer with the help of a
quality management system for ' doing things right the first time. The traditional
approach of post-production detection of defects is discouraged and a prevention
philosophy is adopted to bring down the nonconformances. The organization seeks
continuous never-ending improvements which are tracked with the help of
appropriate measurement systems.
In this chapter the focus will be on understanding the customer and the process and
then satisfying the customer by improving the process through total involvement of
employees. After a brief historical perspective on. TQM and its relevance to Indian
organizations (Section 3, 2), we will define the various terms relevant to quality
management (Section 3.3).
TQM organizations focus on understanding and responding to the needs of the
customer. The voice of the customer is clearly identified and then deployed
throughout the organization with minimum of distortions. In section 3.4, we will
discuss the techniques used to identify customer satisfaction and their expectations.
We will understand what Quality Function Deployment (QFD) means and what is a
house of quality.
In most organizations there are different functions which are geared towards
supporting the core manufacturing (or service) process. Functions, such as, design,
engineering, marketing, finance, systems, R&D, administration, health care and so
on. All these functions can be seen as processes which are designed to satisfy
customer needs. All processes have variations which need to be controlled and then
improved in a never ending cycle of efforts aimed at continuous improvement. In
section 3.5, we will discuss how to get into the path of continuous improvement.
Various problem solving tools will be presented. Procedures will be explained for
identifying major nonconformances and therefore the major problem areas. Since we
are aiming for continuous improvement, measurement systems for monitoring the
quality performance will be discussed. We sketch out a measurement framework for
identifying nonconformances. We will also understand what cost of quality means
and how to establish a measurement system.
Even though customers are the driving force behind the process, without total
employee involvement (in terms of alignment, motivation and empowerment) and top
management leadership, the TQM efforts become futile. Methods need to be adopted
to stimulate total involvement and move toward the common goals of systematic and
continuous improvement with the ultimate aim of satisfying customers, employees
and stakeholders. These aspects will be discussed in section 3.6.
Before concluding, in section 3.7, we will introduce an International quality systems
standard called ISO 9000. Even though a TQM organization is beyond ISO 9000, the
exercise undergone for getting the quality systems certification brings in the
discipline much needed for a organization practicing TQM:
3.2 TQM: A HISTORICAL PERSPECTIVE
Quality management systems have evolved through quality control (QC), quality
assurance (QA), and total quality control (TQC) systems to total quality management
(TQM) systems. We will briefly sketch out each of these systems.
Quality control is concerned with defect detection by using post-production
inspection procedures. Statistical quality control techniques are used while inspecting
the finished goods. Main focus is on the product i. co what is wrong with the product
(or part). Techniques such as acceptance sampling, control charts, control by
attributes and control by variables are typically used by the QC inspectors while
controlling the quality of goods manufactured. The extent of employee involvement
is minimal. Only few inspectors from the QC department are involved in quality
control activities. It takes a real short time (within days) to install a QC system.
However, such systems do not help identify problems.
Quality assurance systems aim to produce as per design specifications and emphasize
defect prevention. Quality is built into the system (that produces the product) by using
22 production and operations management principles. Statistical process control techniques
are used to monitor the process by allowing random variations and eliminating non
random variations. Main focus is on the process -i.e., what is wrong with the process
which manufactures the product. Quality system standards (such as ISO 9000) are
adopted to assure quality in the process. ISO 9000 is an International systems
standard which shows how an organization can establish, document and maintain an
effective quality system. It helps demonstrate to the customer that the organization is
committed to quality and has the ability to meet their requirements. The employee
involvement is limited within the centralized-staff function of the QA department. It
takes between six to twelve months to install such a system. The main theme her is to
document (with well defined procedures) what you do and do what you document.
Total quality control systems are concerned with cost reduction efforts as a drive
towards continual improvement. Here quality is organized into the system. These
systems take off once the cost of quality is calculated. Problem areas are identified
and problem solving techniques are used extensively during the continuous
improvement cycle. Performance is monitored with the help of the COQ system.
These efforts enhance the product quality. Here waste identification and removal is
an important benefit. Philip Crosby's zero defects program (Table 3.1) is a TQC
approach. So is the Taguchi methodology which emphasizes the importance of a
robust design to take care of all downstream fluctuations. In TQC systems we have
more involvement in the form of various quality circles working towards improving
the processes. Time to install is between one to three years. It may be noted that QA
standards form the basis for a TQC or TQM approach.
Total quality management systems manage quality in. They have a strong
philosophical base that incorporates several important concepts of TQC systems.
Management efforts are oriented towards the achievement of complete customer
satisfaction. Here we find an organization wide responsibility for quality. Time to
install is three to five years. The evolution shows a culture change in the organization
which achieves customer orientation through various stages of development that
progress through a systems oriented to an improvement oriented to a prevention
oriented state.
23
Operations Management
Figure 3.1 and Table 3.1 show how TQM emerged over the century and who were
the quality gurus who were responsible for the status this philosophy commands
today. The progress from quality control to quality assurance to total quality control
to total quality management took almost a century of concerted efforts from quality
gurus, such as, Walter Shewhart, W. Edwards Deming, Joseph Juran, Kaoru
Ishikawa, Genichi Taguchi, Armand Feigenbaum, and Philip Crosby. The quality
movement was initiated in Japan by Deming and Juran. It was later picked up by the
Japanese who have made the quality movement a big success story. Around the 80s
Japanese companies, on a continuous cycle of never-ending improvements, surpassed
the west. They captured the markets with their consistent: quality products and have
now shifted their priorities on to satisfying customers with products having high
quality at low price.
We will take a. brief look into the Indian scenario. According to the World
Competitiveness Report (1994) Indian companies lag far behind their global
competitors in terms of customer orientation, time to innovate, time to market and, in
general, in terms of TQM practices. Under the liberalized scenario, it is more of a
concern because the global players are now entering the Indian market. We may be
having global capacities in some cases but we fail in terms of global quality For us it
is a Catch 22 with a difference-if we don't practice TQM we die; If we practice TQM
we struggle to survive (vie may not surpass but we do survive and may be succeed). I
used the word survive because our competitors are already much superior to us in
terms of quality practices. For example global players may be having component
rejection rates of I in 10,000 while Indian companies are struggling with rejection
rates of I in 100. A case in point is the US based company Motorola, which has made
the slogan six sigma quite famous by targeting 99.99997% defect free manufacturing.
According to a 1995 Business Today survey, Indian plants have trouble achieving
even 95% defect free manufacturing. In most cases the burden of high rejection is
passed on to the customer. But with liberalization becoming a reality the customer
has a choice. And companies have to listen to the voice of the customer to drive their
quality initiatives. With mass customization becoming a goal of most quality
programs, there is a lot of pressure on the Indian companies. There is a need, in most
sectors, for instant translation of new designs into finished products with no defects.
3.3 QUALITY TERMINOLOGY

In this section we will define some of' the terms which are normally used in TQM
classes. We will try to understand the meaning of quality , customer, product, quality of
24 design and
quality of conformance (relationship between product and customer through quality)
quality cost, quality measurement (relationship between quality and cost), value
addition, small q, big Q, non-conformances and rework' (relationship between quality
and productivity).
Quality: There are several definitions of CK word. For example:
"Quality is customer satisfaction"
"Quality means meeting customer requirements"
"Quality means fitness for use"
"Quality is conformance to specifications"
"Totality of features and characteristics of a product or service that bear on
its ability to satisfy stated or implied needs"
Customer: "Anyone who is impacted by the product or service". By this definition
we find that there are several customers waiting down the line when a product is
being processed through several stages in an organization before it reaches the final
consumer. Thus we have people who are impacted within the organization and also
people impacted outside the organization. Thus we have two type of customers - the
internal customers and the external customers.
External customer: One who purchases a commodity or service. External customers

are the driving forces behind an organizations business. Figure 3.2 below shows the
external customer.
Internal customer: Any individual (or group or organization) who receives and uses
what an individual (or group or organization) provides (see Figure 3.2). Should
section I meet the needs of section 2? What happens to section 2, if the section 2
requirements (in terms of quality specifications) are not met by section l? What if
section 1 is not capable of meeting section 2 needs? Should the section I work in that
case be outsourced? That would mean making section 1 redundant Taking another
example, manufacturing departments are internal customers of product design and
development departments. If the design department supplies engineering designs that
are not producible by the manufacturing department then the internal supplier
customer relationship suffers. The supplier here is unable to satisfy its internal
customer. Should manufacturing somehow produce it over-riding the design
specifications? How would it affect the overall quality of the product in that case? Or
should design sensitize itself to manufacturing capabilities before developing
products intended for satisfying the external customer?
Hence, almost everyone in an organization has a customer. Satisfying the customer

(either extanal or internal) involves defining their needs and expectations and also
meeting them. Dissatisfied customers are lost opportunities. Studies have indicated
that dissatisfied customers express their dissatisfaction to other potential customers.
Moreover; developing new customers to replace dissatisfied ones is costlier than
retaining satisfied customers. Hence organizations must try their best to satisfy
customers by listening to their dissatisfaction and deploying their voice through the
25
organization so that the situations
Operations Management causing the dissatisfaction are remedied. A proactive stance is necessary in
identifying sources of dissatisfaction because when there are no complaints it does
not necessarily mean that there are no dissatisfactions. Typical methods used are
surveys, questionnaires, follow-up phone calls and so on.
Product: Output of any process. Classified into goods, software and services.
Quality and Customer Satisfaction: We achieve customer satisfaction with the help
of several product features. Or through products that are free from deficiencies.
Products having good features meant to attract customers are said to have good
quality of design. The various dimensions of design quality could be performance,
reliability, durability, ease-of-use, serviceability, aesthetics, availability of options
(additional features and expandability), and reputation. In a service setup the
dimensions are accuracy, timeliness, completeness, friendliness, anticipating
customer needs, knowledge of server, aesthetics and reputation. Hence they have the
capabilities of commanding high price and share and therefore earning higher
revenue. On the other hand products having less deficiencies are said to have good
quality of conformance. Lower deficiencies are achieved through waste reduction
leading to lower costs thereby yielding higher profits. Freedom from deficiencies or
conformance to standards are necessary at delivery, during use and during servicing.
In addition, other supporting business processes such as sales and billing should be
free from errors. Higher conformance means fewer complaints which implies greater
customer satisfaction. The net effect of improved quality of design and conformance
is increased profits (Figure 3.3).
Quality and Productivity: The focus of productivity is now shifting. The old
factory-oriented definition of productivity is "product (or service) output per unit of
resource input". The new market-oriented concept is "salable, good quality product
(or service) output per unit of resource input." The higher the value the better is the
productivity. Figure 3 uses the new definition of productivity.
Quality and Profitability: Profitability is driven by quality.
We know, profit = revenue - cost
and revenue = price * quantity sold
⇒ Profit increases if revenue increases or cost decreases.
⇒ Revenue increases if price increases (quantity sold remaining constant)
or if quantity sold increases (price remaining fixed)
Quality and Cost: There are two debatable viewpoints regarding this relationship.
Both the views are justified depending on the frame of reference. Viewpoint 1:
Improved quality requires more expensive materials, additional labor, more precise
machines and therefore lead to higher costs. Viewpoint 2 : Improved quality is
possible through savings in rework, scrap and warranty expenses leading to decrease
26 in costs.
Value Addition: When raw material is processed in an organization, at each stage

there is a value addition taking place until it comes out as finished product (see Fig
3.2). In TQM organizations the value addition does not stop here. Rather it continues
right up to the customer. Figure 3.4 shows the definition of value.
Small q vs Big Q: The above discussions indicate a need for broadening the scope of
the quality function. The traditional approach which used to be product oriented was
based on the post-production defect detection philosophy. It used to serve well under
monopolistic situations where both the organization and the market were treated as
black boxes. But the big Q focus has a much larger scope with a strong customer
orientation that enhances the product quality by improving the process. The customer
is the driving force which provides the feedback for error free product development
and production. Error prevention philosophy is adopted and there is a high degree of
organizational learning which helps the organization to satisfy customers in a highly
competitive market.
Total Quality Management: Like quality there are several definitions of TQM. A
couple of them collected, from different texts are stated below. These definitions
summarize most of what we have been discussing so far.
“TQM is the system of activities directed at achieving delighted
customers, empowered employees, higher revenues and lower costs”.
“Total quality is performance superiority directed at delighting the customers.
The means used are people, committed to employing organizational resources
to provide value to customers, by doing the right things right the first time,
every time”
Note user-based definitions ought to be translated into product-based definitions
which are be supported by manufacturing based definitions.
Activity A
Describe how increased market share and profitability might result from improved
quality in your organisations.
.........................................................................................................................................
......................................................................................................................................... 27
Operations Management .........................................................................................................................................
Activity B
Select one staff department (e.g. accounting, finance, marketing services, human
resources) and describe how this department can deliver quality service to its internal
customers.
.........................................................................................................................................
.........................................................................................................................................
Activity C
How would an organisation's commitment to quality facilitate or improve the
following:
- The planning Process
- Organisation
- Control
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
3.4 UNDERSTANDING THE CUSTOMER

We have seen how customers are the driving force behind big Q efforts. We also
noted that virtually everyone has a customer. Understanding the stated and implied
needs of the customer is vital for any organization practicing TQM. We have to
translate the user based definitions of quality into product-based definitions. One
method of translating the voice of the customer into design specifications of a
product is quality function deployment (QFD). In this section we try to understand
what QFD is and how it is used by TQM organizations.
Quality Function Deployment
QFD is a method used to identify critical customer attributes and to create a specific
link between customer attributes and design parameters. It helps marketing and
design to answer three primary questions:
1. What Attributes are critical to our customers?
2. What design parameters are important in driving those attributes?
3. What should the design parameter targets be for the new design?
Market driven companies having a sharp customer focus produce designs that are
responsive to customer needs and expectations. Most importantly these designs must
be producible with minimum of inter-departmental conflicts. We therefore need
procedures for listening to the customer and translating them into finished product
realities. QFD provides a cross functional approach which uses a planning tool called
"House of Quality" for organizing and linking the customer survey information with
the product design attributes and later deploying it in stages throughout the
organization. Customer feedback is used by the QFD team to make engineering,
marketing and design decisions. Each step in the QFD process involves building up a
section in the house of quality matrix thereby simplifying the presentation of a large
amount of data. The steps involved in building the house of quality are: (i)
identifying customer needs through market survey, (ii) identifying, customer
counterpart product characteristics, (iii) relating the customer attributes to product.
characteristics; (iv) evaluating product characteristics and developing targets, (v)
evaluating products of competitors by performing internal as well as external
comparisons, and (vi) determining which product features to deploy throughout the
production process. The matrix comprises of the following sections (see Figure 3.5):
• A WHAT section
28 • A HOW section
• A WHAT - HOW relationship section
• A HOW MUCH section
• A CORRELATION section (roof of the matrix)
• IMPORTANCE RATINGS section
• A CUSTOMER ASSESSMENT section
• An ENGINEERING ASSESSMENT section
The process of developing the House of Quality involves :

a) Establishing critical customer attributes for the product based on their
expectations and give them weights according to their importance (i.e., filling
the what section along with the importance rating column). This specifies the
voice of the customer. The importance to customer is shown alongside each
what in a scale of 1 to 10.
b) Establishing critical design parameters that drive system performance (i.e.,
filling the how section). Here product features are defined in measurable terms.
These are the operating characteristics that are likely to affect the customer
attributes. The how much section is also filled up to give the target values and
other technical specifications for each design attribute which are believed to
fulfill the desired customer attributes.
c) Establishing the relationship between the customer wants and the design
parameters (i.e., filling the body of the central relationship matrix). Each cell in
this matrix shows a relationship (either strong/weak or positive/negative)
between the customer attributes and design parameters. These relationships are
shown in the form of symbols. Importance weighting section shows the
significance of each design attribute as it is linked with the customer attributes
through the relationship matrix.
d) Identifying the inter-relationships between the various design parameters to
establish trade-offs (i.e., filling the roof matrix). There, may be either
strong/weak or positive/negative correlationships between the design features. If
there are strong negative correlations between features, we redesign the product
to eliminate such trade-offs.
e) Focusing on customer perceptions of the company's existing product compared
to its competitors. Here we fill in the customer assessment section. It
corresponds to the what column. These comparisons help in identifying our
strengths and weaknesses and can focus our attention to areas where we can get
a competitive advantage. This is external benchmarking which helps us study
the customers perception. 29
Operations Management f) Focusing on the internal assessment by filling in the engineering assessment
section. It corresponds to the how column. Here we benchmark ourselves with
our competitors.
g) Analyzing the matrix and choosing priority items. For example, if there is a
mismatch between the engineering assessment and the customer assessment, we
follow it up by revising the design requirements to meet the true customer
requirements. A mismatch may occur in situations where the internal assessment
puts us iii a superior position (as compared to our competitor), while the
customer assessments have rated us inferior on that particular requirement.
Several houses of quality are required in deploying-the voice of the customer. Figure
3.6 shows an example of how the voice of the customer can be deployed. QFD will be
most effective if we take a systems-approach to implementing quality practices in the
organization. Thus early involvement in the product development process with the help
of cross-functional teams is an absolute necessity to prevent problems downstream.
3.5 UNDERSTANDING AND IMPROVING TIME

PROCESS
In the previous sections we discussed who is a customer and what the voice of the
customer means to the company. In this section we will try to understand and identify
processes that can be aligned to<satisfy the customer needs. We will establish a
system to measure the performance of the process. We will present the seven QC
tools that will help us in identifying and solving major problems. We will understand
what process variability means and how to strive for continuous improvement by
reducing variability. We will then define the voice of the process by undertaking
process capability studies.
Identifying the .Process
In Section 3:3 we saw how organizational inputs are transformed through a series of
stages involving man, machine, method, materials and other resources into value added
outputs that are meant to satisfy customer needs. Figure 3.2 shows an organized series
of sequential stages representing a process that can convert a certain measurable input
into measurable outputs. The concept of a process is further defined in the Appendix
(see Fig A 1 and Fig A2). An important element here is the feedback that is essential
for process monitoring and improvement. These figures also identify the various groups
that are involved in the process namely customers suppliers and process owners. All of
them are responsible for the quality performance of the process.
In TQM we try to identify the key processes on -which the success of the
organization depends. Key processes could be (a) processes that produce the most
important products wanted by customers, (b) processes having high visibility with
customers, or (c) processes having well defined problem areas indicating a high
potential for improvement. Once the processes have been identified the ownership
has to be assigned to fix authority and responsibility for maintaining, operating and
30 improving the process. Quality improvement is achieved through systematic and
continuous improvement of these key processes.
A framework for measuring the process
To know whether a system is improving or not we need to have a measurement framework

to monitor the system performance. Performance monitoring can be done by recording cost
of quality summaries. Quality costs include costs of assuring and ensuring quality- together
with the losses incurred through failures within and outside the organization. Cost of
quality can be broadly classified into cost of conformance and cost of nonconformance.
Cost of conformance includes costs of prevention and appraisal while cost of
nonconformance includes costs of internal and external failures. Appraisal costs are costs of
inspection, testing, verification and control at any stage in the process meant to ensure
acceptance of the product or process. Prevention costs involve costs of activities undertaken
to prevent or reduce the risk of nonconformity. Prevention activities include identification
of nonconformities, identification of their causes and also actions taken to remove such
causes. Thus prevention costs are incurred in getting things done right the first time.
Internal failure costs are due to defects and nonconformities that-are identified within the
organization. They include costs due to scrap, rework, repair, and re-test. External failure
costs are due to defects passing out of the organization. They include costs such as
warranty claims, loss of customer goodwill, replacement costs and so on. Refer the
recommended texts at the end of this chapter to get an exhaustive list of these quality
related costs. It has been estimated that quality costs account for 20 to 30 percent of a
company's revenue. Cutting down the cost of quality is the goal of TQM organizations. In
organizations implementing TQM prevention costs rise in the initial stages because of
investments in systems, processes, planning and training. Appraisal costs gradually reduce
because post production inspection activities are no longer necessary. As prevention
measures start taking effect the failure costs and the total quality costs start decreasing. This
is in contrast to the traditional quality measurements processes where quality products were
supposed to be delivered at high costs, Figure 3.7 shows the difference between traditional
quality and total quality concepts. Thus having a cost of quality system in place can help a
company track improvements over time.
We can also measure and monitor a systems quality improvement program by identifying
nonconformances. A nonconformance is any deviation from measurable quality specifications
that need to be satisfied. Quality improvement programs are most effective if we identify
nonconformances in terms of quantity and cost, and systematically strive to eliminate
dominant nonconformances. Nonconformance could be in one of the following several forms:
Defects (i.e., work not to specification)
Rework (i.e., work requiring correction)
Scrap (i.e., work thrown away)
Backlogs (i.e., work behind schedule)
Late deliveries (i.e., work after due date) '
Surplus items or over-production (i.e., work not required)
We need a well defined measurement system to capture nonconformances in a database.
Next we sort the data and identify dominant nonconformances (in different sections of
the organization) to prioritize quality improvement actions appropriately. We generate
summaries of : a) nonconformance quantities and costs, (b)scrap, rework and repair 31
Operations Management actions, (c) supplier performance, (d) product performance in the field and (e) cost of
quality. Then we undertake improvement activities to eliminate the nonconformances
as far as possible in a continuous cycle using various problem solving tools.
Activity D
Choose a manufacturing company and a service company. Identify a key activity for
improving quality in each.
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
Activity E
Describe the elements of the TQM infrastructure.
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
Organized problem solving
Problems have several viewpoint perspectives. Solving the problems in an organized
manner helps realize the maximum benefits. Organized problem solving assists
solvers to. analyze the causes thoroughly before jumping into conclusions. It helps
generate maximum ideas from members in a team.
The problem solving process involves understanding the existing process(es), and
collecting facts, figures and information to help define the problem. A problem well
defined is half solved. Data analysis is done and the assumptions are reexamined.
Techniques are used to generate ideas for developing potential solutions. All the
alternative solutions are evaluated and the best ones are selected and implemented.
Table 3.2 shows the steps involved in creative problem solving along with the
corresponding seven quality control tools.
Table 3.2: Creative Problem Solving and Seven QC Tools
Problem-solving Step Useful Tools

Understanding the mess Flowcharts
Finding facts (data collection) Checksheets
Identifying problems Pareto diagrams Histograms
Generating ideas Cause-and-effect diagrams (or
Fishbone or Ishikawa diagrams)
Developing solutions Scatter diagrams
Source: The Management and Control of Quality by J. R. Evans and W.M.Lindsay

Apart from these tools we have other
basic tools, such as, brainstorming,
grouping and stratification to help guide
the problem solving process.
Brainstorming is a group process in
which group members express their ideas
in a creative atmosphere. All ideas are
acceptable. The objective is to generate a
lot of ideas which can be further defined
in stages to identify the root causes of
problems.,Grouping.
.helps in focusing the problem solving efforts. Sometime problems can be slated
in several different forms by different individuals. These can be grouped under
one key topic. This helps in summarizing rather long lists of problems into short
32 general categories on which problem solving efforts can be focused. Stratification
helps in breaking down data into
levels (for example, data collection by time, shifts, machines, stages etc.). Sometimes
it is more meaningful to analyze stratified data. Figure 3.8 shows an example where
we have a certain process consisting of three machines that are necessary for
processing a product. Suppose the final output has a wide variation in the quality
characteristic that is being measured. To identify the cause of this problem we collect
data at different stages in the production process and analyze them for variations.
Figure 3.9 shows simplified versions of the seven QC tools which can be applied to
almost any practical problem. Flowcharts are used to understand the larger process
and how each stage affects the other. They help identify all customers, activities,
problem areas and redundant operations (if any). Critical quality characteristics that
need to be controlled at the appropriate stages are also identified. Thus flowcharts
help in identifying quality problems and areas of productivity improvement.
Checksheets help collect and report data in a systematic manner. We use special data
collection forms and use tally marks to. collect the frequency of occurrences of
characteristics that affect quality. Figure 3.9 shows a portion of a checksheet where
the frequency data is being collected for a certain quality dimension of a product.
Histograms are graphical representations of the variation in a set of data. In processes
they help identify variations and their patterns. The tally marks in the checksheet are
arranged in the form of a histogram to show the distribution of the data.
33
Operations Management While drawing histograms samples have to be designed carefully so that they are
representative of the process (or the population). Pareto diagram is a histogram of data
(e.g. the various types of nonconformances) arranged according to their descending order
of frequencies. Pareto diagrams help segregate the major few problem areas from the
trivial many thereby short-listing potential projects for improvement. When tracked over
time they show the=results of improvement programs taking effect. Cause-and-effect
diagrams help identify causes for a certain problem (the effect) There could be various
categories of causes, such as, man, machine, material„ environment, method and so on.
Through brainstorming problem causes are listed under the various categories. Once the
various causes have been collected, those having the biggest impact on the problem are
identified. Scatter diagrams help identify the nature of the various cause-effect
relationships. Causes having strong positive and negative correlation with the problems
arc identified for the improvement program. Control charts are graphical tools
representing the state of control of a process. Samples coming out of a process are
collected at frequent intervals, their quality characteristics measured and then plotted on
the appropriate chart for analysis. If the process is in control there is a high probability
the sample will fall between the statistically calculated upper and lower control limits.
Walter Shewhart, in the 1920s at Bell Laboratories, was the first to propose control charts
for distinguishing between common causes (or random variations) and special causes (or
non-random variations). We have control charts both for variable and attribute measures.
Thus organized problem solving involves defining the problem, identifying the root
cause of the problem, identifying the various solutions, selecting the best solution, and
recommending corrective action procedures for either controlling, reducing, or
eliminating problems.
Improving the process
Control means maintaining a
certain level of performance
while improvement means
achieving a higher level of
performance. Figure 3.10
shows the difference between
control and improvement. To
monitor the performance,
processes must be measurable.
We use statistical process
control (SPC) techniques to
measure and analyze variations
in a process. In any process,
the process-performance
measures fluctuate randomly,
due to common causes, around a certain target value (or average value known as
process mean). However, due to some special causes we also have non-random
variations taking place. We use control charts to identify these non-random deviations
in a process caused by the sporadic problems. We get rid of these underlying causes to
bring the process under control. On the other hand, to improve the process we need to
achieve higher performance levels by reducing the random chronic problems (or the
common causes of fluctuation) around new and superior target levels.
Thus we use SPC to detect special causes of process variation from common causes. A
process is said to be in a state of statistical control when the process variations are due to
the inherent, common causes only. Such processes are considered to be stable and
predictable within appropriate limits. A stable process, which also meets the product
specifications, can produce acceptable products. However, attaining stability is not an
end in itself. Rather continuously striving to reduce the random (or natural) variations
in the process is the main objective of any continuous improvement program. SPC is
implemented on the key processes where the sources of variability have been identified.
The operators are trained to gather preliminary data and prepare and use control charts.
Process Capability Studies
Continuous improvement leads to process improvement which means variability
34 reduction through enhancement of process capability. We will try to understand what
process capability means.
Need and Importance of Forecasting
UNIT 4 NEED AND IMPORTANCE

FORECASTING
Objectives
After going through this unit you should be able to:
• understand the concept of forecasting as applicable in production/operations
management
• appreciate its need
• understand the length of future period of forecast as is related to the decision
situation/purpose for which it is used.
Structure
4.1 Introduction
4.2 Concept of Forecast
4.3 Need of Forecast in Production/Operations Management
4.4 General Steps in the Forecasting Process
4.5 Importance and Application of Forecast in Production/Operations Management
4.6 Summary
4.1 INTRODUCTION
Every individual is interested in the future. Some with respect to themselves. Some
with respect to others-their near or dear ones. Some with respect to their apponents.
Few are just curious. Others need to prepare themselves (PLAN) for contingencies
likely to happen in future if known before hand. It is interesting to note that don't
know about future exactly. For example: People save for future to take care of
contingencies like serious illness, likely heavy expenses, to provide for their families
and children in case of their sudden death etc. These contingencies might not occur,
or when they occur, the magnitude may be such that total savings may not be
sufficient. That means, if it is ACCURATELY known before hand, than the PLANS
can be prepared and implemented to BETTER take care of contingencies.
The same problem is faced by managers and decision makers in their respective field
of operation. Because it takes time to complete an action, if this is sufficiently long,
then after the action in complete, the purpose of action may not exist.
Example: To-day realise as a manager that the demand of your product is much
more than the total production of all producers taken together. You decide to setup
another plant to increase the production so that you can take advantage of huge
demand supply gap. It will take several years for the plant to be effected and start
production. By then high demand gap may not exist-either demand has fallen or other
producers have already started producing more. So by the time your plant is
complete, it not useful for the purpose it was effected. It you could have known about
this situation earlier, then you would have started construction of plant so as to be
completed TODAY, then it would have served the purpose for which it was erected.
Every manager would LIKE to know exact nature of future events to accordingly
take action (PLAN) when sufficient time is in hand to implement the plan. The
effectiveness of his plan depends upon the level of accuracy with which future events
are known to him. But every manager plans for future irrespective of the fact whether
future events are EXACTLY known or not. That implies, he does try to FORECAST
future to the best of his Ability, Judgement and Experience. 5
Forecasting
4.2 CONCEPT OF FORCAST
Usually forecasting and predicting are used interchangebly in general usage. Adam
and Ebert in their book Production and operation management have defined and
distinguished the two as follows:
Forecasting: "Is a process of estimating a future event by casting forward past data.
The past data are systematically combined in a predetermined way to obtained the
estimate of the future".
Prediction: "Is a process of estimating a future event based on subjective
considerations other than just past data; these subjective considerations need not be
combined in a predetermined way".
Thus forcast is an estimate of future values of certain specified indicators relating to a
decisional/planning situation. In some situations forecast regarding single indicator is
sufficient, where as, in some other situations forecast regarding several indicators is
necessary. The number of indicators and the degree of detail required in the forecast
depends on the intended use of the forecast.
How much far in future? This is subject to the situation. It should be sufficiently in
advance so as to leave enough time in the hands of the decision maker to take a
decision/ ' plan and to put that plan operational by the time forecasted situation
occures.
Thus
Forecast (Time in future) >Time taken for preparation of plan
+ Time taken to implement the plan
What methodology is to be used for projecting the past data into future? - depends on :
a) Type of past data
b) Pattern of past data
c) Time horizon of forecast
This method of projecting the past into future is termed as FORECASTING

MODEL. A large many statistical forecasting models are available suitable to
6 different decisions. These models are discussed in detail in UNIT-5 and UNIT-6.
Need and Importance of Forecasting
4.3 NEED OF FORECAST IN PRODUCTION /
OPERATIONS MANAGEMENT
There are two basic reasons for the need of forcast in any field more so in production
/ operation management.
1) Purpose - Any action/plan is contemplated/devised in the PRESENT to take care
of some contingency accruing out-of a situation/condition or set of conditions set in
future. These future conditions offer a purpose/target to be achieved so as to take
advantage of or to minimize the impact of (if the forseen conditions are adverse in
nature) these fixture conditions.
An action or a plan can not be taken/divised in void-without any
purpose/objective/target. Any plan or action is to achieve `something'. This
`something' is a derived function of future condition (s).
Example: The action/plan to set up an additional plant to increase production
capacity. How much increased production and what should be the size of the new
plant is dependent on future demand supply gap. To take advantage of this future
demand-supply gap, a target of increased production is arrived at. To achieve this
target a plan is prepared and put into action.
2) Time - To prepare a plan, to organise resources for its implementation, to
implement; and complete the plan; all these need time as a resource. Some situations
need very little time; some other situations need several years of time. Therefore, if
future forecast is available in advance, appropriate actions can be planned and
implemented ‘intime’.
Example: Consider the same example discussed earlier -to take advantage of future
demand - supply gap;
a) Plan or decision is to be taken. Through exploration several alternatives are
considered and one of them choosen. In the above case, the alternative choosen
is setup an additional plant'. This takes time suppose this is t1.
b) Location of the additional plant is to be choosen. This again takes time. Supose
this is Q.
c) i) Technology negotiations if any have to be conducted.
ii) Land purchase negotiations, acquisition activities i.e. registration etc. have to
be completed.
iii) Permissions and clearnces from various authorities as required under the law
have to be applied for and obtained.
iv) Provision for adequate finances is to be made. Suppose all this takes time t3.
d) Actual errection, construction, testing is to be completed and commercial
production is to be started.
Suppose this takes time 0.
Thus minimum time required to plan and implement is=t l+t 2+t 3+t4
If as and when a situation arises, and planning and action can be completed
immediately-without taking any time; perhaps forecasting would not be needed at all,
Activity A
What is the distinction between forecasting and planners? How can organizations
become confused one forecasting when this distinction is not clear?
…………………………………………………………………………………………
…………………………………………………………………………………………
7
…………………………………………………………………………………………
…………………………………………………………………………………………
Forecasting
4.4 GENERAL STEPS IN THE FORECASTING
PROCESS
The general steps in the forecasting process are as follows:
1) Indentify the General Need. For example: in the present manufacturing
business, unfulfilled demand might have been observed. The manufacturer may
have a feeling, "Why not expand production?" This should constitute the
indentification of general need. Still, the manufacturer does not know for certain
whether expansion is really a wise decision? How much to expand? When to
expand?
2) Select the Period (Time Horizon) of Forecast: Considering the same example:
General estimate regarding time taken to errect the plant. And beyond that the
usual plant life. Thus, in this case long term forecast is needed. The long term'
can be defined appropriately for each situation. In this case, if we consider time
for plant errection to be roughly 3 years-then we need a forecast spanning 5-10
years beyond 3 years. That means a forecast covering a period of 5 years starting
three years from now.
3) Select the Indicators Relevant to the Need: Depending upon the product or
product line, one or more of the following may be identified:
i) Industry Sales.
ii) Competitors (collective) present and projected capacity.
iii) Population projection (in case product is directly related to the population).
iv) Income levels.
v) Economic development etc.
4) Select the Forecast Model to be Used: For this, knowledge of various
forecasting models, in which situations these are applicable, how reliable each
one of them is'; what type of data is required. On these considerations; one or
more models can be
5) Data Collection: with reference to various indicators identified –collect data
from various appropriate sources –data which is compatible with the model(s)
selected in steps(4).Data should also go back that much in past , which meets
the requirements of the model.
6) Prepare Forecaste: Apply the model using the data collected the value of the
forecast.
7) Evaluate: The forecast obtained through any of the model should not be used ,
as it is , blindly. It should be evaluated in terms of ‘confidence interval’ –usually
all good forecast models have methods of calculating upper value within which
the given forecast is expected to remain with certain specified level of
probability .It can also be evaluated from logical point of view whether the value
obtained in logically feasible? It can also be evaluated against some related
variable or phenomenon. Thus , it is possible , some times advisable to modify
the statistically forecasted’ value based on evaluation.
Activity B
Define the term qualitative forecasting and quantitative forecasting. How often your
organization use forecasting techniques and which one?
…………………………………………………………………………………………
…………………………………………………………………………………………
………………………………………………………………………………………….
4.5 IMPORTANCE AND APPLICATIONS OF
FORECASTS IN PRODUCTION/OPERATIONS
MANAGEMENT
Importance of forecast lies in its ability to help the managers /planners to help them
take better actions regarding future and also to help to help them in discharging their
8 functions more effectively. How does it help?
Forecasting
UNIT 5 QUALITATIVE METHODS OF

