Operations Management 1

UNIT
01 Introduction to Operations
Management
Names of Sub-Units
Introduction to Operations Management, Operations Management, Importance of Operations

Management, Functions of Operations Management, Activities Part of Operations Management,
Relationship between Operations and Other Functions in the Organisation, Operations Management
in Manufacturing and Services, Operations Performance Objectives, Production and Operations,
Nature of Production and Operations, Differences between Production and Operations Management,
Systems Approach to Operations Management
Overview
The unit starts with an introduction to operations management, its importance and functions. The
unit further goes into explaining the relationship between operations and other functions in the
organisation. The unit also discusses operations management in manufacturing and services. The
unit moves to understand operations performance objectives, production and operations. The unit
also sheds light on the nature of production and operations. It further goes to illustrate the differences
between production and operations management. The unit then highlights the systems approach to
operations management.
Learning Objectives
In this unit, you will learn to:

 Define operations management
 Explain the relationship between operations and other functions in the organisation
 Discuss the operations performance objectives
 Differentiate between production and operations management
 Describe the Operations Management in Manufacturing and Services
 Relate the systems approaches to operations management
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Operations Management
Learning Outcomes
At the end of this unit, you would:

 Analyse the crucial role of Operations management
 Assess the interface between operations management and information systems
 Evaluate the important factors involved with operations performance objectives
 Evaluate the Managerial transformation process
 Explore the Various functions involved in operations management
 Examine the different kinds of functions involved with service management
 State the various activities involved with the management of operations and production functions
Pre-Unit Preparatory Material
 https://www.newagepublishers.com/samplechapter/001233.pdf
 https://www.agri-bm.kkwagh.edu.in/uploads/department_course/NOTES_OF_ABM-357.pdf
 https://sciendo.com/pdf/10.30657/pea.2020.26.03
 http://elearning.nokomis.in/uploaddocuments/Production%20And%20Operation%20
Mgt/Chp.1%20Nature%20and%20Scope%20of%20Production%20and%20Operations%20
Management/PPT/CH1Nature&%20scope%20Of%20Production%20Mgt.pdf
1.1 INTRODUCTION
Organisations today are competing in a different environment and to survive, they must focus on
innovation, quality, efficiency, improving customer relationships, focuses on diverse and international
perspectives to gain a competitive advantage. The advances in technologies, e-business and global
competition requires effective responsiveness and flexibility. The focus of business enterprises today is to
create a lean and agile organisation that is free of waste with a strong focus on operations management.
The main focus of operations management is to transform various inputs into goods and services using
different managerial functions such as planning, organising, decision making, controlling and so on.
Operations are involved everywhere in the organisation is it finance, marketing and human resources.
Operations management has a crucial role to play in managing the day-to-day operations since it is an
important functional area that determines the satisfaction level of their customers. Most organisations
are involved in the production of goods or services due to which the organisations are involved with
operational processes which are necessary for achieving the targets of organisations for their long-
term survival.
1.2 OPERATIONS MANAGEMENT

To define operations management, let us first understand the two terms ‘operations’ and ‘management’
separately. Operation is concerned with transforming an array of inputs into the desired output
(services) having the required level of quality. On the other hand, management is a process of combining
various resources used in the operations subsystem of the organisation into value-added services in a
controlled manner as per the set organisational policies. A set of interconnected management activities
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UNIT 01: Introduction to Operations Management JGI JAIN
involved in producing certain products is called production management. If these management

activities are involved in producing services, then it is called operations management. According to
Joseph G. Monks, “Operations management is the process whereby resources, flowing within a defined
system, are combined and transformed by a controlled manner to add value in accordance with policies
communicated by management.”
Operations management involves various processes, such as:
 Designing products
 Taking decisions on the required resources
 Arranging schedules, equipment and facilities
 Managing inventory
 Controlling quality
 Designing work methods
 Devising and designing jobs for making the product
1.2.1 Importance of Operations Management

Efficient and effective operations management is needed for ensuring the smooth running of the
production without any kind of unexpected situations. The following points explain the importance of
operations management:
 Ensuring product quality: Operations management is necessary for ensuring and monitoring
the durability and reliability of a product that would suit customers’ requirements. Operations
management ensures that the products meet the required quality standards by identifying areas of
improvement and taking quality measures. Also, it ensures timely delivery of products and effective
aftersales services.
 Increasing productivity: In the context of people, productivity measures how efficiently people are
employed in the production process to generate a given level of output. Operations management
ensures that the right people with the right skills are assigned the right type of work. If the employees
have the required skills to perform their duties, they tend to commit fewer or no errors. As a result,
productivity increases.
 Achieving high customer satisfaction: Customer satisfaction is crucial for any organisation in
today’s competitive business environment as it ensures repeat business for the organisation.
Operations management attempts to fulfill the needs of customers by manufacturing high-quality
products and services and making on-time delivery of those products and services.
 Achieving competitive advantage: Effective operations management helps with keeping the
business ahead of the competition through continued application of advanced production
techniques, producing high-quality products and services and ensuring a high level of customer
satisfaction.
 Reduced operating cost: Operations management ensures the application of cost-effective methods
of production such as lean manufacturing strategies and JIT scheduling. It also attempts to produce
products and services as planned, which reduces wastage and saves unnecessary costs.
1.2.2 Functions of Operations Management

Operations management deals with managing various processes and functions in an organisation with
an aim to make judicious use of resources for the successful delivery of products and services.
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Various functions involved in operations management are:

 Finance: Finance plays a significant role in operations management in effectively planning the
usage of resources without wasting them on unproductive tasks. The finance should be well planned
and utilised for manufacturing useful goods or services according to the demand and wants to
customers.
 Forecasting: It is all about predicting the demand for a product in the future. Through this, a
manager gets to know what to produce, when to produce and how to produce in accordance with
the customer’s needs.
 Strategy: Successful operations management requires effective marketing, sales and supply chain
strategies so that resources can be used optimally.
 Product design: Operations management involves using innovative methods and technologies for
designing a product/service according to the current market trends. Since the customers today are
more concerned about the quality of the product, hence the operations manager needs to ensure
that the product is designed for meeting the needs of the customers.
 Quality control: Quality control is essential for selling and marketing a product. It is necessary
for operations managers ensure a better quality of products by identifying product defects and
rectifying them. Also, strict monitoring and supervision should be in place in order to produce
superior quality products and services.
 Scheduling: Operations involve setting beginning and ending times for each step in the production
process. It includes planning and checking the use of labour, machinery and materials so that
production moves smoothly. Scheduling ensures that work will be finished on time.
1.2.3 Activities Part of Operations Management

Operations management involves a set of activities involved in ensuring that the resources are combined
and transformed in a controlled manner to add value in accordance with policies communicated by
management. The important activities involved with operations management are:
 Planning: Any form of activity requires thorough planning or focussing on workload, capacity,
resources, finance, and more. Also, choosing an appropriate location for production also comes
under the ambit of the planning part of operations management. Before choosing a location, an
organisation needs to consider various factors such as nearness to markets, availability of raw
materials, supply of labour and transportation facilities.
 Organising: Once the process of planning is over, the next stage is organising. The organising
activity is all about establishing a structure of tasks (organisational structure) and authority as
well as the flow of information within the operations subsystem. It also involves determining the
activities required to achieve goals and assigning authority and responsibility for carrying them
out.
 Controlling: It is all about ensuring that the actual performance is in accordance with the planned
performance. In case of any deviations, corrective actions are taken. Controlling costs, quality and
schedules are the important measures here.
1.3 RELATIONSHIP BETWEEN OPERATIONS AND OTHER FUNCTIONS IN THE

ORGANISATION
Well-designed operations require distinctive competencies of an organisation. Such competencies
can be a skilled workforce, strong distribution networks, ability to change production-output rates.
A good operations manager always strives to interface with other organisational functions so that
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all the competencies of the organisation can be exploited. Such interface requirements can also be
analysed from another point of view, i.e. process involved in production management. Under normal
circumstances, processes involve a combination of inputs, such as people, machines, tools, materials,
etc., in a systematic way. Inputs typically are selected by the operations function in association with
other functions. The interface between operations and other functions of the organisation are discussed
as follows:
 Interface between operations management and marketing: The marketing function of an
organisation is concerned with understanding the needs of customers, generating and maintaining
demand for services, achieving customer satisfaction and extending the business to new markets.
The market segmentation decisions of an organisation to a great extent help in determining the
production strategy. This is because the marketing function focuses on identifying the kind of
service a customer value. This starts prior to production of service, positioning, pricing, forecasting
and promotions. Interdisciplinary co-operation involving operations management and marketing
decisions go hand in hand for many decades.
 Interface between operations management and finance: Capital equipment, cost-control policies,
price-volume decisions and inventories form the interface with financial decision making. Finance
provides insight into service costs that help managers evaluate operational performance. It
is important for operations managers to have knowledge of financial procedures, limits and
capabilities. The effectiveness of operational planning and budgeting is driven by the level of co-
operation between these two areas.
 Interface between operations management and design: Introducing new services faster than
competitors require strict integration between the design and operations management functions.
Also, process development and engineering functions provide guidance on methods to be used
for designing and delivering services. This function has a great impact on production. Therefore,
co-operation between these three functions, i.e., process engineering, design and operations
management results in improved organisational performance.
 Interface between operations management and human resource: Availability of a skilled workforce
is the need of the hour in every function of an organisation. In services, the customer’s perceptions
of an organisation are generally formed by the interaction of human resources with customer
contact personnel. Operations management and human resource departments need to coordinate
with each other for recruiting and training employees, motivating them from time to time so that
they remain focused on the accomplishment of organisational goals.
 Interface between operations management and information systems: Information systems serve
the information needs of the operations management department. The operational plans require
information related to recruiting, cash flows, marketing promotions and so on. Such information
needs are fulfilled by information systems.
1.4 OPERATIONS MANAGEMENT IN MANUFACTURING AND SERVICES

Operations management is involved with all the activities involved in designing and transforming a
product into a finished product for the consumption of consumers. Manufacturing operations involve
a framework where man, machines, and material are integrated manufacturing a tangible product.
It deals with several functions involving activities of the supply chain, collecting information on the
customer requirements, purchasing raw materials, maintaining inventory levels, planning capacity,
allocating resources, scheduling the production and delivering the final products. Different processes
are needed for transforming inputs into outputs in the manufacturing process which involve:
 Production planning: Planning is required for determining processes involved in producing goods.
Effective planning is needed to how the goods will be produced.
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 Production control: Once the production process starts it is necessary to continuously monitor
activities and keep a track of the schedule that makes up the process. Production control involves
the process of taking care of purchasing raw materials and handling inventories along with keeping
a track of feedback for making adjustments wherever needed.
 Quality control: It is necessary to ensure that goods are produced according to required specifications
and by maintaining the quality standards desired by the customers.
On the other hand, operations management services is involved with offering goods and services to
customers. The services are required to satisfy the needs and requirements of the customers through
product and service requirements, formulating quality goals and cost-effective targets, documenting
and making the required changes to the existing products and services. Hence, services involve all
the activities associated with operational functions and processes executed by service providers or by
users and customers. The main objectives of service operations are to coordinate and perform activities
and processes required to deliver and manage the delivery of goods and services at different levels for
business users and customers. The different kinds of functions involved with service management are:-
 Planning and processes
 Quality management
 Capacity and scheduling management
 Inventory management
 Information technology
 Service supply chain
 Customer support services
1.5 OPERATIONS PERFORMANCE OBJECTIVES

Operations management is involved in the appropriate allocation of resources with proper monitoring,
recording and reviewing various aspects of operations performance. The important task involved
in the processes is to identify the appropriate measures of performance relating to the internal and
external factors of the business enterprise that play a significant role in organising competitiveness.
The important factors involved with operations performance objectives for measuring the performance
of its operations are based on:
 Speed: It is the time taken between customers ordering a product or service and the time in which
they receive it. Delivery of goods and services on time keeps customers happy and satisfied with
their experience.
 Quality: It is an important factor that determines the acceptability of the product by the customers
according to their expectations. Quality is a fundamental factor of performance that helps with
creating a potential for better services and products and it has a major influence on customer
satisfaction.
 Flexibility: It is being flexible in terms of changing or modifying an operation for matching the needs
and requirements of customers. It could mean introducing new products or services, modifying the
product, being able to produce different quantities or volumes, availability of various products, and
more. Flexibility provides the business entity with a competitive edge because of their large variety,
varying delivery dates, and providing different quantities.
 Cost-effectiveness: Cost is an important factor for every organisation. Keeping the costs low can
also be beneficial for organisations as they can accordingly reduce the price of their commodities
for customers.
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 Dependability: It is an important factor that provides reliable delivery of service and products
which means that the customers can rely on the organisation for receiving their goods or services
on time. It plays a major part in influencing the customer’s desires for making a future purchase
and further recommendations regarding the business.
1.6 PRODUCTION AND OPERATIONS

Operations management is a term that encompasses a large number of functions under its framework
of management. Production and operations are part of a manufacturing organisation where
production is involved with transforming inputs and resources of an organisation into final goods
through systematic and controlled methods. Both the terms are jointly used for turning raw materials,
human resources and capital into different products and services for selling to the customers. The focus
of the production function is to add value to a product or service that helps with satisfying the needs
of customers and creates a strong and long-lasting customer relationship. The focus of the production
function is to achieve or create value for customers through effective planning and control of the factors
of production.
Operations management is involved with identifying the customer’s needs and requirements and
accordingly determining the requirements of the raw material, and thereafter making use of the
supply chain services through internal and external vendors for final delivery to customers. Operations
management is essential in all types of business, manufacturing, and services industries and is critical
in achieving the objective of the business. Operations management helps with achieving the objective
of the organisation in a structured and disciplined manner ensuring effective coordination between
various departments of the business. This is done by utilising resources at the optimum level, helping
with enhancing the productivity of the employees by deploying different techniques like improving
internal systems or monitoring the internal procedures.
1.6.1 Nature of Production and Operations

Production and operations are involved with using physical resources for converting inputs into output
with the provisions of the desired or required utilities to the customer. This is done effectively along
by meeting the objectives of the organisation in terms of efficiency, effectiveness and adaptability.
Production is involved with the manufacturing of goods and services for satisfying human wants. The
main focus of production is to produce goods services in the right quality, the right quantity, at the right
time, cost-effectively.
Operations involve organising and directing the activities to achieve the set targets that add value to
the manufacturing process. The operating system is used for manufacturing the final product that is
needed by the customers to satisfy their wants by providing some utility to them.
The various activities involved with the management of operations and production functions are:
 Production planning and control
 Product design
 Process designing
 Location of facilities
 Plant layout and material handling
 Quality control
 Material management
 Maintenance and service management
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1.6.2 Differences between Production and Operations Management

The main objective of a business entity is to produce goods and services for meeting the needs of
customers. Production management and operations management are terms used technically and are
concerned with the manufacturing of products. The main objective of production management is to
produce goods and services that are of the right quality, quantity, at the right time with minimum cost.
Operation management is focused more on processes and how they can be optimised with minimum
wastage of available resources. The major differences between production and operation management
are:
 Production management is a part of operations management, which is concerned with managing
activities related to production. On the other hand, operations management is concerned with
the management of overall business operations that includes the stages of production and post-
production.
 The scope of production management is limited to only production whereas operations management
has a much wider scope and it is involved with every aspect and normal business activities of the
organisation.
 The focus of production management is to provide a product to customers that are high in quality
is cost-effective on time, whereas the main focus of operations management is to allocate resources
appropriately and use them in the best way possible.
 Production management is found in business involved with manufacturing and having a
manufacturing unit and ensures its efficient performance. On the other hand, operations
management is found in every business and it manages non-production factors too.
1.7 SYSTEMS APPROACH TO OPERATIONS MANAGEMENT

In literal terms, a system is a group of interrelated elements that act according to a set of rules to form a
unified whole. A system, surrounded and influenced by its environment, is described by its boundaries,
structure and purpose and expressed in its functioning. An organisation cannot exist in a vacuum and
depends upon the external environment. It is a part of larger systems, which are the industry that it
belongs to, the economic system, and society. The organisation receives inputs from the environment,
transforms them and delivers them back to the environment. However, this simple model needs to be
developed into an operations management model that indicates how the various inputs are transformed
through various managerial functions of planning, organising, staffing, leading and controlling. The
following are the components of operations management as a system:
 Inputs and claimants: An organisation procures inputs such as people, capital and managerial
skills, as well as technical knowledge and skills from the external environment. Various groups of
people demand differs from the organisation. For example, employees want higher pay, benefits
and job security; consumers demand safe and reliable products at reasonable prices; suppliers
want assurance that their products will be bought; shareholders want not only a high return on
their investment but also security for their money; governments depends on taxes paid by the
organisation and so on. Since different stakeholders demand differently, it is crucial for managers
to integrate the legitimate objectives of the claimants.
 Managerial transformation process: Managers are responsible for transforming the inputs
procured from the external environment into desirable output by exercising various managerial
functions, such as planning, organising, staffing, leading and controlling.
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 Communication system: Communication is important in all phases of the managerial process.

