1

Introduction

1.1 FUNCTIONAL SUBSYSTEMS OF ORGANIZATIONS

An organization consists mainly of

four functional subsystems, viz. Marketing, Production, Finance
and Personnel as shown in Fig. 1.1.

Marketing Finance
Production

Personnel

Fig. 1.1 Functional subsystems of organization.

The marketing function of an organization aims to promote its products among customers,
which helps it to obtain substantial sales order. This, in turn, is communicated to the production
of an
subsystem which is concerned with the management of physical resources for the production
item or provision of a service. This means that the available facilities also need to be managed to
meet the current market requirements. To manufacture the products as per the specifications, the
production function needs to organize its resources (raw materials, equipments, labour and working
capital) according to the predetermined production plans. The finance function provides authorization
and control to all other subsystems to utilize money more effectively through a well designed mechanism.
The personnel function is a supporting function which plans and provides manpower to all other
Dsysiems of the organization and to itself by formulating proper recruitment and training programmes.
It also monitors the performance of the employees for better and
direction, promotions results.
t is therefore amply clear that all the functional subsystems of any business organization are

nterwoven by many linkages. They cannot function in isolation. For example, the marketing function,
if carried out efficiently, can get sales order in large volume. But if the production function is not
be lost. Let us
ygeared to meet the sales requirement, then the reputation of the company may
assume that the production function is fully geared to cope up with the sales commitment, but the
fail to
red working capital is not made available at the right time, then also the company may
fulfil the sales commitment. Again, considering that the plans of marketing. production and finance
1
 2 Production and Operations Management

is unable to exercise its duties properly

functions are synchronized, but the personnel function
well
the changing requirements, or resolving
in terms of providing training to its employees to meet
become a
efforts already made in all other functions would
conflicts among employees, then the
waste. This would lead to non-fulfilment of the sales goals.
of the organization is
Hence, a complete integration among all the functional subsystems
of results.
absolutelyessential for their effective functioning and an overall improvement

1.1.1 Definition
various
Production/Operations management is the process which combines and transforms
resources

used in the Production/Operations subsystem of the organization into value added products/services
in a controlled manner as per the policies of the organization.
which is concerned
Production/Operations function, therefore, is that part of an organization
the
with the transformation of a range of inputs into the required outputs (products/services) having
requisite quality level.
involved in manufacturing certain
The set of interrelated management activities which are
the same concept is extended to services management,
products is called as production management. If
called as operations management. So, in
then the corresponding set of management activities is
services is called as production/operations
general, the concept of manufacturing products/providing
management.
custom-made products like, boilers with a
examples of productions are: manufacturing
Some
selected customers, etc.,
some structural fabrication works for
specific capacity, constructing flats, motor cycle, radio, television, etc. Some
and manufacturing standardized products like, car, bus,
services like, medical facilities and clinical tests, arranging
examples of services are custom-made
and standardized services like, developing standard
food for parties, travel booking services, etc.,
standard insurance policies, etc
computer softwares, providing
are as follows:
The characteristics of most service systems

.It produces intangible items

Quality of output is highly variable
Production and consumption occur simultaneously
N o inventory is accumulated
executives at different
In the process of managing various subsystems of the organization,
decisions are
levels of the organization need to take several management decisions. The management
decisions. The strategic decisions
classified intostrategic decisions, tactical decisions and operational are taken
determination of organizational objectives, etc.
e.g. defining the goals, making policies and
at the top management level. The tactical decisions are taken at the middle management level, which
include acquisition of resources, plant location, new products establishments and monitoring
Some examples
budgets, etc. The operational decisions are taken at the bottom level of management. out
resources to carry
category are: effective and efficient use of existing facilities and
under this
activities within the budget constraints. If we closely examine the relationship among the nunmo

taken at high to low from u

different levels, then it would be found moving from
O decisions
bottom level management to the top level management, respectively. This concept ofrelativeirethe
or the number of decisions taken at different levels is presented in Fig. 1.2. In this Tigure
to
approximate area in each level represents the proportion of number of decisions taken in rel
other levels
 Introduction| 3

Strategic
decisions
(Top level)
Tactical decisions
(Middle level)

Operational decisions
(Bottom level)

Fig. 1.2 Relative frequency of decisions at different levels of management.

A matrix of functional subsystems and management activities is shown in Table 1.1 which
gives a clear account of the different examples under each combination. The information requirements
at the operational level will be largely internal, well defined, narrow, and detailed. On the contrary.
the information requirements at the strategic level will be external, very wide and aggregate in
nature. The information requirements at the tactical level will be in between these two extremes.

Table 1.1 Matrix of Functional Subsystems and Management Activities

Management Functional Subsystems

Activity
Level Marketingg Production/Operations Finance Personnel
Strategic Consideration of new Alternative manu- Long-run strategy to
markets and
Strategies for
new facturing approaches ensure adequate recruitment, salary,
marketing strategies. The and alternative financing, a long-run training. and
information requirements approaches to tax accounting policy benefits. Analysis
for strategic planning automation. to minimize the of shift pattern of
include customer
mpact taxes, and employment, educca-
analysis, competitor planning of systems tion and wage rate
analysis, consumer for budgeting etc.
survey, income
projection, demographic
projections and
technology projections.
Tactical Comparison of overall Summary reports Information on Variance analysis
performance against a which compare budgeted versus on hiring and firing.
marketing plan. It overall planned or actual cost of cost of recruitment,
concerns data on standard performance financial resources, of
customers, competitors, for such classi-
composition
cost of processing skills inventory, cost
competitors" products fications as cost per accounting data and of training, salary
and sales force unit and labour used. error rates. paid, distribution of
requirements. wage rates.

