Operations Management

An Introduction
Anindo
 What is Operations Management?

• Operations Management is
– a systematic approach to
– address all the issues pertaining to
– the transformation process that converts some inputs into output
that are useful, and
– could fetch revenue to the operations system
 Transformation process
• The input–transformation–output process is characteristic of
a wide variety of operating systems.
• The transformation process can be
– Physical (as in manufacturing)
– Locational (as in transportation or warehouse operations)
– Exchange (as in retail operations)
– Physiological (as in healthcare operations)
– Psychological (as in entertainment)
– Informational (as in communication)
Operations as the Core
 Basic terminologies
• A process is any activity or group of activities that take one or
more inputs, transforms them, and provides one or more
outputs for its customers.
• An operation is a group of resources performing all or part of
one or more processes.
• A supply chain is an interrelated series of processes within
and across firms that produces a service or product to the
satisfaction of customers.
• Supply chain management (SCM) is the synchronization of a
firm’s processes with those of its suppliers and customers to
match the flow of materials, services, and information with
customer demand.
 Process View
Internal & External
customers

INPUTS
• Workers 1 3 OUTPUTS
• Managers
• Equipment 5
• Goods
• Facilities 2 4
• Services
• Materials
• Land Process
• Energy

Information on
performance
 Supply Chain View
Support processes

External customers
External suppliers

New Service/ Customer

Product relationship
Development process

Supplier Order
relationship fulfilment
process process
 Core Processes
• A core process is a set of activities that deliver value to the
external customers. Managers of these processes and their
employees interact with external customers and build
relationships with them, develop new services and products,
interact with external suppliers, and produce the service or
product for the external customer.
 Support Processes
• A support process provides vital resources and
inputs to the core processes and therefore is
essential to the management of the business.
PRODUCTION SYSTEMS
 4Ms of a Production System
• Method
• Manpower
• Machine
• Materials
 Competitiveness and Productivity
• The OECD (Organization for Economic Cooperation and
Development) defines competitiveness as “the degree to
which a nation can produce goods and services that meet the
test of international markets while simultaneously maintaining
or expanding the real incomes of its citizens.”
• The most common measure of competitiveness is productivity.
• Productivity is calculated by dividing units of output by units
of input.
 Total Productivity, Partial Productivity,
and Multifactor productivity
• Partial productivity (also called Single-factor productivity)
compares output to individual inputs, such as labour hours,
investment in equipment, material usage, or square footage.
• Multifactor productivity relates output to a combination of
inputs, such as (labour + capital) or (labour + capital + energy
+ materials). Capital can include the value of equipment,
facilities, inventory, and land.
• Total factor productivity compares the total quantity of goods
and services produced with all the inputs used to produce
them.
 Problem 1.1
• Tried and True Clothing has opened four new
stores in college towns across the state. Data
on monthly sales volume and labour hours are
given below. Which store location has the
highest labour productivity?
 Problem 1.2
• Tried and True’s accountant (from Problem 1-1) suggests that
monthly rent and hourly wage rate also be factored into the
productivity calculations. Annandale pays the highest average
wage at $6.75 an hour. Blacksburg pays $6.50 an hour,
Charlottesville $6, and Danville $5.50. The cost to rent store
space is $1800 a month in Annandale, $2000 a month in
Blacksburg, $1200 a month in Charlottesville, and $800 a
month in Danville.
– Which Store is most productive?
– Tried and True is not sure it can keep all four stores open. Based on
multifactor productivity, which store would you close? What other
factors should be considered?
 Problem 1.6
Omar Industries
 Problem 1.6 (Contd.)
Omar Industries maintains production facilities in several
locations around the globe. Average monthly cost data and output
levels are given (in previous slide).

a. Calculate the labour productivity of each facility.

b. Calculate the multifactor productivity of each facility.

c. If Omar needed to close one of the plants, which one would

you choose?
 Competing by Operations
• COST
– Low-Cost Operations
• QUALITY
– Top quality
– Consistent quality
• TIME
– Delivery speed
– On-Time delivery
– Development speed
• FLEXIBILITY
– Customization
– Variety
– Volume flexibility
 Demand
(Facility & layout)

Forecasting
TRANSFORMATION
ACTIVITIES Legal
E Personnel & Social E
N Process design N
and process planning O
V I V
I Production control U I
N Marketing
Material &
R Engineering Material T & PR R
P Equipment Aggregate Scheduling
O planning & Capacity & Control P O
U planning
N U N
M T M
T
E Finance S E
Maintenance S Accounting N
N
T T

Inventory Quality Cost

control control Control

Feedback
Module – 2 (Manufacturing)

TYPES OF PRODUCTION
 Continuous
High flow process
INTERMITTENT
Continuous
PRODUCTION
production
SYSTEMS Line process
VOLUME

Mass production

Batch process

Batch
Job production
CONTINUOUS
Process PRODUCTION
SYSTEMS
Low Projects

Low STANDARDIZATION High

 Intermittent Production systems
• Focus is on Functions
• Intermittent systems are used to produce small quantities (or
batches) of many different items on relatively general purpose
equipment. Processing equipment and personnel are located
according to function, and products flow through the facilities
on irregular paths. Jobs are individually routed, scheduled,
controlled on job or shop order-control system. The goods or
services are often customized and made to order.
• Types of processes used
– Job Process
– Batch process
 Example of an Intermittent Flow
(Car Manufacturing)

Pre-manufacturing activities

Gear Shafts Other

Components rotating parts
Housings
Prismatic
Sheet
Components
Metal parts

Assembly & Test Assembly & Test Assembly & Test

Product A Product B Product C

Dedicated Manufacturing Support for the products

https://www.youtube.com/watch?v=z6n1lEHCFM0
 Continuous production systems

• Focus is on Flow
• Continuous systems are used to produce large volumes of a
single item (or relatively few items) on specialized equipment
following a fixed path. Items follow a similar production
sequence, which can range from assembly line (for TVs) to a
pipeline (for oil). Routing and scheduling focus on flow
controls that govern the rate of flow of raw materials and
finished goods. High-volume repetitive and continuous flow
products are often standardized design and made-to-stock.
• Types of processes
– Line process
– Continuous flow process
 Paper Manufacturing
An example of Continuous Flow System

