Operation Management

Harambee University College Operation Management Department of Management
Chapter 1
Introduction to Operation Management
1.0 Aims and Objectives

1.1 Introduction
1.2 What is operation management
1.3 Difference between manufacturing and service organization
1.4 Operation Management decisions
1.5 Operation strategy and competitiveness
1.5.1 The role of operation strategy
1.5.2 Developing business strategy
1.5.3 Developing an operation strategy
1.5.4 Strategic role of technology
1.6 Historical development of operation management
1.7 Today’s operation management environment
1.8 Operation management in practice
1.9 Operation management across the organization
1.10 Trends in operation research
 Define Operations Management (OM)

 Explain the role of OM in business
 Describe the decisions that operations managers make
 Describe the differences between service and manufacturing operations
 Identify major historical developments in OM
 Identify current trends in OM
 Describe the key aspects of operation management in decision making
 Describer the flow of information between OM and other business functions
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1.1 Introduction
Today companies are competing in a very different environment than they were only a few years ago.
To survive they must focus on quality, time-based competition, efficiency, international perspectives,
and customer relationships. Global competition, e-business, the Internet, and advances in technology
require flexibility and responsiveness. This new focus has placed operations management in the
limelight of business, because it is the function through which companies can achieve this type of
competitiveness. Consider some of today’s most successful companies, such as Wal-Mart, Southwest
Airlines, General Electric, Starbucks, Toyota, FedEx, and Procter & Gamble. These companies have
achieved world-class status in large part due to a strong focus on operations management. In this
module you will learn specific tools and techniques of operations management that have helped these,
and other companies, achieve their success.
The purpose of this course is to help prepare you to be successful in this new business environment.
Operations management will give you an understanding of how to help your organization gain a
competitive advantage in the marketplace. Regardless of whether your area of expertise is marketing,
finance, MIS, or operations, the techniques and concepts in this module will help you in your
business Career. The material in this module will teach you how your company or enterprise can offer
products and services cheaper, better, and faster.
1.2 What is operations management?
A typical business organization has three major functions: finance, marketing, and operations
management. Figure 1.2.1 illustrates this by showing that the vice presidents of each of these
functions reports directly to the president or CEO of the company. These three functions, and other
supporting business functions—such as accounting, purchasing, human resources, and engineering—
perform different but related activities necessary for the operation of the organization. The functions
must interact to achieve goals and objectives of the organization, and each makes an important
contribution. Finance is the function responsible for managing cash flow, current assets, and capital
investments. Marketing is responsible for sales, generating customer demand, and understanding
customer wants and needs. Most of us have some idea of what finance and marketing are about, but
what does operations management do?

Figure 1.2.1. Organizational chart showing the three major business functions
Operations management (OM) is the business function that plans, organizes, coordinates, and
controls the resources needed to produce a company’s goods and services. Operations management is
a management function. It involves managing people, equipment, technology, information, and many
other resources. Operations management is the central core function of every company. This is true
whether the company is large or small, provides a physical good or a service, and is for profit or not
for profit. Every company has an operations management function. Actually, all the other
organizational functions are there primarily to support the operations function. Without operations,
there would be no goods or services to sell.
The role of operations management is to transform a company’s inputs into the finished goods or
services. Inputs include human resources (such as workers and managers), facilities and processes
(such as buildings and equipment), as well as materials, technology, and information. Outputs are the
goods and services a company produces. Figure1.2.2 shows this transformation process.
At a factory the transformation is the physical change of raw materials into products, such as
transforming leather and rubber into sneakers, denim into jeans, or plastic into toys. At an airline it is
the efficient movement of passengers and their luggage from one location to another. At a hospital it
is organizing resources such as doctors, medical procedures, and medications to transform sick people
into healthy ones.

Figure 1.2.2 the transformation process
Operations management is responsible for orchestrating all the resources needed to produce the final
product. This includes designing the product; deciding what resources are needed; arranging
schedules, equipment, and facilities; managing inventory; controlling quality; designing the jobs to
make the product; and designing work methods. Basically, operations management is responsible for
all aspects of the process of transforming inputs into outputs. Customer feedback and performance
information are used to continually adjust the inputs, the transformation process, and characteristics
of the outputs. As shown in Figure 1.2.2, this transformation process is dynamic in order to adapt to
changes in the environment.
For operations management to be successful, it must add value during the transformation process. We
use the term value added to describe the net increase between the final value of a product and the
value of all the inputs. The greater the value added, the more productive a business is. An obvious
way to add value is to reduce the cost of activities in the transformation process. Activities that do not
add value are considered a waste; these include certain jobs, equipment, and processes. In addition to
value added, operations must be efficient. Efficiency means being able to perform activities well, and
at the lowest possible cost. An important role of operations is to analyze all activities, eliminate those
that do not add value, and restructure processes and jobs to achieve greater efficiency.
1.3 Differences between Manufacturing and Service Organizations
Organizations can be divided into two broad categories: manufacturing organizations and service
organizations, each posing unique challenges for the operations function. There are two primary
distinctions between these categories. First, manufacturing organizations produce physical, tangible
goods that can be stored in inventory before they are needed. By contrast, service organizations

produce intangible products that cannot be produced ahead of time. Second, in manufacturing
organizations most customers have no direct contact with the operation. Customer contact is made
through distributors and retailers. For example, a customer buying a car at a car dealership never
comes into contact with the automobile factory. However, in service organizations the customers are
typically present during the creation of the service. Hospitals, colleges, theaters, and barber shops are
examples of service organizations in which the customer is present during the creation of the service.
The differences between manufacturing and service organizations are not as clear-cut as they might
appear, and there is much overlap between them. Most manufacturers provide services as part of their
offering, and many service firms manufacture physical goods that they deliver to their customers or
consume during service delivery. For example, a manufacturer of furniture may also provide
shipment of goods and assembly of furniture. On the other hand, a barber shop may sell its own line
of hair care Products. You might not know that General Motors’ greatest return on capital does not
come from selling cars but rather from post sales parts and service.
The differences between manufacturing and services are shown in Figure 1-3, which focuses on the
dimensions of product tangibility and the degree of customer contact. Pure manufacturing and pure
service extremes are shown, as well as the overlap between them.
Figure 1.3.1. Characteristics of manufacturing and service organizations

Even in pure service companies some segments of the operation may have low customer contact
while others have high customer contact. The former can be thought of as “back room” or “behind the
scenes” segments. Think of a fast-food operation such as Wendy’s, for which customer service and
customer contact are important parts of the business. However, the kitchen segment of Wendy’s
operation has no direct customer contact and can be managed like a manufacturing operation.
Similarly, a hospital is a high-contact service operation, but the patient is not present in certain
segments, such as the lab where specimen analysis is done. In addition to pure manufacturing and
pure service, there are companies that have some characteristics of each type of organization. For
these companies it is difficult to tell whether they are actually manufacturing or service organizations.
Think of a post office, an automated warehouse, or a mail-order catalog business. These companies
have low customer contact and are capital intensive, yet they provide a service. We call these
companies quasi-manufacturing organizations.
Manufacturing Vs Service
Characteristic Manufacturing Service
Output Tangible Intangible
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low

Measurement of productivity Easy Difficult
Opportunity to correct High Low

quality problems
It is important to understand how to manage both service and manufacturing operations. However,
managing service operations is of especially high importance. The reason is that the service sector
constitutes a dominant segment of the world economy.
1.4 Operations management decisions
In this section we look at some of the specific decisions that operations managers have to make.

We can think about specific day-to-day decisions, we need to make decisions for the whole company
that are long term in nature. Long-term decisions that set the direction for the entire organization are
called strategic decisions. They are broad in scope and set the tone for other, more specific decisions.
They address questions such as: What are the unique features of our product? What market do we
plan to compete in? What do we believe will be the demand for our product? Short-term decisions
that focus on specific departments and tasks are called tactical decisions. Tactical decisions focus on
more specific day-to-day issues, such as the quantities and timing of specific resources. Strategic
decisions are made first and determine the direction of tactical decisions, which are made more
frequently and routinely. Therefore, we have to start with strategic decisions and then move on to
tactical decisions. This relationship is shown in Figure 1-5. Tactical decisions must be aligned with
strategic decisions, because they are the key to the company’s effectiveness in the long run. Tactical
decisions provide feedback to strategic decisions, which can be modified accordingly. You can see in
the example of Gourmet Wafers how important OM decisions are. OM decisions are critical to all
types of companies, large and small. In large companies these decisions are more complex because of
the size and scope of the organization.
Large companies typically produce a greater variety of products, have multiple location sites, and
often use domestic and international suppliers. Managing OM decisions and coordinating efforts can
be a complicated task, yet the OM function is critical to the company’s success.
Figure 1-5: the relationships between strategic and tactical decisions
1.5 Operations strategy and competitiveness
To maintain a competitive position in the marketplace, a company must have a long-range plan. This
plan needs to include the company’s long-term goals, an understanding of the marketplace, and a way
to differentiate itself from its competitors. All other decisions made by the company must support this

long-range plan. Otherwise, each person in the company would pursue goals that he or she
considered important, and the company would quickly fall apart.
The functioning of a football team on the field is similar to the functioning of a business and provides
a good example of the importance of a plan or vision. Before the plays are made, the team prepares a
game strategy. Each player on the team must perform a particular role to support this strategy. The
strategy is a “game plan” designed so that the team can win. Imagine what would occur if individual
players decided to do plays that they thought were appropriate.
Certainly the team’s chance of winning would not be very high. A successful football team is a
unified group of players using their individual skills in support of a winning strategy. The same is
true of a business.
The long-range plan of a business, designed to provide and sustain shareholder value, is called the
business strategy. For a company to succeed, the business strategy must be supported by each of the
individual business functions, such as operations, finance, and marketing. Operations strategy is a
long-range plan for the operations function that specifies the design and use of resources to support
the business strategy. Just as the players on a football team support the team’s strategy, the role of
everyone in the company is to do his or her job in a way that supports the business strategy.
1.5.1 The role of operations strategy
The role of operations strategy is to provide a plan for the operations function so that it can make the
best use of its resources. Operations strategy specifies the policies and plans for using the
organization’s resources to support its long-term competitive strategy. Figure 1-6 shows this
relationship.
Remember that the operations function is responsible for managing the resources needed to produce
the company’s goods and services. Operations strategy is the plan that specifies the design and use of
resources to support the business strategy. This includes the location, size, and type of facilities
available; worker skills and talents required; use of technology, special processes needed, special
equipment; and quality control methods. The operations strategy must be aligned with the company’s
business strategy and enable the company to achieve its long-term plan. For example, the business
strategy of FedEx, the world’s largest provider of expedited delivery services, is to compete on time

and dependability of deliveries. The operations strategy of FedEx developed a plan for resources to
support its business strategy. To provide speed of delivery, FedEx acquired its own fleet of airplanes.
To provide dependability of deliveries, FedEx invested in a sophisticated bar code technology to track
all packages.
Figure 1.5.1.1: Relationship between the business strategy and the functional strategy
The Importance of Operations Strategy

Operations strategy did not come to the forefront until the 1970s. Up to that time U.S. companies
emphasized mass production of standard product designs. There were no serious international
competitors, and U.S. companies could pretty much sell anything they produced. However, that
changed in the 1970s and 1980s. Japanese companies began offering products of superior quality at
lower cost, and U.S. companies lost market share to their Japanese counterparts. In an attempt to
survive, many U.S. companies copied Japanese approaches. Unfortunately, merely copying these
approaches often proved unsuccessful; it took time to really understand Japanese approaches. It
became clear that Japanese companies were more competitive because of their operations strategy;
that is, all their resources were specifically designed to directly support the company’s overall
strategic plan.
Harvard Business School professor Michael Porter says that companies often do not understand the
differences between operational efficiency and strategy. Operational efficiency is performing
operations tasks well, even better than competitors. Strategy, on the other hand, is a plan for
competing in the marketplace. An analogy might be that of running a race efficiently, but it may be
the wrong race. Strategy is defining in what race you will win. Operational efficiency and strategy
must be aligned; otherwise you may be very efficiently performing the wrong task. The role of

operations strategy is to make sure that all the tasks performed by the operations function are the right
tasks. Consider a software company that recently invested millions of dollars in developing software
with features not provided by competitors, only to discover that these were features customers did not
particularly want.
1.5.2 Developing a business strategy
A company’s business strategy is developed after its managers have considered many factors and
have made some strategic decisions. These include developing an understanding of what business the
company is in (the company’s mission), analyzing and developing an understanding of the market
(environmental scanning), and identifying the company’s strengths (core competencies). These three
factors are critical to the development of the company’s long-range plan, or business strategy. In this
section, we describe each of these elements in detail and show how they are combined to formulate
the business strategy.
a) Mission
Every organization, from IBM to the Boy Scouts, has a mission. The mission is a statement that
answers three overriding questions:
• What business will the company be in (“selling personal computers,” “operating an Italian
restaurant”)?
• Who will the customers be, and what are the expected customers attributes (“homeowners,” “college
graduates”)?
• How will the company’s basic beliefs define the business (“gives the highest customer service,”
“stresses family values”)?
Following is a list of some well-known companies and parts of their mission statements:
Dell Computer Corporation: “to be the most successful computer company in the world”
Delta Air Lines: “worldwide airlines choice”
IBM: “translate advanced technologies into values for our customers as the world’s largest
information service company”
Lowe’s: “helping customers build, improve and enjoy their homes”
Ryder: “offers a wide array of logistics services, such as distribution management, domestically and
globally”
The mission defines the company. In order to develop a long-term plan for a business, you must first
know exactly what business you are in, what customers you are serving, and what your company’s

values are. If a company does not have a well-defined mission it may pursue business opportunities
about which it has no real knowledge or that are in conflict with its current pursuits, or it may miss
opportunities altogether.
For example, Dell Computer Corporation has become a leader in the computer industry in part by
following its mission. If it did not follow its mission Dell might decide to pursue other opportunities,
such as producing mobile telephones similar to those manufactured by Motorola and Nokia. Although
there is a huge market for mobile telephones, it is not consistent with Dell’s mission of focusing on
computers.
b) Environmental Scanning
A second factor to consider is the external environment of the business. This includes trends in the
market, in the economic and political environment, and in society. These trends must be analyzed to
determine business opportunities and threats. Environmental scanning is the process of monitoring
the external environment. To remain competitive, companies have to continuously monitor their
environment and be prepared to change their business strategy, or long-range plan, in light of
environmental changes.
What Does Environmental Scanning Tell Us? Environmental scanning allows a company to
identify opportunities and threats. For example, through environmental scanning we could see gaps
in what customers need and what competitors are doing to meet those needs. A study of these gaps
could reveal an opportunity for our company, and we could design a plan to take advantage of it. On
the other hand, our company may currently be a leader in its industry, but environmental scanning
could reveal competitors that are meeting customer needs better—for example, by offering a wider
array of services. In this case, environmental scanning would reveal a threat and we would have to
change our strategy so as not to be left behind. Just because a company is an industry leader today
does not mean it will continue to be a leader in the future.
What Are Trends in the Environment? The external business environment is always changing. To
stay ahead of the competition, a company must constantly look out for trends or changing patterns in
the environment, such as marketplace trends. These might include changes in customer wants and
expectations, and ways in which competitors are meeting those expectations. For example, in the
computer industry customers are demanding speed of delivery, high quality, and low price. Dell
Computer Corporation has become a leader in the industry because of its speed of delivery and low
price. Other computer giants, such as Compaq, have had to redesign their business and operations
strategies to compete with Dell. Otherwise, they would be left behind. It is through environmental
scanning that companies like Compaq can see trends in the market, analyze the competition, and
recognize what they need to do to remain competitive.
There are many other types of trends in the marketplace. For example, we are seeing changes in the
use of technology, such as point-of-sale scanners, automation, computer-assisted processing,
electronic purchasing, and electronic order tracking. One rapidly growing trend is e-commerce. For
retailers like The Gap, Eddie Bauer, Fruit of the Loom, Inc., Barnes & Noble, and others, e-
commerce has become a significant part of their business. Victoria’s Secret has even used the Internet
to conduct a fashion show in order to boost sales. Some companies began using e-commerce early in
its development. Others, like Sears, Roebuck, waited and then found themselves working hard to
catch up to the competition.
In addition to market trends, environmental scanning looks at economic, political, and social trends
that can affect the business. Economic trends include recession, inflation, interest rates, and general
economic conditions. Suppose that a company is considering obtaining a loan in order to purchase a
new facility. Environmental scanning could show that interest rates are particularly favorable and that
this may be a good time to go ahead with the purchase.
Political trends include changes in the political climate—local, national, and international—that
could affect a company. For example, the creation of the European Union has had a significant impact
on strategic planning for global companies such as IBM, Hewlett-Packard, and PepsiCo. Similarly,
changes in trade relations with China have opened up opportunities that were not available earlier.
There has been a change in how companies view their environment, a shift from a national to a global
perspective. Companies seek customers and suppliers all over the globe. Many have changed their
strategies in order to take advantage of global opportunities, such as forming partnerships with
international firms, called strategic alliances. For example, companies like Motorola and Xerox want
to take advantage of opportunities in China and are developing strategic alliances to help them break
into that market.
Finally, social trends are changes in society that can have an impact on a business. An example is the
awareness of the dangers of smoking, which has made smoking less socially acceptable. This trend
has had a huge impact on companies in the tobacco industry. In order to survive, many of these
companies have changed their strategy to focus on customers overseas where smoking is still socially
acceptable, or have diversified into other product lines.

c) Core Competencies
The third factor that helps define a business strategy is an understanding of the company’s strengths.
These are called core competencies. In order to formulate a long-term plan, the company’s managers
must know the competencies of their organization.
Core competencies could include special skills of workers, such as expertise in providing customized
services or knowledge of information technology. Another example might be flexible facilities that
can handle the production of a wide array of products. To be successful, a company must compete in
markets where its core competencies will have value. Table 1-2 shows a list of some core
competencies that companies may have.
Highly successful firms develop a business strategy that takes advantage of their core competencies
or strengths. To see why it is important to use core competencies, think of a student developing plans
for a successful professional career. Let’s say that this student is particularly good at mathematics but
not as good in verbal communication and persuasion. Taking advantage of core competencies would
mean developing a career strategy in which the student’s strengths could provide an advantage, such
as engineering or computer science. On the other hand, pursuing a career in marketing would place
the student at a disadvantage because of a relative lack of skills in persuasion.
Increased global competition has driven many companies to clearly identify their core competencies
and outsource those activities considered non-core. Outsourcing is when a company obtains goods or
services from an outside provider. By outsourcing non-core activities a company can focus on its core
competencies.
Table 1.5.2.1: organizational core competencies

1.5.3 Developing an operations strategy
Once a business strategy has been developed, an operations strategy must be formulated. This will
provide a plan for the design and management of the operations function in ways that support the
business strategy. The operations strategy relates the business strategy to the operations function. It
focuses on specific capabilities of the operation that give the company a competitive edge. These
capabilities are called competitive priorities. By excelling in one of these capabilities, a company
can become a winner in its market.
These competitive priorities and their relationship to the design of the operations function are shown
in Figure 1.5.3.1. Each part of this figure is discussed next.
Figure 1.5.3.1: Operations strategy and the design of the operations function
a) Competitive Priorities
Operations managers must work closely with
marketing in order to understand the competitive
situation in the company’s market before they can
determine which competitive priorities are important.
There are four broad categories of competitive
priorities:
1. Cost Competing based on cost means offering a
product at a low price relative to the prices of
competing products. The need for this type of
competition emerges from the business strategy. The
role of the operations strategy is to develop a plan for
the use of resources to support this type of
competition. Note that a low-cost strategy can result in
a higher profit margin, even at a competitive price. Also, low cost does not imply low quality. Let’s
look at some specific characteristics of the operations function we might find in a company
competing on cost.
To develop this competitive priority, the operations function must focus primarily on cutting costs in
the system, such as costs of labor, materials, and facilities.

Companies that compete based on cost study their operations system carefully to eliminate all waste.
They might offer extra training to employees to maximize their productivity and minimize scrap.
Also, they might invest in automation in order to increase productivity. Generally, companies that
compete based on cost offer a narrow range of products and product features, allow for little
customization, and have an operations process that is designed to be as efficient as possible.
This serves to minimize costs of scheduling crew changes, maintenance, inventories of parts, and
many administrative costs. Unnecessary costs are completely eliminated: there are no meals, printed
boarding passes, or seat assignments. Employees are trained to perform many functions and use a
team approach to maximize customer service. Because of this strategy, southwest has been a model
for the airline industry for a number of years.
2. Quality: Many companies claim that quality is their top priority, and many customers say that
they look for quality in the products they buy. Yet quality has a subjective meaning; it depends on
who is defining it. For example, to one person quality could mean that the product lasts a long time,
such as with a Volvo, a car known for its longevity. To another person quality might mean high
performance, such as a BMW. When companies focus on quality as a competitive priority, they are
focusing on the dimensions of quality that are considered important by their customers.
Quality as a competitive priority has two dimensions. The first is high-performance design. This
means that the operations function will be designed to focus on aspects of quality such as superior
features, close tolerances, high durability, and excellent customer service. The second dimension is
goods and services consistency, which measures how often the goods or services meet the exact
design specifications. A strong example of product consistency is McDonald’s, where we know we
can get the same product every time at any location. Companies that compete on quality must deliver
not only high-performance design but goods and services consistency as well.
A company that competes on this dimension needs to implement quality in every area of the
organization. One of the first aspects that need to be addressed is product design quality, which
involves making sure the product meets the requirements of the customer. A second aspect is process
quality, which deals with designing a process to produce error-free products. This includes focusing
on equipment, workers, materials, and every other aspect of the operation to make sure it works the
way it is supposed to. Companies that compete based on quality have to address both of these issues:
the product must be designed to meet customer needs, and the process must produce the product
exactly as it is designed.

To see why product and process quality are both important, let’s say that your favorite fast-food
restaurant has designed a new sandwich called the “Big Yuck.” The restaurant could design a process
that produces a perfect “Big Yuck” every single time. But if customers find the “Big Yuck”
unappealing, they will not buy it. The same would be true if the restaurant designed a sandwich called
the “Super Delicious” to meet the desires of its customers. Even if the “Super Delicious” was exactly
what the customers wanted, if the process did not produce the sandwich the way it was designed,
often making it soggy and cold instead, customers would not buy it. Remember that the product needs
to be designed to meet customer wants and needs, and the process needs to be designed to produce
the exact product that was intended, consistently without error.
3. Time or speed is one of the most important competitive priorities today. Companies in all
industries are competing to deliver high-quality products in as short a time as possible. Companies
like FedEx, Lens Crafters, United Parcel Service (UPS), and Dell compete based on time. Today’s
customers don’t want to wait, and Companies that can meet their need for fast service are becoming
leaders in their industries.
Making time a competitive priority means competing based on all time-related issues, such as rapid
delivery and on-time delivery. Rapid delivery refers to how quickly an order is received; on-time
delivery refers to the number of times deliveries are made on time. When time is a competitive
priority, the job of the operations function is to critically analyze the system and combine or eliminate
processes in order to save time. Often companies use technology to speed up processes, rely on a
flexible workforce to meet peak demand periods, and eliminate unnecessary steps in the production
process.
Practical illustration:
FedEx is an example of a company that competes based on time. The company’s claim is to
“absolutely, positively” deliver packages on time. To support this strategy, the operation function had
to be designed to promote speed. Bar code technology is used to speed up processing and handling,
and the company uses its own fleet of airplanes. FedEx relies on a very flexible part-time workforce,
such as college students who are willing to work a few hours at night. FedEx can call on this part-
time workforce at a moment’s notice, providing the company with a great deal of flexibility. This
allows FedEx to cover workforce requirements during peak periods without having to schedule full-
time workers.

4. Flexibility As a company’s environment changes rapidly, including customer needs and

expectations, the ability to readily accommodate these changes can be a winning strategy. This is
flexibility. There are two dimensions of flexibility. One is the ability to offer a wide variety of goods
or services and customize them to the unique needs of clients. This is called product flexibility. A
flexible system can quickly add new products that may be important to customers or easily drop a
product that is not doing well. Another aspect of flexibility is the ability to rapidly increase or
decrease the amount produced in order to accommodate changes in the demand. This is called volume
flexibility.
Companies that compete based on flexibility often cannot compete based on speed, because it
generally requires more time to produce a customized product. Also, flexible companies typically do
not compete based on cost, because it may take more resources to customize the product. However,
flexible companies often offer greater customer service and can meet unique customer requirements.
To carry out this strategy, flexible companies tend to have more general-purpose equipment that can
be used to make many different kinds of products. Also, workers in flexible companies tend to have
higher skill levels and can often perform many different tasks in order to meet customer needs.
b) The Need for Trade-Offs

You may be wondering why the operations function needs to give special focus to some priorities but
not all. Aren’t all the priorities important? As more resources are dedicated toward one priority, fewer
resources are left for others. The operations function must place emphasis on those priorities that
directly support the business strategy. Therefore, it needs to make trade-offs between the different
priorities. For example, consider a company that competes on using the highest quality component
parts in its products. Due to the high quality of parts the company may not be able to offer the final
product at the lowest price. In this case, the company has made a tradeoff between quality and price.
Similarly, a company that competes on making each product individually based on customer
specifications will likely not be able to compete on speed. Here, the trade-off has been made between
flexibility and speed.
It is important to know that every business must achieve a basic level of each of the priorities, even
though its primary focus is only on some. For example, even though a company is not competing on
low price, it still cannot offer its products at such a high price that customers would not want to pay
for them. Similarly, even though a company is not competing on time, it still has to produce its
product within a reasonable amount of time; otherwise, customers will not be willing to wait for it.

One way that large facilities with multiple products can address the issue of tradeoffs is using the
concept of plant-within-a-plant (PWP), introduced by well-known Harvard professor Wickham
Skinner. The PWP concept suggests that different areas of a facility be dedicated to different products
with different competitive priorities. These areas should be physically separated from one another and
should even have their own separate workforce. As the term suggests, there are multiple plants within
one plant, allowing a company to produce different products that compete on different priorities. For
example, hospitals use PWP to achieve specialization or focus in a particular area, such as the cardiac
unit, oncology, radiology, surgery, or pharmacy.
c) Order Winners and Qualifiers

To help a company decide which competitive priorities to focus on, it is important to distinguish
between order winners and order qualifiers, which are concepts, developed by Terry Hill, a professor
at Oxford University. Order qualifiers are those competitive priorities that a company has to meet if
it wants to do business in a particular market.
Order winners, on the other hand, are the competitive priorities that help a company win orders in
the market. Consider a simple restaurant that makes and delivers pizzas. Order qualifiers might be
low price (say, less than $10.00) and quick delivery (say, under 15 minutes), because this is a
standard that has been set by competing pizza restaurants. The order winners may be “fresh
ingredients” and “home-made taste.” These characteristics may differentiate the restaurant from all
the other pizza restaurants. However, regardless of how good the pizza, the restaurant will not
succeed if it does not meet the minimum standard for order qualifiers. Knowing the order winners and
order qualifiers in a particular market is critical to focusing on the right competitive priorities.
It is important to understand that order winners and order qualifiers change over time. Often when
one company in a market is successfully competing using a particular order winner, other companies
follow suit over time. The result is that the order winner becomes an industry standard, or an order
qualifier. To compete successfully, companies then have to change their order winners to differentiate
themselves. An excellent example of this occurred in the auto industry. Prior to the 1970s, the order
winning criterion in the American auto industry was price. Then the Japanese automobile
manufacturers entered the market competing on quality at a reasonable price. The result was that
quality became the new order winner and price became an order qualifier, or an expectation. Then by
the 1980s American manufacturers were able to raise their level of quality to be competitive with the
Japanese. Quality then became an order qualifier, as everyone had the same quality standard.

d) Translating Competitive Priorities into Production Requirements

Operations strategy makes the needs of the business strategy specific to the operations function by
focusing on the right competitive priorities. Once the competitive priorities have been identified, a
plan is developed to support those priorities. The operations strategy will specify the design and use
of the organization’s resources; that is, it will set forth specific operations requirements. These can be
broken down into two categories.
1. Structure—Operations decisions related to the design of the production process, such as
characteristics of facilities used selection of appropriate technology, and the flow of goods and
services through the facility.
2. Infrastructure—Operations decisions related to the planning and control systems of the operation,
such as the organization of the operations function, the skills and pay of workers, and quality control
approaches.
Together, the structure and infrastructure of the production process determine the nature of the
company’s operations function.
1.5.4 Strategic Role of Technology
Over the last decade we have seen an unprecedented growth in technological capability. Technology
has enabled companies to share real-time information across the globe, to improve the speed and
quality of their processes, and to design products in innovative ways. Companies can use technology
to help them gain an advantage over their competitors. For this reason technology has become a
critical factor for companies in achieving a competitive advantage. In fact, studies have shown that
companies that invest in new technologies tend to improve their financial position over those that do
not. However, the technologies a company acquires should not be decided on randomly, such as
following the latest fad or industry trend. Rather, the selected technology needs to support the
organization’s competitive priorities, as we learned in the example of FedEx. Also, technology needs
to be selected to enhance the company’s core competencies and add to its competitive advantage.
Types of Technologies
There are three primary types of technologies. They are differentiated based upon their application,
but all three areas of technology are important to operations managers. The first type is product
technology, which is any new technology developed by a firm. Product technology is important as
companies must regularly update their processes to produce the latest types of products.

A second type of technology is process technology. It is the technology used to improve the process
of creating goods and services. Examples of this would include computer aided design (CAD) and
computer-aided manufacturing (CAM). These are technologies that use computers to assist engineers
in the way they design and manufacture products. Process technologies are important to companies as
they enable tasks to be accomplished more efficiently.
The last type of technology is information technology, which enables communication, processing, and
storage of information. Information technology has grown rapidly over recent years and has had a
profound impact on business. Just consider the changes that have occurred due to the Internet. The
Internet has enabled electronic commerce and the creation of the virtual marketplace, and has linked
customers and buyers. Another example of information technology is enterprise resource planning
(ERP), which functions via large software programs used for planning and coordinating all resources
throughout the entire enterprise. ERP systems have enabled companies to reduce costs and improve
responsiveness, but are highly expensive to purchase and implement. Consequently, as with any
technology, investment in ERP needs to be a strategic decision.
Technology as a Tool for Competitive Advantage

Technology can be acquired to improve processes and maintain up-to-date standards. Technology can
also be used to gain a competitive advantage. For example, by acquiring technology a company can
improve quality, reduce costs, and improve product delivery. This can provide an advantage over the
competition and help gain market share. However, investing in technology can be costly and entails
risks, such as overestimating the benefits of the technology. Technology should be acquired to
support the company’s chosen competitive priorities, not just follow the latest market fad. Also,
technology may require the company to rethink its strategy. For example, when the Internet became
available it was generally assumed that it would replace traditional ways of doing business. This has
not turned out to be the case. In fact, for many companies the Internet has enhanced traditional
methods. Physical activities such as shipping, warehousing, transportation, and even physical contact
must still be performed. acquiring technology is an important strategic Decision for companies.
1.6 Historical Development of OM

1.6.1 Why OM?
The importance of operations management was not always recognized by business. In fact, following
World War II American corporations were dominated by marketing and finance functions. The
United States had just emerged from the war as the undisputed global manufacturing leader due in

large part to efficient operations. At the same time Japan and Europe were in ruins with their
businesses and factories destroyed. U.S. companies were left to fill these markets: the post-World
War II period of the 1950s and 1960s represented the golden era for U.S. business.
The primary opportunities were in the areas of marketing, to develop the large potential markets for
new products, and in finance, to support the growth. Since there were no significant competitors, the
operations function became of secondary importance, because companies could sell what they
produced. Even the distinguished economist John Kenneth Galbraith was noted as saying: “the
production problem has been solved.”
Then in the 1970s and 1980s things changed. American companies experienced large declines in
productivity growth, and international competition began to be a challenge in many markets. In some
markets such as the auto industry, American corporations were being pushed out. It appeared that
U.S. firms had become lax with the lack of competition in the 1950s and 1960s. They had forgotten
about improving their methods and processes, partly due to the lack of competitive challenge. In the
meantime, foreign firms were rebuilding their facilities and designing new production Methods. By
the time foreign firms had recovered, many U.S. firms found themselves unable to compete. To
regain their competitiveness companies turned to operations management, a function they had
overlooked and almost forgotten about.
The new focus on operations and competitiveness has been responsible for the recovery of many
corporations, and U.S. businesses experienced resurgence in the 1980s and 1990s. Operations became
the function at the core of organizational competitiveness. Although U.S. firms have rebounded, they
are fully aware of continued global competition. Companies have learned that to achieve long-run
success they must place much importance on their operations.
1.6.2 Historical Milestones
When we think of what operations management does—namely, managing the transformation of

inputs into goods and services—we can see that as a function it is as old as time. Think of any great
organizational effort, such as organizing the first Olympic games, building the Great Wall of China,
or erecting the Egyptian pyramids, and you will see operations management at work. Operations
management did not emerge as a formal field of study until the late 1950s and early 1960s, when
scholars began to recognize that all production systems face a common set of problems and to stress
the systems approach to viewing operations processes.

Many events helped shape operations management. We will describe some of the most significant of
these historical milestones and explain their influence on the development of operations management.
Later we will look at some current trends in operations management. These historical milestones and
current trends are summarized in Table 1.6.2.1.
Table 1.6.2.1: Historical development of operations management
A. The Industrial Revolution

The Industrial Revolution had a significant impact on the way goods are produced today. Prior to
this movement, products were made by hand by skilled craftspeople in their shops or homes. Each
product was unique, painstakingly made by one person. The Industrial Revolution changed all that. It

started in the 1770s with the development of a number of inventions that relied on machine power
instead of human power. The most important of these was the steam engine, which was invented by
James Watt in 1764. The steam engine provided a new source of power that was used to replace
human labor in textile mills, machine-making plants, and other facilities. The concept of the factory
was emerging. In addition, the steam engine led to advances in transportation, such as railroads, that
allowed for a wider distribution of goods.
About the same time, the concept of division of labor was introduced. First described by Adam Smith
in 1776 in The Wealth of Nations, this important concept would become one of the building blocks of
the assembly line. Division of labor means that the production of a good is broken down into a series
of small, elemental tasks, each of which is performed by a different worker. The repetition of the task
allows the worker to become highly specialized in that task. Division of labor allowed higher
volumes to be produced. This, coupled with advances in transportation, enabled distant markets to be
reached by steam-powered boats and railroads.
A few years later, in 1790, Eli Whitney introduced the concept of interchangeable parts. Prior to that
time, every part used in a production process was unique. With interchangeable parts, parts are
standardized so that every item in a batch of items fits equally. This concept meant that we could
move from one-at-a-time production to volume production, for example, in the manufacture of
watches, clocks, and similar items.
B. Scientific Management
Scientific management was an approach to management promoted by Frederick W. Taylor at the
turn of the twentieth century. Taylor was an engineer with an eye for efficiency. Through scientific
management he sought to increase worker productivity and organizational output. This concept has
two key features. First, it is assumed that workers are motivated only by money and are limited only
by their physical ability. Taylor believed that worker productivity is governed by scientific laws, and
that it is up to management to discover these laws through measurement, analysis, and observation.
Workers are to be paid in direct proportion to how much they produce. The second feature of this
approach is the separation of the planning and doing functions in a company, which means the
separation of management and labor. Management is responsible for designing productive systems
and determining acceptable worker output. Workers have no input into this process—they are
permitted only to work.

Many people did not like the scientific management approach. This was especially true of workers,
who thought that management used these methods to unfairly increase output without paying them
accordingly. Still, many companies adopted the scientific management approach. Today many see
scientific management as a major milestone in the field of operations management, and it has had
many influences on operations management. For example, piece rate incentives, in which workers are
paid in direct proportion to their output, came out of this movement. Also, a widely used method of
work measurement, stopwatch time studies, was introduced by Frederick Taylor. In stopwatch time
studies, observations are made and recorded of a worker performing a task over many cycles. This
information is then used to set a time standard for performing the particular task. This method is still
used today to set a time standard for short, repetitive tasks.
The scientific management approach was popularized by Henry Ford, who used the techniques in his
factories. Combining technology with scientific management, Ford introduced the moving assembly
line to produce Ford cars. Ford also combined scientific management concepts with division of labor
and interchangeable parts to develop the concept of mass production. These concepts and innovations
helped him increase production and efficiency at his factories.
C. The Human Relations Movement

The early twentieth century was dominated by the scientific management movement and its
philosophy. However, this changed with the publication of the results of the Hawthorne studies. The
Hawthorne studies were conducted at a Western Electric plant in Hawthorne, Illinois, in the 1930s.
The purpose was to study the effects of environmental changes, such as changes in lighting and room
temperature, on the productivity of assembly-line workers. The findings from the study were
unexpected; the productivity of the workers continued to increase regardless of the environmental
changes made. Elton Mayo, a sociologist from Harvard, analyzed the results and concluded that the
workers were actually motivated by the attention they were given. The idea of workers responding to
the attention they are given came to be known as the Hawthorne effect.
Many sociologists and psychologists went to Hawthorne to study these findings, which led to the
human relations movement, an entirely new philosophy based on the recognition that factors other
than money can contribute to worker productivity. The impact of these findings on the development
of operations management has been tremendous. The influence of this new philosophy can be seen in
the implementation of a number of concepts that motivate workers by making their jobs more
interesting and meaningful.

For example, the Hawthorne studies showed that scientific management had made jobs too repetitive
and boring. Job enlargement is an approach in which workers are given a larger portion of the total
task to do. Another approach used to give more meaning to jobs is job enrichment, in which workers
are given a greater role in planning.
Recent studies have shown that environmental factors in the workplace, such as adequate lighting and
ventilation, can have a major impact on productivity. However, this does not contradict the principle
that attention from management is a positive factor in motivation.
D. Management Science
While one movement was focusing on the technical aspects of job design and another on the human
aspects of operations management, a movement called management science was developing that
would make its own unique contribution. Management science focused on developing quantitative
techniques for solving operations problems. The first mathematical model for inventory management
was developed by F.W. Harris in 1913. Shortly thereafter, procedures were developed for statistical
sampling theory and quality control.
World War II created an even greater need for the ability to quantitatively solve complex problems of
logistics control, weapons system design, and deployment of missiles. Consequently, management
science grew during the war and continued to grow after the war was over. Many quantitative tools
were developed to solve problems in forecasting, inventory control, project management, and other
areas. Management science is a mathematically oriented field that provides operations management
with tools that can be used to assist in decision making. A popular example of such a tool is linear
programming.
E. The Computer Age

The 1970s witnessed the advent of the widespread use of computers in business. With computers,
many of the quantitative models developed by management science could be used on a larger scale.
Data processing was made easier, with important effects in areas such as forecasting, scheduling, and
inventory management. A particularly important computerized system, material requirements
planning (MRP), was developed for inventory control and scheduling. Material requirements’
planning was able to process huge amounts of data to compute inventory requirements and develop
schedules for the production of thousands of items. This type of processing was impossible before the
age of computers. Today the exponential growth in computing capability continues to impact
operations management.

F. Just-in-Time
Just-in-time (JIT) is a major operations management philosophy, developed in Japan in the 1980s,
that is designed to achieve high-volume production using minimal amounts of inventory. This is
achieved through coordination of the flow of materials so that the right parts arrive at the right place
in the right quantity; hence the term, just-in-time. However, JIT is much more than the coordinated
movement of goods. It is an all-inclusive organizational philosophy that employs teams of workers to
achieve continuous improvement in processes and organizational efficiency by eliminating all
organizational waste. Although JIT was first used in manufacturing, it has seen use in the service
sector, for example, in the food service industry. JIT has had a profound impact on changing the way
companies manage their operations. It is credited with helping turn many companies around and is
used by companies including Honda, Toyota, and General Motors. JIT promises to continue to
transform businesses in the future.
G. Total Quality Management

As customers demand ever higher quality in their products and services, companies have been forced
to focus on improving quality in order to remain competitive. Total quality management (TQM) is
a philosophy, promulgated by “quality gurus” such as W. Edwards Deming that aggressively seeks to
improve product quality by eliminating causes of product defects and making quality an all-
encompassing organizational philosophy. With TQM everyone in the company is responsible for
quality. TQM was practiced by some companies in the 1970s and became pervasive in the 1990s.
This is an area of operations management that no competitive company has been able to ignore.
The importance of this movement is demonstrated by the number of companies joining the ranks of
those achieving ISO 9000 certification. ISO 9000 is a set of quality standards developed for global
manufacturers by the International Organization for Standardization (ISO) to control trade into the
then-emerging European Economic Community (EEC). Today many companies require their
suppliers to meet these standards as a condition for obtaining contracts.
H. Business Process Reengineering

Business process reengineering means redesigning a company’s processes to increase efficiency,
improve quality, and reduce costs. In many companies things are done in a certain way that has been
passed down over the years. Often managers say, “Well, we’ve always done it this way.”
Reengineering requires asking why things are done in a certain way, questioning assumptions, and
then redesigning the processes. Operations management is a key player in a company’s reengineering
efforts.

I. Flexibility
Traditionally companies competed by either mass-producing a standardized product or offering
customized products in small volumes. One of the current competitive challenges for companies is
the need to offer a greater variety of product choices to customers of a traditionally standardized
product. This is the challenge of flexibility, which means being able to offer a wide variety of
products to customers. For example, Procter and Gamble offers 13 different product designs in the
Pampers line of diapers. Although diapers are a standardized product, the product designs are
customized to the different needs of customers, such as the age, sex, and development of the child
using the diaper.
One example of flexibility is mass customization, which is the ability of a firm to highly customize
its goods and services to different customers. Mass customization requires designing flexible
operations and using delayed product differentiation, also called postponement. This means keeping
the product in generic form as long as possible and postponing completions of the product until
specific customer preferences are known.
J. Time-Based Competition
One of the most important trends in companies today is competition based on time. This includes
developing new products and services faster than the competition, reaching the market first, and
meeting customer orders most quickly. For example, two companies may produce the same product,
but if one is able to deliver it to the customer in two days whereas the other delivers it in five days,
the first company will make the sale and win over the customers. Time-based competition requires
specifically designing the operations function for speed.
K. Supply Chain Management

Supply chain management (SCM) involves managing the flow of materials and information from
suppliers and buyers of raw materials all the way to the final customer. The objective is to have
everyone in the chain work together to reduce overall cost and improve quality and service delivery.
Supply chain management requires a team approach, with functions such as marketing, purchasing,
operations, and engineering all working together. This approach has been shown to result in more
satisfied customers, meaning that everyone in the chain profits. SCM has become possible with the
development of information technology (IT) tools that enable collaborative planning and scheduling.
The technologies allow synchronized supply chain execution and design collaboration, which enables
companies to respond better and faster to changing market needs.

L. Global Marketplace
Today businesses must think in terms of a global marketplace in order to compete effectively. This
includes the way they view their customers, competitors, and suppliers. Key issues are meeting
customer needs and getting the right product to markets as diverse as the Far East, Europe, or Africa.
Operations management is responsible for most of these decisions. OM decides whether to tailor
products to different customer needs, where to locate facilities, how to manage suppliers, and how to
meet local government standards. Also, global competition has forced companies to reach higher
levels of excellence in the products and services they offer. Regional trading agreements, such as the
North American Free Trade Agreement (NAFTA), the European Union (EU), and the global General
Agreement on Tariffs and Trade (GATT), guarantee continued competition on the international level.
M. Environmental Issues
There is increasing emphasis on the need to reduce waste, recycle, and reuse products and parts.
Society has placed great pressure on business to focus on air and water quality, waste disposal, global
warming, and other environmental issues. Operations management plays a key role in redesigning
processes and products in order to meet and exceed environmental quality standards. The importance
of this issue is demonstrated by a set of standards termed ISO 14000. Developed by the International
Organization for Standardization (ISO), these standards provide guidelines and a certification
program documenting a company’s environmentally responsible actions.
N. Electronic Commerce
Electronic commerce (e-commerce) is the use of the Internet for conducting business activities, such
as communication, business transactions, and data transfer. The Internet developed from a
government network called ARPANET, which was created in 1969 by the U.S. Defense Department.
Since the late 1990s the Internet has become an essential business medium, enabling efficient
communication between manufacturers, suppliers, distributors, and customers. It has allowed
companies to reach more customers at a speed infinitely faster than ever before. It also has
significantly cut costs as it provides direct links between entities.
Electronic commerce can occur between businesses, known as B2B (business to business)
commerce, and makes up the highest percentage of transactions. The most common B2B exchanges
occur between companies and their suppliers, such as General Electric’s Trading Process Network. A
more commonly known type of e-commerce occurs between businesses and their customers, known
as B2C exchange, as seen with on-line retailers such as mazon.com.

E-commerce can also occur between customers, known as C2C exchange, like consumer auction sites
such as eBay. E-commerce is creating virtual marketplaces that continue to change the way
business functions.
1.7 Today’s operations management environment
Today’s OM environment is very different from what it was just a few years ago. Customers demand
better quality, greater speed, and lower costs. In order to succeed, companies have to be masters of
the basics of operations management. To achieve this many companies are implementing a concept
called lean systems. Lean systems take a total system approach to creating an efficient operation and
pull together best practice concepts. This includes concepts such as just-in-time (JIT), total quality
management (TQM), continuous improvement, resource planning, and supply chain management
(SCM). The need for increasing efficiency has also led many companies to implement large
information systems called enterprise resource planning (ERP). ERP systems are large,
sophisticated software programs used for identifying and planning the enterprise-wide resources
needed to coordinate all activities involved in producing and delivering products to customers.
Applying best practices to operations management is not enough to give a company a competitive
advantage. The reason is that in today’s information age best practices are quickly passed to
competitors. To gain an advantage over their competitors companies are continually looking for ways
to better respond to customers. This requires companies to have a deep knowledge of their customers
and to be able to anticipate their demands. The development of customer relationship management
(CRM) has made it possible for companies to have this detailed knowledge of their customers. CRM
encompasses software solutions that enable the firm to collect customer-specific data. This type of
information can help the firm identify profiles of its most loyal customers and provide customer-
specific solutions. Also, CRM software can be integrated with ERP software to connect customer
requirements to the entire resource network of the company.
Another characteristic of today’s OM environment is the increased use of cross functional decision
making, which requires coordinated interaction and decision making between the different business
functions of the organization. Until recently employees of a company made decisions in isolated
departments, called “functional silos.” Today many companies bring together experts from different
departments into cross-functional teams to solve company problems. Employees from each function
must interact and coordinate their decisions. This requires employees to understand the roles of other
business functions and the goals of the business as a whole, in addition to their own expertise.

1.8 Operations management in practice
Of all the business functions, an operation is the most diverse in terms of the tasks performed. If you
consider all the issues involved in managing a transformation process, you can see that operations
managers are never bored. Who are operations managers and what do they do?
The head of the operations function in a company usually holds the title of vice president of
operations, vice president of manufacturing, V. P., or director of supply chain operations and
generally reports directly to the president or chief operating officer. Below the vice president level are
midlevel managers: manufacturing manager, operations manager, quality control manager, plant
manager, and others. Below these managers are a variety of positions such as quality specialist,
production analyst, inventory analyst, and production supervisor. These people perform a variety of
functions, such as analyzing production problems, developing forecasts, making plans for new
products, measuring quality, monitoring inventory, and developing employee schedules. Thus, there
are many job opportunities in operations management at all levels of the company. In addition,
operations jobs tend to offer high salaries, interesting work, and excellent opportunities for
advancement. Today many corporate CEOs have come through the ranks of operations.
As you can see, all business functions need information from operations management in order to
perform their tasks. At the same time, operations managers are highly dependent on input from other
areas. This process of information sharing is dynamic, requiring that managers work in teams and
understand each other’s roles.
1.9 OM across the organization
Now that we know the role of the operations management function and the decisions that operations
managers make, let’s look at the relationship between operations and other business functions. As
mentioned previously, most businesses are supported by three main functions: operations, marketing,
and finance. Although these functions involve different activities, they must interact to achieve the
goals of the organization. They must also follow the strategic direction developed at the top level of
the organization. Figure 1-6 shows the flow of information from the top to each business function, as
well as the flow between functions. Many of the decisions made by operations managers are
dependent on information from the other functions. At the same time, other functions cannot be
carried out properly without information from operations. Figure 1.9.1 shows these relationships.

Marketing is not fully capable of meeting customer needs if marketing managers do not understand
what operations can produce, what due dates it can and cannot meet, and what types of customization
operations can deliver. The marketing department can develop an exciting marketing campaign, but if
operations cannot produce the desired product, sales will not be made. In turn, operations managers
need information about customer wants and expectations. It is up to them to design products with
characteristics that customers find desirable, and they cannot do this without regular coordination
with the marketing department.
Finance cannot realistically judge the need for capital investments, make-or-buy decisions, plant
expansions, or relocation if finance managers do not understand operations concepts and needs. On
the other hand, operations managers cannot make large financial expenditures without understanding
financial constraints and methods of evaluating financial investments. It is essential for these two
functions to work together and understand each other’s constraints.
Figure 1.9.1: organizational chart showing flow of information
An information system (IS) is a function that enables information to flow throughout the
organization and allows OM to operate effectively. OM is highly dependent on information such as
forecasts of demand; quality levels being achieved, inventory levels, supplier deliveries, and worker
schedules. IS must understand the needs of OM in order to design an adequate information system.
Usually, IS and OM work together to needs to be ongoing. IS must be capable of accommodating the
needs of OM as they change in response to market demands. At the same time, it is up to IS to bring
the latest capabilities in information technology to the organization to enhance the functioning of
OM.