FORECASTING
Objectives
Upon completion of this unit, you will be able to:
• know the forecasting and qualiltative forecasting in specific;
• acquaint with various methods of judgemental forecasting;
• develop expertise on delphi techniques and its operational details;
• familiar with delphi study and its guidelines, advantages and its variants;
• learn forecasting based on cross-impact analysis and its basics;
• apply Monte Carlo simulation for cross-impact analysis.
Structure
5.1 Introduction
5.2 Judgmental Forecasting
5.3 The Delphi Technique
5.3.1 Opinion-Capture Technique
5.3.2 The Operational Details
5.3.3 The Forecasting Delphi
5.3.4 The Decision-Analysis Delphi
5.3.5 Delphi as a Group Process
5.3.6 Guidelines for Conducting a Delphi Study
5.3.7 Guidelines for Selecting the Delphi Panelists
5.3.8 Advantages
5.3.9 Common Pitfalls of Delphi
5.3.10 Variants of Delphi
5.3.11 Final Remarks on Delphi and its Variants
5.4 Forecasting Based on Cross-Impact Analysis
5.4.1 History of Development
5.4.2 The Basis Concepts of a Cross-Impact Matrix
5.4.3 The Cross-Impact Theory of Gordon and Hayward
5.4.4 Cross-Impact Theory based on Bayesian Rules
5.4.5 Deterministic Dynamic Simulation based upon Cross-Impact (Kane, 1972)
5.5 Summary
5.1 INTRODUCTION
Forecasting generally deals with estimating future values of variables and telling in
advance about the occurrence of future events. Variables generally take quantitative
values. Thus, we can associate quantitative values to variables such as sales
production, profit, market share, rainfall, and population. A series of values of a
variable at equidistant time points forms a time series. A number of rigorous
approaches exit in the literature to forecast time series. Forecasting occurrence of
future events, however is altogether different. Events, such as development of a new
technology or a new product, arrival of a new competitor, formation of a new
coalition, and calling a labour strike are difficult to quantify. Therefore they elude a
rigorous mathematical treatment. We adopt less rigorous, more subjective methods to
deal with forecasting such events.
In this 'connection we wish to mention that forecasting events is in some way similar
to fortune telling that has a long pedigree. Palmistry, astrology, and gazing into glass
objects,
12
Qualitative Methods of Forecasting
the art of fortune telling, are still popular in many countries of the world today. The arts
of science fiction writing and futurology are of recent origin. Although they are not
treated as very scientific, they have produced wonderful. scenarios of the future which
have often come true. A variety of approaches have been forwarded in the past three
decades to make the art of event forecasting more rational, if not exactly scientific.
Qualitative forecasting is relevant to the broad field of social science that is widely
known to be an inexact science. Inexact science contrary to natural sciences, are
characterized by the following:
1) Reasoning is informal. Terminology in inexact science exhibits certain amount
of vagueness, and intuitively facts and implication are given high credence.
2) Attributes are not amenable to exact measurement.
3) Mathematical derivations are rarely used.
4) Predictions are not made with great precision and exactitude.
Helmer and Rescher (1959) suggest that forecasting qualitative events in such inexact
science should develop along the following lines:
1) Quasi-laws should be given more credence. Quasi-laws are those that have
limited generalization and allow exceptions because the condition under which
these are applicable may not be met in certain situation. Such laws are not rated
as belonging to physical science.
2) Forecasting should be accepted on far weaker evidence than explanation. This
epistemological asymmetry stems from the fact that explanations can be
validated by a comparison with factual statements and data while forecasts are
not. While one explanation must be more credible then its negation, a reasoned
forecast must be more tenable and credible then its comparable alternative. An
unreasoned prediction, on the other hand, is not validated by plausible
arguments but ex post facto by a record of success on the parts of the forecaster.
3) Prediction should permit associations of subjective (or personal) probabilities
are a measure of a persons confidence in the truth of some hypothesis in the
light of certain evidences.
4) Experts must be motivated to use their background knowledge in forecasting
exercises. A forecast expert is one
a) who is rational,
b) who has large background knowledge, and
c) whose forecasts show a record of comparative successes in the long run.
A rational person is one
a) whose mental preferences are consistent and who is ready to correct the
inconsistencies if pointed out to him,
b) whose subjective probabilities are stable over time provided he receives no new
relevant evidence,
c) but which are affected by new relevant evidences, and
d) these probabilities should reasonably agree with the probabilities when derivable
from observed facts.
To an expert, statistical information matter less then his knowledge of underlying
regularities about the past instances. Quasi-laws can play an important role for the
expert judgement. The function of an expert is intrinsic in the sense that he operates
with in a theory or a hypothesis and that he is invoked only after an hypothesis is a
formulated and its probability is estimated.
A forecast expert should be able to
a) sketch out general direction of future developments,
b) anticipate major junctures (branch points) on which the course of developments
will hinge, and
c) make contingency forecasts with respect to alternatives associated with them. 13
Forecasting
It is thus to be understood that the basis of forecasting very fax into the future has to
be' subjective, being based on the-power of judgement of the experts.
In this write up we have presented three important approaches to forecasting
events.They are the judgemental forecasting (section 5; 2), the Delphi technique
(section 5.3), and the cross-impact analysis (section 5.4).
5.2 JUDGEMENTAL FORECASTING

Judgemental (subjective) methods are those in which the process used to analyze the
data has not been well specified. They may use objective data or subjective impressions
as inputs, they maybe supported by form-al analysis, but the critical aspect of these
methods is that the inputs are translated into forecasts in the human mind.
Various methods of judgemental forecasting are listed below:
1) Personal Interviews
2) Telephone Interviews
3) Traditional Meetings
4) Structured Meetings
5) Role Playing
6) Mail Questionnaire
7) Delphi
8) Cross- Impact Theory
9) System Dynamics
Various types of errors are associated with judgemental forecasting. But the most
serious ones are
1) Bias, and
2) Anchoring
Bias is caused by preconceived notion about the world. Bias is also caused by the
judgements of a person who stands to lose/gain from the forecast. Although bias can
be caused by the researcher and from the situation, the most serious form of bias is
caused by the judge. Judges often mention what they hope should happen rather then
what they think should happen. Optimism is one form of bias often associated with
judgemental forecasting.
Anchoring is the tendency to start with an answer while making a forecast. A
conservative judge uses the pastas an anchor for marking a forecast.
Armstrong (1985) gives the following suggestion for carrying out judgemental
forecasting:
1) Don't use judges who stands to gain or lose from the forecasting exercise.
2) Decompose the problems whenever possible, particularly when uncertainty is
high, prior theory exist, and when different judges have different information.
3) Provide only the minimum relevant information to the judge.
4) People think in terms of unit differences rather than percentage changes. This
should be kept in mind particularly while presenting information on the
exponential growth.
5) Present historical growth as a decreasing function by using the inverse form.
6) Include projective questions for sensitive issues. In a projective test a judge-:
responds to an ambiguous question or reports how someone else would react.
7) Use eclectic research. It demands that alternative forecasting methods are used
instead of only one while attempting to make a forecast.
8) Assessment of uncertainty about forecasts. can be made either by ;ad4g the
judges to rate their confidence or by comparing different judgmental forecast
14 9) Bootstrapping methods can be sometime applied to model the judgmental
process of
the judges .These method are of two types :(i) Direct bootstrapping , and (ii) Indirect
Bootstrapping .Direct Bootstrapping translates the judge’s rules in to a model often it
is sufficient to ask, the judges what rules they are using. Often, however, judges are
not aware of how they make decisions. In such cases, the judges may be asked to
think aloud We making the forecast. The researcher records this thinking and
translates it into specific rules, Alternatively, the rules are stated as questions that can
be 'Yes' or 'No’. In directed bootstrapping, the judge's forecast, taken as u dependent
variable, is regressed with the variables that the judge uses while making a forecast.
These methods have been found to be useful (a) for repetitive forecasts,(b)as a first
step toward developing an objective forecasting , (c) as a quantative model where no
data exist, so that hypothetical data can be created, and (d)as a tool to understands the
rules that do judges is using so that prejudices if any can be highlighted.
Activity A
Forecast may be made by a group or by an individual on the basis of experience,
hunches or facts about the situation. Explain in tern-is of your organizational context.
…………………………………………………………………………………………
…………………………………………………………………………………………
………………………………………………………………………………………....
Activity B
It has been said that qualitative forecasting methods should be used only as a last
resort. Comment
…………………………………………………………………………………………
…………………………………………………………………………………………
………………………………………………………………………………………....
Activity C
What is the, direction between Recasting and planning? how can organisations
become confused even forecasting when this distinction is not clear?
…………………………………………………………………………………………
…………………………………………………………………………………………
………………………………………………………………………………………....
5.3 THE DELPHI TECHNIQUE

5.3.1 Opinion-Capture Techniques
Collecting the opinion of experts to analyze the genesis and odor lads of a problems
and to come up with recommendation for As solution has been a very desirable task
among planners and Administrators, and particularly so among the technology
forecasters. One can distinguish four categories of opinion-capture techniques that
are generally employed for the purpose of forecasting:
• genius. (single individual) forecasting
• survey (polling) forecasting
• panel (face-to-face interaction) forecasting,
• Delphi (survey with feedback without face to face interaction) forecasting
By and large, it is Accepted that an interacting group is superior to a non-interacting
group" at all levels of task difficulty, though for to most difficult judgment tasks, the
interacting groups may not reach the level of their most accurate members.
A panel or a committee ,,which allows face -to -face interaction, usually suffers from
certain deficiencies such as predominance of certian member, difficulty in changing
the opinion once expressed, and difficulty in expressing a view contradicting that by
a leading To get over these difficulties of a face-to-face group interaction, Helmer 15
Forecasting
and his colleagues at the Rand Corporation, USA devised during 1953 an innovative way
of a structured communication among experts which did not allow a face-to-face
interaction. They conducted a succession of interactive inquiries from a panel of experts
to arrives at a refined consensus with regard to the future development of military warfare
techniques. A panel of seven experts was used. Five questionnaires were circulated.
These were prepared in such a fashion that the responses were quantifiable. The ratio
between the largest and the smallest responses, which was initially 100 to 1, dropped
finally to 2 to 1, thus indicating a great degree of consensus among the panelists. Helmer
and his colleagues called this technique "The Delphi Technique" after the place "Delphi"
in ancient Greece where oracles were cited to make predictions about the future.
For security reasons, the above-mentioned study could be publicly reported only during
1963 (Dalkey and Helmer, 1963). This work, however, went almost unnoticed. Gordon
and Helmer (1964) carried out a Delphi study to assess the direction of long -rang trends
with special emphasis on the science and technology and their probable effects on the
society and the world. Six topics were identified. They were scientific breakthroughs,
population control, automation, space programme, war prevention, and weapon system.
The panelists estimated the year by which there would be a 50% chance of the
development occurring. This study was later included in a book by Helmer (1966).
Helmer, Dalky: and their associates at the Rand Corporation continued to apply the
method in various field and investigate the Delphi method in grate detial. Most of the
study results.are available as Rand Corporation papers. These reports were frequently
republished by various scientific and technological journals, giving widespread attention
to the Delphi methodology.
As the application of Delphi spread and increased, criticisms emerged Sackman (1974) of
the Rand Corporation criticized the method for lacking a theoretical base and for being
beset with many problems. These included the subjective definition of experts the
infrequent use of random sample because of the use of experts, the exclusion of the
benefits of face- to-face interactions, the inclusion of value judgments, and unmeasured
reliability, content and construct validity. The criticisms gave rise to the number of
studies by the proponents of Delphi. The 1975 autumn issue of the journal Technological
Forecasting and Social change was devoted to defending and reviewing the Delphi
technique in the light of Stickman's critique. An edited book by Linstone and Turnoff
(1975) was published in response to Sackman's criticism. The book is one of the best
documents of the Delphi methodology. It provided a comparative digest of the origins,
philosophy, developments, modifications, examples of studies and evaluations of Delphi.
The book totally rejected the. Stickman's comments as unsound. However, Sackman
(1976) continued to remain a skeptic while admitting that the book offered the best
source on the Delphi technique.
Stickman's criticisms notwithstanding, the Delphi method continues to be very popular
and widely accepted particularly when a group consensus is needed. Linstone and
Turnoff (1975) have given a general definition of Delphi.
"Delphi may be characterized as a method for structuring a group communication process
so that the process is effective in allowing a group of individuals, as a whole, to to deal
with a complex problem."
This “structured communication” is a made possible due to four identifying characteristics:
1) anonymity among the panelists,
2) statistical assessment of the group response,
3) controlled feedback of individual and group contributions of information and
knowledge to all panelists, and
4) opportunity to review views given by any panelist. The Operational Details
The Operation Details
A small monitor team conducts a Delphi exercise. The team designs a questionnaire and
sends it to a larger respondent group of participants. The participants are usually asked to
make an evaluation of the problems under consideration according to some type of rating
scheme. Upon receipts of responses to this first round questionnaire the monitor team
summarizes the results by the computing some statistcs of the group response. Based upon
this first-round response; a. second round questionnaire is prepared and sent to the
16 participants, thus giving each participant an opportunity tore-examine his views based upon
the feedback of group response. As the round proceed, a group consensus evolves.
As a general rule the statistical variance in the ratings reduces as the rounds proceed.
Although Delphi technique is applicable for a variety of problems, its principal uses
have been in the areas of (i) forecasting and (ii) decision analysis.
5.3.3 The Forecasting Delphi
The original and the most common use of Delphi is to forecast a future event.
Organization have used the technique to forecast the future demand for their products
and to foresee advent of future technology. The procedure for conducting a Delphi
study is a follows:
1) In the first round the participants are asked to write what they expect to happen
in the future.
2) Upon receiving the suggestion from the first round, the participants are asked in
the second round to specify the year in which they expect the suggested events
to occur. Often the question may be framed asking the participants to estimate
the probability of occurrence of the event during a particular year. Thus, the year
when the event is most likely to occur or the probability of its occurrence in a
particular year-becomes the rating scale. The monitoring team receives
everyone's response and calculates a measure of the central tendency and of the
dispersion (usually the median and interquartile range ) for each suggestion.
3) In the third round, all the suggestions, the statistical measures, and any written
comments are sent back to the panelists. Given the feedback of group response,
they re-estimate when the events will occur. Reanalysis of the statistics usually
indicates a narrowing of the interquartile range, thereby indicting that there is a
greater degree of consensus among the participants.
Additional rounds can generate greater precision, but most Delphi exercises do not
generally go beyond four rounds, since little extra information or narrowing of
opinion is achieved for the effort expended.
5.3.4 The Decision-Analysis Delphi
Another application of Delphi process has been made to the process of decision
making. Turoff (1970), while developing this application, calls it the "Policy Delphi".
He has pointed out that Delphi in such uses is not a decision-making tool, but rather a
decision-analysis tool.
In this type of Delphi exercise, the planning horizon is held constant, and the
participant evaluates various objectives or alternatives according to their importance,
desirability, feasibility, ease of implementation, or probability of occurrence. The
rounds are fairly similar to the forecasting Delphi. In the first round, the participant is
presented with the problem and is asked to recommend alternative solutions. In the
second round, he rates each alternative for its importance, and feasibility, etc. The
third round consists of a re-rating, given the statistical feedback of the ratings from
the second round. At the end of the rounds, the alternatives can be assessed for the
degree of consensus and their worth whileness according to different rating criteria.
The Delphi technique hag been applied in the following areas :
a) Forecasting,
b) Gathering current and historical data not otherwise accurately available,
c) Evaluating possible budget allocations,
d) Delineating the pros and cons associated with potential policy options,
e) Developing casual relationships in complex economic or social phenomena,
f) Distinguishing and clarifying real and perceived human motivations,
g) Exposing priorities or personal values and social goals,
h) Setting corporate goals and objectives,
i) Generating and evaluating strategies,
j) Exploring urban and regional planning options, and
k) Planning health care systems.
17
Forecasting
5.3.5 Dephi as a Group Process
A lot of research works point to the Delphi method as an effective means of
structuring group communication process. Some of them are discussed below in brief
(Martino, 1972)
A) Accuracy.
Dalkey experimented with “almanac” questions, for which were know, but were not
known to the participants. Responses were obtained either by anonymous feedback or
by face-to- face discussion. Experiments showed that medians for anonymous
feedback were more near the true answers than those obtained by face – to –face
discussions.
B) Group Interaction
Salancik conducted a Delphi study in which he asked for 50% likely dates for half the
physicians to use computers in particulars applications Reasons were categorized as
dealing with benefits, cost, and feasibility .He regressed the median dates for each
application with the number of statements dealing with various categories of reasons .
The regression equation explained 85% variance in median dates. He concluded that
panelists assimilate comments from panel members into their aggregate estimates.
C) Regularity in the Estimate
Dalkey analyzed the standardized deviates for the estimates and found them to follow
a long normal distribution . He concluded that the estimate is a “lawful” behaviour.
D) Precision of the Estimates
Martino analyzed more than 40 Delphi studies. He found the spread of estimates
between 20 % - 90 % likely dates to vary linearly with positive trend with 50% likely
dates for several events by the same panel ( Figure 5.1 and 5.2). He concluded that
the higher the length of the forecast the higher is the spread.
18
E) Reliability of the Estimates
Dalkey asked almanac questions. First round responses were treated as a population.
Samples of various sizes were drawn from the population. Correlation between the
median and the true answer was computed. Mean correlation coefficient over all
questions for several sample sizes was taken as a measure of panel reliability A plot
of panel reliability versus panel size indicates an asymptotic growth of the curve to 1
as the panel size increases (Figure 5.3).
F) Optimism/Pessimism in Forecasts
Ament analyzed two Delphi studies on the same topic conducted during 1964 and
1969 where the panelist were asked to estimate probability of occurrence of events by
a particular year in the future. He noted that probability estimates, made during the
year 1964, were significantly less than those made during 1969. He concluded that
long-range forecasts tend to be pessimistic whereas short-range forecasts are
optimistic.
G) Optimism/Pessimism Consistency by Panelists
Martino analyzed 10%, 50% and 90% likely dates. He computed three standardized
deviates for each individual and for each given event. Means were computed for each
individual and each likelihood. He noticed that panelists are consistently optimistic/
pessimistic with respect to the three likelihoods. He also noticed that standard
deviation is comparable to, or greater than, the mean. He inferred that individual
panelists tend to be biased optimistically or pessimistically with moderate
consistency.
5.3.6 Guidelines for Conducting a Delphi. Study
The following guidelines should be followed while conducting a Delphi study
a) All members should agree to serve on the panel.
b) The procedure for conducting the study should be explained to the panelists in
detail.
c) If possible, the panelists should be paid at the usual consultancy rate.
d) Every panel member should be assigned a code number.
e) Two copies of each questionnaire should be sent to the panelists in each round
so that he can retain a copy for his own record:
f) The questionnaires should be easy to understand.
g) It should not contain too many statements. A practical limit is suggested as 25.
h) Statement should be neither very lengthy nor very short. Optimum word length
is generally 25 for familiar events. It has to be higher for unfamiliar events.
i) Contradictory forecasts should be included to initiate debate.
j) Injection of moderator's opinion should be avoided becalm it has been found to
substantially bias the results.
19
Forecasting
k) A statement should not contain possibility of occurrence of compound events.
l) A statement should not be changed.
m) When editing the respondent's comments for clarity, the intent for the originator
should not be lost. Similarly, when editing from round to round, meaning of a
statement should not be changed.
n) Occasionally, by keeping track of how different subgroups of a respondent
group vote on specific items, it is possible to know how polarisation are taking
place.
o) The questionnaire should be pre-tested on any willing guinea pigs outside the
respondent group.
p) Delphi responses can be computer processed.
5.3.7 Guidelines for Selecting the Delphi Panelists
A general principle for selecting a panel for a Delphi study is that a variety must be
introduced to avoid bias. Therefore, the panelists should belong to different schools
of thought, different age groups, different institutions, different geographical
locations, and different sexes, etc.
If the subject matter for a Delphi study concerns an organization only, then naturally,
most of the panel members will be chosen from within the organization. However,
external members must be included whenever they are likely to contribute greatly to
thinking process.
Internal members must naturally have deep knowledge of the organization. They
must maintain the secrecy. Since the top managers of the organization are usually a
very busy set of persons, the internal members may be chosen from among the
managers who are about 2-3 levels lower in the organizational hierarchy.
External members are expected to be outstanding in the relevant field. They may be
selected from peer judgments, suggestions from internal experts, and suggestions
from other panel members.
5.3.8 Advantages
Delphi is always preferred to any other method whenever a consensus of a large
number of informed individuals is desired. Compared to the committee meetings
Delphi has the following advantages:
a) The undue influence of dominant or eloquent personalities is absent.
b) One need not publicly contradict prestigious personalities.
c) The tendency to be carried away by majority opinion is absent.
d) One can always change his views "since anonymity is preserved without causing
any embarrassment to himself.
e) Diversified opinion of many informed individuals will always be collected in
this process.
f) It economizes on the time required by busy individuals sine questionnaires can
be filled up at the individual's convenience,
g) It is relatively cheap to administer.
h) It facilitates conceptualizations of difficult phenomena.
i) It has no geographic and scheduling restrictions to get participants together.
j) It has shown high success in encouraging group and individual consideration of
factors that might otherwise be dismissed or neglected in planning.
The other advantages that are claimed for Delphi are the following:
a) It has great utility in obtaining results when other methodology is appropriate.
b) It is a creative technique and encourages innovative thinking. Hence it is
applicable to ill-structured problems.
c) By generating a consensus of opinion, it facilitates a change in an individual's
20 social values and the overall climate of the organization.
d) Ratings from Delphi studies provide quantitative scores for evaluation and can
aid the choice of a course of action.
e) The two-way communication in a Delphi study facilitates understanding and
learning on the part of the participants.
f) The Delphi consensus leads to a commitment that leads to easy implementation.
Moreover, a Delphi exercise may be used to identify roadblocks to
implementation.
g) It blends the subjective and the objective, the rational and the extra-rational.
h) Delphi can be used along with such other aids as simulation-games, role playing,
cross-impact matrix, trend extrapolation, and scenario writing.
i) It is very flexible, and applicable to many situations.
5.3.9 Common Pitfalls of Delphi
Delphi is not without certain drawbacks albeit the many advantages claimed in its
favour. Most of the drawbacks originate due to deficiency in the design of the Delphi
study by inexperienced monitor teams. The following is a list of the major
deficiencies:
a) The inability to make the Delphi objectives specific,
b) The inability to identify and motivate many "informed individuals" to
participate,
c) The inability to stimulate response,
d) The inability to appreciate and highlight consensus and divergence,
e) The inability to refrain from imposing monitor and preconceptions of a problem
upon the respondent group by over-specifying the structure of Delphi,
f) Though advanced as a structured communication device, the method suffers
from the following:
i) the communication is too restricted for many problem situations,
ii) the requirement of written feedback editing, and distribution places a high
cost on the communication of ideas.
g) The Delphi panelists often give inconsistent views (Mohapatra et a1., 1984).
5.3.10 Variants of Delphi
Over the year, many variations on classical Delphi have been forwarded. Some of
these variants are the following:
a) An initial list of events or some information on the problem context can be
provided to the panelists. .
b) The panelists may be asked to suggest 10%, 5% and 90% likely dates of events
(instead of the conventional most likely date of occurrence).Median of the
50%date is taken as the median of the group response, whereas the spread
between the median of 10% and 90% dates is taken as the interquartile range of
the group response.
c) On-line real-time Delphi can be practised if facilities exit. Here the concept of a
round because redundant. A panelist directly keys in his scores and is informed
of the updated group response immediately.
d) Direct interaction among the panelists may be allowed.
e) The number of rounds (the stopping criterion) for a Delphi study can be
determined by examining if the stability of group response has been achieved.
This can be done by studying examining if the stability of group response for
individual statement from round to round or by studying the histograms of
response for individual statement from round to round or by analyzing the
changes in the coefficient of variation between rounds or even by carrying out
statistical significance tests for comparing the variation of group response
between rounds.
f) A hierarchical stopping criterion is often suggested (Figure 5.4). Such a criterion
is quite comprehensive. Though ideally it look very appealing it is difficult to
apply.
Gustafson et al (1973) present a framework for designing an opinion capture
technique. They divide the group opinion capture techniques into three types: 21
Forecasting
a) Talk Estimate (TE):Interaction Group Committee or Panel

b) Estimate -Feedback Estimate (EFE): Delphi
c) Estimate-Talk-Estate (ETE): NGT
Naturally, "talk" enhances interaction, “feedback” indicates one-way back
communication, anal. “estimate” is the decision process.
5.3.10.1 The Nominal Group Technique (NGT)
Of the many variants of Delhi which have lately been proposed, the Nominal Group
Technique (NGT) has exhibited the greatest potentialities (Ven and Delbecq 1974).
In its basic form, the technique requires participants to generate ideas in private.
Participants then engage in a round-robin meeting in which each offers an idea at
time. Discussion is then allowed. Finally an appropriate form of vote is taken to
determine the Group's final answer However, NGT was designed for the generation
and capture of ideas rather than for the estimation of prescribed quantities.
5.3.10.2 The Estimate-Feedback-Talk-Estimate (EFTE) Procedure
This procedure is developed by Nelms and Porter (1985) and is also referred to by
them as an "interactive Delphi" procedure. The procedure has the following ten steps:
a) Participants are given background information.
b) Participants assemble face to face m a conference room: The Delphi leader
provides \the background information and raises the partinent question.
Discussion among the participants is discouraged.
c) A Delphi questionnaire is .given to each participants. After completing, the .
participants return them to the Delphi leader.
d) Results are summarized and displayed before the group. Answers are ranked
from high to low Medium, quartiles and range are also computed and provided
to the participants.
e) Feedback of results are discussed freely among the participants. The 'name of an
22 'individual who may have been made a particular response is not disclosed publicly
f) A second Delphi round is performed. In addition to the questionnaire, the
panelists are given index cards for anonymous questions and comments. These
are then return to the Delphi leader.
g) Results are summarized and posted. Anonymous questions are read and
recorded for display.
h) Discussion on the feedback is allowed.
i) Results are examined for stability of response of each panelist (not consensus).
In case of sufficient stability, The process is terminated. Otherwise, steps 6
through 9 are repeated.
j) Final results are summarized on paper. Additional statistical analysis is
performed. These are distributed to all the participants for comments.
The following advantages are claimed for the EFTE procedure:
• Protection from group effects,
• Face-to-face interaction,
• Feedback, and
• Stability as stopping criterion leading to fast start to finish.
5.3.11 Final Remarks on Delphi and its Variants
Over the years, popularity of Delphi and its variants is growing. With new
applications of Delphi studies and its variants and with continued research on its
methodological aspects, one hopes that it would become an important tool in the
hands of planners. With careful use, well-thought-out design, and integration with
other techniques, Delphi and its variants can help collect opinion of a large group of
experts in the ill-structured areas of forecasting, objective setting, and long range
planning.
Activity D
How could the Delphi method be used to predict for 5 years into the future, the
demand for the hospital beds in a given community? Under what circumstances
would you recommend use of Delphi method.
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
Activity E
Explain how a Delphi techique delivers a concensus forecast.
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
Activity F
Conduct an Estimate-Feedback-Talk-Estimate (EFTE) procedure for forecasting as
your organization.
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
5.4 FORECASTING BASED ON CROSS,IMPACT

ANALYSIS
5.4.1 History of Development
In a Delphi study conducted by Gordon and Helmer, panelist complained of a
difficulty in estimating of occurrence of future potential events apeared to be
interrelated. The panelists
23
Forecasting
UNIT 6 QUANTITATIVE METHOD OF

FORECASTING
Objectives
• learn the importance of forecasting for decision making
• use forecasting techniques in operations management
• understand different quantitative techniques of forecasting
• know trend analysis, exponential smoothing, decomposition methods, and causal
method of forecasting
• find out the suitability of forecasting models
• calculate the errors in forecasting
Structures
6.1 Introduction
6.2 Forecasting
6.3 Application to Different Functional Areas
6.3.1 Forecasting in Operations Management
6.4 Specific Forecasting Methods
6.5 Main Classes of Quantitative Models
6.5.1 Time Series Models
6.5.2 Causal Models
6.6 Forecast Error
6.7 Selecting a Suitable Forecasting Method
6.8 Summary
6.1 INTRODUCTION
Forecasting is the art and science of predicting the future events. Forecasting was
largely an art, but it has now become a science as well. While managerial judgement
is still required for forecasting, the manager is added today by sophisticated
mathematical tools and methods. While all elements of operations management are
important, forecasting is viewed as the key elements in the operations structure. This
unit is an excellent overview of quantitative forecasting techniques and models and
help recognizing the different models. Also it will help to know their use according to
one's needs. It can be highlighted that the qualitative forecasting is discussed in unit 5
of MS53 . The reader has to read this quantitative forecasting in combination with the
qualitative forecasting. Then only he or she can have a complete understanding of the
subject of forecasting. The needs of the market are changing for us, and we have to
respond more quickly than before. To do so, we have placed a higher emphasis on
forecasting. Students are required to refer MS"8 for different types forecasting
techniques.
6.2 FORCASTING
Forecasting, in general, presents an unresolved philosophical dilemma. `You can
never plan the future by the past', said Edmund Burke. But Patrick Henry disagreed: I
know of no way of judging the future but by the past'. Operations managers try to
forecast a wide range of future events that potentially affect success. Main concerned
36 here is that of
Quantitative Methods of Forecasting
forecasting customer demand for product and services. Forecasting may be short-
term or long-term by nature.
Forecasting is an essential tool in any decision-making process. It's uses vary from
determining inventory requirements for a local shoe store to estimating the annual
sales of video games. The quality of the forecast strongly related to the information
that can be extracted from past data.
Defining Forecasting
A forecast is an estimate of a future event achieved by systematically combining and
casting forward in a predetermined way data about the past. It is simply a statement
about the future. It is clear that we must distinguish between forecast per se and good
forecasts. Good forecast can be quite valuable and would be worth a great deal.
Long-run planning decisions require consideration of many factors: general economic
conditions, industry trends, probable competitors actions, overall political climate,
and so on.
Prediction, on the other hand, is an estimate of a future event achieved through
subjective considerations of managers. This subjective consideration need not occur
in any predetermined way.
Forecasts are possible only when a history of data exists. An established TV
manufacturer can use past date to forecast the number of picture screens required for
next week's TV assembly schedule. A fast-food restaurant can use past data to
forecast the number of hamburger buns required for this weekend's operations. But
suppose a manufacturer offers a new refrigerator or a new car, he cannot depend on
past data. He cannot forecast, but has to predict. For prediction, a good subjective
estimates can be based on the manager's skill, experience, and judgement. One has to
remember that a forecasting technique requires statistical and management science
techniques.
In general, when business people speak of forecasts, they usually mean some
combination of both forecasting and prediction. Commonly, forecasting is substituted
freely for economic forecasting. It implies for some combination of subjective
calculations and subjective judgement. We caution students and operations managers
to avoid misunderstanding.
Forecasts are often classified according to time period and use. In general, short-term
(up to one year) forecasts guide current operations. Medium term (one to three years)
and long-term (over five years) forecasts support decisions on plant location and
capacity Forecast are never perfect. Because it deals with past data, our forecasts will
be less reliable the further into the future we predict. That means forecast accuracy
decreases as time horizon increases. The accuracy of the forecast and the its costs are
interrelated. In general, the higher the need for accuracy translates to higher costs of
developing forecasting models. So how much money and manpower is budgeted for
forecasting? What possible benefits are accrued from accurate forecasting? What are
possible cost of inaccurate forecasting? The best forecast are not necessarily the most
accurate or the least costly. Factors such as purpose and data availability play
important role in determining the desired accuracy of forecast.
6.3 APPLICATION TO DIFFERENT FUNCTIONAL
AREAS
Forecasting is one input to all types of business planning and control, both inside and
outside the operations function. Marketing uses forecasts to plan products,
promotion, and pricing. Finance uses forecasting for managing cash flows and as an
input to financial planning. Accountants rely on forecasts of costs and revenues for
tax planning. Human resource personnel need forecasts for recruiting.
The main focus of this unit is on forecasting on operations function. It serves as an
input for decision on process design, capacity planning, and inventory control. For
process design purposes, forecasting is needed to decide on the type of process and
the degree of automation to be used. For example, a low forecast of future sales
might indicate that little automation is needed and the process should be kept as
simple as possible. If greater volume is forecast, more automation and more elaborate
process including line flow might be justified. Since process decisions are long-range
in nature, they can require forecasts for many years into future. Forecast can measure
the variability in demand during lead time 37
Forecasting
that in turn can help carry proper safety stock levels. Appropriate safety stock
inventory levels could minimise overall carrying and stockout costs associated with
these items.
6.3.1 Forecasting in operations management
In studying forecasting, we must be careful not to be emotional in immersing
ourselves in techniques and loose track of the reasons for forecasting. Forecasting is
an important component of operations planning. It is absolutely necessary for
planning, scheduling, and controlling the system to facilitate effective and efficient
output of goods and services.
Forecasting is helpful in operations management as regard to the aggregate demand
forecast. It is obtained by estimating expected volumes of sales, expressed in dollars,
and then converting the sales dollars into homogeneous production units. Production
unit can be subdivided into component parts and converted into labor or material
requirements. These resource forecasts are used to plan and control operation
subsystems as shown Figure 6.1
Refer Figure 6.1. There are three types of operations sub-functions which need
forecasting. These operations sub-functions are planning the system, scheduling the
system, and controlling the system. Each one will be discussed below in detail.
Planning the system: Managers need to forecast demands so that they can design or
redesign processes necessary to meet demand. Automated, continuous flows facilitate
high production volumes; manual or semi-automated, intermittent flows are generally
more economical for smaller production volumes. The demand forecast is critical to
this design. We have discussed a bit of this at the beginning of the unit. Wide
variation between anticipated demand and actual demand can result in excessive
operations"costs. Capacity planning utilities forecasting at different levels. A long
range forecasting is needed for planning the total capacity of facilities. For medium
range capacity decisions, a detailed forecasting will be needed to determine the
subcontracting, hiring plans, and equipment utilisation. Shoat-range capacity
decisions, including assignment of available people and machines to jobs or activities
in the near future, should be detailed in terms of individual products and they should
be highly accurate. If capacity is not expanded fast enough, both individual firms and
the national economy suffer. On the other hand, too much capacity is burdensome.
For example, Jet aircraft, at $20 million each, cannot be purchased and stocked for
occasional demand, since the cost of excess capacity is considerable. Boeing,
McDonnell Douglas, and airbus- the world's largest commercial aircraft producers-
38 try
very hard to have manufacturing plants size a to meet exactly the number of aircraft
demanded. If the plants are too large, it will be costly to the firm.
Scheduling the system: Job scheduling in intermittent and continuous operations is
more stable if demand forecasts are accurate. Accurate demand forecasting is needed
for best utilisation of the existing conversion system. Managers need intermediate run
demand forecasts for three months, six months, and a year into the future. Both
current and future workforce levels and production rates must be established from
these forecasts.
Controlling the system: In regards to controlling inventory, production, labor, and
overall costs, managers need accurate demand forecast. Accurate forecasts are
needed for the immediate future- hours, days, and weeks ahead. Thus a computerised
forecasting system may be needed for these decisions.
In general, there are different types of decisions in operations and different associated
forecasting requirement as shown in Table 6.1. A peep into the table indicates that
there are two types of forecasting methods in operations management: qualitative
methods of forecasting and quantitative methods of forecasting. It is to be reminded
that qualitative forecasting has been discussed in unit S. This unit will deal with the
quantitative methods of forecasting only.
Table 6.1 Forecasting uses and methods
Uses of Time Accuracy Number of Management Forecasting
forecasting horizon required products level methods
For operations
Process design Long Medium Single or few Top Qualitative
and causal
Capacity planning Long Medium Single or few Top Qualitative
Facilities and causal
Aggregate Medium High Few Middle Causal and
planning
Time series
Scheduling Short Highest Many Lower Time series
Inventory Short Highest Many Lower Time series
management
Source: Operations Management by R.G Schroeder, McGraw-Hill.
Qualitative forecasting depends on managerial experience, because they do not use

any h specific quantitative models. This method is helpful when past data are not
available to the managers or not reliable. Thus different individuals can apply the
same qualitative methods hilt can arrive at different forecasting results. Because of
non-availability of data, the managers can utilise the forecasting by using the
qualitative methods. Some of the well-known qualitative methods are:
• Management judgment
• Consensus
• Writing `scenarios' of the possible events that might occur
• Judgmental methods(Delphi technique)
• Based on the individual's feeling and expert opinion
Some of these methods are discussed in unit
Quantitative forecasting is used when:
• Past data is available, and
• Past data can be fitted into a pattern that can be expected to continue into the
future.
Activity A
Think of any organisation of manufacturing or service sector. Evaluate its short-term,
medium-term and long-term forecasting techniques. Which of the forecasting
technique are in use? ' 39
Forecasting
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
6.4 SPECIFIC FORECASTING METHODS