For instance, the objectives set in planning are communicated to people so that the appropriate
organisation structure can be devised. Communication is essential in the selection, appraisal and
training of managers to fill the roles in this structure. In addition, sound communication in place
can determine whether events and performance conform to plans. Thus, it is communication that
makes managing possible. Another purpose of the communication system is to link the organisation
with its external environment, which comprises customers, suppliers, shareholders and so on.
 External variables: These include threats and opportunities for the organisation. For example,
the emergence of new markets, reduction in entry barriers, strict government controls, and so on.
Managers should scan the external environment on a day to day basis. Although external factors
are uncontrollable, managers have no alternative but to respond to them.
 Outputs: Although the types of outputs vary across organisations, they generally include products,
services, profits, satisfaction and integration of the goals of various claimants to the organisation.
Conclusion 1.8 CONCLUSION
 A set of interconnected management activities involved in producing certain products is called

production management. If these management activities are involved in producing services then it
is called operations management.
 Efficient and effective operations management are needed for ensuring the smooth running of
production without any kind of unexpected situations.
 Operations management deals with managing various processes and functions in an organisation
with an aim to make judicious use of resources for the successful delivery of products and services.
 Operations management involves a set of activities involved in ensuring that the resources
are combined and transformed in a controlled manner to add value in accordance with policies
communicated by management.
 Operations management is involved with all the activities involved in designing and transforming
a product into a finished product for the consumption of consumers. Manufacturing operations
involve a framework where man, machines, and material are integrated manufacturing a tangible
product.
 Production and operations are part of a manufacturing organisation where production is involved
by transforming inputs and resources of an organisation into final goods through systematic and
controlled methods.
 Production and operations are involved with using physical resources for converting inputs into
output with the provisions of the desired or required utilities to the customer.
 The main objective of a business entity is to produce goods and services for meeting the needs of
customers. Production management and operations management are terms used technically and
are concerned with the manufacturing of products.
 In literal terms, a system is a group of interrelated elements that act according to a set of rules to
form a unified whole. A system, surrounded and influenced by its environment, is described by its
boundaries, structure and purpose and expressed in its functioning.
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1.9 GLOSSARY
 Forecasting: An important aspect of operations management for predicting the demand for the
product in the future
 Manufacturing: Production of tangible items in one location and purchased in another
 Operations management: A management function that is involved with managing functions,
people, technology, information, resources and various types of equipment
 Operations: Major functions in an organisation along with supply chains, marketing, finance and
human resources
 Production: A method used for the conversion of inputs into output through a transformation
process
 Systems: A part of a collection of tasks that pool their resources and capabilities together
1.10 CASE STUDY: STRATEGIC DECISION MAKING
Case Objective
The purpose of this case study is to explain the issues that General Motors encountered and how they
used operations research solutions to make strategic decisions.
Om Star is the two-way vehicle communication system for General Motors that can provide several
benefits to the company in terms of improving safety, providing security, entertainment, and enhancing
their productivity.
In 1997, General Motors were faced with certain fundamental strategic decisions regarding Om Star
and the market for telematics (that provides communications services to cars). General Motors had to
analyse and study the evolutionary and revolutionary strategies by analysing the situation for deciding
whether to make use of Om Star as a car feature or as a service. To make the situation more complicated
was the least technical knowledge that General Motors had in regards to the technological advancements,
significant competitors, and to understand the emergence of what competitive and complementary
technologies would come up with. The situation was challenging and it required operations research
expertise for further processes of developing decision support systems, strategic planning, and creating
mathematical models of uncertainty.
The Operation Research Solution

General Motors along with the Om Star team was able to develop a multi-method modelling approach
for evaluating the strategic alternatives. They made use of the dynamic modelling system for working
through certain essential and critical decisions faced by General Motors in 1997. These decisions were
based on choosing between incremental and aggressive marketing strategies for Om Star. The integrated
simulation model was used by them for analysing the new telematics industry which consisted of the
following sectors:
 Customer acquisition
 Customer choice
 Alliances
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 Customer service
 Financial dynamics
 Dealer behaviour
Conclusion
Om Star was successful in their venture and they were able to garner 2 million subscribers and a market
share of more than 80% of the emerging telematics market and their market value was between $5 and
$11 billion. General Motors was able to yield billions of dollars in incremental earnings with the Om Star
project that set the stage for a broader General Motors initiative in service businesses. Om Star was
also able to save lives that otherwise would have been lost in vehicle accidents which were even more
significant than the financial benefits for General Motors.
Source: https://www2.slideshare.net/chhatrapalsurve/operations-research-with-case-study-on-gm-and-ford
Questions
1. What were the challenges faced by General Motors?
(Hint: Little technical knowledge, technological advancements, significant competitors etc.)
2. How did General Motors utilise the operations research solutions for their decision-making?
(Hint: They develop a multi-method modelling approach, evaluating the strategic alternatives,
making use of the dynamic modelling system for critical decisions)
1.11 SELF-ASSESSMENT QUESTIONS
A. Essay Type Questions

1. What is operations management?
2. Explain the importance of operations management.
3. What is the role of operations management in manufacturing and services?
4. Explain the need for operations performance objectives.
5. What are the differences between production and operations management?
1.12 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS
A. Hints for Essay Type Questions

1. A set of interconnected management activities involved in producing certain products is called
production management. If these management activities are involved in producing services then it
is called operations management. Refer to Section Operations Management
2. Efficient and effective operations management is needed for ensuring the smooth running of
production without any kind of unexpected situations. Refer to Section Operations Management
3. Operations management is involved with all the activities involved in designing and transforming
a product into a finished product for the consumption of consumers. Refer to Section Operations
Management in Manufacturing and Services
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4. Operations management is involved in the appropriate allocation of resources with proper
monitoring, recording and reviewing various aspects of operations performance. The important
task involved in the processes is to identify the appropriate measures of performance relating to the
internal and external factors of the business enterprise that play a significant role in organisation’
competitiveness. Refer to Section Operations Performance Objectives
5. The main objective of a business entity is to produce goods and services for meeting the needs of
customers. Production management and operations management are terms used technically and
are concerned with the manufacturing of products. Refer to Section Production and Operations
@ 1.13 POST-UNIT READING MATERIAL
 https://www.aucd.org/docs/lend/hadmin/op_overview.pdf
 https://mrcet.com/downloads/digital_notes/ME/III%20year/POM%20NOTES.pdf
 https://www.vssut.ac.in/lecture_notes/lecture1429900757.pdf
 https://www.davuniversity.org/images/files/study-material/MEC250-Production%20and%20
Operations%20Management.pdf
1.14 TOPICS FOR DISCUSSION FORUMS
 Discuss with your friends the advantages of operations management in day to day working of
a business enterprise. Discuss the ways to increase productivity through effective operations
management.
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UNIT
02 Historical Development of
Names of Sub-Units
Introduction, Contributions of Famous People: Eli Whitney, F.W. Taylor, Gilbreth Couple, Henry Ford,
Henry L. Gantt, and Edwards Demin, Since the 1960s, there has been a shift in the focus of operations
management. Factors Affecting Operations Management Today, Decision Making at Three Levels,
Five Basic Process Categories – Planning, Sourcing, Making, Delivering, Returning, Product Service
Bundling, Operations Manager, Responsibilities of an Operations Manager and Operations Manager
Challenges
Overview
The unit begins with an introduction and explains the famous Contributions - Eli Whitney, F.W.
Taylor, Gilbreth Couple, Henry Ford, Henry L. Gantt, and Edwards Demin, Focus Shift of Operations
Management from the 1960s, Contemporary Factors Affecting Operations Management, Decision
Making at Three Levels, Five Basic Process Categories- Planning, Sourcing, Making, Delivering,
Returning, Product Service Bundling, Operations Manager, Responsibilities of an Operations Manager.
Learning Objectives

 Describe the contributions of significant figures such as Eli Whitney, F.W. Taylor, Gilbreth
Couple, Henry Ford, Henry L. Gantt, and Edwards Demin, as well as the 1960s shift in operations
management focus
 Explain the three levels of contemporary factors affecting operations management and decision
making
 Discuss the five basic process categories: planning, sourcing, manufacturing, delivering, returning,
and product service bundling, according to operations manager
 Analyse an operations manager’s roles and responsibilities, as well as the challenges they face..
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Learning Outcomes

 Analyse the contributions of famous people such as Eli Whitney, F.W. Taylor, Gilbreth Couple,
Henry Ford, Henry L. Gantt, and Edwards Demin, as well as the 1960s focus shift in operations
management
 Understand the contemporary factors affecting operations management, decision making at
three levels
 Access the five basic process categories – planning, sourcing, m,aking, delivering, returning and
product service bundling, operations manager
 Evaluate the responsibilities of an operations manager and challenges faced by operations
managers
 https://theintactone.com/2018/02/21/om-u1-topic-2-historical-evolution-of-operations-
management/
 http://colbournecollege.weebly.com/uploads/2/3/7/9/23793496/om_unit_34_lesson_4.pdf
2.1 INTRODUCTION
With the introduction of operation/manufacturing management in the 18th century, the notion of
operations/manufacturing management was born. Following World War II, marketing and finance
operations dominated most corporations. World War II had devastated Japan’s and Europe’s enterprises
and manufacturing factories, leaving them in ashes. Because there were no strong competitors, the
United States emerged from the war as the unchallenged global manufacturing leader and as most
things were crafted by hand by trained craftspeople in their shops or homes before the industrial
revolution, it had a significant impact on how commodities are produced today. Several ideas were
developed using mechanical power rather than human effort. James Watt invented the steam engine,
which was a major invention. The concept of factory started with the advancement in other sectors
such as transportation or railroads.
Adam Smith proposed the theory of specialisation of labour for the industrial business in 1776, and
he discussed the concept of job subdivision distribution. The notion proposed a way in which workers
who specialise in a certain sector would take on jobs in order to ensure effective task delivery while
simultaneously improving their talents. Following that, Frederick Taylor enforced the concept, which led
to the development of scientific management in the twentieth century. Since then, several advancements
have been made in traditional methods of work operation. Managers around the world devised a
variety of methods for effectively managing manufacturing activities, and the phrase “production
management” was coined. Then, as technology advanced, operations management emerged, which
contributed to the expansion of the company.
2.2 FAMOUS CONTRIBUTIONS

The ‘American system of manufacture’ was named after various contributions and breakthroughs in
the field of operations management that enabled mass production of items in the United States using a
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UNIT 02: Historical Development of Operations Management JGI JAIN
system of standardised and interchangeable parts. Parts were built with a common design that could
be utilised in numerous models of machines and equipment rather than being produced separately for
a specific machine or piece of equipment, and the notion quickly spread to other countries. Individual
business entities or individuals could specialise in various parts of the manufacturing process, reducing
the workload required for cutting, fitting, and filing individual pieces. Several technology advancements
have given managers new opportunities to improve their operations. The main concern of most of these
systems was to create greater and better efficiency in the production process.
Frederick Taylor’s invention of a scientific management system in 1911 was another sort of innovation
that was used to redesign activities/tasks using concepts similar to those used in machine design. Taylor
believed that rather than allowing workers to decide how to perform their duties, it was preferable
to research and analyse the various jobs in order to discover the optimum method of doing so. “By
breaking down activities into tasks that were sequential, logical, and easy to grasp each worker would
have narrowly defined and repetitious tasks to execute, at high speed and thus with minimal costs,”
Kanigel believed in 1999.
Henry ford introduced the development of the moving assembly line where Instead of workers bringing
all the parts and tools to a fixed location for putting a car together at a time, the assembly line brought
the cars to the workers. Ford was instrumental in extending ideas of scientific management, with the
assembly line that was used for controlling the pace of production. This helped with mass production
where there was the development of a system that initiated the assembly of large volumes of standardised
products by unskilled workers at decreasing costs.
2.2.1 Eli Whitney

Eli Whitney’s most famous invention was the cotton gin during the industrial revolution in 1793 which
helped the textile industry immensely with the rapid separation of seeds from cotton fibers. The machine
helped with increasing productivity and boosted the usage of cotton which made cotton a profitable
export crop in the southern part of the United States.
Eli Whitney is also known for introducing the system of interchangeable parts that helped with
making the products more easily replaced and repaired. It resulted in developing large numbers of
weapons quickly and cost-effectively. Eli Whitney built a factory for mass-producing muskets by
fitting the interchangeable parts in an assembly line and his invention played a significant role in the
industrialisation of America
2.2.2 F.W. Taylor

Frederick Winslow Taylor started the Scientific Management movement and is known as the father
of scientific management. He published his book “The Principles of Scientific management” in 1909
he introduced the system where the workers and managers needed to cooperate that improved the
efficiency of the system. He introduced the scientific method to study the optimal way to complete any
form of the task at the workplace. He believed that the best way to develop methods for completing a
task is by calculating the time needed for the various elements of a task. This helped with determining
optimal performance levels by finding the optimal way to do any type of workplace task and completing
the task.
Taylor believed that some people could work more efficiently than others hence it is important for
managers to hire skilled people. This is because selecting the right people for the job was another
important part of bringing efficiency to the workplace. According to him, the workers are motivated
by money to perform their tasks and if the worker does not do enough in a day, he did not deserve to be
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paid as much as another highly productive worker. Hence, it is necessary for the managers to regularly
monitor the performance of the worker and provide instructions and supervision for ensuring that
they’re using efficient ways of working. The significant principles of taylor’s scientific management
Theory became very popular and was widely practiced which resulted in cooperation between workers
and managers that developed into teamwork.
2.2.3 Gilbreth Couple

Frank and Lillian Gilbreth were instrumental in adding importance to efficiency by identifying and
replicating one best way to complete a task through their work on time and motion studies. They believed
in regulation and consistency in the workplace giving importance to efficiency instead of encouraging
a company of many working parts.
The couple believed that to find the best way to get any job done, is by identifying a specific process that
should be replicated through the manufacturing process by eliminating individual steps for producing
efficient results. According to Frank Gilbreth “The greatest misunderstandings occur as to the aims of
scientific management. Its fundamental aim is the elimination of waste, the attainment of worthwhile
desired results with the least necessary amount of time and effort.”
They put a high value on efficiency for managing an organisation and their management hypothesis
was based on three main points:
 Reduce the number of motions in a task
 Focus on the incremental study of motions and time.
 Increase efficiency to increase profit and worker satisfaction
2.2.4 Henry Ford

The modern form of manufacturing started with Henry Ford who was the pioneer at integrating
the production system known as the ‘mass-production’, which manufactures large quantities of
standardised products. Henry Ford used Taylor’s theory of scientific management for creating efficient
and more productive factories. Henry Ford’s major contribution to the manufacturing industry was
the assembly-line process where instead of building one car at a time as a complete unit, the item
moves from workstation to workstation where the parts are added in sequence until the final product is
assembled. Ford’s assembly line was based on three principles “The planned orderly, and the continuous
progression of the commodity through the shop; delivery of work instead of leaving it to the workman’s
initiative to find it; an analysis of operations into their constituent parts”.
The process was used for manufacturing large quantities of standardised products through their
production process which emphasised continuous improvement in their processes. Ford did not spend
hours fabricating and assembling the components of the vehicles through mass production and
completed the process within a few minutes. Due to the success of this method, between 1908 and 1927
the Ford Motor Company was able to produce over 16 million Model T cars. The US military adopted
Ford’s mass production system during World War II.
Toyota Automatic Loom Works was formed in 1926 by Sakichi Toyoda, and years later the company
changed its name to Toyota when it started to produce automobiles. The process of mass production
system employed by Ford was not possible to be used by Toyota since the Japanese market was too
small and not capable of mass production. The requirements of the customer were very varied from
smaller cars to the bigger and more luxurious vehicles. On the other hand, the main focus of Ford’s
4
mass-production system was on the amount of production and not on the requirements of the customer.
The mass production techniques that were initiated by Ford, such as large production plants and
standardised, interchangeable parts became revolutionary to the manufacturing industry and had a
major influence on the world.
2.2.5 Henry L. Gantt

The Gantt chart and the task and bonus system are two of Henry L. Gantt’s major contributions to
conventional management theory. A Gantt chart is a visual (graphic) representation of activities
that occur during the course of a project. Gantt charts are frequently used by business enterprises
to represent various tasks in relation to the time required to complete them. It gives you essential
information about the work schedules that must be completed on specific days and hours. The chart
shows a visual representation of the list of activities on the left side, as well as the time scale at the top.
Gantt charts were originally created by hand, but with the advancement of information technology,
they can now be created, updated, and printed easily. The charts are used to maintain track of project
timelines as well as to provide additional information about the project’s various activities or phases. It
includes details on how the activities are linked to one another, the progress of each work, the resources
needed for each activity, and more. It provides quick access to information on:-
 Various activities
 Identify the beginning and end of each activity.
 The duration of each activity’s timetable
 Personnel assigned to each task
 Each assignment is given its own amount of time.
 Task dependencies, milestones, and the operations’ critical route
 Intersections and connections between activities
 Start and end date of the entire project
The vertical axis of a Gantt chart depicts the tasks that must be accomplished, while the horizontal
axis depicts the project timetable. The Gantt chart was beneficial for developing a work breakdown
structure, assigning tasks to the team, keeping track of work progress, and modifying project timetables
by dragging and dropping timeframes.
2.2.6 Edwards Deming

W.Edwards Demings developed the concept of Total Quality Management, in the 1950s (TQM). After
World War II, Demings went to Japan to work as a consultant on the Japanese Census. Demings became
associated with the Union of Japanese Scientists and Engineers (JUSE) and lectured the Japanese
on statistical methods and company-wide quality: a combination of approaches now known as Total
Quality Management (TQM). This notion aided the Japanese in improving their economy and increasing
output levels.
In the early 1980s, the concept of TQM became popular as a management approach in which all of
a company’s employees are involved and accountable for the quality of their goods. For many years,
quality control was the duty of a specialist staff within the company that evaluated products after they
were manufactured and verified their accuracy levels. Following that, with advancements in technology,
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stronger quality controls were implemented in the manufacturing process to detect faulty components
at an early stage, allowing defects to be eradicated from the manufacturing process.
Production And Operations Management
Location of
Facilities Plant
Maintenance Layout &
Management Material
Handing
Production/
Material Product
Operations
Management Design
Management
Quality Process
Control Design
Production
Planning and
Control
2.3 FOCUS SHIFT OF OPERATIONS MANAGEMENT FROM THE 1960S

Operations management is a strategy that helps businesses in attaining their objectives by ensuring
that resources are acquired and utilised efficiently. Following World War II, the majority of processes
and functions were centred on developing algorithms and approaches for tackling optimisation
problems in diverse functional areas. Following that, in the 1960s, computers were used to conduct
routine accounting chores, as pioneered by J. Orlicky and O. Wright, or to solve operational difficulties
relating to productivity. The introduction of databases and information systems for managing huge
data sets and numbers in the field of operational management in the 1970s was made possible by the
development of MRP systems.
Operational management was soon recognised and established as an important functional field of an
organisation in the 1980s. Soon after, corporations were compelled to turn their focus to upgrading
their manufacturing strategies and service operations, with the development of new goods and better
performance measures, due to fierce competition from Japanese products in global marketplaces. The
biggest contribution to enhancing the processes and functions inside the organisation’s systems was the
implementation of Total Quality Management (TQM) and Just in Time (JIT) in operation management.
Product design, production, logistic management, capacity, job design, operational scheduling, location,
materials, and inventory management were all part of operations management’s responsibilities.
Operational management focus on cost reduction in the early 1980s, but soon transitioned to quality
management using information systems and lean management. Soon after, the focus shifted to the
creation of new computer-integrated systems for better decision-making and increased productivity.
Following that, the 19th century saw significant technological advancements with the development of
interchangeable parts and the standardisation of product components according to precise standards.
Henry Ford, who pioneered the division of labour and the utilisation of interchangeable parts to create
the assembly line system of manufacturing, marked in the twentieth century. Various operations and
production management systems arose before the end of the twentieth century, with the primary
purpose of boosting productivity.
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2.4 CONTEMPORARY FACTORS AFFECTING OPERATIONS MANAGEMENT

Several companies improved their performance to survive in the dynamic industry as a result of
changing trends and increased worldwide rivalry. The businesses used a various methods to improve and
overcome the obstacles they encountered along the way. It was necessary for them to work responsibly
through their competences, which included their workforce, innovative product development, supply
management, new technologies, environmental responsibility, and more, in order to apply improved
operations management practises. Because of the continuously changing environment, firms must
adapt to changes in marketing channels, invest in new technology, and use them to compete in global
marketplaces. The following are some of the current factors affecting operations management:
 Uncertainty about the future: The business entities require specialised professional consultants
for being able to predict customer trends, market trends, and more to keep up with the changing
economic conditions.
 Financial management: Business enterprises require effective financial management for handling
their cash flows, profit margins, reducing costs, financing, budget, and more.
 Regulation and compliance: Changes in technologies and market trends lead to changes in
government rules and regulations depending on the industry. Noncompliance occurs when a
corporation fails to follow the rules and regulations, resulting in fines and penalties.
 Recruiting the right talent with required competencies: Organisations must identify the right
individuals and recruit people with the relevant skills. Organisations must build the necessary skills
and competencies for a long-term future, since selecting the appropriate people is the key to make
a wise investment.
 Changing technologies: Companies must keep up with the changing technologies by innovating
with the changing trends of cloud computing, application development, and more.
 Exploding data: 90% of the world’s data was created in the past two years and qualified professionals
are needed for managing, keeping safe and extracting insights from large amounts of data that is
produced in the company that can be used for getting most returns from the data.
 Customer service: Customers expect rapid and high-quality customer service in today’s world,
and if they aren’t satisfied, they make their opinions and share their displeasure instantly. voice
their discontent immediately. To be successful in their efforts, businesses should search for ways to
improve their operations management and customer service.
 Maintaining reputation: Customers who are dissatisfied spread negative information about the
company, thus businesses must monitor and preserve their reputations.
2.5 DECISION MAKING AT THREE LEVELS