Human resource managers must understand job requirements and worker skills if they are to hire
the right people for available jobs. To manage employees effectively, operations managers need to
understand job market trends, hiring and layoff costs, and training costs.
Accounting needs to consider inventory management, capacity information, and labor standards in
order to develop accurate cost data. In turn, operations managers must communicate billing
information and process improvements to accounting, and depend heavily on accounting data for cost
management decisions.
Figure 1.9.2: information flow between operations and other business functions
1.10 Trends in operations research
Several business trends are currently having a great impact on operations management: the growth of
the service sector; productivity changes; global competitiveness; quality, time, and technological
change; and environmental, ethical, and diversity issues. In this section, we look at these trends and
their implications for operations management.

a. Service sector growth

The service sector of the economy is significant. Services may be divided into three main groups:
 government( local, state, and federal);
 wholesale and retail sales; and
 other services (transportation, public utilities, communication, health, financial services,
real estate, insurance, repair services, business services, and personal services)
The percentage of workforce employed in the service sector is increasing from time to time
(especially in the U.S economy).
b. Productivity changes
What is productivity?
Productivity is the value of outputs (goods and services) produced divided by the values of the input
resources (wages cost of equipment and the like) used or the ratio of outputs (goods and services) to
inputs (e.g. labor and materials). In other words, productivity is a measure of how efficiently inputs
are being converted into outputs. It measures how well resources are used. The more efficiently a
company uses its resources, the more productive it is:
output
Productivity =
input
Productivity and competitiveness

Productivity is essentially a scorecard of how effectively resources are used and a measure of
competitiveness. Productivity is measured on many levels and is of interest to a wide range of people.
As we showed in earlier examples, productivity can be measured for individuals, departments, or
organizations. It can track performance over time and help managers identify problems. Similarly,
productivity can be measured for an entire industry and even a country.
The economic success of a nation and the quality of life of its citizens are related to its
competitiveness in the global marketplace. Increases in productivity are directly related to increases
in a nation’s standard of living. That is why business and government leaders continuously monitor
the productivity at the national level and by industry sectors.
c. Global competition
Today businesses accept the fact that, to prosper, they must view customers, suppliers, facility
locations, and competitors in global terms. Most products today are global composites of materials
and services from throughout the world. Strong global competition affects industries everywhere.

d. Competition based on quality, time and technology

Another trend in managing processes has been an increasing emphasis on competing on the basis of
quality, time, and technological advantage. Part of the success of foreign competitors has been their
ability to provide products and services of high quality and reasonable prices. During the 1970s and
1980s, customers grew more attuned to the quality of the good or service being purchased. Without
quality products or services, a firm looses its ability to compete in the market place, and its cost
structure can also become uncompetitive (because of scrap, rework, and warranty costs). Operations
managers, in conjunction with the managers of other functional departments, are given more attention
to quality than ever.
Another important trend is that more firms are competing on the basis of time: filling orders earlier
than the competition, introducing new products and services quickly, and reaching the market first.
Another increasingly important factor in operations management is accelerating technological

change. It affects the design of new products and services and a firm’s process themselves. Many
new opportunities are coming from advances in computer technology. For instance, robots and other
information technology are but two examples. E-commerce is dramatically changing many sales and
purchasing processes. The internet- part of the telecommunications “information highway” has
emerged as a vital tool linking firms internationally and linking firms externally with customers and
strategic partners. This computer network has global e-mail and data exchange capabilities, with
almost 200 countries already linked to it. Introducing any new technology involves risk, and
employee attitudes toward it depend on how the change is managed. The right choices and effective
management of technology can give a firm a competitive advantage.
e. Ethical, workforce diversity, and environmental issues

Businesses face more ethical quandaries than ever before, intensified by an increasing global presence
and rapid technological change. Companies are locating new operations, and have more suppliers and
customers, in other countries. Potential ethical dilemmas arise when businesses can be conducted by
different rules. Some countries are more sensitive than others about lavish entertainment, conflicts of
interest, bribery, discrimination against minorities and women , poverty, minimum wage levels,
unsafe work places, and workers’ rights. Managers must decide in such cases whether or not to
design and operate processes that do more than just meet local standards that are lower than those
back home. In addition, technological change brings debates about data protection and customer

privacy, such as on the internet. In an electronic world, businesses are geographically far from their
customers, and a reputation of trust may become even more important.
One expert suggests a more ethical approach to businesses in which firms:
 Have responsibilities that go beyond producing goods and services at a profit;
 Help solve important social problems
 Respond to a broader constituency than shareholders alone,
 Have impacts beyond simple market place transactions, and
 Serve a range of human values that go beyond the merely economic.
Environmental issues, such as toxic wastes, poisoned drinking water, poverty, air quality, and global
warming are getting more emphasis. In the past, many people viewed environmental problems as
quality of life issues; in the 2000s, many people see them as survival issues. Interest in a clean,
healthy environment is increasing.
The message is clear: consideration of ethics, workforce diversity, and the environment is
becoming part of every manager’s job. When operating and designing processes, they should
consider integrity, respect for the individual, and respecting the customer along with more
conventional performance measures such as productivity, quality, cost , and profit.
Self-Check
1. What is operation management

2. What is the role of operation management
3. Describe the difference between manufacturing and service organizations
4. Briefly explain the difference between order qualifiers and order winners.
5. Describe the concept raised in historical development of operation management and explain about
each concept precisely.
6. Define the term competitive priority and describe the four broad categories of competitive priority
7. Describe the term supply chain management and what is its objectives

Chapter 2
Competitiveness, Strategy, and Productivity

2.1 Introduction
2.2 Competitiveness
2.3 Mission and strategy
2.4 Strategy and tactics
2.5 Operation strategy
2.6 Productivity
You should be able to:
 List and briefly discuss the primary ways that business organizations compete
 List five reasons for the poor competitiveness of some companies
 Define the term strategy and explain why strategy is important for competitiveness
 Contrast strategy and tactics
 Discuss and compare organization strategy and operations strategy, and explain why it is
important to link the two
 List and briefly discuss the primary ways that business organizations compete
 List five reasons for the poor competitiveness of some companies
 Define the term strategy and explain why strategy is important for competitiveness
 Contrast strategy and tactics
 Discuss and compare organization strategy and operations strategy, and explain why it is
important to link the two
2.1 Introduction
In this chapter you will learn what productivity is, why it is important, some ways organization can
improve productivity. You will learn about different ways companies compete, and why some firms
do a very poor job of performing. And you will learn how effective strategies can lead to productive.

Business Strategy is a long range plan and vision. Each individual business function develop needs to
support the business strategy. An organization develops its business strategy by doing environmental
scanning and considering its mission and its core competencies. The role of operations strategy is to
provide a long-range plan for the use of the company’s resources in producing the company’s primary
goods and services. The role of business strategy is to serve as an overall guide for the development
of the organization’s operations strategy. The operations strategy focuses on developing specific
capabilities called competitive priorities. There are four categories of competitive priorities: cost,
quality, time, and flexibility. Technology can be sued by companies to gain a competitive advantage
and should be acquired to support the company’s chosen competitive priorities. Productivity is a
measure that indicates how efficiently an organization is using its resources. Productivity is computed
as the ratio or organizational outputs divided by inputs
2.2 Competitiveness:
Companies must be competitive to sell their goods and services in the marketplace. Competitiveness
is an important factor in determining whether a company prospers, barely gets by, or fails. Business
organizations compete through some combination of their marketing and operations functions.
Marketing influences competitiveness in several ways, including identifying consumer wants and
needs, pricing, and advertising and promotion.
1. Identifying consumer wants and/or needs is a basic input in an organization’s decision making
process, and central to competitiveness. The ideal is to achieve a perfect match between those
wants and needs and the organization’s goods and/or services.
2. Price and quality are key factors in consumer buying decisions. It is important to understand the
trade-off decision consumers make between price and quality.
3. Advertising and promotion are ways organizations can inform potential customers about features
of their products or services, and attract buyers.
Operations has a major influence on competitiveness through product and service design, cost,
location, quality, response time, flexibility, inventory and supply chain management, and service.
Many of these are interrelated.

1. Product and service design should reflect joint efforts of many areas of the firm to achieve a
match between financial resources, operations capabilities, supply chain capabilities, and consumer
wants and needs. Special characteristics or features of a product or service can be a key factor in
consumer buying decisions. Other key factors include innovation and the time-to-market for new
products and services.
2. Cost of an organization’s output is a key variable that affects pricing decisions and profits. Cost-
reduction efforts are generally ongoing in business organizations. Productivity is an important
determinant of cost. Organizations with higher productivity rates than their competitors have a
competitive cost advantage. A company may outsource a portion of its operation to achieve lower
costs, higher productivity, or better quality.
3. Location can be important in terms of cost and convenience for customers. Location near inputs
can result in lower input costs. Location near markets can result in lower transportation costs and
quicker delivery times. Convenient location is particularly important in the retail sector.
4. Quality refers to materials, workmanship, design, and service. Consumers judge quality in terms of
how well they think a product or service will satisfy its intended purpose. Customers are generally
willing to pay more for a product or service if they perceive the product or service has a higher
quality than that of a competitor.
5. Quick response can be a competitive advantage. One way is quickly bringing new or improved
products or services to the market. Another is being able to quickly deliver existing products and
services to a customer after they are ordered, and still another is quickly handling customer
complaints.
6. Flexibility is the ability to respond to changes. Changes might relate to alterations in design
features of a product or service, or to the volume demanded by customers, or the mix of products
or services offered by an organization. High flexibility can be a competitive advantage in a
changeable environment.
7. Inventory management can be a competitive advantage by effectively matching supplies of goods

with demand.
8. Supply chain management involves coordinating internal and external operations (buyers and
suppliers) to achieve timely and cost-effective delivery of goods throughout the system.

9. Service might involve after-sale activities customers perceive as value-added, such as delivery,
setup, warranty work, and technical support. Or it might involve extra attention while work is in
progress, such as courtesy, keeping the customer informed, and attention to details. Service quality
can be a key differentiator; and it is one that is often sustainable. Moreover, businesses rated
highly by their customers for service quality tend to be more profitable, and grow faster, than
businesses that are not rated highly.
10. Managers and workers are the people at the heart and soul of an organization, and if they are
competent and motivated, they can provide a distinct competitive edge by their skills and the
ideas they create. One often overlooked skill is answering the telephone.
How complaint calls or requests for information are handled can be a positive or a negative. If a
person answering is rude or not helpful, that can produce a negative image. Conversely, if calls are
handled promptly and cheerfully, that can produce a positive image and, potentially, a competitive
advantage.
Why Some Organizations Fail
Organizations fail, or perform poorly, for a variety of reasons. Being aware of those reasons can help
managers avoid making similar mistakes. Among the chief reasons are the following:
1. Neglecting operations strategy.
2. Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive
threats.
3. Putting too much emphasis on short-term financial performance at the expense of research and
development.
4. Placing too much emphasis on product and service design and not enough on process design and
improvement.
5. Neglecting investments in capital and human resources.
6. Failing to establish good internal communications and cooperation among different functional
areas.
7. Failing to consider customer wants and needs.
The key to successfully competing is to determine what customers want and then directing efforts
toward meeting (or even exceeding) customer expectations. Two basic issues must be addressed.

First: What do the customers want? (Which items on the preceding list of the ways to business
organizations compete are important to customers?) Second: What is the best way to satisfy those
wants?
Operations must work with marketing to obtain information on the relative importance of the various
items to each major customer or target market.
2.3 Mission and Strategies
An organization’s mission is the reason for its existence. It is expressed in its mission statement. For a
business organization, the mission statement should answer the question “What business are we in?”
Missions vary from organization to organization, depending on the nature of their business. Mission
statement States the purpose of an organization.
A mission statement serves as the basis for organizational goals, which provide more detail and
describe the scope of the mission. The mission and goals often relate to how an organization wants to
be perceived by the general public, and by its employees, suppliers, and customers.
Goals serve as a foundation for the development of organizational strategies. These, in turn, provide
the basis for strategies and tactics of the functional units of the organization. Organizational strategy
is important because it guides the organization by providing direction for, and alignment of, the goals
and strategies of the functional units. Moreover, strategies can be the main reason for the success or
failure of an organization. There are three basic business strategies: Low cost, Responsiveness, and
Differentiation from competitors.
Responsiveness relates to ability to respond to changing demands. Differentiation can relate to

product or service features, quality, reputation, or customer service. Some organizations focus on a
single strategy while others employ a combination of strategies.
2.4 Strategies and Tactics
If you think of goals as destinations, then strategies are the roadmaps for reaching the destinations.
Strategies provide focus for decision making. Generally speaking, organizations have overall
strategies called organizational strategies, which relate to the entire organization. They also have
functional strategies, which relate to each of the functional areas of the organization. The functional
strategies should support the overall strategies of the organization, just as the organizational strategies
should support the goals and mission of the organization.

Tactics are the methods and actions used to accomplish strategies. They are more specific than
strategies, and they provide guidance and direction for carrying out actual operations, which need the
most specific and detailed plans and decision making in an organization. You might think of tactics as
the “how to” part of the process (e.g., how to reach the destination, following the strategy roadmap)
and operations as the actual “doing” part of the process.
It should be apparent that the overall relationship that exists from the mission down to actual
operations is hierarchical.
Fig. 2.4.1 the hierarchical planning and decision making
Example: Rita is a high school student in Southern California. She would like to have a career in
business, have a good job, and earn enough income to live comfortably. A possible scenario for
achieving her goals might look something like this:
Mission: Live a good life.
Goal: Successful career, good income.
Strategy: Obtain a college education.
Tactics: Select a college and a major; decide how to finance college.
Operations: Register, buy books, take courses, study

Strategy Formulation
Strategy formulation is almost always critical to the success of a strategy. Generally speaking,
strategy formulation takes into account the way organizations compete and a particular organization’s
assessment of its own strengths and weaknesses in order to take advantage of its core competencies
—those special attributes or abilities possessed by an organization that give it a competitive edge.
The most effective organizations use an approach that develops core competencies based on customer
needs as well as on what the competition is doing. Marketing and operations work closely to match
customer needs with operations capabilities.
To formulate an effective strategy, senior managers must take into account the core competencies of
the organizations, and they must scan the environment. They must determine what competitors are
doing, or planning to do, and take that into account. They must critically examine other factors that
could have either positive or negative effects. This is sometimes referred to as the SWOT approach
(strengths, weaknesses, opportunities, and threats). Strengths and weaknesses have an internal focus
and are typically evaluated by operations people. Threats and opportunities have an external focus
and are typically evaluated by marketing people. SWOT is often regarded as the link between
organizational strategy and operations strategy.
In formulating a successful strategy, organizations must take into account both order qualifiers and
order winners. Order qualifiers are those characteristics that potential customers perceive as
minimum standards of acceptability for a product to be considered for purchase.
However, that may not be sufficient to get a potential customer to purchase from the organization.
Order winners are those characteristics of an organization’s goods or services that cause them to be
perceived as better than the competition.
Characteristics such as price, delivery reliability, delivery speed, and quality can be order qualifiers or
order winners. Thus, quality may be an order winner in some situations, but in others only an order
qualifier. Over time, a characteristic that was once an order winner may become an order qualifier,
and vice versa.
Environmental scanning is the monitoring of events and trends that present either threats or
opportunities for the organization. Generally these include competitors’ activities; changing consumer
needs; legal, economic, political, and environmental issues; the potential for new markets; and the
like.

Another key factor to consider when developing strategies is technological change, which can present
real opportunities and threats to an organization. Technological changes occur in products (high-
definition TV, improved computer chips, improved cellular telephone systems, and improved designs
for earthquake-proof structures); in services (faster order processing, faster delivery); and in
processes (robotics, automation, computer-assisted processing, point of- sale scanners, and flexible
manufacturing systems). The obvious benefit is a competitive edge; the risk is that incorrect choices,
poor execution, and higher-than-expected operating costs will create competitive disadvantages.
Important factors may be internal or external. The following are key external factors:
1. Economic conditions. These include the general health and direction of the economy, inflation and
deflation, interest rates, tax laws, and tariffs.
2. Political conditions. These include favorable or unfavorable attitudes toward business, political
stability or instability, and wars.
3. Legal environment. This includes antitrust laws, government regulations, trade restrictions,
minimum wage laws, product liability laws and recent court experience, labor laws, and patents.
4. Technology. This can include the rate at which product innovations are occurring, current and
future process technology (equipment, materials handling), and design technology.
5. Competition. This includes the number and strength of competitors, the basis of competition
(price, quality, special features), and the ease of market entry.
6. Markets. This includes size, location, brand loyalties, ease of entry, potential for growth, long-
term stability, and demographics.
The organization also must take into account various internal factors that relate to possible strengths
or weaknesses. Among the key internal factors are the following:
1. Human resources. These include the skills and abilities of managers and workers; special talents
(creativity, designing, problem solving); loyalty to the organization; expertise; dedication; and
experience.
2. Facilities and equipment. Capacities, location, age, and cost to maintain or replace can have a
significant impact on operations.

3. Financial resources. Cash flow, access to additional funding, existing debt burden, and cost of
capital are important considerations.
4. Customers. Loyalty, existing relationships, and understanding of wants and needs are important.
5. Products and services. These include existing products and services, and the potential for new
products and services.
6. Technology. This includes existing technology, the ability to integrate new technology, and the
probable impact of technology on current and future operations.
7. Suppliers. Supplier relationships, dependability of suppliers, quality, flexibility, and service are
typical considerations.
8. Other. Other factors include patents, labor relations, company or product image, distribution
channels, relationships with distributors, maintenance of facilities and equipment, access to
resources, and access to markets.
After assessing internal and external factors and an organization’s distinctive competence, a strategy
or strategies must be formulated that will give the organization the best chance of success.
2.5 Operations strategy
The approach, consistent with the organization strategy, that is used to guide the operations function.
Operations strategy is narrower in scope, dealing primarily with the operations aspect of the
organization. Operations strategy relates to products, processes, methods, operating resources,
quality, costs, lead times, and scheduling.
In order for operations strategy to be truly effective, it is important to link it to organization strategy;
that is, the two should not be formulated independently. Rather, formulation of organization strategy
should take into account the realities of operations’ strengths and weaknesses, capitalizing on
strengths and dealing with weaknesses. Similarly, operations strategy must be consistent with the
overall strategy of the organization, and with the other functional units of the organization.
Importance of Operations Strategy
Companies often do not understand the differences between operational efficiency and strategy.
Operational efficiency is performing tasks well, even better than competitors whereas strategy is a
plan for competing in the marketplace. Operations strategy is to ensure all tasks performed are the
right tasks.

Developing a Business Strategy
A business strategy is developed after taking into many factors and following some strategic
decisions such as; what business in the company in (mission), Analyzing and understanding the
market (environmental scanning), and Identifying the company’s strengths (core competencies).
Three Inputs to a Business Strategy
Fig. 2.5.1 three inputs to a business strategy
Developing an Operations Strategy
Operations Strategy is a plan for the design and management of operations functions. Operation
Strategy developed after the business strategy. Operations Strategy focuses on specific capabilities
which give it a competitive edge – competitive priorities.
fig. 2.5.2 designing the operation function

Competitive Priorities- The Edge
Four Important Operations Questions: Will you compete on – Cost?, Quality?, Time?, and
Flexibility? You may compete on All ? Some? Tradeoffs?
Competing on Cost?
 Offering product at a low price relative to competition

 Typically high volume products
 Often limit product range & offer little customization
 May invest in automation to reduce unit costs
 Can use lower skill labor
 Probably use product focused layouts
 Low cost does not mean low quality
Competing on Quality?
 Quality is often subjective

 Quality is defined differently depending on who is defining it
 Two major quality dimensions include
 High performance design:
Superior features, high durability, & excellent customer service
 Product & service consistency:
Meets design specifications, Close tolerances, and Error free delivery.
 Quality needs to address
 Product design quality – product/service meets requirements
 Process quality – error free products
Competing on Time?
Time/speed one of most important competition priorities. First that can deliver often wins the race
 Time related issues involve

o Rapid delivery:
 Focused on shorter time between order placement and delivery
o On-time delivery:
 Deliver product exactly when needed every time
Competing on Flexibility?
Company environment changes rapidly so that company must accommodate change by being
flexible. Such as Product flexibility:-Easily switch production from one item to another, and easily
customize product/service to meet specific requirements of a customer; Volume flexibility:-Ability to
ramp production up and down to match market demands
The Need for Trade-offs
Decisions must emphasis priorities that support business strategy, it often required tradeoffs, and it
must focus on order qualifiers and order winners. Which priorities are “Order Qualifiers”? e.g. Must
have excellent quality since everyone expects it. Which priorities are “Order Winners”? e.g. Dell
competes on all four priorities, Southwest Airlines competes on cost, McDonald’s competes on
consistency, FedEx competes on speed, and Custom tailors compete on flexibility.
Translating to Production Requirements
Specific Operation requirements include two general categories
 Structure – decisions related to the production process, such as characteristics of facilities

used, selection of appropriate technology, and the flow of goods and services
 Infrastructure – decisions related to planning and control systems of operations
Strategic Role of Technology
Technology should support competitive priorities. It has three Applications: product technology,
process technology, and information technology
 Products - Teflon, CD’s, fiber optic cable

 Processes – flexible automation, CAD
 Information Technology – POS, EDI, ERP, B2B
Technology for Competitive Advantage
Technology has positive and negative potentials
 Positive:- Improve processes, Maintain up-to-date standards, and enable to obtain competitive
advantage
 Negative:- Costly, and Risks such as overstating benefits

Technology for Competitive Advantage
Technology should support competitive priorities, Can require change to strategic plans, and to
operations strategy. Thus it is an important strategic decision
2.6 Productivity
One of the primary responsibilities of a manager is to achieve productive use of an organization’s

resources. The term productivity is used to describe this. Productivity is an index that measures
output (goods and services) relative to the input (labor, materials, energy, and other resources) used to
produce it. It is usually expressed as the ratio of output to input:
Productivity = Output/Input
Although productivity is important for all business organizations, it is particularly important for
organizations that use a strategy of low cost, because the higher the productivity, the lower the cost of
the output. A productivity ratio can be computed for a single operation, a department, an
organization, or an entire country. In business organizations, productivity ratios are used for planning
workforce requirements, scheduling equipment, financial analysis, and other important tasks.
Productivity has important implications for business organizations and for entire nations.
For nonprofit organizations, higher productivity means lower costs; for profit-based organizations,
productivity is an important factor in determining how competitive a company is. For a nation, the
rate of productivity growth is of great importance. Productivity growth is the increase in productivity
from one period to the next relative to the productivity in the preceding period. Thus,
Productivity growth = Current productivity - Previous productivity x100
Previous productivity
Measuring Productivity
Productivity measures can be based on a single input (partial productivity), on more than one input
(multifactor productivity), or on all inputs (total productivity).
The choice of productivity measure depends primarily on the purpose of the measurement. If the
purpose is to track improvements in labor productivity, then labor becomes the obvious input
measure.

Productivity measures
output produced
Total productivity measure =
all inputs used
output output output output

Partial productivity measure = or or or
labor machines materials capital
output output
Multifactor productivity measures = or
labor  machines labor  materials
output
or
labor  captiatl  energy
Table 2.6.1 Some examples of partial productivity measures
When we compute productivity for all inputs, such as labor, machines, and capital, we are measuring
total productivity. Total productivity describes the productivity of an entire organization.
For example, let’s say that the weekly dollar value of a company’s output, such as finished goods
and work in progress is $10,200 and that the value of its inputs such as labor, materials, and capital is
$8,600. The company’s total productivity would be computed as follows:
output $10,200
Total productivity = = = 1.186
input $8,600
Often it is much more useful to measure the total productivity of one input variable at a time in order
to identify how efficiently each is being used. When we compute productivity as the ratio of output
relative to a single input, we obtain a measure of partial productivity also called single- factor
productivity. Following are two examples of the calculation of partial productivity:

1. A bakery oven produces 346 pastries in 4 hours. What is its productivity?

number pastries 346 pastries
Machine productivity= = =86.5 pastries/hour
oven time 4 hours
2. Two workers paint tables in a furniture shop. If the workers paint 22 tables in
8 hours, what is their productivity?
22 tables
Labor productivity = =1.375 tables/ hour
2 wor ker s  8 hours
Sometimes we need to compute productivity as the ratio of output relative to a group of inputs, such
as labor and materials. This is a measure of multifactor Productivity. For example, let’s say that
output is worth $382 and labor and materials costs are $168 and $98, respectively. A multifactor
productivity measure of our use of labor and materials would be
output $382
Multifactor productivity = = =1.436
labor  materials $168  $98
Interpreting productivity measures
Productivity measures must be compared to something, i.e. another year, a different company. Raw
productivity calculations do not tell the complete story unless there are no major structure differences.
Productivity measure provides information on how the firm is doing relative to what is critical to the
firm.
To interpret the meaning of a productivity measure, it must be compared with a similar productivity
measure. For example, if one worker at a pizza shop produces 17 pizzas in 2 hours, the productivity
of that worker is 8.5 pizzas per hour. This number by itself does not tell us very much. However, if
we compare it to the productivity of two other workers, one who produces 7.2 pizzas per hour and
another 6.8 pizzas per hour, it is much more meaningful. We can see that the first worker is much
more productive than the other two workers. But how do we know whether the productivity of all
three workers is reasonable? What we need is a standard. In Chapter two we will discuss ways to set
standards and how those standards can help in evaluating the performance of our workers.
When evaluating productivity and setting standards for performance, we also need to consider our
strategy for competing in the marketplace—namely, our competitive priorities. A company that
competes based on speed would probably measure productivity in units produced over time.
However, a company that competes based on cost might measure productivity in terms of costs of
inputs such as labor, materials, and overhead. The important thing is that our productivity measure

provides information on how we are doing relative to the competitive priority that is most important
to us.
Example 2: Determine the productivity for these cases:
a. Four workers installed 720 square yards of carpeting in eight hours.
b. A machine produced 70 pieces in two hours. However, two pieces were unusable.
a. Productivity = Yards of carpet installed
Labor hours worked
= 720 square yards/ 4 workers 8 hours/worker
= 720 yards/32 hours = 22 5 yards hour
b. Productivity = Usable pieces/ Production time
= 70-2 = 68 usable pieces
2 hours
=34 pieces/hour
Calculations of multifactor productivity measure inputs and outputs using a common unit of
measurement, such as cost. For instance, the measure might use cost of inputs and units of the output:
Quantity of production
Labor cost + Materials cost + Overhead
Note: The unit of measure must be the same for all factors in the denominator.
Example 3: Determine the multifactor productivity for the combined input of labor and machine time
using the following data:
Output: 7,040 units
Input
Labor: $1,000
Materials: $520
Overhead: $2,000

Multifactor productivity = Output
Labor + Materials + Overhead
= 7 040 units
$1,000 $520 $2,000
= 2 units per dollar input
Productivity and the Service Sector
Measuring service sector productivity is a unique challenge. Traditional measures focus on tangible
outcomes. Service industries primarily produce intangible outcomes, and measuring intangibles is
challenging.
Self-Check
1. Briefly explain areas of competitiveness

2. Describe the overall relationship that exists from the mission down to actual operations
hierarchically and define each term.
3. Define the term environmental scanning
4. Discuss the external and internal factors of the business environment
5. Describe the three input to a business strategy
6. A company that processes fruits and vegetables is able to produce 400 cases of canned
peaches in one-half hour with four workers. What is labor productivity?
7. A wrapping-paper company produced 2,000 rolls of paper one day. Standard price is $1/roll.
Labor cost was $160, material cost was $50, and overhead was $320. Determine the
multifactor productivity.
8. A health club has two employees who work on lead generation. Each employee works 40
hours a week, and is paid $20 an hour. Each employee identifies an average of 400 possible
leads a week from a list of 8,000 names. Approximately 10 percent of the leads become
members and pay a onetime fee of $100. Material costs are $130 per week, and overhead costs
are $1,000 per week. Calculate the multifactor productivity for this operation in fees generated
per dollar of input.

Solution
Que. No. 7
Labor productivity = Quantity produced
Labor hours
= 400 cases
4 workers x 1/2 hour/worker
= 200 cases per labor hour
Que.No.8
Multifactor productivity = Quantity produced @ standard price
= Labor cost + Material cost + overhead
= 2,000 rolls =3.77 rolls per dollar input
$ 160+ $50+ $ 320
Que.No.9
MFP = (Possible leads) (No. of workers) (Fee) (Conversion percentage)
Labor cost + Material cost + Overhead cost
= (400) (2) ($100) (0.10) =$8,000
2 (40) ($20) + $130+ $1,000 $2,730
= 2.93

Chapter 3
Product Design and Process Selection

3.1 Introduction
3.2 Product and service design
3.3 Design process
3.3.1 Product design process
3.3.2 Service design
3.4 Method for improving product design
3.5 Process Selection
3.6 Process Technologies
 Define product design and its strategic impact on organization

 Describe steps to develop a product design
 Using break-even analysis as a tool in selecting between alternative products
 Identity different types of processes and explain their characteristics
 Understand how to use a process flowchart
 Understand how to use process performance metrics
 Understand current technology advancements and how they impact process and product
design
 Understand issues impacting the design of service operations
 Understanding processes selection and process technologies
3.1 Introduction
The essence of any organization is the product or service it offers. There is an obvious link between
the design of those products or services and the success of the organization. Organizations that have
well designed products or services are more likely to realize their goals than those with poorly

designed products or services. Hence, organizations have vital stake in achieving good product and
service design.
Product and service design plays a strategic role in the degree to which an organization is able to
achieve its goals. It is a major factor in customer satisfaction, product and service quality, and
production costs. The customer connection is obvious: the main concern of the customer is the
organization’s product or services, which become the ultimate basis for judging the organization. The
quality connection is twofold. Quality is obviously affected not only by design but also, during
production, by the degree to which production conforms to the intent of design. A key factor is
manufacturability, which refers to the ease with which design features can be achieved by production.
Similarly, design affects cost- the cost of materials specified by design and labor and equipment
costs.
Product design – the process of defining all of the company’s product characteristics. Product design
must support product manufacturability (the ease with which a product can be made). Product design
defines a product’s characteristics of:
-Appearance, - Tolerances, and
- Materials, - Performance standards.
- Dimensions
Process Selection – the development of the process necessary to produce the designed product.
3.2. The Product or service Design
Organizations become involved in product or service design for a variety of reasons. An obvious one
is to be competitive by offering new products or services. Another one is to make the business grow
and increase in profits. Furthermore, the best organizations try to develop new products or services as
an alternative to downsizing. When productivity gains result in the need for fewer workers,
developing new products or services can mean adding jobs and retaining people instead of letting
them go.
Sometimes product or service design is actually redesign. This occurs for a number of reasons such as
customer complaints, accidents or injuries, excessive warranty claims, or low demand. The desire to
achieve cost reductions in labor or materials can be a motivating factor.

Objectives of product and service design
The objectives of product design and service design differs somewhat, but not as much as you might
imagine. The overall objectives for both are to satisfy the customer while making a reasonable profit.
Beyond that, it is crucial for designers to take into account the capability of the organization to
produce a given product or service. In manufacturing this is referred to as design for manufacturing
(DFM). A more general term that encompasses both manufacturing and service is design for
operations.
Whatever the term the implications is that operations people must be involved early in the design
process to ensure that the design will be compatible with the organization’s capabilities. Furthermore,
some design alternatives are more difficult to work with than others. With some, it is difficult to
achieve a high-quality output. Again, production/operations people can provide the necessary inputs
that make these things apparent before problems arise in production or operations. Likewise, it is
important to involve marketing to ensure that customer requirements will be achieved. In sum, the
key objectives for the designers are to design the products or service that will meet (or exceed)
customer expectations, within cost or budget, that takes into account the capabilities of the operations
and the fact that alternative designs may be more or less difficult to produce or provide.
3.3. The design process
3.3.1 The Product Design Process
Idea development: all products begin with an idea whether from; customers, competitors or suppliers.
Idea developments selection affects; Product quality, Product cost, Customer satisfaction, and Overall
manufacturability – the ease with which the product can be made.
Steps in product design process
Step 1 - Idea Development - Someone thinks of a need and a product/service design to satisfy it:
customers, marketing, engineering, competitors, benchmarking, reverse engineering
Step 2 - Product Screening - Every business needs a formal/structured evaluation process: fit with
facility and labor skills, size of market, contribution margin, break-even analysis, return on sales
Step 3 – Preliminary Design and Testing - Technical specifications are developed, prototypes built,
testing starts.

Step 4 – final Design - Final designs based on test results, facility, equipment, material, & labor
skills defined, suppliers identified.
3.2.1.1 Idea Development
Ideas for new products and services should be sought from a variety of sources including market
research, customer viewpoints, the organization’s research and development (R&D) department if
one exists, competitors or relevant developments in new technology. Competitors can provide a good
source of ideas and it is important that the organization analyses any new products they introduce to
the market and make an appropriate response. Reverse Engineering is a systematic approach to
dismantling and inspecting a competitor’s product to look for aspects of design that could be
incorporated into the organization’s own product. This is especially prevalent when the product is a
complex assembly such as a car, were design choices are myriad. Benchmarking compares a product
against what is considered the best in that market segment and the making recommendations on how
the product can be improved to meet that standard. Although a reactive strategy, benchmarking can
be useful to organization’s who have lost ground to innovative competitors.
The design process begins with the motivation for design. For a new business or new product, the
motivation may be obvious: to achieve the goals of the organization. For an existing business, in
addition to the general motivation, there are more specific factors to consider, such as government
regulations, the appearance of new technologies that have products or process applications,
competitive pressures and customer needs.
Ultimately, customer is the driving forces for product or service design. Failure to satisfy customers
can result in customer complaints, returns, warranty claims, and so on. Loss of market share becomes
a potential problem if customer satisfaction is not achieved. One of the source for new or improved
design is most obviously customers which trigger the design process to occur.
Some organizations have research and development departments that also generate ideas for new or
improved products or services.
Competitors are another important sources of ideas. By studying a competitor’s products or services,
and how a competitors operates (e.g., pricing policies, return policies, warranties), an organization
can learn a great deal about achieving the design improvements. Beyond that, some companies buy a
competitors newly designed product the moment it appears on the market, using the procedures called

reverse engineering, they carefully dismantle, and inspect the product. This may uncover product
improvements that can be incorporated in their own products. Hence, Reverse engineering is the
process where in dismantling and inspecting competitors’ products to discover products
improvements. Sometimes reverse engineering can lead to a product that is superior to the one being
examined; that is, designers conceive an improved design, which enable them to “leapfrog” the
competition by quickly introducing an improved version of a competitor’s product. This could deny
the competitors some of the rewards that normally accrue to the first to introduce a new product or
feature.
Ideas for new or improved products and services cannot be entertained in a vacuum; production
capabilities must be a basic consideration. In order to assure this, design and production must work
together; design needs to clearly understand the capabilities of production (e.g. equipment, skills, type
of materials, schedules, technologies, special abilities). The design of a product or service must take
into account its cost, its target market, and its function. Manufacturability is a key concern for
manufactured products.
Research and Development
Research and development (R & D) refers to organized efforts that are directed toward increasing
scientific knowledge or product (and process) innovation. The benefits of successful R & D can be
tremendous. Some research leads to patents, with the potential of licensing and royalties. However,
many discoveries are not patentable, or companies don’t wish to divulge details of their ideas
following the patent route. Even so, the first organization to bring a new product or service to the
market generally stands to profit from it before the others can catch up. Early product may be priced
higher because a temporary monopoly exists competitor bring their versions out. On the other hand,
the cost of R & D can be high. Kodak, for example, spends an average of $2 million a day on R & D.
Large companies in the automotive, computer, communications, and pharmaceuticals industries
spend even more.
3.2.1.2 Product Screening
The screening process consists of market analysis, economic analysis, and technical analysis.
a. Market analysis
Market analysis consists of evaluating the product concept with potential customers through
interviews, focus groups and other data collection methods. The physical product may be tested by

supplying a sample for customer evaluation. The market analysis should identify whether sufficient
demand for the proposed product exists and its fit with the existing marketing strategy. At a strategic
level the organization can use the product life cycle to determine the likely cost and volume
characteristics of the product. The product life cycle describes the product sales volume over time. In
the early introduction phase production costs are high and design changes may be frequent. However,
there should be little or no competition for the new product and so a premium price can be charged to
customers attracted to innovative products. The growth phase sees a rapid increase in volumes and
the possibility of competitors entering the market. At this stage it is important to establish the product
in the market as firmly as possible in order to secure future sales. Production costs should be
declining as process improvements and standardization takes place. In the mature phase competitive
pressures will increase and it is important that sales are secured through a branded product to
differentiate it from competitors and a competitive price. There should be a continued effort at design
improvement to both product and process. Some products, such as consumer durables, may stay in
the mature phase almost indefinitely, and techniques such as advertising are used to maintain interest
and market share.
b. Economic Analysis
Economic Analysis consists of developing estimates of production and demand costs and comparing
them with estimates of demand. In order to perform the analysis requires an accurate estimate of
demand as possible derived from statistical forecasts of industry sales and estimates of market share
in the sector the product is competing in. These estimates will be based on a predicted price range for
the product which is compatible with the position of the new product in the market. In order to assess
the feasibility of the projected estimates of product costs in terms of such factors as materials,
equipment and personnel must be estimated. Techniques such as cost/benefit analysis, decision theory
and accounting measures such as net present value (NPV) and internal rate of return (IRR) may be
used to calculate the profitability of a product. Another tool that can be used is the cost-volume-profit
model that provides a simplified representation that can be used to estimate the profit level generated
by a product at a certain product volume.
Assuming all products made are sold then the volume for a certain profit can be given by the
following formula
X= (P + FC)
(SP – VC)
Where;
X = volume (units) SP = selling price
P = profit VC = variable costs
FC = fixed costs
When profit = 0 (i.e. selling costs = production costs) this is termed the breakeven point and can be
given by the following formula:
X = FC
SP – VC
The break-even point, the point of no profit and no loss, provides managers with insights into profit
planning. Break-even analysis considers two functions of Q
Graphical Approach
 Compute quantity of goods that must be sold to break-even

 Compute total revenue at an assumed selling price
 Compute fixed cost and variable cost for several quantities
 Plot the total revenue line and the total cost line
 Intersection is break-even
 Sensitivity analysis can be done to examine changes in all of the assumptions made

Example: A firm estimates that the fixed cost of producing a line of footwear is $52,000 with a $9
variable cost for each pair produced. They want to know: If each pair sells for $25, how many pairs
must they sell to break-even? If they sell 4000 pairs at $25 each, how much money will they make?
Solution
F $52,000
 Break-even point (Quantity) = Q   3250 pairs
SP  VC $25  $9
 Profit = total revenue – total costs

P  SP Q  F  VC Q 
 $254000  $52,000  $94000
 $12,000
Example 2: The Manhasset Machine Tool Corporation manufactures a variety of machine tools. The
following are taken from the budget for 19A: Sales (10,000 units) $200,000, Variable costs 120,000,
Fixed costs 90,000
What is the break-even point in units in 19A?
Solution
Unit sales price = $20. Unit variable cost = $12. Therefore,
Break-even point = $90’000 = 11,250 units
$20 - $12
Example 3: The Carey Company sold 100,000 units of its product at $20 per unit. Variable costs are
$14 per unit (manufacturing costs of $11 and selling expenses of $3). Fixed costs are incurred
uniformly throughout the year and amount to $792,000 (manufacturing costs of $500,000 and selling
expenses of $292,000). Calculate the break-even point in units and in dollars,
Solution
Break-even point in units = = $792,000 = 132,000 units
$20 - $14
Break-even point in dollars = 132,000 units X $20 = $2,640,000

c. Technical Analysis
Technical analysis consists of determining whether technical capability to manufacture the product.
This covers such issues as ensuring materials are available to make the product to the specification
required, and ensuring the appropriate machinery and skills are available to work with these
materials. The technical analysis must take into account the target market and so product designers
have to consider the costs of manufacturing and distributing the product in order to ensure it can be
sold at a competitive price. Strategic analysis involves ensuring that the product provides a
competitive edge for the organization, drawing on its competitive strengths and is compatible with the
core business.
3.3.1.3 Preliminary Design & Testing
Product concepts that pass the feasibility stage enter preliminary design. The specification of the
components of the package requires a product /service structure which describes the relationship
between the components and a bill of materials or list of component quantities derived from the
product structure. The process by which the package is created must also be specified in terms of
mapping out the sequence of activities which are undertaken. This can be achieved with the aid of
such devices as process flow charts.
General performance characteristics are translated into technical specifications. Prototypes are built &
tested (maybe offered for sale on a small scale). Bugs are worked out & designs are refined.
3.2.1.4 Final Design
The final design stage involves the use of a prototype to test the preliminary design until a final
design can be chosen. Computer Aided Design (CAD) and Simulation Modeling can be used to
construct a computer-based prototype of the product design.
Specifications are set & then used to:
 Develop processing and service delivery instructions

 Guide equipment selection
 Outline jobs to be performed
 Negotiate contracts with suppliers and distributors

3.3.3. Service design
Service design begins with the choice of service strategy, which determines the nature and focus of
the service, and the target market. This requires an assessment by top management of the potential
market and profitability of a particular service, and an assessment of the organizations ability to
provide the service. Once decisions on the focus of the service and the target market have been made,
the customer requirements and expectations of the target market must be determined. That
information is then used to design the service delivery system (i.e. facilities, processes, and personnel
requirements used to provide the service). Example of possible service delivery system includes mail,
telephone, electronic service (computer, network, fax), and face-to-face contact.
Two key issues in service design are the degree of variations in service requirements and the degree
of customer contacts and customer involvements in delivery system. These have an impact on the
degree to which the service can be standardized or must be customized. The lower the degree of
customer contact and service requirements variability, the more standardized the service can be.
Service design with no contact and little or no processing variability is very much like product design.
Conversely, high variability and high customer contact generally means the service must be highly
customized.
Differences between service design and product design
1. Products are generally tangible; services are generally intangible. Consequently service design
often focuses more on intangible factors (eg. Peace of mind, ambiance) than does product design.
2. Services are often produced and received at the same time (e.g. haircut, a car wash). Thus, there
is less latitude in finding and correcting errors before the customer has the chance to discover
them. Consequently, training, process design, and customer relations are particularly important.
3. Service cannot be inventoried. This poses restrictions on flexibility and makes capacity design
very important.
4. Services are highly visible to consumers and must be designed with that in mind; this adds an
extra dimension to process design, one that usually is not present in product design.
5. Some services have low barriers to entry and exit. This places additional burden on service
design to be innovative and cost effective.

6. Location is often important to service design, with convenience as a major factor. Hence, design
of services and choice of location are often closely linked.
3.4. Methods for Improving Product Design
A number of methods are available that help to improve the product design process. Five aspects of
product design are as follows
a. Product Life Cycle

Many new products go through a product life cycle in terms of demand. When an items is first
introduced, it may be treated as curiosity. Demand is generally low because potential buyers are not
yet familiar with the item. Many potential buyers recognize that all of the bugs are probably not been
worked out and that the price may drop after the introductory period. With the passage of time,
production, and design improvements usually create a more reliable and less costly products. Demand
then grows for these reasons and because of increasing awareness of the product or services. At the
next stage in the life cycle, the product reaches maturity: there are few, if any, design changes, and
demand level off. Eventually market becomes saturated, which leads to a decline in demand. In the
last stages of the lifecycle, some firms adopt a defensive research posture whereby they attempt to
prolong the useful life of a product or service by improving the reliability of the item, reducing costs
of producing the item (and, hence ,the price), redesigning it, or changing the packaging.
Product life cycle stages
 Introduction
 Growth
 Maturity
 Decline
Facility & process investment depends on life cycle

b. Design for Manufacture (DFM)

Although the ability of the product or service to fulfill customers’ needs is a major factor in design
there is also a need to ensure that the product designed can be produced easily and at low cost. Design
for Manufacture (DFM) is a concept which provides guidelines on how this can be achieved using
techniques such as simplification, standardization and modularization. Standardization refers to the
extent to which there is absence of variety in a product, service, or process. It involves using
components that can be used in a number of products again reducing costs through economies of
scale and minimizing inventory. Standardized products are made in large quantities of identical items
eg. Calculators, computers, etc. Modularization means using modules or blocks of components that
are standard across products. Again costs are reduced and reliability increased. Simplification
involves a reduction in the number of components in the design in order to reduce cost and increase
reliability
c. Concurrent Engineering
Concurrent engineering is when contributors to the design effort provide work throughout the design
process as a team. This differs from the traditional design process when work is undertaken
separately within functional areas such as engineering and operations. The problem with the
traditional approach is the cost and time involved in bringing the product to market. In a traditional
approach time is wasted when each stage in the design process waits for the previous stage to finish
completely before it can commence and their may be a lack of communication between functional
areas involved in the different stages of design. This can lead to an attitude of “throwing the design
over the wall” without any consideration of problems that may be encountered by later stages. An
example of this is decisions made at the preliminary design stage that adversely affect choices at the
product build stage. This can cause the design to be repeatedly passed between departments to satisfy
everyone’s needs, increasing time and costs. By facilitating communication through the establishment
of a project team problems of this type can be reduced.

d. Robust Design
The more robust a product (or service), the less likely it will fail due to a change in the environment
in which it is used or in which it performed. Hence, the more designers can build robustness into the
product or service, the better it should hold up, resulting in a higher level of customer satisfaction.
Taguchi’s Approach. Japanese engineer Genichi Taguchi approach is based on the robust design.
His premise is that it is often easier to design a product that is insensitive to environmental factors
either in manufacturing or in use, than to control the environmental factors. The central features of
Taguchi approach- and the feature used most often by U.S. companies- is parameter design. This
involves determining the specification setting for both the product and the process that will result in
robust design in terms of manufacturing variations or product deterioration, and conditions during
use. The Taguchi approach modifies the conventional statistical method of experimental design. It
involves determining which factors are controllable and which are not controllable (or are too
expensive to control), and then determining the optimal levels of controllable factors relative to
product performance. The value of this approach is its ability to achieve major advances in product
or process design fairly quickly, using relatively small numbers of experiments.
Critics charge that Taguchi’s methods are inefficient and incorrect, and often lead to non-optimal
solutions. Nonetheless his methods are widely used and have been credited with helping to achieve
major improvements in U.S. products and manufacturing processes.
e. Computer Aided Design

Computers are increasingly used for product design, particularly in manufacturing. Computer Aided
Design (CAD) uses computer graphics for product design.
In construction, rather than producing drawings by hand, computer-aided design (CAD) allows the
designer to work on-screen with the details stored in an electronic database. This not only speeds the
production of initial drawings but also greatly facilitates changes to the drawings, which can be a
very lengthy process (which deters changes) when done manually. Once the basic geometric
information has been stored, it is possible for the designer to construct views of what the final
building will look like and even to allow a virtual walk-through. This helps customers to envision
the final product, reducing the changes during construction, since altering a computer model is far
easier and cheaper. Such CAD systems can also improve subcomponent design, since interfaces can
be designed and problems resolved before construction starts. Ensuring that services such as
electricity and heating can be installed without major alteration to structural elements is a benefit.
Having drawn the components on a CAD system and checked their fit with other parts, the geometric
data can be processed through a computer aided manufacturing (CAM) system to generate machine
instructions to make the part. Alternatively, CAD data can be used to produce rapid prototypes,
where the part is made in a resin material. CAD enables a number of tests to take place, including
simulations of loads and stress details on products.
f. Modular Design
Modular design is another form of standardization. Modules represent grouping of components parts
into subassemblies, usually to the point where the individual parts lose their separate identity. One
familiar example of modular design is with easily removed control panels. Computer, too, have
modular parts that can be replaced if they become defective.
One advantage of modular design of equipment compared to non-modular is failure has often easier
to diagnose, and remedy because they are fewer pieces to investigate. The manufacture and assembly
of module generally involve simplifications: fewer parts are involved, so purchasing and inventory
control become more routine, fabrication and assembly operations become more standardized, and
training costs are often less.
The main disadvantage of modular design stem from the decrease in variety: the number of possible
configurations of modules is much less than the number of possible configuration based on individual
components. Another disadvantage that is sometimes encouraged is the inability to disassemble a
module in order to replace a faulty part: the entire module must be scrapped- usually a more costly
procedure.
3.5. Process Selection
Process selection refers to the way all organization chooses, to produce it’s goods or provide its
services. Essentially it involves choice of technology and related issues, and it has major implications
for capacity planning, layout of facilities. equipment’s and design of work systems
Make or Buy?
The very first step in process planning is to consider whether to make or buy some or all of a product
or to subcontract some or all of a service. A manufacturer might decide to purchase certain part,
rather than make them; sometimes all parts are purchased, with the manufacturer simply per forming
assembly operations. Many firms contract out janitorial services, and some contract repair services.

If a decision is made' to buy or contract, this lessens or eliminate, the used for process selection. In
make or buy decisions, a number of factors are usually considered:
1. Available capacity. If an organization has available capacity, it often makes sense to produce all
items or perform a service in house. The additional costs would be relatively small compared with
those required to buy items or subcontract services.
2. Expertise. If a firm lack expertise to do a job satisfactorily, buying might be a reasonable
alternative.
3. Quality considerations. Firms that specialize can usually offer higher quality than an organization
can obtain itself. Conversely special quality requirements or the ability to closely monitor quality
may cause a firm to perform the work itself.
4. The nature of demand. When demand for an item is high and steady, the organization is better of
doing the work itself. However, a wide fluctuation in demand or small orders are better handled by
others who are able to combine orders from multiple sources, which results in higher volume and
tends to offsets individual buyer fluctuations.
5. Cost. Any cost saving achieved from buying or making must be weighed against the preceding
factors. Cost saving might come from the item itself or from transportation cost savings.
The design of processes is different in all organizations and should be related to the volume and
variety of the demand for the product in the market. In order to assist in selecting the appropriate
process, process designs can be categorized under four process types; project, jobbing, batch, mass
and continuous.
3.5.1. Project
Processes that produce products of high variety and low volume are termed projects. Project
processes are used to make a one-off product to a customer specification. Normally transforming
resources such as staff and equipment that make the product must move or be moved to the location
of the product. Other characteristics of projects are that they may require the coordination of many
individuals and activities, demand a problem-solving approach to ensure they are completed on time
and have a comparatively long duration of manufacture. The timescale of the completion of the
project is an important performance measure. Because each project is unique it is likely that
transforming resources will comprise general purpose equipment which can be used on a number of
projects. Examples of the use of a project process include building construction, interior design and
custom-built furniture.
3.5.2 Jobbing or Job-shop
Jobbing processes are used to make a one-off or low volume product to a customer specification. A
feature of a jobbing process is that the product moves to the location of transforming resources such
as equipment. Thus resources such as staff and equipment can be shared between many products.
Other characteristics of jobbing processes are the use of skilled labour in order to cope with the need
for customization (i.e. variety) and the use of general purpose equipment which is shared between the
products. There tends to be low utilization of equipment in jobbing processes due to the need to
undertake frequent setting up of the machinery when moving from processing one product to another.
Examples of the use of a jobbing process include bespoke tailors and precision engineers.
3.5.3 Batch or Intermittent
Processes that produce products of medium variety and medium volume are termed batch which
denotes that the products are grouped as they move through the design process. In a batch process the
product moves to the location of transforming resources such as equipment and so resources are
shared between the batches. Instead of setting up machinery between each product, as in a jobbing
(Job-shop) process, setups occur between batches, leading to a higher utilization of equipment.
Because of the relatively high volumes involved in batch it can be cost-effective to use specialized
labour and equipment dedicated to certain product batches. A feature of batch processes is that,
because it is difficult to predict when a batch of work will arrive at a machine, a lack of coordination
can lead to many products waiting for that machine at any one time. These queues of work may
dramatically increase the time the product takes to progress through the process. Examples of the use
of a batch process include book printing, university classes and clothing manufacture.
3.5.4 Line or Repetitive
Processes that produce products of high volume and low variety are termed line or mass processes.
Although there may be variants within the product design the production process will essentially be
the same for all the products. Because of the high volumes of product it is cost effective to use
specialized labour and equipment. A feature of line processes is that the movement of the product
may be automated using a conveyor system and the production process broken down into a number of
small, simple tasks. In order to ensure a smooth flow of product the process times per unit must be
equalized at each stage of production using a technique called line balancing. Because of the low
product variety, setting up of equipment is minimized and utilization of equipment is high.