We have been highlighting that forecasting is important in operations and strategic
planning. In stead of getting too deeply into specific types of forecasts for varying
situations, we summarize that the long-range strategic planning and facilities
decisions use less analytical qualitative methods of forecasting, and operational
planning in production and inventory control uses more analytical, time series
analysis. Causal forecasting techniques are used for a variety of planning situations
but are specially in intermediate-term planning.
Table 6.2 summarizes modern forecasting techniques being used in industries. There
are three types of forecasting techniques: qualitative forecasting, naive (time series/
forecasting, and causal forecasting. Qualitative and naive models are the most
frequently used forecasting techniques in operations management. The causal models
are very costly models to implement and are not suitable for short-term forecasting
typically needed h• operations managers. Even though qualitative models are very
popular, it has been discussed in unit 5, and this unit will limit its discussion to
quantitative forecasting.
6.5 MAIN CLASSES OF QUANTITATIVE MODELS

1) Time series models
i) Trend projection (long-term)
ii) Decomposition methods (intermediate-term)
iii) Smoothing methods (short-term)
a) exponential smoothing
b) Naive forecasting
2) Causal models
40 i) Regression and correlation analysis

ii) Econometric model
iii) Simulation method
iv) Input-Output model
A causal model attempt to relate some quantity to other factors. Time series models
attempt to relate some quantity strictly to time. A time-series is a time ordered
sequence of observations which have been taken at regular intervals over a period-of
time (hourly, daily, weekly, monthly, annually etc.).
Some of the important forecasting techniques are explained below.
6.5.1 Time Series Models
i) Trend Projection
Reasons for studying trends are:
1) The study of secular trends allows us to describe a historical pattern.
2) Studying secular trends permits us to project past patterns, or trends, into the future.
3) In many, situations, studying the secular trend of a time series allows us to
eliminate the trend component from the series.
Trend can be a straight line or a curvilinear. Example of straight line trend is increase
of pollutants in the environment as shown in Figure 6.1(a) . Common example of
curvilinear relationship is the life cycle of a new product. When a new product is
introduced, its sales volume is low (i), as the product gains recognition and success,
unit sales grow at an increasing rate (ii). After the product is firmly established, the
unit sales grow at a stable rate (iii). Finally, as the product reaches the end of its life
cycle, unit sales begin to decrease (iv) in Figure 6.1(b).
Trend reflects the effect of global movements in the time series. Consider the linear
trend. Yt= bo +blx
Where T, = estimated value of the dependent variable
bo = Y- intercept
bl = slope of the trend line
x = independent variable (time in trend analysis)

Objective is to find out the value of slope(bl) and intercept(b) from the given set of
independent values of x.
We can describe the general trend of many time series using a straight line. But we
are faced with the problem of finding the best-fitting line. We can use the least
squares methods to calculate the best-fitting line, or equation.
Least-squares Method
Find b,, and b1 such that we get the "best" line which fits the data.
Given (Y1, Y2, Y3, ..., Yn), find b, and bl such that the demand
41
Forecasting
Example: Sales data of a company are given for 14 time periods (t) with respective
sales data (yt). Forecast the sales value for the period 15.
(Adapted from course material, Department of Management Studies, IIT, Delhi).
42
Tt is measured in units of Yt but St , Ct and Rt are all measured in relative terms.

Values of St, Ct, and Rt >1 indicate effects above the trend (above the average level).
43
Forecasting
Steps in decomposition method
Step 1: Identify seasonal factors: For the actual series D, compute a moving average,
whose length is equal to the seasonality (e.g. 12 in monthly data, 4 in quarterly data ,
7 in daily data). Before calculation of moving average, let's define it.
What is a moving average?
Moving average is an average that is repeatedly updated. As we move into the future
and. as new observations become available, the oldest values in the series are
discarded, thereby keeping the average current The message given by the moving
averages technique is that while history helps to plan the future, only a small
fragment of the past is relevant. Thus, if we have the monthly demand data, we may
calculate average of only six month's values in the data to get the forecast for the next
month and such a moving average is called a six month moving average. The
selection of the number of periods in the moving average what is being forecasted
and (ii) the characteristics of the demand. Simple n -period moving average forecast
for the period (t+l) = (aDk) x 1/nwhere.k = (t - n+l) tot.
The moving average technique can be made simple by an example. For 4- period
moving average, we need four observations to compute.
Example: (Adapted from course material, Management Department, IIT, Delhi)
The following table gives the number of patients in a family practice for last four
years. Each year is divided into four quarters and the respective patients being treated
are included for forecasting.
How do you make forecasts for the period 17 i.e. for the first quarter of 5'' year,
considering the trend component, seasonal component, cyclical component and
random component?
Solution: The following table calculates the 4-period moving averages (MAs) and
centered MAs. The sample calculations are shown below. You can calculate the
44 values very fast and accurately with the help of MS-Excel.
Here the time period t =1, 2...16

4-period MA = (920+916+895+905) / 4 = 909 (at period 4)
(916+895+905+947) / 4 = 915.75 (at period 5)
and (1201+1142+1106+1163 ) / 4 = 1153 (at period 16)
from period 6 to 15, you can calculate the values accordingly and cross check with
tabulated vales.
Note that the first moving average (= 909) is for the whole first year i.e. it is
associated with all the four quarters of the whole year. Therefore it is reasonable to
center it. This is the (Tt Ct) component. Now question is where do we center it2 It can
be between 2nd and the 3rd quarter.
We can handle this by taking the midpoints of successive moving averages. For
example: (909+915.75) / 2 = 912.375 (can be centered at 3' quarter) that is the
average of the MA of 4th quarter and MA of 5th quarter.
This indicates that you are using 50 observations and centering at the middle.
Similarly, (915.75+919.25) / 2 =917.50 (center at 4)
Other values are calculated and tabulated for your reference.
Step 2: From Tt Ct component (centered MA), identify seasonal-random component.
Yt
St R t =
Tt C t
For Year 1
Q3=> 895 /912.375= 0.981
Q4=> 905 / 912.5 = 0.986 45

Capacity Planning
UNIT 7 CAPACITY PLANNING

Objectives
After going through this unit, you should be able to:
• learn the capacity planning for long term, medium term and short term period
depending upon the demand fluctuation
• under stage single-stage capacity planning and multiple-stage capacity planning
under certanity and incertainty
• have a brief knowledge of financial implication capacity planning
• compute the requirement of machines and stage efficiency in capacity planning
Structure
7.1 Introduction
7.2 Aspects of Capacity Planning
7.3 Determination of Capacity Requirement
7.3.1 Capacity Planning for a Single-stage System
7.3.2 Capacity Planning for a Multiple-stage System
7.4 Evaluation of Alternative Plant Size
7.4.1 Traditional Economic Analysis
7.4.2 Cost-Volume-Profit Analysis
7.5 Determination of Equipment Requirements
7.5.1 Equipment Requirements for a Single Production Stage
7.5.2 Determination of the Stage Efficiency Stage E
7.6 Summary
7.1 INTRODUCTION
For any organization, the principle of matching demand with supply at any point of
time is to be followed mainly for producing products or services at minimum total cost.
This is possible when the utilization of supply capacity of the organization is
maximized. Capacity planning is required basically to achieve this objective.
Determination of productive capacity requirements is a problem not only when
designing a new system (factory, manufacturing setup, or production unit), or
expanding an existing one, butt also for a shorter operating periods during which the
plant size cannot be changed. Decisions about capacity determination or expansion are
always important, because they provide the basis for both long and short-term
managerial planning-and control of resources.
Productive capacity, generally measured in physical units, refers either to the
maximum output rate products or services or to the amount of key resources available
like machine= hours, man-hours, etc. in each operating period:
When the output of an operations system or the transformation process is fairly
standardized, nominal physical capacity can be expressed as a maximum sustainable
output rate achieved by a full complement of labour on regular time. However, for
systems producing a wide variety of products or services which cannot be measured. in
common units. it becomes necessary to express capacity in terms of critical resource
inputs e.g. labour-hours or machine-hours.
Since changes in capacity are made to satisfy expected changes in demand, capacity
has the. same dimensions as demand. The relationship between the dimensions of
demand and their effect on capacity can be explained in the following way (refer Table
7.1). 5
Production Systems Design
7.2 ASPECTS OF CAPACITY PLANNING

Capacity-related problems may exist in 'three basic form. First is the issue of large
increments in capacity needed for changes in demand over the long term, say 5 to 10
years ahead. For most technologies capacity increments can be made only in large
chunks at a time. even though they cannot be fully utilized when installed (another
shift, or steel mill, or aircraft added when demand exceeds available capacity). Due to
addition of productive capacity, there will be step increases in fixed costs that cannot
be absorbed immediately in this case. This will be absorbed from the gradual increase
in expected demand over a long period. This type of capacity change sets the upper
limit of the productive capacity of a plant. This upper limit is also referred to as the
system design capacity.
Second, within the constraints imposed by the system design capacity, limited
adjustments can be made for periods up to a year or two in order to cover fluctuations
in demand due to seasonality and business cycles. The resulting aggregate planning
relics in the use of inventories, changes in the size of the wokforce through hiring and
layoffs, use of overtime, and subcontracting orders to another firm.
Finally, finer adjustments in capacity may be needed to cope with short-terra random
fluctuations in demand. This is done on a weekly or even daily basis and the
corresponding methods used for this refinement is the subject of operation scheduling.
Random fluctuations in demand, which are both unpredictable and uncontrollable,
affect the accuracy of these methods in a given situation.
Activity A
In the context of your organisations critically evaluate the short time, medium-term,
and long term capacity planning of the manufacturing unit on an service system. Find
out the battik neck exists in each type of planning.
…………………………………………………………………………………………
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7.3 DETERMINATION OF CAPACITY REQUIREMENTS

A feasibility study is usually performed to determine how much capacity will be
needed and when. The phases in long-term capacity -related studies are shown in Fig.
7.1.
7.3.1 Capacity Planning for a Single-Stage System
For simplicity, we shall consider an example for an operations system as a whole. In
practice, however; the analysis indicated must be carried out for each stage of the
production process separately. The production stages, which are considered to be
bottlenecks, are to be analysed first. Let us consider a manufacturing firm which has
experienced an average annual increase in demand of one of its products equal to 200
units. Its present maximum capacity is equal to 2,400 units year. The trend line for
annual demand has been estimated by analysing the past data as Y, = 600 if 200t (with
t = 0 in 1984): Management is interested in adding enough capacity to cover expected
demand for the next 12 years assuming that the linear upward trend will continue in
future.
The minimum duration of the planning horizon is determined by the lead time needed
to add new capacity, i.e., for activities like engineering design, construction,
6 equipment
Capacity Planning
installation etc. The frequency with which management reviews such issues is also an
important consideration. If the lead like for adding the new facility is 3 years and
management reviews such issues 5 years after the latest additions, the minimum
planning horizon should be 3 + 5 = 8 years.
For the last year in the planning horizon, i.e. in 2004, the value oft in the trend-line
equation will be 20: therefore, the annual expected demand then will be Y 2004 = 600
+ (20t)) (20) - 4600. Thus, if the present trend continues, we must provide enough
capacity to produce at an annual output rate equal to Y 2004 = 4,600 units. Given a
current capacity limit of 2400 units, the projected increase in capacity requirements for
2004 is equal to 4600-2400=2200 units. Whether the required capacity will be added all
at once, or in smaller increments depends on the process technology. A typical
manufacturing unit might decide to build facilities for a new large plant, and acquire
equipment gradually as needed. A typical process plant, however , is more severely
restricted by the technology used to large-capacity increments. The choice depends on
balancing the lower variable costs for large-capacity increments against high fixed
costs that cannot be absorbed due to underutilization in near future. The projected
capacity requirements to handle increase in demand is explained in Fig. 7.2.
The above procedure does not account for the degree of uncertainty in future demand. 7
This may be evaluated subjectively by top management planners, or statistically by
computing a measure of dispersion 'f actual demand points in the past from the trend line.
The projected estimate for net capacity requirements cat be adjusted further to allow
for planned shutdowns to handle preventive maintenance or for planning for
unexpected growth or decline. For example, suppose that the firm has decided to build
the new plant with a capacity of 2.500 tonnes/year overseas. If management wants to
increase this by 20 Per cent for planned maintenance and another 10 per cent for further
growth, the capacity adjustment needed would be.
Normal plant capacity = (2500 v fits (1.20) = 3000
Adjusted plant capacity = (300) (1.10) = 3300 units
The adjusted plant capacity represents an average annual output rate for the overseas
plant. If there are no seasonal fluctuations the monthly rate will be 3300/12 = 275
tonnes. but in the presence of a strong seasonal cycle typical of plants actual
requirements will exceed this monthly average during the peak season, and in slack
periods, they will be less than the average. If management can rely on seasonal
inventories, overtime, or subcontracting, the annual capacity requirements can be met
by the above monthly rate.
If inventories cannot be used, the production rate must be continually changed to
follow the actual demand over time period. Let t s assume that the plant in this case can
handle demand with a monthly maximum capacity equal to 300 tonnes. On annual
basis, this corresponds to increasing capacity to 310() tonnes. Between the extremes of
3300 tonnes needed for producing at a constant rate of 275 tonnes /month and 3600
tonnes to absorb peaks of up to 300 tonnes per month1, it is often possible to adopt a
compromise plan. For example, we may assume that an amount of (290) (12) = 3400
tonnes/year is needed. This amount is definitely influenced by the feasible scale Of
production and technology of the process. Therefore, in the determination of long-term
capacity we must be aware of the feasibility of using short-range alternatives such as
inventories.overtimes. Multiply workshifts, or subcontracting.
7.3.2 Capacity Planning for a Multiple-Stage System
When the production process consists of one stage only, the determination of capacity
requirements by previous methods refers to the output rate for the entire new system
directly. More often, however, capacity planning for multistage processes becomes a
necessity. Different equipment configurations at each stage make it virtually
impossible to have all stages operate with the same maximum capacity requirements in
done for the bottleneck operations or production stages. This can result in higher
operating costs due to under utilization of facilities at other non-bottleneck operations.
However, this may well be the only feasible way or alternative: in a given situation.
Activity B
Briefly describe a practical approach toward managing capacity change. Would-it be
important for a person workings to be a general manager not an operations manager, to
under and, this process? Why or why not?
…………………………………………………………………………………………
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7.4 EVALUATION OF ALTERNATIVE PLANT SIZES

The amount of capacity needed for a future planning period can be obtained from one
or several plant sizes each having a different maximum capacity limit The choice
involves critical strategic decisions not only about the technology to be used but also
about whether capacity will be available iii one centralized or several geographically
dispersed locations Here management n lust consider not only production and
distribution costs but the effects of such decisions on competition the organizational
structure and managerial style, and the flexibility needed to adapt in future changes in
the environment Sometimes these strategic issues have a greater influence in the final
selection than the more quantifiable aspects pertaining to technology and costs
8
Capacity Planning
Activity C
If you will be asked to design an alternate plant size w.r.t.. your existing one/ what
solution you are likely to suggest'? What factors are you considering for this type of
decision?
…………………………………………………………………………………………
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7.4.1 Traditional Economic Analysis
Notwithstanding the importance of subjective factors, a proposal for capacity
expansion should fulfill certain economic criteria. When the investment is expected to
provide a satisfactory return without excessive risks within a given timeframe, the
expansion, project may be funded from the capital budgeting allocations, the
financial-performance measures derived from a cash-flow analysis can take the form
of a net present value (NPV). or rate of return on the required investment for new
capacity. Once the revenues and costs for the project have been estimated, the
calculation of such measures is routine, and can be computerized so that it can be
repeated for various assumptions.
Let us assume that the new capacity requirements of 3300 units per year, determined
from the previous example, can be met from three different plant sizes with the cost
characteristics listed in Table 7.2.
Let us assume that the new capacity requirements of 3300 units year, determined form
the previous example, can be met form three different plant sizes with the cost
characteristics listed in Table 7.2.
Table 7.2: Data for three alternative plant sizes
From the data in Table7.2, we note four points of special significance in capacity
studies : (i) An increase in plant size requires a large investment, but can lead to,
significant economics of scale near the full-capacity production volume. This usually
results for savings in construction and equipment per unit of capacity. (ii) Fixed costs
per unit become smaller, because items like utilities, supervision, insurance, etc., are
almost same over a wide range of plant capacity. (iii) Certain variable costs are also
allocated over more units, thus decreasing unit variable costs. (iv) Variable costs also
tend to be lower in large plants due to economics in raw-materials purchases and
shipping, and lower processing costs from more specialized equipment that are
economical only from more specialized equipment that are economical only for large
production volume. For larger plant sizes, with more advanced technology used for
production, we are. in effect, substituting capital for labour, resulting in higher
organizational efficiencies through application of more advanced management
techniques for planning and control of operations (computer-aided scheduling,
maintenance: inventory control and other functions) in most cases.
The concept of economics of scale has been a powerful force in shaping economic
activities both in the private and public sector. Organizations, where this plays an
important role, may come from industries, such as oil refining, steel, communications,
transportation and service systems, like supermarkets, departmental stores, education,
government. etc. In addition, the choice of the correct plant size must be determined
not only by cost performance; but also by the level of expected demand. This requires
the cost-volume-profit analysis in many cases.
7.4.2 Cost-Volume-Profit Analysis
The selection of optimum plant size given capacity requirements must be based on
adequate analysis of cash flows for each alternative plant size. This in turn requires the
9
estimation of total costs (TC) and total revenues (TR) at different production volumes for
Facilities Planning
UNIT 8 FACILITIES PLANNING

Objectives
After studying this unit, you should be able to understand the :
• meaning of capacity planning & its need:
• facility planning and its objectives:
• the layout planning & its type;
• the development of the process layout and approaches for product layout.
Structures
8.1 What is Facility Planning?
8.2 Need for Facility Planning
8.3 Facility Planning - Objectives
8.4 Types of Layouts
8.4.1 Product on Live Layout
8.4.2 Fixed Position Layout
8.4.3 Combination Layout
8.5 Product versus Process Layout
8.6 Developing the Process Layout
8.7 Combinational Approach for Development Process Layout
8.8 Conventional Approach for Developing Process Layout
8.9 Summary
8.1 WHAT IS FACILITY PLANNING

Facility planning exercise determines how an activity's tangible fixed assets best support
achieving the activity's objectives. In developing a layout for a system producing goods
or services, we seek the optimum allocation of space to the components of the system.
More specifically we try to determine the best arrangement of facilities and equipment
capable of satisfying anticipated demand (quantity, quality and timing) at lowest cost.
This is the phase when all the elements of the process are integrated and therefore special
care should be taken to create an environment conductive to high productivity and the
satisfaction of social and psychological needs of all the people at work. Facility Planning
is also known under other names such as Lay out Planning, Plant Layout, Facilities
Design, Facilities Planning etc.
8.2 NEED FOR FACILITY PLANNING

Following questions bring out facility planning opportunities:
i) What impact does facilities planning have on handling and maintenance costs?
It has been estimated that between 20 and 50 per cent of the total operating expenses
within manufacturing are attributed to material handling. It is generally agreed that
effective facilities planning can reduce these costs by at least 10 to 30%. Also good
layout provides easy access to equipment maintenance and repair, thus reducing
downtimes and maintenance costs.
ii) In what do organisations invest the majority of their capital and how convertible is
their capital once invested? 15
iii) What impact does facilities planning have on a facility's capability to adapt to
change and satisfy future requirements?
Since a particular solution to a layout problem is very costly and difficult to change.
it is desirable to maintain adequate flexibility to make it possible for the system to
adapt to changes. Economic considerations force a constant re-evaluation and
re-organisation of the existing systems, personnel and equipment. New machines
and new processes render older models and methods obsolele. Changes that are
constantly taking place in production methods, better equipment and materials
render it impossible for companies to retain their old facilities and layouts without
severely damaging their competitive position in the market place. To sum up,
changes in level of demand, design of product(s) or services and in technology often
result in layout adjustments that can be achieved only with flexibility the existing
configuration.
iv) What impact does facilities planning have on employee morale and how does
employee morale affect operating costs?
The layout design must assure every employee safe, healthy and comfortable
working environment. Due consideration must be given to health and safety norms
Specified in factory act by eliminating or minimizing possible hazardous conditions
in the place of employment. Any equipment or process that may create hazards to
workers' health and safety must be located in areas where the potential for employee
contact is minimal. A well designed layout, besides minimising losses in both
money and manpower resulting from industrial accidents; provides a working
environment that leads to a better utilisation of the all important human resource.
8.3 FACILITY PLANNING-OBJECTIVES
Facilities planning is a. continuing activity in any organisation that plans to keep abreast
of developments in the field. The problem presents a challenge to management because of
the complex interactions of several key factors and the difficulty in assessing their impact
on system performance. Although the methods available fall short of comprehensive
approach, they can provide good solutions to several layout sub-problems through
general guidelines, principles and techniques. Therefore rather than seeking an optimum
solution to the complete layout problem, the analyst relies on experience, good judgement
and some quantitative techniques to produce a satisfactory overall solution. Facilities
planning thus, although becoming more scientific, continues to rely greatly on the
experience of planners.
It may not be realistic or feasible to state one precise objective for any facility planning
exercise or the same objectives for all the facility planning exercises. Some typical
objectives considered while developing layouts are listed below. Their order of
importance depends-on the specific problem under consideration.
i) Support organisation's mission through improved material handling_ materials
control, and good house keeping.
ii) Effectively utilise people, equipment, space and energy.
iii) Minimise capital investment.
iv) Be flexible and promote ease of maintenance.
v) Provide for employee safety and job satisfaction.
These objectives can be restated as characteristics of good layout.
Is it time for relayout study?
Many a time layouts are originally designed efficiently. As the organisation grows and '
changes to accommodate a changing environment, the layout becomes less and less
efficient. This forces the need for a relayout exercise.
Following are some indicators pointing towards a relayout study (which can be _restated
as the characteristics of a poor, layout):
• Congestion in aisles and storage areas and poor utilization of space
16 • Excessive in process inventory and excessive work flow distances
Facilities Planning
• Continual production bottlenecks in some locations and simultaneous idle facilities
elsewhere
• Skilled workers doing excessive unskilled work
• Long operation cycles and delivery delays
• Worker anxiety and strain
• Accidents or near accidents
• Obvious lack of production control
• General feeling of confusion with employees often spending time in locating
products, components, materials, tools etc.
The main purpose of relayout studies is generally to maximise the profitability or .
efficiency of operations. Other purposes include minimising safety or health hazards,
facilitating crucial staff interaction, freeing up bottleneck operations, "and minimising
interference, noise or distractions between different operational areas.
Activity A
Do you propose the relayout of your factory facility location give the reasons for that.
……………………………………………………………………………………………
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……………………………………………………………………………………………
8.4 TYPES OF LAYOUTS

Process or Functional Layout
A process layout is the arrangement of facilities and equipments in groups according to

function performed. Different orders follow different paths through the system,
depending on their special processing requirements.
This grouping, in a process layout. results in departments like drilling, milling, sawing
turning, painting, receiving and shipping etc. It may be noted that there is no loss in
efficiency (in the context of operation) if machines used to convert materials into
products are located long distance apart. The problem is about the loss of time, wasted
effort and cost of moving materials. This grouping of machines by function (Fig. 8.1) is
characteristic of job shops and batch type production facilities.
8.4.1 Product or Line Layout
A product layout is an arrangement of facilities and equipment in the same sequence as

that of the operations needed to complete each unit of the product or the service offered.
Successive units follow the same path through the system. (Fig. 8.2) 17
Examples of such layouts, which are characteristic of mass or continuous production,
may be found in such industries as cement manufacturing*, oil refining*, machining of
engine cylinder blocks, crankshafts, domestic appliances, automobile assembly and mass
production of similar hard discrete items. In contrast to process layouts, product layouts
are not flexible since they are specifically designed for making or assembling a single
product.
8.4.2 Fixed Position Layout

A fixed position layout is the arrangement of facilities and equipment so that resources
needed in the form of workers, equipment, materials etc. flow to the item being produced
or serviced.
This type of layout (Fig. 8.3) is characteristic of such jobs as assembling large steam
turbines, ship building, bus body building etc. Unlike the previously discussed layouts,
this requires both people and machines to be brought to the product being made or
assembled.
This selection of a fixed position layout is often dictated by the complexity, the size or
some other unique feature of the task performed. The size and weight of a ship or jumbo
jet do not allow any alternatives. Similarly the maintenance of a steel mill, a power
plant,-or a building dictate that resources be moved to the place where the work must be
performed.
The crucial aspect in the application of this type of layout is the requirement for effective
scheduling, coordination and control of the productive activities involved and the
resources used in the process (project scheduling).
8.4.3 Combination Layout

Very often a combination of layouts is used. Typically, a process layout is combined with
a product layout. For example, in refrigerator manufacturing, a process-oriented layout is
used to produce various parts (i.e. metal forming, welding, heat treatment). For the final
assembly of the refrigerator, all these functions-are placed in a product-oriented layout.
Activity B
What relationships exist between the layout and location decisions''
……………………………………………………………………………………………
……………………………………………………………………………………………
……………………………………………………………………………………………
* The design of such systems is technology dependent and no flexibility or choice exists in the
design from the point of view of facility design. We therefore restrict our discussion here to
18 manual flow lines used for mass production of discrete items.
Facilities Planning
8.5 PRODUCT VERSUS PROCESS LAYOUT
Relative Advantages of Product Layout
i) Lower total material handling cost
ii) Lower total production time
iii) Less work-in-process
iv) Greater incentive for groups of workers to raise level of performance and greater
possibility of group incentive pay plans with broader coverage.
v) Less floor area required per unit of production.
vi) Simpler production control; fewer controls & records needed, lower accounting cost.
Relative Advantages of Process Layout
i) Less duplication of equipment and hence lower total investment in equipment.
ii) Greater flexibility of production. Flexibility with respect to accommodating
• design changes,
• production volume changes, and
• new products and new machines.
iii) Capability to handle breakdown of equipment by transferring the work to other
machines.
iv) Better and more efficient supervision possible through specialisation.
v) Greater incentive to efficient individual workers:
When to use Product and Process Layouts?
Product Layout
i) One or few standard products.
ii) Large volume of production of each item over a considerable period of time.
iii) Possiblity of carrying out effective motion and time studies and setting accurate
standards.
iv) When there is a scope for getting good labour & equipment balance.
v) Minimum of inspection required during processing.
vi) Minimum of very heavy equipment or equipment requiring special features
(isolation from general production areas etc.)
vii) Little or no occasion to use some machines for more than one operation.
Process Layout
i) Many types cir styles of products, or emphasis on special orders.
ii) Relatively Ion Column o production of individual items.
iii) Adequate motion and time studies difficult or impossible to make.,
iv) Difficult to achieve good labour and equipment balance.
v) Many inspections required during a sequence of operations.
Activity C
Give examples of organisations that have Predominantly Product, process and fixed
position layout.
……………………………………………………………………………………………
……………………………………………………………………………………………
……………………………………………………………………………………………
……………………………………………………………………………………………
19
Activity D
Consider a layout decision which has been made in your residence on at work. How was
the decision made? What were the important factors?
……………………………………………………………………………………………
……………………………………………………………………………………………
……………………………………………………………………………………………
8.6 DEVELOPING THE PROCESS LAYOUT

In order to realise the maxinuun potential of a new layout a systematic plan oral tack must
be followed. The final layout can be no better than the data upon which it is based. To
assure collection and analysis of the necessary supporting data, the following steps are
required in planning for and preparing the layout.
i) Analyse the product or products to be produced - this includes having available
or developing the following
a) Complete design drawings or assembly sketches from which a complete list of
parts can be developed.
b) The parts list which established those parts to be manufactured and/or
purchased and which must be provided for in the general plant area under
consideration.
c) Assembly charts indicating the sequence by which the parts are combined into
subassemblies and assemblies. The assembly chart eventually provided the basin
for arrangement of the production and assembly line patterns on the final layout
ii) Determine the process required to manufacture the product
a) Route sheets and operation sheets must be obtained or developed for each
manufactured part and assembly. For layout purposes only the sequence of
operations is required at this time. This sequence must, however, be complete.
Operation combinations and equipment selections should is best accomplished
at the time of preparing the layout charts and specific selections should be
delayed until that time.
b) Operation process charts arc prepared following the preparation of the route
sheets to provide a means of combining the assembly charts and route sheet
data in a single graphic form, at the same time incorporating inspect ion
operations necessary to assure maintenance of quality and to prevent further
expenditure of time rind money on non acceptable parts. By study of the
operation process charts the most logical location of the inspections in the
process can be determined.
iii) Prepare layout planning charts
The layout planning chart is the most important single phase of the entire layout process.
This chart serves as the medium for first tabulating and then combining the various
factors to be provided in the final layout for production of the product. it incorporates the
following:
a) Flow process showing all operations, moves, storages and inspections in
sequence.
b) Standard limes for each operation obtained from lime study or predetermined
time standards:
c) Machine selection.
d) Manpower requirements for the production activity.
e) Machine balance and Manpower balance.
f) Material handling loads, methods and equipment requirements.
In completing the layout planning chart, full review and analysis is required at each step.
If this is done, the layout of the manufacturing area is primarily a problem of convert ing
20 the
Facilities Planning
layout planning chart data to the physical plant area. In order to do this, the following
problems must be looked into.
iv) Determine the work stations
Layouts must be developed taking into consideration machine. operator. materials and
service area requirements. This is best accomplished by use of man and machine and/or
operation clans and scaled work station sketches.
v) Analyse storage area requirements
This should be studied bon h as to size and location relative to production activities. It
must be kept in mind that a minimum of three storage problems exist for the complete
process and for individual operations.
a) Storage of material or parts awaiting processing (Raw material storage).
b) In-process storage and
c) Finished goods storage. Minimum storage area requirements should be
determined prior to starting the actual layout.
vi) Establish minimum aisle widths
Clearance around the various pieces of equipment and departments should be determined
before starting the layout. Aisle widths will be primarily dependent upon materials
handling methods and equipment. work station clearance requirements and pedestrian
traffic.
With this data, the layout for the production area can be prepared. However, this alone
dries not make the total plant and we must therefore consider four more requirements as
fawns (steps: 7 - lit):
vii) Establish office requirements
These will depend upon the scope of operational activities to be included in the facilities.
viii) Consider personnel facilities and services
Allow for such items as first aid, lunch and refreshment centres. lockers, rest rooms,
ingress & egress, and parking.
ix) Survey plant services
Include utilities waste disposal maintenance, heating and ventilation.
x) Provide for further expansion
This may include provisions for addition of new product line, or increase sales demand
for present products.
Activity E
Critically evaluate the process adopted into manufacture the product / services in your
organisation.
……………………………………………………………………………………………
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8.7 CONVENTIONAL APPROACH FOR DEVELOPING

PROCESS LAYOUT
The right solution to the plant layout problem is important for following reasons:
Savings resulting from material handling costs (amounting to 311- 75 per cent of the cost
of the product in different industries)
Need for having to live for long time with a poorly laid out plant. Once a layout decision
is implemented. it is not ordinarily possible to make changes. Decision will have a long
term influence on the ; productivity. Besides, if safely is also in jeopardy'. t here it ill be
added problems of frequent accidents, lack of motivation of workers absentism etc 21
Due consideration must therefore be given to (i) the determination of relative location of
the various production departments within the plant area and (ii) the arrangement of
equipment and facilities within each of the departments. Besides production departments.
it is necessary to locate and arrange other sections like warehouses, tool rooms,
maintenance areas, power generation, compressed air, food services, wash rooms &
toilets, health and recreational facilities, offices etc.
Space requirements for the above facilities depend on several factors. Production
departments take into account space for housing the machines, movement of operators
and material handling equipment, in-coming, in-process and finished material storage,
tools and auxiliary equipment etc. Space requirements for certain other facilities could
depend on factors like type of manufacturing activity, number of employees in the plant.
Methods employed for developing layouts range from totally subjective ones to
completely objective ones making use of computer support. At one end, we have a layout
man moving a few machine templates on a board representing the factory area and
deciding the location and orientation of templates on the board based on his 'feel'. At the
other end of the spectrum, we have the number cruncher trying to develop the optimal
layout, examining several configurations against some specified measure of effectiveness.
Needless to say that the latter procedure involves collection of a lot of data to be used in a
model developed with several assumptions made to keep the problem tractable.
We are not considering the desirability or otherwise of selecting a model from this
spectrum at the present moment. It can be clearly seen that the desire in all these models is
to establish smooth movement of materials resulting in lower handling costs. This
requires the knowledge of material handling relationship between the different
departments besides the area requirements of the departments.
Material flow between departments often represents the desired closeness that. the layout
man feels, should exist between departments. This is depicted by means of a Relationship
Chart (Rel-Chart). Other considerations affecting the proximity relationship between
departments include convenience, safety, communication needs, use of same personnel
in .two or more departments (or machines) etc.
The standard codes used to represent closeness relationship between departments in
descending order are A, E, I, 0 and U. In addition, there is a code X to describe the
undesirability of having two activities close together eg. the out patient department and
the intensive care unit in a Hospital. A procedure for the construction of a Rel-Chart
based on flow of material is presented below:
Given below is the procedure to develop the From - To' Chart. Table 8.1: Proposed
Production Plan
Sequence Production The sequence of operations along
of per week with weekly demand for the product
1 A C - D - F 500 is given in Table 1 for a firm
2 B-A-C-D-F 1000 producing three products
3- E-B-C-A-F 300
Table 8.2: Flow Chart
TO
FROM A B C D E F
A 500 300 This Chart is developed by noting
the flow between departments to
1000 the next in their defined sequence.
B 1000 300
C 300 500
1000
D 500
1000
E 300
22 F
Work Systems Design
UNIT 9 WORK SYSTEMS DESIGN