Decision making is a crucial aspect of the operational management function, as it is required for
planning and making significant decisions. Enterprise management must make numerous decisions in
order to meet its operational demands and requirements. Managers require a great deal of experience,
knowledge, and sound judgement in order to make decisions that lead to success. Medical sciences,
business, diagnosis and research, and a variety of other industries all demand good decision-making
skills. The decision-making process is linked to domain knowledge, and organised decisions can be
logical, rational, ethical, and dangerous.
“Whatever a manager does, he does through decision making,” says Peter Drucker. Managers are
responsible for making correct, suitable, and successful decisions in the workplace. . The manager must
understand the problems and make the right decisions at the right time for the successful growth of
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the organisation. Decision making can be classified into three categories depending on the level at that
they take place, these are:
 Strategic decisions: These are more important decisions that set the trajectory of the business, and
they are typically made by upper-level management. The board of directors, whose members are
elected by the company’s shareholders, as well as other relevant stakeholders, make the decisions.
Strategic decisions concern major policy decisions such as entering new markets, forming alliances
with external sources and companies, and they necessitate a detailed examination of the situation
and the alternatives available. Introduction of a new programme, location of a new factory,
computer system installation, and other strategic decisions are all examples of strategic decisions.
These decisions are critical to the organisation’s existence and growth. Some of the company’s
strategic decisions are related to:-
 Election of officers and executives
 compensation packages and equity grants or transfers
 Annual budgets and audits
 Shareholder distributions
 Sale of company’s assets
 Dissolution or sale of a company
 Adoption of employee benefit plans
 Other forms of important agreements or long-term strategies
 Tactical decisions: These are decisions about how the organisation works, and they are made by
managers to increase the organisation’s efficiency and effectiveness. The tactical decisions are
made by the company’s senior management, which includes the CEO, COO, CFO, and others, and
these are decisions and plans that concern:-
 Structure and size of the workforce
 Sales and marketing strategy
 Signing of agreements
 Work is assigned and distributed to specified groups and individuals.
 Making Large purchases with the approved budget
 Operational decisions: These are decisions that employees and managers make on a daily basis
for the organisation’s operation, and these decisions have a direct impact on the organisation’s
operations. Their authority and power to make these decisions are mentioned in the organisational
structure. Mid-level, supervisory, and lower-level management make day-to-day decisions that have
only a short-term impact on a corporation as operational managers. Decisions about the following
are made as part of the operational decisions:-
 Job allocation and scheduling employees
 Providing training on specific tasks in a company
 Making purchases of office supplies
2.6 FIVE BASIC PROCESS CATEGORIES

The term “operational management” refers to a set of actions that are necessary for the flow and
transition of goods from the stage of raw materials to the final stage of consumer delivery. Product flow
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can occur from suppliers to consumers, as well as from consumers to suppliers or manufacturers. The
supply chain of the company consists of organisations or individuals involved in the communication,
flow of goods, and the end products. It is an integration of activities that include coordinating various
processes, managing resources, aligning the different operational flows along managing the complex
systems of business administration that directly concern the consumers. The operational management
is involved with various business activities of managing the finished products to warehousing and
distribution processes needed for ensuring customer satisfaction and loyalty. It is necessary to
have a well-organised system to manage the business operations for succeeding in the supply chain
management functions. Operational management is involved with efficient supply chain functions
which is an important activity for every business organisation. The organisations have a network of
multiple activities and processes needed to ensure the smooth operation and flow of inputs and outputs.
Several factors come under operational management such as
 Planning the processes
 Processes involved with sourcing
 Stages involved with making the goods
 Delivery of goods
 The procedure for returning or receiving things that have been returned.
2.6.1 Planning
The process of planning involves determining the requirement of resources, prioritizing the tasks,
working on supply chain efficiency, working on the chain of communication needed for the process
to ensure it aligns with business goals. Planning involves developing best practices for supply chain
efficiency taking into account compliance procedures, transportation, assets, inventory, and other
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required essential for the supply chain activities. It also involves aligning the supply chain with the
financial plan of the company
2.6.2 Sourcing
Sourcing involves obtaining goods and services to meet planned or actual market demand, managing
the infrastructure, and material acquisition. It includes handling the suppliers and vendors for the
supply of incoming material and supplier agreements, purchasing, handling supplier payments, and
supplier performance.
2.6.3 Making
The making process is involved with production and manufacturing which includes various processes
and steps involved that take finished products and make them market-ready to meet planned or actual
demand. It is used for determining make-to-order, make-to-stock, or engineered to order. The process
includes managing all the aspects of production management and bill of materials, along with the
required equipment, facilities, and transportation
2.6.4 Delivering
The delivery of finished products and services is required for meeting the planned or demand for the
product or services. The various functions that are involved with delivering the product are order
management, warehousing, transportation, and distribution management. The process involves the
management of finished goods, assets, inventories, transportation, product life cycle, export or import
of goods, and more.
2.6.5 Returning
Return processes are involved with returning or receiving returned products, from either the customers
or suppliers and the organisations should be well prepared to handle the return of containers, packaging,
or defective product. The return process involves the management of regulatory requirements, business
rules, return of inventory, assets, transportation, and more
2.7 PRODUCT SERVICE BUNDLING

Product service Bundling is a method of offering several products or services for sale by combining two
or more products or services as one combined product with a reward or benefit for the customer. Many
organisations involved with financial services, healthcare, telecommunications, and more combine
their products and services to form a bundle pricing. They sell a set of goods or services by packaging
them together for a lower price than they would charge if the customer bought them separately. It is a
method of offering discounts to customers by combining the products or services for generating higher
revenue or profits. Using a bundle pricing strategy allows the business entity to increase their profits at
lower operational costs while giving customers a discount.
Product services bundling helps with generating more sales, saving on marketing and distribution, and
simplifying the customer experience and it is most suitable for high volume and high margin products.
Bundling is most effective at times when:-
 There is a low marginal cost of bundling
 There are economies of scale in production and economies of scope in distribution
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UNIT 02: Historical Development of Operations Management JGI JAIN DEEMED-TO-BE UNIVERSIT Y
 There are high production set-up costs and high customer acquisition costs
 Consumers appreciate and can benefit from the bundling of products and services of the combined
product.
Commercial Operations Management Areas
Brand Brand Management
Metrics & Performa nce

Management
Management
Interaction
Production Product Management

Customer
Innovation Channel & Sales

Management Management
Marketing Operations
Marketing
Management
People Talent & Skills Management
2.8 OPERATIONS MANAGER

Operations managers are responsible for the smooth operation, organisation, and planning of a
company’s many activities and functions. Because their position demands the use of information, tools,
skills, and strategies to work on activities in order to accomplish the company’s objectives, the operations
manager should have the necessary competencies. Operations managers are responsible for planning,
monitoring, regulating, and executing various functions and processes by the organisation’s people
and workforce in order to achieve specified business objectives. They are involved in detailed planning,
which includes establishing the firm’s goals and objectives, identifying the activities, quantifying the
resources needed, and validating the budget and timeframe for the various tasks.
Operations managers are in charge of overseeing and managing a company’s organisational activities
as well as the execution of numerous job duties. Operational managers assist operational leadership
in many departments such as finance, marketing, sales, purchase, and more by ensuring that tasks
are tracked and completed on time through total monitoring and control. The operational managers
are in charge of supervising, hiring and training the personnel, as well as controlling and managing
quality assurance programmes and conceptualising process improvements. Operations managers are
responsible for monitoring, maintaining, and trying to improve the organisation’s efficiency.
2.8.1 Responsibilities of an Operations Manager

Operations managers are experienced and skilled managers who are in charge of overseeing the
organisation and activities involved in the production of goods and services. They are responsible for
working and operations of the system, planning, control, product designing, operational scheduling,
performance improvement, and creating operational strategies. The operation managers should have
the right experience, the right direction, and discipline for creating definite and clear objectives that
are achievable and towards completing them successfully. The jobs and responsibilities of operations
managers are:
 Assisting and developing standard operating procedures for the various business operational
activities
 Building a strong customer relationship by addressing customer issues on time
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 Effectively handle employee appraisals, promotions, compensation, and termination based on the
performance reviews
 Helps with developing effective operating and capital budgets along with monitoring and controlling
the expenses according to the allotted budget
 Handle operational job scheduling and allocation of work by providing operational support and
guidance to staff
 Involved with human resource management involving job interviews, recruiting, and training
candidates
 Provide clear and definite communication through proper channels and keep the unit or departments
o the organisation well informed.
 Motivate the team to perform well and set clear targets within the system so that the people know
and understand their responsibilities
 Manage the work assignment with the allocation of various tasks and maintain proper and clear
documentation for operational procedures and activities
 Are responsible for maintaining and adopting the appropriate quality measures by working work
on strategies and technical standards needed for the systems
 Managing and conducting performance reviews effectively offer performance feedback to staff and
ensure that all operational duties are carried out in accordance with standard operating procedures.
 Assess the working of the system constantly and take care of issues before they go out of control and
effectively manage the conflicts and resolve them in an amicable manner
 Working in compliance with company policies and procedures with conducting regular meetings
with the team leaders for discussing issues, concerns, updates, and more
 Are involved with the task of managing the risks and uncertainties involved with various job
responsibilities, as well as working toward preventative maintenance by supporting processes and
operational risk.
2.8.2 Challenges Faced by Operations Managers

During their job and responsibility for accomplishing the organisation’s objectives, the operations
manager faces a variety of difficult scenarios. Each task or job is different and unique in its own way,
and the many job functions might present a variety of obstacles that obstruct the system’s operation.
Operation managers face the difficult challenge of studying the circumstances in order to determine the
reasons for task failure and then making a determination on the causes of failure. They are challenged
for executing numerous job operations within a certain amount of time and within a certain budget.
The following are some of the different reasons and circumstances that make operations management
difficult:-
 Lack of effective planning: If the operations manager has failed in making proper plans and
effectively prioritising the tasks and activities as per the business plan then it can lead to failure of
the system.
 Poor leadership: If operations managers are to effectively lead their teams and direct the various
departments of the firm, they must have the necessary abilities and expertise. If they lack the
necessary abilities to manage the system, it can have a negative impact on the organisation’s
operations due to poor people management and ineffective decision making.
12
 Team conflicts: There are many occasions when the problems between the team members or
employees from different departments could be involved in conflicts that can affect the working
of the organisation. The situation can be challenging for the operation’s managers to resolve these
issues amicably so that it does not have a detrimental effect on the system.
 Issues with the lifecycle: Several problems and issues can arise due to a lack of effective planning
and scheduling by the operations manager. The operations managers need to monitor and keep a
track of various functions and processes with the changing requirements for avoiding any issues
that can come up during the working of the system.
 Ineffectivecommunicationprocess: The operations manager needs to have effective communication
with the team members and the stakeholders regularly and keep them informed regarding the
performance of the organisation. Lack of effective communication will lead to delays and failure in
completing tasks and processes on time.
 Insufficient funding: The operations managers face a challenging task due to lack of proper funding
that can harm the outcome of the tasks or activities and can lead to failure of the system
 Approval of the stakeholder: The stakeholders play an important role and are affected by the
performance of the organisation. The operations manager should be able to identify the stakeholders
who are affected or can be affected by the outcome of the successful running of the organisational
system. He must communicate with them regularly and give them regular updates on the working
of the organisation.
 No effective schedule: The failure of operations managers to schedule tasks and activities effectively
can have a negative impact on the organisation’s operations and the completion of activities and
tasks.
 Missing deadlines: Without proper planning and effective monitoring of the system by the operations
managers can lead to delays in completing the tasks that can lead to certain projects missing their
deadlines.
 The concept of operations management started around the 18th century with the introduction of
manufacturing management. After World War II, the organisations were mainly dominated by
marketing and finance functions.
 In 1776, Adam Smith introduced the theory of specialisation of labour for the manufacturing industry
and he spoke about the concept of distribution of jobs into subunits.
 There were several contributions and innovations in the field of operations management that made
mass production of goods possible through the system of standardised and interchangeable parts
in the United States and it was referred to as the ‘American system of manufacture’.
 The development of a system of scientific management by Frederick Taylor in 1911 was another form
of innovation that was used for redesigning tasks using similar principles to those used in designing
machines.
 Henry Ford pioneered the invention of the moving assembly line, which brought the automobiles
to the workers rather than the workers hauling all the parts and tools to a fixed spot to put a car
together at a time.
 Eli Whitney’s most famous invention was the cotton gin during the industrial revolution in 1793
which helped the textile industry immensely with the rapid separation of seeds from cotton fibers.
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 Eli Whitney is also credited for inventing the interchangeable part system, which made it easier to
replace and repair goods. It allowed for the rapid and cost-effective development of vast quantities
of weapons.
 Frederick Winslow Taylor started the scientific management movement and is known as the father
of scientific management.
 Taylor believed that some people could work more efficiently than others hence it is important for
managers to hire the skilled people.
 Frank and Lillian Gilbreth were instrumental in adding importance to efficiency by identifying and
replicating one best way to complete a task through their work on time and motion studies.
 The couple believed that the most effective method to complete any task is to define a precise
technique that should be replicated throughout the production process by eliminating individual
processes.
 The modern form of manufacturing started with Henry Ford who was the pioneer at integrating
standardised products.
 The process was used for manufacturing large quantities of standardised products through their
production process which emphasised continuous improvement in their processes.
 Henry L. Gantt is known for two key contributions to classical management theory which is the
Gantt chart and the task and bonus system. A Gantt chart is a tool that provides a visual (graphic)
display of activities that take place throughout a project.
 The Gantt charts were initially made by hand but later with the advent of information technology
the Gantt charts can be made, updated, and easily printed.
 In the 1950s W. Edwards Demings came up with the concept of Total Quality Management (TQM).
Demings went to Japan after the Second World War as an adviser to the Japanese Census.
 The concept of Total Quality Management became popular as a management process in the early
1980s where all the employees of a company are involved and responsible for the quality of their
products.
 Operations Management (OM) is a system that helps organisations in achieving their goals through
efficient acquisition and utilisation of resources.
 Operational management soon became recognised and was accepted in the 1980s as a significant
functional field of an organisation.
 In the early 1980s, operational management focused on cost reduction but soon they shifted their
focus to quality management through information systems and lean management.
 The changing trends and the increase in global competition resulted in several companies improving
their performance for surviving in the dynamic industry.
 Decision-making is an important part of the operational management function which is needed for
planning and taking key decisions.
 Operational management involves a combination of activities required for the flow and transition
of goods from the stage of raw materials to the final stage of delivery to the consumer.
 The process of planning involves determining the requirement of resources, prioritizing the tasks,
working on supply chain efficiency, working on the chain of communication needed for the process
to ensure it aligns with business goals.
14
 Sourcing involves obtaining goods and services to meet planned or actual market demand, managing
the infrastructure, and material acquisition.
 The making process is involved with production and manufacturing which includes various
processes and steps involved that take finished products and make them market-ready to meet
planned or actual demand.
 The delivery of finished products and services is required for meeting the planned or demand for the
product or services.
 Return processes are involved with returning or receiving returned products, from either the
customers or suppliers and the organisations should be well prepared to handle the return of
containers, packaging, or defective product.
 Product or service Bundling is a method of offering several products or services for sale by combining
two or more products or services as one combined product with a reward or benefit for the customer.
 Product or services bundling helps with generating more sales, saving on marketing and distribution,
and simplifying the customer experience and it is most suitable for high volume and high margin
products.
 Operations managers are involved with functioning, organising, and planning various activities
and functions for the working of an organisation.
 The operations managers are involved with managing and controlling the organisational activities
of businesses and the implementation of the various job functions.
 Operations managers are experienced and skilled managers who have the overall responsibility of
managing the organisation and managing activities that are part of the production of goods and
services.
 The operations manager has to go through several challenging situations during their job and
responsibilities for meeting the objectives of the organisation.
2.10 GLOSSARY
 Operations Management (OM): is a system that helps organisations in achieving their goals through
efficient acquisition and utilisation of resources
 Decision making: is an important part of the operational management function which is needed for
planning and taking key decisions
 Strategic decisions: are decisions that set the course of the organisation are more significant and
are generally taken by the upper-level management of organisations
 Tactical decisions: are decisions regarding the working of the organisation and these are decisions
that are taken by the managers to improve the efficiency and working of the organisation.
 Operational decisions: are decisions that employees and managers make each day for the running
of the organisation and these decisions influence the working of the organisation directly
 Product service bundling: is a strategy of selling several products or services by combining two or
more products or services into a single package.
 Operations managers: are involved with functioning, organizing, and planning various activities
and functions for the working of an organisation
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2.11 CASE STUDY: ALIGNING OPERATIONAL STRATEGIES
Case Objective
The case highlights that how Mac Burgers which is a very popular brand across 200 nations aligned
its operational strategies to achieve its objectives.
Mac Burgers is one of the known brands that is recognised in every country in the world. It has more
than 37,000 restaurants in over 200 countries. They serve around 200 million people every day. Every
business organisation faces challenges every single day in terms of capacity planning. The burger
firm has locations all around the world, with well-sourced supplies from all over the globe, and offers
customers unique burgers and experiences. There are independent franchises in more than 70 % of
Mac Burgers’ 36,500 worldwide locations in more than a hundred countries. The focus of Mac Burger’s
is on the larger issues that include the supply chain so that the franchisees can dedicate themselves to
coordinating the activities between customer demand and capacity planning for their restaurants.
The process of stock management and developing capacity strategies along with aligning the supply
chain network was one of the major challenges facing Mac Burgers. The task of stock management
entails reducing waste while also striking a balance between serving consumer needs and production
planning. The raw materials, work-in-progress and finished products are handled on a fast track First
In, First Out basis at Mac Burgers. This means that the raw materials are used up as soon as the orders
are received. There is always fresh stock since the products get sold out as soon as they are made.
Mac Burgers sought to expand their product line, which is becoming a more difficult balancing act
as customers seek out variety. Hence, it becomes tough for Mac Burgers to work at the challenges of
improving their supply chain and transport systems.
Mac Burgers decided to work on a feasible operational solution for creating a strategy for each of
those markets and regions all on its own. They coordinated with their logistics providers and suppliers
for allocating the maximum feasible solution for the transportation problem. They made use of VAM
techniques which is the best solution method in the standard transportation problem for obtaining
the best result for determining the most efficient way to build a supply chain. Implementing the VAM
method through the company’s ocean freight strategy Mac Burgers was able to form a global ocean
freight council made up of suppliers and logistics companies to provide insight into Mac Burgers’ supply
chain strategy. This helped Mac Burgers and their burger chains to optimise their network along with
sharing the best practices among the council members.
Mac Burgers started the Restaurant Supply Planning Department which was a specialist central stock
management function along with the ability of a given system to produce output within a specific
period. This team is in regular communication with the restaurant managers for finding out the local
events. The planning team enters these aspects into the new planning and forecasting system in order
to forecast the major demand for completed menu items and then work on distribution techniques. The
systems work well as long as the data is provided and for this, the Restaurant Managers had to ensure
that the data entering the system is accurate. The communication system benefitted the managers by
effectively taking stock of the inventories between the individual restaurants and the central Restaurant
Supply Planning team. The central team was basically made up of a mix of specialised stock controllers
and former restaurant employees. This team consisted of 15 regional planners who would deal with
around 85 restaurants each. They would communicate regularly with them through email and the
telephone. They would log in to anything that would affect the number of customers visiting their
restaurant. This helped in taking into account the calculation of the forecasts. This effectively ensured
that the restaurants can produce the meals required according to the levels of the demand forecasted.
16
The entire distribution network system and the transportation system helped Mac Burgers since it had
taken much of the hard work out of stock management and ensured that operating costs are maintained
at a minimum possible level without affecting the quality. The Managers had more time available with
them for focusing on delivering Mac Burgers high standards of efficient quality Service and cleanliness.
This made the customers happy since they could be sure of the item they wanted was on the menu list
on that day. For any kind of business, it is necessary to have efficient stock management with optimum
utilisation of resources along with analysing the existing capacity and determining the future needs.
It helps to minimise waste and enables the business to operate responsibly. Effective material usage
entails that resources are efficiently utilised with minimal waste. This helped in reducing the costs and
Mac Burgers could work on value-added benefits for their customers, by providing them with better
service at lower prices.
Source: http://businesscasestudies.co.uk/mcdonalds-restaurants/managing-stock-to-meet-customer-needs/
Questions
1. What were the issues faced by Mac Burgers?
(Hint: needed to increase their products range, creating better stock-taking methods, improving
their supply chain and transport systems )
2. What measures did Mac Burgers take for improving their distribution network systems?
(Hint: Implementing the feasible operational solution through VAM, effective distribution network
system, improving the efficiency of the system, reducing lead time and costs)