Logs and chips Crushing of Processing of

of wood stored logs and chips the wood

Preparatory

Drying the Refining the Cleaning &

wood pulp Wood pulp Bleaching
Pulp making

Stretching Cutting
Paper rolling Final packing

Paper making
 INTERMITTENT SYSTEM

JOB 1 1 2 3

JOB 2 4 5 6

CONTINUOUS SYSTEM

1 2 3 4
 Flexible Manufacturing Systems
• Flexible manufacturing systems are computer-
enhanced batch or repetitive processes that
facilitate the production of high volumes of
customized products on highly automated
equipment that is responsive to software
instructions.
 Types of Production
• Projects take a long time to complete, involves large investment of funds
and resources, and produce one item at a time to consumer order. Eg.
Construction projects, ship-building, aircraft manufacturing or new product
development.
• Batch production processes many different jobs through the production
system at the same time in groups or batches. Products are typically made
to customer order, volume (in terms of customer order size) is low, and
demand fluctuates. Eg. Printers, Bakeries, Machine shops, Education and
Furniture making.
• Mass production produces large volumes of a standard product for a mass
market. Product demand is stable, and product volume is high. Eg.
Automobiles, televisions, personal computers, fast food, and most
consumer goods.
• Continuous production is used for very high-volume commodity products
that are very standardized. The system is highly automated and typically in
operation for 24 hrs a day. Eg. Refined Oil, Mineral Water, Paints,
Chemicals, etc.
 Types of Process
• Job process is a process with the flexibility needed to produce a
wide variety of products in significant quantities, with considerable
complexity and divergence in the steps performed.
• Batch process differs from the job process with respect to volume,
variety, and quantity.
• Line process is a process that lies between the batch and continuous
process on the continuum; volumes are high and products are
standardized, which allows resources to be organized around
particular products.
• Continuous flow process is the extreme end of high volume
standardized production and rigid line flows, with production not
starting and stopping for long time intervals.
(Services)

TYPES OF PRODUCTION
Low

Service
factory
Labour intensity

Mass Service

Service Shop

Professional
High services

High Customization Low

 Types of Service Productions
• Professional service is highly customized and very labour
intensive. Eg. Accountant, Lawyer, Doctors.
• A service shop is less customized and labour intensive but still
attentive to individual customers. Eg. Hospitals, Schools, etc.
• Mass services offer the same basic service to all customers and
allows less interaction with the service provider. Eg. Retailing
& Banking.
• Services with least degree of customization are and labour
intensity, are most like manufactured products and are thus
best processed by a service factory. Eg. Airlines, Trucking.
Module 4

LAYOUT DESIGNING
 Problem
Spiffy Dry Cleaners has recently changed management, and the
new owners want to revise the current layout. The store performs
six main services: (1) laundry, (2) dry cleaning, (3) pressing, (4)
alterations, (5) delivery, and (6) tuxedo rental. Each is located in a
separate department, as shown here. The load summary chart
gives the current level of interaction between the departments.
Calculate the number of nonadjacent loads for the current layout.
Design an alternative layout to minimize the number of
nonadjacent loads.
4*
 Problem 2
Barko, Inc. makes bark scalpers, processing equipment that strips the bark off trees
and turns it into nuggets or mulch for gardens. The facility that makes bark
scalpers is a small-job shop that employs 50 workers and is arranged into five
departments: (1) bar stock cutting, (2) sheet metal, (3) machining, (4) painting, and
(5) assembly. The average number of loads transported between the five
departments per month is given in the accompanying load summary. chart. The
current layout of the facility is shown schematically on the 2 3 grid. Notice that
there is quite a bit of flexibility in the facility, as indicated by the six possible
locations (i.e., intersections) available for five departments. In addition, the forklift
used in the facility is very flexible, allowing horizontal, vertical, and diagonal
movement of material.
Barko management anticipates that a new bark scalper plant will soon be necessary
and would like to know if a similar layout should be used or if a better layout can
be designed. You are asked to evaluate the current layout in terms of nonadjacent
loads, and if needed, propose a new layout on a 2 x 3 grid that will minimize the
number of nonadjacent loads.
 Muther’s Grid

Muther’s grid is a format for displaying manager’s preferences for department

locations.
 Relationship Diagram

Relationship diagram is a schematic diagram that uses the weighted lines to

denote the location preference.
Line Balancing
TYPES OF LAYOUTS
 Types of

Service delivery Layout Manufacturing

systems processes

Fixed position Project

Non-repeat

Jobbing
Low volume Process or
Functional Batch
Repeat
Line
Product layout
High volume Continuous processing
 Product Layout
• Product layouts, better known as assembly lines, arrange
activities in a line according to the sequence of operations
that need to be performed to assemble a particular product.
• Each product has its own “line” specifically designed to
meet its requirements.
• The flow of work is orderly and efficient, moving from one
workstation to another down the assembly line until a
finished product comes off the end of the line.
• Since the line is set up for one type of product or service,
special machines can be purchased to match a product’s
specific processing requirements.
 Examples of Product Layout
• Automobile assembly
• Fast-food restaurant
• Petrochemicals
Product Layout for a Pizza Kitchen
Product Layout
• Advantages
1. It involves smooth and continuous work flow.
2. It may require less skilled workers
3. It helps in reducing inventory.
4. Production time is reduced in this layout.
• Disadvantages
1. Machines being put up along the line, more machines of each
type have to be installed for keeping a few as stand by,
because if on machine in the line fails, it may lead to shut
down of the complete production line.
2. This layout is very less flexible for product change.
 Process Layout
• Process layouts, also known as functional layouts, group
similar activities together in departments or work centers
according to the process or function they perform.
• A process layout is characteristic of intermittent operations,
service shops, job shops, or batch production, which serve
different customers with different needs.
• Process layouts in manufacturing firms require flexible
material handling equipment (such as forklifts, carts or AGVs)
that can follow multiple paths, move in any direction, and
carry large loads of in-process goods.
 Examples of Process Layout
• Hospital
• Printing Company
• Supermarket
Advantages
1. There exists a wide flexibility regarding allotment of work to equipment and
workers.
2. There is a better utilization of the available equipment.
3. Comparatively less numbers of machines are needed in this layout and hence
thus reducing capital investment.
4. There is an improved product quality, because the supervisors and workers
attend to one type of machines and operations.
5. Varieties of jobs coming as different job orders thus make the work more
interesting for the workers.
• Disadvantages
1. This layout requires more space in comparison to line or product layout for the
same amount of production.
2. Requires large in-process inventory.
3. This layout requires more efficient co-ordination and inspections.
4. Increased material handling cost due to more movement of process raw
material to various paths
 Combination or Hybrid Layouts
• A combination of process and product layouts
• It combines the advantages of both types of layouts.
• Most of the manufacturing sections are arranged in
process layout with manufacturing lines occurring here
and there scattered wherever the conditions permit.
• These days, the most of manufacturing industries have
adopted this kind of layout.
• In this type of layout, a set of machinery or equipment
is grouped together in a section, and so on, so that
each set or group of machines or equipment is used to
perform similar operations to produce a family of
components.
 Hybrid Layout (Contd.)
• Advantages
1. Reduction in cost of machine set-up time and material handling of metals.
2. Elimination of excess work-in-process inventory which subsequently allows the
reduction in lot size.
3. Simplification of production planning functions, etc.