Objectives
The objectives of this unit are to:
• get introduced to importance of job design and job standards in relation to
organisational objectives
• discuss about the traditional Engineering techniques and some behavioural
approaches as job rotation, enlargement and enrichment to enhance productivity
and satisfaction
• study the work measurement techniques for determining the time standard for a
job which is useful for costing, manpower planning, scheduling, incentives.
Structure
9.1 Introduction
9.2 Job Design
9.2.1 Job Design Techniques
9.3 Work Measurement
9.3.1 Work Measurement Techniques
9.4 Compensation
9.5 Summary
9.1 INTRODUCTION
This chapter presents Work Systems Design, which forms one important aspect of
design of production/operations systems.
Work Systems Design involves: (i) job design, (ii) work measurement and (iii) worker
compensation. Work design is closely related to other design decisions. Product
Design determines the type of activities the worker will be involved with. Facilities
Planning decisions affect Work Design : for example. Process layout requires broader
job content than product layout.
Work Design forms one of the earliest areas of Operations Management. Initially it
was viewed in the form of Scientific Management developed by F. W. Taylor. In
recent years research in Work Design has developed in other directions. For example,
the jobs which are expected to increase productivity are the ones which create
considerable job dissatisfaction thereby creating sonic sort of dilemma for job
designers. In view of the above facts, let's discuss first about the job design followed by
work' measurement
9.2 JOB DESIGN
Job Design is concerned with specifying the contents and methods of job. The
objective of job design is to develop a work system which is productive and efficient.
In reality, Job Design answers the questions: who will do the job, how the job will be
done and where the job mill be done.
Various job design approaches developed for satisfying the objectives are divided into
two types:
Traditional Engineering Techniques and Behavioural Approaches.
9.2.1 Job Design Techniques
i) Traditional Engineering Techniques
• Specialisation
• Work Methods Analysis
• Working Environment 31
ii) Behavioural Approaches to Job Design
• Job Rotation
• Job Enlargement
• Job Enrichment
• Socio Technical Systems
i) Traditional Engineering Techniques
Specialisation:
During the scientific management era of F. W. Taylor. management tried to increase
productivity through job specialisation. The rationale for_ job specialisation is that
workers. who need fewer skills, can be more easily trained and lower wages can be
offered for such specialised and repetitive jobs. The advantages and disadvantages
associated with job specialisation are listed below.
Advantages
For Workers For Management
1.Less responsibility 1.Lower wages
2.Little mental effort required 2.Simplified training
3.Low skill required 3.Higher Productivity
Disadvantages
For Workers For Management
1. Boring and monotonous jobs 1. Difficult to motivate
2. Little control over work 2. Worker dissatisfaction leading
to absenteeism, turnover and
quality problems
3. Limited scope for
advancement
Work Methods Analysis
Methods Study is the systematic recording and critical examination of the factors and
resources involved in existing and proposed ways of doing work, as a means of
developing and applying easier and more effective methods and reducing costs.
Methods Study basically deals with finding better ways of doing work and it helps
improve productivity by eliminating unnecessary work, avoidable delays and other
types of waste. These are achieved by
• Improved working procedures
• Improved layout
• Improved working environment
• Improved product design
The basic procedure of Methods Study consists of the following six steps:
i) SELECT the work to be studied
ii) RECORD all the relevant facts of the present/proposed method
iii) EXAMINE the facts critically
iv) DEVELOP the most practical. economic and effective method, with due regards
to all contingent circumstances
v) INSTALL the developed method as standard practice
vi) MAINTAIN the standard practice by periodic reviews
SELECT the work to be studied: While considering whether a method study for a
32 particular job should be carried out, the following factors are considered:
Work Systems Design
• economic
• technical
• human reactions
The following symptoms usually call for method study investigation:
• poor use of material, labor and equipment
• poor layout
• bottlenecks
• excessive fatiguing tasks.
RECORD the facts: In order to investigate the jobs, all the relevant facts should be
available. The facts can be obtained by observations, studying the records and
drawings, discussion with concerned persons in an appropriate form.
Charts and diagrams are the most frequently used recording techniques. The
commonly used charts/diagrams used in methods study are outlined below.
Flow Process chart is a device for recording a process in a compact form, as a means
of better understanding it and improving it. It shows the various steps or events (such
as Operation, Inspection, Movement. Storage said Delay) that occur during the
performance of work or during a series of; actions. The following systems are used in
constructing a flow process chart:
The flow process chart for GEAR MAKING is shown in Figure 9.1.
Activity A
Considering your organisation, can you just examine the method study that has been
under practice.
…………………………………………………………………………………………
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………………………………………………………………………………………….
Operations Process. chart is a process chart giving an overall picture by recording in
a sequence only the main operations (O) and inspections ( ).
The Man-machine chart describes the activities of a man and of the machine(s) lie is
tending. The chart helps in determining the number of machines each operator should
work or the optimum number of operator per machine.
This chart helps in visualising the proportion of work cycle during which the operator
and machine are busy or idle. Figure 8.2 shows a Malt-Machine chart for MIXING A
DRINK IN A BLENDER.
Activity B
Consider the experience in your Organisation-Develop a flow process chart for the
type of work you are engaged with.
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SIMO (Simultaneous Motion) chart is used to record simultaneously on a common

time scale, the therbligs (basic elemental motions) performed by both the hands of the
operator. The idea behind the use of therbligs is to break the jobs down into minute
elements and make improvements on the analysis of these elements by eliminating,
combining or rearranging them. Some of the commonly used therbligs are:
Search (looking for an item)

Hold (retaining an object after it been grasped)
Transport empty (reaching for an object)
Transport (moving hand with the object held in hand).
loaded
Simo chart is used while carrying out Micromotion Study (systematic study of human
motions to perform an operation), which aims at eliminating unnecessary motions and
determining the best sequence of motions.
34
Work Systems Design
The SIMO chart for the operation of SIGNING A LETTER is shown in Figure 9.4.
Figure 9.3 shows the work place layout for the operation.
Motion Study makes use of Principles of Motion Economy, which are used as
guidelines for designing motion-efficient procedures. These principles are classified in
three categories:
i) Principles related to use of human body
ii) Principles for arrangement of work place, and
iii) Principles for the design of tools and equipment.
The Flow Diagram includes a plan view of the work area under consideration, and a
line diagram indicating the path followed by the object under study and flow process
chart symbols 35
Super imposed on the lint diagram to indicate what happens to the object as it passes
through the process. Figure 9.5 shows the floe diagram for GEAR MAKING.
EXAMINE the facts: The recorded facts are, at this stage, systematically examined
by questioning everything about the job- the way the job is being done now, the.
materials that are being used, the tools and equipment, the working conditions etc.
DEVELOP the improved method: Once the questions like WHY, WHAT, WHERE.
WHEN, WHO and HOW are answered, the method study analyst can now try to put
the findings into practice. It is often difficult to generalize the procedure for evaluating
the various alternatives, since this depends upon the particular situation. Often,
judgment plays a vital role. The criteria need not be confined to the quantitative factors
alone. The methods study analyst is faced ,with the problem of predicting performance
time, fatigue, effort, energy expenditure, monotony and job satisfaction for various
alternatives. Man,, of these factors are treated as unquantiliable in the comparison of
alternative work methods.
INSTALL and MAINTAIN the improved method: After the best method for
performing work has been identified, this must be standardized. The motion patterns,
size, quantity of materials, tools, jig and fixtures, the machine and the working
conditions must be specified. All these factors, as well as, working conditions must be
maintained alter they have been standardized. A written standard practice, giving the
detailed account of the operations, must be followed.
Working Environment
Working environment has a significant impact on the person and on task performance.
There are a number of environmental factors such as temperature, humidity,
ventilation, illumination, noise etc. affecting worker performance. The work designer
must know how each factor affects the person or performance, how to diagnose the
problem and what solutions will be effective in different situations_
Environmental problems are the ones that involve the surroundings of the worker.
There is a relationship between the worker, the task and the environment as shown
below.
36
Work Systems Design
Environment may alone affect the worker (for example. being outside on a very hot
day). But the combination of environment and task has serious influence on the worker
(for example. hard work on a hot day).
The common environmental factors are outlined below.
Temperature: Human beings can perform under a wide range of temperature.
However, work gets adversely affected if temperatures are outside the comfort range.
Temperature problems are less problematic in offices than in factories.
Humidity: Humidity is an important variable for maintaining a comfortable working
environment. Temperature levels depend on humidity levels since human beings are
more sensitive to temperature variables at high humidities. High humidity requires
more cooling on a warns day: and more locating on a cold day, than love humidity.
Illumination: Illumination consists of both the quantity and quality of light. Each of
these may contribute to lighting problems. The amount of illumination depends on the
type of job. For example, more illumination is needed for detailed work. Lighting can
be classified in various ways such as:
• Primary and Secondary lighting
• General and Specialised lighting
• Natural and Artificial lighting
Primary lighting is the lighting required to perform a task, whereas Secondary
lighting is light needed to move about and for safety needs.
General lighting is lighting from overhead sources over abroad area. Specialised
lighting is needed for situations like checking quality defects.
Natural lighting is used widely due to its low cost Artificial lighting is used for
specialised lighting.
Usually, lighting problems; arise from the quality rather than quantity of illumination.
Glare and contrast are important aspects.
Glare occurs when a bright light shines in a person's eye and reduces its visibility of
the object to be seen. It can be from a light source or may be reflected from the object
itself. Hence, there should be proper shielding of light sources or relocation of sources
of reflected glare. For example, the computer display screen should be perpendicular to
the nearby window, to eliminate sources of direct or reflected glare.
Contrast is caused when the illumination level of the object is significantly different
from the visual surroundings.
Solutions to lighting problems include the following:
• Controlling the light source by shielding or relocation
• Changing the illumination level
• Changing the task to require less fine visual perception
• Changing the object to control reflectance.
Noise and Vibration
Noise is unwanted sound. Noise is caused by vibration of machines as well as human.
beings. Noise is annoying, thereby leading to errors and /or accidents. It can damage/
impair hearing if it is very loud. Noise limits are set by three criteria: hearing loss,
speech interference and annoyance. Intermittent noise causes less hearing loss than
continuous noise-because the hearing mechanisms have a chance for recovery before
each new exposure. Unwanted background noise has detrimental effect on oral
communication. Noise has a definite effect on work performance.
Measurement of noise levels and exposure times will indicate the extent of noise effect
Measures for tackling the noise problems include the following:
• isolating the person from the noise source by distance and /or barriers.
• Modifying the exposure time. .
• Use of earplugs. 37
Vibration is also an important factor in job design. Vibration can conic from various
sources like machines, tools vehicles, human activity. Corrective action for vibration
include use of shock absorbers, padding, cushioning, rubber mounting.
Activity C
Examine the working environment at your work place which has a significant impact
on your productivity. Give better solution for realocation.
…………………………………………………………………………………………
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………………………………………………………………………………………...
ii) Behavioural Approaches to Job Design
An effective job design is one which a person can do. one that a person wants to do,
and one whose output invaluable to the organisation.
There are two basic schools of thought in job design: efficiency school and behavioral
school
Efficiency school emphasizes on traditional engineering approaches to job design
such as job specialisation, methods study etc. But most of the specialised jobs are
found to be boring. monotonous and less satisfying, thereby leading to problems like
absenteeism, turnover and rejects. This has been highlighted by behavioural aspects
which point out that most workers do not like specialised jobs. They feel that
specialised jobs are not interesting and they want more control over these jobs. This
has led to attempts to make jobs interesting and meaning through approaches like Job
Rotation, Job Enlargement, Job Enrichment, Socio-technical system.
Job Rotation involves assigning different kinds of jobs to workers in turn. For
example, a clerk can be assigned jobs in recruitment, accounts, establishment,
academic sections on a rotating basis.
Job Enlargement involves giving the worker a larger proportion of work. This is also
called horizontal loading i.e. assigning additional work of same skill and
responsibility.
Job Enrichment involves giving the worker work of higher skill and responsibility.
For example, an assembly worker can be given the additional job of inspection.
However, before introducing the above approaches, one has to carry out further studies
on the need of such changes since all workers or jobs are not amenable to job
enlargement/ enrichment.
The Socio-technical Systems approach to job design attempts to develop jobs that
adjust the needs of the technology to the needs of the worker and workgroup. The
approach developed from studies of weaving mills in India and Coal mines in England
around 1950. These studies revealed that work groups could effectively deal with
many production problems better than management if they were allowed to make their
own decisions. The Socio-technical approach has been adopted in many countries. The
rationale underlying these studies is that the individual or work group requires a
pattern of work activities incorporating Task variety, Skill variety. Feedback, Task
Identity and Task Autonomy:
Task variety aims at providing optimum variety of tasks within each job. Too much
variety leads to inefficiency and too less variety leads to boredom.
Skill variety enables workers derive satisfaction from using a number of different
kinds of skill levels
Feedback means informing employees quickly about their performance
Task identity implies that sets of tasks should be separated from others by some clear
boundary
Task autonomy enables employees to exercise some control over their work.
One of the major drawbacks of this approach is the reluctance of managers to give
38 more authority to workers.
Work Systems Design
Activity D
Do you think job rotation & enlargement is necessary for an employee?
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9.3 WORK MEASUREMENT

Work measurement is the process which establishes the time it should take to perform
a precise task, under given conditions, employing a given method and given tools and
equipment when working at a defined work pace. This time is called time standard.
We note that Job Design and Methods Analysis concentrate on how the job is done,
whereas Work Measurement is concerned with determining the amount of time the job
should take.
From the definition of time standard. we see that the time study analyst makes
dual !measurements to obtain the following:
i) the time actually taken by the operator to perform the task, and (ii) the measure of the
worker's actual work pace compared to his concept of normal pace. The former
constitutes the physical measurement whereas the latter is a judgment made by the
time study analyst. Physical measurements can be easily made by means of various
measuring instruments. But, measurement of human work is much more complicated
and requires thorough understanding of work measurement and statistics.
Time standards are used by the operations manager for various purposes as follows:
i) Production planning
ii) Product costing
iii) Determining manpower requirements
iv) Determining optimum number of machines to be tended by an operator
v) Designing incentive schemes.
9.3.1 Work Measurement. Techniques
Although several techniques have been in use for developing time standards. the
following methods are the most important.
i) Stopwatch Time Study
ii) Work Sampling
iii) Predetermined Data
i) Stopwatch Time Study: By far, the most prevalent approach, to work
measurement currently used, is the stopwatch time study. In this technique, the times
and rates of working for the job elements, carried out under specified conditions, are
recorded and the data analysed sous to determine the time necessary for carrying out
the job at a defined level of performance.
The stopwatch study consists of the following steps..
i) Define the task to be studied, and seek the cooperation of the worker, supervisor
and management
ii) Break the job down into elements
iii) Time the job elements
iv) Determine the number of observations to make
v) Rate the worker's performance
vi) Determine the standard time
i) Defining the Task: The time study analyst should be thoroughly familiar with the
job. He ensures that the job is being performed efficiently before setting the time
standard. In other Words methods study precedes time study.
39
The cooperation of management and workers is very essential for the successful
conduct of the time study.
ii) Determining job Elements: After defining the tasks and seeking the cooperation of
all parties, the analyst breaks the job down into elements and obtains time for each
clement There arc several reasons for this phase of elementalisation. First some
elements not occur in every cycle. Second the worker's proficiency may not be the
same for all tic job elements. Third elemental breakdown helps in preparing a manual
of element limes that can be used to determine times for other jobs.
A typical breakdown of a packaging operation into elements is as follows:
a) Gel cartoons and wrapping paper
b) Position the wrapping paper
c) Position the part on the paper
d) Wrap
e) Place in cartoon
f) Cover cartoon
g) Put label on cartoon
h) Set the cartoon aside
In addition to the list of elements, the analyst collects some more facts on the time
study observation sheet shown below. These include the name of the operator,
description of the operation the department in which the operation is being carried out.
Figure 9.6 shows Time Study Observation Sheet. The time study summary is presented
in Figure 9.7.
iii) Timing the Elements: Once the job is broken down into different elements, the
analyst proceeds with actual measurement. The timing is usually done with a standard
decimal minute stopwatch as shown below. ( Figure 9.8 )
There are usually two methods of timing the elements: the continuous method and
the snapback method.
In the continuous method of timing, the watch is started form zero position at the
beginning of the study. The watch runs continuously and the analyst simply records the
stopwatch reading at the end of each element. The elemental times are determined at
the end by taking the difference between successive readings as shown below.
Element number Stopwatch reading Element time
(minutes) (minutes)
1 0.15 0.15
2 0.48 0.33
3 0.80 0.32
4 1.02 0.22
5 1.20 0.18
In the snapback method, the watch is also started from the zero position at the
beginning of the study. At the end of each reading, the analyst simultaneously notes
down the stopwatch reading and snaps back (by depressing the crown). As soon as the
pointer reaches zero reading, the crown is released and the pointer begins moving
again. Element times are computed as shown below.
Element number Stopwatch relation elemental times ,
minutes
1 0.15
2 0.33
3 0.32
4 0.22
5 0.18
40
Work Systems Design
41
Managing Information for
UNIT 10 MANAGING INFORMATION Production System
FOR PRODUCTION SYSTEM

Objectives
After going through this unit you should be able to:
• know the development of computer & communication technology and its
application in operations management;
• learn the concept and need of system in operations management:
• appreciate that operations system does not exist in isolation;
• have a sprit idea of objective(s) and methods of appraisal system in operations
management; and
• understand the impact of quality in information system.
Structure
10.1 Introduction
10.2 The Information-Oriented Costly and Corporate Activities
10.3 Need of the Systems
10.4 Cross Functions Systems and Operational Planning
10.5 Needs of Production Management and Work Organisation
10.6 Information Needs the Business Appraisal
10.6.1 Objectives of the Appraisal
10.7 Potential Benefits in Improving Management Information System
10.8 Information
10:9 Common Information Systems/Databases
10.10 Quality
10.11 Development of Production - Material Information System
10.12 Summary
10.1 INTRODUCTION
Knowledge is the key resource with which Management operates. Information and
intelligence are two essential ingredients of such knowledge. Utilization of
information from data source to decision-making is the index of management
efficiency. Management is responsible for important components of information, such
as, recognition of need, planning, implementing and operating the system. Attempt has
been made to make an understanding of corporate activities and the need of the
information flow among different departments. It has been explained how the
interdependence of functions shows the need for resource balance. Other issues like
information needs of business appraisal, objective of appraisal, methods of appraisal
are discussed. Information need of production content operational planning, product
information and the common database required for the production system etc, arc
highlighted at the end.
10.2 THE INFORMATION-ORIENTED SOCIETY AND

CORPORATE ACTIVITIES
Today the development of computer and communication technology (the combination
of which is referred to as IT. information Technology) has dramatically reduced the
53
cost, and increased the speed, reliability and global reach of information production
and distribution. This development has ushered in a new age which is basically
characterized by the production, distribution and utilization of large volumes of
information unfettered by the constraints of physical distances, and an ccompanying
increase in-IT employment. For the purpose of this paper, we will focus only of
electronic information that is transmitted between individuals or organizations
regarding events and ides via computer and communication equipment.
The concept of production management emerges with the development of the factory
system. As the factory system becomes more complicated, dedicated and integrated,
the tasks and functions involved in production management have been expanding. The
basic problem associated with traditional manufacturing systems is improper
information flow among various departments which results in problems such as
excessive inventories, large work in process, long manufacturing lead times, confusion
and congestion on the shop floor and poor utilisation of resources. Industries with
significant investments on capital equipment understand the importance of proactive
planning systems to manage and maintain. Industries that maintain their investments at
an optimum level of functionality and availability are able to realise the improvement
in profits along with effective4 capacity utilisations and revenues increase.
Liberalisation, privatisation and' globalisation have forced Indian industry to strive for
productivity and quality to face competition from multinational companies (MNCs).
Integrated approach to factory management has clearly demonstrated its impact in
many developed nations. In this, the role of computer aided integrated information
system is not only of vital importance but essential.
Activity A
Give three functions of a manufacturing firm (e.g. marketing, production, finance) and
show how are MIS could help integrate these functions. Do the same for a bank bank.A
retail store.
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10.3 NEED OF THE SYSTEMS

The major problems faced by manufacturing industries today can be identified as:
a) Plant capacity problems
b) Sub optimal production scheduling
c) Large work in progress inventory
d) Long manufacturing lead times
e) Poor utilisation of resources
f) Confusion and congestion in the shop floor
g) Errors in engineering and manufacturing records.
The above mentioned problems can be attributed to poor management of information
flow. There is a need for substantial change in outlook regards management of
factories affairs. In the past, computerisation, if done, was also limited to a few
planning and management functions and that too in isolation. These problems thus call
for better systems to plan and control production operations. The need is for an
integrated information systems, streamlining the information handling in the factory.
It is confusing that the word `system' has acquired two meanings. Its most common use
covers paperwork system-production planning, machine scheduling, inventory control
and management accounting. In a broader context it can be defined as being
organisational - `the complex grouping of human beings and machines, joined together to
achieve a goal or goals: (The term socio-technical system is also used for the same thing.)
To establish control over the òrganisational system% production managers need to have
knowledge of how this system works. They, must control (if they can) the variables of the
54 system and need information for this purpose. They need to know when
the system is going out of control. For all these purposes paperwork system are needed. Managing Information for
Inevitably production management will have some information on which base Production System
decisions- late order reports labour efficiency statements, machine breakdown data:
total cost of production etc. It may be produced in a timely way and citable corrective
action to be introduced if things are going wrong. Yet in many cases this tends not to
happen. The information available will not usually have resulted form a coherent and
well though though out plan, which relates the information to the objectives of the
managers of work groups in production. Usually information will have grown up more
by chance than design.
Activity B
What impact would (a) the technological revolution (b) Research and development (c)
product ranges (d) information explosion have on the need for information by
management in an automobile manufacturing company? A hospital? A university?
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10.4 CROSS FUNCTIONAL SYSTEMS AND
OPERATIONAL PLANNING
The 'broad production system' is only part of the overall company system. While the
production function may have the majority of the resources in the organisation, it
cannot exist as an independent activity. For example, if production control 'is mainly
concerned with the use of production resources and how these relate to inventories and
market demand, then it is essential that the related paperwork systems have to be cross
functional covering production, marketing stock control and distribution - if they are to
be truly effective in their purpose.
The interdependence of functions shows the need for resource balance. For example
the relationship between production capacity usage and inventory levels is often vital.
This suggests the need for short-term or operational planning where the various
resources are planned in order to achieve tactical goals.
Resource Systems
If the overall production system is concerned with the complex groupings of men and
machines, paperwork systems should be mainly, if not completely, concerned with
‘resources’ -inputs to the system and how these resources affect the outcome of the
system, helping to measure, plan and control resource use.
In most manufacturing companies the resources which are fixed and nearly permanent
are by far the most valuable. Plant the recruitment' can gradually reduce the work force,
but the ability to reduce either could be a problem. Direct labour for example, was once
considered by management accountants to be a variable cost, but now it is as fixed and
as variable as the administrative staff. Management accounting systems based on
absorbing the fixed cost and presenting, standard costs to production managers
comprising both fixed and variable elements, do not help in maximising the use of
production resources. They tend to hide the desirability of maximising the difference
between the variable costs that arc incurred in production and i he sales revenue
received for the products which are made.
Production Management
The concept of production management emerges with the development of the factory
system. As the factory system becomes more complicated, dedicated, and integrated,
the tasks and functions involved in production management have been expanding. This
makes comparison of the achievement in production management between firms very
difficult, if not impossible. The three basic functions Of production management have
been classified as production planning, resource planning and materials supply. The
three basic functions are elaborated into eighteen subjects as shown below:
• Design of manufacturing processes
• Management of product design 55

• Facility planning
• Work measurement
• Materials handling
• Production planning
• Purchasing management
• Control and Management of production progress
• Statistical quality control
• Storage and warehousing management
• Management, of occupational safety
• Management of equipment and tools
• maintenance management and reliability
• Data (released to production management) collection and analysis
• Implementation of production information system
• Suggestion systems
• Coherence of manufacturing and marketing
• Total quality management
Activity C
Make a list of management reports that the MIS might provide to ensure control
throughout for
i) a manufacturing firm
ii) a bank
iii) a hospital
iv) a chain of department stores.
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10.5 NEEDS OF PRODUCTION MANAGEMENT AND

WORK ORGANISATIONS
These are identified to be:
a) Closer links between production and other parts of the business systems, to ensure
better balance between capacities, stock levels and customer demand.
b) The introduction of interactive systems to answer 'what if?' types of question
c) Improved information flow to shop stewards and shop floor personnel, so
expressed that it is understandable
d) Better 'money' information to ensure that management and supervisors arc aware
of financial implications of decisions they make
e) An ability to relate information to objectives
10.6 INFORMATION NEEDS-THE BUSINESS APPRAISAL

Anyone who has the opportunity to redesign or introduce new production systems
should initially carry out a business appraisal of the production function and its
relationship with other parts of the business. There should be an environmental
analysis of the production function. The following should be covered:
56
1) What important changes will occur, in the next few years? These could include Managing Information for
the setting up or closing down of production lines, the use of new equipment, the Production System
establishment of new work organisations, general emphasis on some aspect of
resource utilisation. Each factor will need a new or developed paperwork system
to ensure that full benefit is being of will be obtained from it.
2) What are the overall objectives of the business (both now and in the future)? What
impact do these have on the production function and on production management?
Can objectives be established in a hierarchical way? Do objectives relate to
resources which have been allocated to production manager at all levels?
3) What are the greatest problems facing the production function? What might be
done to pull things right or to improve the situation?
4) Is it likely that improved systems will be of benefit in any of the situations
described in 1 to 3 above? If so could the benefits be quantified so that the cost
benefit of development can be calculated?
5) If systems are to be changed or new ones introduced, what priorities should be
established?
The completed approval should specify where systems development is required,
so among the more important elements in the report will be:
6) Where serious discrepancies have come to light between objectives, resource
allocation and information available to measure, plan and control such resources.
7) What key business, business elements and business decisions have been
identified?
8) What opportunities and benefits will exist from improving management
information?
9) What obvious advances in production efficiency could be obtained through the
use of computers, and particularly modeling, which will help to answer ‘what’ if
we did this?
The following is an example of a completed business appraisal for the type
recommended.
10.6.1 Objectives of the Appraisal
These are:
1) To determine the minimum paperwork systems and information requirements
which will aid the production function in measuring, planning and controlling its
resources, so that the function will help to achieve either who or in part the
corporate objectives.
2) To highlight the benefits which better systems and improved information will
help to achieve. These should include:
Identifying the changes which are occurring and are likely to occur in the production
environment - especially the external environment - and ensuring that appropriate
adaptation within the production function is carries out.
Achieving corporate objectives, particularly the wages/ added value ratio.
Planning the strategic as well as the tactical use of production resources.
The business appraisal team
This comprises the following personnel:
Works manager
Production managers of fabrics and pressing
Production trainees (2),
Systems analysis (one senior, one junior)
Shop steward where apropriate.
Method of appraisal used.
The following arc to be identified:
The production business 57
a) Products (product differences), machines. capacities
b) Relationship between product markets and current capacities.
c) Future product markets v future current capacities
d) Relationships between stock values and capacities
e) Contribution per product type
f) Cost, profit/volume relationships
g) Relationship between work organisation needs and overall business requirements
Information needs
These are seen to be concerned with:
a) Measurement - production line statements
b) Planning - operational planning
c) Control - by responsibility and resource
d) Motivation - general motivational systems
Current systems
The following are recorded in detail:
a) Planning and machine scheduling systems
b) Labor efficiency systems
c) Material control systems
d) Wages payment systems
Systems improvement is considered essential for the following activities:
a) Operational planning - all aspects
b) Material productivity
c) Role identification and design of appropriate systems, especially for:
Production management hierarchies
Resource allocation
Work organisation
d) Adaptation to external environment
General problems (faced during appraisal)
a) Lateness in production reports if any kind, particularly management accounting
control systems, is prevalent.
b) Administrative cost of supporting production system.
c) Lack of computer support in systems prevents production managers from
adequate decision making in many instances.
d) There is a need to develop closer links with other parts of the business, through
strategic and tactical planning.
e) Resource allocation based on inadequate plans and control systems needs to be
strengthened.
f) There is a need to develop new performance measurements to ensure that
operational planning is effective e.g.;
added value
contribution
Material yield
g) Inadequacy of available data.
58
Aggregate Production Planning
UNIT 11 AGGREGATE PRODUCTION

PLANNING
Objectives
Upon reading this unit you will get to know:

• Necessity of aggregate planning
• Linkage between different levels of production planning
• Steps in aggregate planning
• Sources of medium range production capacity
• Managerial importance of aggregate planning.
Structure
11.1 Introduction
11.2 Linkage between Long Term and Short Term Planning
11.3 The Purpose of Aggregate Planning
11.4 Steps in Aggregate Planning
11.5 Dimension of Production Capacity
11.6 Managerial Importance of Aggregate Planning
11.7 Summary
11.1 INTRODUCTION
If the demand for a company products was absolutely stable, there would be no need
for aggregate planning. The company can develop a production process and a
workforce level that would produce exactly the amount demanded every month in a
repeating cycle, while maintaining practically no inventory. However this is seldom
found to be true and the demand mix among the products do fluctuate over time.
The problem facing the company is to create production, inventory and the workforce
plans far enough in advance to satisfy the anticipated demand at minimum total cost
without harming the company's long terms strategy and viability. The output of the
planning process should be a period by period plan of how much of each product type
to produce, how much to add or remove from the inventory, how much the workforce
to be increased or decreased, how much over time work should be planned and, if
applicable, how much production should be subcontracted.
As the aggregate plan is based on satisfying expected intermediate term demands, it is
necessary that accurate forecasts of these demands be made. Due importance must be
given to seasonal factor while arriving at forecasts. In addition, intermediate range
wage rates, material prices and holding costs also affect optimal plans. All these
parameters must be properly considered.
Aggregate Planning is necessary in Production and Operations Management (POM)
because it provides for,
Fully loaded facilities and minimizes overloading and underloading, thus reducing
costs.
Adequate production capacity to meet expected aggregate demand.
Getting the most output for the amount of resources available, which is important in
times of scarce production resources.
Aggregate planning is the key to managing change in POM because the changing
patterns of customer demand and the plans for providing production resources that
adapt to those changes are fundamental to aggregate planning. 5
Production Planning & Scheduling
11.2 LINKING LONG TERM AND SHORT TERM
PLANNING
Decisions involving design and mix of products, the location and capacity of facilities
and design of production process are long term decision and they decide the
environment within which the production system must operate.
On the other hand Aggregate planning is the process of determining the company's
production, inventory and personnel levels etc. for three to twelve month ahead.
Aggregate plans act as interface (Fig-11.1) between strategic decision, which fix the
operating environment, and short term scheduling and control decisions, which guide
the company's day-to-day operations.
Aggregate planning typically focuses on manufacturing several aspects of
operations-aggregate production, inventory, and personnel levels-to minimize costs
over some planning horizon while satisfying demand and policy requirements.
Intermediate term planning is normally performed in terms of aggregate production
units and resources (hence the term aggregate planning) rather than for individual
products. Although in the intermediate term major facility and process changes usually
be expanded by using overtime - work, subcontracting production, hiring addition
workers, or even adding entire work shifts. This approach takes the demand pattern as
forecasted and focuses on minimizing the costs.
Fig. 11.1
11.3 THE PURPOSE. OF AGGREGATE PLANS
In this section we explain why companies need aggregate plans and how they
use them to take a macro view of their business. We also discuss how the
aggregate plan relates to a company's long-term and short-term plans. Only
qualitative aspect of the aggregate planning in discussed. Quantitative
explanation of aggregate planning is given in block -4 of MS-5.
Aggregation
The aggregate plan is useful because it focuses on a general course of action, consistent
with the company's strategic goals and objectives, without getting bogged down in
detail's, for example, it allows managers to determine whether they can satisfy
6 budgetary goals without having to schedule each of the company's thousands of
products and
Aggregate Production Planning
employees. Even. if a planner could prepare such a detailed plan, the time and effort
required to update it would make it uneconomical. For this reason, production and
stiffing plans are prepared by grouping together, or aggregating , similar products,
services, units of labour, or units of time. For instance, a manufacturer of bicycles that
products 12 different models of bikes might divide them into two groups, mountain
bikes and road bikes, for the purpose of preparing the aggregate plan, it might also
consider its work-force needs in the terms of unit of labour needed per month. In
general, companies aggregate products or services, labour, and time.
Following Definitions may be used for Aggregating Products:
− Items are the end products sold to customers.
− Families are groups of items that are processed on the same equipment and share
the same general machine setup.
− Product types are groups of product families that have similar cost structures,
holding costs per unit, productivities, and seasonal demand patterns.
Aggregate planning is normally done at the product type level of aggregation and at the
facility level, rather than at the corporate level.
Assigning items to families and product types is easier than it may at first appear. One
of the tricks to making this assignment is somewhat counter intuitive. Product types,
families, and item from a hierarchy, with product types being the highest level of the
three.
Selecting the aggregate measures of production and inventory is normally straight
forward because items within the same product type should be very similar physically
for example, the units may be expressed in terms of the number of appliances, number
of refrigerators, thousand of TV, or tones of steel produced and stored. Production
resources and capacity should be expressed in aggregate form as well. For example,
one of the variables to be determined by the plan is the amount of direct labour
(workforce level) needed, including the amount of overtime labour to use in each time
period. The measure of workforce or overtime would be expressed in labour-hours or
resources consumed in production, such as gallons of paint or hours of machine time
should be expressed in terms of the aggregate amount of each resource consumed to
produce one unit of the aggregate product.
Product Families: Sometimes, products families relate to market grouping or in the
case of production plans, to specific manufacturing processes. A fur can aggregate its
products or services into a set of relatively broad families, avoiding too much detail at
this stage of the planning process. Common and relevant measurements, such as units,
rupees, standard hour or litre, should be used. For example, consider the bicycle
manufacturer that has aggregated all products into two families: mountain bikes and
road bikes, this facilitates production planning for the assembly lines in the plant. A
firm that socializes in quick oil changes might aggregate the services it offers into two
categories: the basic service and special services.
Labour: A company can aggregate labour in various ways, depending on workforce
flexibility. For example, if workers at the bicycle manufacturer are trained to work on
either mountain bikes or road bikes, for planning purposes management can consider
its work force to be a single aggregate group, even through the skills of individual
workers may differ.
Alternatively, management can aggregate labour along product family lines by
splitting the work force into subgroups and assigning a different group to the
production of each product family devoting production lines and even entire plants to
separate product families. in service operations, such as a city government, workers are
aggregated by the type of service they provide: fire fighters, police officers, Sanitation
workers, and administrators.
Companies that aggregate labour along product lines must plan for change in economic
conditions and consumer demand that may cause cutbacks in production of some
product families and increases in production of others when such shifts occur, labour
may not be interchangeable. For example, in automobile assembly, production of
different product families takes place in scattered locations. In such cases, planning for
changes in work-force levels and the use of overtime by aggregating labour around
product families is the most practical approach. 7
Time: A planning horizon is the length of time covered by an aggregate plan.
Typically, the planning horizon is one year, although it can differ in various situations
to avoid the expense and disruptive effect of frequent changes in output rates and the
work force adjustment usually are made monthly or quarterly. In other words, the
company rather than days or hours. Some companies use monthly planning periods for
the near portion of the planning horizon and quarterly periods for the later portion. In
practice, planning periods reflect a balance between the needs for (i) a limited number
of decision points to reduce planning complexity and (ii) flexibility to adjust output
rates and work-force levels when demand forecasts exhibit seasonal variations. The
bicycle manufacturer for example may choose monthly planning periods so that timely
adjustments to inventory levels can be made without excessively disruptive changes to
the work force.
11.4 STEPS IN AGGREGATE PLANNING