Operational Hiring and firing of sales Reports comparing Daily error and Decision on hiring.
force, the day-to-day actual performance to
scheduling of sales and exception reports, training,. termi
production schedule records of processing nation, changing
promotion efforts and and highlighting areas delays, reports of and
periodic analysis of sales where bottlenecks
pay rates
unprocessed transac- issuing benefits.
volumes by region, OCcur.
tions, etc.
product, customer, etc.
 4 Production and Operations Management

to focus various issues

production/operations function of organizations
and
Let us consider the
production/operations
solutions. The
performed by a groun
function is
methodologies for providing
for producing goods or providing services.
of persons in a business who are responsible
to production/operations function mainly becaus
The past few decades have given emphasis ause
and is responsible for customer satisfaction. Thie
it is the important subsystem of an organization,
become useful products for customers, Eor
function adds value to the raw materials so that they
100 square metre of brass sheet will have only its raw material value, but when the same
example.
brass sheet is converted into say, 100 utensils, then the net worth of these 100 utensils would be far
above the raw materials cost. The difference in these two values is known as value addition. In the
other resources like, machines/equipments, manpower
process of value addition, we would be using
and capital. If the quantum of value addition is more than the cumulative expenses incurred in
connection with the utilization of these resources, then we can say that the manufacture of utensils
is a profitable venture. A close examination of the resources involved in carrying out a business
reveals that the resources other than those which are involved in the production/operations subsystem.
are mostly the overheads. Some of them can be kept at minimal level in case of necessity. But, the
activities of the production/operations subsystem are highly essential to manufacture the products/
services. Therefore we need careful policies and procedures to carry out the activities under the
production/operations subsystem so that the required amount of finished goods/services are produced

with specified quality.

In view of the growing global competition, it is essential to provide goods and services at

competitive prices. If the market is not highly competitive, the organization of the
computes thethecostbusiness
all the expenses incurred in manufacturing and administering
product by considering
and then adds the required profit to this cost for fixing the selling price. In a competitive market,
this approach may not work well. Instead, the organization should first fix up a competitivepriceand
then it should try to plan its activities by eliminating unnecessary costs till the required profit is
achieved. This is nothing but a working-backward approach which leads to a definite acceptance of
products/services in a market even with stiff competition.
In production/operations subsystem, one can see a lot of scope to minimize various costs, since
a significant portion of the product cost is incurred at this stage of the business. So the cost of value
addition can be minimized by proper planning of this function. Hence, a detailed study and analysis
of the production/operations subsystem of an organization would automatically help to implement
the working-backward approach in order to compete in the global market with lower prices for its

products/services.

1.2 SYSTEMS CONCEPT OF PRODUCTION

System is a collection of interrelated entities. As stated earlier, operations management is nc

management of transformation systems which convert inputs into goods and/or services. The inputs
to the system are materials, labour, equipments and capital as shown in Fig. 1.3. These inputs
combined and converted into goods and/or services by a suitable process technology. The types
inputs used vary from one industry to another. In product manufacturing, the major inputs are caprl
machines, equipments and tools, and labour is required to operate and maintain the equipments.
materials input is the basis for the conversion process.
n.
Figure 1.3 explains the systems aspect of production/operations function of an organizai
The organization receives several inputs as indicated on the left hand side and converts then
of
useful products and/or services using its facilities (manufacturing facilities). In the proces
 rtroduction|5

Input
Operations Managemet Output

Materials
Labour
Transformation Goods or services
(Conversion)
Equipmet
process
Capital

J
L Feedback information
Environment

production/operations
function.
Fig. 1.3 Systems aspect of
like quality, size,
attributes
deviations in the product's
there will be some
it
conversion. definitely,
to cope up with the
predetermined plans and policies,
Just
of units produced. feedback for
shape and number communicate these deviations to the input stage in the form of
to
is highly essential
making necessary corrections.
below:
A sample list of corections is presented
materials
on the incoming
raw

Tight quality check

Adjustment of machine settings
.Change of tools skills
to machines with matching
Proper allocation of operators decrease in volume of production
plans, like increase or
.Change in the production
to avoid rework
Rigid in-process quality programme modified
the product/service with
the once again tries to produce
Based on this feedback, system a continuous exercise
to
the specifications. The feedback mechanism is
parameters,in order to meet

monitor the status of the system environment

environment. So, the system
has to take feedback from its
The system operates in an environment
classified into internal
and adjust its parameters accordingly.
The environment can be
environment and its
management may be treated as the internal
and external environment. The topwill form 1internal feedbac. The system must respond
to these
instructions and expectations
modifications for achieving better results. and its
continual monitoring of the system
Managing the system involves
transformation social or
the fim may change in terms of legal, political,
CviOnment. The environment outside
in the environment of production/
OnC Conditions, necessitating the corresponding change
thereby from feedback
must consider these changes as