1. Describe the famous contributions made by Eli Whitney and F.W Taylor.
2. What was the assembly line process introduced by Henry Ford?
3. What were the contemporary factors affecting operations management?
4. Explain the three decision-making levels.
5. What are the responsibilities of operations managers?
A. Hints for Essay-type Questions

1. There were several contributions and innovations in the field of operations management that made
mass production of goods possible through the system of standardised and interchangeable parts
in the United States and it was referred to as the ‘American system of manufacture’. The concept
soon extended to other countries where parts were made with a standard design that could be
used in different models instead of being produced independently for a specific machine or piece of
equipment. This brought down the workload needed for cutting, fitting, and filing individual parts
and individual business entities or individuals could specialise in certain parts of the production
process. Several technological developments created new possibilities for managers to look towards
improving their operations. Refer to section Famous contributions
2. The modern form of manufacturing started with Henry Ford who was the pioneer at integrating
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standardised products. Henry Ford used Taylor’s theory of scientific management for creating
efficient and more productive factories. Henry Ford’s major contribution to the manufacturing
industry was the assembly-line process where instead of building one car at a time as a complete
unit, the item moves from workstation to workstation where the parts are added in sequence until
the final product is assembled. Refer to section Henry Ford
3. The changing trends and the increase in global competition resulted in several companies
improving their performance for surviving in the dynamic industry. The companies implemented
various methods for improving and working through the challenges faced by them in the process. It
was necessary for them to responsibly work through their competencies involving their workforce,
innovative product development, supply management, new technologies, the responsibility of the
environment, and more for implementing better techniques of operations management. Refer to
section Contemporary Factors Affecting Operations Management
4. The managers have the responsibility of making accurate, appropriate, and effective decisions in
different situations to get the best out of the situation. All decisions made by managers are focused
on the functionality of the establishment that entails the policies, programs, strategies, and more
needed for maintaining the continuity and smooth working of the system. The manager must
understand the problems and make the right decisions at the right time for successful growth of the
organisation. Refer to section Decision Making at Three levels
5. Operations managers are experienced and skilled managers who have the overall responsibility of
managing the organisation and managing activities that are part of the production of goods and
services. They are responsible for working and operations of the system, planning, control, product
designing, operational scheduling, performance improvement, and creating operational strategies.
The operation managers should have the right experience, the right direction, and discipline for
creating definite and clear objectives that are achievable and towards completing them successfully.
Refer to section Responsibilities of an Operations Manager
 https://www.smartsheet.com/operations-management
 https://www.studocu.com/row/document/university-of-the-punjab/strategic-management/
chapter-4-operations-management-as-and-a-level/17895312.
 Discuss the responsibilities of an operations manager with your group, as well as the issues they
confront today.
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UNIT
03 Strategic Operations Management
Names of Sub-Units
Strategic Operations Management, Key Strategic Operations Decisions, Perspectives on Operations

Strategy, Differences Between Strategic and Tactical Decisions, Six Components of Operations
Strategy, Modern Practices of Operations Management
Overview
The unit starts with an introduction to strategic operations management and goes into the
importance of strategic operations management, key strategic operations decisions, and perspectives
on operations strategy. The unit further moves to the key points of operations strategy, differences
between strategic and tactical decisions, six components of operations strategy and modern practices
of operations management.
Learning Objectives

 Learn about strategic operations management, importance of strategic operations management
and key strategic operations decisions, perspectives on operations strategy
 Know the key points of operations strategy
 Understand the differences between strategic and tactical decisions, six components of operations
strategy, and modern practices of operations management
JGI JAIN
Learning Outcomes

 Analyse strategic operations management, importance of strategic operations management and
key strategic operations decisions, perspectives on operations strategy
 Evaluate the perspectives on operations strategy and the key points of operations strategy
 Access the differences between strategic and tactical decisions, six components of operations
strategy and modern practices of operations management
 https://www.academia.edu/3047883/Strategic_Operations_Management
 https://icmai.in/upload/Students/Syllabus2016/Archive/Inter/Paper-9.pdf
3.1 INTRODUCTION
Strategic operations management helps with aligning business activities in the form of a plan or strategy,
which is designed to create a positive outcome. These strategies help the management with monitoring
and execution of their objectives along with improving their internal and external communication. This
framework of strategy is beneficial for the management of the organisation for creating processes
within the system based on certain policies designed to achieve its objectives. The system helps the
organisation with its business processes that help them to learn and grow. Strategic management
facilitates the process of gathering and analysing data from every perspective of the market and the
customers, keeping the profitability of the company in mind. It helps the management to make logical
decisions and develop new goals quickly to keep pace with the changing business environment.
The strategic operations management processes are made for analysing internal strengths and
weaknesses andexternal opportunities andthreats alongwith different factors affectingthe organisation
known as the SWOT Analysis. The SWOT analysis is used by companies to study and analyse internal and
external environments and other factors that affect their business. It provides the method for executing
the strategies for maximising benefits and outcomes based on definite objectives. The process helps
enterprises to plan for the future and it helps them to analyse the important aspects of their business
environment to formulate competitive strategies.
3.2 STRATEGIC OPERATIONS MANAGEMENT

Strategic operations management is an intrinsic process that helps organisations with improving
their performance and adds value for the customer. Strategic operations management is involved with
creating strategies for the production, designing, monitoring, controlling, and improvement of goods
and services. It is the management of all operations that help with maximising efficiency for enhancing
the quality of products and services required for fulfilling the customer needs.
Strategic operations management is a necessity not only for a firm’s economic environment but its
external social environment as well. The changes in the business environment affect the business
strategy in different ways. At the normal level, the volatile market and the changing of the technological,
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UNIT 03: Strategic Operations Management JGI JAIN
economic, and political environments have made it important for the companies to be flexible and
responsive to the changing conditions. These changes and developments have prompted specific
strategy responses from companies to develop strategies for being competitive within the markets.
Operations management is necessary for every form of business, for every business enterprise for
managing the business decisions efficiently. Organisations need to make strategic business decisions
for different areas of business that contribute to the overall success of the organisation.
Strategic operations management requires efficiency in the areas of:
 Designing of Goods and Services
 Location Strategy
 Supply Chain Management
 Layout Design and Strategy
 Maintenance
 Quality Management
3.2.1 Importance of Strategic Operations Management

Strategic operations management helps with defining the roles and responsibilities of the workforce
within the organisation for the smooth working of the system. Strategic decisions help with determining
the work and processes which ensure that the production system does not go through unexpected
situations. Strategic operations management also helps gain insight into key and specific areas that
need improvement.
The significant benefits of strategic operations management are:
 Product and service quality: It helps with meeting the objectives and goals of the company as well
as meeting the customer’s needs by improving the quality of the product or services. It ensures that
the product or services meet the quality standards and offers opportunities to identify areas where
quality can be improved. One advantage of strategic operations management is that it ensures
products designed to be reliable, durable and meeting customers’ expectations of quality over
quantity.
 Customer satisfaction: Customer satisfaction is essential for any manufacturing operation as it
ensures future business from your current customers. The review of customers can make or harm
a business negatively. Operations management helps with managing the quality while producing
the products and services and it ensures meeting the needs of the customers. The smooth running
of operation helps with delivering products on time to the customers and increases their level of
satisfaction.
 Increase in revenue: Improving the quality of the products and services and consumer satisfaction
are effective with gaining a good reputation within the industry that helps with attracting more
customers and expanding their market share. Operations management helps with identifying
methods for optimising the processes involved in the production of goods or services that help
with cutting costs due to inefficiencies in the process design. Operation’s management is effective
in selling more products and services at reduced costs resulting in revenue increase enabling
continuous growth for the company.
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 Waste Reduction: Operations management helps with waste reduction which is an important aspect
of strategic management of the operations and functions. Many methods and techniques are used
to identify and eliminate waste within manufacturing operations. Organisations employ methods
like JIT scheduling and lean manufacturing strategies as they help in managing inventory costs
which results in reduction of loss of time, overproduction and defective products. Waste reduction
helps with increasing profits by eliminating unnecessary costs and ultimately improving the overall
production process
 Effective coordination and collaboration: Strategic operations management requires effective
coordination and collaboration between the various departments, units, and workforce at different
levelsof the organisation. The various strategies concerning business functions involve configuration
of supply chain activities, sales, and marketing, financial dealings, with optimal utilisation of
human resources. There are several departments involved with strategic decisions making that
benefit from these decisions that help with ensuring the right quality and costs involved with the
production of goods and services.
3.3 KEY STRATEGIC OPERATIONS DECISIONS

There are certain key strategic operations decisions taken for offering quality products at affordable
prices with maintaining efficiency in distribution, quality, and business processes. It ensures that the
customers can have quality products, whenever they want at an affordable price by adopting several
varied activities and strategic decisions.
Some of the key strategic operations decisions taken are in regards to:
 Designing of goods and services: The decisions are taken for designing the products and services
to be offered and it establishes the important requirements or product designing while taking
the operational decisions. It involves cost involved, the quality needed, the requirement of human
resources, and more along with other features of required sustainability.
 Managing quality: It defines the quality expected from the customer’s viewpoint along with the
other methods and policies that the company intends to acquire towards attaining such quality
levels
 Process and capacity design: It establishes the technology, quality, capital investments required,
human resources needed, and more for producing the goods or services. It helps with determining
the major part of the cost structure involved in the production of goods.
 Location and layout strategy: It is involved with the location and layout of the infrastructure in terms
of the convenient location for the consumers, suppliers, and raw materials. It takes into account the
cost, logistics, and government regulations involved with the location of the manufacturing unit.
The layout strategies are needed for integrating the capacity needs, levels of human resources, the
technology required, and inventory needed for ensuring that material, people, and information flow
through the organisation efficiently.
 Human resource and job design: It relates to the strategic decisions involved with motivating,
recruiting, and retaining the required people and workforce with skills and talents needed for their
job which is part of the system designing.
4
 Supply-chain management: The management of logistics and supply chain is necessary for
integrating the activities with the company’s strategy. It includes several decisions to be made
regarding suppliers, vendors, purchasing, transportation, warehousing, and delivery of goods to
the customers on time.
 Inventory management: Inventory management is an important aspect of operation management
relating to decisions in terms of ordering, holding, and methods of optimising the processes for
ensuring lesser wastage of resources. This is necessary for ensuring the enhancing supplier
capabilities, the satisfaction of customers, and adhering to the production schedule.
 Scheduling: It involves decisions regarding various forms of job schedules that can be utilised
effectively and efficiently for intermediate- and short-term schedules by the people and facilities for
meeting the demands of the consumers.
 Maintenance: Involves the strategic decisions regarding the production demand, human resources,
facilities and infrastructure of the organisation that is required for marinating an effective, reliable,
and stable production process
3.4 PERSPECTIVES ON OPERATIONS STRATEGY

Operational strategies are methods used by business enterprises for developing efficient and effective
systems for the work processes, using resources, and people needed for achieving their objectives. The
strategies help with creating an effective plan for the various operational functions for managing the
resources and making the best use of them for producing the goods and services by the company. The
operations strategy’s framework provides methods to create strategy on the basis of market needs and
improvement of processes for production of goods and services.
The different perspectives involved with operations strategy are:

 Top-down perspective: The top-down approach involves decisions taken by the top level of
management in an organisation which is needed for setting the overall strategic direction of the
organisation. Thereafter, the decision is communicated to the rest of the people and workforce
within the organisation. Many organisations use the top-down approach since it reduces risk and
keeps initiatives organised across larger units within the organisation.
 Market requirement perspective: Market requirements involve the operational strategies that
revolve around the objectives and mission of the business enterprise to meet the business goals and
plans for meeting the needs of the market. Market requirements are an important part of any form
of operations strategy and are very relevant in determining the quality of goods, costs, and the lead
time of a product or service for meeting the expectations of the customers.
 Bottom-up perspective: The bottom-up approach is the method of communication within the
organisation that includes the workforce and their ideas and opinions are taken regarding the
various perspectives of the business for making the appropriate decisions. The employees are
encouraged to be involved in the company’s management and decision-making process.
 Operations resources perspective: Operations resources consist of several resources of the company
which include people, all types of equipment, technology, suppliers, vendors, infrastructure, and
more. The operations managers manage the various operations by monitoring and guiding the
people using the resources for the production of goods and services.
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Top-down
Operations strategy
should interpret
higher-level strategy
Market requirements
Operations resources
OPERATIONS
Operations strategy
Operations strategy should STRATEGY
should satisfy the
build operations capabilities
organisation’s market
BoGom-up
Operations strategy
should learn from
day-to-day
experience
Figure 1: Four perspectives on operations strategy

Source: hpmgroup.co/wp-content/uploads/2019/12/Operations_Strategy.pdf
3.4.1 Key Points of Operations Strategy

Operations strategy is affecting in guiding and implementing the operations and functions of the
company through proper planning and analysing the situations. Business enterprises make use of
operations strategies for identifying and implementing processes that are cost-effective for creating
and distributing products and services efficiently in order to maximise their profits. The key points of
operations strategy are:
 Helping with determining and setting a direction for accomplishing the definite objectives in regards
to their resources.
 Using the resources effectively helps with eliminating and controlling wastages of all kinds with
proper utilisation of the resources.
 Removes any form of obstacles and avoids possible problems and replications for ensuring the
smooth running of the business processes.
 An operation strategy helps to define the roles and responsibilities and brings in a level of confidence
through proper planning and finding solutions for a particular task. It helps with creating a niche in
the market and increasing the level of competition.
 Operations strategy helps with improving the efficiency of the managers in regards to making
decisions and managing the operations at all the levels in the organisation.
 The operational strategy helps with implementing a systematic method of thinking and analysing
the situation and it does not allow fast and hasty decisions by the managers. It is used for making
strategies and decisions and communicating the same to the people in the organisation.
6
 Operational strategies are used for setting clear goals and objectives and taking charge of the working
of the organisation. It helps with drawing plans and procedures for running the organisation and
attaining their objectives.
 Operational strategies effectively help with efficient planning for taking care of future uncertainties.
It is effective in planning for the future and helps the management to face their problems confidently.
3.5 DIFFERENCES BETWEEN STRATEGIC AND TACTICAL DECISIONS

Strategic and tactical operations decisions are crucial for the functioning of an organisation because
they determine the way in which an organisation can accomplish its goals. They provide opportunities
for an organisation to attract customers and achieve a competitive advantage. Strategic decisions are
created for defining the long-term goals of the organisation and how they plan to achieve them. The
strategy provides a way of achieving the organisation’s mission. Tactical decisions are specific plans,
best practices, resources, and more that are more concrete and are aligned with small steps and a lesser
time frame.
 Strategic decisions are a long-term vision that is based on internal processes, planning, and
extensive research. Tactics determine how the strategy can be executed and they have a short to
medium-term impact on the organisation, often involve less commitment of resources, and can be
changed more easily.
 Strategic decisions are normally taken at the top level of the organisation and there are high risks
involved with strategic decisions. Tactical decisions are taken at the middle level of the organisational
structure and there is low risk involved with these decisions.
 The strategic decisions are future-oriented and they focus on the purpose of the operations and are
less flexible in comparison to the tactical decisions which are based on the present task and are very
flexible.
3.6 SIX COMPONENTS OF OPERATIONS STRATEGY

The main activities of a business organisation are its operations that form the core activities required for
producing the product and delivering a product or service. Many processes are involved with business
operations in form of manufacturing, inventory management, material acquisition, transportation,
delivery, and more. The operational strategy is focused on improving the profits of the company by
reducing costs within its supply chain, production, logistics, and more. The operation strategy consists
of six components that are necessary for its operations which are:
 Designing of the production system: The components associated with designing the production
system involve selecting the system of processing, product design, inventory plan, distribution
system, and more for the finished goods. The designing of product design is classified into two
categories:
 Customised product design: These kinds of products are designed according to the need
and requirements of customers. It consist of low volume with special features inbuilt in the
customised design.
 Standard product design: These products have a universal design and that is accepted by the
customers. There is high demand and quantity for these products for meeting the long-term
demand of the customers.
7
There are two types of production systems which are:

 Product-focused system: This kind of production system is used in the mass production of
products like automobiles, computers, cold drinks, other beverages, and more.
 Process-focused system: This form of the production system is adopted for product designing
for a single activity or tasks like painting, packaging, labelling, and more.
 Focus on production and services: Focusing on a plan for different production specialisation for
achieving specific objectives needed for providing the customers with products that are according
to their wants. It helps the organisation to offer benefits to their cost-effective customers, higher
quality, faster and on-time delivery, and more flexibility.
 Design and development of Product or Service: Different stages are involved with the development
and designing of the products which are: -
 Generation of idea
 Creating the feasibility reports
 Prototype designing and testing
 Preparing a production model
 The economies of scale for production
 Testing the product in the market
 Feedback
 Development of the final design and starting the production
 Selection of technology and process development: A crucial aspect of operations staretegy is to
decide the method of production which is decided by analysing each process and alternatives through
techno-economic analysis, and it also helps to make decisions related to required technology for the
chosen method of production. It involves making decisions and plans on every detail of processes
and facilities during the process of production for achieving the optimum level of production using
the appropriate technology. The operations managers face several challenges in deciding on the
right option from the several available alternatives.
 Allocation of resources: The production units face continuous problems since there are limited
resources available for production in the form of cash, types of machines, workforce, machines,
services, materials, capacity, and more. The resources need to be allocated in a way that helps in
achieving the objectives of the operations strategy. The efficiency of the production system involves
the optimal allocation of the resources at the right time to the right place of production. This helps
with the reduction of waste with optimal utilisation of resources with the production of high-quality
products using an efficient operations strategy.
 Planning of facility, capacity, and layout: The essential decisions involved with operational
strategy are planning of the location, layout, and facilities created for the production are the key
decision areas for the operations manager. These are critical for achieving competitiveness. The
decision also influences the future expansion of the plant. While evaluating the alternatives, the
operations manager will consider the availability of raw materials, access to the market, etc. Long-
term planning and huge capital are needed. Volume, quality and cost of production are determined
by the production process adopted and the technology being used for the process.
3.7 MODERN PRACTICES OF OPERATIONS MANAGEMENT