1) Begin with a sales forecast for each product that indicates the quantities to be sold
in each time period (usually weeks, months, or quarters) over the planning horizon
(usually 3 months to 12 months).
2) Total all the individual product or service forecasts into one aggregate demand. If
the products are not additive because of heterogeneous units, a homogeneous unit
of measure must be selected that both allows the forecasts to be added and links
aggregate outputs to production capacity.
3) Transform the aggregate demand for each time period into workers, materials
machines, and other elements of production capacity required to satisfy aggregate
demand.
4) Develop alternative resource schemes for supplying the necessary production
capacity to, support the cumulative aggregate demand.
5) Select the capacity plan from among the alternatives considered that statistics
aggregate demand and best meets the objective of the organisation.
Activity A
Visit to some manufacturing company in your neighborhood. Study their forecast for
next year for different products. Suggest a suitable aggregate plan based on it.
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11.5 DIMENSIONS OF PRODUCTION CAPACITY

An essential part of aggregate planning is a comprehensive understanding of each
production system's capacities. If particular importance are the answers to the
following questions:
1) How much of each. production resources is available ? Production capacity in each
time period maybe constrained of machines.
2) How much capacity is provided by each type of resource? The amount of resources
required to produce a single products allows the translation of demand into
production capacity needs. Labour standards (labour-hours per product) and
machine standards (machine hours per product) are commonly used to translate
demand into the number of workers and machines needed:
3) At what step in production do we determine capacity? In product-focused
production, capacity may be determined by a bottleneck operation, or an operation
with the least capacity for a product. In other types of production, capacity may be
determined by the number of labour hours or machine-hours in a particular
production department or an entire factory.
4) How much does it cost to scale capacities up to down? The cost of hiring laying in
and recalling employees, for example, can affect plans for providing production
8 capacity.
Just-in-Time
UNIT 12 JUST - IN - TIME (JIT)

Objectives
Upon completion of this unit, you will get to know:
• What is the philosophy of just-in-time(JIT) operation

• Characteristics of just-in-time system
• Pull method versus push method of operation
• Prerequisite for J3T manufacturing Benefits of ET manufacturing
• Kanban system of manufacturing.
Structure
12.1 Introduction
12.1.1 Raw Material, WIP, Finished Goods
12.2 Stock Points in a Production- Distribution
12.3 Just-In-Time
12.4 Characteristics of Just-In-Time Systems
12.5 The Just-In-Time Manufacturing Philosophy
12.5.1 Prerequisite for JIT manufacturing
12.6 Elements of Manufacturing
12.6.1 Eliminating Waste
12.6.2 Enforced Problem Solving and Continuous Improvement
12.6.3 Benefits of JIT Manufacturing
12.7 JIT Purchasing
12.8 The Kanban System
12.9 JIT Implementation in Industries
12.10 Summary
12.1 INTRODUCTION
In financial parlance, inventory is defined as the sum of the value of raw materials,
fuels and lubricants, spare parts, maintenance consumables, semi-processed materials
and finished goods stock at any given point of time. The operational definition of
inventory would be : the amount of raw materials, fuel and lubricants, spare parts and
semi-processed material to be stocked for the smooth running of the plant. Since these
resources are idle when kept in the stores, inventory is defined as an idle resource or
any kind having an economic value.
Inventories are maintained basically for the operational smoothness which they can
effect by uncoupling successive stages of production, whereas the monetary value of
inventory serves as a guide to indicate the size of the investment made to achieve this
operational convenience. The materials management department is expected to
provide this operational convenience with a minimum possible investment in
inventories. The objectives of inventory, operational and financial, needless to say, are
conflicting. The materials department is accused of both stock outs as well as large
investment in inventories. The solution lies in exercising a selective inventory control
and application of inventory control techniques.
Inventory control has been attracting the attention of managers in India for a long time. 13
12.1.1 Raw Material, WIP, Finished Goods
For control purposes, it is very essential to study the inventory in detail- raw materials,
production components, work-in-progress and finished goods inventories should be
segregated as the reasons for their existence and the causes for their size are different.
Raw materials and production components are purchased from outside suppliers and
the reason for their existence is to uncouple the purchasing function from the
production function. The size of this inventory is depend upon factors such as internal
lead time for purchase, supplier lead time, vendor relations availability of the material
government import policy, in the case of imported material, the annual consumption of
the materials (ABC classification) and the relative criticality of the material (VED
classification).
Work-in progress inventory might exist merely because of the production cycle time or
could also be maintained for decoupling successive manufacturing operations. The
decoupling could be employed either for implementing an incentive scheme or to
enable each of the production departments to plan independently. The size of this
inventory is dependent on the production cycle time, the percentage of machine
utilization, the make/ buy policies of the company, and the management policy for
decoupling the various stages of manufacturing.
The finished goods inventory is maintained to assure a free-flowing supply to the
customers and for this the marketing department insists on substantial finished goods
inventory. The size also depends on the ability of the marketing department to push the
products, the, company's ability to stick to the delivery schedule of the client, the shelf
life and the warehousing capacity.
Two factors which influence the inventories of all types are: the accuracy and details of
the final forecast-all the inventories are geared for future requirements and are
therefore sensitive to this factor-and the available storage space-the logical sequence to
this factor is the shelf life of the items stored, a factor for consideration in the case of
perishable goods.
12.2 STOCK POINTS IN A PRODUCTION -
DISTRIBUTION
Figure 12.1 identifies the main stock points that occur in a production- distribution
system from raw materials and ordering of supplies through the productivity process,
culminating in availability for use. At the head of the system, we must have raw
materials and supplies in order to carry out the production process. If we are to be able
to produce at minimum cost and by the required schedule, these materials and supplies
need to be available. Therefore, we need to develop policies for deciding when to
replenish these inventories and how much to order at one time. These issues are
compounded by price discounts and by the need to ensure that delays in supply time
and temporary increases in requirements will not disrupt operations.
Figure 12.1 Main Stock Points in a Production-Distribution System

Adapted from Buffs, ES Modern Production/Operations Management, 7/e. Wiley Eastern Ltd.
As a part of the conversion process within the productivity system we have in process
inventories, which are converted to finished good inventories. The finished goods
inventory levels depend on the policies used for deciding on the production lot sizes
and their timing and on the usage rates determined by distributor's orders. High volume
items would justify different policies for production and inventory replenishment than
medium - or low - volume items. The production lot size decisions and their binning
14 are very
Just-in-Time
important in relation to the economical use of personnel and equipment and may
justify continuous production of a high volume item. On the other hand, low volume
items will be produced only periodically in economic lots. Again, we will need policy
guidelines to determine the size of buffer inventories to absorb the effects to
production delays and random variations in demand by distributors.
The functions of distributors and retailers are those of inventorying products to make
them available. Distributors and retailers often carry a wide range of items, and they
need replenishment policies that take into account this kind of complexity. They
commonly place routine orders periodically, ordering a variety of items from each
supplier. Price discounts are often an additional factor to consider.
Although the details of problems may differ at each level in the production-distribution
system, note that at each level the basic policy issues are in the inventory
replenishment process, focused on the order quantity and when to order.
12.3 JUST-IN-TIME
Just-in-Time (JIT) is a Japanese innovation, and key features of this were perfected by
Toyota. Some facets of the management practices Toyota developed are ideologically
related to Japan's unique customs, culture, and labour - management relations.
However there is nothing uniquely Japanese about JIT production and it is usable
anywhere. The concepts have been applied successfully in many companies
throughout the world. JIT production means producing and buying in very small
quantities just in time for use. It is simple hand to mouth mode of industrial operations
that directly cuts inventories and also reduces the need for storage space, racks,
conveyors, forklifts, computer terminals for inventory control and of course material
control personnel. Products are assembled just before they are sold, subassemblies are
made just before the products are assembled, and components are fabricated just before
the subassemblies are made - so work-in-process (WIP) inventory is low and
production lead times are short. To operate with these low inventories, the companies
must be excellent in other areas. They must have consistently high quality throughout
the organizations. To achieve this quality and coordination, they must have the
participation and cooperation of all employees. So TIT manufacturing or
manufacturing excellence is a broad philosophy of continuous improvement. More
important, the absence of continuous improvement. More important, the absence of
extra inventories creates an imperative to run an error free operation because there is
no cushion of excess parts to keep production going when problems crop up, causes of
error are rooted out, never to occur again.
The JIT transformation begins with inventory removal. Fewer materials are bought,
and parts and products are made in smaller numbers; that is the lot size inventories
thereby decrease. This immediately results in work stoppages. Production comes to
standstill because feeder processes breakdown or produce too many detectives and
d-there are no buffer stock to keep things going on. Once this happens, analysts and
engineers try to solve the problems and keep things going on. Each round of problem
exposure and solution increases productivity and quality too.
Just-in-time (JIT) is a philosophy of improvement through aggressively discovering
and resolving any problems or weaknesses that impede the organization's effectiveness
and efficiency. Basically, it seeks to eliminate all waste within the organisation,
including the waste of underutilizing the talents, skills, and potential of its employees.
Anything that does not contribute to add in value for an internal or external customer is
considered waste. The philosophy originated in manufacturing operations, but its
concepts have been applied in other area such as a means of work, service and
distribution. JIT can be very effective and powerful as a means of improvement.
Activity A
What is Just-in-time (JIT) production? How does it differ from Manufacturing
Resource Planning (MRP)? What is MRP-JIT system?
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15
Activity B
Visit a repetitive manufacturing facility in your area. What are the major causes of
inventory? Be sure to ask about lot sizes and setup times. Would a JIT system work in
this facility? Why and why not?
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12.4 CHARACTERISTICS OF JUST-IN-TIME SYSTEMS

Just-in-time systems focus on reducing inefficiency and unproductive time in the
production process to improve continuously the process and the quality of the produce
or service. Employee involvement and inventory reduction are essential to JIT
operations. Just-in-time systems are known by many different names, including zero
inventory synchronous manufacturing , lean production, stock less production
(Hewlett- Packard), material as needed (Harley - Davidson ), and continuous flow
manufacturing (IBM). In this section we discuss the following characteristics of JIT
systems : People involvement, Team Work, Discipline, Total quality management,
pull method of material flow, small lot sizes, short setup times, uniform workstation
loads, standardized components and work methods, close supplier ties, flexible work
force, product focus, automated production, and preventive maintenance.
12.4.1 People Involvement
Probability all management efforts have some behavioural aspects, because
management is working through other people to accomplish the organization's
objectives. Management plans and decisions only lay the groundwork. This is the
resulting human behaviour that determines a company's success or failure. Such terms
as zero inventory and stock less production have given some people the impression
that JIT is only an inventory program. JIT has a strong human resources management
components that must be recognized if the technical component is to be fully
successful. Much of the success of JIT can be traced to the fact that companies that use
it train their employees to have the appropriate skill, give them responsibility, and
coordinate and motivate them.
The JIT philosophy of continuous improvement and minimization of waste considers
waste to be any activity that does not add value to the product or serve the customer in
some way. One form of waste that is inconspicuous and difficult to combat is the
underutilization of human talent. JIT seeks to utilize more fully the creative talents of
employees, suppliers, subcontractors, and others who may contribute to the company's
improvement.
Businesses ultimately succeed or fail because of their people. JIT is no exception to
this rule. Because JIT is a system of enforced problem solving, having a dedicated
work force committed to working together to solve production problem, is essential.
JIT manufacturing, therefore, has a strong element of training and involvement of
workers in all phases of manufacturing.
12.4.2 Teamwork
First, and foremost, a culture of mutual trust and teamwork must be developed in an
organization. Managers and workers must see each other as co-workers committed to
the company's success.
Successful people involvement steams from a culture of open trust and teamwork in
which people interact to recognize, define, and solve problems. Sometimes it is
mistakenly assumed that this component is just another program, such as a suggestion
program or a quality circle program. People involvement can include these programs
and others, such as adhoc project teams that focus on specific improvement targets and
semi-autonomous work teams whose membership seldom changes. The involvement
components of JIT is much broader than a program or two: it is a management style
and a permanent company wide attitude of teamwork. So that each person works to
improve the company. People are encouraged to suggest ways to improve methods
16 which are quickly and fairly considered,
Just-in-Time
and the companies are open to trying something new that seem like a worthwhile
improvement.
Another important factor that is crucial to JIT is the empowerment of workers. This
means that workers are given the authority to take the initiative in solving production
problems. Rather than waiting for guidance from above, workers have the authority to
stop production at any time for such things as quality problems machine malfunctions or
safety concerns. Groups of workers are then encouraged to work together to quickly get
production going again. Once workers have identified problems. They are encouraged
to meet during breaks before work or after work to discuss the problems. Having
workers actively involved in problem solving is the objective of worker empowerment.
People, suppliers, workers, managers and customers must all be motivated and
committed to teamwork for JIT manufacturing to be effective.
12.4.3 Discipline
This open, improvement - driven atmosphere does not mean, however, that any
employee is free to work by any method he or she choose to try. Usually there is a
standard way each job is to be done. If an improvement is suggested and approved, a
new standard procedure will be adopted. This standardization prevents variations in
products or services which can cause defects. Defects occur- because some variation
has been introduced into a material or procedure that normally products good result.
When an efficient procedure that results in good quality is established, it is to be
followed until a better way is tested and approved. You can see that creativity and
openness to change are needed, but it is creativity in conjunction with teamwork and
discipline that achieves consistent good quality and leads to improvements.
12.4.4 Total Quality Management (TQM)
JIT systems seek to eliminate scrap and rework in order to achieve a uniform flow of
materials. Efficient JIT operations require conformance to product or service
specifications. JIT systems control quality at the source, with workers acting as their
own quality inspectors.
JIT manufacturing depends on a system of TQM being in place. Successful JIT
manufacturing goes hand-in-hand with an organization-wide TQM culture. Just as
everyone has to be involved in JIT, so also must everyone be involved in TQM. Total
commitment to producing products of perfect quality every time and total commitment
to producing products for fast delivery to customers have one essential thing in common
Both are finely focused on the overall goal of satisfied customers.
12.4.5 Pull Method of Material Flow
Just-in-time systems utilize the pull method of material flow. However, another popular
method of material flow is the push method. To differentiate between these two systems,
we consider the production system for a fast food dish at a restaurant. There are two
workstations. The dish maker is the person responsible for producing; this dish: the
cutlets must be prepared; buns must be toasted and then dressed with ketchup, pickles,
onions, lettuce, and cheese; and the cutlets must be inserted into buns and put on a tray.
The final assembler takes the tray, wraps the buns in paper, and restocks the inventory.
Inventories must be kept low because any buns left unsold after ten minutes must be
destroyed.
The flow of materials is from the dish maker to the final assembler to the customer. One
way to manage this flow is by using the push method, in which the production of the
item begins in advance of customer needs. With this method, management schedules
the receipt of all raw materials (e.g., vegetables, buns, and condiments) and authorizes
the
start of production, all in advance of the dish needs. The dish maker starts of production
no. of dish (the capacity of the griddle ) and, when they are completed, pushes them
along to the final assembler's station, where they might have to wait until he is ready for
them. The packaged dishes then wait on a warming tray until a customer purchases one.
The other way to manage the flow among the dish maker, the final assembler, and the
customer is to use the pull method, in which customer demand activates production of
the item. With the pull method, as customer purchase dish, the final assembler checks
the inventory level of dish and, when they are almost depleted, orders six more. The
dish maker produces the six dish and gives the tray to the final assembler, who
completes the assembly and places the dish in the inventory for sale. The pull method is
better for the
17
production of dish: The two workers can coordinate the two workstations to keep
inventory low, important because of the ten-minute time limit. The production of dish
is a highly repetitive process, setup times and process times are low, and the flow of
materials is well defined. There is no need to produce to anticipated needs more than a
few minutes ahead.
Firms that tend to have highly repetitive manufacturing processes and well-defined
material flows use just-in-time systems because the pull method allows closer control
of inventory and production at the workstations. Other firms, such as job shops,
producing products in low volumes with low repeatability in the production process,
tend to use a push method such as MRP. In this environment a customer order is
promised for delivery on some future date. Production is started at the first workstation
and pushed ahead to the next one. Inventory accumulates in anticipation of shipping
the completed order on the promised date.
12.4.6 Small Lot Sizes
Rather than building up a cushion of inventory, users of JIT systems maintain
inventory with lot sizes that are as small as possible. Small lot size have three benefits.
First, small lot sizes reduce cycle inventory, the inventory in excess of the safety stock
carried between orders. The average cycle inventory equals one-half the lot size: As
the lot size gets smaller, so does cycle inventory. Reducing cycle inventory reduces the
time and space involved in manufacturing and holding inventory,
Second, small lot size help cut lead times. A decline in lead time in turn cuts pipeline
(WIP) inventory because the total processing time at each workstation is greater for
large lots than for small lots. Also, a large lot often has to wait longer to be processed at
the next workstation while that workstation finishes working on another large lot. In
addition, if any defective items are discovered, large lots cause longer delays because
the entire lot must be inspected to find all the items that need rework.
Finally, small lots help achieve a uniform operating system workload. Large lots
consume large chunks of processing time on one workstation and therefore complicate
scheduling.
12.4.7 Short Setup Times
Reduced lot sizes have the disadvantage of increased setup frequency. In operations
where the setup times are normally low, small lots are feasible. However, in fabrication
operations with sizable setup times, increasing the frequency of setups may result in
wasting employee and equipment time. Theses operations must reduce setup times to
realize the benefits of small-lot production.
12.4.8 Uniform Workstation Loads
The JIT systems work. best if the daily load on individual workstation is relatively
uniform. Uniform loads can be achieved by assembling the same type and number of
units each day, thus creating a uniform daily demand at all workstations. Capacity
planning, which recognizes capacity constraints at critical workstations, and line
balancing are used to develop the monthly master production schedule.
12.4.9 Standardized Components and Work Methods
The standardization of components, called part commonality or modularity, increases
repeatability. For example, a firm producing 10 products from 1000 different
components could redesign its products so that they consist of only 100 different
components with large daily requirements. Because the requirements per components
increase, so does repeatability; that is, each worker performs a standardized task or
work method more often each day. Productivity tends to increase because workers
learn to do the task more efficiently. Standardization of components and work methods
aids in achieving the high-productivity, low-inventory objectives of JIT systems.
12.4.10 Close Supplier Ties
The JIT philosophy may extend beyond the walls of the company applying JIT, to
include, its suppliers. It has an impact on the entire logistics system, or "supply chain."
Because JIT systems operate with very low levels of inventory, close relationships
with supplier are necessary. Stock shipments must be frequent, have short lead times,
arrive on schedule, and be of high quality. A contract might require a supplier to
deliver goods to a factory as
18
Just-in-Time
often as several times per day. Purchasing managers focus on three areas: reducing the
number of supplier, using local suppliers, and improving supplier relations.
Typically, one of the first actions undertaken when a JIT system is implemented is to
pare the number of suppliers. Xerox, for example, reduced the number of its suppliers
for 5000 to just 300. This approach puts a lot of pressure on these suppliers to deliver
high-quality components on time. By placing a bigger percentage of its business with
its business with its best suppliers, the company can improve its quality and the
reliability of receiving items. The partnership is a long term agreement so the
companies can develop a smooth working relationship. The desire is for the supplier to
become an extension of the company so that the supply chain is a seamless
organization that works to serve the ultimate customer better than any competing
supply chain could. The JIT company can also benefit from the supplier's expertise by
having supplier representatives participate in the design phase of few products and
recommend improvements. They also work with their suppliers vendors, trying to
achieve JIT inventory flows throughout the entire supplier chain.
It can be beneficial to a supplier to work in such a relationship, particularly with a high
volume manufacturer. When a company reduces the number of suppliers for an item,
the volume of purchase from the remaining supplier or supplier can increase
dramatically.
Continuous improvement is central to the philosophy of JIT and is a key reason for its
success.
12.4.11 Flexible Work Force
Workers in flexible work forces can perform more than one job. When the skill levels
required to perform most tasks are low, a high degree of flexibility in the work force
can be achieved with little training. In situations requiring higher skill levels, such as at
the Hi-tech industries, shifting workers to other jobs may require extensive, costly
training. Flexibility can be very beneficial. Workers can be shifted among workstations
to help relieve bottlenecks as they arise without resorting to inventory buffers. This is
an important aspect to the uniform flow of JIT systems. They can also step in and do
the job for those on vacation or out sick. Although assigning workers to tasks they
don't usually perform may reduce efficiency, some rotation relieves boredom and
refreshes workers.
12.4.12 Product Focus
A product focus can reduce the frequency of setups. If volumes of specific products are
large enough, groups of machines and workers can be organized into a product layout
to eliminate setups entirely. It volume is insufficient to keep a line of similar products
busy, group technology can be used to design small production lines that manufacture,
volume, in families of components with common attributes. Changeovers from a
component in one product family to the next component in the same family are
minimal.
12.4.13 Automated Production
Automation plays a big role in JIT systems and is a key to low-cost production. Sakichi
Toyota, the founder of Toyota, once said "whenever there is money, invest it into
machinery". Money freed up because of JIT inventory reductions can be invested in
automation to reduce costs. The benefits, of course, are greater profits, greater market
share (because prices can be cut), or both. Automation should be planned carefully,
however, many managers believe that if some automation is good, more is better. That
isn't always the case.
12.4.14 Preventive Maintenance
Because JIT emphasizes finely tuned material flows and little buffer inventory
between workstations, unplanned machine downtime can be disruptive. Preventive
maintenance can reduce the frequency and duration of machine downtime. After the
technician has performed routine maintenance activities, he/she can rest other parts
that might need to be replaced. Replacement during regularly scheduled maintenance
periods is easier and quicker than dealing with machine failures during production.
Maintenance is done on a schedule that balances the cost of the preventive
maintenance program against the risks and costs of machine failure.
Another tactic is to make workers responsible for routinely maintaining their own
equipment and develop employee pride in keeping their machines in top condition.
This
19
tactic, however, typically is limited to general housekeeping chores, mini lubrication,
and adjustments. High-tech machines need trained specialists. Doing even simple
maintenance tasks goes a long way toward improving machine performance.
12.4.15 Production Methods
Processes are designed so that there is less specialization of workers. The physical
layout is arranged so that a worker can operate two or three different machines, thus
providing flexibility in processes that might precedes the assembly line. The benefits
that result from this organisation of multi-function workers are:
• reduction of inventory between what would otherwise be separate processes
• decrease in the number of workers required, resulting in a direct increase in

productivity
• increased worker satisfaction because of more broadly defined jobs
• multi-functional workers can engage in teamwork
There are three elements of job standardization that are included on a standard
operation sheet stacked up for all workers to see:
Cycle time, operations routing, and standard quantity of work in process.
Based on the computed cycle time that is derived from market demand, the aggregate
number of workers required to produce one unit of output in the cycle time is
determined. Rebalancing may then be necessary to schedule for minimum labour input
for a given output objective. The standard quantity of work input for a given output
objective. The standard quantity of work in process indicates the in-process inventory
required for smooth flow.
The smoothing of production is regarded as the most critical element in the

Just-in-Time objective. As will be described in more detail under the heading Kanban
which follows, workers go to the preceding process to withdraw the required parts and
components for their operations. If there are fluctuations in the rates at which these
materials are withdrawn, then the preceding process must hold buffer in-process
inventories to give off the-shelf service. The required in-process inventories would
increase also for upstream processes. This results in the objective of minimizing
production fluctuations in the final assembly line by scheduling small lots of individual
models, and focusing "all out" efforts on minimizing setup times for all processes.
Given your current understanding of Japanese business practices, would you like to
work for a Japanese corporation in your homeland? What would be the positive aspects?
The negative aspects?
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12.5 THE JUST-IN-TIME MANUFACTURING

PHILOSOPHY
For years manufacturing firms have sought to provide products with the most value for
lowest cost. Now the leading firms provide products with the most value for lowest
cost with the fastest response time. Quick response to market demands provide a
powerful, sustainable competitive advantage. Indeed, time has emerged as a dominant
dimension of global competition, fundamentally changing the way organization
compete?' It is no longer good enough for firms to be high-quality and low cost
products. To successes today, they must also be first in getting products and services to
the customer fast. JIT is the weapons of choice today in reducing the elapsed time of
20 this cycle.
Just-in-Time
12.5.1 Prerequisites for JIT Manufacturing
The basic idea of JIT is rather simple- drastically reduce work-in-process (WIP)
inventories throughout the production system. In this way, products flow from
suppliers to production to customers with little or no delays or interruptions beyond the
amount of time they spend being produced at work centers in manufacturing. The
overall objective of JIT manufacturing is to reduce manufacturing lead times, and this
is achieved by drastic reduction in WIP. The result is a smooth, uninterrupted flow of
small lots of products throughout production.
Most successful JIT applications have been in repetitive manufacturing, operations
where batches of standard products are produced at high speeds and high volumes with
materials moving in a continuous flow. The Toyota automobile factories, where the
notion of JIT may have started, are perhaps the best example of the use of JIT in
repetitive manufacturing. In these factories, the continuous of products makes
planning and control rather simple, and JIT works best in these shop-floor situations.
Successful use of JIT is rare in large highly complex job shops where production
planning and control is extremely complicated. Smaller, less complex job shops have
used JIT, but these companies have taken many steps to change operations so that they
behave somewhat like repetitive manufacturing. We will discuss more about this in the
next section.
JIT does not come free-certain changes to the factory and the way it is managed must
occur before the benefits can be realized. Among these changes are:
1) Stabilize production schedules.
2) Make the factories more focused.
3) Increase production capacities of manufacturing work centers.
4) Improve products quality.
5) Cross-train workers so that they are multi skilled and competent in several jobs.
6) Reduce equipment breakdowns through preventive maintenance.
12.6 ELEMENTS OF MANUFACTURING

We will discuss JIT by examining its important components, and controlling
production, and several of its ongoing activities.
12.6.1 Eliminating waste
Eliminating waste of all kinds is the deep-seated ideology behind JIT Shigeo, a JIT
authority at Toyota, identified seven waste in production that should be eliminated.
Table 12.1 lists and describes these waste.
Table 12.1: Toward Eliminating Waste in Manufacturing
A recognised JIT authority and engineer at the Toyota Motor company, Shigeo Shingo,
identifies seven wastes.
1. Overproduction: Make only what is needed now.
2. Waiting: Coordinate flows between operations and balance load imbalances by flexible
workers and equipment.
3. Transportation : Design facility layouts that reduce or eliminate materials handling and
shipping.
4. Unneeded production : Eliminate all unneeded production steps.
5. Work in Process (WIP) inventories : Eliminate by reducing setup times, increasing
production rates, and better coordination of production rates between work stations:
6. Motion and Effort : Improve productivity and quality by eliminating unnecessary human
motions, make necessary motions more efficient, mechanize, then automate.
7. Defective products : Eliminate defects and inspection. Make perfect products.
Source : R Hall, Attaining Manufacturing Excellence ( Homewood, IL: Dow Jones- Irwin 1987)
26. 21
12.6.2 Enforced Problem Solving and Continuous Improvement
In traditional manufacturing in-process inventories allow production to continue even
if production problems occur : thus, high machine and worker utilization is achieved. If
defective products are discovered, machines malfunction, or material stock outs occur,
in process inventory can be used to feed what would otherwise be idle workers and
machines. The in-process inventory covers up production problems in traditional
manufacturing. Behind JIT is the continuous drive to improve production process and
methods. Toward that end, JIT strives to reduce inventories because high inventory
levels are thought to cover up production problems. By drastically reducing in-process
inventories, production problems are uncovered and production stops until the causes
of the production problems are solved. Only when the machine is fixed, the quality
control problem is solved, or the cause behind the stock out is found and corrected only
then can production begin again.
JIT is really a system of enforced problem solving. There are few safety factors in JIT.
Every material is expected to meet quality standards, every part is expected to arrive
exactly at the time promised and precisely, at the place it is supposed to be, every
worker is expected to work productively, and every machine is expected to function as
intended without breakdowns. Managers in JIT manufacturing have a choice. They can
put a huge effort into finding and solving the causes of production problems, or they
can live with an intolerable level of interruption. One of the approaches to
implementing a JIT program is to reduce in-process inventories incrementally in small
steps. At each step, different production problems have been removed.
But the job eliminating production problems is not over. Vigilance in continuing to
study potential problem areas is needed to ensure continuous improvement. Japanese
manufacturers have long practiced what they called kaizen, the goal of continuous
improvement in every phase of manufacturing. Managers may encourage workers to
reduce in process inventories a step further to see if any production problem occur,
thus identifying a target for the workers to eliminate. Machine setups may be studied
with workers and managers working to strip away the fat so that setups are almost
instantaneous. Japanese manufacturers have long used the term less than a minute set
up, meaning that their goal is to have all setups take less than a minute.
12.6.3 Benefits of JIT Manufacturing
Some of the benefits that a JIT system provides are:
1) Inventory levels are drastically reduced.
2) The time it takes for products to get through the factory is greatly reduced, thus
enabling factories to engage in time based competition, using speed as a weapon to
capture share.
3) Product quality is improved, and the cost of scrap is reduced. Product quality
improves because of worker involvement in solving the causes of production
problem and with smaller lots, defective parts are discovered earlier.
4) With less in-process inventory, less space is taken up with inventory and materials
handling equipment. Workers are closer together so that they can see each other,
communicate more easily, work out problems more efficiently, learn each other's
jobs, and switch job as needed. This promotes teamwork an-tong workers and
flexibility in work assignments.
5) Because the focus in manufacturing is on finding and correcting the causes of
production problems, manufacturing operations are streamlined and problem-free.
12.7 JIT PURCHASING

The same pull type approach in JIT is applied to purchasing shipments of parts from
suppliers. In JIT purchasing, supplier use the replacement principle of Kanban by
using small. Standardize containers and make several shipments daily to each
customer. If Kanban is used by a supplier. Kanban cards authorize the movement of
containers of parts
22
Scheduling & Sequencing
UNIT 13 SCHEDULING & SEQUENCING

Objectives
Perusal of this unit will enhance student's :
• Understanding of the importance of scheduling and sequencing in operations

management
• Appreciation of the role played by effective scheduling and sequencing in
reducing incidence of changes and cutting down manufacturing cycle time
• Learning of the criticality of correct scheduling and sequencing in improving
response and imparting flexibility to cope with changing needs and wants of
customers
• Acquiring working knowledge of various techniques for scheduling and
sequencing of mass, batch and job shop types of production systems
• Capability in understanding the role of computers and information technology in
obtaining optimal solutions to problems of scheduling and sequencing in very
short time.
Structure
13.1 Introduction
13.2 Situations Requiring Scheduling
13.3 Classifying Production Systems
13.4 Scheduling Mass Production Systems
13.5 Scheduling Batch Production Systems
13.6 Scheduling Jobshop Production Systems
13.7 General Principles of Scheduling
13.8 Summary
13.1 INTRODUCTION
Scheduling is the preparation of timetable of activities or action plan for a specific
period. Since it has to be drawn up before the commencement of that period - a day, a
week, a fortnight or a month, it incorporates projected future activities and events of a
firm.
It is not unusual for companies to prepare a timetable of labour requirements to meet
target production levels within a specific period; it would be of little value if materials
required for performing those operations are not available. Similarly, a good schedule
of activities cannot be prepared until we have frozen the method of manufacturing
(sequence of manufacturing process), we ensure that machines are available and in
running condition, all production accessories like jigs, fixtures, tools, dies, punches,
gauges have not only been designed, but also fabricated and are ready for use, we have
drawn up all productions schedules and sequences including route cards, progress
sheets etc. and we have reliable source of electricity supply or alternatively, standby
arrangement for power generation and supply.
Scheduling of industrial activities or tasks is therefore, a very complex operation as it
involves simultaneous consideration of all the above factors besides the demands of
customers and commitments made to them by the sales personnel.
13.2 SITUATIONS REQUIRING SCHEDULING
Scheduling problems are not only common when programming an individual machine
or equipment but also for programming the entire manufacturing plant. Obviously, the 33
13.3 CLASSIFYING PRODUCTION SYSTEMS