Prations. So, the production/operations system

Extemal environment and adjust its parameters accordingly. 1.4,
is shown in Fig.
production/operations subsystems
etailed schematic diagram of the are system
indicated. This
the different components of the production/operations system
ein converts them into
useful products/services by
rec
Es different inputs as indicated in the figure and
6| Production and Operations Management

Location and Layout

Forecast

Work Study
Product Design and Analysis,

Production Control O
Materials and Control u Products/
Scheduling
Aggregate Planning Materials Requirement Line Balancing, Services
Labour N Master Production Planning (MRP)
P Capacity Planning Line of Balance, Market
Scheduling9 Single Machine Scheduling
Equipment Flow Shop Scheduling,
Job Shop Scheduling,
Capital

Maintenance Management

Quality Control
Inventory Control

Fig. 1.4 Schematic representation of production/operations subsystem.

of
at the transformation stage.
This is usually achieved with the help
utilizing the equipments and procedures
and by applying suitable techniques and procedures. The techniques
required manpower
follows:
system are as
used in the production/operations

1. Forecasting
2. Location and layout techniques
3. Product design and analysis, work study

4. Production control techniques

(a) Aggregate planning
(b) Master production schedule
(c) Materials requirements planning
(d) Capacity planning
(e) Scheduling and control
Line balancing
Line of balance
Single machine scheduling
Flow shop scheduling
Job shop scheduling
 Introduction 7

5. Maintenance management

and control techniques

6. Feedback
(a) Quality control

(b) Inventory control

to be checked for conformance with

the system are
produced by
The finished products/services These are done at the output stage and
and other design specifications.
auality specifications the input stage for necessary
corrections. This feedback
feedbacks are given to
corresponding corrections required depends on the materials
continuous process, but the degree of
mechanism is a
skills and their commitments.
condition, employees
quality. equipments
PRODUCTION SYSTEM
1.3 TYPES OF
and operating methods
system of amainly uses facilities, equipments,
company demand. The above
The production goods that satisfy customers'
systenm) to produce the
(called the production that the company offers and
depend on the type of product
of a production system system is summarized
requirements The classification of production
that it employs to serve its customers.
strategy sections.
in Table 1.2 and
is explained in the following
Classification of Production System
Table 1.2

Examples
Basis Classifications
TV, radio, etc.

Products
Consumer goods like furniture,
Type of output machine, etc.
Producer goods like, lathe, milling
entertainment, banking
Services Transportation, health,
etc.
services, education system,
Construction of bridge, dam, road, etc.
Type of flow Projects auto repair, machine shop,
furniture
Job shop Hospital,
company, etc.
auto factory, etc.
High volume TV factory,
Flow shop power
Postal services, telephone company,
Continuous process chemical plant
corporation, oil refinery,
Medical care, legal services
Type of specification Customized
Insurance, wholesale stores
under service type Standardized

1.3.1 Flow Shop

1s a conversion process
undergo the same sequence
in which successive units of output
S line: for example
using specialized equipments usually positioned along a production
operations, electric motors, assembly of computer
ssembly, assembly of television sets, assembly 'of
keyboards, etc. in which there is a
EXlreme form of flow shop is sometimes treated as a continuous process
others in which there is no way
tant low of materials, as in oil refining, chemical processing and
to
identify successive units of output.
 8| Production and Operations Management

Ordinary flow shop can be classified into continuous flow shop and intermittent flow sh
Continuous flow shop will produce the same type of output like cigarettes, fertilizer, cement. ete
intermittent flow shop. the process is interrupted to set it up to handle diffterent specifications of the
same basic design. In each run. however, all units will follow the same sequence. Examples
are
production of clothing. television sets, ete.
bottling factories, mass

1.3.2 Job Shop

This is a conversion process in which units of different types of products follow different sequences
through different shops. This type of system has more flexibility. But this system results into more
set-up time, more in-process inventory, complex scheduling, varying quality, and so forth.

1.3.3 Batch Manufacturing

A batch manufacturing facility produces some intermediate varieties of products with intermediate
volumes. The volume of any single product may not be sufficient to justify the use of a dedicated
set of equipments for its production. Under this condition, a few or several products will have to
share the production resources to balance their utilization. Production equipment in batch manufacturing
must be capable of performing a variety of tasks, but the range of possible operations is much
narrower than in a job shop.

1.3.4 The Project

A project refers to the process of creating a complex one-of-a-kind product or service with a set of
well-defined tasks in terms of resources required and time phasing. Some examples of projects are:
dam constructions, starting new industries, fabricating boilers, and so on.

1.4 PRODUCTIVITYY
Productivity is a relationship between the output (products/services) and the input (resources consumed
in providing them) ofa business system.