The modern practices of operations management are integrated with the latest technologies that
enclose many forms of innovative processes and tools which the organisation and the employees use
8
to achieve their goals. The company uses operational strategies for planning on ways to use their
resources for various operations with the latest technology for ensuring the required standards in each
operational area. The tools required for operational planning are necessary and play a significant part
in the organisation’s operational strategic decisions. New methods and technologies are evolving every
day and organisations are continuously being challenged by the changing methods that impact the way
they deal with their employees, customers, and others in the industry. It is important for the companies
to carefully monitor and analyse the newer operational methods with new technology to understand
their benefits for making profits within the new markets.
Organisations face a tough task in turning these modern practices with the new technologies into newer
processes with new products and services. It is sometimes difficult to understand the investments
required for the commercially viable offerings in the initial stages. With the latest technologies, the
enterprise needs to identify the potential areas that will lead to new processes, products, and services
for the future. Since it is difficult to accurately foresee the future, hence it is very hard to predict the
methods that would be most impactful. For that is necessary for the organisations to invest in newer
techniques with exploring the potential of many different technologies, and putting their investments
in the most profitable ones. The organisations strategise and use the various tools of feasibility studies,
innovations, and knowledge centres using the knowledge to develop innovations for supporting the
development of standards.
 Strategic operations management helps with aligning business activities in the form of a plan or
strategy, which is designed to create a positive outcome.
 The strategic operations management processes are made for analysing internal strengths and
weaknesses and external opportunities and threats along with different factors affecting the
organisation known as the SWOT Analysis.
 Strategic operations management is an intrinsic process that helps organisations with improving
their performance through and adding value for the customer.
 Strategic operations management is a necessity not only for a firm’s economic environment but its
external social environment as well. The changes in the business environment affect the business
strategy in different ways.
 Operations management is necessary for every form of business and for every business enterprise
for managing the business decisions efficiently.
 Strategic operations management helps with defining the roles and responsibilities of the workforce
within the organisation for the smooth working of the system.
 There are certain key strategic operations decisions taken for offering quality products at affordable
prices with maintaining efficiency in distribution, quality, and business processes.
 Operations strategy is affective in guiding and implementing the operations and functions of the
company through proper planning and analysing the situations.
 Strategic and tactical operations decisions are necessary for the working of the organisation and
they determine how the organisation can accomplish its goals.
 Tactical decisions are specific plans, best practices, resources, and more that is more concrete and
are aligned with small steps and a lesser time frame.
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3.9 GLOSSARY
 Strategic operations management: Is an intrinsic process that helps organisations with improving
their performance through and adding value for the customer
 Top-down approach: Involves decisions taken by the top level of management in an organisation
which is needed for setting the overall strategic direction of the organisation
 Bottom-up approach: Is the method of communication within the organisation that includes the
workforce and their ideas and opinions are taken regarding the various perspectives of the business
 Operations resources: Consist of several resources of the company which include people, all types
of equipment, technology, suppliers, vendors, infrastructure, and more
 Tactical decisions: Are specific plans, best practices, resources, and more that are more concrete
and are aligned with small steps and a lesser time frame
3.10 CASE STUDy: STRATEGIC DECISIONS FOR INVENTORy MANAGEMENT
Case Objective
This study aims to show how Indian Steels make profit using strategic decisions.
The company Indian Steels and Strips Pvt. Ltd. is a steel conglomerate which is located in multiple
locations and it has an annual turnover that exceeds over 15,000 crores. They have highly sophisticated
equipment and computerised machinery and they produce bar forms and different sizes and grades of
high carbon and medium carbon steels in the coil.
Indian Steels and Strips Pvt. Ltd. have three steel plants in the country. One plant is built with British
collaboration, the second one is built with German collaboration, and the third one is made with British
collaboration. These plants have the installed capacity to produce steel valued at almost 1 million tonnes
per annum. Each one of these plants was started within a time frame of 5 years.
During the time of installation of the plants, and while buying the main equipment, they even bought
the spares that were recommended by the OEMs. The company Indian Steels was told that these spares
are insured and they would cover their requirement for the next 4 to 5 years. The company Indian Steel
did not question their logic since they did not have the required expertise for handling this equipment.
Therefore, in each of the steel plants, they purchased the spares amounting to 6 to 10% of the cost of the
equipment.
As the years passed it was ten years and the company recognised the importance of purchasing and its
contribution to the profits of the company. In the next board meeting, the idea was put forth regarding
the appointment of a purchasing director, and a Director of Purchases was appointed. His main
responsibility was to optimise the level of procurement and contribute to making Indian Steels and
Strips Pvt. Ltd. a world-class company. Once the purchasing director settled down in his job, he decided
to investigate the process and systems being followed for purchasing in the company. In his findings, the
following points were pointed out which were important:
 There was 45% of inventory kept as Spares
 Of the total purchases, the emergency purchases accounted for 15% and mostly half of it were spares
10
 There were 10 % of Capital and Insurance spares from the total inventory. They were mostly bought
during the time of purchasing the other types of equipment. There were no designs, drawings, or
specifications available for those spares
 The Spares could not be interchanged amongst plants in different locations since no two spares
matched within the same group of items.
 Most of the spares were imported and they had a lead time of 9 to 12 months of procurement. Most
of the spares were proprietary
 It was the Maintenance Department who was responsible for indenting of spares and the inquiries
would be sent to the people suggested by them. The Materials Management Department did not
even question any of them regarding the quantities, nor the list of suppliers. One day’s production
loss amounted to crores of rupees.
 This made the Director of Purchase realise immediately that the spares were one area where he
needed a lot of work to get results.
Source: http://ebooks.lpude.in/management/mba/term_4/DMGT525_MATERIALS_MANAGEMENT.pdf
Questions
1. Why did Indian Steels and Strips Pvt. Ltd. decide to appoint a purchase Director?
(Hint: Recognise the importance of purchasing, optimise the level of procurement, handling of cash
flow in material management)
2. Explain the problems that he could understand from his findings?
(Hint: Excess amount of spares as inventory, lot cash flow into inventories)
3. What was the shortcoming he found in the handling of spares by the Maintenance Department?
(Hint: Spares were being indented without a process; materials department was not involved)
4. Why did Director of Purchase feel that spares were one area that needs a lot of work?
(Hint: Company was losing out on its cash flow, and profitability, there was excess spares as
inventory)

1. Explain the role of strategic management operations
2. What are the key strategic operations decisions taken for offering quality products at affordable
prices?
3. Explain the perspectives on operations strategy
4. What are the key points of operations strategy?
5. Explain the differences between strategic and tactical decisions
11

1. Strategic operations management is an intrinsic process that helps organisations with improving
their performance through and adding value for the customer. Strategic operations management
is involved with creating strategies for the production, designing, monitoring, controlling, and
improvement of goods and services. It is the management of all operations that help with maximising
efficiency for enhancing the quality of products and services required for fulfilling the customer
needs. Refer to Section Importance of Strategic Operations Management.
2. There are certain key strategic operations decisions taken for offering quality products at affordable
prices with maintaining efficiency in distribution, quality, and business processes. It ensures that
the customers can have quality products, whenever they want at an affordable price by adopting
several varied activities and strategic decisions. Refer to Section Key Strategic Operations Decisions.
3. Operational strategies are methods used by business enterprises for developing efficient and
effective systems for the work processes, using resources, and people needed for achieving their
objectives. The strategies help with creating an effective plan for the various operational functions
for managing the resources and making the best use of them for producing the goods and services
by the company. Refer to Section Perspectives on Operations Strategy.
4. Operations strategy is effective in guiding and implementing the operations of the company
through proper planning and analysing the situations. Business enterprises make use of operations
strategies for identifying and implementing processes that are cost-effective for creating and
distributing products and services efficiently in order o maximise their profits. Refer to Section
Perspectives on Operations Strategy.
5. Strategic and tactical operations decisions are necessary for the working of the organisation
and they determine how the organisation can accomplish its goals. They are used for providing
opportunities for the organisation for attracting customers and achieving a competitive advantage.
Strategic decisions are created for defining the long-term goals of the organisation and how they
plan to achieve them. Refer to Section Differences between Strategic and Tactical Decisions.
 Chase, Richard B., and Eric L. Prentis, Operations Management: A Field Rediscovered, Journal of
Management, 13, no. 2 (October 1987): 351: 366
 Hayes, Robert H., Towards a ‘New Architecture’ for ROM, Production and Operations Management,
9, no. 2 (Summer 2000) 105-110.
 Schonberger, Richard J., World Class Manufacturing: The Next Decade, New York: The Free Press,
1996.
 Discuss with the group the importance of strategic operations management and the key points on
operations strategy needed for the manufacturing industry.
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UNIT
04 Productivity and Production

Systems
Names of Sub-Units
Productivity, Types of Production System, Manufacturing Process Selection, Factors that Affect
Manufacturing Process, Product-Process Matrix, Process Design Selection, Types of Manufacturing
Environments
Overview
The unit starts with an introduction to productivity and production systems moving to definitions
of productivity, productivity measurement and types of production systems. The unit further goes
into the manufacturing process selection, factors that affect manufacturing process, product-process
matrix, and process design selection. It moves to the types of manufacturing environments -- Make to
Stock (MTS), Make to Order (MTO), Assemble to Order (ATO) and Engineer to Order (ETO).
Learning Objectives

 Define productivity, definitions of productivity and productivity measurement
 Summarise the types of production system and manufacturing process selection
 Explain the factors that affect manufacturing process, product-process matrix and process design
selection
 Describe the types of manufacturing environments – Make to Stock (MTS), Make to Order (MTO),
Assemble to Order (ATO) and Engineer to Order (ETO)
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Learning Outcomes

 Understand productivity, definitions of productivity and productivity measurement
 Analyse the types of production system and manufacturing process selection
 Access the factors that affect manufacturing process, product-process matrix and process design
selection.
 Appraise the types of manufacturing environments – Make to Stock (MTS), Make to Order (MTO),
Assemble to Order (ATO), and Engineer to Order (ETO)
 http://www.egyankosh.ac.in/bitstream/123456789/31707/1/Unit-4.pdf
 https://www.researchgate.net/publication/263845397_Strategies_for_increasing_productivity_
in_production_systems
4.1 INTRODUCTION
Business enterprises strive to improve their efficiency for achieving their objectives with making
continuous improvement of the overall effectiveness of the organisation by achieving a level of
performance and the ability to succeed. An effective way of achieving their goal in productivity and
the production function is to apply the right concepts and methods that help the company to increase
both the efficiency and effectiveness of their business activities. The increase in competition has made it
necessary for the manufacturing industry to effectively work on a strategic plan to meet the challenges
of the dynamic industry by eliminating the causes of losses in the production systems. By improving
on their processes and getting into strategic alliances with their suppliers the manufacturing industry
must improve their performance and become competitive for achieving a position in the markets.
Organisations that produce goods and services have constant challenge of increasing their productivity,
making improvements in their efficiency and requiring effective procedures and processes which help
in the development of new quality products. The companies must develop new forms of collaboration,
with high impact of supplies, and with the objective of creating competition in regards to price and
quality of products for making their presence felt in the markets. The companies must work closely
with their vendors and suppliers for developing systematic approaches for improving their production
capabilities and investing in the right talents for achieving their goals. They need to adopt a process-
driven approach with a defined strategy for implementing the strategies of the company through a
comprehensive approach that is flexible, lean efficient and cost-effective.
4.2 PRODUCTIVITY
Productivity is the measure of the economic performance of a company that is used for comparing the
quantity of goods and services produced with the quantity of inputs used for producing those goods
and services. It is defined as the ratio between the volume of input and volume of output. It measures
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UNIT 04: Productivity and Production Systems JGI JAIN
the efficiency of the production inputs, such as labour and capital, that are being used in an economy to
produce a given level of output.
The productivity level can be measured in terms of:
 Productivity of an individual worker
 Productivity of the company
 Industry or sector productivity
 Productivity of the business sector
 National productivity
Productivity is seen as an important source of statistical information regarding the performance of the
company and is considered as a key source of economic growth with gaining a competitive edge. Several
factors can affect productivity such as advancement in technology, skills of the workforce, changes in
inputs, competitive pressures, business cycles and economies of scale. The economic performance of the
business enterprise is judged by the impact of product and labour that help with creating the productive
capacity of economies of scale. It helps with forecasting economic growth and determining the capacity
utilisation for assessing the demand and other forms of inflationary pressures. The benefits gained
from higher productivity are:
 Helps with bringing down the cost per unit and improving the profits
 Consumers gain from productivity in form of lower-priced goods and better-quality products
 The benefit of the gains can be shared with the employees through financial benefits
 Higher productivity gives the entrepreneur chances to exploit better opportunities
 High productivity generates more employment opportunities
 Productivity reflects the efficiency of the production system since there is more output produced
with the same or less input
 There is same output produced with lesser input
 The proportional increase in output is more than the proportional increase in input
4.2.1 Definitions of Productivity

 Productivity is the important factor determining the long-term success and profitability of the
company. It effectively measures the amount of output produced by the company from various
resources like labour, capital, raw materials, and more. A company can generate more output from
its resources if it can improve its productivity.
 Productivity in economics is defined as “the measures output per unit of input, such as labour,
capital, or any other resource and in the economy, it is calculated in terms of the ratio of Gross
Domestic Product (GDP) to the hours worked.”
 Productivity at the corporate level is “the measure of the efficiency of a company’s production
process and it is calculated by measuring the number of units produced relative to employee labour
hours or by measuring a company’s net sales to employee labour hours.”
 The objective of productivity is the maximum utilisation of resources for producing as many goods
and services as possible, wanted by consumers cost-effectively so that the products can be purchased
by a large number of people at affordable prices. Productivity aims at the reduction of wastage of
resources like labour, capital, power, raw materials, machines, time and more.
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4.2.2 Productivity Measurement

Productivity is a common measure of how well resources are being used and it is measured as a ratio
between the output volume and the volume of inputs. It measures how efficiently production inputs of
labour capital and more are being used in an economy for producing a given level of output. It is shown as:
Productivity = Input / Output
Or
Productivity = Quantity of goods and services produced / Amount of resources used
 Productivity measures the efficiency of production and it indicates how efficiently the different
factors of production like land, labour, capital, and energy are being utilised.
 According to a financial and investing advice company The Motley Fool, “in a factory, you can
measure productivity by dividing the total output by the number of workers.”
 Productivity needs to be measured for understanding the performance of the company and for
making investment decisions and it is used for determining the efficiency of the workforce of the
company. The most commonly used productivity measure is the labour productivity measured as
output per hour of the workforce.
4.2.3 Productivity Improvement

Productivity improvement is to adopt efficient productivity improvement measures for doing the right
things better continuously by utilising efficient productivity improvement techniques. Productivity is
a quantitative relationship between what we produce and what we have spent to produce, and it can
also be explained as the ratio between output and input. Productivity improvement techniques can be
applied effectively in enterprises of any size to ensure individuals’ and organisations’ growth from a
one-person company to corporations with thousands of staff. In the words of Nobel Prize Laureate Paul
Krugman Productivity isn’t everything, but in the long run, it is almost everything. A country’s ability
to improve its standard of living over time depends almost entirely on its ability to raise its output per
worker.
Productivity can be improved by reducing downtime of maintenance, reduction in material inputs,
better quality of goods, improved utilisation of resources, reduction in working capital requirements,
reduction in inventory size, and improvement in manpower skills. The productivity Improvement
techniques adopted by several organisations are:
 Proper planning
 Effective utilisation of materials
 Effective utilisation of manpower
 Training the workforce
 Using quality management systems
 Time-saving methods
 Discipline
 Effective utilisation of space
 Effective utilisation of machines
 Elimination of waste
 Improve continuously
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 Involvement of the employees

 Setting directions for the organisation
It is necessary for business enterprises to continuously assess and measure their processes by using the
essential Key Performance Indicators (KPIs). The KPIs are effective performance measurement indicators
that are used in many businesses and industries along with other methods of evaluating performance
with total quality management, lean-to Six Sigma, and more. These performance indicators are used for
measuring the success required for achieving the predetermined goals of the company.
4.3 TYPES OF PRODUCTION SYSTEM

The type of production system used by organisations depends on the kind of product being produced,
the supply of raw materials and the demand for the product. The production systems can be classified
as:
 Job-Shop production: In the Job-shop production system, there is one or a specific quantity of
products designed and produced according to the certain specification of customers within preferred
time and cost. The important characteristic of this kind of production system is less volume and
a high variety of products that demand specific technological requirements demands processing
on machines in a certain manner. It requires detailed planning or the process of sequencing the
requirements of each product, skilled operators, capacity required for the work centre and the work
order priorities.
 Batch production: Batch production is characterised by a limited number of products produced
at regular intervals. It has short production runs; the machinery and plants are flexible and are
used for the production of the products in a batch and thereafter the set-up is changed or the next
batch of items and the lead time for manufacturing and the costs are much lower. The American
Production and Inventory Control Society (APICS) has defined batch production “as a form of
manufacturing in which the job pass through the functional departments in lots or batches and
each lot may have a different routing.”
 Mass production: In mass production, there are large volumes of products produced by the
manufacturing of various parts or assemblies going through a continuous process. There is a
shorter cycle time of production with balanced production lines and there is a continuous flow of
materials, components and parts and dedicated machines are having higher production capacities
and output rates. The process of material handling can be automatic and planning of production is
controlled and easy due to the standardisation of products and process sequence.
 Continuous production: The production function entails the different stages of production
operations from the first stage to the finished product. The items go through a continuous flow
of a sequence of operations from material handling to the production of the item through its final
stage. There is the fully automated process of material handling through dedicated equipment and
machines following a predetermined sequence of operations. It requires thorough planning and
scheduling of operations with zero flexibility.
4.4 MANUFACTURING PROCESS SELECTION

The manufacturing process selection refers to the methods adopted for the production of goods or
services systematically. The process of planning involves the selection of processes, equipment, method
and the sequencing of operations required to transform the raw material into a finished product. The
various steps involved in the selection of the manufacturing process are:
 Establishing the selection criteria: The first step involved in the manufacturing process is to establish
selection criteria based on the important parameters required for selection. The important parameters
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involved in the selection of the manufacturing process are the volumes of product to be manufactured,
the value of the product, designing of the product, required tolerances and required material.
 Identify the processes: The next step is a range of processes to be identified for the processing of
the product. The processes should be able to cater to the requirements needed for satisfying the
production of the item, the required quantity, material requirements and the designing of the
product.
 Evaluate processes: Once the processes have been identified for manufacturing the product, the
next step is to evaluate the processes and place them based on their various parameters such as
process capability, the time required for processing, equipment and tools required for the job, degree
of automation, the skill needed for the tasks, waste produced after processing, and jobs associated
with post-processing. It is important to create a decision matrix with the value and score for each
of these important tasks.
 Selection of the process: In the next step after evaluation of the processes, it is necessary to use the
weighted decision matrix or selection of the process. Thereafter follows the final stage of selecting
the process after carefully evaluating each element and putting extra weight on the elements that
are most important for the selection of the process.
4.5 FACTORS THAT AFFECT MANUFACTURING PROCESS