Production systems present a very wide spectrum of patterns of working for the
conversion of input resources like men, machines, methods, measurement, message
(information and communication), motive power (energy), money acid management
into output in the form of goods and services which are valued by customers.
Production systems can he classified into three categories as below:
a) Mass Production
When goods and services are produced by performing same activities in specified
sequence repetitively, we call it a flow shop or mass production system. It uses special
purpose machinery designed and built to perform specific individual operations in that
company. Henry Ford, the guru of mass production, introduced 'assembly line' concept
in 1913 for assembling Fords Cars in large quantities. Henry Ford opined that any task,
however gigantic and daunting, when split into small elements, becomes easy to learn
and perform. The entire job was divided into small elements which were grouped
together to form stages of manufacture on a flow line basis. The material between the
stages may be moved manually (as in the case of assembly benches for manufacturing
electric fans etc) or on conveyors moving at predetermined speed (for instance, for
assembling TV sets or Maruti Cars).
b) Batch Production
When a range of products have to be manufactured in quantities which are reasonable
hut not large enough to go in for dedicated production line (or assembly line), we go in
for production in batches or lots which are convenient and acceptable without adding
to the cost of manufacturing.
In batch production systems, general purpose machines and equipment are used and
these are grouped together functionwise. All turning machines are located in one area
and the department may he referred to as "turning shop Similarly, the manufacturing
plant may have drilling, grinding milling, sub assembly, assembly, painting and testing
shops. In such situations, material is moved in batches of say 50, 100, 1000 etc from
one shop to another until it is packed and dispatched to its destinations. Flow of
material within the firm tends to be complex and distances traveled are longer as they
are circuitous.
c) Job Shop Production
In jobbing production system, variety of products is larger than the batch production
and quantities to he produced at a time are significantly lower. In jobbing industry, it is
very difficult to predict the type of work and its requirement in terms of demand.
Besides, each order or job maybe quite different in terms of operations, their sequence
and time taken at a workstation.
A job shop would also use general-purpose machines, grouped together into
departments only when the total volume of business is large. Job shops are usually
small and suffer from lack of support services and functions. Uneven loads at different
machines or departments is quite common in practice.
34
13.4 SCHEDULING MASS PRODUCTION SYSTEMS
Mass production systems are appropriate when volume of demand is large and product
variety small. It can take the form of continuous production lines working round the
clock, seven days a week as in many chemical and processing plants or it can be an
intermittent assembly line like assembly of cars on two shift basis.
It would be ideal production system if we have to produce large volumes of one
product (without any changes of design) continuously. For example, Maruti Udyog Ltd
has several assembly lines for assembling different models of cars. However, owing to
large volumes, one assembly line is totally dedicated to Maruti 800 model sold
domestically. Currently, the volume of demand is so high that additional quantities are
manufactured on the second assembly line which caters for the `tatkal' and èxport
model'. Assembly line technology is used very widely for assembling TV sets,
electrical appliances, computers, electronic goods, toys etc.
Assembly lines are typically as below :
Let us assume that the work content of each of the eight stages of assembly of an
appliance is as below :
Stages Work Contact (minutes) Idle Time (minutes)
S1 4.90 0.10
S2 4.90 0.10
S3 4.80 0.20
S4 5.00 -
S5 4.90 0.10
S6 4.90 0.10
S7 4.90 0.10
S8 4.70 0.30
TOTAL 39.00 1.00
If each person is given one assembly independently, he will be able to assemble the
following number of appliances :
Available time = 8 x 60 minutes
(8 hours of work) = 480 minutes
Personal time = 30 minutes
Working time = 450 minutes
Total no. of appliances that will
450
be assembled in a day by one person = =11.54
39
say11
if we engage 8 person in the assembly of these electrical appliances, we shall get a
daily production of 8 x 11 = 88 appliances.
a) However, if we can go in for assembly line splitting/ he entire manufacturing line
of 39 minutes into eight stages as shown above, the throughput rate of the system
will be constrained by the slowest stage viz S4 which is 5 minutes.
Production of appliances per day = 450/5
= 90
This approach is extremely important for high volume mass
production systems and is known as Line Balancing.
b) If through a re-arrangement of some elements of task either by better grouping or
by making slight changes in tooling etc, we are able to modify the work content of
eight stages as below :
35
In this revised line balancing of tasks at different stages,

production of appliances per day = 450/4.88
= 92.2
say 92
c) Usually it is more rewarding to change the design of the appliance or layout of
components within the same appliance so that there is a decrease in the total work
content of the job in such a way that the bottleneck stage (S-4) stands to gain the
most.
Stages Work Content (minutes) Idle Time (minutes)
S1 4.75 0.03
S2 4.76 0.02
S3 4.78 -
S4 4.70 0.08
S5 4.74 0.06
S6 4.75 0.05
S7 4.76 0.04
S8 4.76 0.04
38.00 0.32
In this revised line balancing,
production of appliances per day = 450/4.78
= 94.14
say 94
It is observed that with small changes in the work content of stages of production on
the assembly line, we are able to increase the output rate. Parameter of line efficiency
is often used for measuring the effectiveness of line balancing.
It is the ratio of the total stage time and total cycle time
39 ×100
Line efficiency = for case (b)
8 × 4.88
= 99.89%
39 × 100
Line efficiency = case (c)
8 × 4.88
36
= 99.37%
Activity A
Maruti 800 is assembled on a conveyor belt with 30 stages, roughly well balanced in
terms of cycle time for each stage. The slowest stage has a cycle time of 1.5 minutes
and the cycle time at other stages is no more than 1.4 minutes. Each stage is manned by
3 to 5 workers depending upon the total work content at that stage. What would be the
increase in production per shift if the work content of the slowest stage is brought
lower than 1.4 minutes.
…………………………………………………………………………………………
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13.5 SCHEDULING BATCH PRODUCTION SYSTEMS

Batch production systems are very common as in a large number of industries. Quite a
few products are required to be manufactured in quantities which are not large enough
for assembly line technology. In these situations, similar machine and processes are
grouped together into specialist shops and departments and materials are moved from
one to another in line with the requirement of process sequence. Various issues that
often crop up in batch production are :
a) Determining optimum size of batch / lot size
When production of annual requirements of a product is split into batches so as to meet
the demands of market without building high levels of inventory, we have to determine
the optimum batch or lot size for production. The various costs involved are cost of
setting up or changeover and the cost of stockholding or carrying inventory. Let us
assume :
A = annual demand in quantity or units
C = change even or setting up costs
N = number of production batches per year
R = economic batch size
U = unit cost of production
i = cost of carrying inventory in fractions
Consequently, value of Q obtained when first derivative will be equal to zero, will
correspond to overall cost minimisation i.e. 37
Often, a batch size `Q' is made at a machine and then transferred in one lot to the next
machine in sequence.
Another variant of this mode of production is when the material is transferred to the
next stage while the lot is being manufactured at the first machine.
Since the second derivative will be positive, value of Q for overall cost minimization
can be determined by
Activity B
For an item of product, annual demand is 26,000 units and can be produced at the rate
of 1000 pieces per week, at a cost of 1000 pieces per week, at a cost of Rs 26/- per unit.
If the cost of changeover is Rs 50/- per occasion and cost of carrying inventory is 20%,
what is the economic size of production batch ?
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38 …………………………………………………………………………………………
Issues in Materials Management
UNIT 14 ISSUES IN MATERIALS

MANAGEMENT
Objectives
After studying this unit, you should be able to:
• understand the concept of material;

• appreciate the importance of materials in manufacturing industries;
• understand why proper management of materials in required; and
• know the various issues in materials management.
Structure
14.1 Introduction
14.2 The Concept of Materials
14.3 Importance of Materials
14.4 Need for Materials, Management
14.5 Issues in Materials Management
14.6 Summary
14.1 INTRODUCTION
Historically, factors of production as considered by early classical economists were:
Land, Labour and Capital. These three factors of production were not adequate later
on in the context of manufacturing organisations during and after the industrial
revolution. At this stage the five M's were considered as the main factors of
production in the modern manufacturing organisation The 5M's are Men, Money,
Machines, Materials and Methods. The relative internal importance of these five
factors varies according to type of manufacturing organisation and also over a period
of time.
For example, during the early periods labour was comparatively more important
among land, capital and labour, Later on with the advent of machines; men, machines
and capital became equally important; because machines still needed to be operated
by men. Still later, when emphasis shifted towards automation, labour(men) became
comparatively less important.
From another view point; for example in labour intensive manufacturing
organisations labour is comparatively more important. In capital intensive industries
because mechanization and automation levels are high, capital and machine become
relatively more important.
In many manufacturing organisations, depending upon the type and size of product
one or more type of material is used in manufacture of that product. If the product is
simple. say- glass bottles; large amount of silicon ( basic component of glass) is
consumed. where as in a complicated product for example; a passenger car-large
number of different
j materials and varying quantities are used up in its manufacture. In such cases
material becomes equally if not relatively more important factor among the five Ms.
In almost all modern manufacturing organisations materials are an important factor.
14.2 THE CONCEPT OF MATERIALS
In the context of manufacturing, the final output is product. Mostly manufacturing
processes convert input materials into useful products. Thus, that which physically
becomes a part or whole of the final product can be termed as Material. 5
Materials Planning
Example: In the manufacture of Leather Shoes.
• Leather is input Material
This may be of several types, depending upon the types of shoes being produced i.e.
leather for soles if `type' uses leather soles There may be other types of material for
soles.
• Shoe laces may he another input material
• The thread used in sewing is another input material
• Glues, adhesives etc, used are another input material. These are the type of
materials which directly go into the manufacture of leather shoes and form
integral part of the final product leather shoes. These are called RAW
MATERIALS.
In some other manufacturing situations, apart from raw materials other forms of input
materials such as parts / component etc. (manufactured by others - end product from
their point of view) may also be required. These are also for the purpose termed
material - because these also go into the manufactured product.
From manufacturing organisation's point of view there are many other materials
required and used in the organisation but may not become part of the final product
viz. tools - screw drivers, needles, hammers, tongs etc. required by workers and
operators to he used in doing their work. Machines require spare parts. Attachments,
lubricants etc. which do not form part of the final product but are needed in the
manufacturing process.
We may, understand materials as something which becomes part of the final product
or is required as part of the process required to manufacture the product. Thus, any
physical thing that is required directly or indirectly for the manufacture of a product
can be termed material from the organisational point of view.
14.3 IMPORTANCE OF MATERIALS
For any manufacturing organisation materials, supplies, equipments are of primary
importance. The reasons are
1) Nothing can he produced without materials, supplies or equipment
2) Materials constitute major part of total cost of products. This varies depending
upon type of product. Following Table should make it clear.
Table 14.1
Material cost as per cent of Total cost
Percentage of total cost Manufacturing Groups
Above 75 Fabrication, Construction, Electrodes, Tea etc.
65-75 Wool, Sugar Jute, Cotton, Yarn, Commercial vehicles,
Earth Moving equipments, Scooters, Furniture etc.
55-65 Cotton Textile, Bread, ship building, cables, electricity
generator's, Refrigeration. Heavy machinery etc.
45-55 Chemicals, Cement, Pharmaceuticals. Electronics. Paper.
Engineering, Non-Ferrous type. Machine tools.
Explosives etc.
35-45 Fertilizer, steel, cigarettes, Transportation, Asbestos,
News print, News paper, Ferrow Alloys, Aircraft
manufacturing etc.
Source: Gopala Krishna P. and M.S. Sandilya. Purchasing Strategy-Text and Oases. starting .
p-6. As reproduced in Aswathappa K., production Management. Himalaya, P-394.
3) Because materials form major part of total cost. these offer a very good scope for
reduction of total cost. A small per cent in material cost can result in large per
cent increase in profitability.
Example: Suppose a small company has total sales of rupee 1000. Total cost is
Rs.900/- . Thus profit is Rs.100/- Which amount to 10 per cent of the
6 sales. Suppose out total cost of Rs. 9001-, material cost is Rs.600/-.
If one per cent saving in material cost can he achieved, then resultant saving is
Rs.6/-(1 per cent of 600) which directly adds to the profit, thus profit becomes
Rs.106/-
Therefore, in this case, I per cent saving in material cost results into 6 per cent
increase in profit.
4. End product quality apart from other factors, largely depends on quality of input
materials.
5. Any interruption or shortage in supply of materials when needed by the
production department, in many situations can result in complete stoppage of
production.
6. Because of growing concern for pollution, some contribution has to be materials
manager by finding substitutes which are less polluting or less damaging.
7. In the long term welfare and interest of the mankind, the natural resources (most
of the materials ultimately come from one or the other natural resource ) need to
be conserved and regenerated along with planned usage.
14.4 NEED FOR MATERIALS MANAGEMENT
In manufacturing organisations hundreds of items, materials, components spare parts
etc., of varying dimensions and quality are daily needed. To keep track of these
items, to identify sources of their supply, to negotiate purchase, to coordinate
between manufacturing operations needs, engineering and drawing department,
finance department and suppliers, stores etc. there is a need to have a separate
department / division, which can manage all these efficiently. In large organisations
where the number of such items may run into thousands and the. value of these items
may run into hundreds of eaves: the need for proper management is all the more
important.
Also, because about fifty percent of total revenue, usually is consumed in materials,
its efficient management can directly contribute to the profitability of the
organisation. Since, every manufacturing organisation has production management
for production activity, financial management for finance of the organisation,
personnel management of human resource management or development as is now
being termed, it is but natural to have materials management for efficient
management of materials which account for a major part of a companies total budget.
Materials Management Defined
Lee and Dobler define material management as, "A confederacy of traditional
materials activities hound by a common idea. -- the idea of a an integrated
management approach to planning, acquisition, conversion, flow and distribution of
production materials from the raw material state to the finished product state".
Bailey and Fanner define materials management as, “The management of the flow of
materials into an organisation to the point where those materials arc converted into
the firm's end product(s)”.
The process of planning, procuring, storing, handling and distribution of required
materials within the firm, is termed as materials management.
The scope of materials management is wide. It has impact directly or indirectly on
the activities of many related departments in the organisation.
Its scope spans from the indentification and specification of materials, indentifying,
the sources and suppliers, negotiating prices, purchasing, arranging for in bound
transportation, receiving, and inspection for quantity and quality, efficient, storage,
issueing to respective manufacturing departments, maintaining proper records, and in
some cases disposal of scrap and surplus/obsolete materials and components. Thus its
scope spans from the suppliers to the production shops of the organisation, till the
end product.
Objectives
The main objective of materials management is to make available the right materials,
in right quantity, of right quality, at the right time and right prices. Thus some of the
objectives can be: 7
Materials Planning
Right Material : Identification and specification of materials required to he decided
in consultation with engineering and production. Making efforts to locate suppliers
who are capable to supply exactly what is required. Make available that which is
required and specified.
Right Quality: For every item, supply to be made according to quality specification,
neither of very high quality than specified ( depends on pricing also) nor below, so
that end product quality and process operations are not unduly affected. The quality
of incoming materials be consistently maintained.
Right Quantity: Based on annual or periodic estimates of consumption, the
purchases be made in right quantity i.e. neither too high (storage and handling cost
may increase) nor too low (sometimes material may not be available when needed in
production department).
Right Time: Adherence to timing (as and when required) by the production can be_
achieved through storage. But making purchases too much advance so that the items
will remain in the stores for longer period (increasing the cost of storage and chances
of obsolence / damage etc.) or just in the nick of the time increasing the risk of stock
out, would not amount to the right time. Proper timing of purchase and requirement
he balanced.
Right Prices: Negotiation of purchase price should be competitive without
sacrificing on quality and the reliability of supply. Bulk purchase or long term
purchase contract can also be used effectively in negotiation of prices. Major savings
in overall cost of materials can be effected at this stage thus directly contribution to
the organisation.
Low Payroll Costs: This not only refers to the total payroll of the materials
management department but overall total expenditure of the materials department. If
the department's overall annual expenditure is more than the savings it can achieve in
the total material cost, than the department is not operating efficiently and rather
helping the organisation in savings in overall material costs it would actually he a
burden on the organisation. But the expenditure need not be unduly curtailed at the
cost of undermining the functioning of the department itself.
Proper Records: Maintenance of meticulous records is necessary from company
point of view, because materials management function is responsible for
approximately fifty per cent of the companies budget. Proper record and
administrative control supplemented by rigorous audit can contain temptations of
corruption. Also proper records should constitute part of companies overall data base,
which can be used in future for related planning and management decisions.
Activity A
Kindly evaluate the quantity, quality, delivery schedule and record keeping of the
purchase section of your organisation and prepare a report on discripancy if any.
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14.5 ISSUES IN MATERIALS MANAGEMENT

As per major activity groups involved in materials management in any manufacturing
organisation, several issues emerge, which need to be considered while discharging
its functions: some of these are
a) Issues related to materials planning,
b) Issues related to purchase,
c) Issues related to stores or inventory,
d) Issues related to material handling and disposal.
8 These are being discussed in greater detail.

Issues Relating to Materials Planning
i) Materials Identification: Materials management department closely and
continuously coordinates with the engineering and design, production and process to
help identify the materials, subassembly, spare parts, tool and equipments needed in
the process and manufacture of end products. It provides information with respect to
various options, alternative materials available /or could he made available to meet
the needs of production. The engineering and design, production and process
departments assess these alternatives for suitability to the design from functional
point of view, from processing point of view, i.e. whether it will help in easier / faster
/ more efficient performance of process operations? Through meticulous assessment
each of the material, component etc is identified. This assessment is a continuous
process depending on new materials, substitutes, supply conditions or internal
changes in the products, process methods, designs or schedules.
ii) Standardisation: Basic purpose of standardisation is to achieve inter-
changeability of parts /components internally in the organisation or even across
industry. Second purpose is to reduce the number of vanities of parts / components
uses in the production process of the organisation.
For example: in manufacture of motor car a large number of nuts and bolts of
different dimensions, different specifications may he in use, suitable for various
applications in the product. Suppose there are 100 different types of nuts and bolts
being used. Through proper standardisation this number of different types can be
brought down to 20 or 30 without compromising on functional quality and
requirement of the product.
iii) Make or buy: Large organisations, (even small organisations ) usually are not in
a position to manufacture all parts or components required to be used in the product
manufactured by them.
This is because :
a) It may not he economical to manufacture internally.
b) In house, expertise / technical skill may not be available.
c) Additional capital required to set up facilities for the manufacture of the
component may not he available.
d) Specialized manufactures-suppliers of the specialized components may be
operating in the market, the components of the right quality may he available at
competitive rates.
From time to time it needs to be reviewed whether certain items may he more
advantageously manufactured in house or to be brought from outside. Materials
management activity helps the organisation in taking this decision from time to time.
Engineering and design, production, finance departments etc also join together to
help take this decision. A decision to make an item in house has long term
implications because the company's funds are to he invested into fixed assets to
create the manufacturing facilities. Such a decision is very difficult to reverse later
on.
iv) Coding & Classification: A system of classification and codification for all
items/ parts/components, needs to be devised and implemented. So that detailed
descriptions need not be referred to every time. The code assigned to an item is
uniquely identified. It should be uniformly understood by all concerned in the
organisation.
The following factors need to considered t tile devising a classification and
codification system:
a) The basis of classification and codification should he same and consistently
applicable to all items.
b) It should cover all items presently in use and should he capable to take up any
new items in future.
c) Every item should have a unique code / or number such that there is one-to-one
correspondence between code and the item. No Two codes should refer to the
item, and no two or more items should have same code.
d) The code should he uniformly used and understood throughout the organisation
by the concerned persons. It should he simple to understand and apply. It
should normally be self explanatory. 9
Materials Planning
Several accrue if proper codification system is used in the Organisation:
1) There is no need of long description. Each item can be described by using the
codes.
2) Correct identification of each and every item possible.
3) Duplication of storage, purchase, etc. avoided since each item is uniquely
identified.
4) Uniformity is achieved in maintaining accurate, records in all sectors i.e. stores,
purchase, finance, production etc.
5) Can be used for locational planning of materials in the stores,
Activity B
Visit an organisation which has already computerised its materials management
department. Study the system design for materials management, classification &
coding system and find out any correction or modification required.
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Quality Specification: Materials department, engineering and design department,
production department, collectively decide on required quality standards for every
items; so as to achieve the desired quality of the end product at the same time
meeting the cost target of the end product. Agreed upon quality is precisely specified
and becomes part of the item description and also integral part of the code used to
identify the item. Usually it is in the form of physical, chemical or performance
specifications. Where Engineering Drawing or Blue prints are provided for the part,
the quality specifications become integral part of such Drawing or Blue print. Other
ways of specifying quality, (which. may be used single or in combination) are:
1) By providing samples or prototype.
2) By providing manufacturing operation specification.
3) By Brand or Trade name.
4) By specifying well accepted market grades.
5) By specifying testing procedures and relevant standards.
6) By specifying / providing engineering drawing / blue prints. Proper quality
specification are of greate help to the purchase department, the suppliers, and
the inspection and testing sections.
Issues Relating to Purchasing
This issue is comparatively more important and relevant to large corporations
operating multiple plants may or may not be located at different places. For a single
place organisation decentralization might be feasible on a very limited scale. There
are advantages relevant to both the policies. At times, better results can be achieved
through combining the two and specifically demarking the items or volumes for
which central or local purchasing is responsible.
Some of the possible advantages of centralization are:
a) Favourable price mid terms can be negotiated because of large volume
purchases.
b) Specialised vendors/ancillaries can be encouraged to take up manufacture and
supply of items/components of requited and specified quality.
c) Administration and control is comparatively more easy and efficient.
d) Number of personnel required is comparatively less resulting into reduced
overhead costs of purchasing.
e) Paper work, record keeping is consolidated. Possible to develop uniform
procedures and policies.
f) Easier to maintain the quality of purchased parts items: through centralized
testing and inspection. It is also possible to conduct testing and inspection at
10 die vendors
g) It is beneficial to the vendor also, in case, the size of order constitutes major
proportion of his total production capacity.
Advantage of decentralization:
a) Coordination between purchaser department and the user departments in the
plant is quicker and simple.
b) It is possible to develop local suppliers, which can result into lower
transportation costs and also lower levels of holding inventor's.
c) Availability of local suppliers facilities, quicker readjustment of the internal
requirements is feasible.
d) Better quality coordination between local supplier and the plant can be
maintained.
e) Local control local coordination, and local rescheduling become easy and
quicker.
Normally, a well balanced combination of centralization and decentralisation can he
used more advantageously.
ii) Single Source vs Multiple Source
The purchase department can decide to choose and depend on a single source for
each of some selected items. In the extreme case, the department can decide to use
single source for each of the item. On the other extreme, the policy may be to have
multiple sources for each of the item. Each policy- single source or multiple source
has its own advantages and disadvantages.
Advantages due to single source:
a) For small total annual requirement of an item multiple sources tend to increase
clerical and other expenses.
b) Due to hulk purchases from single source, it becomes possible to avail of
discounts of prices or frights or other services.
c) Supplier tries to cooperate, update-and improve his services because of long
term relations.
d) Scheduling of deliveries or long term contract is feasible.
e) If supplier is the only producer or owns the patent or his quality far superior
other suppliers or prices are highly competitive , one has to depend on single
supplier .
Sometimes by judicious development of single suppliers on long term basis overall
material cost can he reduced significantly.
Advantages of multiple source :
a) Dependency on single supplier is reduced.
b) Break down, strike, stoppage of work with one supplier does not unduly affect
the working of the company.
c) Competition among suppliers, keep then alert.
d) It provides flexibility in the choice of placing an order.
iii.) Vendor/Ancillary Development
This is some what similar to single/multiple supplier decision and also an outcome of
make/buy decision. When total annual requirement is large and item is to be bought
from the market, then it is worth it to encourage ancillaries to take up the production
and supply of the item to a parent company. The ancillary supplies a major portion of
its production to parent company and remaining production is off loaded in the
market. Parent company can also decide to help develop more than one ancillary for
the same item it requirements of item is very large.
Vendor/ancillary development can he encouraged by parent company through tiny
one or combination of the following:
-- Providing item design / drawings
-- Providing technology for production
-- Helping in arrangement of finance
11
-- Helping by loaning of its technical persons
Independent Demand Inventory
UNIT 15 INDEPENDENT DEMAND Systems
INVENTORY SYSTEMS
Objectives
After going through this unit, you will be able to learn
• What is an independent demand system

• What is a production-distribution system
• The need for inventory
• To develop a deterministic model
• What are holding and ordering costs (or setup costs)
• Meaning of economic order quantity, reorder point, lead-time, average inventory,
stock cycle.
• How the model behaves around the optimum point
• To perform sensitivity analysis
• What is finite production rate and how it affects the basic model
• The concept of planned shortages
• What is shortage cost and how it affects the basic model
• Effect of quantity discount on order quantity
• What is material cost
• What is carrying charge
• Effect of constraints on working capital and warehouse space
• What is an Optimal Policy curve
• Single Period Model
• Multiple Period Models
• What is uncertainty in demand and what is a stochastic model
• What are overstocking and under-stocking costs
• What are shortage costs and what is backlogging
• What are expected profits, shortages and demand
• What is demand during LT and what is variability
• What is a service level
• Where to stock and how to determine ROP
• What are safety stocks
• Why selective control
• What is ABC and VED analysis
Structure
15.1 Introduction
15.2 Basic Inventory Model
15.3 Model Sensitivity
15.4 Gradual Replacement Model
15.5 Basic Model with Backlogging
15.6 Bulk Discount Model
15.7 Independent Demand System for Multiple Products
19
Materials Planning 15.8 Models with Uncertain Demand
15.9 Selective Control of Inventory
15.10 Summary
15.1 INTRODUCTION
Inventory items can be broadly. classified into two types: (a) Independent defined
inventory items and (b) Dependent demand inventory items. The former is based on
the items own usage history and statistical variations in demand, while the later is
based on the production schedules of end items of which the inventoried item is a
part. Hence, the former is based on a replenishment philosophy while the later is
based on a requirements philosophy. In this chapter we will be discussing the
independent demand inventory system.
Fig. 15.1: A Production-Distribution System

Figure 15.1 shows a production-distribution system (where the output is obtained by
processing certain inputs). As we move along the arrows from input to output we
come across the various stock points:
a) Raw materials & supplies : Raw materials are needed to start the production
process. Hence they are the inputs to the system.
1. There may be instances when there is a temporary increase in production
requirements. If raw material is not available, production stops. Hence a raw
material inventory is essential.
2. Raw materials are usually transported to the factory site. Quite often there are
delays in supply time which may disrupt operations if we don't have raw
material inventory on hand.
3. Sometimes suppliers of raw materials give bulk discounts which attracts the
companies into stocking raw material even if it is not needed.
b) In-process inventories : During the production process raw materials are
transformed into semi-finished products which are next converted into finished
goods. For example, in Figure 15.1, during transformation the raw material is
partly processed on A and then it moves into B.
1. If the processed material from A is not available, unit B operations get disrupted.
This may happen if A breaks down. Hence we have a stock point between A and
B. We call this work-in-process (WIP) inventory.
2. If B breaks down, we may notice a WIP build up in between A and B. This is
20 unwanted inventory. This situation may, however, affect other downstream
operations if we don't have a stock point immediately after B. This would be our Systems
finished goods inventory. As we see here, inventories are needed for de-coupling
the sequential stages in the production system to maintain smooth flow.
c) Finished goods inventories : As we saw above, in-process inventories are
converted to. finished goods which go into the factory warehouse.
1. If the goods are not available in the warehouse the activities of the
distributors would suffer unless they have an inventory to depend on.
2. Similarly the retailer functioning suffers if the distributor fails to meet the
requirements.
3. Consumers have a wide range of preferences. Both distributors and retailers

carry a wide range of items to meet their needs. Because of these wide
ranging needs their stocking policies also differ.
Even though the problems faced at each stage are different the basic questions asked
all through while determining inventory policies are:
• How much to order, and
• When to order
We will try to address some of the complexities mentioned above with help of
several inventory models. First we will make several assumptions (see Figure 15.4)
to define a idealized situation with the help of a basic inventory model. Then we will
relax the assumptions and move towards more practical situations.
15.2 BASIC INVENTORY MODEL

Let us take a situation from figure 15.1. We said raw materials are procured from
suppliers. The company (which receives the supply) has a certain annual requirement.
To satisfy this need the company resources (which cost money) are used to send
orders to the supplier. The supplier processes the order (again consuming time,
resource and money) and ships (either by road, rail or sea) the ordered quantity back
to the company. To satisfy the annual requirement, if we order one item each time
then the cost of ordering goes up. On the other extreme, if we decide to order the
entire annual requirement all at once, the cost of carrying inventory goes up because
we are faced with the problem of stocking die whole lot. The ordering cost may
include clerical costs, follow-up costs ....etc. The carrying cost is due to the huge
capital (money) that is tied up. Each unit of item held in inventory for each unit of
time costs us money. Thus, if we want to reduce the annual ordering cost, we would
like to order in large bulks which would then increase the holding cost. Figure 1.5.2
and Table 15.1 show an example taking these two extreme situations.
Fig. 15.2: Two Extreme Situations 21

Materials Planning Table 15.1: Two extreme situations
(Note: Situation B is much better than A. But then is this the best?)
To find out if there is a still better solution, let us depend on a graphical model
showing the various costs as Q varies from 0 to 12000. By substituting different
values for Q we plot the results to give the holding cost curve, the ordering cost curve
and the total cost curve (Figure 15.3). The minimum point on the total cost curve is
given by Q0.
Figure 15.3 : The Economic Order Quantity

For this value of Q0 (see Fig 15.3):
Annual holding cost = Annual ordering cost
This Q0 is the optimal value of Q and is known as the economic order quantity
(EOQ). This is the quantity for which the cost of inventory is minimum. This EOQ
formula is known as Wilson’s Lot Size Formula Substituting the expression for Q0 in
the total cost expression and simplifying it we get:
22
Systems
The same expression for Q. can be obtained with the help of differential calculus
where we minimize the total cost expression w.r.t. the variable Q. Figure 15.4 shows
the basic inventory model along with its assumptions.
Fig. 15.4: Basic Inventory Model

The economic order quantity tells us how much, to order in each cycle. But we would
also like to know when to place the order. As we know, there is a certain time needed
to process an order by both the customer and the supplier. The time between placing
an order and its arrival is known as the lead time (Figure 15.4). This time (shown in
the x-axis) tells us
when we should be placing the order during each stock cycle. In other words, as we
can see from the y-axis, there is just enough stock to last the lead time. This level of
stock is known as the reorder level or reorder point (ROP). Figure 15.5. elaborates
the concept of ROP and it's relationship with lead time.
Reorder point (ROP) = demand during lead time (ddlt)
= demand rate (d) * lead time (LT)
ROP =d*LT
In our example:
Annual requirement (R) = 12000 (given)
23
Materials Planning
[Note: If LT is greater than 2t but less than 3t, then there will be two orders
outstanding. If it is greater than 3t but less than 4t, then three orders will be
outstanding and so on]
Thus if 3t > LT > 2t (say 5 weeks)
then ROP =d*LT-2*Qo
24
The assumptions in Fig 15.4 make the model somewhat trivial and remove it tar from Systems
reality. Real life situations are quite complex. For example we might be faced with
the cases of non-instantaneous replenishment, shortages, uncertain demand patterns,
resource constraints and so on. These cases can be handled by modifying the
assumptions in the basic model. Before discussing these other models let us first
study the sensitivity of this model.
Activity A
A manufacturer carries stock of an item with an annual demand of 30,000 units.
Although the inventory manager cannot estimate setup cost (s) or holding cost (h)
precisely. She feels that the ratio of the two is somewhere between 100 to 1 and 150
to 1; that is 5/h=100 to s/h=150. Calculate EOQ on both conditions.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
Activity B
With annual demand of 30,000 units, s/h ratio of 100 to 1, and a lead time of ten
days, what recorder point should a Macro company use? Macro is open for business
250 days per year, and sales are assumed to occur at a constant rate. What would
happen if the lead time sometimes went up to 15 days?
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
15.3 MODEL SENSITIVITY

The optimal quantity Qo = 490 seems to be a rather odd lot. Suppose we are ordering
these unite in a truck which can carry only 250 units at a time. In that case we would
be interested to know how much extra it would cost us to order 250 units each time.
Or for that matter we have a truck which can carry 1000 units say. We would like to
know how this would reflect in our costs.
Activity C
How sensitive is the optimal Q to the s/h ratio? If s/h doubles or triples, what happens
to Q*? s is the setup cost and h is the holding cost.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
25
Materials Planning Activity D
Bow sensitive is Q to annual demand? If annual demand doubles or triples, what
happens to, Q*?
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
Fig. 15.6: Model sensitivity
15.4 GRADUAL REPLACEMENT MODEL

We will study this model where receipt of order is In the first model replenishment
rate p → ∞ . Here it infinite. Under most practical situations the ordered quantity
(which is either produced or supplied) is delivered over a period of time (and not
instantaneously). In other words there is a gradual supply (see Fig 15.7). Let tp be the
time required to receive an order. During this time while the ordered quantity (Q) is
being supplied to the warehouse, there is a simultaneous consumption due to the
constant demand rate (d). Hence the rate at which the order accumulates in the
warehouse is (p-d). Therefore there is a maximum inventory build-up of only Qmax
and not Q. Qmax will be less than Q. Let us verify this:
26
Systems
Note:
• Total cost is lower than that for the basic model.