• Disadvantages
1. Change of the existing layout is time consuming and costly.
2. Inclusion of new components in the existing component requires thorough
analysis.
3. Change of input component mix may likely to change complete layout structure.
4. Change of batch size may change number of machines.
 Types of Hybrid Layout
• Cellular Layout
• Flexible Manufacturing Systems (FMS)
Cellular Layout
• In a cellular layout the design is not according to the
functional characteristics of equipment, but rather by self-
contained groups of equipment (called cells), needed for
producing a particular set of goods or services.
• Group technology, or cellular manufacturing, classifies
parts into families so that efficient mass-production-type
layouts can be designed for the families of goods or
services.
CNC
Computer Numeric Control
 Flexible Manufacturing Systems
• Flexible manufacturing systems are computer-
enhanced batch or repetitive processes that
facilitate the production of high volumes of
customized products on highly automated
equipment that is responsive to software
instructions.
Structure of an FMS
 Fixed position layout
• A fixed-position layout consolidates the resources necessary
to manufacture a good or deliver a service, such as people,
materials, and equipment, in one physical location.
• The production of large items such as heavy machine tools,
airplanes, buildings, locomotives, and ships is usually
accomplished in a fixed-position layout.
Example of FP Layout

Aircraft Manufacturing
Fixed-Position Layout
• This fixed-position layout is synonymous with the "project"
classification of processes.
• Service-providing firms also use fixed-position layouts;
examples include major hardware and software installations,
sporting events, and concerts.
MATERIAL HANDLING EQUIPMENT
 Material Handling

• Material handling is defined as ‘‘the movement, storage,

protection and control of materials throughout the
manufacturing and distribution process’’
• The term is usually associated with activities that occur inside
a facility, as contrasted with transportation between facilities
that involves rail, truck, air, or waterway delivery of goods.
• Material handling functions in manufacturing include
– loading and positioning work units at each workstation,
– unloading work units from the station, and
– transporting work units between workstations.
Source : Groover, 2010
Material Handling Equipment

Automated guided vehicle

(AGV)

Fork-lift truck
Roller Conveyor
 Fork-lift truck
Roller Conveyor

Automated guided vehicle

(AGV)

Forked AGV
 Principles of Material Handling

• Eliminate Handling
– If not, make handling distance as short as possible.
• Keep Moving
– If not, reduce the time spent at the terminal points of a route as short as
possible.
• Use simple patterns of material flow
– If not, reduce backtracking, cross overs, and other congestion producing
patterns as much as possible.
• Carry pay loads both ways
– If not, minimize the time spent in “transport empty” by speed changes and
route relocations.
• Carry full loads
– If not, consider increasing the size of unit loads, decreasing carrying capacity,
lowering speed, or acquiring more versatile equipment.
• Use Gravity
– If not, try to find another source of power that is reliable and inexpensive.
PROCESS FLOW CHARTS
 Process Flow Charting

• Design & Analysis of process begins with identification of

– activities that constitute the process
– time taken for each of the activity
– nature of flow of materials/information in the process.
• A pictorial representation of all these information could be
developed using process flow charting.
• Process flow charting employs a set of standard symbols and
graphical tools to represent all the information pertaining to the
process
• The symbols used are
– A step in the Process
– Transportation (Move)
– Storage or Inventory
 A Simplified Process Flow Chart
Case of Shirt Manufacturing
Inventory of
Cloth & Other WIP
materials Inventory
Stitching 1

Spreading Cutting
Stitching 2

Pressing &
Inspection Assembly

Inventory
of Shirts
MATERIAL FLOW SYSTEMS
U-shaped
S-shaped
I-shaped
L-shaped
 Continuous Flow System
• Characterized by a streamlined flow of products in the
operating system
• Conversion process begins with input of raw material at one
end, progresses through the system in an orderly fashion to
finally become finished goods at the final stage
• Production process is sequential and the required resources
are organized in stages
– Examples:
• several chemical processing industries such as manufacture of
petrochemicals, steel, pharmaceutical, cement and glass
• In a discrete manufacturing industry high volume production of
very few varieties (such as electrical bulbs or spark plugs)
 Paper Manufacturing
An example of process industry

Logs and chips Crushing of Processing of

of wood stored logs and chips the wood

Preparatory

Drying the Refining the Cleaning &

wood pulp Wood pulp Bleaching
Pulp making

Stretching Cutting
Paper rolling Final packing

Paper making
 Process Industry
Distinctive features
• There should be balance of capacity between all the stages in
the manufacturing process to maintain an even flow of the
material from the raw material stage to finished goods
• Productivity of the system is directly related to the flow rate
(or throughput) of the product
• Requires huge capital investments, as incremental addition at
a later stage not possible. High productivity implies lower cost
of production and vice versa.
Backward Integration at Reliance Retailing

Naroda Textiles
Fabric Wool, Silk
Complex

Texturised Yarn Spun Yarn

PG Complex PSF PFY LAB

Polyester chips Polyester resin PTA PX N-Parafins

Polyethylene Poly Propylene PVC

MEG
VCM
EO Oxygen
Hazira EDC
Complex Caustic Unit

Fuel Gas Ethylene C4s Propylene Toluene Xylene Benzene Salt

Polymers
Cracker & Chemicals

ATF
LPG Naptha Gasoline Diesel Sulphur Fuel Oil Bitumen
Jamnagar Kerosene
Complex
Refining & Marketing Refining
Bombay
High Oil & Gas Exploration & Production Oil & Gas
 Operations Management Issues
Process Industry