Examples of the use of a mass process include cars, consumer durables such as televisions and food
items.
3.5.5 Continuous
Processes that operate continually to produce a very high volume of a standard product are termed
continuous. The products produced by a continuous operation are usually a continuous flow such as
oil and gas. Continuous processes use a large amount of equipment specialized and dedicated to
producing a single product (such as an oil refinery for example). To make this large investment in
dedicated equipment cost effective continuous processes are often in constant operation, 24 hours a
day. The role of labour in the operation of the processes is mainly one of monitoring and control of
the process equipment with little contact with the product itself. Examples of a continuous process
include water treatment plants, electricity production and steel making.
Product design considerations must include the process
a. Intermittent processes:
Processes used to produce a variety of products with different processing requirements in lower
volumes. (such as healthcare facility)
b. Repetitive processes:
Processes used to produce one or a few standardized products in high volume. (such as a cafeteria, or
car wash)

Differences between Intermittent and Continuous (repetitive) Operations
Decision Intermittent Continuous

Product Variety Large Small
Degree of Standardization Low High
Path through Facility Varied pattern Line Flow
Critical Resource Labor Equipment
Importance of Work Skills High Low
Type of Equipment General Purpose Specialized
Degree of Automation Low High
Throughput Time Longer Shorter
Work-in-Process Inventory More Less
Process selection is based on five principal considerations
c. Product-Process Grid
d. Degree of vertical integration
e. Flexibility of resources
f. Mix between capital & human resources
g. Degree of customer contact
Match the process and the products
A key concept in process selection is the need to match product requirements with process
capabilities. The difference between success and failure in production can sometimes be traced to
choice of process. Products range from highly customized to highly standardized. Generally, volume
requirements tend to increase as standardization increases; customized products tend to be low
volume, and standardized products tend to be high volume. These factors should be considered in
determining which process to use.
Certain processes are amenable to low-volume, customized products, while others are more suited to
moderate-variety products, and still others to higher volume, highly standardized products. By
matching product requirements with process choices, producers can achieve the greatest degree of
efficiency in their operations. The table below illustrates the product variety.

Fig. 3.5.1 illustration of the product variety.
3.6. Process Technologies
a. Automation
Automation is the substitution of machinery for human labor. The machinery includes sensing
and control devices that enable it to operate automatically. A key question in process planning
is whether to automate. If the decision is made to automate, the next question is how much.
Automation can range from factories that are completely automated to a single automated
operation.
Automation offers a number of advantages over human labor. It has low variability; it is
difficult for human to perform a task in exactly the same way, in the same amount of time,
and on a repetitive process. In a production setting variability is determined to quality and to
meeting schedules. Moreover, machines do not get bored or distracted, nor do they go out on
strike, ask for higher wages, or file labor grievances.
Automation is frequently touted as a strategy necessary for competitiveness. However, it also

has certain disadvantages and limitations compared to human labor. To begin with automation
can be costly. Technology is expensive; usually it requires high volumes of our put to offset
high costs. In addition, automation is much less flexible than humans. Once a process has
been automated, there is substantial reason for not changing it. Moreover, workers sometimes
fear automation because it might cause them to lose their jobs.

b. Computer Aided Manufacturing (CAM)

Computer Aided Manufacturing (CAM) refers to the use of computers in process control,
ranging from robots to automated quality control. These systems replace human functions
with machine functions. They have the advantage of reducing labor; handling dangerous,
dirty, or boring tasks; and yielding high, consistent quality, such equipment can be very
expensive.
Numerically Controlled (N/C) machines are programmed to follow a set of processing

instructions based on mathematical relationships that tell the machine the details of the
operations to be performed. The instructions are stored on a device such as a floppy disk,
magnetic tape, or microprocessor. Although N/C machines have been used for many years,
they are an important part of new approaches to manufacturing. Individuals machine have
their own computer; this is referred to as computerized Numerical Control (CNC). Or one
computer may control a number of N/C machines, which is referred to as direct numerical
control (DNC).
c. Flexible Manufacturing System
Flexible Manufacturing System (FMS) is a group of machines that include supervisory
computer control, automatic material handling, and possibly robots or other processing
equipment. Reprogrammable controllers enable these systems to produce a variety of similar
products. Systems may range from three or four machines to more than a dozen. They are
designed to handle intermittent processing requirements with some of the benefits of
automation and some of the flexibility of individual, or stand-alone, machines (e.g, N/C
machines). Flexible manufacturing systems offer reduced labor costs and more consistent
quality compared with more traditional manufacturing methods, lower capital investment and
higher flexibility than “hard” automation, and relatively quick changing time. Flexible
manufacturing systems appeal to managers, who hope to achieve both the flexibility of job
shop processing and the productivity of repetitive processing systems.
Although these are important benefits, a FMS also has certain limitations. One is that this type
of system can handle a relatively narrow range of part variety, so it must be used for a family
of similar parts, which all require similar machining. Also, a FMS requires longer planning
development times than more conventional processing equipment because of its increased
complexity and cost. Furthermore, companies sometimes prefer a gradual approach to
automation, and FMS represents a sizable chunk of technology.

d. Computer-Integrated Manufacturing
Computer-Integrated Manufacturing (CIM) is a system for linking a broad range of
manufacturing activities through an integrating computer system, including engineering
design, flexible manufacturing systems, and production planning and control.
The overall goal of using CIM is to link various parts of an organization to achieve rapid
response to customer orders and/or product changes, to allow rapid production, and to reduce
indirect labor costs.
Other process technologies

e. Automated Material Handling:
f. Automated guided vehicles (AGV)
g. Automated storage & retrieval systems (AS/RS)
h. Computer-Aided Design (CAD) software
i. Robotics & Numerically-Controlled (NC) equipment
Self-Check
1. What do product design defines

2. What differences exist between product and service design
3. Describe the steps in product design process
4. Briefly explain methods for improving product design
5. Describe some of difference between intermittent and repetitive (continuous) process
6. Explain some of the advantage and disadvantage of automation

Chapter 4
E-Commerce and Supply chain management

4.1 Introduction
4.2 Supply Chain and Supply Chain Management
4.2.1 Components of supply chain
4.2.2 Basic supply chain
4.3 The Bullwhip Effect
4.4 Issues Affecting Supply Chain Management
4.4.1 SCM Factors
4.4.2 Global SCM factors
4.5 Sourcing Issues
4.5.1 Insourcing Vs Outsourcing
4.5.2 Make or Buy Analysis
4.5.3 The role of purchasing
4.5.4 SCM distribution
4.6 Integrated Supply Chain Management
4.7 Supply Chain Performance Measurement
 Describe the structure of supply chains

 Describe the bullwhip effect
 Describe the issues affecting supply chain management
 Describe B2B and B2C electronic commerce
 Describe global issues in supply chain management
 Describe the role of purchasing in supply chain management
 Describe the ethics of supplier management
 Describe sourcing issues
 Describe strategic purchasing partnerships
 Describe supply chain distribution
 Describe integrated supply chain management
 Describe supply chain performance measures

4.1 Introduction
Supply Chain Management is the management of the interconnection of organizations’ that relate to
each other through upstream and downstream linkages between the processes that produce value to
the ultimate consumer in the form of products and services (Slack et al., 2010). Activities in the
supply chain include sourcing materials and components, manufacturing products, storing products in
warehousing facilities and distributing products to customers. The management of the supply chain
involves the coordination of the products through this process which will include the sharing of
information between interested parties such as suppliers, distributors and customers.
4.2 Supply Chains & SCM
Supply chain is the network of all the activities involved in delivering a finished product/service to
the customer. Sourcing of: raw materials, assembly, warehousing, order entry, distribution, delivery.
Supply chain execution means managing and coordinating the movement of materials, information
and funds across the supply chain. The flow is bi-directional. SCM applications provide real-time
analytical systems that manage the flow of products and information throughout the supply chain
network. Interconnected or interlinked networks, channels and node businesses are involved in the
provision of products and services required by end customers in a supply chain.
Supply Chain Management is the vital business function that coordinates all of the network links. It
coordinates movement of goods through supply chain from suppliers to manufacturers to distributors.
It Promotes information sharing along chain like forecasts, sales data, & promotions. It is the
management of the flow of goods. It includes the movement and storage of raw materials, work-in-
process inventory, and finished goods from point of origin to point of consumption.
Supply Chain Management is the management of the interconnection of organizations that relate to
each other through upstream and downstream linkages between the processes that produce value to
the ultimate consumer in the form of products and services. Activities in the supply chain include
sourcing materials and components, manufacturing products, storing products in warehousing
facilities and distributing products to customers.
SCM draws heavily from the areas of operations management, logistics, procurement, and
information technology, and strives for an integrated approach

Supply chain management addresses the following problems:
 Distribution network configuration: the number, location, and network missions of suppliers,
production facilities, distribution centers, warehouses, cross-docks, and customers.
 Distribution strategy: questions of operating control (e.g., centralized, decentralized, or
shared); delivery scheme (e.g., direct shipment, pool point shipping, cross docking, direct
store delivery, or closed loop shipping); mode of transportation (e.g., motor carrier, including
truckload, less than truckload (LTL), parcel, railroad, intermodal transport, including trailer
on flatcar (TOFC) and container on flatcar (COFC), ocean freight, airfreight); replenishment
strategy (e.g., pull, push, or hybrid); and transportation control (e.g., owner operated, private
carrier, common carrier, contract carrier, or third-party logistics (3PL)).
 Trade-offs in logistical activities: The above activities must be coordinated in order to achieve
the lowest total logistics cost. Trade-offs may increase the total cost if only one of the
activities is optimized. For example, full truckload (FTL) rates are more economical on a cost-
per-pallet basis than are LTL shipments. If, however, a full truckload of a product is ordered
to reduce transportation costs, there will be an increase in inventory holding costs, which may
increase total logistics costs. The planning of logistical activities therefore takes a systems
approach. These trade-offs are key to developing the most efficient and effective logistics and
SCM strategy.
 Information: The integration of processes through the supply chain in order to share valuable
information, including demand signals, forecasts, inventory, transportation, and potential
collaboration.
 Inventory management: Management of the quantity and location of inventory, including raw
materials, work in process (WIP), and finished goods.
 Cash flow: Arranging the payment terms and methodologies for exchanging funds across
entities within the supply chain.
4.2.1 Components of a Supply Chain
Supply chain management (SCM) is a network of facilities and distribution options that goes into
improving your company. Making a product or service and delivering to customers by finding raw
components. For example; transformation of materials into intermediate and finished products and the
distribution of finished products to consumers.

Here are the five basic components of SCM:
a. Plan
Every company needs a strategy on how to manage the resources in order to achieve their customers
demand for their products and services. The supply chain management is developing a set of metric to
monitor the supply chain so that it can deliver high qualities and values to customers.
b. Source
To create their products, companies need to be very careful when choosing suppliers to deliver their
goods and services needed. The managers need to develop a set of pricing and delivery system in the
supply chain. They can also put processes for managing their goods and goods inventory, for
example; receiving shipments.
c. Make
In manufacturing the supply chain manager should always schedule the activities that are needed for
the production, packaging, testing and preparation for delivery. The most metric-intensive portion of
the supply chain, production output and measure levels. Eg. Internal Functions include – processing
functions i.e. processing, purchasing, planning, quality, shipping
d. Deliver
This part is mainly referred to as logistics by the supply chain management. In this case companies
coordinate receipts of orders, pick carriers to get products to customers and develop a network of
warehouses. Logistics managers are responsible for traffic management and distribution management;
that means, Traffic management – arranging the method of shipment for both incoming and outgoing
products or material, and Distribution management – movement of material from manufacturer to the
customer
e. Return
In many companies this is usually where the problem is – in the supply chain. The planners should
create a flexible and responsible network for receiving a flaw and excess products sent back to them
(from customers).

4.2.2 A Basic Supply Chain
Supply chain management is a cross-functional approach that includes managing the movement of
raw materials into an organization, certain aspects of the internal processing of materials into finished
goods, and the movement of finished goods out of the organization and toward the end consumer. As
organizations strive to focus on core competencies and becoming more flexible, they reduce their
ownership of raw materials sources and distribution channels. These functions are increasingly being
outsourced to other firms that can perform the activities better or more cost effectively. The effect is
to increase the number of organizations involved in satisfying customer demand, while reducing
managerial control of daily logistics operations. Less control and more supply chain partners led to
the creation of the concept of supply chain management. The purpose of supply chain management is
to improve trust and collaboration among supply chain partners, thus improving inventory visibility
and the velocity of inventory movement.
4.3. The Bullwhip Effect
The bullwhip effect occurs when the demand order variabilities in the supply chain are amplified as
they moved up the supply chain. Distorted information from one end of a supply chain to the other
can lead to tremendous inefficiencies. Companies can effectively counteract the bullwhip effect by
thoroughly understanding its underlying causes.
Bullwhip Effect-the inaccurate or distorted demand information from one end of a supply chain to the
other can lead to tremendous inefficiencies: such as, excessive inventory investment, poor customer
service, lost revenues, misguided capacity plans, inactive transportation, and missed production
schedules. How do exaggerated order swings occur? What can companies do to mitigate them?

a. Major causes of the bullwhip effect:
1. Demand forecast updating
2. Order batching
3. Price fluctuation
4. Rationing and shortage gaming
 Demand Forecast Updating
Every company in a supply chain usually does product forecasting for its production scheduling,
capacity planning, inventory control, and material requirements planning. Forecasting is often based
on the order history from the company's immediate customers.
For example, if you are a manager who has to determine how much to order from a supplier, you use
a simple method to do demand forecasting, such as exponential smoothing. With exponential
smoothing, future demands are continuously updated as the new daily demand data become available.
The order you send to the supplier reflects the amount you need to replenish the stocks to meet the
requirements of future demands, as well as the necessary safety stocks. The future demands and the
associated safety stocks are updated using the smoothing technique. With long lead times, it is not
uncommon to have weeks of safety stocks. Because the amount of safety stock contributes to the
bullwhip effect, it is intuitive that, when the lead times between the resupply of the items along the
supply chain are longer, the fluctuation is even more significant.
 Order Batching
In a supply chain, each company places orders with an upstream organization using some inventory
monitoring or control. Demands come in, depleting inventory, but the company may not immediately
place an order with its supplier. It often batches or accumulates demands before issuing an order.
There are two forms of order batching: periodic ordering and push ordering.
In push ordering, a company experiences regular surges in demand. The company has orders
"pushed" on it from customers periodically because salespeople are regularly measured, sometimes
quarterly or annually, which causes end-of-quarter or end-of-year order surges. Salespersons who
need to fill sales quotas may "borrow" ahead and sign orders prematurely. As a result, the surge in
demand is even more pronounced, and the variability from the bullwhip effect is at its highest.

MRP systems are often run monthly, resulting in monthly ordering with suppliers. If the majority of
companies that do MRP or distribution requirement planning (DRP) generate purchase orders at the
beginning of the month (or end of the month), order cycles overlap. Periodic execution of MRPs or
periodic ordering amplifies variability contributes to the bullwhip effect.
 Price Fluctuation
When a product's price is low (through direct discount or promotional schemes), a customer buys in
bigger quantities than needed. When the product's price returns to normal, the customer stops buying
until it has depleted its inventory As a result, the customer's buying pattern does not reflect its
consumption pattern, and the variation of the buying quantities is much bigger than the variation of
the consumption rate - the bullwhip effect.
 Rationing and Shortage Gaming
When product demand exceeds supply, a manufacturer often rations its product to customers. In one
scheme, the manufacturer allocates the amount in proportion to the amount ordered. For example, if
the total supply is only 50 percent of the total demand, all customers receive 50 percent of what they
order. Knowing that the manufacturer will ration when the product is in short supply, customers
exaggerate their real needs when they order. Later, when demand cools, orders will suddenly
disappear and cancellations pour in. This seeming overreaction by customers anticipating shortages
results when organizations and individuals make sound, rational economic decisions and "game" the
potential rationing.
During the Christmas shopping seasons in 1992 and 1993, Motorola could not meet consumer
demand for handsets and cellular phones, forcing many distributors to turn away business.
Distributors like Air Touch Communications and the Baby Bells, anticipating the possibility of
shortages and acting defensively, drastically over ordered toward the end of 1994. Because of such
overzealous ordering by retail distributors, Motorola reported record fourth-quarter earnings in
January 1995. Once Wall Street realized that the dealers were swamped with inventory and new
orders for phones were not as healthy before, Motorola's stock tumbled almost 10 percent.
b. How to Counteract the Bullwhip Effect
Understanding the causes of the bullwhip effect can help managers find strategies to mitigate it.
Indeed, many companies have begun to implement innovative programs that partially address the

effect. Next we examine how companies tackle each of the four causes. We categorize the various
initiatives and other possible remedies based on the underlying coordination mechanism, namely,
information sharing, channel alignment, and operational efficiency. With information sharing,
demand information at a downstream site is transmitted upstream in a timely fashion. Channel
alignment is the coordination of pricing, transportation, inventory planning, and ownership between
the upstream and downstream sites in a supply chain. Operational efficiency refers to activities that
improve performance, such as reduced costs and lead-time. The followings are ways to control the
bullwhip effect.
 Avoid Multiple Demand Forecast Updates
Ordinarily, every member of a supply chain conducts some sort of forecasting in connection with its
planning (e.g., the manufacturer does the production planning, the wholesaler, the logistics planning,
and so on). Bullwhip effects are created when supply chain members process the demand input from
their immediate downstream member in producing their own forecasts.
Demand input from the immediate downstream member, of course, results from that member's
forecasting, with input from its own downstream member.
One remedy to the repetitive processing of consumption data in a supply chain is to make demand
data at a downstream site available to the upstream site. Hence, both sites can update their forecasts
with the same raw data.
 Break Order Batches
Since order batching contributes to the bullwhip effect, companies need to devise strategies that lead
to smaller batches or more frequent resupply. One reason that order batches are large or order
frequencies low is the relatively high cost of placing an order and replenishing it. EDI can reduce the
cost of the paperwork in generating an order. Using EDI, companies such as Nabisco perform
paperless, computer-assisted ordering (CAO), and, consequently, customers order more frequently.
 Stabilize Prices
The simplest way to control the bullwhip effect caused by forward buying and diversions is to reduce
both the frequency and the level of wholesale price discounting. The manufacturer can reduce the
incentives for retail forward buying by establishing a uniform wholesale pricing policy.

 Eliminate Gaming in Shortage
Situations when a supplier faces a shortage, instead of allocating products based on orders, it can
allocate in proportion to past sales records. Customers then have no incentive to exaggerate their
orders. The sharing of capacity and inventory information helps to alleviate customers' anxiety and,
consequently, lessen their need to engage in gaming. But sharing capacity information is insufficient
when there is a genuine shortage. Some manufacturers work with customers to place orders well in
advance of the sales season. Thus they can adjust production capacity or scheduling with better
knowledge of product demand.
4.4. Issues Affecting Supply Chain Management
Supply chain management (SCM) is the integration of all activities associated with the flow and
transformation of goods from the raw materials stage through to the end-user, as well as the
associated information flows. Materials and information flow both up and down the supply chain. A
Web-based supply chain management system (WSCMS) is defined as an Internet-enabled SCM
system that integrates networks of suppliers, factories, warehouses, distribution centers and retailers,
through which the whole chain of logistic processes is managed so that faster and more flexible
coordination can be achieved between a company and its customers and suppliers along the supply
chain.
The role of information technology (IT) in SCM has changed dramatically in recent years;
transforming business operations from electronic data interchange (EDI) systems and enterprise
resource planning (ERP) systems to Internet/Intranet for supporting SCM. Due to the popularity and
functionality of the Internet/Intranet, many researchers have realized that benefits can be derived from
applying Internet technology to communications and systems management in supply chains.
Although the Internet/Intranet in SCM can add value in a number of ways such as saving costs,
improving quality, delivery and support, and offering greater competitive advantages, implementing a
WSCMS is much more complex than implementing an EDI or ERP system.
With the rapid growth of IT, many companies are taking advantage of Internet technology to better
manage their supply chains. The Web-based SCM system has provided an alternative means of
managing an ever-increasing number of suppliers and customers and creating the necessary links
among data, information and effective communication. White (1996) pointed out that the combined
use of the Internet with SCM allows customers and suppliers to share mission critical information on

a timely basis to enable effective, real-time decision-making. Web-based SCM applications as

mission-critical business applications that are used by companies to run their businesses, such as
taking customer orders and order management; planning the distribution of inventory and forecasting
demand; accounting; and managing the flow of materials.
E-commerce and e-business – uses internet and web to transact business.
Electronic commerce (e-commerce or EC) describes the buying, selling, and exchanging of
products, services, and information via computer networks, primarily the Internet.
Types of E-Commerce
1. B2C (Business to Consumer) –This is most common form of ecommerce. These systems
allow businesses to sell goods and services to consumers via the internet. Group of these
online shop-fronts are called e-malls and are essentially online shopping centers.
2. Consumer-to-consumer (C2C). In this case an individual sells products (or services) to other
individuals.
3. B2B (Business to Business) –
These systems are designed for businesses to collaborate or sell goods and services to each
other.
4. B2B2C (Business to Business to Consumer)
These systems are merely combinations of B2B and B2C systems designed to manage the
whole supply chain from the consumer through to raw material providers. They are design to
process orders from consumers and then use this information to place orders with wholesalers
and ultimately manufacturers.
5. G2B or G2C (Government to Business or Government to Consumer)
These systems involve the government providing services to business and consumers. These
services may range from the online provision of information.
6. Mobile commerce (m-commerce). When e-commerce is done in a wireless environment,
such as using cell phones to access the Internet
7. Intra-business (intra-organizational) commerce. In this case an organization uses EC
internally to improve its operations. A special case of this is known as B2E (business to its
employees) EC.

4.4.1. SCM Factors
Supply chain management integrates the management of supply and demand. According to the
Council of Supply Chain Management Professionals, it encompasses “the planning and management
of all activities involved in sourcing and procurement, conversion and logistics.” Supply chain
management also covers coordination and collaboration with channel partners, such as customers,
suppliers, distributors and service providers.
Demand Management
Demand management is an essential element in supply chain management, focusing companies and
their partners on meeting the needs of customers, rather than the production process. The lead
company in the supply chain makes partners aware of customers’ needs, encouraging them to
maximize component or supply quality and add value to the finished product. By raising awareness of
customers’ needs and increasing collaboration, companies can improve the competitiveness of the
whole supply chain and increase business opportunities for all members.
Communication
Effective communication helps the entire supply chain improve the efficiency and productivity of its
operations by enabling all members to share the same demand and operational information.
Communication keeps all members informed of developments that affect their contribution to the
supply chain, enabling them to quickly adjust their operations in line with changing demand
conditions. Effective communication also enables members to respond rapidly to new business
opportunities, helping to get new products to market quickly or increasing supply levels following a
successful marketing campaign.
Integration
Integrating supply chain processes helps each member reduce its inventory costs. Suppliers share up-
to-date information on demand to route their products to company’s warehouses for onward shipment
to stores with minimum time in inventory. This reduces company’s costs significantly, enabling them
to offer customers highly competitive pricing. To achieve this level of integration, companies develop
single information networks that enable all members to access and share supply and demand data
securely. The networks are based on open standards, such as Internet Protocol, so all members can
communicate, even if they have different internal networks.

Collaboration
Collaboration in the supply chain strengthens relationships between members, improving teamwork
and helping all members increase their business. Lead companies run business development and
training programs to improve supply chain partners’ market and product knowledge. They also
undertake joint new product development programs with partners contributing specialist knowledge
of components and materials.
Seven factors enable stronger capabilities in supply-chain management and risk management. These
are:
 Risk governance. Appropriate risk-management structures, processes and culture provide a

firm foundation.
 Flexibility and redundancy. Embedding these qualities in product, network and process
architectures can minimize the impact of disruptions while enabling adaptation to change.
 Alignment between partners in the supply chain. Partners can align strategically on key
value dimensions, identification of emerging patterns and advancement toward higher value
propositions.
 Upstream and downstream supply-chain integration. Information sharing, visibility and
collaboration with supply-chain partners is a key.
 Alignment between internal business functions. Companies can align and integrate their
value-chain functions on strategic, tactical and operational levels.
 Complexity management/rationalization. Companies can standardize and simplify
networks and processes, interfaces, product architectures, product portfolios and operating
models.
 Data, models and analytics. Intelligence and analytical capabilities can support supply-chain
and risk-management functions.
4.4.2 Global SCM Factors
With increased globalization and offshore sourcing, global supply chain management is becoming an
important issue for many businesses. Like traditional, supply chain management, the underlying
factors behind the trend are reducing the costs of procurement and decreasing the risks related to
purchasing activities. The big difference is that global supply chain management involves a
company's worldwide interests and suppliers rather than simply a local or national orientation.

Because global supply chain management usually involves a plethora of countries, it also usually
comes with a plethora of new difficulties that need to be dealt with appropriately. One that companies
need to consider is the overall costs. While local labor costs may be significantly lower, companies
must also focus on the costs of space, tariffs, and other expenses related to doing business overseas.
Additionally, companies need to factor in the exchange rate.
Time is another big issue that should be addressed when dealing with global supply chain
management. The productivity of the overseas employees and the extended shipping times can either
positively or negatively affect the company's lead time, but either way these times need to be figured
into the overall procurement plan. Other factors can also come into play here as well. For example,
the weather conditions on one side of the world often vary greatly from those on the other and can
impact production and shipping dramatically. Also, customs clearance time and other governmental
red tape can add further delays that need to be planned for and figured into the big picture.
Besides contemplating these issues, a business attempting to manage its global supply chain must also
ask itself a number of other serious questions. First, the company needs to make decisions about its
overall outsourcing plan. For whatever reason, businesses may desire to keep some aspects of supply
chain closer to home. However, these reasons are not quite as important as other countries advance
technologically.
Another issue that must be incorporated into a global supply chain management strategy is supplier
selection. Comparing vendor bids from within the company's parent-country can be difficult enough
but comparing bids from an array of global suppliers can be even more complex. How to make these
choices is one of the first decisions companies must make, and it should be a decision firmly based on
research. Too often companies jump on the lowest price instead of taking the time to factor in all of
the other elements, including those related to money and time which were discussed above.
Additionally, companies must make decisions about the number of suppliers to use. Fewer supplies
may be easier to manage but could also lead to potential problems if one vendor is unable to deliver
as expected or if one vendor tries to leverage its supply power to obtain price concessions.
Finally, companies who choose to ship their manufacturing overseas may have to face some
additional considerations as well. Questions regarding the number of plants that are needed, as well as
the locations for those plants can pose difficult logistical problems for companies. However, it often
helps to examine these issues in terms of the global supply chain.

Managing extensive global supply chains introduces many complications
 Geographically dispersed members - increase replenishment transit times and inventory

investment
 Forecasting accuracy complicated by longer lead times and different operating practices
 Exchange rates fluctuate, inflation can be high
 Infrastructure issues like transportation, communication, lack of skilled labor, & scarce local
material supplies
 Product proliferation created by the need to customize products for each market
4.5. Sourcing Issues

The internal supply chain of the focal manufacturing company includes sourcing, production, and
distribution. Sourcing or purchasing of the company is responsible for selecting suppliers,
negotiating contracts, formulating purchasing process, and processing order.
 Which products to produce in-house and which are provided by other supply chain members
 Vertical integration – a measure of how much of the supply chain is owned by the
manufacturer
 Backward integration – owning or controlling of sources of raw material and component parts
 Forward integration – owning or control the channels of distribution
 Vertical integration related to levels of insourcing or outsourcing products or services
4.5.1. Insourcing vs. Outsourcing
Outsourcing can be defined as the contracting-out of services that were previously performed in-
house. Outsourcing is a supply strategy often chosen as a means of increasing organizational
efficiency and effectiveness. Although some short-term benefits for organizations can be achieved
through outsourcing, there is a growing recognition that there may be longer-term costs not fully
assessed by them. Outsourcing can impact on the size, structure, and competitiveness of purchaser
and vendor sectors. Outsourcing also has an effect on employment levels, patterns, and conditions.
Social issues may be affected in respect of growth in earnings inequality because the contracts offered
little scope to compete other than by worsening employees’ terms and conditions of employment.
Risks of outsourcing include losing in-house expertise and knowledge, unintentional loss of control,
and reductions in quality.

What questions need to be asked before sourcing decisions are made?
 Is product/service technology critical to firm’s success?

 Is product/service a core competency?
 Is it something your company must do to survive?
4.5.2. Make or Buy Analysis
There are times when an organization must consider whether to make or buy a certain items. This
issue can arise in a number of ways, such as in response to unreliable suppliers, idle capacity of an
organization, the desire to achieve a greater control over the production process, and increasing costs.
Generally, the following factors are taken into account in deciding whether to make or buy:
1. Cost to make versus cost to buy, including start-up costs.
2. Stability of demand and possible seasonality
3. Quality available from suppliers compared with a firm’s own quality capabilities
4. The desire to maintain close control over operations
5. Idle capacity available within the organization
6. Lead-times for making versus buying
7. Who has parents, expertise, and so on if these are factors
8. Stability of technology; if a technology is changing, it may be better to use the suppliers
9. The degree to which the necessary operations are consistent with, or in conflict with, current
operations.
Evaluating source of supply /vendor analysis/
In many respects, choosing a vendor involves taking into account many of the same factors associated
with making a major purchase. A company considers price, quality, the suppliers reputation, past
experience with the supplier, service and after sale; this process is called vendor analysis. The main
difference is that a company, because of the quantities it orders and production requirements, often
provides suppliers with detailed specifications of the materials or parts it wants instead of buying
items off the shelf, although even large companies buy standard items that way.

The main factors to look at when a company selects a vendors are
1. Price. This is the most obvious factor, along with any discounts offered, although it may
not be the most important
2. Quality. A company may be willing to spend more money to obtain high quality.
3. Service. Special service can sometime is important in choosing suppliers. Replacement of

defective items, instruction in the use of equipment, repair of equipment, and similar
service can be a key in selecting one supplier over another.
4. Location. Location of a supplier can have impacts on shipping time, transportation costs,
and response time for a rush orders or emergency orders. Local buying can create goodwill
in the community by helping the local community.
5. Inventory policy of supplier. If a supplier maintains an inventory policy of keeping spare

parts on hand, this could be helpful in case of an emergency equipment breakdown.
Total Cost of Outsourcing :

TC Buy  FC Buy  VC Buy  Q 
Total Cost of Insourcing:
TC Make  FC Make  VC Make  Q 
Indifference Point :
FC Buy  VC Buy  Q   FC Make  VC Make  Q 
Example: Make-or-Buy analysis- Mary and Sue, have decided to open a bagel shop. Their first
decision is whether they should make the bagels on-site or by the bagels from a local bakery. If they
buy from the local bakery they will need airtight containers at a fixed cost of $1000 annually. They
can buy the bagels for $0.40 each. If they make the bagels in-house they will need a small kitchen at
a fixed cost of $15,000 annually. It will cost them $0.15 per bagel to make. They believe they will
sell 60,000 bagels.
Solution
Mary and Sue wants to know if they should make or buy the bagels.
FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)

$1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q)
Q = 56,000 bagels
Since the costs are equal at 56,000 bagels and Mary and Sue expect to use 60,000 bagels, they should
make the bagels in-house.
4.5.3. The Role of Purchasing
The purchasing function is responsible for obtaining material inputs for the operating system.
Purchasing is the connecting link between the organization and its suppliers. The basic objective of
purchasing are (1) to determine quality, quantity and when an item is needed (2) to obtain a
reasonable price (3) to maintain good relations with suppliers (4) to maintain sources of supply (5) to
be acknowledgeable about prices, new products, and new services that become available.
Purchasing role has attained increased importance since material costs represent 50-60% of cost of
goods sold
 Ethics considerations is a constant concern

 Developing supplier relationships is essential
 Determining how many suppliers to use
 Developing partnerships
Critical Factors in Successful Partnership Relations
Critical factors in successful partnering include;
 Impact – attaining levels of productivity  Have a long-term orientation

and competitiveness that are not possible  Share a common vision
through normal supplier relationships  Are strategic in nature
 Intimacy – working relationship between  Share short/long term plans
two partners  Share information
 Vision – the mission or objectives of the  Driven by end-customer needs
partnership  Share risks and opportunities
Benefits derived from good supplier relation include supplier flexibility in terms of accepting changes
in delivery schedules, quality, and quantities. Moreover, suppliers can often help identify problems

and offer suggestions for solving them. Thus, simply choosing and switching suppliers on the basis of
price is a very shortsighted approach to handling an ongoing need.
Keeping good relations with suppliers is increasingly recognized as an important factor in

maintaining a competitive edge. Many companies are adopting a view of suppliers as partners rather
than adversaries. This viewpoint stresses a stable relationship with relatively few reliable suppliers
who can provide high-quality supplies, maintain precise delivery schedules, and remain flexible
relative to changes in productive specifications and delivery schedules.
4.5.4 Supply Chain Distribution
Warehouses involved in supply chain distributions and include; Plant warehouses, Regional
warehouses, and Local warehouses. Warehouses can either be General – used for long-term storage or
Distribution – used for short-term storage, consolidation, and product mixing
 Transportation consolidation – warehouses consolidate less-than-truckload (LTL) quantities

into truckload (TL) quantities.
 Product mixing – warehouse value added customer service of grouping a variety of products
into a direct shipment to the customer.
 Services are offered can improve customer service by moving goods closer to the customer
and thus reducing replenishment time
 Cross docking or movement of material without storage and order-picking material while still
performing the receiving and shipping functions.
 Radio Frequency Identification Technology (RFID) – automated data collection technology
which relies on radio waves to transfer data between reader and RFID tag.
 Third-party Service Providers – ease of developing an electronic storefront has allowed the
discovery of suppliers from around the world.
4.6. Integrated SCM
Partnerships require sharing information, risks, technologies, and opportunities. Impact, intimacy,
and vision are critical to successful partnering. Supply chain distribution requires effective
warehousing operations. Implementing integrated SCM requires: Analyzing the whole supply chain,
Starting by integrating internal functions first, and integrating external suppliers through partnerships.
Manufacturer’s Goals:- Reduce costs, Reduce duplication of effort, Improve quality, Reduce lead
time, Implement cost reduction program, Involve suppliers early, Reduce time to market.
Supplier’s Goals:- Increase sales volume, Increase customer loyalty, Reduce cost, Improve demand
data, and Improve profitability.
4.7. Supply Chain Performance Measurement
In today’s world, supply chain management (SCM) is a key strategic factor for increasing
organizational effectiveness and for better realization of organizational goals such as enhanced
competitiveness, better customer care and increased profitability. The era of both globalization of
markets and outsourcing has begun, and many companies select supply chain and logistics to manage
their operations. Most of these companies realize that, in order to evolve an efficient and effective
supply chain, SCM needs to be assessed for its performance.
Measuring supply chain performance
Traditional measures include;-Return on investment, Profitability, Market share, and Revenue growth
 Additional measures such as Customer service levels (Warranty costs, Products return &
allowance, Cost reductions allowed because of product defects, Company response times, and
Transaction costs), Inventory turns, Weeks of supply, and Inventory obsolescence.
Customer demands for better-quality requires companies to develop ways to measure improvements
Current Trends in SCM
Increased use of electronic marketplace such as
 E-distributors – independently owned net marketplaces having catalogs representing

thousands of suppliers and designed for spot purchases
 E-purchasing – companies that connect on-line MRO suppliers to business who pay fees to
join the market, usually for long-term contractual purchasing
 Value chain management – automation of a firm’s purchasing or selling processes
 Exchanges – marketplace that focuses on spot requirements of large firms in a single industry
 Industry consortia – industry-owned markets that enable buyers to purchase direct inputs from
a limited set of invited suppliers
Decreased supply chain velocity due to greater distances with greater uncertainty and generally less
efficient.

Self-Check
1. Define the term Supply Chain Management

2. Briefly explain the components of SCM
3. Describe the major causes of bullwhip effect and possible mechanism to reduce it
4. Define at least four types of e-commerce
5. Describe the major differences between global SCM and traditional SCM
6. Describe the possible risks of outsourcing
7. Explain some of the factors that should take into account in deciding whether to make or buy.
8. What are manufacturer’s goals in integrated SCM
9. What are traditional measures of SCM performance

Chapter 5
Total Quality Management

5 Aims and Objectives
5.5 Introduction
5.6 Evolution of TQM
5.7 Defining Quality
5.8 PDCA cycle
5.9 Features of TQM
5.10 Success and Failure factors of TQM
5.10.4 Success factors of TQM
5.10.5 Failure factors of TQM
5.11 Quality tools
5.12 Difference between manufacturing quality Vs Service quality
5.13 Cost of quality
5.13.4 Quality control costs
5.13.5 Quality failure costs
5.14 The Malcolm Baldrige National Quality Award (MBNQA)
 Identify key features of the TQM philosophy

 Describe tools identifying and solving quality problems
 Describe quality awards and quality certifications
5.1 Introduction
TQM is different from the old concept of quality as it focus is on serving customers, identifying the
causes of quality problems, and building quality into the production process. Four categories of
quality cost of prevention, appraisal, internal and external costs. Seven TQM notable individuals
include Walter A. Shewhart, W. Edwards Demings, Joseph M. Juran, Armand V. Feigenbaum, Philip
B. Crosby, Kaoru Ishikawa, and Genichi Taguchi
Seven features of TQM combine to create TQM philosophy; customer focus, continuous
improvement, employee empowerment, use of quality tools, product design, process management,

and managing supplier quality. QFD is a tool used to translate customer needs into specific
engineering requirements. Reliability is the probability that the product will functions as expected.
The Malcom Baldridge Award is given to companies to recognize excellence in quality management.
5.2 Evolution of TQM
Back to after World War II when the United States was the only intact plant of industrialized nations.
The United States set the quality standard for the world; with the assumption that whatever we
created, we sold; we were selling everything we made. There really was no pressure to do anything
different.
In the early twentieth century, quality management meant inspecting products to ensure that they met
specifications. In the 1940s, during World War II, quality became more statistical in nature.
Statistical sampling techniques were used to evaluate quality, and quality control charts were used to
monitor the production process. Later on, in a global marketplace it no longer mattered where a
product came from. People want quality and want more quality at less cost.
Edward Deming with the help of so-called “quality gurus,” the concept took on a broader meaning.
Quality began to be viewed as something that encompassed the entire organization, not only the
production process. Since all functions were responsible for product quality and all shared the costs
of poor quality, quality was seen as a concept that affected the entire organization. At that time since
American’s products are have no market problems, they were refused to accept this concept, then this
people said No man is a prophet in his own land, Deming’s work and his original recommendations
on quality were ignored in his homeland before Japanese business imported his ideas and made them
work in Japan.
In1950, Edward Demining invited by Ichiro Ishikawa, to lecture Japanese senior officers who are a
union of Japanese Scientists, Engineers , and government officials devoted to improve Japanese
productivity and enhance their post-war quality of life” about the concept of quality.
Deming encouraged the Japanese to adopt a systematic approach to problem solving. He also
encouraged senior managers to become actively involved in their company's quality improvement
programs. His greatest contribution was the concept that the consumers are the most important part of
a production line. Meeting and exceeding the customers' needs and requirements is the task that
everyone within an organization has to accomplish.
During the period 1955—60, following the visits of Deming and Joseph M. Juran to Japan, the
Company-wide Quality Control (CWQC) movement started to develop.

Kaoru Ishikawa was its leader, and this movement asserts that quality refers to more than product
quality alone. It also takes in after-sales service, quality of management, the company itself, and
human life. Ishikawa also made a significant contribution to the development of Total Quality
Management (TQM).
Until around 1950, Japanese products were perceived worldwide as being very inexpensive, but with
poor quality. By the 1980s, products made in Japan were known all over the world for their high
quality and reliability. In contrast to the specialized approach traditionally used in the United States, a
number of Japanese companies, rebuilding from post-war devastation, adopted an innovative,
integrated approach to achieving quality.
Perhaps, the main reason for the origin of the term TQM could be a substitution in the previously
used term of Total Quality Control (TQC), the word “control” by “management” with the reasoning
that quality is not just a matter of control, it has to be managed. This is reinforced by Deming’s
(1982) view that sampling inspection should be suppressed and also by Crosby (1979) who makes the
point that control is not necessary when a zero defects level is achieved. The term “control” is
sometimes understood as meaning control over the workforces’ activities, and this is clearly not the
aim of TQM.
Quality Gurus
To fully understand the TQM movement, we need to look at the philosophies of notable individuals
who have shaped the evolution of TQM. Their philosophies and teachings have contributed to our
knowledge and understanding of quality today. Their individual contributions are summarized in
Table 5.2.1 below.
Table 5.2.1 Quality Guru’s and their contribution

5.3 Defining of Quality
The definition of quality depends on the role of the people defining it. Today, there is no single
universal definition of quality. Some people view quality as “performance to standards.” Others view
it as “meeting the customer’s needs” or “satisfying the customer.” Let’s look at some of the more
common definitions of quality.
 Conformance to specifications measures how well the product or service meets the targets
and tolerances determined by its designers.
 Fitness for use focuses on how well the product performs its intended function or use.
 Value for price paid is a definition of quality that consumers often use for product or service
usefulness. This is the only definition that combines economics with consumer criteria; it
assumes that the definition of quality is price sensitive.
 Support services provided are often how the quality of a product or service is judged. Quality
does not apply only to the product or service itself; it also applies to the people, processes, and
organizational environment associated with it.
 Psychological criteria: - A way of defining quality that focuses on judgmental evaluations of
what constitutes product or service excellence. Similarly, we commonly associate certain
products with excellence because of their reputation
What is total quality?

Total quality is called total because it consists of 3 qualities:
 Quality of return to satisfy the needs of the shareholders,
 Quality of products and services to satisfy some specific needs of the consumer (end user) and
 Quality of life to satisfy the needs of the people in the organization.
Management
 Management is concerned with five basic activities, namely planning, organizing, directing,
controlling, and improvement
There is no universally accepted unique definition of TQM. Some of the definitions are
 An approach to improving the effectiveness and flexibility of business as a whole. It is
essentially a way of organizing and involving the whole organization, every department, every
activity, every single person at every level.

 An approach for continuously improving the quality of goods and services delivered through
the participation of all levels and function of the organization
 Totally integrated approach to produce the best product and service possible through constant
innovation.
 A system that puts customer satisfaction before profit. It is a system that comprises a set of
integrated philosophies, tools and processes used to accomplish business objectives by
creating delighted customers and happy employees.
 A management philosophy that builds a customer-driven, learning organization dedicated to
total customer satisfaction through continuous improvement in the effectiveness and
efficiency of the organization and its processes.
 Total Quality Management (TQM) is a structured system for meeting and exceeding customer
needs and expectations by creating organization-wide participation in the planning and
implementation of breakthrough and continuous improvement processes. It integrates with the
business plan of the organization and can positively influence customer satisfaction and
market share growth. It is also a system of management and a way of working, not a program
that an organization simply sets in motion and then walks away from.
Concepts of the TQM Philosophy

Customer focus…………………… Goal is to identify and meet customer needs.
Continuous improvement……….... A philosophy of never-ending improvement.
Employee empowerment……….... Employees are expected to seek out, identify, and correct quality
problems.
Use of quality tools………………. Ongoing employee training in the use of quality tools.
Product design…………………… Products need to be designed to meet customer expectations.
Process management………………Quality should be built into the process; sources of quality
problems should be identified and corrected.
Managing supplier quality………. Quality concepts must extend to a company’s suppliers.
5.4 PDCA Cycle
The Plan–Do–Check–Act (PDCA) cycle

Describes the activities a company needs to perform in order to incorporate continuous improvement
in its operation. The circular nature of this cycle shows that continuous improvement is a never-
ending process.

Let’s look at the specific steps in the cycle.
• Plan The first step in the PDCA 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.
THE SEVEN-STEP QUALITY PROCESS
Identification of Theme What

Data Collection and Analysis PLAN
Causal Analysis Why
Who
Solution Planning and Implementation Where
When DO
How
Evaluation of Results CHECK
Standardization ACT
Reflection and Next Problem
5.5 Features of TQM

1. Customer Focus
The first, and overriding, feature of TQM is the company’s focus on its customers. Quality is defined
as meeting or exceeding customer expectations. The goal is to first identify and then meet customer

needs. TQM recognizes that a perfectly produced product has little value if it is not what the customer
wants. Therefore, we can say that quality is customer driven. However, it is not always easy to
determine what the customer wants, because tastes and preferences change. Also, customer
expectations often vary from one customer to the next. Companies need to continually gather
information by means of focus groups, market surveys, and customer interviews in order to stay in
tune with what customers want.
2. Continuous Improvement
Another concept of the TQM philosophy is the focus on continuous improvement. Traditional
systems operated on the assumption that once a company achieved a certain level of quality, it was
successful and needed no further improvements. We tend to think of improvement in terms of
plateaus that are to be achieved, such as passing a certification test or reducing the number of defects
to a certain level.
Traditionally, change for American managers involves large magnitudes, such as major
organizational restructuring. The Japanese, on the other hand, 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.
Continuous improvement, called kaizen by the Japanese, requires that the company continually strive
to be better through learning and problem solving. Because we can never achieve perfection, we must
always evaluate our performance and take measures to improve it.
3. Employee Empowerment
Part of the TQM philosophy is to empower all employees to seek out quality problems and correct
them. With the old concept of quality, employees were afraid to identify problems for fear that they
would be reprimanded. Often poor quality was passed on to someone else, in order to make it
“someone else’s problem.” The new concept of quality, TQM, provides incentives for employees to
identify quality problems. Employees are rewarded for uncovering quality problems, not punished.
In TQM, the role of employees is very different from what it was in traditional systems. Workers are
empowered to make decisions relative to quality in the production process. They are considered a
vital element of the effort to achieve high quality. Their contributions are highly valued, and their
suggestions are implemented. In order to perform this function, employees are given continual and
extensive training in quality measurement tools.
4.Team Approach
TQM stresses that quality is an organizational effort. To facilitate the solving of quality problems, it
places great emphasis on teamwork. The use of teams is based on the old adage that “two heads are
better than one.” Using techniques such as brainstorming, discussion, and quality control tools, teams
work regularly to correct problems. The contributions of teams are considered vital to the success of
the company. For this reason, companies set aside time in the workday for team meetings. Teams
vary in their degree of structure and formality, and different types of teams solve different types of
problems. One of the most common types of teams is the quality circle, a team of volunteer
production employees and their supervisors whose purpose is to solve quality problems. The circle is
usually composed of eight to ten members, and decisions are made through group consensus. The
teams usually meet weekly during work hours in a place designated for this purpose. They follow a
preset process for analyzing and solving quality problems. Open discussion is promoted, and criticism
is not allowed.
5.6 Success and failure factors of TQM
5.6.1 TQM success factors
 Creating a clear vision

 Customer Driven Quality
The quality of products and services is defined as satisfying and delighting the customer. As
the TQM process matures, customer driven quality becomes a strategic concept for the
company.
 Leadership
Senior executives must create clear, visible values and expectations. They “walk the talk” by
demonstrating personal involvement in quality improvement activities.
 Continuous Improvement
Since the highest quality companies apply the principles of continuous improvement, the
world class quality standard is not a static standard but a moving target. Continuous
improvement must be applied to all operations and processes including the TQM process
itself.
 Full Participation
Meeting world class quality standards requires a fully committed, well-trained, empowered
and involved work force. Human resources are the only resources that can increase in value
over time. This is achieved by executing a well-defined plan for human resource development
and management.
 Fast Response
 Design Quality and Prevention.
The quality improvement process emphasizes preventing problems by building quality into
the products and services during the design process, This must be done if cycle times are to be
reduced.
 Long Range Outlook.
Achieving quality and market leadership requires a long term outlook. The goals, long-term
plans, short-term plans, and measures must be effectively linked together to align the
employees with the corporate resources to meet the goals.
 Management by Fact.
Corporations must be managed “by facts not gut feelings. ” The information used for
decisions must be based on reliable data and analysis, and must be linked to customer
satisfaction.
 Partnership Development.
Companies should seek to build partnerships with all stakeholders of the company. The
stakeholders include customers, suppliers, employees, stockholders, the community,
universities, and others.
 Public Responsibility
The company needs to address areas of corporate citizenship and responsibility. Included in
this value is the sharing of nonproprietary quality related information.
 Rewards and recognition
People should be rewarded based on their performance and be motivated to enhance the
performances. This supports the paradigm shift.
5.6.2 Fail factors of TQM
 Inadequate human resources development and management

 Employees are not trained in quality improvement skills.
 Employees and/or teams are not recognized for achievements in quality improvement.
 Employees are not trained in problem identification techniques.
 Employees are not trained in group discussion and communication techniques.
 Employees are not empowered to implement quality improvement efforts.

 Cross-functional teams are not employed.

 Lack of planning for quality
 Strategic plans do not include quality goals.
 Management’s compensation is not linked to achieving quality goals.
 Quality is not effectively measured.
 Quality action plans are often vague.
 There is no joint planning with suppliers.
 The best practices and/or products of other companies are not benchmarked.
 Lack of leadership for quality
 There are excess layers of management.
 Quality is not everyone’s responsibility.
 Quality is treated as a separate initiative.
 Top management is not visibly and explicitly committed to quality.
 Inadequate resources for TQM
 Time constraints prohibit effective TQM implementation.
 Employees are resistant to change.
 There are inadequate resources to effectively employ TQM.
 Lack of customer focus
 The strategic plan is not customer driven.
 Quality is not defined by the customer.
 Lack of vision
It was realized that visioning is looking ahead time. It helps one to establish a goal and
environment for change. However, to have a clear vision, peoples’ “ability to learn” should be
accelerated. Learning does not only enhance knowledge, but when blended with experience it
develops a completive vision.
 Lack of management commitment
It was emphasized that senior management should be involved in every aspect of the activities
and not try to flee away from responsibilities. There should be teamwork.
 Lack of cost and benefit analysis
Organizations tend to measure visible costs such as quality, warranty, and other easy to count
costs, rather than critical cost parameters. It was highlighted that lost revenue (profit) helps to
escalate the cost.
 Organization structure

“Boundarylessness” organization is created. This promotes information flow and

communication. The objective is to eliminate unnecessary barriers among different entities
and try to collaborate efficiently.
 TQM creating its own bureaucracy
The process improvements “czar” isolates themselves from the real world or actual people
that can also be an enabler for process improvement. They focus on generic procedures on
how to improve and meet standards.
 Lack of Rewards and recognition
People should be rewarded based on their performance and be motivated to enhance the
performances. This supports the paradigm shift.
5.7 Quality Tools
You can see that TQM places a great deal of responsibility on all workers. If employees are to
identify and correct quality problems, they need proper training. They need to understand how to
assess quality by using a variety of quality control tools, how to interpret findings, and how to correct
problems. In this section we look at seven different quality tools.
 Cause-and-effect diagram
A chart that identifies potential causes of particular quality problems. It is also called Ishikawa or
fishbone chart and Identifies many possible causes for an effect or problem and sorts ideas into useful
categories. The “head” of the fish is the quality problem. The diagram is drawn so that the “spine” of
the fish connects the “head” to the possible cause of the problem. These causes could be related to the
machines, workers, measurement, suppliers, materials, and many other aspects of the production
process. Each of these possible causes can then have smaller “bones” that address specific issues that
relate to each cause. For example, a problem with machines could be due to a need for adjustment,
old equipment, or tooling problems. Similarly, a problem with workers could be related to lack of
training, poor supervision, or fatigue.