The process of manufacturing is a challenging task and many factors affect the process of manufacturing
like demand and supply of goods, labour, capital required, equipment, factory overhead, supply of
raw materials, and more. The management process also has a major impact on the manufacturing
processes. Some of the important factors affecting the manufacturing process are:
 Raw Materials and Supplies: The manufacturing process depends on the supply of raw materials
from external sources and there can be many factors that can delay or hamper a regular delivery
schedule. It could be in terms of a problem in the supply source, problems with transportation,
bad weather, and more reasons. If supplies do not reach on time, then there are possibilities of a
shutdown or a major slowdown in the manufacturing process.
 Machinery and equipment: The manufacturing process involves large and complex machines for
completing the manufacturing process. Hence, it is necessary to identify means of improving the
efficiency of all working parts of production for ensuring a continuous and more efficient operation.
 Factory overhead and utilities: The manufacturers depend on various techniques for working
the power machines, cooling the equipment and lighting the workspace in the workstations. The
temporary shutting down of the power supply or not having a proper and steady water source can
impact the process of production, which would affect the total manufacturing process.
 Labour costs: The manufacturing process is hampered by the expenses required for skilled labour
that varies depending on the location of the people doing the work. The labour rates vary globally,
and there are times when skilled and specialised labour is required for the making of complex parts.
There could be a requirement of trained operators and technicians who are highly skilled for adding
value to the final product which can be very expensive.
 Manufacturing time: The manufacturing process is affected by the time taken or manufacturing
the product, since taking longer time results in adding to the costs.
 Quality required: The manufacturing process requires investing in quality control which adds to
the costs of the production, but it helps ensure that the product is being produced using the right
material and follows the specifications needed. In the long run, it would be cost-effective to invest
6
in quality and it will help with saving a lot of money with lesser issues and avoiding the problems of
non-conformity.
 Entrepreneurship: Entrepreneurship has a significant role to play in the manufacturing process since
they take the risks and set the entire productive machinery into action. They take key decisions on
investment, production, innovation, location, research and development and more factors.
4.6 PRODUCT-PROCESS MATRIX

The product-process matrix was developed by Robert H. Hayes and Steven C. Wheelwright and it is
called the Hayes-Wheelwright Matrix. It consists of all aspects of the product development process and
it merges with the total product lifecycle from the time the product was an idea thereafter going through
the entire production process and its introduction to the consumers in the market. The framework of the
product matrix helps the product managers to identify and determine the performance and competence
of the company for making better decisions on processes, opportunities and investments. The decisions
taken by the management relate to the specific competencies the costs involved, price of the product,
quality and flexibility, time taken, and more.
A product-process matrix is a tool that is used for analysing the relationship between the product life
cycle and the technological life cycle and facilitating the process of determining the strategic options
available to the company. The matrix consists of two aspects of product life cycle and process life cycle
where the product life cycle takes the product through the various stages that culminate into a cost-
effective process. On the other hand, the process life cycle involves the various processes involved and
the process structure. Hence, the product-process matrix provides a broad view of the competence and
competitive advantage of the company. It provides a path with better planning that result in ineffective
alignment between the different departments of the organisation and provides them with more definite
predictions and strategic responses to the changes in the industry. It helps them with identifying better
business opportunities and guides them through effective investment decisions. The matrix columns
consist of types of products that are organised into the following manner:
 One of the kind products, low volume, low standardisation
 Multiple products, low volume
 Few major products, higher volume
 High volume, high standardisation, commodity products
The rows of the matrix consist of the choices made for the process and according to Hayes and
Wheelwright, most of the organisations are based along the diagonal of the matrix, where product type
and process choice are aligned with one another.
4.7 PROCESS DESIGN SELECTION

Process design selection refers to the way an organisation chooses to produce its good or services by
taking into account the kind of technology, the layout of the facility, capacity planning and designing
of the work systems. The process design selection involves a sequence of activities for adding value
to the output following the customer’s requirements. The objective of the organisation is to meet the
requirement of the customer since it has a long-term effect on costs, quality of the product, flexibility,
and more which are important factors involved with the production process.
Process selection takes place after determining the selection of new products and services. It takes into
account the total sequence of operations needed to achieve the product design specification.
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The operation sequence in process design selection is normally determined by the:

 Nature of the product
 Materials required
 The layout of the plant
 Quantity to be produced
The process design selection involves a sequence of decisions made for managing the processes and the
involvement of the organisation’s resources to add value to the product. Selection of the process entails
making choices that fit the situation in an effective enterprise process chain that is linked with the
business strategy for gaining the satisfaction of the customers and competitive advantage. The various
steps involved with process designing are:
 Establishing the method of manufacturing
 Determining the sequence and the kind of operations required
 Selecting the different tools and equipment needed
 Accessing and analysing the fitment of the product in the facilities
4.8 TYPES OF MANUFACTURING ENVIRONMENTS

The organisations focus on achieving a high level of productivity and efficiency in the manufacturing
process possible and for that, they make use of different environments and processes. The kind of process
and environment to be used depends on the product to be manufactured and the technologies to be
used. For creating the perfect manufacturing environment there needs to be a proper understanding of
the most common processes and to understand the working of the different environments together to
meet customer demand and provide high levels of productivity and efficiency. The various processing
methods used in different environments are:
 Job shop: This is the manufacturing environment that operates on a small scale, and it is used when
a low volume of high-variety goods or services are needed and it requires skilled and flexible workers.
 Batch processing: It is used for a moderate volume of goods or services and does not require highly
skilled workers or flexible equipment.
 Repetitive: This is the process used for high volumes of standardised goods or services and it requires
a certain flexibility of equipment and low skilled workers and the process is normally termed as
‘assembly’.
 Continuous: This is the process that is carried out when a highly standardised output is required
which is of high volume and is non-discrete. In this process, there is almost no variety in output
and they do not require the flexibility of the equipment. The skill of the workers depends on the
complexity of the system.
 Project: This is the environment used for carrying out tasks that are not part of the routine work
and the work needs to be completed within a time frame.
The environments that they work in the manufacturing sector go through the following attributes that
are involved in making the final product and these are:
 Make-to-stock
 Make-to-order
 Assemble-to-order
 Engineer-to-order
8
4.8.1 Make to Stock (MTS)

Make to Stock (MTS) is a common form of manufacturing strategy where the production planning and
production schedules are based on the forecasted demand. The products are manufactured by the
manufacturer for fulfilling anticipated market demand and the products made are used for fulfilling
the orders for the next production period. The inventory kept for the production of the product has the
shortest lead time compared to other manufacturing environments.
4.8.2 Make to Order (MTO)

Make to Order is a business production strategy that is used for manufacturing products customised
according to their specifications. It is a manufacturing process where the production of the item takes
place only after a confirmed order is received from the customer. It takes a long time to complete the
product and the inventory in this environment is held as raw materials which are ready to be used after
the confirmation of the order for the products.
4.8.3 Assemble to Order (ATO)

In the assemble-to-order manufacturing strategy, the manufacturer stock up the sub-assembly parts
and inventories and assembles the parts into the final product only when the customer places their
order. The strategy depends on the ability of the company to assemble and deliver goods quickly. The
inventory is held as standard components for final assembly and the final assembly takes place only
after the organisation receives the final customer order specification.
4.8.4 Engineer to Order (ETO)

The Engineer to Order involves the production of an entire product that is custom-made to the desired
specifications of a customer. This form of manufacturing has unique requirements and it is a complex
process that requires close collaboration between the manufacturing company and the client. The
production of the product is not started till they have received the order from the customer and the
inventory in this environment is purchased after the order is received.
 Business enterprises strive to improve their efficiency for achieving their objectives with making
continuous improvement of the overall effectiveness of the organisation by achieving a level of
performance and the ability to succeed.
 Organisations that produce goods and services have constant challenge of increasing their
productivity, making improvements in their efficiency and requiring effective procedures and
processes help in the development of new quality products.
 Productivity is the measure of the economic performance of a company that is used for comparing
the quantity of goods and services produced with the amount of inputs used for producing those
goods and services.
 Productivity is seen as an important source of statistical information regarding the performance of
the company and is considered as a key source of economic growth with gaining a competitive edge.
 Productivity is the important factor determining the long-term success and profitability of the
company. It effectively measures the amount of output produced by the company from various
resources such as labour, capital, raw materials, and more.
9
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 The objective of productivity is the maximum utilisation of resources for producing as many goods
and services as possible, wanted by consumers cost-effectively so that the products can be purchased
by a large number of people at affordable prices.
 Productivity is a common measure of how well resources are being used and it is measured as a
ratio between the output volume and the volume of inputs.
 Productivity needs to be measured for understanding the performance of the company and for
company.
 Productivity improvement is to adopt efficient productivity improvement measures for doing the
right things better continuously by utilising efficient productivity improvement techniques
 Productivity can be improved by reducing downtime of maintenance, reduction in material inputs,
better quality of goods, improved utilisation of resources, reduction in working capital requirements,
reduction in inventory sise, and improvement in manpower skills.
 The type of production system used by organisations depends on the kind of product being produced,
the supply of raw materials and the demand for the product.
 A product-process matrix is a tool that is used for analysing the relationship between the product
life cycle and the technological life cycle and facilitating the process of determining the strategic
options available to the company.
 Process design selection refers to the way an organisation chooses to produce its good or services by
taking into account the kind of technology, the layout of the facility, capacity planning and designing
of the work systems.
 Process selection takes place after determining the selection of new products and services. It takes
into account the total sequence of operations needed to achieve the product design specification.
 The process design selection involves a sequence of decisions made for managing the processes and
the involvement of the organisation’s resources to add value to the product.
 Make-to-stock (MTS) is a common form of manufacturing strategy where the production planning
and production schedules are based on the forecasted demand for the demand.
 The Engineer to Order involves the production of an entire product that is custom-made to the
desired specifications of a customer
4.10 GLOSSARY
 Productivity: The measure of the economic performance of a company that is used for comparing
the quantity of goods and services produced with the amount of inputs used for producing those
goods and services
 Productivity measurement: Helps with understanding the performance of the company and for
company
 Job-shop production system: There is one or a specific quantity of products designed and produced
according to the certain specification of customers within preferred time and cost
 Batch production: It is characterised by a limited number of products produced at regular intervals
 Mass production: There are large volumes of products produced by the manufacturing of various
parts or assemblies going through a continuous process
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 Production function: Entails the different stages of production operations from the first stage to
the finished product
 Product-process matrix: Helps the product managers to identify and determine the performance
and competence of the company for making better decisions on processes, opportunities and
investments
 Process design Selection: Refers to the way an organisation chooses to produce its good or services
by taking into account the kind of technology, the layout of the facility, capacity planning and
designing of the work systems
4.11 CASE STUDY: FRITO-LAY – DELL’S TRANSFORMATION
Case Objective
The case highlights that how Dell managed to successfully transform itself by utilising world-class
strategies
The Dell Computer Corporation is the number two supplier and also one of the leading sellers of PCs.
Their main competitor is the Hewlett-Packard Company. Due to its unique method of marketing Dell
has been a very successful firm and has accomplished exceptional sales. They can develop a successful
inventory production model since they have had the right form of resources within their business.
Because of this, Dell has been able to gain a competitive edge over its rival computer companies, which
are starting to copy and replicate them. The competitive advantage Dell has over them is that Dell has
well planned JIT inventory system along with excellent supplier integration. This has helped them to cut
down on lead time in serving the customers for laptops and computers and bring down the inventory
costs. This successful process improvement had worked immensely for the company.
The process of lean methods of JIT inventory systems has evolved and helps to increase the level of
production and build a leaner manufacturing system that helps to minimise the level of inventories.
Since the method of Just-in-time is a cost-effective approach and it helps to make production operations
efficient in comparison to other methods of production. Dell realised the importance of this approach
and they believed that it would be a good opportunity for their business processes hence before the
competition decides to implement it and they cut down on their inventory and have no warehouses to
stock them. This helped Dell to achieve its main objective of continuous improvement of their business.
They also realised that they could reduce their costs by working on optimising and integrating their
computer manufacturing system. Since their inventories were minimised, it helped them to build an
overall leaner supply chain for Dell.
This requires a lot of support from the workforce and the company’s strategic management team for
establishing a JIT company such as Dell. They believed that the JIT systems would require an effective
pull production method of workflow which would be useful within Dell. Since the total system of supply
chain system works on a faster and more flexible method, hence it is the demand of the customer which
initiates the production of Dell computers. Normally they prefer to use the direct marketing model for
selling their computers. But there are times that the demand for computers can increase without any
specific reason. Dell has an effective method of countering this situation even though they have a low
inventory they still can work and push through the processes of their manufacturing to the capacity
to meet the demand that succeeds supply. Because of this many companies globally are making the
transition into adopting JIT manufacturing methods for their business.
Source: https://www.ukessays.com/essays/information-technology/dells-just-in-time-inventory-management-system-business-essay.php
11
JGI JAIN
Questions
1. What was the unique method of marketing used by Dell Computer Corporation?
(Hint: Successful inventory production model, effective methods of resourcing)
2. Why did Dell decide to use the JIT manufacturing method?
(Hint: Due to inventory production strategy of JIT, achieving of zero inventory)
3. How has Dell been able to gain a competitive edge over its rival computer companies?
(Hint: Well-planned out inventory system, excellent supplier integration)
4. What initiates the production of Dell computers?
(Hint: Demand from the customers, integrating their computer manufacturing system)
5. How did JIT help in building a leaner supply chain for Dell?
(Hint: Improved on their supplier integration, cost-effective approach, improving the performance
of their business)

1. What is productivity?
2. Explain why productivity needs to be measured?
3. What are the different types of production systems?
4. Explain the concept of Product-Process Matrix.
5 What are the different types of manufacturing environments?

1. Productivity is the measure of the economic performance of a company that is used for comparing
the quantity of goods and services produced with the number of inputs used for producing those
goods and services. Refer to Section Productivity.
2. Productivity is a common measure of how well resources are being used and it is measured as a ratio
between the output volume and the volume of inputs. It measures how efficiently production inputs
of labour capital and more are being used in an economy for producing a given level of output. Refer
to Section Productivity Measurement.
3. The type of production system used by organisations depend on the kind of product being produced,
the supply of raw materials, and the demand for the product. Refer to Section Types of Production
System.
4. The product-process matrix was developed by Robert H. Hayes and Steven C. Wheelwright and it is
called the Hayes-Wheelwright Matrix. Refer to Section Product-Process Matrix.
12
5. The organisations focus on achieving the high level of productivity and efficiency in the
manufacturing process possible and for that, they make use of different environments and processes.
Refer to Section Types of Manufacturing Environments.
 Everett E. Adam, and Ronald J. Ebert “Production and Operation Management: Concepts, Model and
Behavior” Prentice Hall of India Private Limited, 5th Edition.
 Chary S.N. “Production and Operation Management”, Tata McGraw-Hill Publishing, New Delhi, 3rd
Edition
 Buffa Elwood S., Operations Management, New Delhi: Wiley Eastern, 1986
 Discuss with the group the importance of productivity measurement for a manufacturing unit with
the group. Also, Identify effective ways to improve productivity
13
UNIT
05 Product Design and Development
Names of Sub-Units
Product Design, Activities of Product Design, Product Development Process, Service Design Process,
Value Analysis, Design for Logistics (DFL), Quality Function Deployment (QFD)
Overview
The unit starts with an introduction to product design and development and moves to understanding
the activities of product design, product development process, service design process and value
analysis. It further goes into designing products for manufacturing and assembly, Design for Logistics
(DFL) and Quality Function Deployment (QFD).
Learning Objectives

 Learn about product design, activities of product design and product development process
 Understand designing products for manufacturing and assembly
 Explain the Design for Logistics (DFL) and Quality Function Deployment (QFD)
Learning Outcomes

 Access service design process, and value analysis
 Analysing designing products for manufacturing and assembly
 Appraise the Design for Logistics (DFL) and Quality Function Deployment (QFD)
JGI JAIN
 https://www.researchgate.net/publication/349836532_Operation_management
 https://apps2.mdp.ac.id/perpustakaan/ebook/Karya%20Umum/Karya%20Umum -
Operations%20Management.pdf
 https://www.vssut.ac.in/lecture_notes/lecture1429900757.pdf
 https://courses.lumenlearning.com/boundless-business/chapter/introduction-to-operations-
management/
5.1 INTRODUCTION
The ability of the organisations to identify the needs of customers and quickly create products that meet
these needs cost-effectively results in their being economically successful. Product development involves
a set of activities that begin with analysing the market opportunity and end with the production, sale
and delivery of a product. Product development is a challenging process due to changing preferences of
the customer and uncertainties concerning other competitive products. The product could be in the form
of a service or an item offered for sale or in a physical, virtual or cyber form. The designers, engineers
and marketers need to be aware that every potential user has some preconception and attitude toward
their product and its use. People’s preconceived beliefs about products are integrated into the general
production values they hold as consumers for specific product categories, and they are based on the
experiences they have had earlier as users of the related product. The needs of the customers are met by
using the products and the products are the main component of marketing where the various marketing
activities revolve around the product.
Every product has a life cycle and has a useful life after which it needs replacement or it has to be re-
invented. To make products more relevant to the segment and times, they can be updated, re-launched,
or extended, to retain the product’s originality. There is a cost involved in making a product and each
of these products is sold at a price. The pricing that is charged for the products is dependent upon
the quality, market, target segment and marketing of the product. In product designing, there is an
integration of the product and process development that results in a product with the optimum qualities
according to the needs of the customers.
5.2 PRODUCT DESIGN

Product design is the process of designing the product according to the needs of the users and integrating
it with the business goals of the company. It helps the organisations make consistently successful
products by optimising the user experience in the solutions they make for them with products that can
be made sustainable for the longer-term business needs. It is a method used for efficient and effective
creation and development of ideas through a design process that leads to making new products. It is
done by identifying the market opportunity, and having a clear understanding of the user’s needs and
problem, thereafter developing a proper solution for that problem, and ratifying the solution with the
users.
In the words of Tim Brown “Design thinking is a human-centred approach to innovation that draws
from the designer’s toolkit to integrate the needs of people, the possibilities of technology and the
requirements for business success”.
The product designers must understand the elements of a good design while considering high-quality
products or features. While designing the product the designers need to be aware of the problems they
2
UNIT 05: Product Design and Development JGI JAIN
need to solve, know where the problem is and have an understanding of what they want to achieve. For
finding the right solution they need to go through the following phases:-
 Emphasise: Learn about the people for whom you are designing. Conduct research for getting a
better understanding of the user’s needs
 Define: Determine a point of view that is based on the user’s insights and needs
 Ideate: Brainstorm and generate as many creative solutions as possible.
 Prototype: Create the prototypes for testing their hypothesis and to know whether they are on the
right track
 Test: In the last phase it is essential to take feedback from the users
5.2.1 Activities of Product Design

The activities involved in product design are a critical framework that designers use to solve problems
and they have a major impact on the business. The organisations must have a clear and well-structured
process with systematic and definite steps for planning and integrating. The activities involved with
product designing are:
 Idea generation and research phase: The research phase involves getting information as the starting
point through analysis and other methods that would influence the designing of the product. The
generation of ideas can be inspired by internal and external sources. The research phase focuses on
people who could include potential users, target users, producers, sellers, recyclers and more that
are concerned with the product life cycle. It involves getting information concerned with the target
users regarding their age, education background, income level, social status, lifestyle and more that
have an impact on the direction of product design.
 Analysis and screening Ideas: This stage is mainly concerned with the research information that
provides a thorough understanding of the people, machines and environment. The screening of
ideas helps with eliminating the ideas that do not have the potential for avoiding the incurring
of extra costs in the following stages. It helps with analysing the potential needs of the users for
achieving customisation of the design in a targeted manner. The basis of design analysis the
different aspects of the products involved are positioned for creating a framework and benchmark
that sets a direction and basis for the whole design process.
 Conceptual design stage: The conceptual design is an important part of the product life cycle and
its main purpose is to create a direction for the future product. It consists of a series of targeted and
systematic concepts for the product design based on the needs of the users and market demand. It
is a stage that is prepared for the visualisation of the design concepts and it determines the position
of the product design.
 Feasibility study and product design method: The feasibility study consists of analysing and
studying the market and doing an economic and strategic analysis and removing ideas that are
not suitable for product designing. The market and economic analysis are used for determining
the production and development costs in comparison to the estimated sales volume. It is a method
that is designed to complete the visualisation process from design concept to creating a model of
the product.
 Design evaluation method: Design evaluation method is to compare and evaluate the solution to
the problem in the design process, by determining the value of each method and judging its merits
and demerits for selecting the best design. The significance of design evaluation is to control the
design process, focusing on the direction of the design according to the design plan with proper
analysis. It provides the designers with the basis for evaluating the quality of the design and judging
3
design ideas for selecting the best solution in all aspects of performance for meeting the customer
requirements.
 Product testing: Once the design model and design method are selected, it is tested. After several
processes, the initial run of the manufacturing process is conducted. Many adjustments and changes
and testing of the product for performance and market testing are carried out for checking on the
acceptability of the product with the target audience before finalising the design. It involves the
people using the product to determine whether it suits their needs and requirements and also make
suggestions for any changes and improvements required.
 Launching of the product: The launching of the new product involves effective co-coordination of
the supply chain along with a proper marketing plan for the rollout. The production starts with a
low level of productivity and once the processes and the marketing of the product falls in line the
manufacturing volume increases.
5.3 PRODUCT DEVELOPMENT PROCESS