• If d → p then Q → ∞ . That means we need a fully dedicated supply system to
meet the demand. There is only one initial setup (a dependable system with high Cp )
and the cost minimization process forces the lot size Q to be extremely high
approaching ∞ . There is no inventory build-up.
Activity E
Explain how the situation of the finite production (gradual replenishment) note
inventory differs from the simple lot size situation. What impact does the cost of the
item have on each situation? Explain.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
15.5 BASIC INVENTORY MODEL WITH

BACKLOGGING ALLOWED
We relax another assumption here by allowing shortages. We plan to Accept
shortages or backorders (orders to be satisfied at a later date forcing customers to
wait). Let us assume that we can make customers wait by giving them a price
discount. This becomes a cost to the company. Let Cb be the cost to have one unit
backordered for one year (Rs/unit/year). That is if we are asking a customer
demanding one unit to wait for a year then the cost (to the company) of his waiting
for one year is Cb. Figure 15.8 show stock positions ranging from -B (demand
deliberately put on backorder list) to (Q-B), the maximum level of positive inventory
immediately after a lot size of Q is delivered. When amount Q is delivered B units go
towards satisfying the backlogs. Intuitively, a low shortage cost would bring in a
tendency to accumulate backorders (because A reduces the total holding costs).
27
Materials Planning
Activity F
A company orders is lot size of 2000 units. The holding cost per unit per year is $8,
and the back order penalty per unit per year is $15. What should be the optimal
inventory held, and what should be the maximum backorder position?
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
Activity G
With an annual demand of 2000 units, setup costs of $250, holding costs of $8 per
unit per year and back order penalty costs of $24 per unit per year, what is the
optimal time between orders? Use 250 day working Year and specify the time in
days.
…………………………………………………………………………………………
…………………………………………………………………………………………
………………………………………………………………………………………….
28
15.6 BULK DISCOUNT MODEL Systems
In the basic model we assumed there are no quantity discounts and the material price
was considered to be fixed (say p per unit).
Material cost in the basic model = (price/unit) * R
=p*R
and Holding cost which is a function of price,
Ch = f(price)
= constant * price
= Fh * p
where Fh is the carrying charge (expressed as a fraction of inventory value)
Hence, the optimal quantity, Q0 = 2*R*Cp/(Fh*p)
Quite often suppliers give us price breaks. For example the supplier in our example
says that he would give us a discount on the unit price if we ordered in the following
quantity ranges as per the following price discount schedule:
If we want to take advantage of these price discounts then our order quantities will
increase. Note:
Because of the increased Q inventory costs of holding go up. But then

what is the net effect of all these changes? Is there an overall advantage
or disadvantage?
To answer these questions, let us look at our changed cost expression. The total cost
expression is as follows:
∴ Total Cost = ordering cost + holding cost + material cost
TC = Cp* (R/Q) + pi * Fh * (Q/2) + pi*R
Because of the price breaks (pi) we have a step function here. We are interested in
finding out the quantity Q that is going to minimize the total cost expression. Figure
15.9 shows the total cost curve for the valid quantity ranges and the minimum cost in
this curve gives the optimal quantity. When drawn to scale the minimum cost will be
Rs 48520/= for a order quantity of 1000 units.
We have a general procedure for calculating the optimal quantity for the bulk
discount model:
1. Calculate the EOQ for each price break (in our example for p1, p2, p3)
2. Determine if these EOQs are feasible. A feasible EOQ must fall within the
quantity range for the corresponding price break. If the EOQ falls outside this
range, it is not feasible and hence is eliminated.
3. Calculate total cost for feasible EOQs and at price breaks.
4. Select the quantity yielding the lowest total cost.
29
Materials Planning
Fig.15.9: Total cost curves for model with price breaks.
Table 15.2 and 15.3 below summarize our example:

Table 15.2: Calculation of valid EOQs
Pl = Rs 5.00 P2 = Rs 4.50 P3 = Rs 4.00
Valid range 0499 500-999 ≥ 1000
EOQ 489.90 516.40 547.72

Feasible ? yes yes no
Table 15.3: Total cost summary for the example problem
Valid lot sizes Q = 490 Q = 516 Q = 500 Q = 1000
(first feasible (second feasible (first price (second price
EOQ) EOQ) break quantity) break quantity)
Unit price 5.00 4.50 4.50 4.00
Material Cost Rs 60,000.00 Rs 54,000.00 Rs 54,000.00 Rs 48,000.00
(price*R)
cost 244.90 232.60 240.00 120.00
(R/Q)*Cp
Inventory 245.00 232.20 225.00 400.00
holding cost
(Q/2)*price*Fh
Total cost Rs 60,489.90 Rs 54,464.90 Rs 154,465.00 Rs 48,520.00
We find there is a net advantage in ordering 1000 units for a minimum total
cost of Rs 48520.
Also note: As observed earlier. for EOQs
ordering cost = holding cost
30 (within rounding off errors in our example)
Materials Planning
UNIT 16 DEPENDENT DEMAND
INVENTORY SYSTEMS
Objectives
Upon completion of this unit you will be able to:
• understand the concept of dependent demand systems and independent demand
systems;
• know Material Requirement Planning (MRP) and Manufacturing Resource
Planning (MRP II);
• get into the elements of MRP;
• the difference among the MRP, EOQ and Part period method;
• the application of MRP in different environment;
• difference between MRP and JIT;
• experience the changing role of production and hive fury control managers.
Structure
16.1 Introduction
16.2 What is MRP?
16.3 Material Requirement Planning (MRP)
16.4 MRP versus Order-Point Systems
16.5 Some Important elements of MRP
16.6 Manufacturing Resource Planning (MRP II)
16.7 MRP Computations
16.8 MRP Implementation
16.9 Some Misconception About MRP
16.10 Comparison with JIT
16.11 Summary
16.1 INTRODUCTION
Independent demand inventories are subject to market condition and thus
independent of operations. Demand for product or service is termed independent
when it occurs independently of demand for any other product or service. With
independent demand, demand for one item is unrelated with demand for another
item. In a movie theater, for example, demand for film postage is independent of
demand for popcorn. Examples of independent demand inventories are also finished
goods and spare parts in a manufacturing company that are used to satisfy final
customer demand. These inventories should be managed by the order point methods
described in unit 15.
Dependent demand inventories, on the other hand, are not subject to market
conditions. They are dependent on demand. When demand for one product is linked
to demand for another product, the demand is termed dependent. Dependency may
occur when one item demand is derived from a second item. If the demand for one
item is known, then the demand for one or more related items can be deduced. If, for
example, the demand for an end product is known, one can calculate how many of its
sub-components are needed, because their demand is directly dependent on end-item
demand. Example of dependent demand inventories are raw materials and work-in-
process inventories used in manufacturing companies. These inventories should be
managed by material requirement planning (MRP) or Just-in-time (JIT) system. The
scope of this unit is Material requirement Planning (MRP), whereas JIT is discussed
in unit 12.
Only independent demand needs forecasting; dependent demand can be derived from
44 the independent demand to which it is linked.
Dependent Demand
16.2 WHAT IS MRP? Inventory Systems
Material Requirement Planning (MRP) is a system of planning and scheduling the
time-phased materials requirement for production operations. If the delivery schedule
for the end products is known, then Me sue and timing of the requirements of the
various lower-level work-in-process items and raw-materials can he planned exactly
by simple arithmetical calculation. Such planning is known as Material Requirement
Planning (MRP).
Although MRP is easy to understand, it can he used in two different ways: MRP-I
and MRP-II.
MRP-I: It is an inventory control system, which releases manufacturing and
purchase orders at the right time to support the maser schedule. This system launches
orders to control work-in-process and raw materials inventories through proper
timing of order placement. MRP-I doesn't include capacity planning. Henceforth the
terminology MRP-I and MRP will be used interchangeably.
MRP-II: It is an information system used to plan and control inventories and
capacities in manufacturing companies. The MRP-fl system coordinates sales,
purchasing, manufacturing, finance, and engineering by adopting a focal production
plan and by using one unified data tame to plan and update the activities in all the
systems. The subsequent sections shall cover MRP followed by MRP-II.
16.3 MATERIAL REQUIREMENT PLANNING (MRP)
MRP provides the following objectives:
• Inventory reduction: MRP enables a manager to determine how many of a
component are needed and when, in order to meet the master schedule. It avoids
the costs of excessive inventory.
• Reduction in production and delivery lead times: MRP identifies materials
and component quantities, timings, availability, and procurement and
production actions required to meet delivery dead lines. MRP help avoid delays
in production. It prioritises production activities by putting due dates on
customers job orders.
• Increased efficiencies: MRP provides close coordination among various works
centers as products progress through them. MRP focuses on having all
components available at appropriately scheduled times. The information
provided by MRP encourages production efficiencies.
Total process of Material Requirement Planning (MRP) is explained clearly in Figure
16.1 below:
Fig. 16.1: Material Requirement Planning Process
Source: Theory and problems in production and Operations Management, S.N.Chary, TMH
outline series. 45
Materials Planning
16.4 MRP VERSUS ORDER-POINT SYSTEMS
Prior to the advent of MRP, there was no choice. The typical manufacturing
companies managed all inventories with order-point systems. Some of the key
distinctions between MRP and order-point systems are summarised in the table-
below.
Comparison of-MRP and Order-point systems
Source: Operations Management by R.G.Schroeder, International student edition, 1st edition,

1955, McGraw Hill.
Activity A
It has been said that MRP is an information system, which does not rely on
sophisticated mathematical models. Discuss the historical significance of this
statement.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
16.5 SOME IMPORTANT ELEMENTS OF M
Master scheduling, Bill of Materials (BOM), inventory records, capacity planning
and purchasing are few important elements in MRP system. Each one of these
elements will be discussed in detail.
Master Scheduling: By controlling the master schedule, top management can
control customer service, inventory levels, and manufacturing costs. The purpose is
to specify the output of the operations function. Top managers can not perform the
master scheduling task by themselves, because there are too many details. They can
set master-scheduling policy, thereby controlling the materials planning function.
Top management should also interface with manufacturing through the aggregate
production plan. The aggregate production plan deals with families of products or
product lines, not the specific products, models. For example in car manufacturing
the aggregate production plan might contain various types of cars, but not the
particular type of engine, hydraulic options, other features which can be selected by
the customer. It seeks to make the resources, equipment,' people, and other facilities
available for the future. As a result of an inflated master scheduling, the order
priorities are no longer valid. The formal MRP system then quickly brakes down and
the informal planning and control system dominates. Nothing is more insidious than
an infloated master schedule which leads to invalid order due dates. Rarely is the
master schedule a reflection of future demand forecasts. Rather the master schedule is
a forecast of what will be produced. finished-goods inventory is a buffer between the
master schedule and final customer demand, smoothing out loads and providing fast
customer service.
Bill of Materials (BOM): It is a structure list of all the materials or parts needed to
produce a particular finished product, assembly, subassembly, manufactured parts, or
purchased parts. It is as good as a recipie used for cooking. Some companies have
several BOMs for same product. Engineering has one BOM, manufacturing hat: a
different version and cost accounting has still different. An MRP system requires a
single BOM for the entire company. BOMs are constantly undergoing change as
products are redesigned. If there errors in BOM, the proper materials will not be
ordered and the product cannot be
46
Dependent Demand
assembled and shipped. As a result, the ordered parts. which are available will wait in Inventory Systems
inventory while the missing parts are expedited. Management must insist that all
BOMs are accurate 100 per cent. It is not too costly to have 100 per cent accuracy.
Rather it is too costly to tolerate imperfect BOMs.
Inventory Records: In practice constant effort is required to keep inventory records
accurate. Traditionally, inventory accuracy has been assured by annual physical
inventory count, where the plant is shut down for a day or two and everything is
counted from wall to wall. With cycle counting, a small percentage of the items are
counted each day by storeroom personnel. Errors are corrected in the records and an
attempt is made to find and correct the procedure which caused them.
Capacity Planning: The necessary elements of an order-launching materials
requirement planning system have been described above. This system requires master
scheduling, a DOM, inventory records and parts explosion. The parts explosion
process assumes that the master schedule is feasible with respect to capacity. Using
the master schedule as, input, parts are exploded to produce shop orders and purchase
orders. If sufficient capacity is not available, then either capacity or the master
schedule must be changed until the master schedule is feasible. The resulting order-
launching system will determine correct due dates if sufficient capacity is available.
If sufficient capacity is not available, inventories will rise, past-due orders will build
up, and expediting will be used to pull orders through the factory. To correct this
situation, a capacity planning subsystem is deeded.
Purchasing: The purchasing function is greatly enhanced by the use of an MRP
system. First, past-due ' orders are largely eliminated because MRP generates valid
due dates and keeps them up to dam. By developing and executing a valid materials
plan, management can .eliminate much of the order expediting which is usually done
by purchasing. With an MRP system, it is possible to provide vendors with reports of
planned future orders. The practice of giving vendors planned orders more closely
interlocks them with the company's own material plan.
16.6 MANUFACTURING RESOURCE PLANNING (MRP
II)
MRP systems were developed on a segregated basis, rather than as part of a highly
information system. More recently, companies are beginning to relate many of their
information subsystems to the MRP system. Bills of materials data can be shared
with an engineering information system data base; order release and order receipts
data can lie shared by the order billing and accounts payable information systems;
and inventory status data from MRP can be part of marketing or purchasing
information systems. This type of information integration, in fact, is exactly the
impetus for a new generation of manufacturing planning and control systems and is
called as Manufacturing Resource Planning (MRP II)
Manufacturing Resource Manning (MRPII) is an integrated information system that
shares data among and synchronizes the activities of production and other functional
areas of the, business. MRP II is an integrated information system. The MRP II
system coordinates sales, purchasing, manufacturing, finance, and engineering by
adopting a focal production plan and by using one unified database to plan and
update the activities in all the systems.
One use of the MRP II system is to evaluate various business proposals. If, for
"ample, the output of product X increases by 20 per cent in weeks 15 to 20 and that of
Y decreases by 15 Per cent in weeks 10 to 15, bow would operations and profitability
can be affected? The system can simulate how purchases and, hence accounts
payable are affected, when deliveries to customers and accounts receivable occur,
what capacity revisions are needed, and so on. The company-wide implications of the
proposed change can be evaluated, and various departments can be coordinated
according to a common purpose.
The MRP II used to have integrated modules that handle everything from incoming
raw materials to inventory control, bill of materials, forecasting, production
scheduling, product costing, and general ledger transactions. With a network of some
computer workstations, employees have accurate inventory and production
information on which to base their decisions. 47
Materials Planning
A schematic diagram of MRP II is given in Figure 16.2, which is self-explanatory.
See the figure 16.2.
As shown in figure, the process involves development of production plan from

business plan to specify monthly levels of production for each product line over next
one to five years. Production plan affect all other functional departments. So it is
developed by all the executives of different functional department. The production
department is expected to produce at the committed levels, the sales department to
sell at these levels, and the finance department to ensure adequate financial resources
for these levels. Guided by the production plan, the master production schedule
specifies the weekly quantities of specific products to be built. At this point a check
is made to determine whether the capacity available is adequate to sustain the
proposed master schedule. If not, either the capacity or the master schedule must be
changed. Once settled, the master schedule is used in the MRP logic to create
material requirements and priority schedules for production. Then, and analysis of
detailed capacity requirements determines whether capacity is sufficient for
producing the specific components at each work center during the scheduled time
periods. If not, the master schedule is revised to reflect the limited available capacity.
After a realistic, capacity feasible schedule is developed, the emphasis shifts to
execution of the plan. From these schedules, work center loading, shop floor control,
and vendor follow-up activities can be determined to ensure that the master schedule
is met.
Fig. 16.2: MRP IT: An integrated system for planning and control
Source. Production and Operation Management E.E. Adam and R.J. Ebert
48
Dependent Demand
16.7 MRP COMPUTATIONS Inventory Systems
a) Lot-for lot
In order to make these MRP computations, one needs to know
1) The product structure showing how the end-product is made up of certain
assemblies, sub-assemblies, down to the components, a Bill of Materials being
derived therefrom. The Bill of Material (BOM) is a structured list of all the
materials or parts needed to produce a particular finished product, assembly,
sub-assembly, manufactured part, or purchased parts. If there errors in BOM,
the proper materials will not be ordered and the product cannot be assembled
and shipped. As a result, the ordered parts which are available will wait in
inventory while the missing parts are expedited. Management must insist that
all BOMs are accurate 100 percent. It is not too costly to have 100 percent
accuracy. Rather it is too costly to tolerate imperfect BOMB.
2) The lead times to produce/procure the different items at the various levels (from
components to the end products).
3) The demand or the delivery schedule of the end products.
4) The current on hand stock of the various items as also the schedule receipts of
the items being planned.
MRP is thus a calculation of the requirements of the dependent demand items, i.e.
items whose demand in dependent upon the demand for their respective higher level
items. The end products in a company would be the independent demand items if the
demand for these is not easily computable based on the demand for other items some
where else.
The MRP system generates planned order releases. Each order is associated with a
set up cost i.e. cost of placing and receiving an order. This raises the question of how
much to order. One must consider the tradeoff of ordering costs and holding costs.
Various lot-sizing policies are possible. Lot-for-lot ordering is one important lot
sizing policy. Lot-for-lot is a lot sizing policy in which order quantity equals net
requirements for the period. The definition will be more cleared through examples
discussed subsequently. The main advantage of an MRP system is that it avoids
unnecessary stocks of items and produces/procures them only when required and in
the quantities required. Classical inventory systems use àveraging' techniques suffer
from a predictable drawback: in some periods there is more of the stock when less is
needed and in others there is less when more is needed. This type of averaging
technique is of an unrealistic approach. For most dependent demand items their
demand is `bunched' or `lumpy'. MRP treats the discrete distribution as discrete and
not continuous. In the classical production-inventory systems, averaging is a part of
the system. In such cases the economies in materials are sought through Economic
Order Quantities (EOQ) or Optimal Period of Review which try to balance the order
cost with carrying costs for the materials. MRP obviates this need and treats the
problem of costs due to the materials directly, by producing/procuring the materials
in the quantity and the time these are required.
The timing of the order quantities are not àveraged' and made uniform. The material
is .ordered in the lot sizes, but only at the -time they are required for production.
There is no extrinsic trigger for placing an order quantity or a review period.
Computing the MRP for releasing a production/procurement order, involves
following steps.
1) To determine the time the higher level item are required and in what quantity?
2) To determine the time when and in what quantity the next lower level item is
required? This gives the gross requirement of the material.
3) To obtain the real or net requirement, the òn hand' and `schedule to receive'
quantities of the item are deducted from the gross requirement. If there is
sufficient quantity on hand then there is no need to order for a further quantity.
4) The MRP so calculated are checked for viability vis-à-vis the production
capacity. If there is mismatc5 then the master schedule is modified and the
MRP is calculated again.
49
Total Productive Maintenance
UNIT 17 TOTAL PRODUCTIVE
MAINTENANCE (TPM)
Objectives
• get into the origin of Total Productive Maintenance (TPM)
• know the characteristics of TPM and getting motivated towards the TPM
• eliminate variety of losses of an organisation and thereby aiming at maximising
the equipment utilisation
• identify chronic defects and sporadic defects associated with the equipment
• sharpen the understanding of autonomous maintenance and its relevance in
operational context
• acquire the concept of TPM promotion and its structure
Structure
17.1 Introduction
17.2 Motivation and Identifying Characteristics of TPM
17.3 Eliminating Six Big Losses
17.4 Chronic and Sporadic Losses
17.5 Autonomous Maintenance
17.5.1 Prerequisite for Autonomous Maintenance
17.6 TPM Promotion
17.6.1 Concept of TPM Promotion
17.6.2 TPM Promotional Structure
17.7 Summary
17.9 References
17.1 INTRODUCTION
The origin of total productive maintenance (TPM) can be traced back to 1951 when
preventive maintenance was first introduced in Japan. The Japanese took the
concepts and techniques of preventive maintenance from the U.S.A. The induction of
preventive maintenance from the U.S.A. heralded the modernisation of plant
maintenance in Japan. Nippondenso Company Limited first introduced plant-wide
preventive maintenance in 1960. This was the usual form of preventive maintenance,
wherein operators devoted themselves only to production jobs and the maintenance
personnel were responsible for the maintenance of plant and equipment. In the mid
1960's, Nippondenso undertook the automation of its production with the result that
the manufacturing and assembly operations became largely automated. This brought
in a new problem - one of maintenance of automated equipment. It was found that the
maintenance crew, only by itself, could not effectively maintain the greatly increased
number of automated equipment. Accordingly, the management of the company
decided to change the allotment of duties of the operators of automated equipment in
as much as each operator was made responsible for routine maintenance of his
equipment. This was the origin of one of the important features of TPM, which is
autonomous maintenance by production operators.
Thus, Nippondenso had already recognized the importance of preventive
maintenance in improving equipment availability and had also by then introduced
autonomous maintenance by production operators, as noted above, thereby freeing
the maintenance personnel from the routine maintenance tasks and making it possible
for the maintenance department to take up the essential tasks of maintenance
planning based on equipment 5
Emerging Issues in Planning/
Operations Management performance, plant and equipment modification for improved reliability and
maintainability, development of reliability and maintainability specifications for new
equipment and designing-out-of-maintenance. These tasks are aimed at maintenance
prevention (MP). Thus preventive maintenance together with MP and maintainability
improvement (MI) activities gave birth to productive maintenance (PM). The aim of
productive maintenance is, therefore, the maximisation of plant and equipment
effectiveness in the pursuit of economic effectiveness and achievement of optimum life
cycle cost of production equipment. This was the origin of the second important feature
of TPM which involves activities to maximise equipment effectiveness. Moreover,
Nippondenso, by then, had already developed quality circle activity with all the
employees participating in it. It recognized the use of small group voluntary activity for
promoting the adsorption of PM and getting the total involvement of plant personnel in
productive maintenance of plant and equipment. Based on this, Nippondenso decided
to evolve PM with all employees participating in it total participation through small
group voluntary activity. This essentially was the origin of the third important feature
of TPM which is the use of company-led small group activity.
Based on the above developments, Nippondenso evolved TPM between 1969 and
1971, and it was awarded the 1971 Distinguished Plant Prize (PM Prize) for the
development and effective implementation, of TPM by the Japanese Institute of Plant
Engineers (JIPE). Thereafter, the formal definition of TPM was enunciated by JIPE in
1971.
17.2 MOTIVATION AND IDENTIFYING
CHARACTERISTICS OF TPM
Having discussed in chronological sequence the origins of the three important
features of TPM, we can now take up in sequence the basic motivations, and
identifying characteristics of TPM. Takahashi has identified three specific motives
for the advocation and subsequent adoption of TPM in Japan. These three motives
are as follows:
1) Adoption of the life cycle approach for improving the overall performance of
production equipment.
2) Improving productivity through a highly motivated workforce which can be
achieved through job enlargement in which all workers are given a range of
challenging jobs in order to develop their skills at different crafts.
3) The use of voluntary small group activity for identifying the likely cause and
frequency of failure of critical equipment, possible plant and equipment
modifications which will result in significant savings; and efforts to fully utilize
existing equipment through improved availability.
The formal definition of TPM was also enunciated along the same lines. Two specific
parts of the first motive are as follows:
i) pursuit of economic life cycle cost of physical assets, which must include
building in of reliability and maintainability features and the extension of the
useful life of the assets, and since TPM deals primarily with production
equipment and is used in manufacturing industries, such assets are plant and
machinery, and
ii) improving the overall performance of plant and machinery, which should also
take into account the effective use of such production equipment through the
minimisation of losses not only due to breakdowns, but also due to poor quality and
losses due to set-up, adjustment. idling and minor stoppages of the equipment and
equipment operating at reduced speeds.
Although the contribution of the last four causes, namely set-up, adjustments, idling
and minor stoppages, and operation at reduced speeds, may seem small as compared
to breakdowns and defective products, in actual practice, these four losses add up to a
significant amount. This recognition differentiates productive maintenance (PM)
from preventive maintenance. Whereas the practical application of preventive
maintenance nowadays (Nakajima has taken preventive maintenance to include
routine maintenance and periodic inspections, whereas productive maintenance (PM)
must include not only routine or periodic preventive maintenance activities but also
the concept of maintenance prevention (MP) and designing-out-of-maintenance.)
covers much more than just `routine' or periodic preventive maintenance, and
6 includes condition-based maintenance, or
predictive preventive maintenance, plant modifications and designing-out-of-maintenance,
activities aimed at the minimisation of quality losses and set-up, adjustment, idling and minor
stoppages, and speed losses do not come under the purview of preventive maintenance.
To be able to stay in business, the manufacturing organisations have to ensure much higher
levels of equipment availability. Such high levels of equipment availability cannot be
achieved with the Ì operate - you fix' altitude wherein the production operators only run the
machines and the maintenance department attends to all maintenance activities, including
routine activities which are carried out to keep the machines in good running order, such as
cleaning of the machines, periodic lubrication, periodic checks and inspections and minor
adjustments and repair. The maintenance departments are finding it difficult to attend to such
routine tasks. Moreover, attending to such routine tasks is resulting in a situation wherein the
necessary preventive maintenance activities, such as preventive replacement of critical
components, equipment overhauls and necessary plant modifications, are getting backlogged
for lack of available manpower, and this, in turn, is resulting in greater incidence of failures
and loss of equipment availability.
As against this backdrop, let us consider a situation wherein the production operators perform
basic maintenance activities on their own machines. They not only maintain their own
machines in good running order but also are capable of detecting potential problems before a
major breakdown occurs (at which time, the maintenance department is called in to take the
necessary preventive action to avoid a long shutdown). This will not only leave the
maintenance department free to attend to more pressing tasks which require higher levels of
skills, but also bring back in the production operators the pride of craftsmanship. The
production operators will then cherish their machines and tools with care and this, in turn,
will inculcate in them a sense of belonging to the organisation. Thus, the integration of
simpler and routine maintenance tasks with the production work not only enlarges the
production job and makes it more interesting but also fosters in the production operators a
commitment to the plant. Moreover, with this the maintenance tradesmen are also able to
carry out their tasks properly and under a more congenial atmosphere and this brings with it a
feeling of job satisfaction in them. This, as we had noted earlier, is what is meant by
autonomous maintenance and a key ingredient of TPM is that the production operators
perform basic maintenance tasks on their own equipment.
The objectives of maximisation of equipment availability, minimisation of quality loss, and
minimisation of set-up, adjustment, idling and minor stoppages and speed losses are major
challenges to any manufacturing organisation and these challenges call for reforms and
improvements in standards, processes, methods and procedures. Such reforms and/or
improvements cannot be carried out by a few technical people working in production and
maintenance departments; these challenges require the active participation and involvement
of all employees in the organisation.
In the preceding paragraphs we have discussed the need for having a highly motivated
workforce, that is, the need for a high level of motivation in the persons who carry out the
essential tasks, or activities, whether they are production operators, maintenance tradesmen,
or quality control inspectors. After all, in the final analysis, these persons perform the
important tasks which directly affect equipment availability, product quality and productivity.
These persons must not only do their allotted task to the best of their capability, but they
should also for ever attempt to reach higher levels bf performance. Higher levels of
performance require commitment to the job, motivation and a sense of belonging to the
organisation. This sense of belonging to the organisation also inculcates in the employee a
sense of belonging to the larger group, wherein the maintenance fitter not only identifies with
the plant/equipment, he also identifies with the production operators and the quality control
inspectors, who are also a part of the same group. Thus innovative ideas and suggestions for
reforms and improvements must be preceded by an attitudinal change in the workmen leading
to involvement, which, in turn, comes from a conscious effort through a synchronization of
hand, head and heart and from creative work which is beneficial to the larger group. One of
the practical and time-tested ways of inducing involvement and a sense of belonging in the
workman is through active participation, wherein he voluntarily joins a group of people who
sit down to discuss their problems and suggest better ways of doing what they are doing; a.
voluntary small group of people who meet to discuss problems with housekeeping, quality,
equipment availability and productivity and to suggest reforms and improvements. This is
active participation and quality circles and ZD groups are its different forms. In the context of
TPM, we call these PM circles (and PM sub-circles).
7
Operations Management Involvement of the workmen on the shop-floor is not enough since, as discussed
earlier, the objectives of maximisation of equipment availability, minimisation of
quality loss and the minimisation of four other types of losses cannot be achieved
without the involvement and active participation of all employees in the organisation.
To be able to effectively deal with these challenges, the organisation has to ensure the
involvement of all functions in the organization, namely marketing/sales,
design/engineering, materials management/purchasing, production, maintenance
amid quality control. Thus the promotion and adsorbtion of TPM requires the
development of the TPM Promotion System which links the various PM sub-circles
and PM circles to the Departmental PM Committees and the Departmental PM
Committees, in turn, are linked tip ward to the Corporate PM Committee. The
Corporate PM Committee establishes the company PM policies and objectives and
oversees the activities of the various Divisional/Departmental PM Committees.
Similarly, Divisional/Departmental PM Committees establish the PM policies and
objectives for the division/department and oversee the activities of the PM circles
which come under them. There is an overlap and the shop manager/foreman wino is a
member of the Divisional/ Departmental PM Committee is the PM circle leader. The
PM sub-circles come under the overall direction and guidance of a PM circle and
consist of volunteers who may be operators, maintenance tradesman etc and is
headed by a leader, who is typically also a volunteer.
Activity A
What is preventive maintenance? Is it different from productive maintenance? Give
examples.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
Activity B
Productive maintenance is a superset of preventive maintenance. Explain with your
own experience.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
Activity C
Think of your company's maintenance management activities. Which one is in
practice now: Preventive maintenance or Productive maintenance?
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
17.3 ELIMINATING SIX BIG LOSSES
We had noted that the first of the three motives for the advocation and subsequent
adoption of TPM, as identified by Takahashi, was the adoption of the life cycle
approach for improving the overall performance of production equipment. Efforts at
improving the overall performance of plant and machinery must not only be directed
at losses due to ineffective maintenance, but also towards time other losses which
limit the effectiveness of production equipment. After all, the formal definition of
TPM clearly states that the aim of TPM is the maximisation of equipment
effectiveness and as a further clarification, it is also noted that this implies efforts
directed at the improvement of the overall effectiveness of production equipment.
Wireman, in his book on TPM, explains the first two clauses of the formal definition
of TPM, namely maximising equipment effectiveness and establishment of a total
system of PM covering the whole life of equipment, as ensuring equipment capacity
and implementing a programme of maintenance for the entire life of the equipment.
He goes on to state that ensuring equipment capacity implies efforts directed at
ensuring that the equipment performs to its specifications 'operates at its design
speed, produces at the design rate and results in quality product at these speeds and
rates'. This implies efforts aimed at the maximisation of equipment utilisation (and
8 not just the maximisation of
equipment avail - ability), and there are six significant causes of reduction of
equipment utilisation. These are as follows:
1) Losses due to ineffective maintenance, and these, in TPM terminology, are called
breakdown losses.
2) Setup and adjustment losses.
3) Losses due to idling and minor stoppages of equipment.
4) Loss due to operation at reduced speed, or at less than full (design) load-this
Wireman calls `reduced capacity loss'.
5) Losses due to poor product quality - due to defects in process and production of
defective items.
6) Loss due to reduced yield from the startup of the equipment to the point of stable
production - and this Wireman calls 'startup/restart loss'.
These are the six major equipment losses and the stress it places on the elimination of
these major losses is one of the three identifying characteristics of TPM.
The reduction of equipment utilisation has three constituents, which have to do with
the availability of the equipment, the rate at which the equipment is performing, and
the product quality performance of the production equipment (this, in TPM literature,
is called the 'quality rate', in keeping with the performance rate). Thus the overall
equipment effectiveness has three constituents, namely, availability, performance
rate, and quality rate and overall equipment effectiveness
= availability x performance rate x quality rate.
Note: These three constituents are also measures of equipment effectiveness.
These three constituents, the six big losses and the method of calculating these three
constituents from the shop. or equipment performance, data are given in Fig. 17.1.
The terns used in the figure are as explained below:
i) Loading time is the available time on the equipment for production/productive
work. This is the total time available minus the necessary time for planned or
essential activities, such as time lost due to meetings, scheduled tea/coffee
breaks or precautionary rest periods, and also breaks in production schedule or
planned production stoppages for planned/preventive maintenance work, and,
on rare occasions, scheduled production stoppages for non maintenance
reasons.
ii) Operation time is loading time minus the downtime, or the time the machine is
down for reasons other than given above under (i). Such downtime includes
time lost due to equipment breakdowns, setup of equipment, tools, dies and
accessories, and adjustments to the equipment. These adjustments are generally
carried out by operators, and take less than 10 minutes.
iii) Net operation time is the time the equipment or the machine is operated at its
design speed, or at the design rate of production, or at the design load. The time
lost due to idling and minor stoppages of the machine, and operating it at a
reduced speed or at a reduced rate of production are subtracted from the
operation time to get the net operation time. The term 'design load' has also
been included to take account of process plant equipment which are either
derated and/or operated at low loads for various reasons. An example of this
would be a 210 MW thermal power unit being operated at 150 MW because
two out of six pulverizers are down. In thermal power plant terminology, such
outages are called partial outages.
iv) Value-added operation time is the net operating time during which actual value
addition is carried out. This is obtained by subtracting the total estimated time
for rework of defective/nonconforming products from the net operation time.
Thus the time required to make tap for the quality losses is subtracted from the
net operation time to get the value-added operation time.
Activity D
Carry out an analysis of machine utilisation in ,your organisation. Find out the
significant causes of reduction of equipment utilisation.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
9
10
17.4 CHRONIC AND SPORADIC LOSSES
What we will discuss in this section relates to all the six major losses. The effect of
chronic losses is most acutely felt in the cases of equipment breakdowns and product
quality problems. Chronic is used to refer to an undesirable condition, or
phenomenon, which is either deep seated and continued over a long time, or occurs
repeatedly over a long period of time. As opposed to this, a sudden, or an unexpected,
occurrence which occurs rarely is referred to as sporadic. The difference between
chronic and sporadic losses is illustrated in Fig. 17.2.
Chronic breakdowns, or chronic defects, occur repeatedly over a long period of time
and keep on occurring till something radical, or different, is done to get rid of the
cause, or causes, of such breakdowns, or defects. Chronic losses are caused by
conditions, which, over a period of time, get to be perceived as normal, and such
losses only become obvious, or come to be recognized, when they are compared with
the optimum conditions. The figure illustrates a case wherein after the chronic loss
had been recognized, necessary efforts had been made to bring the level of loss down
to the desired optimum level. Sporadic breakdowns, or sporadic defects, on the other
hand, are sudden and unexpected occurrences and these occur only occasionally. The
cause for a sporadic problem can be easily found out. Sporadic breakdowns, or
sporadic defects, are usually due to a single cause (recall control charts and the
existence of an àssignable cause'). Sporadic. losses can thus be removed by
restoration – are pair or corrective action which restores the equipment, or the
process, to its original, satisfactory condition. On the other hand, simple restoration
actions are usually ineffective when it comes to chronic problems. This is primarily
because chronic problems are usually due to multiple causes and these causes are
usually difficult to find since they are hidden in the structure of the equipment and
also the operational and maintenance practices. Thus chronic losses call for
innovation, as opposed to restoration.
Fig. 17.2: Difference between Chronic and Sporactic Losses
There are many other differences between chronic and sporadic losses. The
differences leave been summarized in the form ofa table and this is given as Table
17.1. From the table. Ave find that one may summarize by noting that sporadic
problems, or conditions, are
11
Operations Management conspicuous, have easily identifiable causes and therefore call for simple and easily
designed corrective actions which can be implemented by line personnel. As opposed
to this, chronic problems are hidden and are usually due to a complex combination of
causes. Coming to the type of analysis required, for sporadic problems, since the
cause-and-effect relationship is rather simple to trace and such losses are generally
due to a single cause, the type of analysis required is simple and straight-forward.
Usually logical step-by-step deduction would be adequate, and in most cases, the true
cause can be detected by 'asking why five times', in keeping with the teachings of
Taiichi Ohno of Toyota. As opposed to this, the type of analysis required for chronic
problems is usually intricate and complex. It also calls for detailed knowledge of the
system/process and the equipment. This, together with the need for the application of
sophisticated techniques, such as correlation analysis; design of experiments and
analysis of variance etc., calls for the involvement of specialists in identifying,
planning and implementation of corrective action(s).
Table 17.1:Differences between Chronic and Sporadic Losses
The characteristics of different types of equipment losses are given in Table 17.2. A
closer look at the table would show the reader that five out of the six big losses have
been included in the table and the only loss which has not be explicitly included is
the startup loss. Implicitly, the startup loss is also included since yield loss is also a
form of quality loss. We have noted earlier that the difference between sporadic and
chronic losses is clearly felt (or seen) incases of equipment breakdowns and product
quality inadequate ILS. However, the table shows us that, in addition to chronic
breakdowns and chronic defects, idling and minor stoppage and speed Losses are also
hidden. Moreover, there are some setup and adjustment losses which are hidden
12 (whereas the others are quite obvious). As a
UNIT 18 ADVANCED MANUFACTURING
SYSTEMS
Objectives
Upon completion of this unit, students will get to know:
• What is a manufacturing system
• Process-oriented view of the firm
• Competitive priorities and the Indian fine
• Manual; mechanized & automated systems
• What is automation
• Hard, soft and hybrid systems
• Conceptual view of CIM
• Major components of CIM
• Benefits of CAD
• Intelligent design tools for manufacturing
• Classification of parts into families
• Evolution of NC machines
• What are robots
• Closing the design-manufacturing gap
• Retrieval & Generative Systems
• What is AGVS and ASRS
• Components of FMS
• What are wastes
• Elements of HT
• A systems approach to quality
• MRP, ERP and CSMRP systems
• What are bottlenecks
• What is a sociotechnical system
Structure
18.1 Introduction
18.2 Manufacturing Systems: Evolution & Competitiveness
18.3 Classification of Process Technology
18.4 Computer Integrated Manufacturing (CIM)
18.5 Computer-Aided Design (CAD)
18.6 Group Technology (GT)
18.7 Computer-Aided Manufacturing (CAM)
18.8 Robotics
18.9 Computer-Aided Process Planning (CAPP)
18.10 Manufacturing Planning. & Control Systems
18.11 Flexible Manufacturing Systems (FMS)
18.12 Just-in-Time (JIT) Manufacturing Systems
22 18.13 Total Quality Management (TQM)
Advanced Manufacturing Systems
18.14 Advanced MRP Type Systems
18.15 Optimized Production Technology (OPT)
18.16 Summary
18.17 Glossary
18.20 References
18.1 INTRODUCTION
A manufacturing system comprises of man, machine and processes working together
as a whole guided by a set of ideas, theories and principles. It is normally driven by
customer needs and wants. In modern systems it is very_ important to listen to the
voice of the customer and deploy his needs through the entire manufacturing process.
Figure 18.1 shows such a system along with the necessary feedback loops which help
transform the raw material into finished goods (through a series of value added
stages) for the satisfaction of either the stated or unstated needs of the customer. The
basic functions of this generic manufacturing system are product & process design,
planning & control and the manufacturing process. Modern concepts are aimed at
integrating these functions to form a sensitive system, which is responsive to the
ever-changing customer needs.
Under the liberalized economy, we are facing global competition in our own soil.
Foreign capital, in the form of advanced manufacturing systems, is compelling Indian
companies to rethink their manufacturing strategies for competing on the dimensions
of cost, quality, flexibility and deliverability. Hence it is important for us to
understand the various modern-manufacturing systems available today.
It is important for us to note that no organizational function can work in isolation.