 Flowchart
A flowchart is a schematic diagram of the sequence of steps involved in an operation or process. It
provides a visual tool that is easy to use and understand. By seeing the steps involved in an operation
or process, everyone develops a clear picture of how the operation works and where problems could
arise.
 Checklists
A checklist is a list of common defects and the number of observed occurrences of these defects. It is
a simple yet effective fact-finding tool that allows the worker to collect specific information regarding
the defects observed. Check sheets: - a structured prepared form for collecting and analyzing data.
 Control charts
Charts used to evaluate whether a process is operating within set expectations. Graphs used to study
how a process changes over time. These charts are used to evaluate whether a process is operating
within expectations relative to some measured value.
The chart has a line down the center representing the average value of the variable we are measuring.
Above and below the center line are two lines, called the upper control limit (UCL) and the lower
control limit (LCL). As long as the observed values fall within the upper and lower control limits, the
process is in control and there is no problem with quality. When a measured observation falls outside
of these limits, there is a problem.

 Scatter diagrams
Graphs that show how two variables are related to each other. They are particularly useful in
detecting the amount of correlation, or the degree of linear relationship, between two variables For
example, increased production speed and number of defects could be correlated positively; as
production speed increases, so does the number of defects. Two variables could also be correlated
negatively, so that an increase in one of the variables is associated with a decrease in the other. For
example, increased worker training might be associated with a decrease in the number of defects
observed.
The greater the degree of correlation, the more linear is the observations in the scatter diagram. On
the other hand, the more scattered the observations in the diagram, the less correlation exists between
the variables.
 Pareto Analysis
Pareto analysis is a technique used to identify quality problems based on their degree of importance.
The logic behind Pareto analysis is that only a few quality problems are important, whereas many
others are not critical. The technique was named after Vilfredo Pareto, a nineteenth-century Italian
economist who determined that only a small percentage of people controlled most of the wealth.
This concept has often been called the 80–20 rule and has been extended to many areas. In quality
management the logic behind Pareto’s principle is that most quality problems are a result of only a
few causes. The trick is to identify these causes.
One way to use Pareto analysis is to develop a chart that ranks the causes of poor quality in
decreasing order based on the percentage of defects each has caused. For example, a tally can be
made of the number of defects that result from different causes, such as operator error, defective
parts, or inaccurate machine calibrations.

 Histograms
A histogram is a chart that shows the frequency distribution of observed values of a variable or how
often each different value in a set of data occurs.
5.8 Differences between Manufacturing Quality and Service Quality Organizations
Defining quality in manufacturing organizations is often different from that of services.
Manufacturing organizations produce a tangible product that can be seen, touched, and directly
measured. Examples include cars, CD players, clothes, computers, and food items. Therefore, quality
definitions in manufacturing usually focus on tangible product features.
The most common quality definition in manufacturing is conformance, which is the degree to which a
product characteristic meets preset standards. Other common definitions of quality in manufacturing
include performance—such as acceleration of a vehicle; reliability—that the product will function as
expected without failure; features—the extras that are included beyond the basic characteristics;
durability— expected operational life of the product; and serviceability—how readily a product can
be repaired. It is easy to see how different customers can have different definitions in mind when they
speak of high product quality.
In contrast to manufacturing, service organizations produce a product that is intangible. Usually, the
complete product cannot be seen or touched. Rather, it is experienced.
The intangible nature of the product makes defining quality difficult. Also, since a service is
experienced, perceptions can be highly subjective. In addition to tangible factors, quality of services
is often defined by perceptual factors. These include responsiveness to customer needs, courtesy and
friendliness of staff, promptness in resolving complaints, and atmosphere. Other definitions of quality
in services include time—the amount of time a customer has to wait for the service; and
consistency—the degree to which the service is the same each time. For these reasons, defining
quality in services can be especially challenging. Dimensions of quality for manufacturing versus
service organizations are shown in Table 5.8.1 below.
Table 5.8.1 Manufacturing Vs Service organization quality
5.9 Cost of Quality
The reason quality has gained such prominence is that organizations have gained an understanding of
the high cost of poor quality. Quality affects all aspects of the organization and has dramatic cost
implications. The most obvious consequence occurs when poor quality creates dissatisfied customers
and eventually leads to loss of business.
However, quality has many other costs, which can be divided into two categories. The first category
consists of costs necessary for achieving high quality, which are called quality control costs. These
are of two types: prevention costs and appraisal costs. The second category consists of the cost
consequences of poor quality, which are called quality failure costs. These include external failure
costs and internal failure costs. The first two costs are incurred in the hope of preventing the second
two.
5.9.1 Quality Control Costs
Prevention costs are all costs incurred in the process of preventing poor quality from occurring. They
include quality planning costs, such as the costs of developing and implementing a quality plan. Also
included are the costs of product and process design, from collecting customer information to
designing processes that achieve conformance to specifications. Employee training in quality
measurement is included as part of this cost, as well as the costs of maintaining records of
information and data related to quality.

Appraisal costs are incurred in the process of uncovering defects. They include the cost of quality
inspections, product testing, and performing audits to make sure that quality standards are being met.
Also included in this category are the costs of worker time spent measuring quality and the cost of
equipment used for quality appraisal.
5.9.2 Quality Failure Costs
Internal failure costs are associated with discovering poor product quality before the product
reaches the customer site. One type of internal failure cost is rework, which is the cost of correcting
the defective item. Sometimes the item is so defective that it cannot be corrected and must be thrown
away. This is called scrap, and its costs include all the material, labor, and machine cost spent in
producing the defective product. Other types of internal failure costs include the cost of machine
downtime due to failures in the process and the costs of discounting defective items for salvage value.
External failure costs are associated with quality problems that occur at the customer site. These
costs can be particularly damaging because customer faith and loyalty can be difficult to regain. They
include everything from customer complaints, product returns, and repairs, to warranty claims,
recalls, and even litigation costs resulting from product liability issues. A final component of this cost
is lost sales and lost customers. External failure can sometimes put a company out of business almost
overnight.
5.10 The Malcolm Baldrige National Quality Award (MBNQA)
The Malcolm Baldrige National Quality Award was established in 1987, when Congress passed the
Malcolm Baldrige National Quality Improvement Act. The award is named after the former Secretary
of Commerce, Malcolm Baldrige, and is intended to reward and stimulate quality initiatives. It is
designed to recognize companies that establish and demonstrate high quality standards. The award is
given to no more than two companies in each of three categories: manufacturing, service, and small
business. Past winners include Motorola Corporation, Xerox, FedEx, 3M, IBM, and the Ritz-Carlton.
To compete for the Baldrige Award, companies must submit a lengthy application, which is followed
by an initial screening. Companies that pass this screening move to the next step, in which they
undergo a rigorous evaluation process conducted by certified Baldrige examiners.
The examiners conduct site visits and examine numerous company documents. They base their
evaluation on seven categories.

The Baldrige criteria have evolved from simple award criteria to a general framework for quality
evaluation. Many companies use these criteria to evaluate their own performance and set quality
targets even if they are not planning to formally compete for the award
Benefits obtained by implementing TQM

 Quality excellence
 Customer satisfaction
 Employee satisfaction
 Business sustainability
 Increasing market share
 Profitability and good reputation of the company
Self-Check
1. Identify some of the quality guru’s and describe their contribution to TQM in short.
2. Explain some of the definition of TQM
3. Explain the PDCA cycle and the 7 steps of quality process in combination
4. Describe some of TQM success and failure factors
5. Identify some of the quality tools and briefly explain about them
6. Describe the difference between manufacturing quality and service quality in an organizations
7. What is/are the major differences between internal failure cost and external failure costs
8. What are the Malcolm Baldrige National Quality Award seven quality categories on which
evaluation basis?
9. What are some of the benefits obtained by implementing TQM?

Chapter 6
Statistical Quality Control

6.5 Introduction
6.6 Statistical process control
6.6.4 Control charts
6.6.5 Acceptance sampling
6.7 Sampling plan
6.8 Process variability and control
6.9 Statistical quality control (SQC) in service
 Describe Categories of SQC

 Explain the use of descriptive statistics in measuring quality characteristics
 Identify and describe causes of variation
 Describe the use of control charts
 Identify the differences between x-bar, R-, p-, and c-charts
 Explain process capability and process capability index
 Explain the process of acceptance sampling and describe the use of OC curves
 Describe the challenges inherent in measuring quality in service organizations
6.1 Introduction
Inspecting all the items is very time consuming and costly affair. An alternative to this is
statistical control which is a type of inspection based on probability and mathematical
techniques. In many instances it may be used in place of ordinary inspection procedures. Its
objective, like that of inspection, is to control quality level of product without doing 100 percent
inspection.
SQC uses statistical methods to gather and analyze data in the determination and control of
quality. It is based on sampling, probability, and statistical inference, i.e., judging an entire lot by
the characteristics of a sample.

The question often raised is ‘whether a sample always reflects the true characteristics of the
production lot’. The answer is no. However, the sampling may be the only way to estimate the
quality of a lot.
6.2 Statistical Process Control
Statistical process control (SPC) is the application of statistical techniques to determine whether
the output of a process conforms to the product or service design. It aims at achieving good
quality during manufacture or service through prevention rather than detection. It is concerned
with controlling the process that makes the product because if the process is good then the
product will automatically be good.
6.2.1 Control Charts
SPC is implemented through control charts that are used to monitor the output of the process and
indicate the presence of problems requiring further action. Control charts can be used to monitor
processes where output is measured as either variables or attributes. There are two types of
control charts: Variable control chart and attribute control chart.
1. Variable control charts: It is one by which it is possible to measures the quality

characteristics of a product. The variable control charts are X-BAR chart, R-BAR chart,
SIGMA chart.
2. Attribute control chart: It is one in which it is not possible to measures the quality
characteristics of a product, i.e., it is based on visual inspection only like good or bad, success
or failure, accepted or rejected. The attribute control charts are p-charts, np-charts, c-charts,
u-charts. It requires only a count of observations on characteristics e.g., the number of
nonconforming items in a sample.

Characteristics of control charts
A control chart is a time-ordered diagram to monitor a quality characteristic, consisting of:
1. A nominal value, or center line, the average of several past samples.
2. Two control limits used to judge whether action is required, an upper control limit (UCL)
and a lower control limit (LCL).
3. Data points, each consisting of the average measurement calculated from a sample taken
from the process, ordered overtime.
By the Central Limit Theorem, regardless of the distribution of the underlying individual
measurements, the distribution of the sample means will follow a normal distribution. The
control limits are set based on the sampling distribution of the quality measurement.
Benefits of using control charts
1. A control chart indicates when something may be wrong, so that corrective action can be
taken.
2. The patterns of the plot on a control chart diagnosis possible cause and hence indicate
possible remedial actions.
3. It can estimate the process capability of process.
4. It provides useful information regarding actions to take for quality improvement.
Objectives of control charts
Following are the objectives of control charts:
1. To secure information to be used in establishing or changing specifications or in

determining whether the process can meet specifications or not.
2. To secure information to be used on establishing or changing production procedures.
3. To secure information to be used on establishing or changing inspection procedures or

acceptance procedures or both.

4. To provide a basis for current decision during production.
5. To provide a basis for current decisions on acceptance for rejection of manufacturing or

purchased product.
6. To familiarize personnel with the use of control chart.
CONTROL CHARTS FOR VARIABLES
As the name indicates, these charts will use variable data of a process. X chart given an idea
of the central tendency of the observations. These charts will reveal the variations between
sample observations. R chart gives an idea about the spread (dispersion) of the observations.
This chart shows the variations within the samples.
X-Chart and R-Chart: The formulas used to establish various control limits are as follows:
(a) Standard Deviation of the Process, σ, Unknown
R-Chart: To calculate the range of the data, subtract the smallest from the largest
measurement in the sample.
The control limits are: UCLR = D4R- and LCLR =D3R- where R- = average of several past R
values and is the central line of the control chart, and
D3, D4 = constants that provide three standard deviation (three-sigma) limits for a given
sample size
X -Chart: The control limits are:
UCL ̅ = ̿ + A2 ̅ and LCL ̅ = ̿ + A2 ̅
Where ̿ = central line of the chart and the average of past sample mean’s, and
A2 = constant to provide three-sigma limits for the process mean.
(b) Standard Deviation of the Process, σ, Known
Control charts for variables (with the standard deviation of the process, σ, known) monitor the
mean, ̅ , of the process distribution.

The control limits are:
UCL = ̿ + 2σ ̅ and LCL = ̿ - 2σ ̅
Where ̿ = center line of the chart and the average of several past sample means, Z is the
standard normal deviate (number of standard deviations from the average),
σ ̅ = σ / √ and is the standard deviation of the distribution of sample means, and n is the
sample size
Procedures to construct X-chart and R-chart
1. Identify the process to be controlled.
2. Select the variable of interest.
3. Decide a suitable sample size (n) and number of samples to be collected (k).
4. Collect the specified number of samples over a given time interval.
5. Find the measurement of interest for each piece within the sample.
6. Obtain mean (X) of each sample.
7. Establish control limits for X and R-charts.
Control charts for attributes
P-charts and C-charts are charts will used for attributes. This chart shows the quality
characteristics rather than measurements.
P-CHART
A p-chart is a commonly used control chart for attributes, whereby the quality characteristic is
counted, rather than measured, and the entire item or service can be declared good or
defective.
The standard deviation of the proportion defective, p, is:
σp = √ ̅ ̅ , where n = sample size, and ̅ = average of several past p values and

central line on the chart.

Using the normal approximation to the binomial distribution, which is the actual distribution
of p,
UCLp = ̅ + Zσp and LCLp = ̅ - Zσp
Where: z is the normal deviate (number of standard deviations from the average).
ILLUSTRATIONS ON X BAR CHART AND R BAR CHART
(i) Standard Deviation of the Process, Σ, Unknown
ILLUSTRATION 1: Several samples of size n = 8 have been taken from today’s production
of fence posts. The average post was 3 yards in length and the average sample range was
0.015 yard. Find the 99.73% upper and lower control limits.
SOLUTION: ̿ = 3 yds
̅ = 0.015 yds
A2 = 0.37 from Statistical Table
UCL = ̿ + A2 ̅ =3+0.37(0.015) = 3.006 yds
LCL = ̿ −A2 ̅ =3−0.37 (0.015) =2.996 yds
ILLUSTRATION 2 (Problem on X and R Chart): The results of inspection of 10 samples

with its average and range are tabulated in the following table. Compute the control limit for
the X and R-chart and draw the control chart for the data.

Solution: ̿ = Σ ̅ /No. of samples
̅ = ΣR/No. of samples
Therefore, ̿ = 76 = 7.6
10
R = 26 = 2.6
10
For X chart
Upper Control Limit (UCL) = ̿ + A2 ̅
Lower Control Limit (LCL) = ̿ - A2 ̅
For R chart
Upper Control Limit (UCL) = D4 ̅
Lower Control Limit (LCL) = D3 ̅
The values of various factors (like A2, D4 and D3) based on normal distribution can be found
from the following table:
A2 = 0.58, D3 = 0 and D4 = 2.11
Thus, for X chart
UCL = 7.6 + (0.58 × 2.6)
= 7.6 + 1.51 = 9.11
LCL = 7.6 – (0.58 × 2.6) = 6.09
For R chart UCL = 2.11 × 2.6 = 5.48
LCL = D3 × R = 0 × R = 0
These control limits are marked on the graph paper on either side of the mean value (line).
X and R values are plotted on the graph and jointed, thus resulting the control chart.
From the X chart, it appears that the process became completely out of control for 4th sample
over labels.

(ii) Standard Deviation of the Process, σ, known
ILLUSTRATION 3: Twenty-five engine mounts are sampled each day and found to have an
average width of 2 inches, with a standard deviation of 0.1 inches. What are the control limits
that include 99.73% of the sample means (z = 3)?
Solution: UCL ̅ = ̅ +zσ ̅ =2+3 (0.1/√ =2+0.06=2.06 inches
LCL ̅ = ̅ -zσ ̅ =2−3 (0.1/ √ =2−0.06=1.94 inches
ILLUSTRATION 4 (Problem on p-Chart): The following are the inspection results of 10 lots,
each lot being 300 items. Number defective in each lot is 25, 30, 35, 40, 45, 35, 40, 30, 20 and
50. Calculate the average fraction defective and three sigma limit for P-chart and state whether
the process is in control.

̅ ̅
Upper Control Limit, UCL = √
̅ ̅
Lower Control Limit, LCL = ̅ -3√
where p =Total number of defective pieces found
Total number of pieces inspected
p = 350 = 0.1167
3000
and n = number of pieces inspected every day
= 300
̅ ̅
Therefore, √ = √ =√ = 0.01852
̅ ̅
and 3√ = 3*0.01852 = 0.05556
Thus, UCL = 0.1167 + 0.05556 = 0.17226 = 0.1723 (Approx.)
LCL = 0.1167 – 0.05566 = 0.06114 = 0.0611 (Approx.)
Conclusion: All the samples are within the control limit and we can say process is under control.

TYPES OF SAMPLING ERRORS
There are two types of errors. They are type-I and type-II that can occur when making inferences
from control chart.
Type-I: Error or α-error or Level of Significance
Reject the hypothesis when it is true.
This results from inferring that a process is out of control when it is actually in control. The
probability of type-I error is denoted by α, suppose a process is in control. If a point on the
control chart falls outside the control limits, we assume that, the process is out of control.
However, since the control limits are a finite distance (3σ) from the mean. There is a small
chance about 0.0026 of a sample falling outside the control limits. In such instances, inferring the
process is out of control is wrong conclusion.
The control limits could be placed sufficiently far apart say 4 or 5σ stand deviations on each side
of the central lines to reduce the probability of type-I error.
Type-II: Error or β-error
Accept the hypothesis when it is false.
This results from inferring that a process is in control when it is really out of control. If no
observations for outside the control limits, we conclude that the process is in control while in
reality it is out control. For example, the process mean has changed.
6.2.2 Acceptance sampling
The objective of acceptance sampling is to take decision whether to accept or reject a lot based
on sample’s characteristics. The lot may be incoming raw materials or finished parts.
An accurate method to check the quality of lots is to do 100% inspection. But, 100% inspection
will have the following limitations:
 The cost of inspection is high.

 Destructive methods of testing will result in 100% spoilage of the parts.

 Time taken for inspection will be too long.

 When the population is large or infinite, it would be impossible or impracticable to inspect
each unit.
Hence, acceptance-sampling procedure has lot of scope in practical application. Acceptance

sampling can be used for attributes as well as variables.
Acceptance sampling deals with accept or reject situation of the incoming raw materials and
finished goods. Let the size of the incoming lot be N and the size of the sample drawn be n.
The probability of getting a given number of defective goods parts out a sample consisting of n
pieces will follow binomial distribution. If the lot size is infinite or very large, such that when a
sample is drawn from it and not replaced, then the usage of binomial distribution is justified.
Otherwise, we will have to use hyper-geometric distribution.
Specifications of a single sampling plan will contain a sample size (n) and an acceptance number
C. As an example, if we assume the sample size as 50 and the acceptance number as 3, the
interpretation of the plan is explained as follows: Select a sample of size 50 from a lot and obtain
the number of defective pieces in the sample. If the number of defective pieces is less than or
equal to 3, then accept the whole lot from which the sample is drawn. Otherwise, reject the
whole lot. This is called single sampling plan. There are several variations of this plan.
In this process, one will commit two types of errors, viz., type-I error and type-II error. If the lot
is really good, but based on the sample information, it is rejected, then the supplier/ producer will
be penalized. This is called producer’s risk or type-I error. The notation for this error is α. On the
other hand, if the lot is really bad, but it is accepted based on the sample information, then the
customer will be at loss. This is called consumer’s risk or type-II error. The notation for this
error is β. So, both parties should jointly decide about the levels of producer’s risk (α) and
consumer’s risk (β) based on mutual agreement.
Operating characteristic curve (o.c. curve)
The concepts of the two types of risk are well explained using an operating characteristic curve.
This curve will provide a basis for selecting alternate sample plans.

The probability of accepting the lot for given per cent defective is shown on y-axis. The value for
per cent defective indicates the quality level of the lot inspected. AQL means acceptable quality
level and LTPD indicates lot tolerance per cent defectives. These represent quality levels of the
lot submitted for inspection.
If the quality level of the lot inspected is at AQL or less than AQL, then the customers are
satisfied with the quality of the lot. The corresponding probability of acceptance is called 1 – α.
On the other hand, if the quality level is more than or equal to LTPD, the quality of the lot is
considered to be inferior from consumer’s viewpoint. The corresponding probability of
acceptance of the lot is called β. The quality leveling between AQL and LTPD is called
indifferent zone.
6.3 Sampling plan

1. Single sampling plan (SSP)
The design of single sampling plan with a specified producer’s risk and consumer’s risk is
demonstrated in this section. The required data for designing such plan are as follows:
(a) Producer’s Risk (α)
(b) Consumer’s Risk (b)
(c) Acceptable Quality Level (AQL)
(d) Lot Tolerance Per cent Defectives (LPTD)

The objective of this design is to find out the values for the sample size (n) and acceptance
number (C). The values for n and C are to be selected such that the O.C. curve passes through the
following two coordinates:
 Coordinate with respect to the given α and AQL.

 Coordinate with respect to the given β and LTPD.
But, the values of n and C should be integers. So, it will be very difficult to find n and C exactly
for the given parameters of the design. Hence, we will have to look for approximate integer
values for n and C such that the O.C. curve more or less passes through the above two
coordinates.
2. Double sampling plan (DSP)
If it is not possible to decide the fate of the lot on the basis of the first sample. a second sample is
drawn out of the same lot, and the decision whether to accept or reject the lot is taken on the
basis of the combined results of the first and second samples. In a DSP, after the first n1 samples
have been inspected, there are three choices depending on the number of defectives found:
1. Reject the lot, 2. Accept the lot, and 3. Draw a second sample of n2 items.
If choice 3 is made, the final accept/reject decision is made on combined sample of (n1 + n2)
items.
In this plan of sampling, one, two, three or more samples may be required to reach a decision
regarding acceptance or rejection of a batch. A multiple sampling plan operates in the same way
as the DSP, but with more than two samples. Double and multiple sampling plans reduce
inspection costs because many accept/reject decisions are made based on the first sample which
is smaller than that of the single sampling plan. However, SSP is more popular and easy to use.
6.4. Process variability and Control
Everything we do in life is a process, and everything in life varies. For example, brushing teeth is
a process, and we have never brushed our teeth twice in exactly the same way. Variations that
occur in an industrial process fall in two broad categories: (a) Variations due to chance, and (b)
Variations due to assignable causes.

The chance variations may be due to minor causes, none of which can account for any
significant part of the total variation. The result is that these variations occur in a random
manner, and there is very little that we can do about them. When a process is in a state of
statistical control, variations that occur in the number of defects, the size of a dimension,
chemical composition, weight, etc are due to chance variation only.
On the other hand, variations due to assignable causes are relatively large and can be traced. In
general, assignable causes are:
 Differences among workers’ skills,

 Differences among machines,
 Differences among materials, and
 Differences due to interaction between any two or all three of these factors.
In a process control, we try to determine whether variation is due to ‘common causes’ or ‘special
causes’.
Common causes are those that are inherent in the process over time, affect everyone working in
the process, and affect all outcomes of the process. For example, studying engineering drawing is
a process. Common causes that affect all students are: the text book, the class room, the drawing
table, the drawing instruments, the lighting in the room, the teacher, the number of credit hours,
and so on. The common causes can be eliminated by making fundamental changes in the system
or the process (e.g. change classroom, better lighting facility, keep better instruments, modify the
number of credit hours, etc).
Special causes are those that are not part of the process all the time. They do not affect everyone,
but arise due to specific situations. These causes can be removed with the help of specific
measures. For example, if someone is very weak in drawing he can take up some additional
tutorial classes or help from his friends.
As opposed to the aim of acceptance sampling (to accept or reject products already produced),
control charts help to produce a better product. The charts have three main applications:
 To determine the process capability to meet specifications.

 To guide modifications for improving the quality of the products.

 To help bring a process in control.

 To keep a process in control, and
Product Specifications
Preset product or service dimensions, tolerances e.g. bottle fill might be 16 oz. ±.2 oz. (15.8oz.-
16.2oz.). Based on how product is to be used or what the customer expects
Process Capability – Cp and Cpk
Assessing capability involves evaluating process variability relative to preset product or service
specifications
 Cp assumes that the process is centered in the specification range
specification width USL  LSL

Cp  
process width 6σ
 Cpk helps to address a possible lack of centering of the process
 USL  μ μ  LSL 
Cpk  min  , 
 3σ 3σ 
Relationship between Process Variability and Specification Width
Three possible ranges for Cp

Cp = 1, as in Fig. (a), process
variability just meets specifications
Cp ≤ 1, as in Fig. (b), process not

capable of producing within
specifications
Cp ≥ 1, as in Fig. (c), process exceeds

minimal specifications
One shortcoming, Cp assumes that the

process is centered on the
specification range
Cp=Cpk when process is centered

Example
Computing the Cp Value at Cocoa Fizz: three bottling machines are being evaluated for possible
use at the Fizz plant. The machines must be capable of meeting the design specification of 15.8-
16.2 oz. with at least a process capability index of 1.0 (Cp≥1)
The table below shows the information gathered from production runs on each machine. Are
they all acceptable?
Machine σ USL-LSL 6σ
A .05 .4 .3
B .1 .4 .6
C .2 .4 1.2
Solution:
USL  LSL .4
Machine A: Cp    1.33
6σ 6(.05)
Machine B: Cp=?
Machine C: Cp=
Computing the Cpk Value at Cocoa Fizz
Design specifications call for a target value of 16.0 ±0.2 OZ. (USL = 16.2 & LSL = 15.8)
Observed process output has now shifted and has a µ of 15.9 and a σ of 0.1 oz.
 16.2  15.9 15.9  15.8 

Cpk  min  , 
 3(.1) 3(.1) 
.1
Cpk   .33
.3
Cpk is less than 1, revealing that the process is not capable
6.5. SQC in Services
Service Organizations have lagged behind manufacturers in the use of statistical quality control.
Statistical measurements are required and it is more difficult to measure the quality of a service

 Services produce more intangible products

 Perceptions of quality are highly subjective
A way to deal with service quality is to devise quantifiable measurements of the service element
Check-in time at a hotel
 Number of complaints received per month at a restaurant

 Number of telephone rings before a call is answered
 Acceptable control limits can be developed and charted
Example
Service at a bank: The Dollars Bank competes on customer service and is concerned about
service time at their drive-by windows. They recently installed new system software which they
hope will meet service specification limits of 5±2 minutes and have a Capability Index (Cpk) of
at least 1.2. They want to also design a control chart for bank teller use.
They have done some sampling recently (sample size of 4 customers) and determined that the
process mean has shifted to 5.2 with a Sigma of 1.0 minutes.
Solution
USL  LSL 7 -3
Cp    1.33
6σ  1.0 
6 
 4
 5.2  3.0 7.0  5.2 

Cpk  min  , 
 3(1/2) 3(1/2) 
1.8
Cpk   1.2
1.5
Control Chart limits for ±3 sigma limits
 1 
UCLx  X  zσ x  5.0  3   5.0  1.5  6.5 minute
 4
 1 
LCL x  X  zσ x  5.0  3   5.0  1.5  3.5 minute
 4

Self-Check
1. Define the term statistical process control

2. What difference exist between variable control chart and attributable control charts
3. Describe the benefits of using control charts
4. Explain the difference between type I error and type II error
5. What are the limitation of 100% inspection
6. Describe the characteristics of double sampling plan
7. What differences exist between variation due to chance and variation due to
assignable causes?

Chapter 7
Just-In-Time (JIT) and Lean System

7.1 Introduction
7.2 History of relation between management and workers
7.2.1 Kanban control
7.2.2 JIT today
7.2.3 JIT application profile
7.3 Key to successful JIT implementation
7.3.1 Kanban system
7.4 JIT manufacturing system overview
7.5 Seven wastes in JIT
7.6 Value Added Manufacturing
7.7 Pull Vs Push System
7.8 Requirements for successful implementation of JIT
7.9 Goals of JIT manufacturing system
7.10 Advantage Vs Disadvantage of JIT
7.11 Benefits of JIT

 Explain the core beliefs of the JIT philosophy
 Describe the meaning of waste in JIT
 Explain the differences between “push” and “pull” systems
 Explain the key elements of JIT manufacturing
 Explain the elements of TQM and their role in JIT
 Describe the role of people in JIT and why respect for people is so important
 Understand impact of JIT on service and manufacturing
 Understand functional impact of JIT on all areas

7.5 Introduction
JIT is a philosophy that was developed by the Toyota Motor Company in the mid-1970s. It is a
manufacturing system whose goal is to optimize process and procedures by continuously
pursuing waste reduction. It has since become the standard of operation for many industries. It
focuses on simplicity, eliminating waste, taking a broad view of operations, visibility, and
flexibility. Three key elements of this philosophy are JIT manufacturing, total quality
management, and respect for people. JIT views waste as anything that does not add value.
Traditional manufacturing systems use “push” production, whereas JIT uses “pull” production.
Push systems anticipate future demand and produce in advance in order to have products in place
when demand occurs. This system usually results in excess inventory. Pull systems work
backwards. They last workstation in the production line requests the precise amounts of
materials required.
JIT manufacturing is a coordinated production system that enables the right quantities or parts to
arrive when they are needed precisely where they are needed. Key elements of JIT
manufacturing are the pull system and kanban production, small lot sizes and quick setups,
uniform plant loading, flexible resources, and streamlined layout.
TQM creates an organizational culture that defines quality as seen by the customer. The
concepts of continuous improvement and quality at the source are integral to allowing for
continual growth and the goal of identifying the causes of quality problems.
JIT considers people to be the organization’s most important resource. JIT is equally applicable
in service organizations, particularly with the push toward time-based competition and the need
to cut costs. JIT success is dependent on inter-functional coordination and effort.
7.2. History of relations between management and workers
Whilst we may think today that Japan has harmonious industrial relations with management and
workers working together for the common good, the fact is that, in the past, this has not been
true. In the immediate post Second World War period, for example, Japan had one of the worst
strike records in the world. In 1953, the car maker Nissan suffered a four month strike -
involving a lockout and barbed wire barricades to prevent workers returning to work. That

dispute ended with the formation of a company backed union, formed initially by members of the
Nissan accounting department. Striking workers who joined this new union received payment for
the time spent on strike, a powerful financial incentive to leave their old union during such a long
dispute. The slogan of this new union was ‘Those who truly love their union love their
company’.
7.2.1. The kanban control
In order to have a method of controlling production (the flow of items) in this new environment
Toyota introduced the kanban. The kanban is essentially information as to what has to be done.
Within Toyota the most common form of kanban was a rectangular piece of paper within a
transparent vinyl envelope.
The information listed on the paper basically tells a worker what to do - which items to collect or
which items to produce. In Toyota two types of kanban are distinguished for controlling the flow
of items:
• A withdrawal kanban. Which details the items that should be withdrawn from the preceding
step in the process.
• A production ordering kanban. Which details the items to be produced.
All movement throughout the factory is controlled by these kanbans—in addition since the
kanbans specify item quantities precisely no defects can be tolerated—e.g. if a defective
component is found when processing a production ordering kanban then obviously the quantity
specified on the kanban cannot be produced. Hence, the importance of automation (as referred to
above) the system must detect and highlight defective items so that the problem that caused the
defect can be resolved.
Another aspect of the Toyota Production System is the reduction of setup time. Machines and
processes must be re-engineered so as to reduce the setup time required before processing of a
new item can start. In the Western world, JIT only began to impact on manufacturing in the late
1970’s and early 1980’s. Even then it went under a variety of names—e.g. Hewlett Packard
called it ‘stockless production’. Such adaptation by Western industry was based on informal
analysis of the systems being used in Japanese companies.

7.2.2. JIT today
Just-In-Time (JIT) is a very popular term these days among the managers of various industries.
No conference on Operations Management is seen complete unless some topics or papers are
included in the deliberation. It is seen in various ways by the practitioners in manufacturing,
services and administrative sectors. JIT is a system, a concept, a philosophy, a set of tools, a way
of life and so on. No two
JIT are same—they vary according to the places and conditions in which they are being applied.
JIT is both a philosophy and a set of methods for manufacturing. JIT emphasizes waste
reduction, total quality control, and devotion to the customer. It strives to eliminate sources of
manufacturing waste by producing the right part in the right place at the right time. Waste results
from any activity that adds cost without adding value, such as moving and storing of an item. It
tries to provide the right part at the right place and at the right time.
JIT is also known as lean production or stockless production system. It should improve profits
and return on investment by reducing inventory levels (or increasing the inventory turnover rate),
improving product quality, reducing production and delivery lead times, and reducing other costs
(such as those associated with machine setup and equipment breakdown). In a JIT system,
underutilized (or excess) capacity is used instead of buffer inventories to hedge against problems
that may arise. JIT applies primarily to repetitive manufacturing processes in which the same
products and components are produced over and over again. The general idea is to establish flow
processes (even when the facility uses a jobbing or batch process layout) by linking work centers
so that there is an even, balanced flow of materials throughout the entire production process,
similar to that found in an assembly line. To accomplish this, an attempt is made to reach the
goals of driving all queues toward zero and achieving the ideal lot size of one unit.
JIT is a manufacturing system whose goal is to optimize processes and procedures by

continuously pursuing waste reduction.
7.2.3. JIT application profile
Just-In-Time (JIT) has assumed a kind of mystique of an oriental philosophy. Much of it is plain
common sense-as more American and European companies are discovering to their benefit.

General Motors, IBM, Hewlett-Packard, General Electric, and Black and Decker are among the
big US companies that have adopted JIT production methods. European companies are joining
them, Britain’s state owned Rover Group is the latest recruit. Its car division has announced that
‘preferred suppliers’ will get long-term contracts to prove the bids which make up more than half
of its production costs.
One misconception of JIT is that it is limited to the flow line/large-batch environment of the
automotive industry. Once the automotive company has started along the JIT route, there seems
to be no area which does not benefit from JIT principles like the elimination of waste. JIT applies
very well to the tool-room (job-shop) as it does to the assembly line. Techniques for eliminating
waste can be applied to good effect outside manufacturing as well, such as in sales and
distribution.
Fig. 7.2.3.1 JIT and Choice of Process
Most successful JIT applications have been in repetitive manufacturing, where batches of
standard products are produced at high speeds and high volumes. Smaller, less complex job
shops have used JIT, but operations have been changed so that they behave somewhat like
repetitive manufacturing.

JIT concepts, which started in manufacture, have spread to all functions of a business. In Japan,
JIT has developed into a total management system from marketing to delivery. It has diffused
through suppliers and distributors. It has provided Japanese companies with a formidable
competitive advantage over their Western rivals. If we are competing against a Japanese
company, we are competing against JIT.
Putting this concept into practice means a reversal of the traditional thinking process. In
conventional production processes, units are transported to the next production stage as soon as
they are ready. In JIT, each stage is required to go back to the previous stage to pick up the exact
number of units needed.
Toyota is accredited with systematizing JIT. The Japanese carmaker defines it as the ‘reduction
of cost through the elimination of waste’. It spreads throughout Japan in the 1970s as a logical
way to manage a large flow of materials. Materials do not increase in value unless they are being
processed. So profits are increased when inventory and safety stocks are reduced or replaced by
small, frequent deliveries.
Unlike automation, JIT is not capital intensive. Prof. Voss of UK observes that the average
manufacturing company put 75% of its effort into reducing labor costs, which often represent
about 10 % of its total costs, instead of concentrating on material which can represent more than
half its costs.
The volume of materials flowing through a factory is reduced by JIT, making bottlenecks and
other problems more visible. A favorite analogy is with water in a river. When the level of water
falls, rocks start to appear. The rocks can then be removed rather than hit. It can, for instance,
become plain that it is pointless automating a warehouse because the warehouse itself is
unnecessary.
The results of just-in-time inventory management are apparent: cost reduction, increased speed
to market and identification of bottlenecks in the workflow. Effective implementation, however,
requires a different way of thinking about relationships with suppliers, bringing them into a
cooperative endeavor with the recognition of mutual goals.

Corporate culture must promote an inquiring attitude and an interest in finding better ways to do
things through communication and cooperation. The Ford and Toyota examples illustrate a final
important point for knowledge management: Some of the best ideas for process improvement
can come from tapping the brains of those closest to the situation.
Generally JIT manufacturing system is:
• To have only required inventory when needed,
• To improve quality to zero defects,
• To reduce lead times by reducing setup times,
• To incrementally revise operations themselves,
• To accomplish these things at a minimum cost.
It is insufficient for firms just to be high-quality and low-cost producers. Today, they must also
be first in getting products and services to customer fast. To compete in this new environment,
order-to delivery cycle must be drastically reduced. JIT is weapon of choice today to reduce
elapsed time of this cycle.
Figure order-to-delivery cycle
A JIT company adds value with every activity where JIT has been introduced; there have been
dramatic increases in the proportion of the actual value-adding time to the total cycle time, often
more than 70%. Since non-JIT companies usually report about 15%, JIT improves operating
efficiency significantly. By eliminating non-value added costs, such as defective materials, in
process inventories, and delays; JIT simplifies the entire manufacturing system and improves
long-term productivity.

JIT has been found to be so effective that it increases productivity, work performance and
product quality, while saving costs and it helps companies spotlight those areas that are falling
behind and need improvement. It also slashes inventory, free up space on the factory floor and
shine a blinding spotlight on the delivery and quality performance of parts suppliers. Therefore,
the result of JIT was smaller inventories of both parts and final products with smaller inventories,
billions of dollars were freed up for investment purposes.
7.3. Keys to successful JIT implementation
There are some prerequisites for successful JIT implementation. Industries need to do the
following:
• Stabilize and level the Master Production Schedule (MPS) with uniform plant loading: create
a uniform load on all work centers through constant daily production (establish freeze windows
to prevent changes in the production plan for some period of time) and mixed model assembly
(produce roughly the same mix of products each day, using a repeating sequence if several
products are produced on the same line). Meet demand fluctuations through end-item inventory
rather than through fluctuations in production level.
• Reduce or eliminate setup times: The process of JIT is to produce parts in a lot size of 1. In
many cases this is not economically feasible because of the cost of set up compared with
inventory carrying cost. The JIT solution to this problem is to reduce the setup time as much as
possible ideally to zero. Bringing down the set up time for machine is the key factor to
implement JIT system. This concept is popularly known by the name ‘Single Minute Exchange
of Dies (SMED)’. This means the maximum time taken in changing a die to switch over from
one type of component to another should be in single digit (0 to 9). This is possible by off-line
set up of the dies. Aim for ‘one-touch’ setup - which is possible through better planning, process
redesign, and product redesign.
• Reduce lot sizes (manufacturing and purchase): reducing setup times allows economical
production of smaller lots; close cooperation with suppliers is necessary to achieve reductions in
order lot sizes for purchased items, since this will require more frequent deliveries.

• Reduce lead times (production and delivery): production lead times can be reduced by moving
work stations closer together, applying group technology and cellular manufacturing concepts,
reducing queue length (reducing the number of jobs waiting to be processed at a given machine),
and improving the coordination and cooperation between successive processes; delivery lead
times can be reduced through close cooperation with suppliers, possibly by inducing suppliers to
locate closer to the factory.
• Preventive maintenance: use machine and worker idle time to maintain equipment and prevent
breakdowns.
• Flexible work force: workers should be trained to operate several machines, to perform
maintenance tasks, and to perform quality inspections. In general, the attitude of respect for
people leads to giving workers more responsibility for their own work.
• Require supplier quality assurance and implement a zero defects quality program: errors
leading to defective items must be eliminated, since there are no buffers of excess parts. A
quality at the source (jidoka) program must be implemented to give workers the personal
responsibility for the quality of the work they do, and the authority to stop production when
something goes wrong.
• Small-lot (single unit) conveyance: use a control system such as a kanban (card) system to
convey parts between work stations in small quantities (ideally, one unit at a time). In its largest
sense, JIT is not the same thing as a kanban system, and a kanban system is not required to
implement JIT (some companies have instituted a JIT program along with a MRP system),
although JIT is required to implement a kanban system and the two concepts are frequently
equated with one another.
7.3.1. The kanban system
The Kanban system was developed by Toyota in the early stages of JIT improvement campaign.
The particular feature of a Kanban system is that it short-circuits normal ordering procedures: as
supplies of a Kanban-controlled material are used up, new supplies are requested simply by
releasing a re-order card which is sent direct to the supply point (i.e. the manufacturer or stock
lists). It is often described as a ‘pull’ system, in contrast with traditional ordering procedures,
which ‘push’ orders into the system.

The term ‘Kanban’ simply means ‘card’. To explain the Kanban concept, consider the case of an
assembler who is drawing a particular component from a pallet which, when full, contains 100
pieces. As the last piece is drawn, the assembler takes an identifying card from the empty pallet
and sends it back down the line to the earlier work center where that part (among others) is
made. On receiving the Kanban card, the work center responsible for supplying the component
makes a new batch of 100 and sends it to the assembly post (so that the assembler isn’t kept
waiting, there will probably be an extra pallet in the system to maintain the supply while the new
batch is being made). This means that there is a minimum of paperwork, and the order cycle is
generated on a ‘pull’ basis, the components only being made when there is an immediate need
for them, thus keeping work-in-progress to a minimum.
A kanban is a card that is attached to a storage and transport container. It identifies the part
number and container capacity, along with other information. There are two main types of
kanban (some other variations are also used):
• Production Kanban (P-kanban): This signals the need to produce more parts.
• Conveyance Kanban (C-kanban): This signals the need to deliver more parts to the next work
center (also called a “move kanban” or a “withdrawal kanban”).
A kanban system is a pull-system, in which the kanban is used to pull parts to the next
production stage when they are needed; a MRP system (or any schedule-based system) is a push
system, in which a detailed production schedule for each part is used to push parts to the next
production stage when scheduled. The weakness of a push system (MRP) is that customer
demand must be forecast and production lead times must be estimated. Bad guesses (forecasts or
estimates) result in excess inventory, and the longer the lead time, the more room for error. The
weakness of a pull system (kanban) is that following the JIT production philosophy is essential,
especially concerning the elements of short setup times and small lot sizes.
7.4. JIT manufacturing system overview
The main idea behind the principle of JIT is to exclude the roots of manufacturing waste by
getting just the right quantity of raw materials and generating just the right quantity of products
in the right place at the right time. In other words JIT is a process aimed at increasing value
added and eliminating waste by providing the environment to perfect and simplify the processes.

JIT works as a pull system and applies to generally every level in a multi-level production
system. A pull system is actually “the subsequent process that pulls its requirements from the
preceding processes in question”. One useful and effective way to implement this “pull”
production is a kanban system.
Companies are beginning to turn to internet based technologies to communicate with their
suppliers, making the JIT ordering and delivering process speedier and more flexible. Although
applied mostly to manufacturing, the concepts are not limited to this area of the business. Indeed
JIT concepts are always applied to non-manufacturing areas in the same way as in manufacturing
areas in the excellent company.
The philosophy of JIT is a continuous improvement that puts emphasis on prevention rather than
correction, and demands a companywide focus on quality. It is about developing competence and
simplification in the way we do things by squeezing out waste every step of the way.
But there are no short cuts to excellence. We can learn from, and so avoid the pitfalls of,
companies which have already embarked on the JIT journey. It is not necessary to make the
same mistakes.
The requirement of JIT is that equipment, resources and labor are made available only in the
amount required and at the time required to do the job. It is based on producing only the
necessary units in the necessary quantities at the necessary time by bringing production rates
exactly in line with market demand. In short, JIT means making what the market wants, when it
wants it, while using a minimum of facilities, equipment, materials, and human resources.
The relationship of JIT to manufacturing strategy development can be considered in terms of

both its impact on customer needs and of matching or improving or competitor activities. Table-
below shows how JIT benefits can be used to provide different forms of competitive advantage.
For example, an improvement in flexibility helps to make the facility more responsive to changes
to customer demand, and shortens lead time.
A JIT system is designed to expose errors and get them corrected rather than covering them up
with inventory because a perfect quality is required for the successful functioning of a JIT
system.

JIT capability Competitive advantage derived from JIT capability

WIP reduction Lower-cost manufacture
Increased flexibility Responsive to customer demands: volume, short lead time,
product change
Raw materials reduction Lower-cost manufacture
Increased quality Higher-quality products Lower-cost manufacture
Increased productivity Lower-cost manufacture
Reduced space requirements Lower-cost manufacture
Lower overheads Lower-cost manufacture
7.5. The seven wastes in JIT
Shigeo Shingo, a recognized JIT authority and engineer at the Toyota Motor Company identifies
seven wastes as being the targets of continuous improvement in production processes.
 Waste of overproduction: eliminate by reducing setup times, synchronizing quantities

and timing between processes, compacting layout, visibility, and so forth. Make only
what is needed now.
 Waste of waiting: eliminate through synchronizing work flow as much as possible, and
balance uneven loads by flexible workers and equipment.
 Waste of transportation: establish layouts and locations to make transport and handling
unnecessary. Then rationalize transport and material handling that cannot be eliminated.
 Waste of processing itself: First question why this part or product should be made at all,
then why each process is necessary. Extend thinking beyond economy of scale or speed.
 Waste of stocks: Reduce by shortening setup times and reducing lead times, by
synchronizing work flows and improving work skills, and even by smoothing fluctuations
in demand for the product. Reducing all the other wastes reduces the waste of stocks.
 Waste of motion: Study motion for economy and consistency. Economy improves
productivity, and consistency improves quality. First improve the motions, then
mechanize or automate. Otherwise there is danger of automating waste.
 Waste of making defective products: Develop the production process to prevent defects
from being made so as to eliminate inspection. At each process, accept no defects and
make no defects.

7.6. Value-Added Manufacturing
A method of manufacturing that seeks to eliminate waste in processing. Any step in the
manufacturing process that does not add value to the product for the customer is wasteful. Some
examples of wasteful steps are: process delays, material transport, storages, work-in-process
(WIP) inventories, finished goods inventories, excessive paper processing, etc that do not add
value to the product.
JIT system cannot be implemented overnight. It should be a gradual process. It may be practical
to have a hybrid model in the early phase. According to Shingo, Toyota Motor Company took
20years to implement JIT system. We also need to note the following points:
 Not all Japanese companies practice JIT.

 There are several versions of JIT. Each company that practices the JIT philosophy does
so a little differently.
 Variations in cultures account for variations in JIT philosophies and techniques. For
example, the kanban card system is natural to the Japanese, who generally enjoy playing
cards. In USA, the cards are often spurned and kanban squares, kanban lights, or yelling
‘Hey, Jack! Send me some more materials!’ are used instead.
 JIT is less a set of techniques and more an umbrella encompassing several techniques
such as the total quality control, total employee involvement, kanban, setup time
reduction, zero inventories, and pull coordination.
7.7. Push Vs Pull system
The terms push and pull are used to describe two different systems for moving work through a
production process.
Push System
When work is finished at a workstation, the output is pushed to the next station; or, in the case of
the final operation, it is pushed on to final inventory. In this system work is pushed on as it is
completed, with no regard for whether the next station is ready for the work. In a totally
predictable environment, demand forecasts would always be realized; bill of materials will be
absolutely accurate; suppliers would ship on time and with total accuracy; nothing would be

misplaced or miscounted; machines would never fail; all personnel would be present when
expected; and all intervals in the process would be totally predictable. In such an environment,
all manufacturing activities may be scheduled using the push MRP system.
Pull system
Control of moving the work rests with the following operation; each work station pulls the
output from the preceding station as it is needed. Output of the final operation is pulled by
customer demand or the master schedule. Thus in pull system, work is moved in response to
demand from the next stage in the process.
Push System Pull System

Signal to produce more Schedule or plan Customer signal
Timing of signal Advance of the need At the time of the need
Type of signal Paper or computer Container, square, cart, or paper
Information scope Global Local only
Planning horizon Fairly long Very short
Level demand needed No Generally yes
Standard parts/products Not necessary Generally necessary
Large queues possible Yes No
Negatives Too much inventory Does not plan ahead.
Not visual. Missed customer demand at the
Long planned lead times. beginning of the product lifecycle
Requires more information. and too much inventory at the end.
Best for Non-repetitive, batch. Repetitive, high-volume
Seasonal demand, short product manufacturing.
lifecycles. Stable demand.
Long lead time purchasing.
Problem visibility Not visible Visible
Stress to improve Little Much
Problems found from Computer reports Shop floor

7.8. Requirements for Successful Implementation of JIT
For JIT to be successful the following requirements must be met:
1. The environment has to support it.
2. The most appropriate way to implement JIT is to do it step by step.
3. A hybrid model (traditional + JIT) is the most appropriate. If JIT fails, the traditional model
will be used as a fallback position.
4. A flexible management system is essential. The private sector is usually more compatible.
5. Key elements of the JIT system must be in place. They are:
(i) Close ties with few reliable suppliers.
(ii) Low inventories of raw materials, work-in-process inventories and finished goods.
(iii) Appropriate material handling system, so that there won’t be work-in-process inventories.
(iv) Small lot sizes with shorter lead times.
(v) Low cost set-up times.
7.9. Goals of JIT Manufacturing System
JIT is about doing the simple things well, and gradually doing them better and it is about
developing competence and simplification in the way we do things. In addition to this, it is also
about squeezing out waste every step of the way. Generally, JIT manufacturing seeks to achieve
the following goals:
1. To produce the required quality or zero defects. In manufacturing, traditionally people

thought that zero defects producing was not possible because of the fact that people thought that
at some level of production it would be no longer be possible to produce without defects. Also
despite there were defects, the product did reach customers expectation. With the aim of JIT
there will be no longer any cause of a defect and therefore all products will meet more than the
expectations. This is also related to a part of quality management.

An approach to quality control that starts from the premise that if quality cannot be built into the
process, then the only way to ensure that no defective products are passed on to the customer
(downstream process) is to inspect every part made.
In a Just-in-time environment where waiting for an inspector would be intolerable, the

alternatives are self-inspection and error proofing. Inspection at source also improves the
likelihood of discovering the root cause of the problem so it can be eliminated.
Each individual and function involved in the manufacturing system must, therefore, accept the
responsibility for the quality level of its products. Traditional companies believe quality is costly,
defects are caused by workers, and the minimum level of quality that can satisfy the customer is
enough.
Companies practicing the JIT believe quality leads to lower costs, than systems cause most
defects, and that quality can be improved within the Kaizen framework. This concept introduces
the correction of the problem before many other defective units have been completed.
2. Zero set-up time. Reducing the set-up times leads to a more predictable production. No setup
time also leads to a shorter production time/production cycle, and less inventories.
To effectively implement a low inventory system, the common practice of lot sizing through the
economic order quantity model must be forgotten. Therefore, the time to set up for a different
product in the line needed to be significantly reduced. Innovative designs and changeover
techniques are critical.
3. To produce the required items or zero inventories. Inventories, including work-in-progress,

finished goods and sub-assemblies, have to be reduced to zero. There will be no sub-assemblies,
no work-in-progress and no finished goods. This means a different view than in traditional
manufacturing, where inventories are seen as a buffer against a fluctuating demand, or as a
buffer against non-reliable suppliers. Also, in traditional manufacturing inventory was built up to
make sure expensive machines were running for full capacity, because only then the hourly costs
were as low as possible.
4. Zero handling. Zero handling in JIT means eliminating all non-value adding activities. So,
zero-handling means reducing (by redesigning) non-value adding activities.