Productivity Output
Input
For the survival of any organization, this productivity ratio must be at least 1. If it is more
one, the organization is in a comfortable position. So, the objective of the organization should be to
identify ways and means to improve productivity to the highest possible level. There are several
strategies for improving the productivity which are:

1. Increased output for the same input.

2. Decreased input for the same output.
3. Proportionate increase in the output is more than the proportionate increase in the input.
4. Proportionate decrease in the input is more than the proportionate decrease in the output
S. Simultaneous increase in the output with decrease in the input.
eping
Increesed output for the same input.
In this strategy, the output is increased
while kepu
the input constant. Let us assume that in a steel plant, the layout of the existing shops is not prop
 Introduction 9

liohtly altering the location of the billet-making section, i.e. bringing it closer to the furnace
tormation at the top ot ladles can be reduced to a greater extent
hich produces hot metal, the scale in ladles to the bilet-making section. In the long run, this would
The molten metal is usually carried billet this exercise, there is no extra cost involved
of produced. In
aive more yicld in terms of tons
task is the relocation
the
of facility by shifting it closer to the furnace which
billet-making
The only example where the output is increased without any increase
cost. So, this is an
involves insignificant
in the input.

the same output In this strategy, the input is decreased to produce the
Decreased input for substitute raw material to manufacture a product which
Let us assume that there exists a
same output. If we can identify such material and
and it is available at a lower price.
has the required properties reduce the In this exercise, the
input cost.
manufacturing the product, then certainly it will
use it for alternate substitute material. The process
of
department is to identify an
job of the purchase extra cost. So, naturally, the productivity ratio will increase
involve any
identification does not material to produce the same output.
way of using the cheaper raw
because of the
decreased input by
the
the proportionate increase in
increase in the output is more than
Proportionate
a new product into
the existing product mix of an
the example of introducing
input. Consider facilities are not fully utilized. So,
the R&D wing of
that the existing
organization. Let which can be
us a s s u m e
has a very good market and
has identified a new product which for
the company
facilities of the organization.
If the new product is taken up
manufactured with the surplus
will result.
production, then the following
of selling the new
increase in the revenue of the organization by way
(a) There will be an
mix.
product in addition to the existing product maintenance cost of
be an increase in the
material cost, and operation and
(b) There will
new product.
machineries because of producing the
the
examine these two increases, we
find that the proportionate increase in
If we closely be a net
more than the proportionate
increase in the input cost. Hence, there will
revenue will be
increase in the productivity ratio.

than the proportionate decrease in

the
Proportionate decrease in the input is more
i.e. dropping an uneconomical
output. Let us consider the reverse case of the previous example,
product from the existing product mix. This will result in the following:
because of dropping a product
(a) There will be a decrease in the revenue of the organization
from the existing product mix.
and maintenance cost of
(6) There will be a decrease in the material cost, and operation
mix.
machineries because of dropping an existing product from the product
the input
find that the proportionate decrease in
e be closely examine these two decreases, we the revenue. Hence, there will be a net increase
w more than the proportionate decrease in
in the
productivity ratio.
that advanced automated
crease in the output with decrease in the input. Let us a s s u m e

etc., are available in the

Oes like, Robot, Automated Guided Vehicle System (AGVS),
 10 Production and Operations Management

market which can be employed in the organization of our interest. The outcome of these modem

tools can be summarized as following.

(a) There will be a drastic reduction in the operation cost. Initially, the cost on equipment
would be very high. But, in the long run, the reduction in the operation cost would break.
on the input.
the high initial investment and offer more savings
even
(b) These advanced facilities would help in producing more number of goods because thev
don't experience fatigue. The increased production will therefore yield more revenue.

In this example, there is an increase in the revenue while there is a decrease in the input in the

Hence. the productivity ratio will increase at a faster rate.

long run.

1.5 STRATEGIC MANAGEMENT

The environment of organizations is becoming more and more complex because of the increased rate
of environmental, social and technological change. the increased internationalization of business
organizations and the increased scarcity and cost of natural resources. The process of making decisions
about their future in this complex and changing environment is called strategic management. Strategic
management involves making those decisions that define the organization's Mission and Objectives,
determine the organization's most effective utilization of its resources and seek to assure the
effectiveness of the organization within its environment.
Strategic management has two phases, namely strategy formulation and strategy implementation.
Strategy formulation is concerned with making decisions with regard to:

Defining the organization's philosophy and mission.

Establishing long- and short-range objectives to achieve the organization's mission.
Selecting the strategy to be used in achieving the organization's objectives.
Strategy implementation is concerned with aligning the organizational structure., systems and
processes with the chosen strategy. Strategies exist at different levels in an organization.
The hierarchy of strategies can be given as:

Mission

Objectives
Corporate strategies
Business unit strategies
.Functional strategies
The Mission statement
of an organization defines its line or lines of business, identifies
products and services and specifies the markets it serves at
of three to five years. present and will serve within a time a
Objectives can be classified into long- and short-term
objectives.
the results desired in pursuing the organization's mission and normallyLong-term
extend
objectives spe
fiscal year. Short-term objectives are beyond the cun
that management uses to measure the
performance targets, normally of less than one year du ation

progress towards the achievement of

Corporate strategies are established at the highest level of long-term objec
range time horizon. management and involve a o
 Introduction| 11
Business strategies (Business unit strategies) deal with the mechanism of competing in a given