• The notion of capacity

– Flow rate determines capacity
– Bottleneck easily identifiable
• Nature of inventories
– Work in Progress will be minimal
– Inventory of Spares & Maintenance will be high
• Importance of maintenance
• Relevance of vertical integration
– Joint & Bye Products are many
– Exploiting processing opportunities of these
important
 Continuous Flow System
Mass production in discrete manufacturing
• In discrete manufacturing various components are manufactured in
discrete fashion and the final product is obtained through an assembly
process
• In a mass production system, the volume of production is very high and
the number of variations in the final product is low
– Examples:
• Automobile and two wheeler manufacturers,
• Manufacturers of electrical components such as switches and health care
products such as disposable syringes
• The entire manufacturing is organised by arranging the resources one
after the other as per the manufacturing sequence (known as product line
structure)
 Process Design for Mass Production Systems

Pre manufacturing Activities

Product A Product B Product C

Machining Machining Machining

Fabrication Fabrication Fabrication

Assembly Assembly Assembly

Testing Testing Testing

Dedicated & Decentralised Manufacturing Support

Product A Machine
1
Machine
2
Machine
3
... Machine
m
 Intermittent Flow System
• Characterised by mid-volume, mid-variety
products/services
• Increases the flow complexities
• Flow and capacity balancing are difficult but
important
– Process industries use batch production methods
– Discrete industries use alternative methods of
designing layout issues
• Capacity Estimation is hard
• Production Planning & Control is complex
Process Design for Intermittent Flow in Discrete
Manufacturing

Pre-manufacturing activities

Gear Shafts Other

Components rotating parts
Housings
Prismatic
Sheet
Components
Metal parts

Assembly & Test Assembly & Test Assembly & Test

Product A Product B Product C

Dedicated Manufacturing Support for the products

 Jumbled Flow System
• Occurs on account of non-standard and complex flow patterns
characteristic in certain systems
– Highly customised items
– customer orders for one or a few
• Examples
– turnkey project executor such as BHEL or L&T
– customised manufacturing systems such as PCB fabricators,
sheet metal fabricators, tool room operators and printing and
publishing
• Operational complexity arising out of jumbled flow is high
• Discrete manufacturing with Jumbled flow uses a Job Shop
structure
 Process flow in Job Shops

Machine Machine
1 3
Job 1
Machine
6
Job 3
Machine
4

Machine Machine
2 7
Job 2
Machine
5
 Jumbled Flow System
• Complex issue is capacity management
– Considerable time is lost due to repeated setup of
processes
• Due to jumbled flow, crisscrossing of jobs in the
system results in poor visibility.
– Problems are often hidden and build up of work in process
inventory takes place
• Cost accounting and estimation systems are crucial
as there is a constant need to quote for specific
customer orders
 Process design for operations
Salient features of alternative choices
Flow Characteristics Continuous Intermittent Jumbled

Product High Volume, Very low Mid volume, Mid variety Very high variety, low
Characteristics variety volume
Examples of Process Industry, Mass Batch production in Process Project Organisations, Tool
production systems production systems in and discrete manufacturing Rooms, General purpose
discrete manufacturing fabricators
Issues of importance Flow Balancing, Manufacturing system and Capacity Estimation,
Maintenance, Capacity layout design, Changeover Scheduling, Production
utilization and management, Capacity Control, Cost estimation
debottlenecking, Vertical planning and estimation
integration
Operations Line Balancing, Forecasting, Capacity Project Management &
Management Tools Maintenance Planning and estimation, Scheduling, Capacity
& Techniques management, Process Optimized production planning and optimization,
optimisation, Product planning and product Job shop scheduling,
layout design, Flow shope sequencing, Group Functional Layout design,
scheduling, Pull type Technology layout design, Job order costing, Work in
scheduling, Single piece Materials Management Process Management
flow design
Module 3

PLANT LOCATION
 Objective

• Plant Location may be understood as the function of

determining where the production facility or plant should be
located for maximum operating economy and effectiveness.
• The overall objective in choosing one location over
alternatives is to secure the best net gains for an organization
now and in the long term. This concerns –
– Initial and later development investments, and the trading costs when
providing services or products to customers.
– The impact on sales revenue that the facility is able to make
– The level of service the facility is able to provide to its customers.
 The levels of decision

• Choosing the continent or region

– Access to new markets (eg. Marriott, Starbucks); lower costs (call
center jobs in India, Malaysia, etc); a combination of both factors (eg.
McKinsey)
• Choosing the country
• Choosing the area or city
– Trade-offs between factors such as climate, availability of staff and
density of potential customer catchment areas
• Choosing the site
– This is the domain of micro-scale decision that deals with the precise
location within a city center, retail warehouse, business or industrial
park or site in relation to major roads, rail links airports or seaports.
 General factors influencing location decisions

• The origin of existing locations

• Politically based constraints
• Technology developments
• New countries are opening up
• Market access / local presence in large consumer markets
• Currency value fluctuations
 Specific factors influencing location decisions
Continent / Region, Country and Area / City

• Well developed infrastructure

• Proximity to markets
• Proximity to suppliers
• Hospitable business climate
• Availability of staff
• Quality of life for employees
• Variable cost structures (staff costs, energy costs, transportation costs)
• Fixed costs and investments (investment factors, fixed costs)
 Specific factors influencing location decisions
Continent / Region, Country and Area / City
Contd.
• Favorable government policies
– Environmental concerns
– Political attitudes towards inward investments
– Barriers and licenses
– Capital movement restrictions
– Government planning assistance
– Availability of suitable land
• Being near to other company facilities
• Being near to the customer
• Individual preferences
 Specific factors influencing location decisions
the choice of site

• Adequate, off-street parking for both staff and customers

• Attractive building in terms of the external impact and internal arrangements
regarding the basic tasks involved and the front office space where customers
interface with delivery systems.
• Attractive rental costs and local taxes
• The appropriateness of the existing space to meet specific needs of business
including the amount of time and investment to bring it to the required level
• Proximity to support services
• Room for future expansion and associated development costs
• Being visible from the street or highway would be of particular relevance where
call-in trade is an important factor in a business
• Convenient entry and exit to major road systems through to the closeness of the site
to public transportation for customers and employees will be important in many
business
• Proximity to competitors (competitive clustering)
 Location techniques

• Location Factor Rating

• Centre of Gravity Method
• Load Distance Method
 Factor Rating
• In the location factor rating system, factors that are important in the location
decision are identified.
• Each factor is weighted from 0 to 1.00 to prioritize the factor and reflect its
importance.
• A subjective score is assigned (usually between 0 and 100) to each factor based on
its attractiveness compared with other locations, and the weighted scores are
summed.
• Decisions typically will not be made based solely on these ratings, but they provide
a good way to organize and rank factors.
S7.2
Exotech Computers manufactures computer components such as chips, circuit boards,
motherboards, keyboards, LCD panels, and the like and sells them around the world. It
wants to construct a new warehouse/distribution center in Asia to serve emerging Asian
markets. It has identified sites in Shanghai, Hong Kong, and Singapore and has rated
the important location factors for each site as follows:

Recommend a site based on these location factors and ratings.