5. Zero lead-time. Lead time is the time between ordering a product and receiving it. The time
taken to process orders, order parts, manufacture goods, store, pick and dispatch goods all impact
the customer lead-time.
Zero lead-time is a result of the usage of small lots and increases the flexibility of the system.
When there are no lead times, the possibility to make planning which do not rely on forecasts
becomes bigger and bigger. The JIT philosophy recognizes that in some markets it is impossible
to have zero lead-times, but makes clear that when a firm focuses on reducing lead-times, this
firm can manufacture in the same market.
6. Enable Productivity in Diversified Small-Quantity Production. With every customer

desiring a customized product, diversity is extremely important. Many product variations can be
made on a single line, with short changeover times.
7. Reducing Manufacturing Cost. Designing products that facilitate and ease manufacturing
processes. This will help to reduce the cost of manufacturing and building the product to
specifications. One aspect in designing products for manufacturability is the need to establish a
good employer and employee relationship. This is to cultivate and tap the resources of the
production experts (production floor employee), and the line employees to develop cost saving
solutions.
8. Jidohka (automation with a human touch). Technological advancements needed to be taken

advantage of along with improving worker skill level, without sacrificing employee morale.
7.10. Advantages and Disadvantages of JIT
Advantages of JIT
Advocates of JIT claim it is a revolutionary concept that all manufacturers will have to adopt in
order to remain competitive. Its benefits are many:
1. Shortened lead time.
2. Reduced time spent on non-process work.
3. Eliminate waste and rework and consequently reduce requirements for raw materials, person,
power and machine capacity

4. It increases worker motivation and teamwork.
5. Reduced inventory. As a result: Frees up working capital for other projects, Less space is
needed, and Customer responsiveness increases.
6. Reduce or eliminate setup times
7. Reduce lot sizes (manufacturing and purchase): reducing setup times allows economical
production of smaller lots.
8. Problem clarification.
9. Cost savings
(a) Materials Cost Savings: Materials cost savings is basically the reduction of costs incorporated
with purchasing, receiving, inspection, and stockroom costs.
Cost Saving are:
• Reduction of Suppliers • Eliminate unpacking
• Long-term Contracts • Eliminate Inspection
• Reduce Order Scheduling • Eliminate inventory stocking
• Simplify Receiving Systems • Eliminate Excess Material.
(b) Manufacturing Cost Savings: Manufacturing cost savings identifies saving in the engineering,
production, and the quality control activities. A major part of manufacturing cost savings is
keeping a high level of quality, quality reduces cost and increases revenue.
(c) Sales Cost Savings: Sales cost saving comes in the form of reducing overlap between the
supplier and the customer, which is inspection and testing. The most effective situation that the
sales department can establish is finding customers that also use JIT systems.
10. Total product cycle time drops.
11. Product quality improved.
12. Reduced scrap and rework

13. Smoother production flow
14. Less inventory, of raw materials, work-in-progress and finished goods.
15. Higher productivity
16. Higher worker participation
17. More skilled workforce, able and willing to switch roles
18. Reduced space requirement
19. Improved relationships with suppliers
Disadvantages of JIT
There are often a number of barriers that also have to be overcome to achieve the final goal.
 The JIT method demands a much disciplined assembly-line process. The entire factory
has to be in sync to successfully exploit its methods. Manufacturers can afford fewer
errors in the delivery of the supplier’s component; if a part isn’t there, the assembly line
stops, and that can result in the loss of manpower and cash.
 Changes in production planning, inaccurate forecasting procedures resulting in under or
over forecasting of demand, equipment failures creating capacity problems and employee
absenteeism all create problems in implementing JIT.
 JIT requires special training and the reorganization of policies and procedures.
 The organizational cultures vary from firm to firm. There are some cultures that tie to JIT
success but it is difficult for an organization to change its cultures within a short time.
 Difference in implementation of JIT. Because JIT was originally established in Japan, the
benefits may vary.
 Resistance to change. JIT involves a change throughout the whole organization, but
human nature resists changing. The most common resistances are emotional resistance
and rational resistance. Emotional resistances are those psychological feeling which
hinder performance such as anxiety. Rational resistance is the deficient of the needed
information for the workers to perform the job well.
 JIT requires workers to be multi-skilled and flexible to change.

7.11. Benefits of JIT
The most significant benefit is to improve the responsiveness of the firm to the changes in the
market place thus providing an advantage in competition. Following are the benefits of JIT:
 Product cost—is greatly reduced due to reduction of manufacturing cycle time, reduction
of waste and inventories and elimination of non-value added operation.
 Quality—is improved because of continuous quality improvement programmes.
 Design—Due to fast response to engineering change, alternative designs can be quickly
brought on the shop floor.
 Productivity improvement.
 Higher production system flexibility. Greater flexibility
 Administrative and ease and simplicity.
 Reduction in inventories
 Shorter lead times
 Lower production costs
 Increased productivity
 Increased machine utilization
Self-Check
1. Define the term JIT

2. Explain the concept of JIT. How does it help the manufacturing system to improve
productivity?
3. Describe the key to successful JIT implementation in short.
4. What are the merits and demerits of JIT?
5. What do you understand by kanban? Explain the method to calculate the number of kanban?
6. Explain the philosophy involved in JIT systems. What are the major requirements for a
successful JIT implementation?
7. What benefits are obtained by implementing JIT
8. Describe some of the advantage and disadvantages in implementing JIT
9. What are the goals of JIT

Chapter 8
Forecasting
8.5 Introduction
8.6 Principle of Forecasting
8.7 Types of forecasting models
8.7.4 Qualitative methods
8.7.5 Quantitative methods
8.8 Forecasting trends
8.9 Measuring forecasting errors
8.10 Forecasting software

 Identify Principles of Forecasting
 Explain the steps in the forecasting process
 Identify types of forecasting methods and their characteristics
 Describe time series and causal models
 Generate forecasts for data with different patterns: level, trend, seasonality, and
cyclical
 Describe causal modeling using linear regression
 Compute forecast accuracy
 Explain how forecasting models should be selected
8.1 Introduction
Forecasting is an estimate of demand, which will happen in future. Since, it is only an estimate
based on the past demand, proper care must be taken while estimating it. Given the sales
forecast, the factory capacity, the aggregate inventory levels and size of the work force, the
manager must decide at what rate of production to operate the plant over an intermediate
planning horizon.

There are two uses of forecast. One is to help managers plan the system, and the other is to help
them plan the uses of the system. Planning the systems generally involves long-range plans about
the type of product and services to offer, what facilities and equipment’s to have, where to
allocate and so on.
Business forecasting pertains to more than predicting demand. Forecasts are also used to predict
profits, revenues, costs, productivity changes, prices and availability of energy and raw
materials, interest rates, movements of key economic indicators (eg. GNP, inflation, government
borrowing), and prices of stocks and bonds. For the sake of simplicity, this chapter will focus on
forecasting demand. Keep in mind, however, that the concepts and techniques apply well to the
other variables.
8.2 Principles of Forecasting
Many types of forecasting models, each differ in complexity and amount of data. Forecasts are
rarely perfect, they are more accurate for grouped data than for individual items, and are more
accurate for shorter than longer time periods
Forecasting Steps
 Decide what needs to be forecast; i.e. Level of detail, units of analysis & time horizon
required
 Evaluate and analyze appropriate data
o Identify needed data & whether it’s available
o Select and test the forecasting model
o Cost, ease of use & accuracy
 Generate the forecast
 Monitor forecast accuracy over time
8.3 Types of Forecasting Models
8.3.1 Qualitative methods – judgmental methods
Estimating method that relies on expert human judgment combined with a rating scale, instead of
on hard (measurable and verifiable) data. Forecasts generated subjectively by the forecaster, it is
an educated guesses.

This is forecasting that uses factors that cannot be directly measured. The estimates are made
with a system of ratings to produce a figure. No verifiable data is used it is based on human
judgment and the system of ratings to produce a result.
4 important methods of Qualitative forecasting techniques
These techniques are primarily based upon judgment and intuition and especially when sufficient
information and data is not available so that complex quantitative techniques cannot be used. The
widely used qualitative methods are:
(a) Jury of executive opinion:
This is a method by which the relevant opinions of experts are taken, combined and averaged.
These opinions could be taken on an individual basis or there could be a brain storming group
session in which all members participate in generating new ideas that can later be evaluated for
their feasibility and profitability.
(b) Opinions of the sales person:
The sales people being closer to consumers can estimate future sales in their own territories,
more accurately. Based on these and the opinions of sales managers, reasonable trends of the
future sales can be calculated. These forecasts are good for short range planning since sales
people are not sufficiently sophisticated to predict long-term trends.
(c) Consumers' expectations:
This method involves a survey of the customers as to their future needs. This method is
especially useful where the industry serves a limited market. Based on the future needs of the
customers a general overall forecast for the demand can be made.
(d) The Delphi method:
The Delphi method originally developed by Rank Corporation in 1969 for forecasting military
events, has become a useful tool in other areas also. It is basically a more formal version of the
jury of opinion method. A panel of experts is given a situation and asked to make initial
predictions, on the basis of a prescribed questionnaire, these experts develop written opinions.

These responses are analyzed and summarized and submitted back to the panel for further
considerations. All these responses are anonymous so that no member is influenced by others
opinions. This process is repeated until a consensus is obtained.
Type Characteristics Strengths Weaknesses

Executive A group of managers Good for strategic or One person's opinion
opinion meet & come up with a new-product forecasting can dominate the
forecast forecast
Market Uses surveys & Good determinant of It can be difficult to
research interviews to identify customer preferences develop a good
customer preferences questionnaire
Delphi Seeks to develop a Excellent for forecasting Time consuming to
method consensus among a long-term product develop
group of experts demand, technological
changes, and scientific
advances
The Advantages of Qualitative Forecasting
Managers use forecasts to inform and support their decisions. A small business owner can use
sales forecasts to determine if he should hire new employees, while the chief executive of a large
company can use customer research surveys to plan marketing campaigns. Unlike quantitative
forecasting, numbers are not at the core of qualitative forecasting, which relies on judgment,
experience and opinions.
8.3.2 Quantitative methods:
A statistical technique for making projections about the future which uses numerical facts and
prior experience to predict upcoming events. The two main types of quantitative forecasting used
by business analysts are the explanatory method that attempts to correlate two or more variables
and the time series method that uses past trends to make forecasts.
Quantitative forecasting techniques typically call for the analysis of statistics and raw data. The
simple moving method, weight moving method, exponential smoothing method, and time series
analysis are quantitative forecasting techniques that are usually used by economists and data
analysts. These techniques are used to evaluate numerical data while considering changes in
trends. Accurate forecasting is used by businesses to help make sound business decisions.
 Forecasts generated through mathematical modeling.

 Quantitative methods are based on an analysis of historical data concerning one or more
time series.
o A time series is a set of observations measured at successive points in time or
over successive periods of time.
o If the historical data used are restricted to past values of the series that we are
trying to forecast, the procedure is called a time series method.
o If the historical data used involve other time series that are believed to be related
to the time series that we are trying to forecast, the procedure is called a causal
method.
 Quantitative approaches are generally preferred. In this chapter we will focus on
quantitative approaches to forecasting.
8.3.2.1 Time Series Models
Assumes information needed to generate a forecast is contained in a time series of data
Assumes the future will follow same patterns as the past
 Forecaster looks for data patterns as

o Data = historic pattern + random variation
 Historic pattern to be forecasted:
o Level (long-term average) – data fluctuates around a constant mean
o Trend – data exhibits an increasing or decreasing pattern
o Seasonality – any pattern that regularly repeats itself and is of a constant length
o Cycle – patterns created by economic fluctuations
 Random Variation cannot be predicted
Type of Quantitative Forecasting Method
Naive: Ft 1  At
 The forecast is equal to the actual value observed during the last period – good for level
patterns
Simple Mean: Ft 1   A t / n
 The average of all available data - good for level patterns

Moving Average: Ft 1   A t / n
The average value over a set time period (e.g.: the last four weeks). Each new forecast drops the
oldest data point & adds a new observation. More responsive to a trend but still lags behind
actual data.
The simple moving method of forecasting is a form of quantitative research that is based on an
adjustable set period. This method is used to show trends over a period of time by evaluating raw
data, usually over the course of 30 days or many months. Every month, the older information is
replaced with the information of the new month. For example, if data is evaluated over the
course of August and September, then the numbers from August will be removed and be
replaced by September's information to see if there are any trends in the data.
 Weighted Moving Average: Ft 1   Ct A t
All weights must add to 100% or 1.00 e.g. Ct .5, Ct-1 .3, Ct-2 .2 (weights add to 1.0). It allows
emphasizing one period over others; above indicates more weight on recent data (Ct=.5). Similar
to the simple moving method, a weight moving method dissects the information during an
evaluation period but with different weights given to each month. This method of data evaluation
is usually used to evaluate trends with expected monthly changes; the sales of seasonal clothing,
for example, can benefit from these types of quantitative forecasting techniques. This
quantitative forecasting technique tends to focus on older data like that of moving average
methods.
 Exponential Smoothing: Ft 1  αA t  1  α  Ft
Most frequently used time series method because of ease of use and minimal amount of data
needed. It needs just three pieces of data to start: Last period’s forecast (Ft), Last periods actual
value (At), and Select value of smoothing coefficient, between 0 and 1.0. If no last period
forecast is available, average the last few periods or use naive method. Higher values (e.g. .7 or
.8) may place too much weight on last period’s random variation.
The exponential smoothing method evaluates more recent information. This method is good for
researching data that changes rapidly, such as sales figures in a temperamental market. For

example, if a business analyst is trying to predict next month's sales, then exponential smoothing
will call upon the data on the recent days leading to this new month to predict projected sales.
8.3.2.2 Time Series Patterns
If time series techniques only look at the patterns that are part of the actual history of sales (that
is, are endogenous to the sales history), then what are these patterns? The answer is that no
matter what time series technique we are talking about, they all examine one or more of only
four basic time series patterns: level, trend, seasonality, and noise. Figure 3.1 illustrates these
four patterns broken out of a monthly time series of sales for a particular refrigerator model. The
level is a horizontal sales history, or what the sales pattern would be if there were no trend,
seasonality, or noise. For a product that is sold to a manufacturing concern as a component in
another product whose demand is stable, the sales pattern for this product would be essentially
level, with no trend, seasonality, or noise. Trend is a continuing pattern of a sales increase or
decrease, and that pattern can be a straight line or a curve.
Seasonality is a repeating pattern of sales increases and decreases that occurs within a one-year
period or less (“seasonal patterns” of longer than one year are typically referred to as “cycles,”
but can be forecast using the same time series techniques).

Noise is random fluctuation—that part of the sales history that time series techniques cannot
explain. This does not mean the fluctuation could not be explained by regression analysis or
some qualitative technique; it means the pattern has not happened consistently in the past, so the
time series technique cannot pick it up and forecast it.
Time Series Problem
 Determine forecast for periods 7 & 8

Period Actual
 2-period moving average
1 300
 4-period moving average
 2-period weighted moving 2 315
average with t-1 weighted 0.6 3 290

and t-2 weighted 0.4
4 345
 Exponential smoothing
5 320
with alpha=0.2 and the period
6 forecast being 375 6 360
7 375
Time Series Problem Solution
Period Actual 2-Period 4-Period 2-Per.Wgted. Expon. Smooth.

1 300
2 315
3 290
4 345
5 320
6 360
7 375 340.0 328.8 344.0 372.0
8 367.5 350.0 369.0 372.6

8.4 Forecasting Trends
Basic forecasting models for trends compensate for the lagging that would otherwise occur.
One model, trend-adjusted exponential smoothing uses a three step process
 Step 1 - Smoothing the level of the series

St  αA t  (1  α)(St 1  Tt 1 )
 Step 2 – Smoothing the trend
Tt  β(St  St 1 )  (1  β)Tt 1
 Forecast including the trend
FITt 1  St  Tt
Forecasting trend problem: a company uses exponential smoothing with trend to forecast
usage of its lawn care products. At the end of July the company wishes to forecast sales for
August. July demand was 62. The trend through June has been 15 additional gallons of product
sold per month. Average sales have been 57 gallons per month. The company uses alpha+0.2 and
beta +0.10. Forecast for August.
 Smooth the level of the series:
SJuly  αA t  (1  α)(S t 1  Tt 1 )  0.262  0.857  15  70
 Smooth the trend:
TJuly  β(S t  St 1 )  (1  β)Tt 1  0.170  57  0.915  14.8
 Forecast including trend:
FITAugust  St  Tt  70  14.8  84.8 gallons
Forecasting Seasonality
 Calculate the average demand per season

o E.g.: average quarterly demand
 Calculate a seasonal index for each season of each year:
o Divide the actual demand of each season by the average demand per season for
that year

 Average the indexes by season

o E.g.: take the average of all Spring indexes, then of all Summer indexes,…
 Forecast demand for the next year & divide by the number of seasons
o Use regular forecasting method & divide by four for average quarterly demand
 Multiply next year’s average seasonal demand by each average seasonal index
o Result is a forecast of demand for each season of next year
Seasonality problem: a university wants to develop forecasts for the next year’s quarterly
enrollments. It has collected quarterly enrollments for the past two years. It has also forecast total
enrollment for next year to be 90,000 students. What is the forecast for each quarter of next year?
Quarter Year 1 Seasonal Index Year 2 Seasonal Index Avg. Index Year3
Fall 24000 1.2 26000 1.238 1.22 27450
Winter 23000 22000
Spring 19000 19000
Summer 14000 17000
Total 80000 84000 90000
Average 20000 21000 22500
Causal Models
Often, leading indicators can help to predict changes in future demand e.g. housing starts.
Causal models establish a cause-and-effect relationship between independent and dependent
variables. A common tool of causal modeling is linear regression: Y  a  bx
Additional related variables may require multiple regression modeling
Linear Regression
Regression Analysis is similar to trend analysis, except the independent variable is not restricted
to time. Instead of letting time represent our independent variable, we could forecast sales based
upon the price of the product. Since products often go on sale, we could collect data over several

months collecting the weekly price and number of items sold for the week. For this model, we
would find the regression equation in the same manner in which we found the trend line except
we would call the independent variable x, instead of t.
Identify dependent (y) and independent (x) variables
Solve for the slope of the line
b
 XY  n XY
 X  nX 2 2
Solve for the y intercept
a  Y  bX
Develop your equation for the trend line
Y=a + bX
Linear Regression Problem: A maker of golf shirts has been tracking the relationship between
sales and advertising dollars. Use linear regression to find out what sales might be if the
company invested $53,000 in advertising next year.
Sales $ (Y) Adv.$ (X) XY X^2 Y^2
1 130 32 4160 2304 16,900
2 151 52 7852 2704 22,801
3 150 50 7500 2500 22,500
4 158 55 8690 3025 24964
5 153.85 53
Tot 589 189 28202 9253 87165
Avg 147.25 47.25
b
 XY  n XY
 X  nX2 2

28202  447.25147.25
b  1.15
9253  447.25
2
a  Y  bX  147.25  1.1547.25
a  92.9
Y  a  bX  92.9  1.15X
Y  92.9  1.1553  153.85
How Good is the Fit? – Correlation Coefficient
Correlation coefficient (r) measures the direction and strength of the linear relationship between
two variables. The closer the r value is to 1.0 the better the regression line fits the data points.
n  XY   X  Y 
r
 X    X   Y   Y 
2 2
2 2
n * n
428,202  189589
r  .982
4(9253) - (189) * 487,165  589
2 2
r 2  .982  .964
2
Coefficient of determination (r) measures the amount of variation in the dependent variable
about its mean that is explained by the regression line. Values of (r2) close to 1.0 are desirable.
8.5 Measuring Forecast Error
Forecasts are never perfect; we need to know how much we should rely on our chosen
forecasting method. Measuring forecast error E t  A t  F:t Note that over-forecasts = negative
errors and under-forecasts = positive errors.
Measuring Forecasting Accuracy
 Mean Absolute Deviation (MAD) measures the total error in a forecast without regard to
sign.
MAD 
 actual  forecast
n
The mean of the absolute values of all forecast errors is calculated, and the forecasting
method or parameter(s) which minimize this measure is selected. The mean absolute
deviation measure is less sensitive to individual large forecast errors than the mean
squared error measure.

 Cumulative Forecast Error (CFE) measures any bias in the forecast
CFE   actual  forecast 
 Mean Square Error (MSE) penalizes larger errors
 actual - forecast 
2
MSE 
n
The average of the squared forecast errors for the historical data is calculated. The
forecasting method or parameter(s) which minimize this mean squared error is then
selected. It is a traditional error measures.
 Tracking Signal measures if your model is working
CFE
TS 
MAD
Accuracy & Tracking Signal Problem: A company is comparing the accuracy of two forecasting
methods. Forecasts using both methods are shown below along with the actual values for January
through May. The company also uses a tracking signal with ±4 limits to decide when a forecast
should be reviewed. Which forecasting method is best?
Month Actual Method A Method B

sales
F’cast Error Cum. Tracking F’cast Error Cum. Tracking
Error Signal Error Signal
Jan. 30 28 2 2 2 27 2 2 1
Feb. 26 25 1 3 3 25 1 3 1.5
March 32 32 0 3 3 29 3 6 3
April 29 30 -1 2 2 27 2 8 4
May 31 30 1 3 3 29 2 10 5
MAD 1 2
MSE 1.4 4.4

8.6 Forecasting Software

 Spreadsheets
o Microsoft Excel, Quattro Pro, Lotus 1-2-3
o Limited statistical analysis of forecast data
 Statistical packages
o SPSS, SAS, NCSS, Minitab
o Forecasting plus statistical and graphics
 Specialty forecasting packages
o Forecast Master, Forecast Pro, Autobox, SCA
Guidelines for Selecting Software
 Does the package have the features you want?

 What platform is the package available for?
 How easy is the package to learn and use?
 Is it possible to implement new methods?
 Do you require interactive or repetitive forecasting?
 Do you have any large data sets?
 Is there local support and training available?
 Does the package give the right answers?
Other Forecasting Methods
 Focus Forecasting
o Developed by Bernie Smith
o Relies on the use of simple rules
o Test rules on past data and evaluate how they perform
 Combining Forecasts
o Combining two or more forecasting methods can improve accuracy
 Collaborative Planning Forecasting and Replenishment (CPFR)
o Establish collaborative relationships between buyers and sellers
o Create a joint business plan
o Create a sales forecast

o Identify exceptions for sales forecast

o Resolve/collaborate on exception items
o Create order forecast
o Identify exceptions for order forecast
o Resolve/collaborate on exception items
o Generate order
Self-Check
1. What is forecasting
2. What are the steps in forecasting
3. Describe time series forecasting method and explain each.
4. Forecast for week 11 sales using exponential smoothing method based on the following data.
Robert's Drugs
α=0.1
Week (t ) Salest Ft
1 110 #N/A
2 115 110
3 125 110.5
4 120 111.95
5 125 112.755
6 120 113.98
7 130 114.582
8 115 116.123
9 110 116.011
10 130 115.41
11
5. What are measures of forecasting accuracy? And explain them briefly?

6. How Collaborative Planning Forecasting and Replenishment (CPFR) is formed or
established.
7. Describe type of qualitative forecasting techniques
8. What differences you observe between qualitative and quantitative forecasting techniques

Chapter 9
Capacity Planning and Facility Location Decision

9.1 Introduction
9.2 Capacity Planning
9.2.1 Measurements of capacity planning
9.2.2 Determinants of effective capacity
9.2.3 Process of capacity planning
9.3 Location Analysis
9.3.1 Need for selecting suitable location
9.3.2 Factors affecting plant/facility location
9.3.2.1 General locational factors
9.3.2.2 Specific locational factors for manufacturing organization
9.3.2.3 Specific locational factors for service organization
9.4 Location theories
9.5 Location Models
9.5.1 Factor rating method
9.5.2 Weighted factors rating methods
9.5.3 Loaded distance method
9.5.4 Center of gravity
9.5.5 Break-even analysis
9.6 Locational economics

 Define capacity planning
 Define location analysis
 Describe relationship between capacity planning and location, and their importance
 Explain the steps involved in capacity planning and location analysis
 Describe the decision support tools used for capacity planning
 Identify key factors in location analysis
 Describe the decision support tools used for location analysis

9.1 Introduction
Capacity planning is deciding on the maximum output rate of a facility. Location analysis is
deciding on the best location for a facility.
Capacity planning and location analysis decision are often made simultaneously because the
location of the facility is usually related to its capacity. When a business decides to expand, it
usually also addresses the issue of where to locate. These decisions are very important because
they require long-term investments in buildings and facilities, as well as a sizable financial
outlay.
In both capacity planning and location analysis, managers must follow three-step process to
make good decision. The steps are assessing needs, developing alternatives, and evaluating
alternatives.
To choose between capacity planning alternatives managers may sue decision trees, which are a
modeling tool for evaluating independent decisions that must be made in sequence.
Key factors in location analysis included proximity to customers, transportation, source of labor,
community attitude, and proximity to supplies. Service and manufacturing firms focus on
different factors. Profit-making and nonprofit organizations also focus on different factors.
Several tools can be sued to facilitate location analysis. Factor rating is a tool that helps
managers evaluates qualitative factors. The load-distance model and center of gravity approach
evaluate the location decision based on distance. Break-even analysis is sued to evaluate
location decisions based on cost values. The transportation method is an excellent tool for
evaluating the cost impact of adding sites to the network of current facilities.
9.2. Capacity Planning
Design of the production system involves planning for the inputs, conversion process and outputs
of production operation. The effective management of capacity is the most important
responsibility of production management. The objective of capacity management (i.e., planning
and control of capacity) is to match the level of operations to the level of demand.

Capacity planning is to be carried out keeping in mind future growth and expansion plans,
market trends, sales forecasting, etc. It is a simple task to plan the capacity in case of stable
demand. But in practice the demand will be seldom stable. The fluctuation of demand creates
problems regarding the procurement of resources to meet the customer demand.
Capacity decisions are strategic in nature. Capacity is the rate of productive capability of a
facility. Capacity is usually expressed as volume of output per period of time.
Production managers are more concerned about the capacity for the following reasons:
 Sufficient capacity is required to meet the customers demand in time.

 Capacity affects the cost efficiency of operations.
 Capacity affects the scheduling system.
 Capacity creation requires an investment.
Capacity planning is the first step when an organization decides to produce more or new
products.
9.2.1. Measurement of Capacity Planning
The capacity of the manufacturing unit can be expressed in number of units of output per period.
In some situations measuring capacity is more complicated when they manufacture multiple
products. In such situations, the capacity is expressed as man-hours or machine hours. The
relationship between capacity and output is shown in Fig. below.
1. Design capacity: Designed capacity of a facility is the planned or engineered rate of output of
goods or services under normal or full scale operating conditions. For example, the designed
capacity of the cement plant is 100 TPD (Tonnes per day). Capacity of the sugar factory is
150 tonnes of sugarcane crushing per day. Design capacity is the maximum output that can
possibly attained.
2. System (effective) capacity: System capacity is the maximum output of the specific product
or product mix the system of workers and machines is capable of producing as an integrated
whole. System capacity is less than design capacity or at the most equal, because of the
limitation of product mix, quality specification, breakdowns. The actual is even less because
of many factors affecting the output such as actual demand, downtime due to

machine/equipment failure, un-authorized absenteeism. Effective capacity is the maximum

possible output given a product mix, scheduling difficulties, machine maintenance, quality
factors, and so on.
3. Actual output: the rate of output actually achieved. It cannot exceed effective capacity,
and is often less than effective capacity due to breakdowns, defective outputs, shortage of
materials, and similar factors.
These different measures of capacity are useful in defining two measures of system
effectiveness: efficiency and utilization. Efficiency is the ratio of actual output to effective
capacity. Utilization is the ratio of actual output to design capacity.
Efficiency = actual output/effective capacity
Utilization = actual output/design capacity
It is common for managers to focus exclusively on efficiency, but in many instance, this
emphasis can be misleading. This happens when effective capacity is low compared with design
capacity. In those cases, high efficiency would seem to indicate effective uses of resources when
it does not. The following example illustrates this point.
Given the information below, compute the efficiency and the utilization of the vehicle repair
department.
Design capacity = 50 trucks per day
Effective capacity = 40 trucks per day
Actual output = 36 units per day
Solution
Efficiency = actual output/effective capacity = 36 units per day/40 units per day = 90%
Utilization = actual output/design capacity = 36 units per day/50 units per day = 72%
Thus, compared with the effective capacity of 40 units per day, 36 units per day looks pretty
good. However, compared with the design capacity of 50 units per day, 36 units per day is much
less impressive although probably more meaningful.

fig. 9.2.1.1 capacity and output relationship
3. Licensed capacity: Capacity licensed by the various regulatory agencies or government

authorities. This is the limitation on the output exercised by the government.
4. Installed capacity: The capacity provided at the time of installation of the plant is called
installed capacity.
5. Rated capacity: Capacity based on the highest production rate established by actual trials is
referred to as rated capacity.
9.2.2. Determinants of Effective Capacity
Many decision made concerning system design have an impact on capacity. The same is true for
many operating decisions. The main factors related to the following.
1. Facilities 4. Human considerations

2. Products or services 5. Operations
3. Processes 6. External forces
Facilities factors: the design of facilities, including size and provision for expansion, is very
important. Locational factors, such as transportation costs, distance to market, labor supply,
energy sources, and room for expansion, are also important. Likewise, layout of work areas often

determines how smoothly work can be performed, and environmental factors such as heating,
lightening, ventilation also play an important role in determining whether personnel can perform
effectively or they must struggle to overcome poor design characteristics.
Product/service factors: product or service design can have a tremendous influence on capacity.
For example, when items are similar, the ability of the system to produce those items is generally
much greater than when successive items differ. For example, a restaurant that offers a limited
menu can usually prepare and serve meals at a faster rate than a restaurant with excessive menu.
Generally speaking, the more uniform the output, the more opportunities there are for
standardization of methods and materials, which leads to greater capacity. The particular mix of
products or services rendered must also be considered since different items will have different
rates of output.
Process factors: The quantity capability of a process is an obvious determinants of capacity. A

more subtle determinant is the influence of output quality. For instance, quality of outputs does
not meet standards, the rate of output will be slowed by the need for inspection and rework
activities.
Human factors: the task that make up a job, the variety of activities involved, and the training,
skill, and experience required to perform a job all have an impact on potential and actual output.
In addition, employee motivation has a very basic relationship to capacity, as do absenteeism and
labor turnover.
Operation factors: scheduling problems may occur when an organization has differences in
equipment capabilities among alternatives pieces of equipment or differences in job
requirements. Inventory stocking decisions, late delivery, acceptability of purchased materials
and parts, and quality inspections and control procedures also can have an impact on effective
capacity.
External factors: product standards especially minimum quality and performance standard can
restrict management’s option for increasing and using capacity. Thus, pollution standards on
products and equipment often reduces effective capacity, as does paper work required by
government regulatory agencies by engaging employees in nonproductive activities. A similar
effect occurs when a union contract limits the number of hours and type of work an employee
may do.

Calculating processing requirements

When evaluating capacity alternatives, a necessary piece of information is the capacity
requirements of products that will be processed with a given alternatives. To get this information
one must have reasonably accurate demand forecast for each product, and know the standard
processing time per unit for each product on each alternative machine, the number of workdays
per year, and the number of shifts that will be used.
Example: A department works one 8 hour shift, 250 days a year, and has these figures for usage
of a machine that is currently being considered.
Product annual demand standard processing Processing time needed (hr)
time per unit (hr.)
#1 400 5.0 2,000
#2 300 8.0 2,400
#3 700 2.0 1,400
5,800
How many machines are needed for the given 250 working days per year?
Solution
Working one 8 hour shift, 250 days a year provide an annual capacity of 8 x 250 = 2,000hours
per year. We can see that three of these machines would be needed to handle the required
volume.
5,800 hours/2,000 hours per machine = 2.90 machines.

Example 2: A manager has the option of purchasing one, two, or three machines. Fixed costs and
potential volumes are as follows.
Number of Total Annual Corresponding

Machines Fixed Costs Range of Outputs
1 $9,600 0 to 300
2 15,000 301 to 600
3 20,000 601 to 900
Variable cost is $10 per unit, and revenue is $ 40 per unit.
a. Determine the breakeven point for each range
b. If projected annual demand is between 580 and 660 units, how many machine should the
manager purchase?
Solution
a. Compute the breakeven point for each range using the formula QBE = FC/R-VC
For one machine QBE = $9,600/$40 per unit - $10 per unit = 320 units (not in range).
For two machine QBE = $15,000/$40 per unit - $10 per unit = 500 units.
For one machine QBE = $20,000/$40 per unit - $10 per unit = 666.67 units.
b. Comparing the projected range of demand for the two range for which a breakeven point
occurs, you can see that the breakeven point is 500, in the range 301 to 600. This means
that even if demand is at the low end of the range (i.e., 580), it would be above the
breakeven point and thus yield a profit. That is not true of range 601 to 900. At the top end
of projected demand (i.e. 660), the volume still be less than the breakeven point for that
range. So there would be no profit. Hence, the manager should choose two machines.
9.2.3. Process of capacity planning
Capacity planning is concerned with defining the long-term and the short-term capacity needs of
an organization and determining how those needs will be satisfied. Capacity planning decisions
are taken based upon the consumer demand and this is merged with the human, material and
financial resources of the organization. Capacity requirements can be evaluated from two
perspectives—long-term capacity strategies and short-term capacity strategies.

1. LONG-TERM CAPACITY STRATEGIES

Long-term capacity requirements are more difficult to determine because the future demand and
technology are uncertain. Forecasting for five or ten years into the future is more risky and
difficult. Even sometimes company’s today’s products may not be existing in the future. Long
range capacity requirements are dependent on marketing plans, product development and
lifecycle of the product. Long-term capacity planning is concerned with accommodating major
changes that affect overall level of the output in long-term. Marketing environmental
assessment and implementing the long-term capacity plans in a systematic manner are the major
responsibilities of management. Following parameters will affect long range capacity decisions.
A. Multiple products: Company’s produce more than one product using the same facilities in
order to increase the profit. The manufacturing of multiple products will reduce the risk of
failure. Having more than one product helps the capacity planners to do a better job. Because
products are in different stages of their life-cycles, it is easy to schedule them to get maximum
capacity utilization.
B. Phasing in capacity: In high technology industries, and in industries where technology
developments are very fast, the rate of obsolescence is high. The products should be brought
into the market quickly. The time to construct the facilities will be long and there is no much
time as the products should be introduced into the market quickly. Here the solution is phase in
capacity on modular basis. Some commitment is made for building funds and men towards
facilities over a period of 3–5 years. This is an effective way of capitalizing on technological
breakthrough.
3. Phasing out capacity: The outdated manufacturing facilities cause excessive plant closures
and down time. The impact of closures is not limited to only fixed costs of plant and
machinery. Thus, the phasing out here is done with humanistic way without affecting the
community. The phasing out options makes alternative arrangements for men like shifting
them to other jobs or to other locations, compensating the employees, etc.
2. SHORT-TERM CAPACITY STRATEGIES

Managers often use forecasts of product demand to estimate the short-term workload the facility
must handle. Managers looking ahead up to 12 months, anticipate output requirements for
different products, and services. Managers then compare requirements with existing capacity

and then take decisions as to when the capacity adjustments are needed. For short-term periods
of up to one year, fundamental capacity is fixed. Major facilities will not be changed. Many
short-term adjustments for increasing or decreasing capacity are possible.
The adjustments to be required depend upon the conversion process like whether it is capital
intensive or labour intensive or whether product can be stored as inventory.
Capital intensive processes depend on physical facilities, plant and equipment. Short-term
capacity can be modified by operating these facilities more or less intensively than normal. In
labour intensive processes short-term capacity can be changed by laying off or hiring people or
by giving overtime to workers. The strategies for changing capacity also depend upon how long
the product can be stored as inventory.
The short-term capacity strategies are:
1. Inventories: Stock of finished goods during slack periods to meet the demand during peak
period.
2. Backlog: During peak periods, the willing customers are requested to wait and their orders
are fulfilled after a peak demand period.
3. Employment level (hiring or firing): Hire additional employees during peak demand period
and lay-off employees as demand decreases.
4. Employee training: Develop multi-skilled employees through training so that they can be
rotated among different jobs. The multi-skilling helps as an alternative to hiring employees.
5. Subcontracting: During peak periods, hire the capacity of other firms temporarily to make
the component parts or products.
6. Process design: Change job contents by redesigning the job.
9.3. Location Analysis
Plant location or the facilities location problem is an important strategic level decision making
for an organization. One of the key features of a conversion process (manufacturing system) is
the efficiency with which the products (services) are transferred to the customers.
This fact will include the determination of where to place the plant or facility. The selection of
location is a key-decision as large investment is made in building plant and machinery. It is not
advisable or not possible to change the location very often. So an improper location of plant may
lead to waste of all the investments made in building and machinery, equipment.

Before a location for a plant is selected, long range forecasts should be made anticipating future
needs of the company. The plant location should be based on the company’s expansion plan and
policy, diversification plan for the products, changing market conditions, the changing sources of
raw materials and many other factors that influence the choice of the location decision. The
purpose of the location study is to find an optimum location one that will result in the greatest
advantage to the organization.
9.3.1. Need for selecting a suitable location
The need for selecting a suitable location arises because of three situations.
I. When starting a new organization, i.e., location choice for the first time.
II. In case of existing organization.
III. In case of Global Location.
I. In Case of Location Choice for the First Time or New Organizations’
Cost economies are always important while selecting a location for the first time, but should
keep in mind the cost of long-term business/organizational objectives. The following are the
factors to be considered while selecting the location for the new organizations’:
1. Identification of region: The organizational objectives along with the various long-term
considerations about marketing, technology, internal organizational strengths and weaknesses,
region specific resources and business environment, legal-governmental environment, social
environment and geographical environment suggest a suitable region for locating the operations
facility.
2. Choice of a site within a region: Once the suitable region is identified, the next step is
choosing the best site from an available set. Choice of a site is less dependent on the
organization’s long-term strategies. Evaluation of alternative sites for their tangible and
intangible costs will resolve facilities-location problem.
The problem of location of a site within the region can be approached with the following cost-
oriented non-interactive model, i.e., dimensional analysis.

3. Dimensional analysis: If all the costs were tangible and quantifiable, the comparison and
selection of a site is easy. The location with the least cost is selected. In most of the cases
intangible costs which are expressed in relative terms than in absolute terms. Their relative
merits and demerits of sites can also be compared easily. Since both tangible and intangible costs
need to be considered for a selection of a site, dimensional analysis is used.
Dimensional analysis consists in computing the relative merits (cost ratio) for each of the cost
items for two alternative sites. For each of the ratios an appropriate weightage by means of
power is given and multiplying these weighted ratios to come up with a comprehensive figure on
the relative merit of two alternative sites, i.e.,
C1M, C2M, …, CzM are the different costs associated with a site M on the ‘z’ different cost items.
C1N, C2N, …, CzN are the different costs associated with a site N and W1, W2, W3, …, Wz are
the weightage given to these cost items, then relative merit of the M and site N is given by:
(C1M /C1N)W1 × (C2M /C2N)W2 ,....., (Cz M /Cz N)Wz. If this is > 1, site N is superior and vice-versa.
When starting a new factory, plant location decisions are very important because they have direct
bearing on factors like, financial, employment and distribution patterns. In the long run,
relocation of plant may even benefit the organization. But, the relocation of the plant involves
stoppage of production, and also cost for shifting the facilities to a new location. In addition to
these things, it will introduce some inconvenience in the normal functioning of the business.
Hence, at the time of starting any industry, one should generate several alternate sites for
locating the plant. After a critical analysis, the best site is to be selected for commissioning the
plant. Location of warehouses and other facilities are also having direct bearing on the
operational performance of organizations.
The existing firms will seek new locations in order to expand the capacity or to place the existing
facilities. When the demand for product increases, it will give rise to following decisions:
 Whether to expand the existing capacity and facilities.

 Whether to look for new locations for additional facilities.
 Whether to close down existing facilities to take advantage of some new locations.

II. In Case of Location Choice for Existing Organization
In this case a manufacturing plant has to fit into a multi-plant operations strategy. That is,
additional plant location in the same premises and elsewhere under following circumstances:
1. Plant manufacturing distinct products.
2. Manufacturing plant supplying to specific market area.
3. Plant divided on the basis of the process or stages in manufacturing.
4. Plants emphasizing flexibility.
The different operations strategies under the above circumstances could be:
1. Plants manufacturing distinct products: Each plant services the entire market area for the
organization. This strategy is necessary where the needs of technological and resource inputs are
specialized or distinctively different for the different product-lines.
For example, a high quality precision product-line should not be located along with other
product-line requiring little emphasis on precision. It may not be proper to have too many
contradictions such as sophisticated and old equipment, highly skilled and semi-skilled
personnel, delicate processes and those that could permit rough handlings, all under one roof and
one set of managers. Such a setting leads to much confusion regarding the required emphasis and
the management policies.
Product specialization may be necessary in a highly competitive market. It may be necessary to

exploit the special resources of a particular geographical area. The more decentralized these pairs
are in terms of the management and in terms of their physical location, the better would be the
planning and control and the utilization of the resources.
2. Manufacturing plants supplying to a specific market area: Here, each plant manufactures
almost all of the company’s products. This type of strategy is useful where market proximity
consideration dominates the resources and technology considerations. This strategy requires
great deal of coordination from the corporate office. An extreme example of this strategy is that
of soft drinks bottling plants.

3. Plants divided on the basis of the process or stages in manufacturing: Each production
process or stage of manufacturing may require distinctively different equipment capabilities,
labour skills, technologies, and managerial policies and emphasis. Since the products of one
plant feed into the other plant, this strategy requires much centralized coordination of the
manufacturing activities from the corporate office that are expected to understand the various
technological aspects of all the plants.
4. Plants emphasizing flexibility: This requires much coordination between plants to meet the
changing needs and at the same time ensure efficient use of the facilities and resources.
Frequent changes in the long-term strategy in order to improve be efficiently temporarily, are not
healthy for the organization. In any facility location problem the central question is: ‘Is this a
location at which the company can remain competitive for a long time?’
III. In Case of Global Location
Because of globalization, multinational corporations are setting up their organizations in Ethiopia

and Ethiopian companies are extending their operations in other countries. In case of global
locations there is scope for virtual proximity and virtual factory.
Virtual Proximity
With the advance in telecommunications technology, a firm can be in virtual proximity to its
customers. For a software services firm much of its logistics is through the information/
communication pathway. Many firms use the communications highway for conducting a large
portion of their business transactions. Logistics is certainly an important factor in deciding on a
location—whether in the home country or abroad. Markets have to be reached. Customers have
to be contacted. Hence, a market presence in the country of the customers is quite necessary.
Virtual Factory
Many firms based in Asia like China, USA, and Europe in the service sector and in the
manufacturing sector often out sources part of their business processes to foreign locations such
as Ethiopia. Thus, instead of one’s own operations, a firm could use its business associates’
operations facilities. The Ethiopian BPO firm is a foreign-based company’s ‘virtual service

factory’. So a location could be one’s own or one’s business associates. The location decision
need not always necessarily pertain to own operations.
Reasons for a Global/Foreign Location
A. Tangible Reasons
The tangible reasons for setting up an operations facility abroad could be as follows:
Reaching the customer: One obvious reason for locating a facility abroad is that of capturing a
share of the market expanding worldwide. The phenomenal growth of the GDP of Ethiopia is a
big reason for the multinationals to have their operations facilities in our country. An important
reason is that of providing service to the customer promptly and economically which is logistics-
dependent. Therefore, cost and case of logistics is a reason for setting up manufacturing facilities
abroad. By logistics set of activities closes the gap between productions of goods/services and
reaching of these intended goods/services to the customer to his satisfaction. Reaching the
customer is thus the main objective. The tangible and intangible gains and costs depend upon the
company defining for itself as to what that ‘reaching’ means. The tangible costs could be the
logistics related costs; the intangible costs may be the risk of operating is a foreign country. The
tangible gains are the immediate gains; the intangible gains are an outcome of what the company
defines the concepts of reaching and customer for itself.
The other tangible reasons could be as follows:
(a) The host country may offer substantial tax advantages compared to the home country.
(b) The costs of manufacturing and running operations may be substantially less in that foreign
country. This may be due to lower labour costs, lower raw material cost, better availability of
the inputs like materials, energy, water, ores, metals, key personnel etc.
(c) The company may overcome the tariff barriers by setting up a manufacturing plant in a
foreign country rather than exporting the items to that country.
B. Intangible Reasons
The intangible reasons for considering setting up an operations facility abroad could be as
follows:

1. Customer-related Reasons
(a) With an operations facility in the foreign country, the firm’s customers may feel secure that
the firm is more accessible. Accessibility is an important ‘service quality’ determinant.
(b) The firm may be able to give a personal tough.
(c) The firm may interact more intimately with its customers and may thus understand their
requirements better.
(d) It may also discover other potential customers in the foreign location.
2. Organizational Learning-related Reasons
(a) The firm can learn advanced technology. For example, it is possible that cutting-edge
technologies can be learn by having operations in an technologically more advanced
country. The firm can learn from advanced research laboratories/universities in that country.
Such learning may help the entire product-line of the company.
(b) The firm can learn from its customers abroad. A physical location there may be essential
towards this goal.
(c) It can also learn from its competitors operating in that country. For this reason, it may have to
be physically present where the action is.
(d) The firm may also learn from its suppliers abroad. If the firm has a manufacturing plant there,
it will have intensive interaction with the suppliers in that country from whom there may be
much to learn in terms of modern and appropriate technology, modern management methods,
and new trends in business worldwide.
3. Other Strategic Reasons
(a) The firm by being physically present in the host country may gain some ‘local boy’ kind of
psychological advantage. The firm is no more a ‘foreign’ company just sending its products
across international borders. This may help the firm in lobbying with the government of that
country and with the business associations in that country.

(b) The firm may avoid ‘political risk’ by having operations in multiple countries.
(c) By being in the foreign country, the firm can build alternative sources of supply. The firm
could, thus, reduce its supply risks.
(d) The firm could hunt for human capital in different countries by having operations in those
countries. Thus, the firm can gather the best of people from across the globe.
(e) Foreign locations in addition to the domestic locations would lower the market risks for the
firm. If one market goes slow the other may be doing well, thus lowering the overall risk.
9.3.2. Factors Influencing Plant Location/Facility Location
Facility location is the process of determining a geographic site for a firm’s operations.
Managers of both service and manufacturing organizations must weigh many factors when
assessing the desirability of a particular site, including proximity to customers and suppliers,
labour costs, and transportation costs.
Location conditions are complex and each comprises a different Characteristic of a tangible (i.e.
Freight rates, production costs) and non-tangible (i.e. reliability, Frequency security, quality)
nature.
Location conditions are hard to measure. Tangible cost based factors such as wages and products
costs can be quantified precisely into what makes locations better to compare. On the other hand
non-tangible features, which refer to such characteristics as reliability, availability and security,
can only be measured along an ordinal or even nominal scale. Other non-tangible features like
the percentage of employees that are unionized can be measured as well. To sum this up non-
tangible features are very important for business location decisions.
It is appropriate to divide the factors, which influence the plant location or facility location on
the basis of the nature of the organization as
1. General locational factors, which include controllable and uncontrollable factors for all type
of organizations’.
2. Specific locational factors specifically required for manufacturing and service organizations’.

Location factors can be further divided into two categories:
Dominant factors are those derived from competitive priorities (cost, quality, time, and
flexibility) and have a particularly strong impact on sales or costs. Secondary factors also are
important, but management may downplay or even ignore some of them if other factors are more
important.
9.3.2.1. General Locational Factors
Following are the general factors required for location of plant in case of all types of
organizations’.
Controllable Factors
1. Proximity to markets 2. Supply of materials
3. Transportation facilities 4. Infrastructure availability
5. Labour and wages 6. External economies
7. Capital
Uncontrollable Factors
1. Government policy 4. Community and labour attitudes
2. Climate conditions 5. Community Infrastructure
3. Supporting industries and services

Fig. 9.3.2.1.1 factors influencing plant location
Controllable Factors
1. Proximity to markets: Every company is expected to serve its customers by providing goods
and services at the time needed and at reasonable price organizations may choose to locate
facilities close to the market or away from the market depending upon the product. When the
buyers for the product are concentrated, it is advisable to locate the facilities close to the market.
Locating nearer to the market is preferred if
• The products are delicate and susceptible to spoilage.
• After sales services are promptly required very often.
• Transportation cost is high and increase the cost significantly.
• Shelf life of the product is low.