This is narrower in scope than a corporate strategy. A strategic business unit is an operating
hasiness.
that sells a distinct set of products services to an identifiable group of
or
an organization
unit in with a defined set of competitors. Business strategy is generally
customers in competition
unit business.
applicable to a single are still narrower in scope
than business strategies. These include the
Functional strategies
finance, marketing and personnel. Functional strategies
aetivities of the functional areas, production,
are mainly concerned with "how to" type
of issues.
business but
strategies, they
must support

1.5.1 Corporate Strategles

is given below:
A sample list of corporate strategies
1. Stable growth strategy
2. Growth strategy
product or service
Concentration on a single
Concentric diversification
Vertical diversification
Horizontal diversification
Conglomerate diversification

3. Endgame strategies
4. Retrenchment strategies
Turnaround strate8y
Disinvestment strategy
Liquidation strategy
5. Combination strategies
Simultaneous strategy
.Sequential strategy
Stable growth strategy. In stable growth strategy, the objectives, percentage increase in each
year's level of achievement expected, and mix of products and services offered to customers continue
to be the same.

Growth strategy. The various attributes of a growth strategy are:

(a) The growth rate of an organization is not necessarily more than that of the economy as
a whole but it is more than the growth rate of the market in which the products of the
organization are sold.
(b) Organizations will attempt to postpone or even eliminate the danger of price competition
in their industry.
C) Organizations will develop new products, new markets, new processes and new uses for
old products.

Concentration on a single product or service. This strategy aims to increase sales, profits
arket share faster than it had in the past. Sometimes the sales turnover may not be as expected.
OVercome such a situation, the
following
measures are suggested.
12 Production and Operations Management
o r colour.
sizes, options,
styles
product can be offered in new
(a) The same
ine.
product
products can be developed in the existing or internationally.
(6) New
geographic
areas, either nationally
be encouraged to buy
( C ) T h e market
can be expanded into new
users can
while light
start buying
Non-users can be encouraged to
a strategies, product differentiation
more frequently. proper
pricing
increased through
be
The market share
can
(e)
new products or
and advertising. which
involves adding
strategy The products or services
It is a growth or
services.

present products
diversification.
Concentric
and experience
in technology.
organization's know-how
similar to the organization's viable when the
services that are of the becomes more

lie within the scope base. This strategy

must
that are added customer
channels or
distribution
product line, belongs, grows.
the organization integration and
backward
to which forward
industry
has two options, namely,
o w n products
o r services
Vertical diversification.
This strategy
into distributing its
organization or services
m o v e s an
s o m e o r all
of the products
Forward integration
integration. into supplying
moves an organization
Backward integration services.
or
its present products of its
used in producing buys one

strategy in which an organization

It is a growth
Horizontal
diversification.
can be accomplished
through mergers.
or into his market. It
gets
competitors' facility
aims to add new products
or

It is a growth strategy which

diversification. or services.
Conglomerate present products
different from the organization's
services that are significantly
demand.
environment of declining product
are used in an
Endgame strategies. strategies
These and
strategy, niche strategy, harvest strategy
includes leadership
This category of strategies aims to achieve an above
means that an organization
disinvestment strategy. The leadership
strategy The niche
one of the few companies
remaining in the industry.
average profitability by
becoming will either maintain
stable
that
to segment of the declining industry
identify a
maintenance,
strategy attempts investments, reduce
Harvest strategy aims to decrease
demand or decline slowly.
order to cut costs and improve cash
flow. Quick disinvestment strategy
advertising and research in it later.
off the business in the early stage of the decline rather than harvesting and selling
aims to sell

These are used during economic recessions and during poor financia
Retrenchment strategies. includes
performance of organizations. These are short-term strategies. This category of strategies
aims
turnaround strategy, disinvestment strategy and liquidation strategy. The turnaround strategy
cut costs by using the following measures:

. Change management personnel both at the top and bottom levels.

2. Cut down on capital expenditure.

3. Centralize decision-making in an attempt to control costs.
4. Reduce recruitment.
5. Reduce advertising and promotion expenditures.
 Introduction | 13

if required.
6. Fire employees
assets.
7. Sell off some
control.
8. Tighten inventory
collection of accounts receivable.
9. Improve the
involves selling off a of the business which can be a
major part
The disinvestment strategy involves terminating an
or a division. Liquidation strategy
unit, a product line,
strategic business off its assets or by shutting down the entire operation
either by selling
arcanization's existence
involve more than one strategy at the same
Combination strategies Combination strategies
divided into simultaneous
combination strategies and sequential
of strategies can be
time. This category of strategies may be retrenching
combination
in certain areas o

combination strategies. An example A sequential strategy may

a growth strategy
in other areas or products.
products while pursuing when conditions improve
turnaround strategy and then employing a growth strategy
involve using a

(or Business Unit) Strategies

1.5.2 Generic Competitive
is as follows:
(or business unit) strategies
A list of generic competitive
Overall cost leadership strategy
Differentiation strategy
Focus strategy
to produce and deliver
the product or service with
leadership strategy aims
The overall cost
Differentiation strategy aims to
create a

at low cost relative to its competitors.

specified quality, a
The uniqueness may be
achieved through
service which is unique in that industry. the
new product or
network. This strategy will enable
customer service or dealer
design or brand image, technology, or service. Organizations using
focus strategy aim
to fix a higher price for its product in
organization or product line segments
of customers, geographic markets
to concentrate on a particular group broader
narrow market better
than its competitors who serve a
order to serve a wel1-defined but
market.