S7.14
A development company is attempting to determine the location for a new outlet mall.
The region where the outlet mall will be constructed includes four towns, which
together have a sizable population base. The grid-map coordinates of the four towns
and the population of each are as follows:

a. Determine the best location for the outlet mall using the center-of-gravity method.
b. Plot the four towns and the location of the new mall on a grid map.
 How Inventory Management
fits the Operations Management Philosophy

Operations As a Competitive
Weapon
Operations Strategy
Project Management Process Strategy
Process Analysis
Process Performance and Quality
Constraint Management
Process Layout Supply Chain Strategy
Lean Systems Location
Inventory Management
Forecasting
Sales and Operations Planning
Resource Planning
Scheduling
 Inventory Management
• Inventory management is the planning and controlling of inventories in
order to meet the competitive priorities of the organization.

– Effective inventory management is essential for realizing the full

potential of any value chain.

• Inventory management requires information about expected demands,

amounts on hand and amounts on order for every item stocked at all
locations.

– The appropriate timing and size of the reorder quantities must also be
determined.
 Inventory Basics
• Inventory is created when the receipt of materials, parts, or finished goods
exceeds their disbursement.
• Inventory is depleted when their disbursement exceeds their receipt.
• An inventory manager’s job is to balance the advantages and disadvantages
of both low and high inventories.
– Both have associated cost characteristics.
 Pressures for
Low Inventories
• Inventory holding cost is the sum of the cost of capital and
the variable costs of keeping items on hand, such as storage
and handling, taxes, insurance, and shrinkage.
– Cost of Capital is the opportunity cost of investing in an asset relative
to the expected return on assets of similar risk.
– Storage and Handling arise from moving in and out of a storage facility
plus the rental cost and/or opportunity cost of that space.
– Taxes, Insurance, and Shrinkage: More taxes are paid and insurance
costs are higher if end-of-the-year inventories are high. Shrinkage
comes from theft, obsolescence and deterioration.
 Pressures for
High Inventories
• Customer Service: Reduces the potential for stockouts and
backorders.
• Ordering Cost: The cost of preparing a purchase order for
a supplier or a production order for the shop.
• Setup Cost: The cost involved in changing over a machine
to produce a different item.
• Labor and Equipment: Creating more inventory can
increase workforce productivity and facility utilization.
• Transportation Costs: Costs can be reduced.
• Quantity Discount: A drop in the price per unit when an
order is sufficiently large.
 Economic Order Quantity

• Economic Order Quantity (EOQ) is the lot

size that minimizes total annual inventory
holding and ordering costs.
• Assumptions of EOQ
1. The demand rate is constant and known with
certainty.
2. There are no constraints on lot size.
3. The only relevant costs are holding costs and
ordering/setup costs.
4. Decisions for items can be made independently
of other items.
5. Lead time is constant and known with certainty.
 Cycle-Inventory Levels

Receive Inventory depletion

order (demand rate)
Q
On-hand inventory (units)

Q Average
— cycle
2
inventory

1 cycle
Time
 Total Annual
Cycle-Inventory Costs
Q = lot size; C = total annual cycle-inventory cost
H = holding cost per unit; D = annual demand
S = ordering or setup costs per lot
Annual cost (dollars)

Q D
Total cost = (H) + (S)
2 Q

Q
Holding cost = (H)
2

D
Ordering cost = (S)
Q

Lot Size (Q)

Costing out a Lot Sizing Policy Example
12.2
Museum of Natural History Gift Shop:
• Bird feeder sales are 18 units per week, and the supplier
charges $60 per unit. The cost of placing an order (S) with the
supplier is $45.
• Annual holding cost (H) is 25% of a feeder’s value, based on
operations 52 weeks per year.
• Management chose a 390-unit lot size (Q) so that new orders
could be placed less frequently.
• What is the annual cycle-inventory cost (C) of the current
policy of using a 390-unit lot size?
 Costing out a Lot Sizing Policy Example
12.2
Museum of Natural History Gift Shop:

• What is the annual cycle-inventory cost (C) of the current

policy of using a 390-unit lot size?

D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15

Q D 390 936
C= (H) + (S) = (15) + (45)
2 Q 2 390

C = $2925 + $108 = $3033

 Lot Sizing at the Museum
of Natural History Gift Shop

Q == 390
D = 936 units; H = $15; S = $45; Q 468 units;
units; C = ?
$3033

Would a lot size of 468 be better?

Q D 468 936
C= (H) + (S) = (15) + (45)
2 Q 2 468

C = $3510 + $90 = $3600

Q = 468 is a more expensive option.