Nearness to the market ensures a consistent supply of goods to customers and reduces the cost of
transportation.
2. Supply of raw material: It is essential for the organization to get raw material in right
qualities and time in order to have an uninterrupted production. This factor becomes very
important if the materials are perishable and cost of transportation is very high.
General guidelines regarding effects of raw materials on plant location are:
• When a single raw material is used without loss of weight, locate the plant at the raw
material source, at the market or at any point in between.
• When weight loosing raw material is demanded, locate the plant at the raw material
source.
• When raw material is universally available, locate close to the market area.
• If the raw materials are processed from variety of locations, the plant may be situated so
as to minimize total transportation costs.
Nearness to raw material is important in case of industries such as sugar, cement, jute and cotton
textiles.
3. Transportation facilities: Speedy transport facilities ensure timely supply of raw materials to
the company and finished goods to the customers. The transport facility is a prerequisite for the
location of the plant. There are five basic modes of physical transportation, air, road, rail, water
and pipeline. Goods that are mainly intended for exports demand a location near to the port or
large airport. The choice of transport method and hence the location will depend on relative
costs, convenience, and suitability. Thus transportation cost to value added is one of the criteria
for plant location.
4. Infrastructure availability: The basic infrastructure facilities like power, water and waste
disposal, etc., become the prominent factors in deciding the location. Certain types of industries
are power hungry e.g., aluminum and steel and they should be located close to the power station
or location where uninterrupted power supply is assured throughout the year. The non-
availability of power may become a survival problem for such industries. Process industries like
paper, chemical, cement, etc., require continuous. Supply of water in large amount and good

quality, and mineral content of water becomes an important factor. A waste disposal facility for
process industries is an important factor, which influences the plant location.
5. Labour and wages: The problem of securing adequate number of labour and with skills
specific is a factor to be considered both at territorial as well as at community level during plant
location. Importing labour is usually costly and involve administrative problem. The history of
labour relations in a prospective community is to be studied. Prospective community is to be
studied. Productivity of labour is also an important factor to be considered. Prevailing wage
pattern, cost of living and industrial relation and bargaining power of the unions’ forms in
important considerations.
6. External economies of scale: External economies of scale can be described as urbanization

and locational economies of scale. It refers to advantages of a company by setting up operations
in a large city while the second one refers to the “settling down” among other companies of
related Industries. In the case of urbanization economies, firms derive from locating in larger
cities rather than in smaller ones in a search of having access to a large pool of labour, transport
facilities, and as well to increase their markets for selling their products and have access to a
much wider range of business services.
Location economies of scale in the manufacturing sector have evolved over time and have
mainly increased competition due to production facilities and lower production costs as a result
of lower transportation and logistical costs. This led to manufacturing districts where many
companies of related industries are located more or less in the same area. As large corporations
have realized that inventories and warehouses have become a major cost factor, they have tried
reducing inventory costs by launching “Just in Time” production system (the so called Kanban
System). This high efficient production system was one main factor in the Japanese car industry
for being so successful. Just in time ensures to get spare parts from suppliers within just a few
hours after ordering. To fulfill these criteria corporations have to be located in the same area
increasing their market and service for large corporations.
7. Capital: By looking at capital as a location condition, it is important to distinguish the

physiology of fixed capital in buildings and equipment from financial capital. Fixed capital costs
as building and construction costs vary from region to region. But on the other hand buildings
can also be rented and existing plants can be expanded. Financial capital is highly mobile and

does not very much influence decisions. For example, large Multinational Corporations such as
Coca-Cola operate in many different countries and can raise capital where interest rates are
lowest and conditions are most suitable.
Capital becomes a main factor when it comes to venture capital. In that case young, fast growing
(or not) high tech firms are concerned which usually have not many fixed assets. These firms
particularly need access to financial capital and also skilled educated employees.
Uncontrollable Factors
1. Government policy: The policies of the state governments and local bodies concerning labour
laws, building codes, safety, etc., are the factors that demand attention.
In order to have a balanced regional growth of industries, both central and state governments in
our country offer the package of incentives to entrepreneurs in particular locations. The incentive
package may be in the form of exemption from a safes tax and excise duties for a specific period,
soft loan from financial institutions, subsidy in electricity charges and investment subsidy. Some
of these incentives may tempt to locate the plant to avail these facilities offered.
2. Climatic conditions: The geology of the area needs to be considered together with climatic
conditions (humidity, temperature). Climates greatly influence human efficiency and behavior.
Some industries require specific climatic conditions e.g., textile mill will require humidity.
3. Supporting industries and services: Now a day the manufacturing organization will not
make all the components and parts by itself and it subcontracts the work to vendors. So, the
source of supply of component parts will be the one of the factors that influences the location.
The various services like communications, banking services professional consultancy services
and other civil amenities services will play a vital role in selection of a location.
4. Community and labour attitudes: Community attitude towards their work and towards the
prospective industries can make or mar the industry. Community attitudes towards supporting
trade union activities are important criteria. Facility location in specific location is not desirable
even though all factors are favoring because of labour attitude towards management, which
brings very often the strikes and lockouts.

5. Community infrastructure and amenity: All manufacturing activities require access to a

community infrastructure, most notably economic overhead capital, such as roads, railways, port
facilities, power lines and service facilities and social overhead capital like schools, universities
and hospitals.
These factors are also needed to be considered by location decisions as infrastructure is

enormously expensive to build and for most manufacturing activities the existing stock of
infrastructure provides physical restrictions on location possibilities.
9.3.2.2. Specific Locational Factors for Manufacturing Organization
Dominant Factors
Factors dominating location decisions for new manufacturing plants can be broadly classified in
six groups. They are listed in the order of their importance as follows.
1. Favorable labour climate
2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Utilities, taxes, and real estate costs
1. Favorable labour climate: A favorable labour climate may be the most important factor in
location decisions for labor-intensive firms in industries such as textiles, furniture, and consumer
electronics. Labour climate includes wage rates, training requirements, attitudes toward work,
worker productivity, and union strength. Many executives consider weak unions or al low
probability of union organizing efforts as a distinct advantage.
2. Proximity to markets: After determining where the demand for goods and services is
greatest, management must select a location for the facility that will supply that demand.
Locating near markets is particularly important when the final goods are bulky or heavy and
outbound transportation rates are high. For example, manufacturers of products such as plastic
pipe and heavy metals all emphasize proximity to their markets.

3. Quality of life: Good schools, recreational facilities, cultural events, and an attractive lifestyle
contribute to quality of life. This factor is relatively unimportant on its own, but it can make the
difference in location decisions.
4. Proximity to suppliers and resources: In many companies, plants supply parts to other
facilities or rely on other facilities for management and staff support. These require frequent
coordination and communication, which can become more difficult as distance increases.
5. Utilities, taxes, and real estate costs: Other important factors that may emerge include utility
costs (telephone, energy, and water), local and state taxes, financing incentives offered by local
or state governments, relocation costs, and land costs.
Secondary Factors
There are some other factors needed to be considered, including room for expansion,
construction costs, accessibility to multiple modes of transportation, the cost of shuffling people
and materials between plants, competition from other firms for the workforce, community
attitudes, and many others. For global operations, firms are emphasizing local employee skills
and education and the local infrastructure.
9.3.2.3. Specific Locational Factors for Service Organization
Dominant Factors
The factors considered for manufacturers are also applied to service providers, with one
important addition — the impact of location on sales and customer satisfaction. Customers
usually look about how close a service facility is, particularly if the process requires considerable
customer contact.
Proximity to Customers
Location is a key factor in determining how conveniently customers can carry on business with a
firm. For example, few people would like to go to remotely located dry cleaner or supermarket if
another is more convenient. Thus the influence of location on revenues tends to be the dominant
factor.

Transportation Costs and Proximity to Markets
For warehousing and distribution operations, transportation costs and proximity to markets are
extremely important. With a warehouse nearby, many firms can hold inventory closer to the
customer, thus reducing delivery time and promoting sales.
Location of Competitors
One complication in estimating the sales potential at different location is the impact of
competitors. Management must not only consider the current location of competitors but also try
to anticipate their reaction to the firm’s new location. Avoiding areas where competitors are
already well established often pays. However, in some industries, such as new-car sales
showrooms and fast food chains, locating near competitors is actually advantageous. The
strategy is to create a critical mass, whereby several competing firms clustered in one location
attract more customers than the total number who would shop at the same stores at scattered
locations. Recognizing this effect, some firms use a follow –the leader strategy when selecting
new sites.
Secondary Factors
Retailers also must consider the level of retail activity, residential density, traffic flow, and site
visibility. Retail activity in the area is important, as shoppers often decide on impulse to go
shopping or to eat in a restaurant. Traffic flows and visibility are important because businesses’
customers arrive in cars. Visibility involves distance from the street and size of nearby buildings
and signs. High residential density ensures nighttime and weekend business when the population
in the area fits the firm’s competitive priorities and target market segment.
9.4. Location Theories
Alfred Weber’s Theory of the location of industries
Alfred Weber (1868–1958), with the publication of Theory of the Location of Industries in 1909,
put forth the first developed general theory of industrial location. His model took into account
several spatial factors for finding the optimal location and minimal cost for manufacturing plants.
The point for locating an industry that minimizes costs of transportation and labour requires
analysis of three factors:

1. The point of optimal transportation based on the costs of distance to the ‘material index’—the
ratio of weight to intermediate products (raw materials) to finished product.
2. The labour distortion, in which more favorable sources of lower cost of labour may justify
greater transport distances.
3. Agglomeration and degglomerating.
Agglomeration or concentration of firms in a locale occurs when there is sufficient demand for
support services for the company and labour force, including new investments in schools and
hospitals. Also supporting companies, such as facilities that build and service machines and
financial services, prefer closer contact with their customers.
Degglommeration occurs when companies and services leave because of over concentration of
industries or of the wrong types of industries, or shortages of labour, capital, affordable land, etc.
Weber also examined factors leading to the diversification of an industry in the horizontal
relations between processes within the plant.
The issue of industry location is increasingly relevant to today’s global markets and transnational
corporations. Focusing only on the mechanics of the Weberian model could justify greater
transport distances for cheap labour and unexploited raw materials. When resources are
exhausted or workers revolt, industries move to different countries.
9.5. Location Models
Various models are available which help to identify the ideal location. Some of the popular
models are:
1. Factor rating method
2. Weighted factor rating method
3. Load-distance method
4. Centre of gravity method
5. Break even analysis

9.5.1. Factor Rating Method
The process of selecting a new facility location involves a series of following steps:
1. Identify the important location factors.
2. Rate each factor according to its relative importance, i.e., higher the ratings is indicative of
prominent factor.
3. Assign each location according to the merits of the location for each factor.
4. Calculate the rating for each location by multiplying factor assigned to each location with
basic factors considered.
5. Find the sum of product calculated for each factor and select best location having highest total
score.
ILLUSTRATION 1: Let us assume that a new medical facility, Health-care, is to be located in

Delhi. The location factors, factor rating and scores for two potential sites are shown in the
following table. Which is the best location based on factor rating method?

9.5.2. Weighted Factor Rating Method
In this method to merge quantitative and qualitative factors, factors are assigned weights based
on relative importance and weightage score for each site using a preference matrix is calculated.
The site with the highest weighted score is selected as the best choice.
ILLUSTRATION 2: Let us assume that a new medical facility, Health-care, is to be located in

Delhi. The location factors, weights, and scores (1 = poor, 5 = excellent) for two potential sites
are shown in the following table. What is the weighted score for these sites? Which is the best
location?
SOLUTION: The weighted score for this particular site is calculated by multiplying each factor’s
weight by its score and adding the results:
Weighed score location 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 + 10 × 5
= 75 + 100 + 75 + 15 + 50 = 315
Weighed score location 2 = 25 × 5 + 25 × 3 + 25 × 3 + 15 × 2 + 10 × 3
= 125 + 75 + 75 + 30 + 30 = 335
Location 2 is the best site based on total weighted scores.

9.5.3. Load-distance Method
The load-distance method is a mathematical model used to evaluate locations based on proximity
factors. The objective is to select a location that minimizes the total weighted loads moving into
and out of the facility. The distance between two points is expressed by assigning the points to
grid coordinates on a map. An alternative approach is to use time rather than distance.
DISTANCE MEASURES
Suppose that a new warehouse is to be located to serve Delhi. It will receive inbound shipments
from several suppliers, including one in Ghaziabad. If the new warehouse were located at
Gurgaon, what would be the distance between the two facilities? If shipments travel by truck, the
distance depends on the highway system and the specific route taken. Computer software is
available for calculating the actual mileage between any two locations in the same county.
However, for load-distance method, a rough calculation that is either Euclidean or rectilinear
distance measure may be used. Euclidean distance is the straight-line distance, or shortest
possible path, between two points.
Fig. 9.5.3 Distance between point A and point B
The point A on the grid represents the supplier’s location in Ghaziabad, and the point B
represents the possible warehouse location at Gurgaon. The distance between points A and B is
the length of the hypotenuse of a right triangle, or
dAB = Sqrt ((XA – XB)2 + (YA – YB)2)
Where dAB = distance between points A and B
XA = x-coordinate of point A

YA = y-coordinate of point A
XB = x-coordinate of point B
YB = y-coordinate of point B
Rectilinear distance measures distance between two points with a series of 90° turns as city
blocks. Essentially, this distance is the sum of the two dashed lines representing the base and side
of the triangle in figure. The distance travelled in the x-direction is the absolute value of the
difference in x-coordinates. Adding this result to the absolute value of the difference in the y-
coordinates gives
DAB = |XA – XB| + |YA – YB|
Calculating a Load-Distance Score
Suppose that a firm planning a new location wants to select a site that minimizes the distances
that loads, particularly the larger ones, must travel to and from the site. Depending on the
industry, a load may be shipments from suppliers, between plants, or to customers, or it may be
customers or employees travelling to or from the facility. The firm seeks to minimize its load
distance, generally by choosing a location so that large loads go short distances.
To calculate a load-distance for any potential location, we use either of the distance measures
and simply multiply the loads flowing to and from the facility by the distances travelled. These
loads may be expressed as tones or number of trips per week.
ILLUSTRATION 3: The new Health-care facility is targeted to serve seven census tracts in
Delhi. The table given below shows the coordinates for the center of each census tract, along
with the projected populations, measured in thousands. Customers will travel from the seven
census tract centers to the new facility when they need health-care. Two locations being
considered for the new facility are at (5.5, 4.5) and (7, 2), which are the centers of census tracts C
and F. Details of seven census tract centers, co-ordinate distances along with the population for
each center are given below. If we use the population as the loads and use rectilinear distance,
which location is better in terms of its total load distance score?

Solution: Calculate the load-distance score for each location. Using the coordinates from the
above table. Calculate the load-distance score for each tract.
Using the formula DAB = |XA – XB| + |YA – YB|
Summing the scores for all tracts gives a total load-distance score of 239 when the facility is
located at (5.5, 4.5) versus a load-distance score of 168 at location (7, 2). Therefore, the location
in census tract F is a better location.
9.5.4. Centre of Gravity
Centre of gravity is based primarily on cost considerations. This method can be used to assist
managers in balancing cost and service objectives. The center of gravity method takes into
account the locations of plants and markets, the volume of goods moved, and transportation costs
in arriving at the best location for a single intermediate warehouse.

The center of gravity is defined to be the location that minimizes the weighted distance between
the warehouse and its supply and distribution points, where the distance is weighted by the
number of tones supplied or consumed. The first step in this procedure is to place the locations
on a coordinate system. The origin of the coordinate system and scale used are arbitrary, just as
long as the relative distances are correctly represented. This can be easily done by placing a grid
over an ordinary map. The centre of gravity is determined by the formula.
Where Cx = x-coordinate of the centre of gravity
Cy = y-coordinate of the centre of gravity
Dix = x-coordinate of location i
Diy = y-coordinate of location i
ILLUSTRATION 4: The new Health-care facility is targeted to serve seven census tracts in
Delhi. The table given below shows the coordinates for the center of each census tract, along
with the projected populations, measured in thousands. Customers will travel from the seven
census tract centers to the new facility when they need healthcare.
Two locations being considered for the new facility are at (5.5, 4.5) and (7, 2), which are the
centers of census tracts C and F. Details of seven census tract centers, coordinate distances along
with the population for each center are given below. Find the target area’s center of gravity for
the Health-care medical facility.

Next we find Cx and Cy.
Cx = 453.5/68 = 6.67
Cy = 205.5/68 = 3.02
The center of gravity is (6.67, 3.02). Using the center of gravity as starting point, managers can
now search in its vicinity for the optimal location.
9.5.5. Break Even Analysis
Break even analysis implies that at some point in the operations, total revenue equals total cost.
Break even analysis is concerned with finding the point at which revenues and costs agree
exactly. It is called ‘Break-even Point’. The Fig. 2.3 portrays the Break Even Chart:
Breakeven point is the volume of output at which neither a profit is made nor a loss is incurred.
The Break Even Point (BEP) in units can be calculated by using the relation:

Fig. 9.5.4.1 Units of output or percentage of capacity
Plotting the break even chart for each location can make economic comparisons of locations.
This will be helpful in identifying the range of production volume over which location can be
selected.
ILLUSTRATION 5: Potential locations X, Y and Z have the cost structures shown below. The
ABC company has a demand of 1,300,000 units of a new product. Three potential locations X, Y
and Z having following cost structures shown are available. Select which location is to be
selected and also identify the volume ranges where each location is suited?
Solution: Solve for the crossover between X and Y:
10X + 150,000 = 8X + 350,000
2X = 200,000
X = 100,000 units
Solve for the crossover between Y and Z:

8X + 350,000 = 6X + 950,000
2X = 600,000
X = 300,000 units
Therefore, at a volume of 1,30,000 units, Y is the appropriate strategy. From the graph (Fig. 2.4)
we can interpret that location X is suitable up to 100,000 units, location Y is suitable up to
between 100,000 to 300,000 units and location Z is suitable if the demand is more than 300,000
units.
Fig. 9.5.4.2 BEP chart
9.6. Locational Economics
An ideal location is one which results in lowest production cost and least distribution cost per
unit. These costs are influenced by a number of factors as discussed earlier. The various costs
which decide locational economy are those of land, building, equipment, labour, material, etc.
Other factors like community attitude, community facilities and housing facilities will also
influence the selection of best location. Economic analysis is carried out to decide as to which
locate best location.
The following illustration will clarify the method of evaluation of best layout selection.
ILLUSTRATION 6: From the following data select the most advantageous location for setting a
plant for making transistor radios.


Self-Check
1. What do you mean by plant location?
2. What is virtual proximity?
3. What is virtual factory?
4. What is agglomeration?
5. What is degglomeration?
6. Mention any four objectives of plant layout.
7. Explain different operations strategies in case of location choice for existing organization.
8. Explain the factors to be considered while selecting the location for the new organization.
9. Explain the reasons for global or foreign location.
10. Explain the need for selecting a suitable location.
11. Explain the factors influencing plant location.

Chapter 10
Facility Layout

10.1 Introduction
10.2 Objectives and effects of plant layout
10.3 Principles of plant layout
10.4 Factors affecting layout
10.5 Classification of layout
10.5.1 Process layout
10.5.2 Product layout
10.5.3 Combination layout
10.5.4 Fixed position layout
10.5.5 Group or cellular layout
10.6 Design of product layout
10.7 Design of process layout
10.8 Service layout
10.9 Organization of physical facilities

 Define layout planning and its importance
 Identify and describe different types of layouts
 Compare process layouts & product layouts
 Describe the steps involved in designing a process layout
 Describe the steps involved in designing a product layout
 Explain the advantages of hybrid layouts
 Define the meaning of group technology (cell) layouts
10.1 Introduction
Decisions about layout are made only periodically, but since they have long-term consequences,
they must be made with careful planning. The layout design affects the cost of producing goods

and delivering services for many years into the future. The design of layouts begins with a
statement of the goals of the facility. Layouts are designed to meet these goals. After initial
designs are developed, improved designs are sought. This can be a tedious and cumbersome task
because the number of possible designs is so large. For this reason, quantitative and computer-
based models are often used. Layout planning is deciding on the best physical arrangement of all
resources that consumes space within a facility. Proper layout planning is highly important for
the efficient running of a business. Otherwise, there can be much wasted time and energy, as
well as confusion.
Plant layout is defined as the most effective physical arrangement of machines, processing
equipment, and service departments to have the best co-ordination and efficiency of man,
machine and material in a plant. It refers to the physical arrangement of production facilities. It is
the configuration of departments, work centers and equipment in the conversion process. It is a
floor plan of the physical facilities, which are used in production.
According to Moore “Plant layout is a plan of an optimum arrangement of facilities including

personnel, operating equipment, storage space, material handling equipment and all other
supporting services along with the design of best structure to contain all these facilities”. It is the
spatial arrangement of physical resources used to create the product. It also means how the space
needed for material movement, storage, indirect labor, etc is arranged in a factory.
For a factory which is already in operation, this may mean the arrangement that is already
present. However, for a new factory this means the plan of how the machines, equipment, etc
will be arranged in the different sections or shops. These should be arranged in such a way that
material movement cost, cost of storage in between processes, the investment on machines and
equipment etc should be optimal and the product is as cheap as possible.
Need to plan a layout can emerge due to various reasons. Some of them could be
 Need to make minor changes in present layout due to method improvement, new type
of inspection plan, and new type of product,
 Need to rearrange the existing layout due to marketing and technological change,
 Re-allocating the existing facilities due to new location, or
 Building a new plant.

10.2 Objectives and effects of Plant Layout
The primary goal of the plant layout is to maximize the profit by arrangement of all the plant
facilities to the best advantage of total manufacturing of the product.
The objectives of plant layout are:
1. Streamline the flow of materials through 7. Flexibility of manufacturing operations

the plant. and arrangements.
2. Facilitate the manufacturing process. 8. Provide for employee convenience,

safety and comfort.
3. Maintain high turnover of in-process
inventory. 9. Minimize investment in equipment.
4. Minimize materials handling and cost. 10. Minimize overall production time.
5. Effective utilization of men, equipment 11. Maintain flexibility of arrangement

and space. and operation.
6. Make effective utilization of cubic space. 12. Facilitate the organizational structure.
Effects of A Plant Layout
A good layout will result in the following:
 Material handling and transportation is minimized and efficiently controlled.

 The movements made by workers are minimized.
 Waiting time of the semi-finished products is minimized.
 Bottlenecks and point of congestion are eliminated (by line balancing) so that raw
material and semi-finished goods move faster from one workstation to another.
 Overall satisfaction & simplification which will result in full utilization, minimum delay
and congestion, ease in maintenance, and low manufacturing time.
 Increased production, safer working conditions, well ventilated rooms, clean
environment,
 Increased flexibility for changes in product design, future expansion, and optimal use of
space.

 A good layout provides maximum satisfaction to the employees, management, and

shareholders.
 Suitable spaces are allocated to production centers and service centers.
 Working conditions are safer, better (well ventilated rooms, etc.) and improved.
 There will be improved work methods and reduced production cycle time.
 There is an increased productivity, better product quality, and reduced capital cost.
In other words, the layout design must consider how to achieve the following:
 Higher utilization of space, equipment, and people.

 Improved flow of information, materials, and people.
 Improved employee morale and safer working conditions.
 Improved customer/client interaction.
 Flexibility to change the layout that exists anytime.
10.3 Principles of Plant Layout
1. Principle of integration: A good layout is one that integrates men, materials, machines and
supporting services and others in order to get the optimum utilization of resources and
maximum effectiveness.
2. Principle of minimum distance: This principle is concerned with the minimum travel (or
movement) of man and materials. The facilities should be arranged such that, the total
distance travelled by the men and materials should be minimum and as far as possible straight
line movement should be preferred.
3. Principle of cubic space utilization: The good layout is one that utilizes both horizontal and
vertical space. It is not only enough if only the floor space is utilized optimally but the third
dimension, i.e., the height is also to be utilized effectively.
4. Principle of flow: A good layout is one that makes the materials to move in forward direction
towards the completion stage, i.e., there should not be any backtracking.
5. Principle of maximum flexibility: The good layout is one that can be altered without much
cost and time.

6. Principle of safety, security and satisfaction: A good layout is one that gives due
consideration to workers safety and satisfaction and safeguards the plant and machinery
against fire, theft, etc.
7. Principle of minimum handling: A good layout is one that reduces the material handling to
the minimum.
10.4 Factors Affecting Layout
Layouts are affected by types of industry, production systems, types of products, volume of
production, and types of manufacturing processes used to get the final products. They are
elaborated below.
1. Types of Industries
Synthetic process based industry: In this, two or more materials are mixed to get a product, e.g.
cement is obtained from the combination of limestone and clay.
Analytic process based industry: It is opposite of synthetic process. Here, the final products are
obtained as a result of breaking of material into several parts. For example, the petroleum
products are obtained from the fractional distillation (breaking process) of the crude oil.
Conditioning process based industry: Here, the form of raw material is changed into the desired
products, e.g. jute products in the jute industry, or the milk products in the dairy farm.
Extractive process based industry: By applying heat, desired product is extracted from the raw
material, e.g. Aluminum from bauxite, and steel from iron ores.
2. Types of Production System
Continuous Production
They are characterized by standardized, high-volume, capital-intensive products made to store in

inventory, by small product mix; by special purpose equipment; and by continuous product flow.

Job Shop Production
This is characterized by made-to-order, low volume, labor-intense products; by a large product

mix; by general purpose equipment; by interrupted product flow; and by frequent schedule
changes. The system should be flexible, which needs general purpose machines and highly
skilled workers. Example: space vehicle, aircraft, special tools and equipment, prototype of
future products.
Batch Production
They are characterized by medium size lots of the same type of item or product and has the
following other features:
 lot may be produced once or on regular interval

 generally to meet continuous customer demand
 plant capacity generally higher than demand
 general purpose machine but having higher production rate
 specially designed jigs and fixtures
 most suitable for CAM
Example: industrial equipment, furniture, house-hold appliances, machine shop, casting, plastic
molding, press work-shop, etc.
3. Type of Product
Whether the product is heavy or light, large or small, liquid or solid, etc.
4. Volume of Production
Whether the production is in small quantity, or in lots or batches, or in huge quantity (mass
production).
10.5 Classification of Layout
Layouts can be classified into the following five categories:
1. Process layout 4. Fixed position layout
2. Product layout 5. Group layout
3. Combination layout

10.5.1 Process Layout
Process layout is recommended for batch production. All machines performing similar type of
operations are grouped at one location in the process layout e.g., all lathes, milling machines, etc.
are grouped in the shop will be clustered in like groups.
Thus, in process layout the arrangement of facilities are grouped together according to their
functions. A typical process layout is shown in Fig. 2.5. The flow paths of material through the
facilities from one functional area to another vary from product to product. Usually the paths are
long and there will be possibility of backtracking.
Process layout is normally used when the production volume is not sufficient to justify a product
layout. Typically, job shops employ process layouts due to the variety of products manufactured
and their low production volumes.
Fig. 10.5.1.1 process layout
Advantages
1. In process layout machines are better utilized and fewer machines are required.
2. Flexibility of equipment and personnel is possible in process layout.
3. Lower investment on account of comparatively less number of machines and lower cost of
general purpose machines.
4. Higher utilization of production facilities.
5. A high degree of flexibility with regards to work distribution to machineries and workers.
6. The diversity of tasks and variety of job makes the job challenging and interesting.
7. Supervisors will become highly knowledgeable about the functions under their department.

Limitations
1. Backtracking and long movements may occur in the handling of materials thus, reducing
material handling efficiency.
2. Material handling cannot be mechanized which adds to cost.
3. Process time is prolonged which reduce the inventory turnover and increases the in process
inventory.
4. Lowered productivity due to number of set-ups.
5. Throughput (time gap between in and out in the process) time is longer.
6. Space and capital are tied up by work-in-process.
10.5.2 Product Layout
In this type of layout, machines and auxiliary services are located according to the processing
sequence of the product. If the volume of production of one or more products is large, the
facilities can be arranged to achieve efficient flow of materials and lower cost per unit. Special
purpose machines are used which perform the required function quickly and reliably.
The product layout is selected when the volume of production of a product is high such that a
separate production line to manufacture it can be justified. In a strict product layout, machines
are not shared by different products. Therefore, the production volume must be sufficient to
achieve satisfactory utilization of the equipment. A typical product layout is shown in Fig.
below.
Fig. 10.5.2.1 product layout
Advantages
1. The flow of product will be smooth and logical in flow lines.

2. In-process inventory is less.
3. Throughput time is less.
4. Minimum material handling cost.
5. Simplified production, planning and control systems are possible.
6. Less space is occupied by work transit and for temporary storage.
7. Reduced material handling cost due to mechanized handling systems and straight flow.
8. Perfect line balancing which eliminates bottlenecks and idle capacity.
9. Manufacturing cycle is short due to uninterrupted flow of materials.
10. Small amount of work-in-process inventory.
11. Unskilled workers can learn and manage the production.
Limitations
1. A breakdown of one machine in a product line may cause stoppages of machines in the
downstream of the line.
2. A change in product design may require major alterations in the layout.
3. The line output is decided by the bottleneck machine.
4. Comparatively high investment in equipment’s is required.
5. Lack of flexibility. A change in product may require the facility modification.
10.5.3 Combination Layout
A combination of process and product layouts combines the advantages of both types of layouts.
A combination layout is possible where an item is being made in different types and sizes. Here
machinery is arranged in a process layout but the process grouping is then arranged in a sequence
to manufacture various types and sizes of products. It is to be noted that the sequence of
operations remains same with the variety of products and sizes. Figure below shows a
combination type of layout for manufacturing different sized gears.

Fig. 10.5.3.1 Combination layout for making different types and sizes of gears
10.5.4 Fixed Position Layout
This is also called the project type of layout. In this type of layout, the material, or major
components remain in a fixed location and tools, machinery, men and other materials are brought
to this location. This type of layout is suitable when one or a few pieces of identical heavy
products are to be manufactured and when the assembly consists of large number of heavy parts,
the cost of transportation of these parts is very high.
Fig. 10.5.4.1 Fixed position layout
Advantages
The major advantages of this type of layout are:
1. Helps in job enlargement and upgrades the skills of the operators.
2. The workers identify themselves with a product in which they take interest and pride in doing
the job.

3. Greater flexibility with this type of layout.
4. Layout capital investment is lower.
10.5.5 Group Layout (or Cellular Layout)
There is a trend now to bring an element of flexibility into manufacturing system as regards to
variation in batch sizes and sequence of operations. A grouping of equipment for performing a
sequence of operations on family of similar components or products has become all the
important.
Group technology (GT) is the analysis and comparisons of items to group them into families
with similar characteristics. GT can be used to develop a hybrid between pure process layout and
pure flow line (product) layout. This technique is very useful for companies that produce variety
of parts in small batches to enable them to take advantage and economics of flow line layout.
The application of group technology involves two basic steps; first step is to determine
component families or groups. The second step in applying group technology is to arrange the
plants equipment used to process a particular family of components. This represents small plants
within the plants. The group technology reduces production planning time for jobs. It reduces the
set-up time.
Thus group layout is a combination of the product layout and process layout. It combines the
advantages of both layout systems. If there are m-machines and n-components, in a group
number of machine-component cells (group) such that all the components assigned to a cell are
almost processed within that cell itself. Here, the objective is to minimize the intercell
movements.
The basic aim of a group technology layout is to identify families of components that require
similar of satisfying all the requirements of the machines are grouped into cells. Each cell is
capable of satisfying all the requirements of the component family assigned to it.
The layout design process considers mostly a single objective while designing layouts. In process
layout, the objective is to minimize the total cost of materials handling. Because of the nature of
the layout, the cost of equipment’s will be the minimum in this type of layout. In product layout,

the cost of materials handling will be at the absolute minimum. But the cost of equipment’s
would not be at the minimum if the equipment’s are not fully utilized.
In-group technology layout, the objective is to minimize the sum of the cost of transportation and
the cost of equipment’s. So, this is called as multi-objective layout. A typical Group Layout (or
Cellular Layout) is shown in Fig. below.
Fig. 10.5.5.1 Group layout or Cellular layout
Advantages of Group Technology Layout
Group Technology layout can increase—
1. Component standardization and rationalization.
2. Reliability of estimates.
3. Effective machine operation and productivity.
4. Customer service.
It can decrease the—
1. Paper work and overall production time.
2. Work-in-progress and work movement.
3. Overall cost.

Limitations of Group Technology Layout
This type of layout may not be feasible for all situations. If the product mix is completely
dissimilar, then we may not have meaningful cell formation.
10.6 Design of Product Layout
In product layout, equipment or departments are dedicated to a particular product line, duplicate
equipment is employed to avoid backtracking, and a straight-line flow of material movement is
achievable. Adopting a product layout makes sense when the batch size of a given product or
part is large relative to the number of different products or parts produced.
Assembly lines are a special case of product layout. In a general sense, the term assembly line
refers to progressive assembly linked by some material-handling device. The usual assumption is
that some form of pacing is present and the allowable processing time is equivalent for all
workstations. Within this broad definition, there are important differences among line types. A
few of these are material handling devices (belt or roller conveyor, overhead crane); line
configuration (U-shape, straight, branching); pacing (mechanical, human); product mix (one
product or multiple products); workstation characteristics (workers may sit, stand, walk with the
line, or ride the line); and length of the line (few or many workers). The range of products
partially or completely assembled on lines includes toys, appliances, autos, clothing and a wide
variety of electronic components. In fact, virtually any product that has multiple parts and is
produced in large volume uses assembly lines to some degree.
A more-challenging problem is the determination of the optimum configuration of operators and

buffers in a production flow process. A major design consideration in production lines is the
assignment of operation so that all stages are more or less equally loaded. Consider the case of
traditional assembly lines illustrated in Fig. below.
Fig. 10.6.1 Traditional assembly line

In this example, parts move along a conveyor at a rate of one part per minute to three groups of
workstations. The first operation requires 3 minutes per unit; the second operation requires 1
minute per unit; and the third requires 2 minutes per unit. The first workstation consists of three
operators; the second, one operator; and the third, two operators. An operator removes a part
from the conveyor and performs some assembly task at his or her workstation. The completed
part is returned to the conveyor and transported to the next operation. The number of operators at
each workstation was chosen so that the line is balanced. Since three operators work
simultaneously at the first workstation, on the average one part will be completed each minute.
This is also true for other two stations. Since the parts arrive at a rate of one per minute, parts are
also completed at this rate.
Assembly-line systems work well when there is a low variance in the times required to perform
the individual subassemblies. If the tasks are somewhat complex, thus resulting in a higher
assembly-time variance, operators down the line may not be able to keep up with the flow of
parts from the preceding workstation or may experience excessive idle time. An alternative to a
conveyor-paced assembly-line is a sequence of workstations linked by gravity conveyors, which
act as buffers between successive operations.
Line Balancing
Assembly-line balancing often has implications for layout. This would occur when, for balance
purposes, workstation size or the number used would have to be physically modified.
The most common assembly-line is a moving conveyor that passes a series of workstations in a
uniform time interval called the workstation cycle time (which is also the time between
successive units coming off the end of the line). At each workstation, work is performed on a
product either by adding parts or by completing assembly operations. The work performed at
each station is made up of many bits of work, termed tasks, elements, and work units. Such tasks
are described by motion-time analysis. Generally, they are grouping that cannot be subdivided on
the assembly-line without paying a penalty in extra motions.
The total work to be performed at a workstation is equal to the sum of the tasks assigned to that
workstation. The line-balancing problem is one of assigning all tasks to a series of workstations

so that each workstation has no more than can be done in the workstation cycle time, and so that
the unassigned (idle) time across all workstations is minimized.
The problem is complicated by the relationships among tasks imposed by product design and
process technologies. This is called the precedence relationship, which specifies the order in
which tasks must be performed in the assembly process.
The steps in balancing an assembly line are:
1. Specify the sequential relationships among tasks using a precedence diagram.
2. Determine the required workstation cycle time C, using the formula
C = Production time per day
Required output per day (in units)
3. Determine the theoretical minimum number of workstations (Nt) required to satisfy the
workstation cycle time constraint using the formula
Nt = Sum of task times (T)
Cycle time (C)
4. Select a primary rule by which tasks are to be assigned to workstations, and a secondary rule
to break ties.
5. Assign tasks, one at a time, to the first workstation until the sum of the task times is equal to
the workstation cycle time, or no other tasks are feasible because of time or sequence
restrictions. Repeat the process for workstation 2, workstation 3, and so on until all tasks are
assigned.
6. Evaluate the efficiency of the balance derived using the formula
Efficiency = Sum of task times (T)
Actual number of workstations (N ) × Workstations cycle time (C) a
7. If efficiency is unsatisfactory, rebalance using a different decision rule.

Illustration 7: The MS 800 car is to be assembled on a conveyor belt. Five hundred cars are
required per day. Production time per day is 420 minutes, and the assembly steps and times for
the wagon are given below. Find the balance that minimizes the number of workstations, subject
to cycle time and precedence constraints.
Solution: 1. Draw a precedence diagram as follows:
2. Determine workstation cycle time. Here we have to convert production time to seconds
because our task times are in seconds.

3. Determine the theoretical minimum number of workstations required (the actual number may
be greater)
4. Select assignment rules.
(a)Prioritize tasks in order of the largest number of following tasks:
Our secondary rule, to be invoked where ties exist from our primary rule, is (b) Prioritize tasks in
order of longest task time. Note that D should be assigned before B, and E assigned before C due
to this tie-breaking rule.
5. Make task assignments to form workstation 1, workstation 2, and so forth until all tasks are
assigned. It is important to meet precedence and cycle time requirements as the assignments are
made.

6. Calculate the efficiency.
7. Evaluate the solution. An efficiency of 77 per cent indicates an imbalance or idle time of 23
per cent (1.0 – .77) across the entire line.
In addition to balancing a line for a given cycle time, managers must also consider four other
options: pacing, behavioral factors, number of models produced, and cycle times.
Pacing is the movement of product from one station to the next after the cycle time has elapsed.
Paced lines have no buffer inventory. Unpaced lines require inventory storage areas to be placed
between stations.
Behavioral Factors
The most controversial aspect of product layout is behavioral response. Studies have shown that
paced production and high specialization lower job satisfaction. One study has shown that
productivity increased on unpaced lines. Many companies are exploring job enlargement and
rotation to increase job variety and reduce excessive specialization.
Number of Models Produced
A mixed-model line produces several items belonging to the same family. A single-model line
produces one model with no variations. Mixed model production enables a plant to achieve both
high-volume production and product variety. However, it complicates scheduling and increases
the need for good communication about the specific parts to be produced at each station.
Cycle Times
A line’s cycle time depends on the desired output rate (or sometimes on the maximum number of
workstations allowed). In turn, the maximum line efficiency varies considerably with the cycle
time selected. Thus, exploring a range of cycle times makes sense. A manager might go with a
particularly efficient solution even if it does not match the output rate. The manager can
compensate for the mismatch by varying the number of hours the line operates through overtime,
extending shifts, or adding shifts. Multiple lines might even be the answer.

10.7 Design of Process Layout
The analysis involved in the design of production lines and assembly lines relates primarily to
timing, coordination, and balance among individual stages in the process.
For process layouts, the relative arrangement of departments and machines is the critical factor
because of the large amount of transportation and handling involved.
Procedure for Designing Process Layouts
Process layout design determines the best relative locations of functional work centers. Work
centers that interact frequently, with movement of material or people, should be located close
together, whereas those that have little interaction can be spatially separated.
One approach of designing an efficient functional layout is described below.
1. List and describe each functional work center.
2. Obtain a drawing and description of the facility being designed.
3. Identify and estimate the amount of material and personnel flow among work centers
4. Use structured analytical methods to obtain a good general layout.
5. Evaluate and modify the layout, incorporating details such as machine orientation,
storage area location, and equipment access.
The first step in the layout process is to identify and describe each work center. The description
should include the primary function of the work center; drilling, new accounts, or cashier; its
major components, including equipment and number of personnel; and the space required. The
description should also include any special access needs (such as access to running water or an
elevator) or restrictions (it must be in a clean area or away from heat).
For a new facility, the spatial configuration of the work centers and the size and shape of the
facility are determined simultaneously. Determining the locations of special structures and
fixtures such as elevators, loading docks, and bathrooms becomes part of the layout process.

However, in many cases the facility and its characteristics are a given. In these situations, it is
necessary to obtain a drawing of the facility being designed, including shape and dimensions,
locations of fixed structures, and restrictions on activities, such as weight limits on certain parts
of a floor or foundation.
Fig. 10.7.1 Relationship flow diagram
To minimize transport times and material-handling costs, we would like to place close together
those work centers that have the greatest flow of materials and people between them.
To estimate the flows between work centers, it is helpful to begin by drawing relationship
diagram as shown in Fig. above (Relationship flow diagram).
For manufacturing systems, material flows and transporting costs can be estimated reasonably
well using historical routings for products or through work sampling techniques applied to
workers or jobs. The flow of people, especially in a service system such as a business office or a
university administration building, may be difficult to estimate precisely, although work
sampling can be used to obtain rough estimates.
The amounts and/or costs of flows among work centers are usually presented using a flow
matrix, a flow-cost matrix, or a proximity chart.
1. Flow Matrix
A flow matrix is a matrix of the estimated amounts of flow between each pair of work centers.
The flow may be materials (expressed as the number of loads transported) or people who move
between centers. Each work center corresponds to one row and one column, and the element fij
designates the amount of flow from work center (row) I to work center (column) j.

Normally, the direction of flow between work centers is not important, only the total amount, so
fij and fji can be combined and the flows represented using only the upper right half of a matrix.
Table 10.7.1 flow matrix
2. Flow-cost Matrix
A basic assumption of facility layout is that the cost of moving materials or people between work
centers is a function of distance travelled. Although more complicated cost functions can be
accommodated, often we assume that the per unit cost of material and personnel flows between
work centers is proportional to the distance between the centers. So for each type of flow
between each pair of departments, i and j, we estimate the cost per unit per unit distance, cij.
Table 10.7.2 flow-cost matrix

3. Proximity Chart
Proximity charts (relationship charts) are distinguished from flow and flow-cost matrices by the
fact that they describe qualitatively the desirability or need for work centers to be close together,
rather than providing quantitative measures of flow and cost. These charts are used when it is
difficult to measure or estimate precise amounts or costs of flow among work centers.
This is common when the primary flows involve people and do not have a direct cost but rather
an indirect cost, such as when employees in a corporate headquarters move among departments
(payroll, printing, information systems) to carry out their work.
10.8 Service Layout
The major factors considered for service providers, is an impact of location on sales and
customer satisfaction. Customers usually look about how close a service facility is, particularly if
the process requires considerable customer contact. Hence, service facility layouts should
provide for easy entrance to these facilities from the freeways. Well-organized packing areas,
easily accessible facilities, well designed walkways and parking areas are some of the
requirements of service facility layout.
Service facility layout will be designed based on degree of customer contact and the service
needed by a customer. These service layouts follow conventional layouts as required. For
example, for car service station, product layout is adopted, where the activities for servicing a car
follows a sequence of operation irrespective of the type of car. Hospital service is the best
example for adaptation of process layout. Here, the service required for a customer will follow
an independent path. The layout of car servicing and hospital is shown in Figs. 1 and 2
Fig. 1 Service layout for car servicing

10.9 Organization of Physical Facilities
The following are the most important physical facilities to be organized:
1. Factory building 4. Ventilation
2. Lighting 5. Work-related welfare facilities
3. Climatic conditions
I. Factory Building
Factory building is a factor which is the most important consideration for every industrial
enterprise. A modem factory building is required to provide protection for men, machines,
materials, products or even the company’s secrets. It has to serve as a part of the production
facilities and as a factor to maximize economy and efficiency in plant operations. It should offer
a pleasant and comfortable working environment and project the management’s image and
prestige. Factory building is like skin and bones of a living body for an organization. It is for
these reasons that the factory building acquires great importance.
Following factors are considered for an Industrial Building:
A. Design of the building.
B. Types of buildings.

A. Design of the Building
The building should designed so as to provide a number of facilities—such as lunch rooms,

cafeteria, locker rooms, crèches, libraries, first-aid and ambulance rooms, materials handling
facilities, heating, ventilation, air-conditioning, etc. Following factors are considerations in the
designing of a factory building:
1. Flexibility: Flexibility is one of the important considerations because the building is likely to
become obsolete and provides greater operating efficiency even when processes and technology
change. Flexibility is necessary because it is not always feasible and economical to build a new
plant, every time a new firm is organized or the layout is changed. With minor alternations, the
building should be able to accommodate different types of operations.
2. Product and equipment: The type of product that is to be manufactured, determines column-
spacing, type of floor, ceiling, heating and air-conditioning. A product of a temporary nature may
call for a less expensive building and that would be a product of a more permanent nature.
Similarly, a heavy product demands a far more different building than a product which is light in
weight.
3. Expansibility: Growth and expansion are natural to any manufacturing enterprises. They are
the indicators of the prosperity of a business. The following factors should be borne in mind if
the future expansion of the concern is to be provided for:
(i) The area of the land which is to be acquired should be large enough to provide for the future
expansion needs of the firm and accommodate current needs.
(ii) The design of the building should be in a rectangular shape. Rectangular shapes facilitate
expansion on any side.
(iii) If vertical expansion is expected, strong foundations, supporters and columns must be
provided.
(iv) If horizontal expansion is expected, the side walls must be made non-load-bearing to provide
for easy removal.

4. Employee facilities and service area: Employee facilities must find a proper place in the
building design because they profoundly affect the morale, comfort and productivity. The
building plan should include facilities for lunch rooms, cafeteria, water coolers, parking area
and the like. The provision of some of these facilities is a legal requirement. Others make
good working conditions possible. And a good working condition is good business.
Service areas, such as the tool room, the supervisor’s office, the maintenance room, receiving
and dispatching stations, the stock room and facilities for scrap disposal, should also be
included in the building design.
B. Types of Buildings
Industrial buildings may be grouped under two types:
1. Single-storey buildings, 2. Multi-storey buildings
The decision on choosing a suitable type for a particular firm depends on the manufacturing
process and the area of land and the cost of construction.
1. Single-Storey Buildings
Most of the industrial buildings manufacturing which are now designed and constructed are
single storeyed, particularly where lands are available at reasonable rates. Single-storey
buildings offer several operating advantages. A single-storey construction is preferable when
materials handling is difficult because the product is big or heavy, natural lighting is desired,
heavy floor loads are required and frequent changes in layout are anticipated.
Advantages
Advantages of single-storey building are:
1. There is a greater flexibility in layout and production routing.
2. The maintenance cost resulting from the vibration of machinery is reduced considerably
because of the housing of the machinery on the ground.
3. Expansion is easily ensured by the removal of walls.

4. The cost of transportation of materials is reduced because of the absence of materials

handling equipment between floors.
5. All the equipment is on the same level, making for an easier and more effective layout
supervision and control.
6. Greater floor load-bearing capacity for heavy equipment is ensured.
7. The danger of fire hazards is reduced because of the lateral spread of the building.
Limitations
Single-storey buildings suffer from some limitations. These are:
1. High cost of land, particularly in the city.
2. High cost of heating, ventilating and cleaning of windows.
3. High cost of transportation for moving men and materials to the factory which is generally
located far from the city.
2. Multi-Storey Buildings
Schools, colleges, shopping complexes, and residences, and for service industries like
Software, etc. multi-storey structures are generally popular, particularly in cities. Multi-storey
buildings are useful in manufacture of light products, when the acquisition of land becomes
difficult and expensive and when the floor load is less.
Advantages
When constructed for industrial use, multi-storey buildings offer the following advantages:
1. Maximum operating floor space (per sq. ft. of land). This is best suited in areas where land
is very costly.
2. Lower cost of heating and ventilation.
3. Reduced cost of materials handling because the advantage of the use of gravity for the flow
of materials.

Limitations
Following are the disadvantages of multi-storey building:
1. Materials handling becomes very complicated. A lot of time is wasted in moving them
between floors.
2. A lot of floor space is wasted on elevators, stairways and fire escapes.
3. Floor load-bearing capacity is limited, unless special construction is used, which is very
expensive.
4. Natural lighting is poor in the centers of the shop, particularly when the width of the
building is somewhat great.
5. Layout changes cannot be effected easily and quickly.
II. Lighting
It is estimated that 80 per cent of the information required in doing job is perceived visually.
Good visibility of the equipment, the product and the data involved in the work process is an
essential factor in accelerating production, reducing the number of defective products, cutting
down waste and preventing visual fatigue and headaches among the workers. It may also be
added that both inadequate visibility and glare are frequently causes accidents.
In principle, lighting should be adapted to the type of work. However, the level of illumination,
measured in should be increased not only in relation to the degree of precision or miniaturization
of the work but also in relation to the worker’s age. The accumulation of dust and the wear of the
light sources cut down the level of illumination by 10–50 per cent of the original level. This
gradual drop in the level should therefore be compensated for when designing the lighting
system.
Regular cleaning of lighting fixture is obviously essential.
Excessive contrasts in lighting levels between the worker’s task and the general surroundings
should also be avoided. The use of natural light should be encouraged. This can be achieved by

installing windows that open, which are recommended to have an area equal to the time of day,
the distance of workstations from the windows and the presence or absence of blinds. For this
reason it is essential to have artificial lighting, will enable people to maintain proper vision and
will ensure that the lighting intensity ratios between the task, the surrounding objects and the
general environment are maintained.
Control of Lighting
In order to make the best use of lighting in the work place, the following points should be taken
into account:
1. For uniform light distribution, install an independent switch for the row of lighting fixtures
closest to the windows. This allows the lights to be switched on and off depending on whether or
not natural light is sufficient.
2. To prevent glare, avoid using highly shiny, glossy work surfaces.
3. Use localized lighting in order to achieve the desired level for a particular fine job.
4. Clean light fixtures regularly and follow a maintenance schedule so as to prevent flickering
of old bulbs and electrical hazards due to worn out cables.
5. Avoid direct eye contact with the light sources. This is usually achieved by positioning them
property. The use of diffusers is also quite effective.
III. Climatic Conditions
Control of the climatic conditions at the workplace is paramount importance to the workers
health and comfort and to the maintenance of higher productivity. With excess heat or cold,
workers may feel very uncomfortable, and their efficiency drops. In addition, this can lead to
accidents.
This human body functions in such a way as to keep the central nervous system and the internal
organs at a constant temperature. It maintains the necessary thermal balance by continuous heat
exchange with the environment. It is essential to avoid excessive hear or cold, and wherever
possible to keep the climatic conditions optimal so that the body can maintain a thermal balance.

Working in A Hot Environment
Hot working environments are found almost everywhere. Work premise in tropical countries
may, on account of general climatic conditions, be naturally hot. When source of heat such as
furnaces, kilns or hot processes are present, or when the physical workload is heavy, the human
body may also have to deal with excess heat. It should be noted that in such hot working
environments sweating is almost the only way in which the body can lose heat. As the sweat
evaporates, the body cools. There is a relationship between the amount and speed of evaporation
and a feeling of comfort. The more intense the evaporation, the quicker the body will cool and
feel refreshed. Evaporation increases with adequate ventilation.
Working in A Cold Environment
Working in cold environments was once restricted to non-tropical or highly elevated regions.
Now as a result of modern refrigeration, various groups of workers, even in tropical countries,
are exposed to a cold environment.
Exposure to cold for short periods of time can produce serious effects, especially when workers
are exposed to temperatures below 10°C The loss of body heat is uncomfortable and quickly
affects work efficiency. Workers in cold climates and refrigerated premises should be well
protected against the cold by wearing suitable clothes, including footwear, gloves and, most
importantly, a hat.
Control of the Thermal Environment
There are many ways of controlling the thermal environment. It is relatively easy to assess the
effects of thermal conditions, especially when excessive heat or cold is an obvious problem. To
solve the problem, however, consistent efforts using a variety of available measures are usually
necessary. This is because the problem is linked with the general climate, which greatly affects
the workplace climate, production technology, which is often the source of heat or cold and
varying conditions of the work premises as well as work methods and schedules. Personal factors
such as clothing, nutrition, personal habits, and age and individual differences in response to the
given thermal conditions also need to be taken into account in the attempt to attain the thermal
comfort of workers.