1.5.3 Functional Strategies

Under this category of strategies, there are four strategies

Marketing strategies
.Financial strategies
Personnel strategies
Production/Manufacturing strategies
products or services from the producers
Marketing strategies consist of activities intended to move
to the customers or markets. Financial strategies consist of activities aimed at acquiring tunds to meet
the organization's current and future needs, monitoring and controlling the financial results of the
Organization. Personnel strategies involve identification of human needs, devising proper reward
ystem, mechanism of retaining employees, mechanism to match employees competeneies with the

Organization's present and future needs.

 Introduction | 13

if required.
6. Fire employees
some assets.
7. Sell off
control.
8. Tighten inventory
receivable.
the coliection of accounts
9. Improve
involves selling off a major part of the business which can be a
The disinvestment strategy involves terminating an
a division. Liquidation strategy
a product line, or
ctrategic business unit, down the entire operation.
off its assets or by shutting
by selling
orcanization's existence either

involve more than one strategy at the same

Combination strategies. Combination strategies
simultaneous combination strategies and sequential
can be divided into
time. This category
of strategies in certain areas or
An example of combination strategies may be retrenching
combination strategies. in other areas or products. A sequential strategy
may
while pursuing a growth strategy
products when conditions improve.
turnaround strategy and then employing growth
a strategy
involve using a

Generic Competitive (or Business Unit) Strategies

1.5.2
follows:
business unit) strategies is as
A list of generic competitive (or
.Overall cost leadership strategy
Differentiation strategy
Focus strategy
and deliver the product or service with
The overall leadership strategy aims to produce Differentiation
cost
its competitors. strategy aims to create a
at a low cost relative to
specified quality, be achieved through
new product or service
which is unique in that industry. The uniqueness may
customer service o r dealer network.
This strategy will enable the
design or brand image, technology, focus strategy aim
for its or service. Organizations using
organization to fix a higher price product
markets or line segments in
product
to concentrate on a particular group of customers, geographic
serve a broadeer
well-defined but narrow market better than its competitors who
order to serve a

market.

1.5.3 Functional Strategies

Under this category of strategies, there are four strategies:

Marketing strategies
Financial strategies
Personnel strategies
Production/Manufacturing strategies
Marketing strategies consist of activities intended to move products or services from the producers
to the customers or markets. Financial strategies consist of activities aimed at acquiring funds to meet
results of
the organization's current and future needs, monitoring and controling the
organization. Personnel strategies involve identification of human needs,
financial
devising proper reward
the
sysiem, mechanism of retaining employees, mechanism to match employees' competencies with the

organization's present and future needs.

 14 | Production and Operations Management
function of organization aims
an
Production/operations
Production/Manufacturing strategies. combination of the following strategies to
provide products/services to its customers by using a

to
fill market gaps.
1. Timely delivery of products/services.
demand in terms of change in product design
or change
2. Flexibility in meeting customers'
in production volume.

of products/services to meet customers' specifications.

3. Quality relative to that of its
price for its products/services
4. Cost effectiveness in terms of low
competitors.
function. The selected
These the production/operations
alternatives form bases for
strategic
with desired product characteristics, process
strategies are translated into operations subgoals follows:
characteristics and customer services. Some of the specific
operations objectives are as
This objective aims improve to
Achieving highest efficiency at al operational subsystems.
that the overall productivity of the organization
the efficiency of each operational subsystem such
is improved.

up the operations subsystems to

meet delivery commitments. Meeting
Geaning
committed delivery dates while satisfying demand is considered to be an important factor which will
as well as holding the customers for a longer period.
help improving the image of the organization
in
This helps in achieving the objective of the focus strategy.

Flexibility in meeting customers' demand in terms of change in product design. Very

often the design of products/services keep changing because of customers' taste, technological
obsolescence and change in technical requirements where these products/services will be used. Under
such situations, the design and development section of the organization should immediately respond
to these changes and make available the required design so that the organization can retain its
customers and also attract more customers. This will help in achieving some of the objectives of
growth strategies.
Flexibility in production volume to meet changing customers' demand. In many situations,
buyers may cancel a part of their orders because of reduced requirements from their side. But, the
supplier organization would have already planned for raw materials. The above change in the order
size will force the supplier organization to have surplus stock because of unutilized raw materials
corresponding to the partial cancellation of the order. Here, the supplier organization is willing to
accept the cancellation of order from the buyer's side mainly to retain customers. In this process, the
organization would build up enormous inventory. This inventory may be utilized for new products
alternate products or new orders of the same product. These exercises will fulfil the objectives of the
growth strategy, viz. concentric diversification, and also the objective of simultaneous combination
strategy.
Satisiying customers' demand with world class product quality. In view of the growing
global competition, quality plays a major role in promoting products/services locally and internationally
Hence, the objective of the organization should be to produce products/services with world class
quality. Fulfilling this objective would definitely help in improving the company's market share and
in a of the organization in the long nun. This will help in
would thereby result significant growth
achieving the objectives of growth strategies as well as that of generie strategies.
 Introduction 15