The best lot size (EOQ) is the lowest point on the
total annual cost curve!
 Lot Sizing at the Museum
of Natural History Gift Shop
Current
cost
3000 —

Total cost
Annual cost (dollars)

2000 —

Holding cost

1000 —
Ordering cost
Lowest
cost
0 — | | | | | | | |
50 100 150 200 250 300 350 400
Best Q (EOQ) Current
Lot Size (Q) Q
 Inventory
Control Systems
• Continuous review (Q) systems (Reorder point systems
ROP) are designed to track the remaining inventory of an
item each time a withdrawal is made to determine
whether it is time to reorder.
• Periodic review (P) systems (Fixed Interval Reorder
systems) in which an item’s inventory position is
reviewed periodically rather than continuously.
 Periodic Review (P) System
• Periodic review (P) system: A system in which
an item’s inventory position is reviewed
periodically rather than continuously.
– Sometimes called a fixed interval reorder system
or a periodic reorder system.
– A new order is always placed at the end of each
review, and the time between orders is fixed at P.
– Demand is a variable, so total demand between
reviews varies.
– The lot size, Q, may change from one order to the
next.
 Comparison of
Q and P Systems

P Systems
 Convenient to administer
 Orders for multiple items from the same supplier
may be combined
 Inventory Position (IP) only required at review
 Systems in which inventory records are always
current are called Perpetual Inventory Systems

Q Systems
 Review frequencies can be tailored to each item
 Possible quantity discounts
 Lower, less-expensive safety stocks
 Selective Control of Inventories
Alternative Classification Schemes
• ABC Classification (on the basis of consumption value)
• XYZ Classification (on the basis of unit cost of the item)
– High Unit cost (X Class item)
– Medium Unit cost (Y Class item)
– Low unit cost (Z Class item)
• FSN Classification (on the basis of movement of inventory)
– Fast Moving
– Slow Moving
– Non-moving
• VED Classification (on the basis of criticality of items)
– Vital
– Essential
– Desirable
• On the basis of sources of supply
– Imported
– Indigenous (National Suppliers)
– Indigenous (Local Suppliers)
 Identifying Critical
Inventory Items

• Thousands of items are held in inventory

by a typical organization, but only a small
% of them deserves management’s closest
attention and tightest control.
• ABC analysis: The process of dividing
items into three classes, according to their
dollar usage, so that managers can focus
on items that have the highest dollar
value.
 ABC Analysis

100 — Class C
Class B
90 —
Class A
80 —
Percentage of dollar value

70 —

60 —

50 —

40 —

30 —

20 —

10 —

0—
10 20 30 40 50 60 70 80 90 100
Percentage of items
 VED Analysis
• Based on critical value & shortage cost of an item
–It is a subjective analysis.
•Items are classified into:
Vital:
•Shortage cannot be tolerated.
Essential:
•Shortage can be tolerated for a short period.
Desirable:
Shortage will not adversely affect, but may be using more resources.
These must be strictly Scrutinized
V E D ITEM COST

A AV AE AD CATEGORY 1 10 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL

CATEGORY 2 - MODERATE CONTROL.
CATEGORY 3 - NO NEED FOR CONTROL
Japanese techniques
Anindo
Meaning of Quality
Kaizen
• Kaizen is Japanese word which means “continuous improvement”.
• It is a philosophy of never ending improvement.
• The Japanese believe that the best and most lasting changes come from gradual
improvements. To use an analogy, they believe that it is better to take frequent
small doses of medicine than to take one large dose.
• In its most basic form, kaizen is a system in which employees identify many
small improvements on a continual basis and implement these improvements
themselves.
• Companies have three approaches to implement kaizen:
• PDSA Cycle (Deming Wheel)
• Benchmarking
• 5S Workplace Scan
PDSA Cycle (Deming Wheel)

• The plan–do–study–act
(PDSA) cycle describes
the activities a company
needs to perform in order
to incorporate continuous
improvement in its
operation.
• Plan The first step in the PDSA cycle is to plan. Managers must evaluate the
current process and make plans based on any problems they find. They need to
document all current procedures, collect data, and identify problems. This
information should then be studied and used to develop a plan for improvement as
well as specific measures to evaluate performance.
• Do The next step in the cycle is implementing the plan (do). During the
implementation process managers should document all changes made and collect
data for evaluation.
• Study The third step is to study the data collected in the previous phase. The data
are evaluated to see whether the plan is achieving the goals established in the plan
phase.
• Act The last phase of the cycle is to act on the basis of the results of the first three
phases. The best way to accomplish this is to communicate the results to other
members in the company and then implement the new procedure if it has been
successful. Note that this is a cycle; the next step is to plan again. After we have
acted, we need to continue evaluating the process, planning, and repeating the
cycle again.
Benchmarking

• Another way companies implement continuous improvement is by studying

business practices of companies considered “best in class.” This is called
benchmarking.
• The ability to learn and study how others do things is an important part of
continuous improvement.
• For example, companies have used American Express to benchmark for conflict
resolution.
Six Sigma

• Six Sigma is a project-oriented methodology (or system) that provides businesses

with the tools and expertise to improve their processes. This increase in
performance through a decrease in process variation leads to defect reduction (to
near zero) and an increase in product and service quality and increased profits.
• In Six Sigma “as close to zero defects as possible” translates into a statistically
based numerical goal of 3.4 defects per million opportunities (DPMO), which is
the near elimination of defects from a process, product, or service.
• As implemented by Motorola, Six Sigma follows four basic steps—align,
mobilize, accelerate, and govern.
DMAIC
Critical Success Factors for Six Sigma

• It is crucial that top management is committed to six sigma

• Employees must have adequate training in order to implement six sigma
effectively
• The company’s culture and values must adjust properly
• The six sigma initiative must be focused on the customer; in order to do this, the
company must have the proper metric.
• The company must be able to clearly show how six sigma financially benefits the
company;
• Management must properly understand the company’s processes.
Lean Systems
Pull Systems, Kanban, Jidoka, Andon
Kanban

• Kanban is the Japanese word for card. In the pull system, each kanban
corresponds to a standard quantity of production or size of container.
• A kanban contains basic information such as part number, brief description, type
of container, unit load (i.e., quantity per container), preceding station (where it
came from), and subsequent station (where it goes to).
• Sometimes the kanban is color-coded to indicate raw materials or other stages of
manufacturing. The information on the Kanban does not change during
production. The same kanban can rotate back and forth between preceding and
subsequent workstations.
Kanban description
Two-bins and Kanban
Jidoka

• Jidoka—the authority to stop the production line if quality problems were

encountered.
• It was the idea that workers could identify quality problems at their source, solve
them, and never pass on a defective item that led Kenichii Ohno (VP of Toyota) to
believe in zero defects. To that end, Ohno was determined that the workers, not
inspectors, should be responsible for product quality. To go along with this
responsibility, he also gave workers the unprecedented authority of jidoka.
Andons

• To encourage jidoka, each worker is given access to a switch that can be used to
activate call lights or to halt production. The call lights, called andons, flash
above the workstation and at several andon boards throughout the plant.
• Green lights indicate normal operation, yellow lights show a call for help, and red
lights indicate a line stoppage.
• Supervisors, maintenance personnel, and engineers are summoned to troubled
workstations quickly by flashing lights on the andon board.
• At Toyota, the assembly line is stopped for an average of 20 minutes a day
because of jidoka. Each jidoka drill is recorded on easels kept at the work area. A
block of time is reserved at the end of the day for workers to go over the list and
work on solving the problems raised. For example, an eight-hour day might
consist of seven hours of production and one hour of problem solving.
Poka-Yoke

A poka-yoke is any mechanism in a lean manufacturing process that helps an equipment operator avoid
(yokeru) mistakes (poka). Its purpose is to eliminate product defects by preventing, correcting, or drawing
attention to human errors as they occur.