Therefore, instead of having a functional viewpoint. of the organization, we need to
develop a process orientation. Hence the manufacturing system also can no longer be
compartmentalized. Firms have to adopt a process-oriented view of themselves while
being proactive in terms of meeting future challenges.
In this chapter we will be seeing several advanced technologies that can help
organizational functions to excel as independent sub-systems. However, it is
important for us to adopt strategies through which these technologies can be
integrated to form manufacturing and/or business systems appropriate for our
sociotechnical environment.
Figure 18.1: A Manufacturing System

23
Operations Management 18.2 MANUFACTURING SYSTEMS: EVOLUTION &
COMPETITIVENESS
Over the years manufacturing systems have evolved to provide potential competitive
weapons used by firms to stay ahead in business. A typical manufacturing system
would provide a set of critical success factors which can best support the overall
business objectives in terms of cost, flexibility, quality and deliverability. Thus
depending on the firm's business objectives we have different sets of these success
factors being used through appropriate manufacturing systems which help the firm in
a competitive environment. Table 18.1 shows some of these competitive priorities
used by firms worldwide.
Table 18.1: Competitive Priorities
World class companies use different types of advanced manufacturing systems to

support their competitive priorities. Some of these systems will be discussed in the
following sections. A Japanese Manufacturing System is one such system, which
helps the firm face competition. For the Japanese firm quality is not a competitive
advantage anymore is it is just a qualifier. Their biggest challenge is low price.
Studies have indicated that companies in Japan have made low price as their top most
priority for competing globally since the mid-eighties. The next in importance being
rapid design changes followed by consistent quality. The rest being on-time
deliveries, rapid volume changes, high product performance, fast delivery and
reliable after sales service.
For the Indian Company the focus has been mostly on mass production. The fifty
years of protected economy insulated the Indian industry from foreign competition.
The industry, which was not even domestically competitive, was far from being
globally competitive. However, with the liberalized economy we have global
competition on the home turf. Now we want it or not we have to face competition. In
order to face competition we have to understand, customize and use the right kind of
advanced manufacturing systems with the optimum blend of technology and people
to form effective socio-technical systems for our industry (or socio-economic
conditions).
In this chapter we will try to understand some of the advanced manufacturing
systems used by the world-class companies. Since advanced technology is a key
component of any manufacturing system, we first try to classify technology and
understand some terminology. This classification will help us in understanding and
positioning our own manufacturing system depending on our needs. We will discuss
24 this in the following section. After that we will try to understand some of the
important manufacturing systems that we can adapt to our needs.
Activity A
Take a manufacturing firm you know. Draw the complete process. Show value
addition taking place. Identify the non value-added stages.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
Activity E
Take five different firms belonging to the same industry. Compare their respective
competitive priorities.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
18.3 CLASSIFICATION OF PROCESS TECHNOLOGY

Technology plays a key role in the development of manufacturing systems.
Technology itself has made rapid advancements since the beginning of the industrial
revolution gradually replacing the human power with machine power. Hence,
manufacturing technology can be classified into three categories: Manual,
Mechanized, Automated. Figure 18.2 shows this classification.
Source: Adapted from Modem Production /Operations Management by E.S.Buffa &

R.K.Sarin
Figure 18.2: Classification of process technology
Automation applies mechanical, electrical and computer-based systems to drive and

control production. It helps in improving product quality, ensuring fast production
and delivery, offering product flexibility and lowering labor costs. Automation is
again of three types: fixed automation, flexible automation and programmable
automation. While fixed automation is for producing high volume products,
programmable automation, on the other hand, can only yield a few parts by volume
but variety of parts as compared to the type of design. This is shown in Figure 18.3.
The evolving process technologies over the last few decades can be also categorized
under their respective area of applications as suggested by Shani et al2: 25
• Engineering technologies such as computer-aided design (CAD), computer-

aided engineering (CAE), computer-aided process planning (CAPP), computer-
aided manufacturing (CAM);
• Manufacturing techniques such as robots, group technology, cellular

manufacturing, flexible manufacturing systems (FMS), automated
storage/retrieval system; and
• Business techniques such as manufacturing requirements planning (MRP 11),

just-in-time (JIT), kanban techniques, and total quality management (TQM)
Meredith and Hill' have classified advanced manufacturing technologies based on

their level of integration. Thug:
• Level l -stand-alone (or unitary) equipment such as robots or numeric-controlled

(NC) machine tools.
• Level 2 - cells consisting of groups of equipment and materials for the production
of parts, typically utilizing group technology (GT) and computer-aided
manufacturing (CAM). At their highest level of integration, a cell might form a
flexible manufacturing system (FIMS).
• Level 3 - linked islands involving cells from level 2 being linked together into
larger production systems which typically utilize CAD/CAM, automated storage
and retrieval systems, JIT, and MRP II.
• Level 4 -full integration providing linkage of entire manufacturing function and

all, its interfaces through an extensive information network. This level of
integration is commonly known as computer integrated manufacturing (CIM).
Literature4 also provides a further classification of the various emerging hard and soft
technologies currently in use by world class companies. As per this classification we
have hard technologies, soft technologies and hybrid technologies. Table 18.2 below
shows this classification along with the grouping of technologies under each class.
Thus we can have various combinations of these technologies forming different

modern manufacturing systems. These modern systems provide for both flexibility
and integration. In this unit we will discuss manufacturing systems adopting hard
technology, soft technology and hybrid technology. "A soft technology uses
programs, philosophies and behavioral approaches. A hybrid system uses information
technology (IT) as an enabler and combines the advantages of both the hard and soft
technologies somewhat more effectively
26 In the following sections, we will discuss CIM and its components to understand how
advanced manufacturing systems work.
18.4 COMPUTER INTEGRATED MANUFACTURING

(CIM)
CIM Systems provide an integrated approach to production processes through
efficient information handling for overall improvements in product quality and
productivity. An integrated system is far more beneficial than isolated islands of
computerized applications in different areas like design, manufacturing management
and planning. Figure 18.4 and figure 18.5 show two popularly used conceptual views
of CIM. Figure 18.4 shows the various components of CIM which use computing
technology to achieve fully automated process integration.
Figure 18.4: Computing technology in manufacturing

The word "integrated" in the context of CIM is used to describe several instances of
applications needing integration of data, information, functions, processes, machines
or devices. Thus, CIM systems can be used for integrating data or information either
horizontally or vertically within an organization. For example, they can be used
27
Operations Management either for coordinating engineering functions with manufacturing functions or for
coordinating manufacturing processes with one another. They could be used for
integrating material handling systems with production control systems and also for
coordinating methods and procedures in one part of the organization with those in
other parts. Figure 18.5 shows the various components of a modern CIM system,
which includes systems management as yet another important module. .
CIM systems represent the use of most of the hard technologies shown in Table 18.2.
Thus the various components of a CIM system are: computer aided drafting,
computer aided design (CAD) and engineering (CAE), computer aided production
planning (CAPP) computer aided manufacturing (CAM), computer aided quality
control (CAQC), numerically controlled (NC/CNC/DNC) machine tools, Robots,
transfer lines and flexible manufacturing systems (FMS). In addition, to be effective,
they also use the systems management concepts, which include JIT, TQM, and MRP.
These are discussed in the following sections.
Fig-18.5: Components of CIM5
Activity C
Visit few manufacturing organizations. List all the design and manufacturing
activities that have been computerized.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
18.5 COMPUTER-AIDED DESIGN (CAD)

These are specialized software and hardware which allow engineers to design
products directly on computer terminals, analyze them and store in electronic
databases for later use by computer aided manufacturing systems. Computer graphics
is used to design geometric specifications of a part., which is further evaluated and
28 analyzed with the help of computer –
aided engineering (CAE). CAD packages can be also used to generate numerically
controlled part programs, which give instructions to computer-controlled tools.
CAD systems enhance productivity through faster synthesis, analysis, and
documentation of designs, resulting in shorter product development lead-time and
lower design costs. They provide greater accuracy and improve quality of designs
through computer-aided engineering. They help generate large number of design
alternatives. These systems also improve communication through better quality of
engineering drawings. A CAD system helps create a database for manufacturing with
details on the material specifications, product dimensions, and bill of materials. Thus
CAD benefits also get carried over to CAM. Figure 18.6 shows a typical CAD/CAM
system.
Modern design systems engage rules and techniques for efficient design from a
manufacturing viewpoint. For example, for a part to be produced by the machining
process, the designer must be guided by the following rules for economic machining:
• Design to use standard components,
• Use pre-shaped work pieces (designed for a similar previous job) to minimize
machining,
• Standardize the features6 to be machined,
• Avoid impossible to machine features,
• Avoid difficult to machine features,
• Minimize features that are expensive to produce, and so on.
Fig. 18.6: A typical CAD/CAM System

Thus, we have modern concepts like design-for-manufacturability, design-for-
machinability, design-for-assembly, and other similar design-for-X methodologies,
which foster concurrency by taking all downstream concerns of a manufacturing
system up-front. These systematic design-for-manufacture concepts form a part of
CIM systems. Note the level of detailed domain knowledge that is required for the
parts, tools and processes. Computers provide suitable database structures to store
and manipulate such data. Much research has been done on such systems, which
provide intelligence to the CAD tools used for manufacturing [See Box 1: Intelligent
design tools: the need of the hour].
18.6 GROUP TECHNOLOGY (GT)

It means grouping parts of a similar characteristic into families. Grouping is done
either based on similarities in design (i.e., the geometry of the parts), or based on
similarities in manufacturing (i.e., the type of processing requirements). For
computer-compatibility and ease of classification, various coding schemes are used.
Coding schemes facilitate retrieval of parts for either design or manufacturing
purposes. Thus, GT can be used either for retrieving existing designs for developing
new parts or for retrieving existing process plans for generating new ones by editing.
GT can be also used in forming manufacturing cells of machine groups that are
closely associated with each family of parts. The benefits of GT are shown in some
of the following sections.
29
Operations Management 18.7 COMPUTER-AIDED MANUFACTURING (CAM)
These are specialized computer systems that translate the CAD information into
instructions for automated production machines. CAM involves the effective use of
computer technology in the planning, monitoring and control of manufacturing
processes Figure 18.7 shows some applications of CAM.
Fig. 18.7: CAM Applications
CAM includes several technologies, such as, computer-run machine tools (NC, CNC
and DNC machines), flexible manufacturing systems (discussed later), automated
assembly systems, and computer-aided quality control systems. A numerically
controlled (NC) machine tool is a form of programmable automation, which can
accommodate a variety of part configurations. It can be programmed to perform tasks
either directly, or with a disc or tape. Figure 18.8 shows the evolution of NC
machines to CNC (computerized NC) and DNC (direct NC) machine tools-with the
help of computing technology. The operating principle in all forms of NC machines
is the control of the relative position of a tool or processing clement with respect to
the work-part being processed. The basic components include a program, (with
detailed step-by-step instructions for positioning the spindle, selecting the speed,
tools and other functions), machine control unit (which reads the program of
instructions and runs the processing equipment) and the processing equipment (e.g. a
drilling, milling or turning machine).
30 Fig. 18.8: Evolution of NC machines

18.8 ROBOTICS
A robot is a programmable, multi-functional manipulator with an end-effector (such
as a gripper or welder). Modern day robots also possess vision capability: Robots can
be used to move work-pieces and/or tools along a specified path. Advancement in
robotics is aimed at enhancing the capabilities of robots to emulate the human worker
in terms of his dexterity, flexibility and intelligence. They are useful because they can
withstand hostile environmental conditions and work long hours with consistency in
output. Apart from this, they have a wide range of applications in material handling,
machining, assembly, and inspection. They arc used, for example, in welding and
spray painting operations.
18.9 COMPUTER-AIDED PROCESS PLANNING (CAPP)
Process planning is necessary to determine the sequence of individual manufacturing
operations needed to produce a given part or product. Typically, the operation
sequences are documented on a route sheet, which is a listing of the production
operations and associated machine tools for a work-part or assembly.
large number of machine tools per part: (b) new machine tools in the shop floor,
which effect the old optimal routings and (c) machine breakdowns, which force
temporary routings to be documented as permanent routings.
The above issues are better managed with the help of automated process planning. A
CAPP system helps generate production routings that are rational, consistent and
even optimal. There are two types of CAPP systems: (a) Retrieval type CAPP
systems and (b) Generative CAPP systems. Retrieval systems are also known as
variant systems, which use group technology (GT) to group parts into families that
are distinguished according to their manufacturing characteristics. For each family a
standard process plan is established. This plan is stored and retrieved when
necessary. For parts having slightly different manufacturing requirements, existing
process plans are customized (through editing) to accommodate the variation (hence
also known as variant systems).
Fig. 18.10: A Generative CAPP System

31
Operations Management Generative CAPP systems create process plans using expert systems based on logical
procedures. An expert system is a computer program that helps the system emulate
the human expert. In a fully generative CAPP system the process plans can be
generated without human assistance and without any dependence on pre-defined
standard plans. Thus the components of a fully generative system are: (i) A technical
knowledge base, (ii) a CAD data base (or even a data base of GT codes defining the
part features) for storing the part descriptions, and (iii) an inference engine having the
capability to apply the domain specific process knowledge and planning logic for the
particular part description being planned. Figure 18.10 shows a generic generative
CAPP system.
18.10 MANUFACTURING PLANNING AND CONTROL

SYSTEMS
These are computer-based information systems that plan and schedule operations.
Automated planning and control systems, as pointed earlier, compare alternatives,
monitor operations, update data continuously, and project operating results. Such
systems also include order-entry processing, shop floor control, purchasing, and cost
accounting. Hence, they are closely associated with automated material handling
systems, which are guided by computers to store and retrieve items. Automated
storage and retrievable systems (ASRS) are computer-controlled warehouses where
parts are stored and retrieved automatically as needed in manufacturing and/or
shipping. Automatic transportation of parts within the factory is done using automatic
guided vehicle systems (AGVS).
18.11 FLEXIBLE MANUFACTURING SYSTEMS (FMS)

These are clusters of automated machines that are controlled by computers. The
clusters produce variety of products on the same machinery. Machine settings are
automatically changed, as per computer instructions, to produce the different variety
of products. Robots and automated material handling systems are used for handling
the parts. Figure 18.11 shows how a typical FMS looks like.
Fig. 18.11: A Flexible Manufacturing System (loop layout)
Thus, the basic components of an FMS are: (i) Automated processing stations, which
use a variety of programmable machine tools having large tool banks; (ii) Automated
material handling systems, for handling the parts contained in pallets and transferring
them between machines in any routing sequence; (iii) Computer control systems, for
coordinating the activities between the other two components; and (iv) Human
operator, for loading raw parts onto the system, unloading finished parts (or
assemblies), changing tool settings, maintaining and repairing equipment, NC part
32 programming and operating the computerized system.
An FMS combines flexibility with efficiency. When properly applied, these systems
reduce manufacturing lead times, reduce work-in-progress, achieve higher average
machine utilization (through off-line setups and better scheduling), and provide
greater flexibility in production scheduling. One example from a foreign country is
General Electric's electric-meters plant: in New Hampshire, USA, which produces
2000 different meters on the same flexible equipment.
Activity D
Visit a suitable manufacturing organization. Collect a list of the various automated

material handling systems that you come across.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
18.12 JUST-IN-TIME MANUFACTURING SYSTEMS (JIT)

JIT also known as zero inventories and stockless production is a philosophy of
manufacturing, which focuses on the reduction of waste and delays at each stage of
the manufacturing process starting with purchase and ending with after-sales-service.
The major focus of a JIT system is waste elimination.
Fig. 18.12 (a-e): The Seven Wastes
Waste is anything other than that which adds value to the product. Every moment
from order entry to delivery is meant to add value to the product. Non-value adding
moments are reduced to a minimum. Thus, waste is also defined as anything other
than the minimum amount of equipment, materials, parts, space, and time, which are
absolutely essential to add value to the product. There are several types of wastes.
Toyota motor company of Japan has identified seven wastes after years of continuous
improvement activities (see figure 18.12). These are1 : waste from overproduction,
waste of waiting time, waste of transportation, processing waste, waste of motion,
inventory waste, and waste from product defects. As high-lighted in Figure 18.12.
Japanese manufacturing systems focus on producing what the customer desires
without any delays or defects, and without wasting any resources (i.e., labor,
material, or equipment). They employ methods through which employees are bound
to develop.
33
Computers in Operations
Management
UNIT 19 COMPUTERS IN OPERATIONS
MANAGEMENT
Objectives
After studying this unit, students will be able to:
• Appreciate the strategic role of computers in operations management

• Learn the impact of computers - in - manufacturing for restructuring operations
management in the coming years
• Comprehend strategies for information systems (applications), information,
management (monitoring and control) and information technology (delivery) in
operations management in future
• Understand the impact of integrating information technology (IT) in all facets of
operations management
• Visualise reconfiguration of operations management to meet changing needs and
wants of the customers who would demand increasingly highly differentiated and
customised products.
Structure
19.1 Introduction
192 Continuous Performance Improvement
19.3 Computers in Demand Forecasting and Order Processing
10.4 Computers in Design and Drafting
19.5 Computers in Purchasing and Outsourcing
19.6 Computers in Materials Management
19.7 Computers in Operations Planning, Scheduling and Control
19.8 Computers in Manufacturing
19.9 Computers in Process Control and Quality Management
19.10 Computers in Technology and Productive Maintenance
19.11 Computers in Automatic Assemblies
19.12 Computers in Finished Product Warehouses
19.13 Computers in Distribution (Outbound Logistics)
19.14 Future Trends in Operations Management
19.15 Emerging Importance of Information Technology
19.16 Summary
19.1 INTRODUCTION
The role of computers have gone much beyond debates, discussions and doubts.
Computers and its latest avataar, Information Technology, has already arrived and
should encompass the overlapping technologies of computing, micro-electronics,
robots and telecommunications capabilities.
Operations management has been undergoing a metamorphic change in its
philosophy, content and approach ever since Michael A. Porter, the Guru of strategy,
has propounded the Value Chain Analysis (VCA), which is a whole new way of
looking at a company's functions and structures. Porter has visualised a firms
structure as below : 45
An organization's functions can be grouped as below:

a) Primary Activities
i) Inbound logistics
ii) Operations
iii) Outbound logistics
iv) Marketing and sales
v) Service
b) Support Activities
i) Purchasing and Outsourcing
ii) Human Resource Management
iii) Technology (or knowledge base)
iv) Infrastructure comprising of finance, planning, quality etc.
Subsequently Porter and many other researchers have argued that it is not only
important to develop competence in these individual functions, but also build strong
links among them so that they function in tandem to one another and harmonize their
activities to deliver higher real and perceived value(s) to the customer. It is almost
impossible to visualize strengthening links among individuals, functions and
companies without learning to use computers imaginatively and integral with
telecommunication, micro-electronic and information technology capabilities.
19.2 CONTINUOUS PERFORMANCE IMPROVEMENTS

Operations management plays a pivotal role in the overall business strategy of an
industrial enterprise and although it is more focused in manufacturing industry, it is
becoming equally relevant in the service industry despite its spread, variety and
complexity.
The approach towards effective operations management has been in flux for quite
some time. Japanese management practices have brought into the centre of the radar
screen of operations management, following seven issues, represented by the ultimate
performance standards by moving towards -zero' progressively and positively:
1. Zero Defects
2. Zero Set-up Time
3. Zero Handling
4. Zero Batch Size
5. Zero Breakdown
6. Zero Lead Time
7. Zero Surging
These may not be attainable in practice but they do provide a guiding framework for
46 continuous improvement in performance.
The above seven-pronged approach in improving effectiveness of operations Management
management can be realised by increasingly integrating computer and information
technology with all facets of working of the conversion process viz.
- Computers in marketing (or more specifically in demand forecasting and order
processing)
- Computers in design and drafting
- Computers in purchasing and outsourcing
- Computers in materials management, including inward logistics and stores
- Computers in operations planning, scheduling and control
- Computers in manufacturing
- Computers in process control and quality management
- Computers in tero technology and productive maintenance systems
- Computers in productivity measurement, performance evaluation and reward
systems
- Computers in automatic assemblies
- Computers in finished product warehousing
- Computers in distribution or outbound logistics
We would now describe role of computers now and in future, in the above twelve
functional areas:-
19.3 COMPUTERS IN DEMAND FORECASTING AND

ORDER PROCESSING
Listening to the voice of the customers means analysing his needs and wants in a
systematic manner. The approach would be monitoring these so closely and
frequently that we can forecast the trend in his needs and preferences over time. This
leads to more reliable decision in the choice of products and its features.
Similarly if it is a customized product, it is important that the order is processed
expeditiously over the computer network to the manufacturing units without any
delay or detention. This is possible to achieve by installing appropriate computer
systems which are on-line, real-time systems.
In the case of fast-moving consumer goods (FMCGs) the preparation of the invoice at
the departure counter of the retail store itself, triggers off flow of information to the
concerned wholesaler and/or manufacturer instantaneously through computer
networks.
Activity A
Think of an order processing system when a large number of sales orders are to be
delivered from stockable items in finished product warehouses. Draw up a suitable
reporting system, on a weekly basis, to highlight the volumes processed and level of
service, in terms of delays in executing delivery from the firm's warehouse.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
19.4 COMPUTERS IN DESIGN AND DRAFTING

Computers are being used extensively in the computations of design, evaluating
alternatives etc, in hard engineering areas to developing computerized textile, fashion
or film animations. Computers are playing a role of underpinning technology in
multimedia creations and have ingressed into almost all walks of life.
Local Area Networks (LANs) and Wide Area Networks (WANs) have made it
possible for designs of various specialist functions to work concurrently and
simultaneously on their 47
Operations Management areas instead of working sequentially. This has reduced the cycle tunes significantly.
Besides, design offices, Computer Aided Design/Drafting (CAD) systems have been
linked to Computer Aided Purchasing, Materials Management and Manufacturing
Systems. As and when the design of the product is completed, designers of jigs,
fixtures, tools, gauges, punches, dies etc. get into stride simultaneously to preparing
the Material Requirement Planning (MRP), triggering off purchasing and
manufacturing activities.
Activity B
Think of a number of functional specialists working as a team, on a product design in
a totally computerised environment.
Can you visualise a. method by which they interact frequently on the computer
network so that the overall time duration for launching a new product is substantially
reduced.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
19.5 COMPUTERS IN PURCHASING AND

OUTSOURCING
Owing to greater emphasis on core competence, companies are going virtual by
outsourcing a large number of jobs and functions. This has increased the relevance
and importance of building long term relationships with your suppliers and vendors
of materials and services. Computers have made it possible by improving the access,
reach and spread of purchasers.
Besides, we can install computer hook-up with most of the ancillaries who would
make available complete data on the availability, price, delivery of components they
make on a long-term basis for the purchaser, who can access this data and dispatch
the purchase order electronically to the supplier.
Purchasing procedures have been re-engineered to speed up the entire process.
Purchasers no longer wait for invoice to be received and advise preparation and
dispatch of payment cheques, as per the terms of payment, no sooner the quantities
received are matched with quantities in purchase order. This is done through
computerized system.
Add to this the possibility of automatically advising your banker to electronically
transfer the payment to suppliers' bank account (Electronic Clearance Service has
already been introduced by the Reserve Bank of India albeit for a few selected cities).
Activity C
If your firm is hooked onto the suppliers of most of the components and sub
assemblies, can you describe a system of telepurchasing.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
19.6 COMPUTERS IN MATERIALS MANAGEMENT

Computers have been used extensively in operating inventory control systems in
warehouses for raw materials, for packaging materials, for maintenance parts and
spares, for petrol, diesel, oil and lubricants, for consumables, for laboratory
chemicals, for safety equipment, for various stationery etc. Usually fixed order
quantity review system comprising of minimum stock, ordering level and economic
order quantity is operated. The moment stock of an item depletes to the ordering level
(OL), the computerized schedule triggers off the indent for, purchasing the net lot -
Order Quantity (OQ) which should generally arrive before the stock is exhausted. A
48 buffer of minimum stock is maintained to
provide for fluctuations higher than the mean rate of consumption and/or a mean lead Management
time of the supplier.
Computers are also used for preparing purchase orders and currently; thanks to
advances in telecommunication, purchase orders can electronically be dispatched to
the supplier.
Similarly, computer systems are used to support progressing and inspection at
vendors works, tracking materials in transit from different locations, reporting arrival,
arranging acceptance with or without the assistance of inward inspection, binning etc.
Similarly in the event of any consignments being rejected on arrival suppliers are
advised to collect the same back. Computers keep a tab on the movement of materials
until these have been physically put into the designated location and taken into
computerized inventory control mechanism.
During the last ten years, organizations have installed total material requirement
planning-MRP systems which maintain total control on the out-sourced materials and
services as well as in-house manufactured components, sub-assemblies and final
assembly, packaging and transfer into finished product warehouses.
The framework of MRP usually extends cover the finished product warehousing
including dispatches to various destinations within the organisation as well as direct
dispatches to customers, wholesalers etc.
Computers have already become indispensable in this area and it is becoming rather
difficult to visualize how companies could operate a reasonably efficient materials
management without computers. With the continuing drop in prices of personal
computers, it is al most becoming clear that hardly any company's operations are
small enough to exclude the use of computers.
Activity D
Briefly describe the technique of Material Requirement Planning and highlight how
computerisation would help in better co-ordination and control of material flow.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
19.7 COMPUTERS IN OPERATIONS PLANNING,

SCHEDULING AND CONTROL
Conversion process is rather complex as a large number of variables come into play
and can influence the planning and scheduling of individual operations of each
component. It is rather difficult to visualise operations in the present day world
without the use of computers.
Scheduling high volume (mass) production systems represented by continuous
production processes or assembly lines is perhaps the simplest. However, assembly
line manufacturing is, in turn, dependent upon production of large number of
components and subassemblies which are the result of batch production system
and/or job shop production systems. Operation Planning and Scheduling and Control
of theses type of manufacturing systems is rather complex and cannot be done within
the constraints of time available, without imaginative use of computers in material
requirement planning (MRP)., Manufacturing Resources Planning (MRP-Ii) or its
latest and increasingly popular version of Enterprise Resource Planning (ERP).
19.8 COMPUTERS IN MANUFACTURING

When Computerised Numerically Controlled machine tools originated in 1970s.
these were rather expensive and it was thought that, to get the most of these CNC
machines, we have to operate them in three shifts (round the clock) and go in for
longer nuns (larger batch sizes) to economise on unit cost of production. However,
technology developed so rapidly that we were able to integrate computers into not
only the process of manufacturing, but also in shorting the time involved in setting up
and changeover. This meant that CNC 49
Operations Management machining centres could be set up very, quickly for new jobs. In many cases, the
changeover time reduces from days to hours and hours to minutes. This imparted the
much needed flexibility and reduced the response time for manufacturing units to
changing customer demands. Thanks to these advances in Computer. Aided
Manufacturing (CAM) systems, move to Flexible Manufacturing Systems became a
reality. Today this very technology is helping to changeover to Just-in-Time (JIT)
technology and even batch or job-shop production systems are approximating to
assembly line ones i.e. reducing the lot size of production between different work
stations to one - similar to what is obtained on an assembly line or conversely,
production patterns will move towards job-shop production systems.
19.9 COMPUTERS IN PROCESS CONTROL AND
QUALITY MANAGEMENT
As the focus shifted to manufacturing products correctly first time, it became clear to
forward thinking managers that quality cannot be inspected into a product - instead it
is a very basic feature of a product and should be designed into the product at the first
stage itself. It was also revealed that cent percent inspection is neither required nor
reliable - doubts were expressed about the consistency of performance in human
inspections. Today increasingly human intervention for inspection of products is
being replaced with electronic measurements through better design of measuring
instruments and equipment. The philosophic approach has shifted to monitoring and
management of process conditions; consequently, what would ensue from the process
- the final product, will be consistently of the right quality. Computers are playing
increasingly important role in continuously monitoring, supervising and managing
critical process conditions without relief, without tea, coffee and lunch breaks,
without getting tired, withstanding heat and cold, rain and dry weather, in polluted
stinking or nuclear hazardous working environments. For example, the plant
availability of thermal power plants can be substantially enhanced by installing
micro-processor based Flame Safeguard and Supervisory System (FSSS),A computer
aided scanner maintains round-the-clock vigil on the size of the flame in the furnace
(the very heart of thermal power plant). With the help of the basic capability of
computers of comparing, a digitized size of the flame is stored in the computer
memory permanently. When the size of the flame increases beyond the upper limit of
the specified flame size, the microprocessor activates and reduces the flow of fuel in
the pipeline until its flame size returns to normal permissible size. Conversely, when
the flame in the furnace shrinks in size below the lower desirable size of the flame,
the microprocessor actuates the fuel lines again and increases the flow so that the size
of the flame returns to its normal size i.e. within the upper and lower permissible
limits. This precludes the possibility of fission or bursting of tubes in the boiler and
consequently prevents breakdown of thermal plants, reduces thermal shocks to the
tubes and prolongs the operating life of the equipment.
Besides, electronics, in particular, industrial electronics, will play greater role in
measuring process variables on a continuous basis, monitoring and managing the
process conditions and keeping them within the desirable limits. Just as it is possible
to control space aircraft from central station on earth, we are able to fly aircrafts
without pilots, railway trains without drivers etc. Similarly, in coming years, it would
be possible to monitor and control centrally the entire manufacturing unit (cybernated
factories) from computerized control rooms.
With the continuous increase in computing capabilities of the chip, the heart of the
computer, it has already become feasible to obtain solution to scheduling the next job
on the machine while previous one is being worked upon, by taking into account all
the variables of availability of materials, tools, jigs and fixtures, drawings, operator,
machines etc--a task that, until recently,, has been baffling production planners and
schedulers.
Computers in manufacturing will be able to co-ordinate different computer aided
functions and take a wholistic decision, taking into account all the contingent factors.
Activity E
Can you think of any household or office equipment, which cuts in and cuts out at
two extreme limits of specifications on higher and lower side automatically.
50 …………………………………………………………………………………………

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Production and Operations

UNIT 1 PRODUCTION AND OPERATIONS

Perusal of this unit will impart to the students an understanding of the.

1.1 SCOPE AND SIGNIFICANCE

1.3 FACTORS OF PRODUCTION

1.4 PRODUCTIVE USE OF RESOURCES

Input= Output + Waste

Dividing both sides by input. we obtain

There are two approaches for enhancing utilization of resources viz.

Productivity like efficiency is the ratio of output to input

This ratio can be increased/improved in the following ways:

Reduction of waste or scrap is another way of enhancing productivity. If we work out

1.5 ENVIRONMENTAL CONCERNS OF OPERATIONS

Upon completion of this unit you should be able to:

2.2 ROLE OF PRODUCTION MANAGEMENT

2.2:.1 The reactive role of Production/Operations Management

Many companies do not find it necessary to incorporate the functional area

Today's production management is not confined to the plant level manufacturing

2.3.1 Production System Model

A production process consists of 1) objective, 2) input, 3) processing, 4) output, and

1) A clear-cut objective should be established for any production activity.

For smooth production it is essential that proper coordination should be achieved

2.3.2 Characteristics of Production Systems

A production system is characterised by the following:

UNIT 3 TOTAL QUALITY MANAGEMENT

After going through this unit, you should be able to understand:

3.3 QUALITY TERMINOLOGY

External customer: One who purchases a commodity or service. External customers

Hence, almost everyone in an organization has a customer. Satisfying the customer

Value Addition: When raw material is processed in an organization, at each stage

3.4 UNDERSTANDING THE CUSTOMER

The process of developing the House of Quality involves :

3.5 UNDERSTANDING AND IMPROVING TIME

To know whether a system is improving or not we need to have a measurement framework

Table 3.2: Creative Problem Solving and Seven QC Tools

Problem-solving Step Useful Tools

Source: The Management and Control of Quality by J. R. Evans and W.M.Lindsay

UNIT 4 NEED AND IMPORTANCE

a) Type of past data

b) Pattern of past data

c) Time horizon of forecast

This method of projecting the past into future is termed as FORECASTING

UNIT 5 QUALITATIVE METHODS OF

5.2 JUDGEMENTAL FORECASTING

5.3 THE DELPHI TECHNIQUE

a) Talk Estimate (TE):Interaction Group Committee or Panel

5.3.10.1 The Nominal Group Technique (NGT)

5.3.10.2 The Estimate-Feedback-Talk-Estimate (EFTE) Procedure

5.4 FORECASTING BASED ON CROSS,IMPACT

UNIT 6 QUANTITATIVE METHOD OF

Qualitative forecasting depends on managerial experience, because they do not use

6.4 SPECIFIC FORECASTING METHODS

6.5 MAIN CLASSES OF QUANTITATIVE MODELS

40 i) Regression and correlation analysis

Where T, = estimated value of the dependent variable

bl = slope of the trend line

x = independent variable (time in trend analysis)

(Adapted from course material, Department of Management Studies, IIT, Delhi).

Tt is measured in units of Yt but St , Ct and Rt are all measured in relative terms.

Here the time period t =1, 2...16

Other values are calculated and tabulated for your reference.

Step 2: From Tt Ct component (centered MA), identify seasonal-random component.

Q3=> 895 /912.375= 0.981

then ROP =dLT-2Qo