labour relation and manpower cost control. Manpower cost is a

To be effective in advisable
it is to apply more
cost of products/services. In a declining market,
nortion of the total
increased emphasis on labour cost minimization. These exercises
eontrol on labour utilization and give in fulfilling the objectives of
in achieving the objectives of the turnaround strategy and
will help products/services at a low price.
cost strategy which aims to provide
leadership
overall utilization and its cost control. In the process of providing products/
Etficient material
raw materials are converted into finished goods by the value addition
services to customers, the it will be
examine the different cost components of the products/services,
If we closely
process.
of raw materials forms major a So, any attempt to optimize the
proportion.
evident that the cost thus
of the raw materials would certainly improve the productivity of the organization,
utilization as well as the overall cost leadership
it achieve the objectives of the turnaround strategy
helping
strate
utilization and its cost control. In
the process of value addition, many
Efficient facility of facilities reduce the cost of equipments/
facilities are utilized. So, proper selection and usage the
the turnaround strategy as well as
machineries. This will helpin achieving the objectives of
overall cost leadership strategy.
be improving their productivity by formulating
interested in
In general, organizations would are (Sahay, Prem Vrat
and
strategies. The objectives of such corporate strategies
proper corporate
Jain, 1996):
investment.
1. To increase the rate of return
on

2. To increase sales turnover.

3. To maximize profit.
4. To improve the economy of the nation.

5. To improve earning per share.

6. To improve employment.
7. To attain substantial market share.
are internal to the organization. In
Except the fourth and sixth objectives, all other objectives
the long run, to have greater acceptability and recognition of the industry to which the organization
of the nation and also
belongs, it is better to tune its activities in the line of improving the economy
to maximize the employment opportunities for the nation. The other objectives are closely interrelated.
For example. if the sales turnover (second objective) of the organization is increased, definitely, it
will have a positive impact on the objectives 1, 3, 4, 5, and 7. At the same time, on certain occasions
t will have some effect on the sixth objective. The production/manufacturing strategies would help
in
achieving the above corporate objectives.
1.6 GROSs DOMESTIC PRODUCT (GDP) AND ITS IMPACT
Domestic Product of a and services produced in that
ross
nation
nation is the sum of values of goods
in a year.
The Gross Domestic Product (GDP), Per-capita GDP (PGDP), and Gross World Product (GWP)
Selected 12 countries are presented in Table 1.3. These are based on the absolute measures given
n
million S and average of 20 years data from 1970 to 1989.
16 Production and Operations Management
Table 1.3 International Per-capita GDP, GDP, GWP and Population Data of Selected Countries

(Average of 20 Years from 1970-1989)

20 Year Average
20 Year Average (Million $)
Population
PGDP GDP GWP (Million)
Country
142,542 1.40 14.59
Australia 9770
200,307 1.97 137.95
Brazil 1452
263,753 2.59 23.91
Canada 11,031
502.308 93 53.77
France 9342
628,097 6.17 61.63
Germany 10,192
1.54 680.53
India 230 156.523
1,121,748 11.01 16.34
Japan 9642
68,281 0.67 37.85
Korea 1804
571 44,080 0.43 77.20
Nigeria 25,959 0.25 47.72
544
Philippines 3.93 56.52
U.K. 7088 400,595
12,037 2,727,114 26.77 226.56
U.S.A
Source: Trends in International Distribution of Gross World Product, National Accounts Statistics (Special

issue), United Nations, Series X, No. 18, New York, 1993.

The average population of each country for the period 1970-1989 is calculated by dividing its
GDP by its Per-capita GDP. The details of the countries corresponding to the minimum and the
maximum measures are summarized in Table 1.4.

Table 1.4 Minimum and Maximum of Different Measures

Average Measure Minimum Maximum

PGDP India U.S.A.

GDP Philippines U.S.A.
GWP Philippines U.S.A.
Population Australia India

From Table 14, one can visualize the fact that the PGDP, GDP and GWP are very high for
U.S.A. The Per-capita GDP is very low for India. The GDP and GWP are very low for Philippines.
The average population is maximum for India and it is minimum for Australia.
Though India has very low per-capita GDP (last rank), its GDP and GWP rank 8 out of 12.
to low). Labour is considered to be one of the factors of
But, its population ranks first (high
production. Since India has the highest reserve of manpower which is not fully utilized, it has a scope
to improve its GDP and other related measures
by properly utilizing this excess manpower.
The per-capita GDP of India is very low when
compared to several developed countries. D
after India adopted liberalized economic policy, many multinational companies have been c
a
to India to set up business ventures
mainly to exploit the availability of the cheap labour. This g
increased employment opportunity to India and hence
improves the GDP of India. Above all
Production/Operations function is gaining increased importance, since it is the value addition tunet
 Introduction| 17

result, As the concepts and techniques

and existing manufacturing/service organizations.
a
t these new
also gaining more importance to improve the individual
af the Production/Operations function are

organizational productivity.