Production systems designed with quality in mind include visible instructions for worker or machine
action, and direct feedback on the results of that action. This is known as visual control.

Visual control of quality often leads to what the Japanese call a poka-yoke.

Examples include kanbans, standard operation sheets, andons, process control charts, and tool boards. A
factory with visual control will look different from other factories. You may find machines or stockpoints
in each section painted different colors, material-handling routes marked clearly on the floor,
demonstration stands and instructional photographs placed near machines, graphs of quality or
performance data displayed at each workstation, and explanations and pictures of recent improvement
efforts posted by work teams.
Examples of Poka-Yoke

Color codings Indicators

5S – Workplace
Scan

Seiri

Seiton

Seis
o
Seikitsu

Shitsuk
e
Quality Control Tools
7 QC Tools
 Quality Tool

Cause and Effect Diagrams

(Ishikawa or Fishbone diagrams)
 Ishikawa (Fishbone) Diagram
Purpose:
Graphical representation of the trail leading to the root cause of a problem

How is it done?
• Decide which quality characteristic, outcome or effect you want to
examine
• Backbone –draw straight line
• Ribs – categories
• Medium size bones –secondary causes
• Small bones – root causes
Example of Ishikawa Diagram
 Cause & Effect Diagrams
Benefits:

• Breaks problems down into bite-size pieces to find root cause

• Fosters team work

• Common understanding of factors causing the problem

• Road map to verify picture of the process

• Follows brainstorming relationship

 Quality Tool

Flow Charts
 Flow Charts
Purpose:
Visual illustration of the sequence of operations required to
complete a task
 Schematic drawing of the process to measure or improve.
 Starting point for process improvement
 Potential weakness in the process are made visual.
 Picture of process as it should be.
Benefits:
 Identify process improvements
 Understand the process
 Shows duplicated effort and other non-value-added steps
 Clarify working relationships between people and organizations
 Target specific steps in the process for improvement.
 Flow Charts
Top Down
Benefits
• Simplest of all flowcharts
• Used for planning new processes or examining existing
one
• Keep people focused on the whole process
How is it done? Measure Analyze Improve Control
• List major steps Hardware Fleet leader
Problem report Customer input
• Write them across top of the chart procurement reports

• List sub-steps under each in order they occur

Customer
Hardware return Stress analysis coordination Service reports

Heat transfer Compliance Operational

Failure analysis analysis verification statistics

Life analysis Documentation

Substantiation FAA approval

 Flow charts
Linear
Benefits
• Show what actually happens at each step in the process
• Show what happens when non-standard events occur
• Graphically display processes to identify redundancies and other wasted effort
Toolbox
How is it done?
• Write the process step inside each symbol
• Connect the Symbols with arrows showing the direction of flow
 Quality Tool
Sample Linear Flow

END
5 - Action Assignee
performs detail
analysis of failure. No
Start Requests failure
analysis as needed. 11 - Fleet Analysis
Still monitors failure to
failing? ensure corrective
action is effective.
1- Fleet Analysis
Yes
utilizes data
Yes
warehouse reports to 6 - Action Assignee
create and distribute documents
a selection matrix. 10 - FRB determines
investigation
required corrective
findings.
action - i.e. QAM or
supplier corrective
2 - Other Groups action.
compile data as
determined by FRB.
7 - Action Assignee 9 - FRB Categorize
reports investigation Failure: Workmanship,
3 - FRB meets to results to FRB. Still component, material,
No
analyze data. failing? maintenance, or
design. Also fleet
wide or RSU.

4 - FRB selects 8 - Fleet Analysis

candidate problems monitors failed item
for additional to ensure failure has
investigation. been corrected.
 Quality Tool

Checksheets
 Checksheets
Purpose:
• Tool for collecting and organizing measured or
counted data
• Data collected can be used as input data for other
quality tools

Benefits:
• Collect data in a systematic and organized manner
• To determine source of problem
• To facilitate classification of data (stratification)
 Quality Tool

Histograms
 Histograms
Purpose:
• To determine the spread or variation of a set of data points
in a graphical form

How is it done?:
• Collect data, 50-100 data point
• Determine the range of the data
• Calculate the size of the class interval
• Divide data points into classes Determine the class
Stable process, exhibiting bell shape
boundary
• Count # of data points in each class
• Draw the histogram
 Histograms
Benefits:
• Allows you to understand at a glance the variation that exists in a process
• The shape of the histogram will show process behavior
• Often, it will tell you to dig deeper for otherwise unseen causes of variation.
• The shape and size of the dispersion will help identify otherwise hidden sources of
variation
• Used to determine the capability of a process
• Starting point for the improvement process
 Quality Control Tool

Pareto Charts
 Pareto Charts
Purpose:
Prioritize problems.

How is it done?
• Create a preliminary list of problem
classifications.
• Tally the occurrences in each problem
classification.
• Arrange each classification in order from
highest to lowest
• Construct the bar chart
 Pareto Charts
Benefits: 120

 Pareto analysis helps

100
graphically display results so
the significant few problems 80
emerge from the general

Quantity
background 60

 It tells you what to work on

40
first
20

0
Dent Scratch Hole Others Crack Stain Gap
Defects 104 42 20 14 10 6 4
Pareto Charts
Pareto Charts
Weighted Pareto
 Weighted Pareto charts use
the quantity of defects
multiplied by their cost to 900
determine the order.
800

700

Weighted 600
Defect Total Cost cost

Weighted Cost
Gap 4 200 800 500

Dent 104 2 208

400
Hole 20 5 100
Crack 10 8 80 300
Scratch 42 1 42
Others 14 1 14 200

Stain 6 1 6
100

0
Gap Dent Hole Crack Scratch Others Stain
Weighted cost 800 208 100 80 42 14 6
 Quality Control Tool

Control Charts
 Control Charts
Purpose:
The primary purpose of a control chart is to
predict expected product outcome.