In controlling the thermal environment, one or more of the following principles may be applied:
1. Regulating workroom temperature by preventing outside heat or cold from entering (improved
design of the roof, insulation material or installing an air-conditioned workroom.
Air-conditioning is costly, especially in factories. But it is sometimes a worthwhile investment if

an appropriate type is chosen);
2. provision of ventilation in hot workplaces by increasing natural ventilating through openings

or installing ventilation devices;
3. Separation of heat sources from the working area, insulation of hot surfaces and pipes, or
placement of barriers between the heat sources and the workers;
4. Control of humidity with a view to keeping it at low levels, for example by preventing the
escape of steam from pipes and equipment;
5. Provision of adequate personal protective clothing and equipment for workers exposed to
excessive radiant heat or excessive cold (heat-protective clothing with high insulation value
may not be recommended for jobs with long exposure to moderate or heavy work as it
prevents evaporative heat loss);
6. Reduction of exposure time, for example, by mechanization, remote control or alternating

work schedules;
7. Insertion of rest pauses between work periods, with comfortable, if possible air-conditioned,
resting facilities;
8. Ensuring a supply of cold drinking-water for workers in a hot environment and of hot drinks
for those exposed to a cold environment.
IV. Ventilation
Ventilation is the dynamic parameter that complements the concept of air space. For a given
number of workers, the smaller the work premises the more should be the ventilation.
Ventilation differs from air circulation. Ventilation replaces contaminated air by fresh air,
whereas as the air-circulation merely moves the air without renewing it. Where the air

temperature and humidity are high, merely to circulate the air is not only ineffective but also
increases heat absorption. Ventilation disperses the heat generated by machines and people at
work. Adequate ventilation should be looked upon as an important factor in maintaining the
worker’s health and productivity.
V. Work-Related Welfare Facilities
Work-related welfare facilities offered at or through the workplace can be important factors.
Some facilities are very basic, but often ignored, such as drinking-water and toilets. Others may
seem less necessary, but usually have an importance to workers far greater than their cost to the
enterprise.
1. Drinking Water
Safe, cool drinking water is essential for all types of work, especially in a hot environment.
Without it fatigue increases rapidly and productivity falls. Adequate drinking water should be
provided and maintained at convenient points, and clearly marked as “Safe drinking water”.
Where possible it should be kept in suitable vessels, renewed at least daily, and all practical steps
taken to preserve the water and the vessels from contamination.
2. Sanitary Facilities
Hygienic sanitary facilities should exist in all workplaces. They are particularly important where
chemicals or other dangerous substances are used. Sufficient toilet facilities, with separate
facilities for men and women workers, should be installed and conveniently located. Changing
rooms and cloakrooms should be provided. Washing facilities, such as washbasins with soap and
towels, or showers, should be placed either within changing-rooms or close by.
3. First-Aid and Medical Facilities
Facilities for rendering first-aid and medical care at the workplace in case of accidents or
unforeseen sickness are directly related to the health and safety of the workers. First-aid boxes
should be clearly marked and conveniently located. They should contain only first-aid requisites
of a prescribed standard and should be in the charge of qualified person. Apart from first-aid

boxes, it is also desirable to have a stretcher and suitable means to transport injured persons to a
center where medical care can be provided.
4. Rest Facilities
Rest facilities can include seat, rest-rooms, waiting rooms and shelters. They help workers to
recover from fatigue and to get away from a noisy, polluted or isolated workstation. A sufficient
number of suitable chairs or benches with backrests should be provided and maintained,
including seats for occasional rest of workers who are obliged to work standing up. Rest-rooms
enable workers to recover during meal and rest breaks.
5. Feeding Facilities
It is now well recognized that the health and work capacity of workers to have light refreshments
are needed. A full meal at the workplace in necessary when the workers live some distance away
and when the hours of work are so organized that the meal breaks are short. A snack bar, buffet
or mobile trolleys can provide tea, coffee and soft drinks, as well as light refreshments. Canteens
or a restaurant can allow workers to purchase a cheap, well-cooked and nutritious meal for a
reasonable price and eat in a clean, comfortable place, away from the workstation.
6. Child-Care Facilities
Many employers find that working mothers are especially loyal and effective workers, but they
often face the special problems of carrying for children. It is for this reason that child-care
facilities, including crèches and day-care centers, should be provided. These should be in secure,
airy, clean and well lit premises. Children should be looked after property by qualified staff and
offered food, drink education and play at very low cost.
7. Recreational Facilities
Recreational facilities offer workers the opportunity to spend their leisure time in activities likely
to increase physical and mental well-being. They may also help to improve social relations
within the enterprise. Such facilities can include halls for recreation and for indoor and outdoor
sports, reading-rooms and libraries, clubs for hobbies, picnics and cinemas. Special educational
and vocational training courses can also be organized.

Self-Check
1. What is plant layout?
2. Mention any four objectives of plant layout.
3. Explain the objectives of plant layout.
4. Explain the main principles of plant layout.
5. Explain the factors considered for an industrial building.
6. Explain the different types of layouts.
7. Explain the physical facilities required in an organization/factory.

Chapter 11
Work-System Design

11.1 Introduction
11.2 Job design in concept and practice
11.3 Implementation of work-design approaches
11.4 Work method analysis
11.5 Motion study
11.6 Work measurement
11.6.1 Time study
11.6.2 Predetermined motion time
11.6.3 Work sampling
11.7 Learning Curve

 Describe the elements of work system design and the objectives of each element
 Describe relevant job design issues
 Describe methods analysis
 Understand the importance of work measurement
 Describe how to do a time study
 Describe how to do work sampling
 Develop standard times
 Show how to use work standards
 Describe compensation plans
 Describe learning curves

11.1 Introduction
Productivity has now become an everyday watch word. It is crucial to the welfare of industrial
firm as well as for the economic progress of the country. High productivity refers to doing the
work in a shortest possible time with least expenditure on inputs without sacrificing quality and
with minimum wastage of resources.
Work-study forms the basis for work system design. The purpose of work design is to identify
the most effective means of achieving necessary functions. This work-study aims at improving
the existing and proposed ways of doing work and establishing standard times for work
performance.
Work-study is encompassed by two techniques, i.e., method study and work measurement.
“Method study is the systematic recording and critical examination of existing and proposed
ways of doing work, as a means of developing and applying easier and more effective methods
and reducing costs.”
“Work measurement is the application or techniques designed to establish the time for a qualified
worker to carry out a specified job at a defined level or performance.”
There is a close link between method study and work measurement. Method study is concerned
with the reduction of the work content and establishing the one best way of doing the job
whereas work measurement is concerned with investigation and reduction of any ineffective time
associated with the job and establishing time standards for an operation carried out as per the
standard method.
11.2 Job Design in Concept and Practice
Job design is defined as the process through which specific work tasks are allocated to
individuals and groups. as shown in figure below, a manager’s efforts in job design should
address job content and job context; that is ,job design encompasses the specification of task
attributes (job content ) and the creation of a supportive work setting (job context).

A continuum of job design strategies
The strategies are job simplification, job enlargement and rotation, and job enrichment. Each
strategy varies in the degree of specialization involved in the division of labor. The contingency
orientation of modern management theory recognizes that there are situations in which highly
specialized jobs are the best and others in which less specialization is appropriate. Managers
must learn to deploy each of the strategies to proper advantage.
Job simplification Job rotation & enlargement Job enrichment
Job scope Narrow Wide Wide
Job depth Low Low High
High task Low task

specialization specialization
Fig. 12.2.1 a continuum of job design strategies; variations in job scope and job depth
Job simplification:
It involves standardizing work procedures and employing people in clearly defined and highly
specialized tasks. Simplified jobs are very narrow in job scope, the number and combination of
different tasks a person performs.
The most extreme form of job simplification is, of course, complete automation-the total
mechanization of a job. While our concern is with the forms of job simplification that still
involve the human element, we will deal with automation and its growing contemporary
significance at other points in the book.
Job simplification is often done with the expectation of increased productivity through lower
skill requirements for workers, easier and quick training, and less difficult supervision. On the

other hand, it can sometimes reduce productivity because of the cost of related absenteeism and
turnover and poor performance due to boredom and dissatisfaction. Although jobs narrow in
scope appeal to some people, disadvantages emerge when they prove inconsistent with what
people really desire from their work.
Job rotation and job enlargement
These are strategies of job design that increase the number and variety of tasks performed by a
worker. They both expand job scope. This is assumed to offset some of the disadvantages of job
simplification and increase job performance and satisfaction.
Job Rotation
Job rotation increases task variety by periodically shifting workers among jobs involving
different sets of task assignments while no one job is changed in design, the workers gain variety
in their tasks by switching jobs on a regular basis. Job rotation can be done on almost any time
schedule, such as an hourly, daily or weekly basis. Job enlargement increases task variety by
combining into one job two or more tasks that were previously assigned to separate workers.
Job Enlargement
This involves the horizontal integration of tasks to expand the range of tasks involved in a
particular job. If successfully implemented this can increase task identity, task significance and
skill variety through involving the worker in the whole work task either individually or within
the context of a group. Job Rotation is a common form of job enlargement and involves a worker
changing job roles with another worker on a periodic basis. If successfully implemented this can
help increase task identity, skill variety and autonomy through involvement in a wider range of
work task with discretion about when these mix of tasks can be undertaken. However this
method does not actually improve the design of the jobs and it can mean that people gravitate to
the jobs that suit them and are not interested in initiating rotation with colleagues. At worst it can
mean rotation between a numbers of boring jobs with no acquisition of new skills.
Job Enrichment
Job enrichment involves the vertical integration of tasks and the integration of responsibility and
decision making. If successfully implemented this can increase all five of the desirable job

characteristics by involving the worker in a wider range of tasks and providing responsibility for
the successful execution of these tasks. This technique does require feedback to so that the
success of the work can be judged. The managerial and staff responsibilities potentially given to
an employee through enrichment can be seen as a form of empowerment. This should in turn
lead to improved productivity and product quality.
Frederick Herzberg, as reflected in his two-factor theory, considers it illogical to expect high
levels of satisfaction and performance from persons whose jobs are designed according to the
rules of simplification, enlargement or rotation.
Job enrichment is the means through which he believes this end is achieved. Job enrichment
differs from other job design strategies in that it seeks to expand not just job scope, but also job
depth-the extent of planning and evaluating duties performed by the individual worker rather
than the supervisor.
Vertical loading increase
Job depth
Pull down responsibilities from above
Horizontal
loading increases
Pull Pre- To improve this job –rearrange
Job scope work in its task elements Pull later
work in
Push down or automate routine tasks
Fig. 12.2.2 Steps in improving a job through horizontal and vertical loading

11.3 Implementation of Work Design Approaches
There are a number of factors which account for the fact that job enlargement and job enrichment
are not more widely implemented. Firstly the scope for using different forms of work
organization will be dependent to a large extent on the type of operation in which the work is
organized.
Job shop manufacturing will require skilled workers who will be involved in a variety of tasks
and will have some discretion in how they undertake these tasks. Sales personnel may also have
a high level of discretion in how they undertake their job duties also.
The amount of variety in a batch manufacturing environment will to a large extent depend on the
length of the production runs used. Firms producing large batches of a single item will obviously
have less scope for job enrichment than firms producing in small batches on a make-to-order
basis. One method for providing job enlargement is to use a cellular manufacturing system,
which can permit a worker to undertake a range of tasks on a part. When combined with
responsibility for cell performance this can lead to job enrichment.
Jobs in mass production industries may be more difficult to enlarge. Car plants must work at a
certain rate in order to meet production targets and on a moving line it is only viable for each
worker to spend a few minutes on a task before the next worker on the line must take over. A
way of overcoming this problem is to use teams. Here tasks are exchanged between team
members and performance measurements are supplied for the team as a whole. This provides
workers with greater variety and feedback, but also some autonomy and participation in the
decisions of the team.
Secondly financial factors may be a constraint on further use. These may include the
performance of individuals who actually prefer simple jobs, higher wage rates paid for the higher
skills of employees increasing average wage costs and the capital costs of introducing the
approaches. The problem is that many of the benefits associated with the technique, such as an
increase in creativity, may be difficult to measure financially.
Finally the political aspects of job design changes have little effect on organizational structures
and the role of management. Although job enrichment may affect supervisory levels of

management, by replacement with a team leader for example, the power structures in which
technology is used to justify decisions for personal objectives is intact.
11.4 Work Methods Analysis
Dividing and analyzing a job is called method study. The approach takes a systematic approach
to reducing waste, time and effort. The approach can be analyzed in a six-step procedure:
1. Select
Tasks most suitable will probably be repetitive, require extensive labour input and be critical to
overall performance.
2. Record
This involves observation and documentation of the correct method of performing the selected
tasks. Flow process charts are often used to represent a sequence of events graphically. They are
intended to highlight unnecessary material movements and unnecessary delay periods.
3. Examine
This involves examination of the current method, looking for ways in which tasks can be
eliminated, combined, rearranged and simplified. This can be achieved by looking at the flow
process chart for example and re-designing the sequence of tasks necessary to perform the
activity.
4. Develop
Developing the best method and obtaining approval for this method. This means choosing the
best alternative considered taking into account the constraints of the system such as the
performance of the firm’s equipment. The new method will require adequate documentation in
order that procedures can be followed. Specifications may include tooling, operator skill level
and working conditions.
5. Install
Implement the new method. Changes such as installation of new equipment and operator training
will need to be undertaken.

6. Maintain
Routinely verify that the new method is being followed correctly
New methods may not be followed due to inadequate training or support. On the other hand
people may find ways to gradually improve the method over time. Learning curves can be used
to analyze these effects.
11.5 Motion Study
Motion study is the study of the individual human motions that are used in a job task. The
purpose of motion study is to try to ensure that the job does not include any unnecessary motion
or movement by the worker and to select the sequence of motions that ensure that the job is
being carried out in the most efficient manner possible. For even more detail videotapes can be
used to study individual work motions in slow motion and analyze them to find improvement
- A technique termed micro motion analysis.
The principles are generally categorized according to the efficient use of the human body,
efficient arrangement of the workplace and the efficient use of equipment and machinery. These
principles can be summarized into general guidelines as follows:
- Efficient Use of the Human Body
Work should be rhythmic, symmetrical and simplified. The full capabilities of the human body
should be employed. Energy should be conserved by letting machines perform tasks when
possible.
- Efficient Arrangement of the Workplace
Tools, materials and controls should have a defined place and be located to minimize the motions
needed to get to them. The workplace should be comfortable and healthy.
- Efficient use of Equipment
Equipment and mechanized tools enhance worker abilities. Controls and foot-operated devices
that can relieve the hand/arms of work should be maximized. Equipment should be constructed
and arranged to fit worker use.

Motion study is seen as one of the fundamental aspects of scientific management and indeed it
was effective in the design of repetitive, simplified jobs with the task specialization which was a
feature of the mass production system. The use of motion study as declined as there as been a
movement towards greater job responsibility and a wider range of tasks within a job. However
the technique is still a useful analysis tool and particularly in the service industries, can help
improve process performance.
11.6 Work Measurement
The second element of work-study is work measurement which determines the length of time it
will take to undertake a particular task. This is important not only to determine pay rates but also
to ensure that each stage in a production line system is of an equal duration (i.e. ‘balanced’) thus
ensuring maximum output. Usually the method study and work measurement activities are
undertaken together to develop time as well as method standards. Setting time standards in a
structured manner permits the use of benchmarks against which to measure a range of variables
such as cost of the product and share of work between team members. However the work
measurement technique has been criticized for being misused by management in determining
worker compensation. The time needed to perform each work element can be determined by the
use of historical data, work sampling or most usually time study.
11.6.1 Time Study
The purpose of Time Study is through the use of statistical techniques to arrive at a standard time
for performing one cycle of a repetitive job. This is arrived at by observing a task a number of
times. The standard time refers to the time allowed for the job under specific circumstances,
taking into account allowances for rest and relaxation. The basic steps in a time study are
indicated below:
1. Establish the standard job method
It is essential that the best method of undertaking the job is determined using method study
before a time study is undertaken. If a better method for the job is found then the time study
analysis will need to be repeated.
2. Break down the job into elements

The job should be broken down into a number of easily measurable tasks. This will permit a
more accurate calculation of standard time as varying proficiencies at different parts of the whole
job can be taken into account.
3. Study the job
This has traditionally been undertaken with a stopwatch, or electronic timer, by observation of
the task. Each time element is recorded on an observation sheet. A Video camera can be used for
observation, which permits study away from the workplace, and in slow motion which permits a
higher degree of accuracy of measurement.
4. Rate the worker’s performance
As the time study is being conducted a rating of the worker’s performance is also taken in order
to achieve a true time rating for the task. Rating factors are usually between 80% and 120% of
normal. This is an important but subjective element in the procedure and is best done if the
observer is familiar with the job itself.
5. Compute the average time
Once a sufficient sample of job cycles have been undertaken an average is taken of the observed
times called the cycle time. The sample size can be determined statistically, but is often around
five to fifteen due to cost restrictions.
6. Compute the normal time
Adjust the cycle time for the efficiency and speed of the worker who was observed. The normal
time is calculated by multiplying the cycle time by the performance rating factors.
Normal Time (NT) = cycle time (CT) x rating factor (RF)
7. Compute the standard time
The standard time is computed by adjusting the normal time by an allowance factor to take
account of unavoidable delays such as machine breakdown and rest periods. The standard time is
calculated as Standard Time (ST) = Normal Time (NT) x allowance.

11.6.2 Predetermined Motion Times
One problem with time studies is that workers will not always co-operate with their use,
especially if they know the results will be used to set wage rates. Combined with the costs of
undertaking a time study, a company may use historical data in the form of time files to construct
a new standard job time from previous job element. This has the disadvantage however of the
reliability and applicability of old data.
Another method for calculating standard times without a time study is to use predetermined
motion time system (PMTS) which provides generic times for standard micro motions such as
reach, move and release which are common to many jobs. The standard item for the job is then
constructed by breaking down the job into micro motions that can then be assigned a time from
the motion time database. The standard time for the job is the sum of these micro motion times.
The advantages of this approach are that standard times can be developed for jobs before they are
introduced to the workplace without causing disruption and needing worker compliance. Also
performance ratings are factored in to the motion times and so the subjective part of the study is
eliminated. The timings should also be much more consistent than historical data for instance.
Disadvantages include the fact that these times ignore the context of the job in which they are
undertaken i.e. the timings are provided for the micro motion in isolation and not part of a range
of movement. The sample is from a broad range of workers in different industries with different
skill levels, which may lead to an unrepresentative time. Also the timings are only available for
simple repetitious work which is becoming less common in industry.
11.6.3 Work Sampling
Work Sampling is useful for analyzing the increasing proportion of non-repetitive tasks that are
performed in most jobs. It is a method for determining the proportion of time a worker or
machine spends on various activities and as such can be very useful in job redesign and
estimating levels of worker output. The basic steps in work sampling are indicated below:
1. Define the job activities
All possible activities must be categorized for a particular job. e.g. “worker idle” and “worker
busy” states could be used to define all possible activities.

2. Determine the number of observations in the work sample
The accuracy of the proportion of time the worker is in a particular state is determined by the
observation sample size.
Assuming the sample is approximately normally distributed the sample size can be estimated
using the following formula. n = (z/e)2 * p(1 - p)
Where n = sample size
z = number of standard deviation from the mean for the desired level of confidence
e = the degree of allowable error in the sample estimate
p = the estimated proportion of time spent on a work activity
The accuracy of the estimated proportion p is usually expressed in terms of an allowable degree
of error e (e.g. for a 2% degree of error, e = 0.02). The degree of confidence would normally be
95% (giving a z value of 1.96) or 99% (giving a z value of 2.58).
3. Determine the length of the sampling period
There must be sufficient time in order for a random sample of the number of observations given
by the equation in 2 to be collected. A random number generate can be used to generate the time
between observations in order to achieve a random sample.
4. Conduct the work sampling study and record the observations
Calculate the sample and calculate the proportion (p) by dividing the number of observations for
a particular activity by the total number of observations.
5. Periodically re-compute the sample size required
It may be that the actual proportion for an activity is different from the proportion used to
calculate the sample size in step
2. Therefore as sampling progresses it is useful to re-compute the sample size based on the
proportions actually observed.

11.7 Learning Curves
Organizations have often used learning curves to predict the improvement in productivity that
can occur as experience is gained of a process. Thus learning curves can give an organization a
method of measuring continuous improvement activities. If a firm can estimate the rate at which
an operation time will decrease then it can predict the impact on cost and increase in effective
capacity over time. The learning curve is based on the concept of when productivity doubles, the
decrease in time per unit is the rate of the learning curve. Thus if the learning curve is at a rate of
85%, the second unit takes 85% of the time of the first unit, the fourth unit takes 85% of the
second unit and the eighth unit takes 85% of the fourth and so on. Mathematically the learning
curve is represented by the function
y = ax-b
Where
x = number of units produced
a = hours required to produce the first unit
y = time to produce the xth unit
b= constant equal to -(ln p)/(ln 2)
Where
ln = log10
p = learning rate (e.g. 80% = 0.8)
Thus for a 80% learning curve
b= - (ln 0.8)/ ln(2) = -(-0.233)/ 0.693 = 0.322
Learning curves are usually applied to individual operators, but the concept can also be applied
in a more aggregate sense, termed an experience or improvement curve, and applied to such
areas as manufacturing system performance or cost estimating. Industrial sectors can also be
shown to have different rates of learning. It should be noted that improvements along a learning

curve do not just happen and the theory is most applicable to new product or process
development where scope for improvement is greatest. In addition step changes can occur which
can alter the rate of learning, such as organizational change, changes in technology or quality
improvement programs. To ensure learning occurs the organization must invest in factors such as
research and development, advanced technology, people and continuous improvement efforts.
Self-Check
1. Define the term job design

2. What are job design strategies and briefly explain each.
3. Explain work method analysis approach
4. What is motion study
5. What is job rotation
6. What are the basic steps in time study under work measurements
7. Explain about learning curve

Chapter 12
Inventory management
12.0 Aims and Objective
12.1 Introduction
12.2 Dependent demand
12.3 Independent demand
12.4 Type of inventory
12.5 Inventory decisions
12.6 Economic Order Quantity Model
12.7 The reorder point model
12.7.1 Safety stock and service level
12.8 The ABC inventory Classification system
12.0 Aims and objectives
 Describe the different types and use of inventory

 Describe the objectives of inventory management
 Calculate inventory performance measures
 Understand relevant costs associated with inventory
 Calculate order quantities
 Calculate order quantities for single-period inventory
 Perform ABC inventory control and analysis
 Understand the role of cycle counting in inventory record accuracy
12.1 Introduction
Inventory generally refers to the materials in stock. It is also called the idle resource of an
enterprise. Inventories represent those items which are either stocked for sale or they are in the
process of manufacturing or they are in the form of materials, which are yet to be utilized. The
interval between receiving the purchased parts and transforming them into final products varies
from industries to industries depending upon the cycle time of manufacture. It is, therefore,
necessary to hold inventories of various kinds to act as a buffer between supply and demand for

efficient operation of the system. Thus, an effective control on inventory is a must for smooth
and efficient running of the production cycle with least interruptions. Demand can be classified
into two categories; dependent and independent
12.2 Dependent Demand
A dependent demand item has a demand which is relatively predictable because it is dependent
on other factors. Thus a dependent demand item can be classified has having a demand that can
be calculated as the quantity of the item needed to produce a scheduled quantity of an assembly
that uses that item.
12.3 Independent Demand
Independent demand is when demand is not directly related to the demand for any other
inventory item. Usually this demand comes from customers outside the company and so is not as
predictable as dependent demand. Because of the unknown future requirements of customers,
forecasting is used to predict the level of demand. A safety stock if then calculated to cover
expected forecast error. Independent demand items can be finished goods or spare parts used for
after sales service.
12.4 Types of Inventory
Generally inventory is classified as either raw materials, work-in-progress (WIP) or finished

goods. The proportion between these inventory types will vary but it is estimated that generally
30% are raw materials, 40% are work in progress and 30% finished goods. The location of
inventory can be used to define the inventory type and its characteristics. There are various
definitions of inventory types including the following:
- Buffer/Safety
This is used to compensate for the uncertainties inherent in the timing or rate of supply and
demand between two operational stages.
- Cycle
If it is required to produce multiple products from one operation in batches, there is a need to
produce enough to keep a supply while the other batches are being produced.

- Anticipation
This includes producing to stock to anticipate a increase in demand due to seasonal factors. Also
speculative policies such as buying in bulk to take advantage of price discounts may also
increase inventory levels.
- Pipeline/Movement
This is the inventory needed to compensate for the lack of stock while material is being
transported between stages. e.g. the time taken in distribution from the warehouse to a retail
outlet.
12.5 Inventory Decisions
The main concern of inventory management is the trade-off between the cost of not having an
item in stock against the cost of holding and ordering the inventory. A stock-out can either be to
an internal customer in which case a loss of production output may occur, or to an external
customer when a drop in customer service level will result. In order to achieve a balance between
inventory availability and cost the following inventory management aspects must be addressed of
volume - how much to order and timing - when to order.
12.6 The Economic Order Quantity (EOQ) Model
The Economic Order Quantity (EOQ) calculates the inventory order volume which minimizes
the sum of the annual costs of holding inventory and the annual costs of ordering inventory. The
model makes a number of assumptions including:
 Stable or Constant Demand

 Fixed and identifiable ordering cost
 The cost of holding inventory varies in a linear fashion to the number of items held
 The item cost does not vary with the order size
 Delivery lead time does not vary
 No quantity discounts are available
 Annual demand exists
These assumptions have led to criticisms of the use of EOQ in practice. The assumption of one
delivery per order, and then the use of that stock over time increases inventory levels and goes

against a JIT approach. Also annual demand will not exist for products with a life-cycle of less
than a year. However the EOQ approach still has a role in inventory management in the right
circumstances and if its limitations are recognized.
Using the EOQ each order is assumed to be of Q units and is withdrawn at a constant rate over
time until the quantity in stock is just sufficient to satisfy the demand during the order lead time
(the time between placing an order and receiving the delivery). At this time an order for Q units
is placed with the supplier. Assuming that the usage rate and lead time are constant the order will
arrive when the stock level is at zero, thus eliminating excess stock or stock-outs.
The order quantity must be set at a level which is not too small, leading to many orders and thus
high order costs and not too large leading to high average levels of inventory and thus high
holding costs.
The annual holding cost is the average number of items in stock multiplied by the cost to hold an
item for a year. If the amount in stock decreases at a constant rate from Q to 0 then the average in
stock is Q/2.
Thus if CH is the average annual holding cost per unit, the total annual holding cost is:
Annual Holding Cost = Q * CH
The annual ordering cost is a function of the number of orders per year and the ordering cost per
order. If D is the annual demand, then the number of orders per year is given by D/Q. Thus if CO
is the ordering cost per order then the total annual ordering cost is:
Annual Ordering Cost = D * CO
Thus the total annual inventory cost is the sum of the total annual holding cost and the total
annual ordering cost:
Total Annual Cost = Q * CH + D * CO
2 Q
Where: Q = order quantity

CH = holding cost per unit
D = annual demand
CO = ordering cost per order
The minimum total cost point is when the holding cost is equal to the ordering cost and solving
for Q gives:
Example: A computer company has annual demand of 10,000. They want to determine EOQ for
circuit boards which have an annual holding cost (H) of $6 per unit, and an ordering cost (S) of
$75. They want to calculate TC and the reorder point (R) if the purchasing lead time is 5 days.
EOQ (Q)
2 * (D * Co) 2 * 10,000 * $75

Q   500 units
CH $6
Reorder Point (R)
10,000
R  Daily Demand x Lead Time  * 5 days  200 units
250 days
Total Inventory Cost (TC)
 500   10,000 
TC   $6   $75  $1500  $1500  $3000
 2   500 
12.7 The Re-Order Point (ROP) Model
The EOQ model tells us how much to order, but not when to order. The Reorder point model
identifies the time to order when the stock level drops to a predetermined amount. This amount
will usually include a quantity of stock to cover for the delay between order and delivery (the
delivery lead time) and an element of stock to reduce the risk of running out of stock when levels
are low (the safety stock).
The previous economic order quantity model provides a batch size that is then depleted and
replenished in a continuous cycle within the organization. Thus the EOQ in effect provides a
batch size which the organization can work to. However this assumes that demand rates and

delivery times are fixed so that the stock can be replenished at the exact time stocks are
exhausted. Realistically though both the demand rate for the product and the delivery lead-time
will vary and thus the risk of a stock-out is high. The cost of not having a item in stock when the
customer requests it can obviously be costly both in terms of the potential loss of sales and the
loss of customer goodwill leading to further loss of business.
12.7.1 Safety Stock and Service Level
Safety stock is used in order to prevent a stock-out occurring. It provides an extra level of
inventory above that needed to meet predicted demand, to cope with variations in demand over a
time period. The level of safety stock used, if any, will vary for each inventory cycle, but an
average stock level above that needed to meet demand will be calculated.
To calculate the safety stock level a number of factors should be taken into account including:
 cost due to stock-out

 cost of holding safety stock
 variability in rate of demand
 variability in delivery lead time
It is important to note that there is no stock-out risk between the maximum inventory level and
the reorder level. The risk occurs due to variability in the rate of demand and due to variability in
the delivery lead time between the reorder point and zero stock level.
The reorder level can of course be estimated by a rule of thumb, such as when stocks are at twice
the expected level of demand during the delivery lead time. However to consider the probability
of stock-out, cost of inventory and cost of stock-out the idea of a service level is used. The
service level is a measure of the level of service, or how sure, the organization is that it can
supply inventory from stock.
This can be expressed as the probability that the inventory on hand during the lead time is
sufficient to meet expected demand (e.g. a service level of 90% means that there is a 0.90
probability that demand will be met during the lead time period, and the probability that a stock-
out will occur is 10%. The service level set is dependent on a number of factors such as
stockholding costs for the extra safety stock and the loss of sales if demand cannot be met.

12.8 The ABC Inventory Classification System
Normally a mix of fixed-order-interval and fixed order quantity inventory systems are used
within an organization. When there are many inventory items involved this raises the issue of
deciding which particular inventory system should be used for a particular item. The ABC
classification system sorts inventory items into groups depending on the amount of annual
expenditure they incur. This will depend on both the estimated number of items used annually
multiplied by the unit cost. To instigate a ABC system a table is produced listing the items in
expenditure order (with largest expenditure at the top), and showing the percentage of total
expenditure and cumulative percentage of the total expenditure for each item.
By reading the cumulative percentage figure it is usually found, following Pareto’s Law, that 10-
20% of the items account for 60-80% of annual expenditure. These items are called A items and
need to be controlled closely to reduce overall expenditure. This often implies a fixed quantity
system with perpetual inventory checks or a fixed-interval system employing a small time
interval between review periods. It may also require a more strategic approach to management of
these items which may translate into closer buyer-supplier relationships. The B items account for
the next 20-30% of items and usually account for a similar percentage of total expenditure. These
items require fewer inventory level reviews than A items. A fixed order interval system with a
minimum order level may be appropriate here. Finally C items represent the remaining 50-70%
of items but only account for less than 25% of total expenditure. Here much less rigorous
inventory control methods can be used, as the cost of inventory tracking will outweigh the cost
of holding additional stock.
It is important to recognize that overall expenditure may not be the only appropriate basis on
which to classify items.
Other factors include the importance of a component part on the overall product, the variability
in delivery time, the loss of value through deterioration and the disruption caused to the
production process if a stock-out occurs.

Self-check
1. What do you mean by ‘Inventory Management’?

2. What do you mean by ‘Inventory Control’?
3. What is independent demand?
4. What is the benefit of buffer/safety stock?
5. What are the assumptions of economic order quantity model?
6. What are the factors that should be taken into account to calculate safety stock?
7. Explain about the ABC inventory classification system?
8. A retailer expects to sell about 200 units of a product per year. The storage space taken
up in his premises by one unit of this product cost at $20 per year. If the cost associated
with ordering is $35 per order what is the economic order quantity given that interest
rates are expected to remain close to 10% per year and the total cost of one unit is $100.
What is the total annual cost?

Chapter 13
Aggregate Planning

13.1 Introduction
13.2 Aggregate planning strategies and guidelines
13.3 Master Production Schedule
13.4 Material Requirement Planning (MRP)
13.4.1 Objectives of MRP
13.4.2 MRP System

 Explain business planning
 Explain sales and operations planning
 Identify different aggregate planning strategies and options for changing demand and/or
capacity in aggregate plans
 Develop aggregate plans, calculate associated costs, and evaluate the plan in terms of
operations, marketing, finance, and human resources
 Describe differences between aggregate plans for service and manufacturing companies
 Explain role and objectives of the master production schedule (MPS) and describe the
objectives of master production scheduling
 Develop a MPS and project the capacity needed using rough-cut capacity planning
 Calculate available-to-promise quantities (ATP)
 Describe time fence policies
13.1 Introduction
Aggregate planning is an intermediate term planning decision. It is the process of planning the
quantity and timing of output over the intermediate time horizon (3 months to one year). Within
this range, the physical facilities are assumed to –10 be fixed for the planning period. Therefore,
fluctuations in demand must be met by varying labour and inventory schedule. Aggregate
planning seeks the best combination to minimize costs.

13.2 Aggregate Planning Strategies and guidelines
The variables of the production system are labour, materials and capital. More labour effort is
required to generate higher volume of output. Hence, the employment and use of overtime (OT)
are the two relevant variables. Materials help to regulate output. The alternatives available to the
company are inventories, back ordering or subcontracting of items.
These controllable variables constitute pure strategies by which fluctuations in demand and
uncertainties in production activities can be accommodated by using the following steps:
1. Vary the size or the workforce: Output is controlled by hiring or laying off workers in
proportion to changes in demand.
2. Vary the hours worked: Maintain the stable workforce, but permit idle time when there is a
slack and permit overtime (OT) when demand is peak.
3. Vary inventory levels: Demand fluctuations can be met by large amount of inventory.
4. Subcontract: Upward shift in demand from low level. Constant production rates can be met by
using subcontractors to provide extra capacity.
Aggregate Planning Guidelines
The following are the guidelines for aggregate planning:
1. Determine corporate policy regarding 5. Maintain needed control over inventories.

controllable variables.
6. Maintain flexibility to change.
2. Use a good forecast as a basis for
planning. 7. Respond to demand in a controlled
manner.
3. Plan in proper units of capacity.
8. Evaluate planning on a regular base.
4. Maintain the stable workforce.
Example: a shoe company produces two models of dance shoes. Over the past 3 years 72,000
pairs of Model M have been produced using 21,600 direct labor hours and 5760 machine hours,
and 108,000 pairs of Model W using 43,200 hours of labor and 12,960 hours of machine time.

Step 1: Determine the Planning factors:
Labor Factors
Total DL hours building model

Direct Labor Planning Factor 
number of units built
21,6000 hours 43,200 hours
DL PFM   0.30 hour ; DL PFW   0.40 hour
72,000 pairs 108,000 pairs
Machine Factors
Total machine hours building model

Machine Planning Factor 
number of units built
5760 hours 12,960
Machine PFM   0.08hour ; MachinePFW   0.12hour
72,000 pairs 108,000
Step 2: Calculate the Workload Generated by This Schedule
A B C D E F
4 Planning Factors (hours per pair)
5 Direct Machine
6 Labor Time
7 Model M 0.30 0.08
8 Model W 0.40 0.12
9
10 Quarterly Master Production Schedule (MPS) (pairs)
11 Q1 Q2 Q3 Q4 Totals
12 Model M 6000 5500 9500 6500 27500
13 Model W 10000 12000 7500 10100 39600
Step 3: Calculate the Capacity Needs for Each Resource for Each Time Period
A B C D E F
15 Direct Labor Hours Required
17 Model M 1800 1650 2850 1950 8250
18 Model W 4000 4800 3000 4040 15840
19 Totals 5800 6450 5850 5990 24090
20
21 Machine Time (Hours) Required
23 Model M 480 440 760 520 2200
24 Model W 1200 1440 900 1212 4752
25 Totals 1680 1880 1660 1732 6952

Step 4: Calculate Individual Work center, Capacity Needs Based on Historical, Percentage
Allocation
A B C D E F
27 Work Center Historical Breakdown
28 Direct Machine
29 Labor Time
30 Center 101 60% 60%
31 Center 102 40% 40%
32
33 Direct Labor Hours Required by Work Center
35 Center 101 3480 3870 3510 3594 14454
36 Center 102 2320 2580 2340 2396 9636
37 Totals 5800 6450 5850 5990 24090
38
39 Machine Time Hours Required by Work Center
41 Center 101 1008 1128 996 1039.2 4171.2
42 Center 102 672 752 664 692.8 2780.8
43 Totals 1680 1880 1660 1732 6952
13.3 Master Production Schedule (MPS)
Master scheduling follows aggregate planning. It expresses the overall plans in terms of specific
end items or models that can be assigned priorities. It is useful to plan for the material and
capacity requirements.
Time interval used in master scheduling depends upon the type, volume, and component lead
times of the products being produced. Normally weekly time intervals are used. The time horizon
covered by the master schedule also depends upon product characteristics and lead times. Some
master schedules cover a period as short as few weeks and for some products it is more than a
year.
Functions of MPS
Master Production Schedule (MPS) gives a formal detail of the production plan and converts this
plan into specific material and capacity requirements. The requirements with respect to labour,
material and equipment are then assessed.
The main functions of MPS are:
1. To translate aggregate plans into specific end items: Aggregate plan determines level of
operations that tentatively balances the market demands with the material, labour and equipment

capabilities of the company. A master schedule translates this plan into specific number of end 2.
2. Evaluate alternative schedules: Master schedule is prepared by trial and error. Many computer
simulation models are available to evaluate the alternate schedules.
3. Generate material requirement: It forms the basic input for material requirement planning
(MRP). items to be produced in specific time period.
4. Generate capacity requirements: Capacity requirements are directly derived from MPS.
Master scheduling is thus a prerequisite for capacity planning.
5. Facilitate information processing: By controlling the load on the plant. Master schedule
determines when the delivery should be made. It coordinates with other management information
systems such as, marketing, finance and personnel.
6. Effective utilization of capacity: By specifying end item requirements schedule establishes the
load and utilization requirements for machines and equipment.
Fig. 13.3.1 flow chart of Aggregate plan and Master Schedule

Consider the following example:
 Make-to-stock environment with fixed orders of 125 units

 There are 110 in inventory to start
 When are new order quantities needed to satisfy the forecasted demand?
W eek BI 1 2 3 4 5 6 7 8 9 10 11 12
F o re c a s t 50 50 50 50 75 75 75 75 50 50 50 50
P ro je c te d a va ila b le 110 60 10 -4 0
MPS
W eek BI 1 2 3 4 5 6 7 8 9 10 11 12
F o re c a s t 50 50 50 50 75 75 75 75 50 50 50 50
P ro je c te d a va ila b le 110 60 10 85 35 -4 0
MPS 125
Projected Available = beginning inventory + MPS shipments - forecasted demand
The MPS row shows when replenishment shipments need to arrive to avoid a stock out (negative
projected available).
Revised and Completed MPS Record
W eek BI 1 2 3 4 5 6 7 8 9 10 11 12
F o re c a s t 50 50 50 50 75 75 75 75 50 50 50 50
P ro je c te d a va ila b le 110 60 10 85 35 85 10 -6 5
MPS 125 125

W eek BI 1 2 3 4 5 6 7 8 9 10 11 12
F o re c a s t 50 50 50 50 75 75 75 75 50 50 50 50
P ro je c te d a va ila b le 110 60 10 85 35 85 10 60 110 60 10 85 35
MPS 125 125 125 125 125
13.4 Material Requirement Planning (MRP)
MRP refers to the basic calculations used to determine components required from end item
requirements. It also refers to a broader information system that uses the dependence relationship
to plan and control manufacturing operations. “Materials Requirement Planning (MRP) is a
technique for determining the quantity and timing for the acquisition of dependent demand items
needed to satisfy master production schedule requirements.”
13.4.1 Objectives of MRP
1. Inventory reduction: MRP determines how many components are required when they are
required in order to meet the master schedule. It helps to procure the materials/ components as
and when needed and thus avoid excessive buildup of inventory.
2. Reduction in the manufacturing and delivery lead times: MRP identifies materials and
component quantities, timings when they are needed, availabilities and procurements and
actions required to meet delivery deadlines. MRP helps to avoid delays in production and
priorities production activities by putting due dates on customer job order.
3. Realistic delivery commitments: By using MRP, production can give marketing timely
information about likely delivery times to prospective customers.
4. Increased efficiency: MRP provides a close coordination among various work centers and
hence help to achieve uninterrupted flow of materials through the production line. This
increases the efficiency of production system.

13.4.2 MRP System
The inputs to the MRP system are: (1) A master production schedule, (2) An inventory status file
and (3) Bill of materials (BOM).
Using these three information sources, the MRP processing logic (computer programme)
provides three kinds of information (output) for each product component: order release
requirements, order rescheduling and planned orders.
1. Master Production Schedule (MPS)
MPS is a series of time phased quantities for each item that a company produces, indicating how
many are to be produced and when. MPS is initially developed from firm customer orders or
from forecasts of demand before MRP system begins to operate. The MRP system whatever the
master schedule demands and translates MPS end items into specific component requirements.
Many systems make a simulated trial run to determine whether the proposed master can be
satisfied.
2. Inventory Status File
Every inventory item being planned must have an inventory status file which gives complete and
up to date information on the on-hand quantities, gross requirements, scheduled receipts and
planned order releases for an item. It also includes planning information such as lot sizes, lead
times, safety stock levels and scrap allowances.

3. Bill of Materials (BOM)
BOM identifies how each end product is manufactured, specifying all subcomponents items,
their sequence of buildup, their quantity in each finished unit and the work centers performing
the buildup sequence. This information is obtained from product design documents, workflow
analysis and other standard manufacturing information.
Self-Check
1. What do you mean by aggregate planning?

2. What is master production schedule?
3. What is material requirement planning?
4. What are the guidelines for aggregate planning?
5. Explain the functions of master production schedule.
6. Explain the objective of MRP.
7. Discuss the aggregate plan and master schedule.
8. Discuss the MRP system.

Chapter 14
Enterprise Resource Planning

14.1 Introduction
14.2 Evolution of ERP
14.3 ERP System Architecture
14.4 Extended ERP
14.5 Advantage Vs Disadvantage of ERP
14.6 Major features of ERP
14.7 ERP implementation lifecycle
14.8 Benefits of ERP implementation
 Describe enterprise resource management

 Describe the evolution of ERP Systems
 Describe the benefits and costs of ERP systems
 Provide an overview of MRP
 Explain the different types of demand
 Describe the objectives of MRP
 Describe the inputs needed for MRP
 Explain MRP operating logic
 Describe action notices
 Use different lot size rules with MRP
 Describe the role of capacity requirements planning (CRP)
 Calculate the workloads at critical work centers using CRP

14.1 Introduction
The unprecedented growth of information and communication technologies (ICT) driven by

microelectronics, computer hardware and software systems has influenced all facets of
computing applications across organizations. Simultaneously the business environment is
becoming increasingly complex with functional units requiring more and more inter-functional
data flow for decision making, timely and efficient procurement of product parts, management of
inventory, accounting, human resources and distribution of goods and services. In this context,
management of organizations needs efficient information systems to improve competitiveness by
cost reduction and better logistics. It is universally recognized by large and small-to- medium-
size enterprises (SME) that the capability of providing the right information at the right time
brings tremendous rewards to organizations in a global competitive world of complex business
practices.
Starting in the late 1980s and the beginning of the 1990s new software systems known in the
industry as enterprise resource planning (ERP) systems have surfaced in the market targeting
mainly large complex business organizations. These complex, expensive, powerful, proprietary
systems are off the-shelf solutions requiring consultants to tailor and implement them based on
the company’s requirements.
Enterprise resource planning systems or enterprise systems are software systems for business
management, encompassing modules supporting functional areas such as planning,
manufacturing, sales, marketing, distribution, accounting, financial, human resource
management, project management, inventory management, service and maintenance,
transportation and e-business. The architecture of the software facilitates transparent integration
of modules, providing flow of information between all functions within the enterprise in a
consistently visible manner.
14.2 Evolution of ERP
The evolution of ERP systems closely followed the spectacular developments in the field of
computer hardware and software systems. During the 1960s most organizations designed,
developed and implemented centralized computing systems, mostly automating their inventory
control systems using inventory control packages (IC).

These were legacy systems based on programming languages such as COBOL, ALGOL and
FORTRAN. Material requirements planning (MRP) systems were developed in the 1970s which
involved mainly planning the product or parts requirements according to the master production
schedule. Following this route new software systems called manufacturing resources planning
(MRP II) were introduced in the 1980s with an emphasis on optimizing manufacturing processes
by synchronizing the materials with production requirements. MRP II included areas such as
shop floor and distribution management, project management, finance, human resource and
engineering. ERP systems first appeared in the late 1980s and the beginning of the 1990s with
the power of enterprise-wide inter-functional coordination and integration. Based on the
technological foundations of MRP and MRP II, ERP systems integrate business processes
including manufacturing, distribution, accounting, financial, human resource management,
project management, inventory management, service and maintenance, and transportation,
providing accessibility, visibility and consistency across the enterprise.
During the 1990s ERP vendors added more modules and functions as “add-ons” to the core
modules giving birth to the “extended ERPs.” These ERP extensions include advanced planning
and scheduling (APS), e-business solutions such as customer relationship management (CRM)
and supply chain management (SCM).
Fig. 14.2.1 ERP Evolution

14.3 ERP Systems Architecture
ERP vendors, mostly experienced from the MRP and financial software services fields,
realized the limitations of the old legacy information systems used in large enterprises of the
1970s and 1980s. Some of these old systems were developed in-house while others were
developed by different vendors using several different database management systems,
languages and packages, creating islands of non-compatible solutions unfit for seamless data
flow between them. It was difficult to increase the capacity of such systems or the users were
unable to upgrade them with the organization’s business changes, strategic goals and new
information technologies.
An ERP system is required to have the following characteristics:
 Modular design comprising many distinct business modules such as financial,

manufacturing, accounting, distribution, etc.
 Use centralized common database management system (DBMS)
 The modules are integrated and provide seamless data flow among the modules,
increasing operational transparency through standard interfaces
 They are generally complex systems involving high cost
 They are flexible and offer best business practices
 They require time-consuming tailoring and configuration setups for integrating with the
company’s business functions
 The modules work in real time with online and batch processing capabilities
 They are or soon they will be Internet-enabled
Different ERP vendors provide ERP systems with some degree of specialty but the core
modules are almost the same for all of them. Some of the core ERP modules found in the
successful ERP systems are the following:
 Accounting management  Sales & distribution management

 Financial management  Human resources management
 Manufacturing management  Supply chain management
 Production management  Customer relationship management
 Transportation management  E-Business

Why implement an ERP System?
 To support business goals

o Integrated, on-line, secure, self-service processes for business
o Eliminate costly mainframe/fragmented technologies
 Improved Integration of Systems and Processes
 Lower Costs
 Empower Employees
 Enable Partners, Customers and Suppliers
The modules of an ERP system can either work as stand-alone units or several modules can be
combined together to form an integrated system.
14.4 Extended ERP
The proliferation of the Internet has shown tremendous impact on every aspect of the IT sector
including ERP systems becoming more and more “Internet-enabled” (Lawton, 2000).This
environment of accessing systems resources from anywhere anytime has helped ERP vendors
extend their legacy ERP systems to integrate with newer external business modules such as
supply chain management, customer relationship management, sales force automation (SFA),
advanced planning and scheduling (APS), business intelligence (BI), and e-business capabilities.
In fact ERP is becoming the e-business backbone for organizations doing online business
transactions over the Internet. Internet-based solutions are destined to improve customer
satisfaction, increase marketing and sales opportunities, expand distribution channels, and
provide more cost-effective billing and payment methods. The extension to SCM and CRM
enables effective tri-party business relationships between the organization, suppliers and the
customers. A supply chain management has sub-modules for procurement of materials,
transformation of the materials into products and distribution of products to customers.
“Successful supply chain management allows an enterprise to anticipate demand and deliver the
right product to the right place at the right time at the lowest possible cost to satisfy its
customers. Dramatic savings can be achieved in inventory reduction, transportation costs and
reduced spoilage by matching supply with actual demand” (IBM, 2001). With the deployment of
a CRM, organizations are able to gather knowledge about their customers, opening opportunities

to assess customer needs, values and costs throughout the business life cycle for better
understanding and investment decisions. The sub-modules found in typical CRM packages are
marketing, sales, customer service and support systems using Internet and other access facilities
with the intention of increasing customer loyalty through improved customer satisfaction.
E-commerce is the conduct of business transactions among organizations with the support of
networked information and communication technologies, especially utilizing Internet
applications such as the Web and e- mail, effectively reaching global customers.
Adoption of e-commerce and e- business solutions, especially business-to-business (B2B)

solutions, are seen by many as the wave of current and future extensions of traditional ERP
systems of most small, medium and large vendors. The front-end Web based Internet-business
applications are integrated with the back-office ERP-based applications, enabling business
transactions such as order placement, purchasing, inventory updates, employee benefits, etc. to
take place between the customers, suppliers and the enterprise based on reliable, relevant data
and applications instantly in a border-less domain.
The legacy ERP systems designed to integrate enterprise functions within the four walls of the
enterprise have introduced software solutions with a Web-interface essentially extending to
Internet-enabled CRM, SCM and other Internet-business models. Examples of such extended
ERPs are available from most of the ERP vendors. Thus SAP’s Internet-enabled integrated ERP
system called mySAP.COM (SAP, 2001) is a suite of ERP, CRM and other products that can be
linked together using Internet portals.
Fig. 14.4.1 Web-enabled extended ERP system

14.5 Advantage Vs Disadvantage of ERP
Advantages of ERP Systems
 Reliable Information Access  Cost Reduction

 E Commerce, E business  Delivery & Cycle Time Reduction
 Global Outreach  Avoids Data & Operations
 Improved scalability Redundancy
Disadvantages of ERP systems
 Time-consuming  Features and complexity

 Expensive  Scalability and global outreach
 Conformity of the modules  Extended ERP capability
 Vendor dependence
14.6 Major Features of ERP

 Company-wide Integrated Information System
 Performs core corporate activities and increases customer service
 Bridges the information gap across the organization
 Complete integration of Systems
o Across departments
o Across companies
 Better Project Management
 Automatic introduction of latest technologies (EFT), (EDI), Internet, Intranet, Video
conferencing, E-Commerce, etc.
 Eliminates most of the business problems like Material shortages, Productivity
enhancements, Customer service, Cash Management, Inventory problems, Quality
problems, Prompt delivery etc.
 Addresses current requirements of the company and provides opportunity of continually
improving and refining business processes.
 Provides business intelligence tools like Decision Support Systems (DSS), Executive
Information System (EIS), Reporting, Data Mining and Early Warning Systems (Robots)

14.7 ERP Implementation Lifecycle
Stage 1-Solution Inquiry
 Key questions that a business should ask are:

o Are we ready for ERP?
o How will an ERP help our business?
o Have we considered other solution areas beyond ERP?
o Who will lead our implementation effort?
 Identify what benefits the organization needs to get out of an ERP, and focus on these
benefits throughout the implementation
 Executive management should endorse the ERP project
 Develop a Mission Statement or Project Charter
 Establish metrics to measure how well the objectives of the ERP effort are being met.
 Designate a Project Champion
 Implementation responsibilities to be shared between the IT department and functional
areas
 Build a framework for participation from all quarters.
Stage 2-ERP Approach

o Do we have the in house resources, skills and experience to implement ERP?
o Should we build effective strategic partnerships?
o Have we considered how the implementation will differentiate our business?
o Have we developed a business case for the ERP implementation project?
 Determine the number of partners, the scope of the partnerships etc.
 Set up the internal project team
 Steering Committee (Executive level)
 Advisory Committee (One level lower,-Key Directors & major stakeholders)
 Cross Functional Project Team
 Create the business case, justification & ROI scenarios to determine the most feasible
approach
 Ensure that all gaps between plans & performance are closed out

Stage 3 - Package Selection

o Do the features and functions meet our needs?
o Is the ERP package compatible with our business?
o Should we buy an integrated package from a single vendor or best-of-breed
solutions from several vendors?
 Develop and document a project scope statement
 Conduct a business process review & identify signature business processes
 Document “as is” flows of current information
 Identify functional gaps
 Document & sign off “to-be” flows of current information
 Customize the RFP to include features that meet your “to-be” flows
 Key factors should be kept in mind while selecting the software
o Functional Capabilities
o Technical Attributes
o Partnership’s Capabilities
o Cost
Stage 4 - Implementation Plan

o How do we get started with the implementation?
 Procure and install required hardware and package software
 Roll out with preliminary implementation plan that covers
 A Phased Approach
 Segregation of Duties Plan
 Quality Plan
 Security Plan
 Package training for implementation team
 Project team members’ normal job responsibilities should be reassigned to other
employees/outside consultants for the project duration.