The process involved with product development entails all the steps required for developing the product
from its concept to its availability in the market. It includes the identification of the market need,
doing research, finding a solution, creating a product roadmap and developing the product. Product
development starts with:
 Idea generation: The first stage of the product development process starts with generating ideas
for a new product through methods of brainstorming. The ideas relate to the needs of customers,
market research, pricing and more.
 Product definition: The second stage consists of defining the specifications of the product in terms
of:
 Business analysis and mapping the various strategies
 Determining the value proposition for developing the strategies
 Work on success metrics for evaluating the performance of the product
 Create a marketing strategy through various distribution channels
 Prototyping: The stage of a prototype helps with thorough research and creating a detailed business
plan with identifying the areas of risk before creating the product. It requires the process of going
through:
 Proper market risk research for analysing the potential risks that could be associated with the
production of the product
 Developing a strategy and creating a timeline for the tasks
 Work on the feasibility analysis and make the required changes
 Initial design: For creating the initial design, the designers create a minimum viable product design
based on the prototype with a focus on the key functions of the product for the target audience. The
process would require many iterations for getting the right product and it would require-
 Connecting with the stakeholders and sharing the progress reports
 Sourcing and purchasing materials through vendors
 Receiving feedback and making changes if required
 Validation and testing: Before launching the product in the market it is necessary to validate and
test the product for:
 Working through any issues that could arise while developing the product
4
 Doing front-end testing for risks or errors during the development process
 Testing the marketing plan for any form of errors in its functionality
 Launchingtheproduct: The last stage is the production of the final product before it is commercialised
in the market. It is necessary to measure the performance and success of the product with the
performance metrics.
5.4 SERVICE DESIGN PROCESS

The service design process is an important aspect of business operations involving the collaboration and
coordination of human resources, effective communication and material components for the creation
of quality service. It is a method of planning and organising resources of business for meeting the needs
and requirements of the customers.
The important components of service design are the:
 People: It involves the people who are involved with the creation of the product and using the
product like the employees, customers, vendors, agents and more.
 Resources: The resources are the different physical or other resources that are required to perform
the service successfully like the space, layout of the facility, digital environment, raw materials and
more.
 Processes: The processes are different techniques, procedures, workflows, methods and more that
are performed by the workforce or the user throughout the service like interviewing, sharing a file,
solving issues and more.
The main objective of the service design process is to effectively meet the needs of the business entity
and the customers. The main components involved with the service design process are:
 User-centric process: It is a user-centred or customer-centred process where the first step is involved
with research, exploration and gathering of data for getting actionable insights about customers
 Brainstorming: Brainstorming involves the involvement of people sitting together pitching ideas
and participating equally in the service design process that helps with generating several ideas.
 Conducting a market analysis: It is necessary to study and analyse the market, understand the trends
and drivers for the service. It helps with the service design process along with improving the existing
services for satisfying and retaining the established customers. It helps with understanding the needs
of the users for the service and the potential tangible and intangible benefits for the customers
 Ideation and creation of design: This involves all the stakeholders of the company for achieving
sustainable solutions by generating new ideas which is an important part of the service design. It
is a method to avoid errors and mistakes for leading towards effective long-term solutions. It is a
method used for understanding the problems and needs of the people by exploring several ideas for
implementing actions that are cost-effective through iterations of various service prototypes.
 Prototyping and testing: The method of prototyping is adopted for evaluating, communicating
and exploring the services in the future. The customers must know about the services provided
and prototyping is one of the easiest and cheapest ways for working on an idea and it helps with
mitigating possible errors. This can be done by collecting customer feedback and integrating it with
the design of the service design process.
 Evaluate user’s experience: The last stage involves the implementation of the service design process
that can include several processes and procedures. It is a method of gathering insights from the
users about the service features and knowing their level of satisfaction with the services provided.
5
The advantages of the service design process are that it helps with:
 Improving the sales
 Creating loyalty
 Strengthening the brand and identity
 Improving efficiency
 Reducing wastage
5.5 VALUE ANALYSIS

Values analysis is an integral part of product development that helps with identifying and eliminating
the aspects that have no real value for the customers. It is a method that is used for improving the
value of the product or services by understanding the various components and their associated costs.
Thereafter one looks at finding methods for improvements to the components by increasing the value of
the functions and reducing their cost. It is a form of metrics that are used for improving the functions
without compromising on the reliability of the product, quality and performance.
Value analysis is defined by the Society of American Value Engineers (SAVE) “Value analysis is the
systematic application of recognised techniques that identify the function of a product or services
establish a monetary value for the function and provide the necessary function reliability at that lowest
overall cost.”
The value analysis approach implies breaking down operational processes into smaller components for
evaluating their importance and performance and improving or removing them to ensure the increased
value of a product in the future. The different phases involved with value analysis are:-
 Gathering information: The main objective is to collect project data and concepts and for
understanding and analysing the risks involved, budget, costs and other issues
 Innovation: This is the next stage of value analysis which is involved with creativity and generating
of new ideas or replacing the existing ones
 Evaluation: This is the phase where the various ideas and alternatives are evaluated and analysed
for selecting the most effective one which should be capable of the desired functions and performance
 Making a choice: This is the phase of selecting the right alternative and making a choice based on
which the product is developed
 Implementation: The selected alternative is put to use with proper planning for product development.
 Review: The progress of the analysis is reviewed and monitored regularly, changes are continuously
monitored and followed up to remove any kind of errors for achieving the desired results
The techniques used for the value analysis process are Pareto chart, pert and Gantt diagrams,
matrixes and more. It helps the organisation with improving the efficiency and effectiveness of all
processes involved with the business. This value analysis process helps:
 Reducing costs
 Maintain higher quality
 Provide opportunities for using new technologies
 Eliminate wastage
 Encouraging new ideas
6
 Improving brand image

 Improve the design
5.6 DESIGN FOR LOGISTICS (DFL)

Design for Logistics is a part of the supply chain function and it is used as a strategic technique to reduce
the cost of logistics with effective product designing. The products are designed keeping in mind the
costs involved and improved customer service in the domain of logistics and supply chain management.
Efforts are made by organisations for improving the design of the products for logistics that helps them
with reducing their costs during the process of logistics and delivery of the products. The designing
of the products is done in a manner that simplifies planning and improves operational efficiency. The
function of logistics involves the movement of raw materials, coordinating the flow of goods, packaging
the product for shipment, storing the product, transportation and managing the entire process of the
supply chain. It consists of all the operations needed for both tangible and intangible goods to be made
available in the right amount, at the right time, transporting it to the appropriate location in proper
condition and delivering it to the final customer or a specific destination. It involves the operations
in a forward direction, that entails the functions of receiving and processing an order for the goods,
preparing and checking the inventory, picking and packing the goods, dispatching it on time and
selecting the transportation route for delivering the product efficiently and properly to the customer
within a time frame. There are mainly three components involved with Design for Logistics which are:
 Economic Packaging and transportation: The products are designed in a manner that should
facilitate easy packing, shipping, easy to track and be displayed on the shelf.
 Concurrent and parallel processing: The manufacturing process should be designed for performing
parallel tasks for saving time and lowering the inventory cost.
 Standardisation: The standardisation of parts facilitates the process of using common parts for
different products that helps with saving time and eliminating wastage.
The organisations look for gaining a competitive advantage that sets them apart from others in
business offering similar products or services. By being innovative and offering value-added customer
services with benefits and lower pricing the organisations need to be flexible, innovative and adaptive
to changes within their supply chain. Several aspects are connected with the logistics of goods in terms
of the latest technology, labour costs, security, prices, trade regulations, vessel capacity and more. The
organisation collaborates with the logistics teams during the phase of product designing to help create
strategies to reduce the cost of packaging, shipping and warehousing.
5.7 QUALITY FUNCTION DEPLOYMENT (QFD)

The methodology of Quality Function Deployment (QFD) focuses on the needs and expectations of the
customers and thereafter translates them into technical requirements during product development.
The system of Quality Function Deployment gained popularity during the1960s in Japan and its focus is
on listening to the voice of the customer (VOC) by putting customer needs first throughout the process of
product development. The focus is consistently on customer needs which are taken into account during
the design process and also for the various metrics involved with quality assurance milestones during
the entire product lifecycle. The quality is measured according to the satisfaction of the customers with
the product on the quality matrix.
The process of Quality Function Deployment starts with collecting inputs from the potential customers
through surveys and other research methods. Thereafter the data is analysed for understanding the
demands, requests, requirements and preferences of the customers through the focussed methodology
7
of Voice of the Customer. The inputs of the data are ranked based on their importance and listed on
the left-hand side of the quality matrix and it represents what the customers want from the product.
These are then deployed to the appropriate organisational function for action so that the organisations
can bring products to market according to the wants and needs of the customers. This is possible by
listening to the voice of the customers and noting their preferences at the beginning of the product
design process.
The quality function provides the organisation with:
 Requirement planning capability
 Method of integrated and graphic thinking
 Means to express and preserve the engineering through the process
 The method of communicating the thought process to the members of the QFD team
 Determining methods for reporting to the management regarding the problems and issues, needs
and risks associated with the customer requirements
 The ability of the organisations to identify the needs of customers and to quickly create products
that meet these needs cost-effectively results in their being economically successful.
 Every product has a life cycle and has a useful life after which it needs replacement or it has to
be re-invented. To make products more relevant to the segment and times, they can be updated, re-
launched, or extended, to retain the product’s originality.
 Product design is the process of designing the product according to the needs of the users and
integrating it with the business goals of the company.
 The product designers must understand the elements of a good design while considering high-
quality products or features.
 The activities involved in product design are a critical framework that designers use to solve
problems and they have a major impact on the business.
 The process involved with product development entails all the steps required for developing the
product from its concept to its availability in the market. It includes the identification of the market
need, doing research, finding a solution, creating a product roadmap and developing the product.
 The service design process is an important aspect of business operations involving the collaboration
and coordination of human resources, effective communication and material components for the
creation of quality service.
 Values analysis is an integral part of product development that helps with identifying and eliminating
value of the product or services by understanding the various components and their associated
costs.
 The value analysis approach implies breaking down operational processes into smaller components
for evaluating their importance and performance and improving or removing them to ensure the
increased value of a product in the future.
 Design for Logistics is a part of the supply chain function and it is used as a strategic technique to
reduce the cost of logistics with effective product designing. The products are designed keeping in
8
mind the costs involved and improved customer service in the domain of logistics and supply chain
management.
 It consists of all the operations needed for both tangible and intangible goods to be made available
in the right amount, at the right time, transporting it to the appropriate location in proper condition
and delivering it to the final customer or a specific destination.
 The methodology of Quality Function Deployment (QFD) focuses on the needs and expectations of the
customers and thereafter translates them into technical requirements during product development.
 The process of Quality Function Deployment starts with collecting inputs from the potential through
surveys and other research methods.
5.9 GLOSSARY
 Product design: This is the process of designing the product according to the needs of the users by
integrating it with the business goals
 Product development process: Entails all the steps required for developing the product from its
concept to its availability in the market
 Service design process: It involves the collaboration and coordination of human resources, effective
communication and material components for the creation of quality service
 Values analysis: It is an integral part of product development that helps with identifying and
eliminating the aspects that have no real value for the customers
 Design for logistics: This is when products are designed keeping in mind the costs involved and
improved customer service in the domain of logistics and supply chain management
 Quality Function Deployment (QFD): Focuses on the needs and expectations of the customers and
thereafter translates them into technical requirements during product development
5.10 CASE STUDY: RESOLVING THE TRANSPORTATION PROBLEM BY DEERE &

COMPANY
Case Objective
This study aims to show an optimal solution for the Transportation Problem by Deere & Company.
Deere & Company is known for manufacturing and supplying machinery under the brand name
John Deere. The machines and equipment are used for construction, agriculture and forestry. They
manufacture equipment for lawn care and also for diesel engines. The Deere & Company was doing well
and in 2013 they were ranked 307 in Fortune Global 500 ranking and in 2014 they were listed 80th in the
Fortune 500 America’s ranking.
Deere and Company have a varied range of products that are made to order and these include industrial
equipment and different kinds of range of heavy machinery for the consumer market. The market
is more energised during March and July when more sales take place since the retail sales are very
seasonal. The dealer’s inventories were getting replenished every week by the company and they were
utilising direct shipment and cross-docking operations. the shipment was being transported from the
source warehouses located near Deere & Company’s manufacturing facilities and the entire operation
was time taking and was proving too costly.
9
JGI JAIN
The company decided to work on their operational research problem to find the initial basic feasible
solution as well as the optimal solution or nearer the optimal solution of the transportation problem.
The transportation problem is the most effective form of linear programming problem that can be used
for different sources of supply to a different destination in a manner that the total transportation cost
can be minimised. The company decided against initiating a reduction in their transportation costs by
10% within four years. They decided to redesign the transportation network and trade-offs through its
supply chain network. This resulted in many intermediate merge centres and the optimisation of cross-
dock terminal locations.
During the peak seasons, Deere & Company began to consolidate the shipments and use break-bulk
terminals. The company effectively worked at optimising the network designs and modes of transport
tactically by creating a network with an increase in the use of third-party logistics providers at any given
point in time. Deere & Company’s redesigning of the networks helped them to achieve the benefits of
cost-management and a decrease in inventory by $1 billion. There was a significant decrease in delivery
time for the customers from ten days to five days or lesser and there was also an annual reduction in
transportation with 5% of cost savings.
Source: https://www.logisticsbureau.com/7-mini-case-studies-successful-supply-chain-cost-reduction
Questions
1. What were the problems faced by Deere & Company?
(Hint: Dealer’s inventories were getting replenished every week by the company, the supply of large
equipment, the entire operation was time taking and was proving too costly)
2. What methods did they use for bringing the changes?
(Hint: Worked through their operational research and redesigned the transportation network,
selecting modes of transport, efficiency in their supply chain network)

1. Describe how does product designing help the organisations make consistently successful products.
2. Evaluate the service design process.
3. Explain why value analysis is considered an integral part of product development.
4. Discuss the need for Design for Logistics in product development.
5. Outline the importance of Quality Function Deployment.

1. Product design is the process of designing the product according to the needs of the users with
integrating it with the business goals. It helps the organisations make consistently successful
products by optimising the user experience in the solutions they make for them with products that
10
can be made sustainable for longer-term business needs. It is essentially a method used for efficient
and effective creation and development of ideas through a design process that leads to making new
products. Refer to Section Product Design
2. The service design process is an important aspect of business operations and it involves the
collaboration and coordination of human resources, effective communication and material
components for the creation of quality service. It is a method of planning and organising of business’s
resources for meeting the needs and requirements of the customers. Refer to Section Service Design
Process
3. Values analysis is an integral part of product development that helps with identifying and eliminating
value of the product or services by understanding the various components and their associated
costs. Refer to Section Value Analysis
4. The products are designed keeping in mind the costs involved and improved customer service in the
domain of logistics and supply chain management. Efforts are made by organisations for improving
the design of the products for logistics that helps them with reducing their costs during the process
of logistics and delivery of the products. The products are designed in a manner that simplifies
planning and improves operational efficiency. Refer to Section Design for Logistics
5. The methodology of Quality Function Deployment (QFD) focuses on the needs and expectations of
the customers and thereafter translates them into expectations into technical requirements during
product development. The system of Quality Function Deployment gained popularity during the1960s
in Japan and its focus is on listening to the voice of the customer (VOC) by putting customer needs
first throughout the process of product development. Refer to Section Quality Function Deployment
 Harvard Business Review on Brand Management, Harvard Business School Press, 1999.
 Linda Gorchels, The Product Manager’s Handbook: The Complete Product Management Resource,
McGraw-Hill, 2000.
 Chary S.N. “Production and Operation Management”, Tata McGraw-Hill Publishing, New Delhi, 3r d
Edition
 Discuss with the group the importance of Quality Function Deployment that focuses on listening to
the Voice of the Customer and its advantage for the business organisation.
11
UNIT
06 Facility Location
Names of Sub-Units
Introduction, Need for Selection of Location, Alfred Weber Location Theory, Errors in Selection, Steps
in Location Decision, Factors Affecting Location Decisions, Locating Logistics Facilities, Locating
Warehouses, Plant Location Methods, Factor Rating (including a numerical example), Centroid
Method (including a numerical example) and Linear Programming (including a numerical example
Overview
The unit starts with an introduction to facility location, the need for selection of the location, Alfred
Weber Location Theory, errors in selection, steps in location decision, and factors affecting location
decisions. the unit further moves to locating logistics facilities, locating warehouses, and plant location
methods. the unit goes into factor rating (including a numerical example), centroid method (including
a numerical example), and linear programming (including a numerical example)
Learning Objectives

 Analyse the need for selection of location
 Explain alfred weber’s location theory, errors in selection, steps in location decision, and factors
affecting location decisions.
 Describe locating logistics facilities, locating warehouses, and plant location methods
 Learn factor rating (including a numerical example), centroid method (including a numerical
example), and linear programming (including a numerical example)
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Learning Outcomes

 Access the need for selection of location
 Appraise Alfred Weber’s Location Theory, errors in selection, steps in location decision and factors
affecting location decisions.
 Evaluate locating logistics facilities, locating warehouses, and plant location methods
 Analyse factor rating (including a numerical example), centroid method (including a numerical
example), and linear programming (including a numerical example)
 https://icmai.in/upload/Students/Syllabus2016/Inter/Paper-9-January-2021.pdf
 https://mrcet.com/downloads/digital_notes/ME/III%20year/POM%20NOTES.pdf
6.1 INTRODUCTION
One of the most crucial decisions for any business organisation is the selection of a facility location since
the selection decision has a major role to play in determining the operating cost, production cost, and
efficiency of the firm. Facility location selection is considered to be one of the most important elements
in the marketing strategy since it is a long-term decision that benefits the business entity, customers
and society in the long run.
A facility location is a place where the various resources needed for manufacturing products are
brought together for the smooth working of the system. Hence deciding on the location for the premises
of the facility is a strategic decision because a good location is an important key element for attracting
customers to the outlets and can lead to strong competitive advantages. It is a decision that is taken
for maximum operating economy and effectiveness and these decisions once taken cannot be changed
since initially, it involves a major investment cost. This decision is very crucial for large-scale industries
since the decision of establishing a plant at a location is a one-time investment and the operational
efficiency of the whole system increases with productivity improvement.
Location decisions are an integral part of the strategic planning process of every organisation and most
organisations that are profit-oriented set up their location based on the profit potential. This is because
many organisations look forward to expanding their markets and also adding to the convenience of the
customers. Taking the wrong decision can be detrimental to the operations due to inadequate supplies
of raw materials, excessive transportation costs, loss of competitive advantage, shortage of qualified
labour, and more reasons. A specific location site must be chosen that will best serve the desired target
market with a proper study and analysis of customers and their shopping behaviour. Location decisions
are risky and should be well planned and thought of. The location strategy helps the organisation in
determining the markets, product offering, forecasting demand for different markets, accessibility to
their customers, and best manufacturing and service location.
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UNIT 06: Facility Location JGI JAIN
6.2 NEED FOR SELECTION OF LOCATION