Benefits:
• Predict process out of control and out of
specification limits
• Distinguish between specific, identifiable causes of
variation
• Can be used for statistical process control
 Control Charts
• Strategy for eliminating assignable-cause variation:
• Get timely data so that you see the effect of the
assignable cause soon after it occurs.
• As soon as you see something that indicates that an
assignable cause of variation has happened, search
for the cause.
• Change tools to compensate for the assignable cause.
• Strategy for reducing common-cause variation:
• Do not attempt to explain the difference between any
of the values or data points produced by a stable
system in control.
• Reducing common-cause variation usually requires
making fundamental changes in your process
 Control Charts
• Control Chart Decision Tree
• Determine Sample size (n)

• Variable or Attribute Data

• Variable is measured on a continuous scale

• Attribute is occurrences in n observations

• Determine if sample size is constant or changing

 Control Charts
Control Chart Decision Tree
X bar , R

X bar, S

IX, Moving Range

Start
p (fraction defective) or
np (number def. Per sample

c (defects per sample or

u defects per unit

u
 Control Charts

What does it look like?

o Adding the element of time will help clarify
your understanding of the causes of
variation in the processes.
o A run chart is a line graph of data points
organized in time sequence and centered
on the median data value.
 Control Charts
Individual X charts
How is it done?
• The data must have a normal distribution (bell curve).
• Have 20 or more data points. Fifteen is the absolute minimum.
• List the data points in time order. Determine the range between
each of the consecutive data points.
• Find the mean or average of the data point values.
• Calculate the control limits (three standard deviations)
• Set up the scales for your control chart.
• Draw a solid line representing the data mean.
• Draw the upper and lower control limits.
• Plot the data points in time sequence.
 Control Charts
• Next, look at the upper and lower
control limits. If your process is in
control, 99.73% of all the data
points will be inside those lines.
• The upper and lower control
limits represent three standard
deviations on either side of the
mean.
• Divide the distance between the
centerline and the upper control
limit into three equal zones
representing three standard
deviations.
 Control Charts
• Search for trends:
• Two out of three consecutive
points are in zone “C”
• Four out of five consecutive
points on the same side of
the center line are on zone
“B” or “C”
• Only one of 10 consecutive
points is in zone “A”
 Control Charts
• Basic Control Charts
interpretation rules:
• Specials are any points above the
UCL or below the LCL
• A Run violation is seven or more
consecutive points above or
below the center (20-25 plot
points)
• A trend violation is any upward or
downward movement of five or
more consecutive points or drifts
of seven or more points (10-20
plot points)
• A 1-in-20 violation is more than
one point in twenty consecutive
points close to the center line
 Quality Control Tool

Scatter Diagrams
 Scatter Diagrams
Purpose:
• To identify the correlations that might exist between a
quality characteristic and a factor that might be
driving it
• A scatter diagram shows the correlation between two
variables in a process.
• These variables could be a Critical To Quality (CTQ)
characteristic and a factor affecting it two factors
affecting a CTQ or two related quality characteristics.
• Dots representing data points are scattered on the
diagram.
• The extent to which the dots cluster together in a
line across the diagram shows the strength with
which the two factors are related.
 Scatter Diagrams
How is it done?:
• Decide which paired factors you want to examine. Both factors
must be measurable on some incremental linear scale.
• Collect 30 to 100 paired data points.
• Find the highest and lowest value for both variables.
• Draw the vertical (y) and horizontal (x) axes of a graph.
• Plot the data
• Title the diagram
The shape that the cluster of dots takes will tell you something about
the relationship between the two variables that you tested.
• If the variables are correlated,
when one changes the other Scatter Diagrams
probably also changes.
• Dots that look like they are
trying to form a line are
strongly correlated.
• Sometimes the scatter plot may
show little correlation when all
the data are considered at once.
 Stratifying the data, that
is, breaking it into two or
more groups based on
some difference such as
the equipment used, the
time of day, some
variation in materials or
differences in the people
involved, may show
surprising results
 Scatter Diagrams
• You may occasionally get scatter
diagrams that look boomerang- or
banana-shaped.
To analyze the strength of the
correlation, divide the scatter plot into
two sections.
Treat each half separately in your
analysis
Benefits:
• Helps identify and test probable causes.
• By knowing which elements of your
process are related and how they are
related, you will know what to control or
what to vary to affect a quality
characteristic.
Stratification
A New QC tool
Why stratification?

• When data from a variety of sources or categories have been lumped

together, the meaning of the data can be impossible to see. This
technique separates the data so that patterns can be seen. This is the
separation of data into categories.
• It is used to identify which categories contribute to the problem being
solved and which categories are worthy of further investigation.
• Stratification is an analysis technique that helps pinpoint the
location or source of a quality problem. It may be necessary to
stratify the data in many different ways.
 Blue Pink Green
Reactor 1 Reactor 2 Reactor 3
Output Output Output 100
Input (x) (y) Input (x) (y) Input (x) (y) 99.8
1 0.45 98.95 1 0.6 98.85 1 0.5 98.25
2 0.27 99.05 2 0.63 98.95 2 0.4 98.35 99.6
3 0.26 99.3 3 0.21 99.45 3 0.45 98.6 99.4
4 0.1 99.3 4 0.29 99.55 4 0.34 98.65
5 0.24 99.4 5 0.34 99.55 5 0.29 98.75 99.2
6 0.4 99.55 6 0.24 99.65 6 0.21 98.75 99
7 0.22 99.55 7 0.25 99.75 7 0.31 98.85
8 8 8 0.22 98.85 98.8
9 9 9 0.13 98.95 98.6
10 10 10 0.11 99.05
11 11 11 98.4
12 12 12 98.2
13 13 13
14 14 14 98
15 15 15 0 0.2 0.4 0.6 0.8
16 16 16
17 17 17
18 18 18
19 19 19
20 20 20
References

• Operations Management 6th Edition, Russell & Taylor

• Operations Management 5th Edition, S.N. Chary
• Operations Management – Theory & Practice, 2nd Edition, B Mahadevan
• Production and Operations Management, R B Khanna
• Seven Quality Control Tools by M Aschner
• Juran’s Quality Handbook by Joseph Juran and A Blanton Godfrey