CLASS MANUFACTURING
1.7 WORLD
and rapidly in line with the increasing global
The concerm for improving performance continuously
measures provide clear insight into real
momentum. Various performance
competition gathering
is
deviations, if they exist. If a system fails to give
and they, in turn, help in correcting
nroblems or labour. It is due
or the level of technology
the fault is not with the culture
then
desirable results, measures used. Hence, identification and definition
of right
to ineffective
and incorrect performance
measures are to be given the top most priority.
type of performance is of a recent origin. The following attributes of the World
World Class Manufacturing concept
are aimed to fulfil
the customer demands:
Class Manufacturing
1. Products with high quality
2. Products at competitive price
enhanced features
3. Products with several
4. Products in a wider variety
shorter lead times
5. Products delivered with
time
6. Products delivered on
demand
7. Flexibility in fulfilling products'
but highly essential
external to the manufacturing system
measures are
All these performance must set up their
of the company. These can be measured internally. Companies
for the success
have a high level of acceptance at
so that the product will
measures in these lines
performance
customer point. of its
stiff competition is a direct consequence
The of the company in the face of
success
over its competitors.
performance measurement system
manufacturing function having a superior closer
the company's products should have a specification
Under the World Class Manufacturing,
the customer error free,
to the customer needs than those
made by any competitor, they should reach
be delivered at the
faster than any other competitor, and should always
get delivered in a lead time
promised due dates.

lustration on Superior Performance Measure

five different products whose details are given in
Let consider that
us company manufactures
a
and the production department on
Table 1.5. There is a disagreement between the sales department
aggregate achievement of the products. How do we then analyze the problem?
target
achievement
Discussion. The sales department says that there is a shortfall in aggregate
by computing
arget which is contradicted by the production department. This disagreement analyzed
is
and from that of
ne aggregate achievement target from the view point of the production department
the sales department.
Aggregate Achievement target based on Production Department's view:

Achievement target [Total Production/Total Requirement] x 100

= [900/1000] x 100 = 90%.
 18 Production and Operations Management

Table 1.5 Products Details

Actual Excess
SI. No. Product Requirement Production Production
A 40 40
B 100 200 100
C 200 100
D 500 300
5 E 160 60 100
Total 1000 900 200

The production department may claim that it has met 90% of the requirement. But the reality
is different.
Aggregate Achievement target based on Sales Department's view:
Let us use the following revised formula to compute the achievement target.

Production Excess Production

Achievement target =Total Total Requiremer
100

9 0 0 200
x 100 70%
1000

From this
example, it is clear that the disagreement between the sales department and the
production department is mainly due to incorrect use of the performance measure for
aggregate achievement target. The formula used by the sales department is more realistic measuring the
subtracts the excess production from the total because it
production
has been really absorbed by the customer. Also, this
to arrive at the net total
production which
approach paves way recognize the inventory
a to
which, in turn, warrants action from the management for its minimization.

OBJECTIVE TYPE QUESTIONS

1. takes care of production and services.
(a) Production management
b) Operations management
(c) Systems management
(d) None of the above
2. In
organization, inventory cannot be carried to future periods.
(a) Manufacturing
(b) Service
(c) Both (a) and (b)
(d) None of the above
3. Hospital system is an
example of.
(a) Project
(c) Flow shop (b)Job shop
(d) None of the above
4. The output of educational
system comes under
(a) Products
(b) Services
(c) Both (a) and (b)
(d) None of the above
 Introduction 19
is an example of standardized service.
.
a) Medical care (b) Legal service
(c) Insurance
(d) None of the above

6. Productivity is

(a) InputOutput (b) Output/Input

and (b) (d) None of the above
(c) Both (a)
to have the productivity index
7. It is desirable
Less than 1
(b) More than 1
(a)
to 1 (d) None of the above
(c) Equal
is a complex one-of-a-kind product.
8.
(b) Spindle
(a) Motor
(d) Dam
(c) Soap intermediate varieties of products
manufacturing facility produces
some

with intermediate volumes.

(b) Project
(a) Job shop (d) Flow shop
(c) Batch manufacturing
which successive units of output
undergo the
is a conversion process in
usually positioned along production
a
10 specialised equipments
same sequence of operations,
using
line. (b) Job shop
(a) Flow shop None of the above
(d)
(c) Project and services produced in that
nation is the sum of values of goods
of a
11.
nation in a year.
(b) GDP
(a) GNP the above
(d) None of
(c) GDD
has certain attributes
which have focus on
12. World class manufacturing
(b) Management style
(a) Shop floor
(c) Customer satisfaction (d) None of the above

QUESTIONS

1. Define production and operations management.

with suitable examples.
2. Briefly discuss different products and services
3. Discuss the attributes of services.
4. Discuss the systems concept of production.
with suitable examples.
5. Discuss different types of production systems
6. Briefly discuss different ways of improving productivity. with
strategies
.List different Also, discuss the link of production/manufacturing
strategies.
other strategies.
could be converted into its opportunities.
8. Discuss how some of the weaknesses of India
9. Explain the concept of World Class Manufacturing.