ERP Implementation Methodologies
 The Big Bang

 Modular Implementation
 Process Oriented Implementation
Implementation Approach
Stage 5 – Sandbox

o What steps do we take to ensure that the implementation is on track?
 Create a separate dedicated work environment specifically for the project team
 Build user acceptance test scripts
 Identify required custom reports
 Implement a system of sign off’s & hand off’s for deliverables and work products
 Ensure complete data migration from the old software system to the new begins early in
the implementation process
 Constantly evaluate risks, constraints & assumptions
 Develop training plan for all users
 Develop rollout plan

Stage 6 - Design & Deployment
 Key questions that a business should ask are: How do we ensure that the project team and
the end users are in sync? How do we ensure that our people are accepting change?
 Roll out training plan for all users in a phased manner
 Conduct user group conferences & prototype sessions to demonstrate the system’s
capabilities
 Solicit feedback from end users and ensure that all concerns & questions are addressed
 Encourage end users to network with peers at other institutions undergoing similar
implementation initiatives
 Ensure that implementation information is continuously communicated to the user
community
 Pilot rollout / evaluation
 Complete live rollout - rollout support
Stage 7- ERP Integration

o How do we integrate the ERP with our other legacy systems?
 Design interfaces ( if required) to integrate existing applications (e.g. CRM, HR) directly
with the ERP system
 Ensure adequate documentation exists to support the integration between interfaces
Stage 8 - IT Infrastructure

o Is our IT infrastructure ready for ERP?
 Set up server infrastructure to build training, development and production instances that
run concurrently
 Ensure that the infrastructure can handle the load of concurrent transactions from all
instances
 Ensure system security policy is in force
Stage 9 – Operations
 Key questions that a business should ask are: How will we recover from a major outage?

 Execute a onsite maintenance with partners

 Implement a Disaster Recovery Plan
o Review Business Impact & Associated Risk
o Offsite backups
o Provide disaster recovery training to key personnel
Stage 10 - Extending the Enterprise
 Consider expanding ERP to other solution areas

 Supply Chain Management
 Customer Relationship Management
 E-commerce Solutions
14.8 Benefits of ERP Implementation
1. Tangible Benefits after ERP Implementation
 Inventory Reduction  Cash management improvement

 Personal reduction  Revenue/profit improvement
 Productivity improvement  Transportation/ logistics cost
 Order management improvement reduction
 Technology cost reduction  Maintenance reduction
 Procurement cost reduction  On time delivery improvement
2. Intangible benefits after ERP implementation
 New/improved business processes  Business performance

 Customer responsiveness  Supply/ demand chain
 Cost reduction  Information/visibility
 Integration  Economic Performance of firm
 Standardization (Internal coordination cost)
 Flexibility  Monitoring cost
 Globalization  Bonding cost
 Residual cost
 Information processing cost

 Communication cost  Opportunity cost due to poor

 Documentation cost information
3. Business Performance factor
 Reduced organizations business risks  Decreased work load in various

 Enhanced organizations regulatory departments
compliance  Decreased workload in central
 Makes MIS more accurate and department
accessible.  ERP is less costly to maintain and
 Facilitate improved services to operate as compared to legacy
customer and suppliers systems
 Allows new services to customer and  ERP is less costly to
suppliers enhance/upgrade as compared to
 Enhanced primary users knowledge legacy system
and skills  ERP is less costly to integrate as
 Increased institutional accountability compared to legacy system
 Increased shareholders confidence in  ERP made it easier to take advantage
organization of new technology
 Enhanced support to organizational  Nature of work in various
activities departments has changed
 Enhanced organization business
performance
Self-Check
1. Define the term ERP

2. Explain the evolution of ERP
3. Describe the advantage and disadvantage of ERP
4. Describe some of the core module of ERP
5. What are the tangible and intangible benefits obtained from ERP implementation
6. What are some of the major features of ERP

Chapter 15
Scheduling

15.1 Introduction
15.2 Principle of scheduling
15.3 Inputs to scheduling
15.4 Scheduling strategies
15.5 Type of scheduling
15.6 Scheduling methodology
15.7 Dispatching phases
15.7.1 Dispatching or priority decision rules
15.7.2 Forms used in dispatching
15.8 Routing or sequencing
15.8.1 Techniques of routing
15.8.2 Loading or assignment
 Explain the different kinds of scheduling operations

 Describe different shop loading methods
 Develop a schedule using priority rules
 Develop a schedule performance measures
 Calculate scheduling for multiple workstations
 Describe the theory of constraints
 Describe scheduling techniques for service applications
 Develop a workforce schedule in which each employee has two consecutive days off
15.1 Introduction
Scheduling can be defined as “prescribing of when and where each operation necessary to
manufacture the product is to be performed.”

It is also defined as “establishing of times at which to begin and complete each event or
operation comprising a procedure”. The principle aim of scheduling is to plan the sequence of
work so that production can be systematically arranged towards the end of completion of all
products by due date.
Scheduling determines the programme for the operations. Scheduling may be defined as ‘the
fixation of time and date for each operation’ as well as it determines the sequence of operations
to be followed.
It is the time phase of loading. It is assignment of job to a facility specifying the particular
sequence of the work and the time of actual performance. Examples of scheduling include:
railway time-table, examination schedule, the time table for teaching various subjects.
Scheduling should be done at relatively lower level of the organization.
Scheduling activities are highly dependent on the type of the production system and the output
volume delivered by the system. Scheduling activities differ in
(a) High-volume system
(b) Intermediate-volume system, and
(c) Low-volume Systems
High-Volume (flow) Systems
They make use of specialized equipment that routes work on a continuous basis through the
same fixed path of operations, generally at a rapid rate. The problems of order release,
dispatching, and monitoring are less complex than in low-volume, make-to-order systems.
However, material flows must be well coordinated, inventories carefully controlled, and extra
care taken to avoid equipment breakdowns, material shortages, etc. to avoid production-line
downtime.
Intermediate-volume (flow and batch) Systems
They utilize a mixture of equipment and similar processes to produce an intermittent flow of
similar products on the same facilities. The sequencing of jobs and production-run lengths are of

significant concern to schedulers, as they attempt to balance the costs of changeover time against
those of inventory accumulations.
Low-Volume (batch or single job) Systems
They use general-purpose equipment that must route orders individually through a unique
combination of work centers. The variable work-flow paths and processing time generates
queues, work-in-process inventories, and capacity utilization concerns that can require more day-
to-day attention than in the high- or intermediate-volume systems.
15.2 Principles of Scheduling
1. The principle of optimum task size: Scheduling tends to achieve maximum

efficiency when the task sizes are small, and all tasks of same order of magnitude.
2. Principle of optimum production plan: The planning should be such that it imposes
an equal load on all plants.
3. Principle of optimum sequence: Scheduling tends to achieve the maximum efficiency

when the work is planned so that work hours are normally used in the same sequence.
15.3 Inputs to Scheduling
1. Performance standards: The information regarding the performance standards

(standard times for operations) helps to know the capacity in order to assign required
machine hours to the facility.
2. Units in which loading and scheduling is to be expressed.
3. Effective capacity of the work center.
4. Demand pattern and extent of flexibility to be provided for rush orders.
5. Overlapping of operations.
6. Individual job schedules.

15.4 Scheduling Strategies
Scheduling strategies vary widely among firms and range from ‘no scheduling’ to very
sophisticated approaches. These strategies are grouped into four classes:
1. Detailed scheduling: Detailed scheduling for specific jobs that are arrived from customers is
impracticable in actual manufacturing situation. Changes in orders, equipment breakdown,
and unforeseen events deviate the plans.
2. Cumulative scheduling: Cumulative scheduling of total work load is useful especially for
long range planning of capacity needs. This may load the current period excessively and
under load future periods. It has some means to control the jobs.
3. Cumulative detailed: Cumulative detailed combination is both feasible and practical

approach, if master schedule has fixed and flexible portions. For continuous systems, detailed
schedules (production rates) can often be firmed as the master schedule is implemented. For
job shop operations, schedules may be planned based on the estimated labor and equipment
(standard hour) requirements per week at key work centers. When detailed scheduling is
desirable, capacity is sometimes allocated to specific jobs as late as a week, or a few days,
before the actual work is to be performed.
4. Priority decision rules: Priority decision rules are scheduling guides that are used
independently and in conjunction with one of the above strategies, i.e., first come first serve.
These are useful in reducing Work-In-Process (WIP) inventory.
Order Release
Order release converts a need from a planned-order status to a real order in the shop or with a
vendor by assigning it either a shop order or purchase order number. Well-designed scheduling
and control systems release work at a reasonable rate that keeps unnecessary backlogs from the
production floor. Releasing all available jobs as soon as they are received from customers is a
common cause of increased manufacturing lead times and excess work in process (WIP).

Figure 15.4.1 illustrates how the order release function creates a scheduled receipt. As the shop
day and current calendar day coincide, the planned order release takes place. The order quantity
is deleted (from the MRP planned-order release row), and a shop order for that amount is added
to the dispatch list, along with a start and due date priority. The order quantity is then reentered
(on the MRP form) as a scheduled receipt on the listed due date.
Figure 15.4.1. Relationship between planned-order releases and dispatch list.
15.5 Types of Scheduling
Types of scheduling can be categorized as forward scheduling and backward scheduling.

1. Forward scheduling is commonly used in job shops where customers place their orders on
“needed as soon as possible” basis. Forward scheduling determines start and finish times of next
priority job by assigning it the earliest available time slot and from that time, determines when
the job will be finished in that work center. Since the job and its components start as early as
possible, they will typically be completed before they are due at the subsequent work centers in
the routing. The forward method generates in the process inventory that are needed at subsequent
work centers and higher inventory cost. Forward scheduling is simple to use and it gets jobs done
in shorter lead times, compared to backward scheduling.
2. Backward scheduling is often used in assembly type industries and commit in advance to
specific delivery dates. Backward scheduling determines the start and finish times for waiting
jobs by assigning them to the latest available time slot that will enable each job to be completed
just when it is due, but done before. By assigning jobs as late as possible, backward scheduling
minimizes inventories since a job is not completed until it must go directly to the next work
center on its routing.
Example 1: A job is due to be delivered at the end of 12th week. It requires a lead time of 2
weeks for material acquisition, 1 week of run time for operation-1, 2 weeks for operation-2, and
1 week for final assembly. Allow 1 week of transit time prior to each operation. Illustrate the
completion schedule under (a) forward, and (b) backward scheduling methods. Solution: The
solution is shown in Figure below.
Fig.15.5.1 Forward and backward scheduling

15.6 Scheduling Methodology
The scheduling methodology depends upon the type of industry, organization, product, and level
of sophistication required. They are:
1. Charts and boards, 2. Priority decision rules, and 3. Mathematical programming

methods.
1. Gantt Charts and Boards
Gantt charts and associated scheduling boards have been extensively used scheduling devices in
the past, although many of the charts are now drawn by computer. Gantt charts are extremely
easy to understand and can quickly reveal the current or planned situation to all concerned. They
are used in several forms, namely,
(a) Scheduling or progress charts, which depicts the sequential schedule;
(b) Load charts, which show the work assigned to a group of workers or machines; and
(c) Record a chart, which are used to record the actual operating times and delays of workers and
machines.
2. Priority Decision Rules
Priority decision rules are simplified guidelines for determining the sequence in which jobs will
be done. In some firms these rules take the place of priority planning systems such as MRP
systems. Following are some of the priority rules followed.
Symbol Priority rule

FCFS First come, first served
EDO Earliest due date
LS Least slack (that is, time due less processing time)
SPT Shortest processing time
LPT Longest processing time
PCO Preferred customer order
RS Random selection

3. Mathematical Programming Methods
Scheduling is a complex resource allocation problem. Firms process capacity, labour skills,
materials and they seek to allocate their use so as to maximize a profit or service objective, or
perhaps meet a demand while minimizing costs.
The following are some of the models used in scheduling and production control.
(a) Linear programming model: Here all the constraints and objective functions are formulated as
a linear equation and then problem is solved for optimality. Simplex method, transportation
methods and assignment method are major methods used here.
(b) PERT/CPM network model: PERT/CPM network is the network showing the sequence of
operations for a project and the precedence relation between the activities to be completed.
15.7 Sequencing and Dispatching Phase
Sequencing activities are closely identified with detailed scheduling, as they specify the order in
which jobs are to be processed at the various work centers. Dispatching is concerned with
starting the processes. It gives necessary authority to start a particular work, which has already
been planned under ‘routing’ and ‘scheduling’. For starting the work, essential orders and
instructions are given. Therefore, the definition of dispatching is ‘release of orders and
instructions for starting of the production for an item in accordance with the ‘route sheet’ and
schedule charts’.
Dispatching functions include:
 Implementing the schedule in a manner that retains any order priorities assigned at the
planning phase.
 Moving the required materials from stores to the machines, and from operation to
operation.
 Authorizing people to take work in hand as per schedule
 Distributing machine loading and schedule charts, route sheet, and other instructions and
forms.
 Issuing inspection orders, stating the type of inspection at various stages.
 Ordering tool-section to issue tools, jigs and fixtures.

15.7.1 Dispatching or Priority Decision Rules
Job shops generally have many jobs waiting to be processed. The principal method of job
dispatching is by means of priority rules, which are simplified guidelines (heuristics) to
determine the sequence in which jobs will be processed. The use of priority rule dispatching is an
attempt to formalize the decisions of the experienced human dispatcher. Most of the simple
priority rules that have been suggested are listed in Table 5.6. Some of the rules used job
assignment are: first come, first served (FCFS), earliest due date (EDD), longest processing time
(LPT), and preferred customer order (PCO). These rules can be classified as: Static or Dynamic.
Static rules do not incorporate an updating feature. They have priority indices that stay constant
as jobs travel through the plant, whereas dynamic rules change with time and queue
characteristics. Table below shows standard dispatching rules.
Symbol Priority rule Description of the rule

FCFS First come, first served Select a job that has been in workstations queue the longest
EDD Earliest due date Select a job which is due first.
FISFS First in System, First Select a job that has been on the shop floor the longest.
Served
SPT Shortest processing time Select a job with minimum processing time.
S/RO Slack per remaining Select a job with the smallest ratio of slack to operations
operation remaining to be performed.
Covert Order jobs based on ratio-based priority to processing time.
LTWK Least Total Work Select a job with smallest total processing time (SPT).
LWKR Least Work Remaining Select a job with smallest total processing time for
unfinished operations.
MOPNR Most Operations Select a job with the most operations remaining in its
Remaining processing sequence.
MWKR Most Work Remaining Select a job with the most total processing time remaining.
RANDOM Random Select a job at random.
WINQ Work in Next Queue Select a job whose subsequent machine currently has the
shortest queue.

LTWK and EDD (assuming due dates are fixed) are static rules. LWKR is dynamic, since the
remaining processing time decreases as the job progresses through the shop, i.e. through time.
Slack based rules are also dynamic.
Slack = due date – current time – remaining work
Rules can also be classified as myopic or global. Myopic rules look only at the individual
machine, whereas global rules look at the entire shop. SPT is myopic whereas WINQ is global.
1. Job slack (S): This is the amount of contingency or free time, over and above the expected
processing time, available before the job is completed at a predetermined date (to), i.e.
S = to – t1 – Σaj , where t1 = present date (e.g. day or week number, where ti < to), Σaj = sum of
remaining processing times. Where delays are associated with each operation,
2. Job slack per operation, i.e. S/N, where N = number of remaining operations. Therefore
where S is the same for two or more jobs, the job having the most remaining operations is
processed first.
3. Job slack ratio, or the ratio of the remaining slack time to the total remaining time, i.e. S/(t0 –
t1). In all the above cases, where the priority index is negative the job cannot be completed by the
requisite date. The rule will therefore be to process first those jobs having negative indices.
4. Shortest imminent operation (SIO), i.e. process first the job with the shortest processing times.
5. Longest imminent operation (LIO). This is the converse of SIO.
6. Scheduled start date. This is perhaps the most frequently used rule. The date at which
operations must be started in order that a job will meet a required completion date is calculated,
usually by employing reverse scheduling from the completion date, e.g.
Xi = t0 – Σaj or, Xi = to – Σ(ai + fi)
Where, Xi = scheduled start date for an operation, fi = delay or contingency allowance.
Usually some other rule is also used, e.g. first come, first served, to decide priorities between
jobs having equal Xi values.

7. Earliest due date, i.e. process first the job required first.
8. Subsequent processing times. Process first the job that has the longest remaining process
times, i.e. Σai or, in modified form, Σ (ai + .fi).
9. Value. To reduce work in progress inventory cost, process first the job which has the highest
value.
10. Minimum total float. This rule is the one usually adopted when scheduling by network
techniques.
11. Subsequent operation. Look ahead to see where the job will go after this operation has been
completed and process first the job which goes to a ‘critical’ queue, that is a facility having a
small queue of available work, thus minimizing the possibility of facility idle time.
12. First come, first served (FCFS).
13. Random (e.g. in order of job number, etc.).
Rules 12 and 13 are random since, unlike the others, neither one depends directly on job
characteristics such as length of operation or value.
Priority rules can be classified further as follows:
1. Local rules depend solely on data relating to jobs in the queue at any particular facility.
2. General rules depend on data relating to jobs in the queue at any particular facility and/or data
for jobs in queues at other facilities.
Local rules, because of the smaller amount of information used, are easier and cheaper to
calculate than general (sometimes called global) rules. All of the above rules with the exception
of rule 11 are local rules.
One further classification of rules is as follows:
• Static rules are those in which the priority index for a job does not change with the passage of
time, during waiting in anyone queue.
• Dynamic rules are those in which the priority index IS a function of the present time.

Rules 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13 are all static, whereas the remainders are dynamic.
Perhaps the most effective rule according to present research is the SIO rule, and, lore
particularly, the various extensions of this rule. Massive simulation studies have shown that, of
all ‘local’ rules, those based on the SIO rule are perhaps the most effective, certainly when
considered against criteria such as minimizing the number of Jobs in the system, the mean of the
‘completion distribution’ and the throughput time. be SIO rule appears to be particularly
effective in reducing throughput time, the ‘truncated SIO’ and the ‘two-class SIO’ rules being
perhaps the most effective derivatives, having the additional advantage of reducing throughput
time variance and lateness.
The ‘first come, first served’ priority rule has been shown to be particularly beneficial in
reducing average lateness, whereas the ‘scheduled start date and total float’ rule has been proved
effective where jobs are of the network type.
Example 1; Let the current time is 10. Machine B has just finished a job, and it is time to select
its next job. Table 15.7.1.1 provides information on the four jobs available. For each of the
dispatching rules discussed in Table 5.6, determine the corresponding sequence.
A job is due to be delivered at the end of 12th week. It requires a lead time of 2 weeks for
material acquisition, 1 week of run time for operation-1, 2 weeks for operation-2, and 1 week for
final assembly. Allow 1 week of transit time prior to each operation. available jobs are
Solution: pij = processing time for job i on machine j
SPT: Looking at machine B, we find that jobs (1, 2, 3, 4) have processing times of (5, 3, 2, 4).
Placing jobs in increasing order of processing time results in the job sequence {3, 2, 4, 1}. So
load job 3 on machine B.

EDD: Jobs (1, 2, 3, 4) have due dates (30, 20, 10, 25) respectively. Arranging in increasing order
of the due dates, we have the job sequence (3, 2, 4, 1), which means job 3 should be loaded next
on machine B.
FCFS: Jobs arrived at machine B at times (10, 5, 9, 8). Placing earliest arrivals first, we obtain
the job sequence (2, 3, 4, 1).
Example. (i) Sequence the jobs given in Table above by the following priority rules:
(a) FCFS (First Come First Served), (b) EDD (Earliest Due Date), (c) LS (Least Slack), (d) SPT
(Shortest Processing Time), and (e) LPT (Longest Processing Time).
(ii) Compare the effectiveness of FCFS and SPT rules in terms of (a) Average completion time,
(b) Average job lateness, (c) Average no. of jobs at work center
Table 15.7.1.1a
Solution: The solution is shown in Tables 5.7a, 5.7b, and 5.7c below.
Tables 15.7.1.1b

Tables 15.7.1.1c. Sequencing of Jobs as per Different Rules
Tables 15.7.1.1d. Effectiveness of FCFS and SPT
15.7.2 Forms Used in Dispatching
Work orders: are issued to departments to commence the desired lot of products.
Time card: is given to each operator in which the time taken by each operation and other
necessary operations are given.
Inspection tickets: are sent to the inspection department, which shows the quality of the work
required, and stages at which inspection is to be carried out. Afterwards these are returned with
the inspection report and quantity rejected.
Move tickets: are used for authorizing the movement of the material from store to shops, and
from operation to operation.
Tool and equipment tickets: authorizes the tool department that new tools, jigs, fixtures and
other equipment may be issued to shops.

15.8 Routing or Sequencing
Routing may be defined as the selection of path which each part of the product will follow,
which being transformed from raw material to finished products. Path of the product will also
give sequence of operation to be adopted while being manufactured. Sequencing procedures seek
to determine the best order for processing a set of jobs through a set of facilities.
In other way, routing means determination of most advantageous path to be followed from
department to department and machine to machine till raw material gets its final shape, which
involves the following steps:
(a) Type of work to be done on product or its parts.
(b) Operation required to do the work.
(c) Sequence of operation required.
(d) Where the work will be done.
(e) A proper classification about the personnel required and the machine for doing the work.
For effective production control of a well-managed industry with standard conditions, the routing
plays an important role, i.e., to have the best results obtained from available plant capacity. Thus
routing provides the basis for scheduling, dispatching and follow-up.
Two types of problems can be identified. First, the static case, in which all jobs to be processed
are known and are available, and in which no additional jobs arrive in the queue during the
exercise. Second, the dynamic case, which allows for the continuous arrival of jobs in the queue.
Associated with these two cases are certain objectives. In the static case the problem is merely to
order a given queue of jobs through a given numbers of facilities, each job passing through the
facilities in the required order and spending the necessary amount of time at each. The objective
in such a case is usually to minimize the total time required to process all jobs: the throughput
time. In the dynamic case the objective might be to minimize facility idle time, to minimize work
in progress or to achieve the required completion or delivery dates for each job. Sequencing
procedures are relevant primarily for static cases.

Several simple techniques have been developed for solving simple sequencing problems, for
example the sequencing of jobs through two facilities, where each job must visit each facility in
the same order. Fairly complex mathematical procedures are available to deal with more realistic
problems, but in all cases either a static case is assumed or some other simplifying assumptions
are made. Route or sequencing depends on the nature and type of industries as discussed below:
A. Continuous Industry
In this type of industry, once the route is decided in the beginning, generally no further control
over the route is needed. The raw material enters the plant, moves through different processes
automatically till it gets final shape, e.g. soft drink bottling plant, brewery, food processing unit,..
B. Assembly Industry
Such industries need various components to be assembled at a particular time. So, it is necessary
that no component should fail to reach at the proper time and proper place in required quantity,
otherwise the production line will be held up, resulting in wastage of time and production delay
(e.g. assembly of bike, scooter, car, radio, type writer, watch, etc). If all batches visit the same
sequence of workstations, the system is called a flow shop.
In these industries much attention is paid for routing. A work-flow sheet for every component is
prepared which gives full information about the processes, machines and the sequence in which
parts will reach at the particular place and time. This type of routing needs a good technical
knowledge, so the staff of the production control department must be qualified and experienced
one.
C. Job-shop Industry
This is also called sequencing and scheduling situation with many products. The general job
shop problem is to schedule production times for N jobs on M machines. At time 0, we have a
set of N jobs. For each job we have knowledge of the sequence of machines required by the job
and the processing time on each of those machines. Due dates may also be known. The objective
may be to minimize the makespan for completion of all jobs, minimizing the number of tardy
jobs or average tardiness, minimizing the average flow time, or achieving some weighted
combination of these criteria.

This problem is very complex and difficult to solve. On each of the M machines there are N!
possible job orderings making a total of (N!)M possible solutions. For just 10 jobs on 5 machines
there are over 6x1031 choices. Some techniques of optimization like Dynamic programming, and
Branch and bound have been attempted to do scheduling in random or job shop environment.
However, we will try to look at some other options with some examples.
Since such industries always handle different types of products, so after receiving the
manufacturing orders, the planning dept has to prepare each time the detailed drawing and
planning.
This will indicate the proper sequence of routes for the job. In a job shop, each part type has its
own route. These individual routes may be carefully planned by an experienced process planner.
15.8.1 Techniques of Routing
While converting raw material into required goods different operations are to be performed and
the selection of a particular path of operations for each piece is termed as ‘Routing’. This
selection of a particular path, i.e. sequence of operations must be the best and cheapest to have
the lowest cost of the final product. The various routing techniques are:
1. Route card: This card always accompanies with the job throughout all operations. This
indicates the material used during manufacturing and their progress from one operation to
another. In addition to this the details of scrap and good work produced are also recorded.
2. Work sheet: It contains
(a) Specifications to be followed while manufacturing.
(b) Instructions regarding routing of every part with identification number of machines and work
place of operation. This sheet is made for manufacturing as well as for maintenance.
3. Route sheet: It deals with specific production order. Generally made from operation sheets.
One sheet is required for each part or component of the order. These include the following:

(a) Number and other identification (c) Number of pieces to be made.

of order.
(d) Number of pieces in each lot—if
(b) Symbol and identification of part. put through in lots.
(e) Operation data which includes:
(i) List of operation on the part. (iii) Machine to be used for each operation.
(ii) Department in which operations (iv) Fixed sequence of operation, if any.

are to be performed.
(f) Rate at which job must be completed, determined from the operation sheet.
4. Move order: Though this is document needed for production control, it is never used for
routing system. Move order is prepared for each operation as per operation sheet. On this the
quantity passed forward, scrapped and to be rectified are recorded. It is returned to planning
office when the operation is completed.
15.8.2 Loading or Assignment
It means assignment of job to a facility, viz: machine, men, dept, etc. Assigning a subject to a
teacher is loading. Loading should be done at the higher level. Frequently, when attempting to
decide how orders are to be scheduled onto available facilities, one is faced with various
alternative solutions. For example, many different facilities may be capable of performing the
operations required on one customer or item. Operations management must then decide which
jobs are to be scheduled onto which facilities in order to achieve some objective, such as
minimum cost or minimum throughput time.
One simple, rapid, but approximate method of facility/job assignment is best described by means
of an example shown in Figure 15.8.2.1.

Figure 15.8.2.1
Example 15.8.2.1. A company must complete five orders during a particular period. Each order
consists of several identical products and each can be made on one of several facilities. Table-5.1
gives the operation time for each product on each of the available facilities. The available
capacity for these facilities for the period in question is: A = 100 hours, B = 80 hours, and C =
150 hours.
Table 15.8.2.1
The index number for a facility is a measure of the cost disadvantage of using that facility for
processing, and is obtained by using this formula:

Ij = (Xij – Ximin) / Ximin
Where Ij = Index number for facility j
Xij = Operation time for item i on facility j
Ximin = Minimum operation time for item i
For order 1: IA = (5.0 – 2.5)/2.5 = 1.0
IB = (4.0 – 2.5)/2.5 = 0.6
IC = (2.5 – 2.5)/2.5 = 0
• The best facility for order 1 is C (IC = 0); the processing time for that order (75 hours) is less
than the available capacity. We can therefore schedule the processing of this order on this
facility.
• Facility A is the best facility for order 2, but also the best for order 3. Both cannot be
accommodated because of limitations on available capacity, so we must consider the
possibility of allocating one of the orders to another facility. The next best facility for order 2 is
facility B (IB = 0.67) and for order 3 the next best facility is also facility B (IB = 1). Because
the cost disadvantage on B is less for order 2, allocate order 2 to B and 3 to A as shown in the
table.
• The best facility for order 4 is B but there is now insufficient capacity available on this facility.
The alternatives now are to reallocate order 2 to another facility or to allocate order 4
elsewhere. In the circumstances it is better to allocate order 4 to facility C.
• Finally order 5 can be allocated to its best facility, namely, facility C.
Example 15.8.2.2 Suppose there are three machines and 6 jobs need operation on them. All
machines are capable of doing the operation but the time of operation varies from machine to
machine. Assign the jobs so that (i) the overall operation time is minimum, (ii) the capacity of
each machine is not exceeded.

Table 15.8.2.2
Index no = (Time for non-optimal machine)/Time for the best machine
Example 15.8.2.3. A piece of mining equipment requires the manufacturing times shown in
Table 15.8.2.3. Each of the activities must be done sequentially, except that steel fabrication can
begin 2 weeks after purchasing begins, and the hydraulics and electrical activities can be done
concurrently. Construct a Gantt chart for this job.
Table 15.8.2.3
Solution: The Gantt Chart is drawn in Table 15.8.2.4. The chart shows the different activities
along with their respective durations.

Table 15.8.2.4
Self-Check
1. What is routing?
2. What is scheduling?
3. What is dispatching
4. Mention the types of scheduling.
5. Explain the techniques of routing.
6. What are the inputs to scheduling?
7. Explain the scheduling strategies.
8. Discuss the scheduling methods.

Chapter 16
Project Management
16.1 Introduction
16.2 Some Terms Related to Network Planning
16.3 Project management activities
16.3.1 Feasibility analysis
16.3.2 Plan
16.3.3 Control
16.4 CPM and PERT Model
16.5 Network analysis
16.5.1 Identifying project activities
16.5.2 Estimating Activity Durations
16.5.3 Identifying activity relationships
16.5.4 Drawing the network diagrams
16.5.5 Identifying schedule constraints
16.5.6 Project crashing

 Describe project management objectives
 Describe the project life cycle
 Diagram networks of project activities
 Estimate the completion time of a project
 Compute the probability of completing a project by a specific time
 Determine how to reduce the length of a project effectively
 Describe the critical chain approach to project management
16.1 Introduction
A project is a temporary endeavor undertaken to create a unique product or service. We call it

temporary because every project has a definite beginning and a definite end. Temporary does not

necessarily mean short in duration; many projects last for several years. In every case, however,
the duration of a project is finite. Projects are not ongoing efforts. In addition, temporary does
not generally apply to the product or service created by the project. Most projects create a lasting
result.
A project is an interrelated set of activities with a definite starting and ending point, which
results in a unique outcome for a specific allocation of resources. The complexity of the project
will increase with the size and number of activities within the project. Extensive planning and
co-ordination activities are required for larger projects to ensure that the project aims are met.
Examples of projects include installing an IT system, building a bridge or introducing a new
service or product to the market.
16.2 Some Terms Related to Network Planning
Event: An event is a specific instant of time which marks the start and the end of an activity.
Event consumes neither time nor resources. It is denoted by a circle or a node and the event
number is written within the circle. Example of events: start of examination, end of the game,
start of meeting, meeting ended, etc.
Activity: A project consists of different types of tasks or jobs to be performed. These jobs or
tasks are called activities. An activity may be a process, a material handling or material
procurement cycle. Examples of activities: Laying the foundation of a building, process of
writing examination, arranging for bank loans, etc. An activity is shown by an arrow and it
begins and ends with an event.
Unlike event, an activity consumes time and resources. An activity is denoted by a, b, c, etc.
which is marked below the arrow and estimated time to accomplish the activity is written above
the arrow.
Dummy activity: When two activities start at the same instant of time (like activities b and c in
Figure 16.2.1), the head events are joined by a dotted arrow-known as a dummy activity. A
dummy activity does not consume time. It may be critical or non-critical. It becomes a critical
activity when its earliest start time (EST) is same as its latest finishing time (LFT).

Fig. 16.2.1 An Example of A Network Diagram.
Critical activities: An activity is called critical if its earliest start time plus the time taken by it is
equal to the latest finishing time. In a network diagram, critical activities are those which if
consume more than their estimated time, the project will be delayed. A critical activity in a
network diagram is denoted by a thick arrow to distinguish it from a non-critical activity.
Critical path: Critical path (CP) is formed by critical activities. A CP is the longest path and
consumes the maximum time. A CP has zero float. A dummy activity joining two critical
activities is also a critical activity. Any amount of delay on CP will delay the entire project by
the same amount. So, a CP re.
Subprojects: Projects are frequently divided into more manageable smaller projects which are
called subprojects. Subprojects are often contracted out to an external enterprise or to another
functional unit in the performing organization. Examples of subprojects include:
• A single project phase.
• The installation of plumbing or electrical fixtures on a construction project.
• Automated resting of computer programs.
Work Breakdown Structure (WBS): WBS represents a systematic and logical breakdown of
the project into its component parts. It is constructed by dividing the project into major parts,
with each of these being further divided into sub-parts. This is continued till a breakdown is done
in terms of manageable units of work for which responsibility can be defined.

WBS is a deliverable oriented grouping of project elements which organizes and defines the total
scope of the project. Each descending level represents an increasingly detailed definition of a
project component which may be products or services. WBS helps in:
• Effective planning by dividing the work into manageable elements which can be planned,
budgeted, and controlled.
• Assignment of responsibility for work elements to project personnel and outside agencies.
• Development of control and information system.
Organization Breakdown Structure (OBS)
OBS represents formally how the project personnel and outside agencies are going to work for
the project. To assign responsibility for the tasks mentioned, the WBS has to be integrated with
project organization structure or the OBS.
16.3 Project Management Activities
The project management process includes the following main elements:
16.3.1 Feasibility Analysis
This step involves evaluating the expected cost of resources needed to execute the project and
compare these to expected benefits. At the start of the project a plan of the resources required to
undertake the project activities is constructed. If there is a limit on the amount of resources
available then the project completion date may have to be set to ensure there resources are not
overloaded. This is a resource-constrained approach. Alternatively the need to complete the
project by a specific date may take precedence. In this case an alternative source of resources
may have to be found, using sub-contractors for example, to ensure timely project completion.
This is called a time-constrained approach.
Once a plan has been constructed it is necessary to calculate estimates for the time and resources
required to undertake each activity in the project. Statistical methods should be used when the
project is large (and therefore complex) or novel.

This allows the project team to replace a single estimate of duration with a range within which
they are confident the real duration will lie. This is particularly useful for the early stage of the
project when uncertainty is greatest. The accuracy of the estimates can also be improved as their
use changes from project evaluation purposes to approval and day-to-day project control. The
PERT approach allows optimistic, pessimistic and most likely times to be specified for each task
from which a probabilistic estimate of project completion time can be computed.
16.3.2 Plan
This stage estimated the amount and timing of resources needed to achieve the project
objectives. The project management method uses a systems approach to dealing with a complex
task in that the components of the project are broken down repeatedly into smaller tasks until a
manageable chunk is defined. Each task is given its own cost, time and quality objectives. It is
then essential that responsibility is assigned to achieving these objectives for each particular task.
This procedure should produce a work breakdown structure (WBS) which shows the hierarchical
relationship between the project tasks.
16.3.3 Control
This stage involves the monitoring the progress of the project as it executes over time. This is
important so that any deviations from the plan can be addressed before it is too near the project
completion date to take corrective action. The point at which the project progress is assessed is
termed a Milestone.
The type of project structure required will be dependent on the size of the team undertaking the
project. Projects with up to six team members can simply report directly to a project leader at
appropriate intervals during project execution. For larger projects requiring up to 20 team
members it is usual to implement an additional tier of management in the form of team leaders.
The team leader could be responsible for either a phase of the development or a type of work.
For any structure it is important that the project leader ensures consistency across development
phases or development areas as appropriate. For projects with more than 20 members it is likely
that additional management layers will be needed in order to ensure that no one person is
involved with too much supervision.

The two main methods of reporting the progress of a project are by written reports and verbally
at meetings of the project team. It is important that a formal statement of progress is made in
written form, preferably in a standard report format, to ensure that everyone is aware of the
current project situation. This is particularly important when changes to specifications are made
during the project. In order to facilitate two-way communication between team members and
team management, regular meetings should be arranged by the project manager. These meetings
can increase the commitment of team members by allowing discussion of points of interest and
dissemination of information on how each team’s effort is contributing to the overall progression
of the project.
16.4 CPM and PERT Model
CPM stands for Critical Path Method. It has mostly been used in deterministic situations like
construction projects. For the most part, houses, bridges, and skyscrapers use standard materials
whose properties are well known. They employ more or less standard components and stable
technology.
Changes occur mainly in design, size, shapes, and arrangements of different components- rather
than in design concepts. CPM takes just one time into account, and it deals with deterministic
situation. It is activity oriented and can be used for both large and small projects. It is widely
recognized and is the most versatile and potent management planning technique. CPM is used
for planning and controlling the most logical and economic sequence of operations for
accomplishing a project.
CPM Technique
CPM follows the following steps for accomplishing a project planning:
 Break down the project into various activities systematically.

 Label all activities.
 Arrange all the activities in logical sequence.
 Construct the arrow diagram.
 Number all the nodes (events) and activities.
 Find the time for each activity.
 Mark the activity times on the arrow diagram.

 Calculate early and late, start and finishing times.

 Tabulate various times and mark EST and LFT on the arrow diagram.
 Calculate the total project duration.
 If it is intended to reduce the total project duration. Crash the critical activities of the
network.
 Optimize the cost.
 Update the Network.
 Smooth the network resources.
PERT is Program Evaluation and Review Technique. This is mostly used in non-deterministic or
probabilistic or stochastic situations such as: space research, R & D projects. These projects
(going to Mars, Moon, etc) are relatively new; their technology is rapidly changing, and their
products are nonstandard. There is some standard hardware in ICBMs (Inter-continental Ballistic
Missiles) and lunar rockets, but much of their design and construction needs new type of
materials and technology, and projects are contracted, planned, and scheduled before all
technological problems have been solved.
 PERT is commonly used to conduct the initial review of a project .It is very useful device
to plan the time and resources.
 PERT is used in activity where timings could not be estimated with enough certainty. It
can be employed at those places where a project cannot be easily defined in terms of time
or resources required.
 However, events can be readily defined which means it is known that, first, part A will be
manufactured, only then subassembly S can be built, and so on.
 PERT offers a lot of advantages for non-repetitive type of projects, R & D, prototype
production, space research, defense projects, etc.
 Because of the uncertainty of activity timings, PERT fits into a probabilistic model.
Probability concept helps in estimating activity timings.
 PERT is mainly concerned with events and is thus seen as an event oriented system.

PERT Techniques
The PERT planning technique consists of the following steps:
 The project is broken down into different activities systematically.

 Activities are arranged in logical sequence.
 The network diagram is drawn. Events and activities are numbered.
 Using three time estimate, the expected time for each activity is calculated.
 Standard deviation and variance for each activity are computed.
 Earliest starting times, and latest finishing times are calculated.
 Expected time, earliest starting time, and latest finishing times are marked on the network
diagram.
 Slack is calculated.
 Critical path(s) are identified and marked on the network diagram.
 Length of critical path or total project duration is found out.
 Lastly, the probability that the project will finish at due date is calculated.
Time Estimates in PERT
To take care of uncertainty, PERT takes three time estimates into account: optimistic, most
likely, and pessimistic time. PERT time estimates follow beta distribution.
Optimistic time (to): This is the shortest time taken by an activity if everything goes
exceptionally well.
Most likely time (tm): It is the time in which the activity is normally expected to complete
under normal contingencies.
Pessimistic time (tp): It is the maximum time that would be required to complete the activity if
bad luck were encountered at every turn. This does not include catastrophes like earthquakes,
floods, fires, etc.

PERT CPM
activity-on-arrow network construction activity-on-node network construction
Multiple time estimates Single estimate of activity time
Probabilistic activity times Deterministic activity times
For non-repetitive jobs where the time for the jobs of repetitive in nature
and cost estimates tend to be quite where the activity time estimates can
uncertain. be predicted with certainty
16.5 Network Analysis
This section describes the major stages in the construction of the critical path method (CPM) and
program evaluation and review (PERT) project networks. The stages in network analysis are now
outlined.
16.5.1 Identifying Project Activities
In order to undertake network analysis it is necessary to break down the project into a number of
identifiable activities or tasks. This enables individuals to be assigned responsibility to particular
tasks which have a well-defined start and finish time. Financial and resource planning can also
be conducted at the task level and coordinated by the project manager who must ensure that each
task manager is working to the overall project objectives and not maximizing the performance of
particular task at the expense of the whole project.
Activities consume time and/or resources. The first stage in planning a project is to break down
the project into a number of identifiable activities with a start and end. Performance objectives of
time, cost and quality can be associated with each activity. The project is broken down into these
tasks using a work breakdown structure. This is a hierarchical tree structure which shows the
relationship between the tasks as they are further sub-divided at each level.

16.5.2 Estimating Activity Durations
The next stage is to retrieve information concerning the duration of the tasks involved in the
project. The can be collated from a number of sources, such as documentation, observation,
interviewing etc. Obviously the accuracy of the project plan will depend on the accuracy of these
estimates. There is a trade-off between the cost of collecting information on task duration’s and
the cost of an inaccurate project plan.
16.5.3 Identifying Activity Relationships
It is necessary to identify any relationships between tasks in the project,. For instance a particular
task may not be able to begin until another task has finished. Thus the task waiting to begin is
dependent on the former task. Other tasks may not have a dependent relationship and can thus
occur simultaneously.
Critical path diagrams are used extensively to show the activities undertaken during a project and
the dependencies between these activities. Thus it is easy to see that activity C for example can
only take place when activity A and activity B has completed. Once a network diagram has been
constructed it is possible to follow a sequence of activities, called a path, through the network
from start to end.
The length of time it takes to follow the path is the sum of all the durations of activities on that
path. The path with the longest duration gives the project completion time. This is called the
critical path because any change in duration in any activities on this path will cause the whole
project duration to either become shorter or longer. Activities not on the critical path will have a
certain amount of slack time in which the activity can be delayed or the duration lengthened and
not affect the overall project duration. The amount of slack is a function of the difference
between the path duration the activity is on and the critical path duration. By definition all
activities on the critical path have zero slack. It is important to note that there must be at least
one critical path for each network and there may be several.
There are two methods of constructing critical path diagrams, Activity on Arrow (AOA) were
the arrows represent the activities and Activity on Node (AON) were the nodes represent the

activities. The issues involved in which one to utilize will be discussed later. The following
description on critical path analysis will use the AON method.
16.5.4 Drawing the Network Diagram
For the activity-on-node notation each activity task is represented by a node with the following
format. Thus a completed network will consist of a number of nodes connected by lines, one for
each task, between a start and end node.
Calculating the Earliest Start/Finish times (forward pass)
From the duration of each task and the dependency relationship between the tasks it is possible to
estimate the earliest start and finish time for each task as follows. You move left to right along
the network, forward through time.
1. Assume the start (i.e. first) task begins at time = 0.
2. Calculate the earliest finish time where:-
Earliest Finish = Earliest Start + Duration
Calculate the earliest start time of the next task where:-
Earliest Start = Earliest Finish of task immediately before.
If there is more than one task immediately before take the task with the latest finish time to
calculate the earliest start time for the current task.
Repeat steps 2 and 3 for all tasks
Calculating the Latest Start/Finish times (backward pass)
It is now possible to estimate the latest start and finish time for each task as follows. You move
right to left along the network, backward through time.
1. Assume the end (i.e. last) task end time is the earliest finish time (unless the project end time
is given).

2. Calculate the latest start time where:-
Latest Start = Latest Finish - Duration
Calculate the latest finish time of the previous task where:-
Latest Finish = Latest Start of task immediately after.
If there is more than one task immediately after take the task with the earliest start time to
calculate the latest finish time for the current task.
Repeat steps 2 and 3 for all tasks
Calculating the slack/float times
The slack or float value is the difference between the earliest start and latest start (or earliest
finish and latest finish) times for each task. To calculate the slack time
1. Slack = Latest Start - Earliest Start OR Slack = Latest Finish - Earliest Finish
2. Repeat step 1 for all tasks.
Identifying the Critical Path
Any tasks with a slack time of 0 must obviously be undertaken on schedule at the earliest start
time. The critical path is the pathway connecting all the nodes with a zero slack time. There must
be at least one critical path through the network, but there can be more than one. The
significance of the critical path is that if any node on the path finishes later than the earliest finish
time, the overall network time will increase by the same amount, putting the project behind
schedule. Thus any planning and control activities should focus on ensuring tasks on the critical
path remain within schedule.
Example: Cables By Us is bringing a new product on line to be manufactured in their current

facility in some existing space. The owners have identified 11 activities and their precedence
relationships. Develop an AON for the project.

Immediate Duration
Activity Description
Predecessor (weeks)
A Develop product specifications None 4
B Design manufacturing process A 6
C Source & purchase materials A 3
D Source & purchase tooling & equipment B 6
E Receive & install tooling & equipment D 14
F Receive materials C 5
G Pilot production run E&F 2
H Evaluate product design G 2
I Evaluate process performance G 3
J Write documentation report H&I 4
K Transition to manufacturing J 2
Solution
Step 1: Draw the Network Diagram:
Step 2: Add Deterministic Time Estimates and show the Connected Paths
Step 3: Calculate the Path Completion Times
Paths Path duration

ABDEGHJK 40
ABDEGIJK 41
ACFGHJK 22
ACFGIJK 23

 The longest path (ABDEGIJK) limits the project’s duration (project cannot finish in less
time than its longest path)
 ABDEGIJK is the project’s critical path
 All activities on the critical path have zero slack
 Slack defines how long non-critical activities can be delayed without delaying the project
 Slack = the activity’s late finish minus its early finish (or its late start minus its early
start)
 Earliest Start (ES) = the earliest finish of the immediately preceding activity
 Earliest Finish (EF) = is the ES plus the activity time
 Latest Start (LS) and Latest Finish (LF) = the latest an activity can start (LS) or finish
(LF) without delaying the project completion
ES, EF Network
LS, LF Network

Calculating Slack
Late Early Slack

Activity
Finish Finish (weeks)
A 4 4 0
B 10 10 0
C 25 7 18
D 16 16 0
E 30 30 0
F 30 12 18
G 32 32 0
H 35 34 1
I 35 35 0
J 39 39 0
K 41 41 0
16.5.5 Identifying Schedule Constraints - Gantt Charts
Although network diagrams are ideal for showing the relationship between project tasks, they do
not provide a clear view of which tasks are being undertaken over time and particularly how
many tasks may be undertaken in parallel at any one time. The Gantt chart provides an overview
for the Project Manager to allow them to monitor project progress against planned progress and
so provides a valuable information source for project control.
To draw a Gantt Chart manually undertake the following steps:
- Draw a grid with the tasks along the vertical axis and the time-scale (up to the project
duration) along the horizontal axis.
- Draw a horizontal bar across from the task identifier along the left of the chart starting at
the earliest start time and ending at the earliest finish time.
- Indicate the slack amount by drawing a line from the earliest finish time to the latest finish
time.
16.5.6 Project Crashing
The use of additional resources to reduce project completion time is termed crashing the
network. This involves reducing overall indirect project costs by increasing direct costs on a

particular task. One of most obvious ways of decreasing task duration is to allocate additional
labour to a task. This can be either an additional team member or through overtime working. To
enable a decision to be made on the potential benefits of crashing a task the following
information is required.
- The normal task duration

- The crash task duration
The cost of crashing the task to the crash task duration per unit time
The process by which a task is chosen for crashing is by observing which task can be reduced for
the required time for the lowest cost. As stated before the overall project completion time is the
sum of the task durations on the critical path.
Thus it is always necessary to crash a task which is on the critical path. As the duration of tasks
on the critical path are reduced however other paths in the network will also become critical. If
this happens it will require the crashing process to be undertaken on all the paths which are
critical at any one time.
Self-Check
1. What is project
2. Define the term critical path
3. What do work breakdown structure represents
4. Describe the difference between CPM and PERT Model
5. Explain the three time estimate that PERT takes into account
6. What is slack
7. What is project crashing
8. Explain the stages of network analysis

References
1. William J.Stevensen, production and operation management, 5th edition, Rochester

institute of technology.
2. Richard B.Chase and F.Robert Jacobs, operation management for competitive advantage,
11th edition.
3. Dr. Ram Naresh Roy, A modern approach to operation management, Copyright © 2005
New Age International (P) Ltd., Publishers.
4. S. Anil Kumar and N.Suresh. Production and Operation Management. 2nd edition.
Copyright © 2008, 2006 New Age International (P) Ltd.

Operation Management

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Harambee University College Operation Management Department of Management

Introduction to Operation Management

1.0 Aims and Objectives

1.0 Aims and Objectives

 Define Operations Management (OM)

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1.2 What is operations management?

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Figure 1.2.2 the transformation process

1.3 Differences between Manufacturing and Service Organizations

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Figure 1.3.1. Characteristics of manufacturing and service organizations

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Characteristic Manufacturing Service

Output Tangible Intangible

Customer contact Low High

Uniformity of input High Low

Labor content Low High

Uniformity of output High Low

Opportunity to correct High Low

1.4 Operations management decisions

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Figure 1-5: the relationships between strategic and tactical decisions

1.5 Operations strategy and competitiveness

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1.5.1 The role of operations strategy

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The Importance of Operations Strategy

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1.5.2 Developing a business strategy

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Table 1.5.2.1: organizational core competencies

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1.5.3 Developing an operations strategy

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4. Flexibility As a company’s environment changes rapidly, including customer needs and

b) The Need for Trade-Offs

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c) Order Winners and Qualifiers

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d) Translating Competitive Priorities into Production Requirements

1.5.4 Strategic Role of Technology

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Technology as a Tool for Competitive Advantage

1.6 Historical Development of OM

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1.6.2 Historical Milestones

When we think of what operations management does—namely, managing the transformation of

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Table 1.6.2.1: Historical development of operations management

A. The Industrial Revolution

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C. The Human Relations Movement

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E. The Computer Age

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G. Total Quality Management

H. Business Process Reengineering