Facility location is an important component of the supply chain function that has a major impact on
the efficiency of several activities involved with logistics. There are many aspects involved with facility
location like the location of manufacturing plants, availability of raw materials, assembly locations,
and other forms of distribution centres. The location of the facility is a place that is set up for producing
goods or services.
Selection of location decisions has a significant impact on the company’s long-term performance in
terms of productivity and capital. The need for selecting the location is to look for an optimal location
that aligns with the needs and objectives of the organisation for minimising the costs and risks while
maximising the opportunities. For the success of the business, it is necessary to be in the right location
for boosting the long-term performance and survival of the company. Selecting an inappropriate
location can lead to several problems like higher cost and investment, unfavourable marketing and
transportation, dissatisfied employees and consumers, interruptions of production delays, wastages,
bad quality, and more problems. The need for selection of location can arise due to:
 Expansion of business or starting a new one
 Benefiting from a cost advantage
 Searching for a new location with additional facilities
 Availability of raw materials
 Mergers and acquisitions
 Talent attraction and retention
 Due to political or social changes
 Increase in product demand
 Availing tax benefits and other socio-economic reasons
6.3 ALFRED WEBER LOCATION THEORY

The Alfred Weber theory was introduced on the subject of the location of plant and office in 1909. It
was initially published as a German essay and then in 1929, it was translated into English. According to
Weber, the factors that affect the location of a plant can be classified into:
 Primary factors: These are also called the regional factors and they influence the distribution of
industrial units through different regions.
 Secondary factors: These are factors are also called the agglomerating and deglomerating factors
and they relate to the redistribution of the industry from the original regions. The agglomerating
factors revolve around the advantages of the industries in a particular region in the form of lesser
cost of production, specialisation of labour, centralised purchases, uniform production policies, and
more. On the other hand, deglomerating factors involve the different negatives that are associated
with the concentration of industries in a particular region in the form of congestion and housing
issues, unhealthy competition, increase in local taxes, and more.
Weber analysed other factors involved with the location of industries like rent and interest, depreciation,
and more elements that do not change and do not have an impact on the location of a business unit in
different regions. He believed that the production costs differ from one region to another region and the
3
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industries are situated in a place or region where there is a minimum cost of production. Weber believed
that two factors affect production regionally and they are:
 Transportation cost
 Labour costs
Weber believed that transportation costs are influenced by the distance to be covered and also by the
quantity to be transported. Normally the industries are located in places where labour, raw material,
and fuel are easy to obtain. He divided raw materials into two categories:
 Gross Raw Materials: These are materials that do not form part of the finished products but help
give a shape to the finished product like coal.
 Pure Raw Materials: These are materials that are directly converted into the finished product like
cotton, wool, iron ore, and more.
Weber believed that the industries requiring pure raw materials should be situated closer to the
consumption markets for saving on transportation costs. Weber introduced the following mathematical
equation to prove his point:
Material Index = Weight of localised gross material/ Weight of finished commodity
If the index is more than unity then it would be right for the plant to be located near the sources for supply
of raw material, if it is less than one, then the plant should be located near the point of consumption.
6.4 ERRORS IN SELECTION

Selecting the right location for a plant contributes to the smooth and efficient working of the system
and the organisation. Selection of plant location is a challenging job and many entrepreneurs commit
errors in selecting the wrong locations. The most common errors are:
 Having an unprepared site selection team
 Lack of proper investigation concerning the different factors involved.
 Personal biases of likes and prejudices on part of important executives or stakeholders involved in
overriding certain facts.
 Lack of executive consensus and the reluctance of the executives to move from their established
traditional locations to new and better ones
 Incorrect search criteria without validating the overall operating objectives and criteria
 Narrowing the search area too rapidly to accelerate the process
 Failure to consider and validate all the issues concerning location factors, specifications, needs,
timing, and risks
 Improper labour market analysis of factors that should be quantified and interpreted during the
site selection process
 Failure to evaluate and understand community trends that affect most aspects of business
operations
 Poor understanding of environmental issues and risks, barriers to development, and other kinds of
variable construction costs
4
 Failure to capture and overlook available discretionary incentives

 No proper implementation of incentives and acceptance to overvaluation of incentives
6.5 STEPS IN LOCATION DECISION

Location decisions are an important aspect that involves strategic and logistical decision-making for the
production of products and they effectively contribute to the success of an enterprise. The availability,
quality, and reliability of modes of transportation, the availability of labour force and wage rates, the
quality and reliability of utilities, government stability and industrial relations laws, worker motivation,
telecommunication systems, and other factors should all be considered when making location decisions.
The organisations make their location decisions based on the availability of marketing resources, the
latest technologies, and long-term strategies. Many companies prefer to engage outside consultants for
advising them in selecting manufacturing sites. The steps involved in location decision are:
1. Identify the Relevant Decision Criteria for evaluating location alternatives: The business entities
need to select the location by creating relevant decision criteria that include various economic
factors in terms of availability of labour, raw materials, and material costs involved. There are
other forms of non-economic factors that impact the external environment of the plant location The
objectives and location constraints are determined based on the requirements, needs, and opinions
of the owners, stakeholders, employees, and more people associated with the firm.
2. Relate the Objectives to the Criteria Using Appropriate Models: The appropriate choice criteria
should be analysed using models such as break-even analysis, linear programming, and qualitative
factor analysis. Though it is preferable to describe the location decision process consistently and
scientifically, intangible characteristics are difficult to measure. As a result, in order to arrive at a
solution, the judgement of responsible management is considered.
3. Develop a detailed list of selection criteria: The next step in selecting a new site is developing a total
list of selection criteria that captures the key aspects for the new site. The criterion addresses the
issues and qualifications needed for the new site.
4. Research and use of models for evaluating the alternative locations: The organisations must
collect primary and secondary data for evaluating different alternative locations. Primary data
is the data that is collected first time for a specific purpose. The methods like personal interviews,
surveys, telephonic interviews, and more are used for collecting the primary data. Secondary data
is information that is already available but was acquired for a different purpose or by a different
entity. Some of the sources for secondary data are Journals of the Federation of Indian Chambers of
Commerce and Industry (FICCI), Central Statistical Organisation (CSO), and more.
5. Developing a detailed list of selection criteria: The next step in selecting a new site is to develop an
exhaustive list of selection criteria that captures the key aspects needed for qualifications of the new
site.
6. Analyse the qualitative and quantitative factors: The qualitative factors include the external
environment, size and surrounding s of the place and community, connectivity to the nearest
markets, educational systems, and more. Though these factors do have a direct impact on the
bottom line of the firm they are still important for the success of the company. The quantitative
factors include the labour rates, cost of logistics, building costs, utility rates, taxes, and more.
7. Select the appropriate location and finalise the decision: The selected location should meet the
defined objectives and be able to satisfy the criteria set by the company and provide benefits to
them.
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6.6 FACTORS AFFECTING LOCATION DECISIONS

Selecting the appropriate facility location is of major importance in all types of business and it involves
several complexities while selecting the suitable location. Several factors can influence the choice of
location that is:
 Proximity to the markets: The organisations prefer to locate their facilities close to their market for
being able to minimise their transportation costs and also be able to provide effective and on-time
delivery to their customers. It helps them in responding to the fluctuations in demand and supply of
materials
 Availability of skilled labour: It becomes challenging for organisations to find a suitable location
that has readily available appropriate skilled and unskilled labour. The processes can be made simple
by providing training to the workforce, simplifying processes, and also by moving the importantly
skilled workforce from one place to another.
 Availability of community amenities: The business entities prefer to be located in a place that has
a provision for an effective system of communication, community services, housing facilities, shops,
and other external amenities.
 Easy availability of resources: The organisations prefer a location which easy accessibility to the
suppliers and resources for minimising the costs and being readily available in the region.
 Availability of essential services: the location facility should have availability of electricity, fuel
and gas, communication, effective water drainage system, disposal of waste, and more services that
need to be considered whilst selecting a location.
 Room for expansion: There should be enough room for expansion if required while selecting the
appropriate location by the business enterprises. This is necessary for long-term survival that would
need changes and expansion.
 Safety requirements: Certain safety norms have to be considered for setting up specific plants or
manufacturing units that can present potential hazards to the surrounding neighbourhood like
certain chemical factories or nuclear power stations.
 Political, Socio-economic situation: The organisations must consider the political situation of
certain locations while taking their decisions. The socio-economic conditions of the region can have
a major impact on decisions related to facility location.
 Government regulations, grants, taxes, and import and export barriers: The organisations need
to consider the various government regulations and taxes involved before selecting their facility
location. It is beneficial for them to work on locations where the government offers financial facilities
in form of special grants, low-interest loans, reduced taxes, and other grants.
6.7 LOCATING LOGISTICS FACILITIES

The location of a new facility involves the efficiency of the flow of goods in the distribution system
through an efficient logistic facility. In today’s competitive environment the efficiency involved with
the movement of goods from raw material sites to processing facilities, finished goods assembly plants,
distribution centres, retailers, and customers is very important. The logistic decisions are involved with
production costs, transportation costs, inventory carrying costs, warehousing, and more factors involved
with the final delivery of the product to the customers. The entire process of logistics management
starts from getting the raw materials from the supplier, moving towards the production of goods in the
6
factory; thereafter moving towards the distribution channels for fulfilling the demand of the consumers
for the finished products on time and cost-effectively. Every organisation has various logistics demands
and objectives, and each one has a different manner of evaluating operational success. The distribution
system is dependent on the latest technologies and information systems for tracking shipments and
transporting large quantities of goods and services across the globe that is worth many millions of
dollars.
The selection of the facility location and allocation decisions are normally followed by a proper
evaluation of the existing distribution network system and analysing the quality of the services
facilities offered according to the customer’s demands for the location. There are several qualitative
and quantitative models used for analysing the important issues that enable a facility location model to
become compatible with logistics and supply chain network requirements. The various logistics facility
location models concern decisions related to:
 Modes of transportation modes and capacities
 Setting up of transportation links
 Direct shipment of commodities from the facilities to customer locations
 The flow of material between facilities in form of semi-finished products being moved to other plants
for being transformed into end products
 Locating appropriate warehouses and providing multi-sourcing facilities between the warehouses
and customers
6.8 LOCATING WAREHOUSES

Selecting the right warehouse location can make all the difference in the effectiveness, efficiency,
and profitability of the company since organisations are constantly looking for ways of being cost-
effective. Before making any location decision the organisation must determine the need for deciding
about the location of their warehouses that helps with generating revenues for them and for achieving
profitability over the long term. Warehousing is an integral part of every logistics system for the storage
and exchange of goods that most companies are using for enhancing their position. Warehouses
are used for long-term storage to provide goods for future consumption and it has become a core
competency for business organisations. The goods are stored in warehouses for the relocation of goods,
from a production place to its final place of destination. Some warehouses offer specialised services for
the goods that they store and they help with the interruption in the flow of materials and goods. The
flow of materials and goods through the warehouse can be divided into three important processes:
 Receiving and storing the materials and goods and making them available when needed
 Managing the goods for internal distribution and production.
 Segregating, transporting, and distributing goods to different customers or other locations.
The main reason for the companies to hold stock in the warehouses is for generating revenue through
the sale of goods and services. To avoid the risk of lost sales due to a situation of having a stock-out, a
company would always want to hold some level of stock on hand. The main aim of holding stock is to
safeguard against the unexpected fluctuating demand, guarding against lost sales and a situation of
stock out. Holding stocks or inventory helps in meeting the customer demand but it can also lead to
higher costs because of extra storage and impacts the ability of the company to operate at a low cost
and have a profit margin in the business.
7
6.9 PLANT LOCATION METHODS

Every business enterprise looks forward to newer markets and growth opportunities that prompt them
to look for new facility locations for their manufacturing units. The selection of facility location for
setting up a manufacturing plant is a challenging and complex process that can take several months
or years. The entire process involves the method of identifying a suitable place or region, having an
appropriate area and thereafter making comparisons and selecting a site from that area that is suitable
for the organisation. There are several methods and analytical techniques that have been developed to
help the firms select a location some of these are:
 Factor rating method: In this method, there is a range of factors that are taken into account that
are relevant to the location decision and each of these factors is given a weighting that shows its
importance in comparison with the other factors. Every location is then evaluated on each factor
and this score is multiplied by the factor value. The alternative with the highest score is then selected.
 Centre of Gravity or Centroid method: The centre of gravity is based mainly on cost considerations
and helps the management in balancing cost and service objectives. The centre of gravity technique
is used for arriving at the best location by taking into account the locations of plants and markets,
the volume of goods moved, transportation costs, and more. In this technique, the first step is to
place locations on a coordinate system where the relative distances are correctly measured. It can
be done by placing the grid on the map
The centre of gravity is defined as the position where the weighted distance between the warehouse and
its supply and distribution locations is minimised, with the distance being weighted by the number of
tones provided or consumed. The initial stage in this technique is to plot the coordinates of the places.
The coordinate system’s origin and scale can be whatever you like, as long as the relative distances are
accurately represented. This is readily accomplished simply overlaying a grid on a regular map, and the
centre of gravity is computed using the following formula:
CX = ∑Dix.Wi / ∑Wi and CY = ∑Diy.Wi /∑Wi
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
 Locational Break-Even Analysis: The location break-even analysis uses the cost-volume analysis
for making an economic comparison between the location alternatives. Thereafter the organisation
identifies the fixed and variable costs by graphing them for each location, for determining the one
that provides the lowest cost. The location break-even analysis can be carried out mathematically
or graphically.
 Location Cost-Volume-Profit Analysis: The Cost-Volume-Profit (CVP) Analysis can be shown either
mathematically or graphically and it has three important steps:
i. For every location, alternatives determine the fixed and variable costs
ii. Plot the total-cost lines on the same graph for all the locations,
iii. Use the lines to determine which alternatives will have the highest and lowest total costs for
expected levels of output
The location Cost-Volume-Profit analysis is followed by four assumptions that must be followed while
using this method:
 Fixed costs are constant.
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UNIT 06: Facility Location JGI JAIN DEEMED-TO-BE UNIVERSIT Y
 Variable costs are linear

 The required level of output can be closely estimated.
 There is only one product involved.
Total cost = FC = v(Q)

Where, FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units
6.9.1 Factor Rating (including a numerical example)

The factor rating method is widely used as an analytical technique that includes a large variety of factors
in the analysis. It is specifically useful for service and industrial locations where the quantitative and
qualitative factors are merged and are assigned weights that are based on their relative importance.
Thereafter the weight-age score for each site is calculated using a preference matrix. The site that gets
the highest weighted score is selected as the best choice. The different steps that are included in the
factor rating method are:
 Listing of the relevant factors
 Assigning importance weight to each factor
 Develop a scale for each factor (using 0-1)
 Determine the score for each location using a factor scale
 Multiply scores by weights for each factor and total
 Select a location with a maximum total score
Rating
Sl. No. Location factor Factor rating
Location 1 Location 2
1. Facility utilisation 8 3 5
2. Total patient per month 5 4 3
3. Average time per emergency trip 6 4 5
4. Land and construction costs 3 1 2
5. Employee preferences 5 5 3
 Finding the best solution
Factor Location 1 Location 2

Sl. No. Location factor rating (Rating) Total (Rating) Total
(1) (2) = (1) .(2) (3) =(1) .(3)
1. Facility utilisation 8 3 24 5 40
2. Total patient per month 5 4 20 3 15
3. Average time per emergency trip 6 4 24 5 30
4. Land and construction coasts 3 1 3 2 6
5. Employee preferences 5 5 25 3 15
Total 96 Total 106
Location 2 has a score of 2 which is higher than that of location 1. Therefore, location 2, is the right
choice.
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6.9.2 Centroid Method (including a numerical example)

The centroid approach is used to find a single facility site that takes into account existing facilities, as
well as the distance between them and the amount of items that must be shipped between them. The
method is normally used for locating the distribution warehouses and it’s the simple way the method
works on the assumption that inbound and outbound transportation costs are equal. The centroid
method starts by placing the existing locations on a coordinate grid system and the main objective is to
establish relative distances between locations.
The centroid approach aids commercial entities in determining the placement of manufacturing
facilities and other production-related components of their operations. The main objective of this
method is to use mathematical formulations for minimising shipping costs, lowering shipping time, or
both concerning the profits. The centroid method uses formulas to calculate the coordinates of a two-
dimensional point that fits distance and volume requirements. The centroid method is determined by
the following equations:
X-coordinate of the centroid method = ∑i dix Qi /∑I Qi
Y-coordinate of the centroid method = ∑i diy Qi /∑I Qi
Where,
dix = x-coordinate of location i
diy = y-coordinate of location i
Qi = Quantity of goods moved to or from location i
North-South
New York (130, 130)

Chicago (30, 120)
120
Pittsburgh (90, 110)
90
60
30
Atlanta (60.40)
East-west
30 60 90 120 150
Arbitrary origin
Store Location Number of containers shipped per month

Chicago (30, 120) 2000
Pittsburgh (90, 110) 1000
New York (130, 130) 1000
Atlanta(60, 40) 2000
10
(30)(2000)+ (90)(1000)+ (130)(1000) + (60)(2000)

x- coordinate =
2000+1000+1000+2000
= 66.7
(120)(2000)+ (110)(1000)+ (130)(1000) + (40)(2000)

y- coordinate =
2000+1000+1000+2000
= 93.3
North-South
New York (130, 130)

Chicago (30, 120)
120
Pittsburgh (90, 110)
90 +
Center of gravity (66.7, 93.3)
60
30
Atlanta (60, 40)
East-West
30 60 90 120 150
Arbitrary origin
The location of the firm would be at:

X coordinate 66.7
Y coordinate 93.3
6.9.3 Linear Programming (including a numerical example)

Linear programming (LP) is a powerful framework that is used by business entities for solving
optimisation problems. The program allows the specification of a set of decision variables, a linear
objective, and a set of linear constraints on these variables.
Selecting the facility location, which is an optimisation problem for determining the sites for factories,
requires choosing the best option among potential sites. It has several constraints of demands that
must be serviced by the established facilities. The main objective is a challenge to select the appropriate
facility site that minimises costs and also caters to the demand of distances from the demand points to
the servicing facilities. There could be limited capacities for servicing which classifies the problems into
the different variants depending on their capacity. Let us look at an example
The capacitated facility location problem can be solved using a mathematical optimisation model
Let us take into account n customers i=1,2,…,
n and m sites for facilities j=1,2,… facilities j=1,2,…, m
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JGI JAIN DEEMED-TO-BE UNIVERSIT Y
Define continuous variables xij≥0 as the amount serviced from facility j to demand point i, and binary
variables yj=1 if a facility is established at location j, yj=0 otherwise. An integer-optimisation model for
the capacitated facility location problem can now be specified as follows:
m n m
minimize  fj y j    cij xij

j1 i1 j1
m
subjectto : 
j1
x ij di for i  1, ..., n
 xij M jy j for i  1, ..., m

j1
xij  di y j for i  1, ..., n, j  1, ..., m

xij  0 for i  1, ..., n; j 1, ..., m
yi 0, 1 for i  1, ..., m
The primary objective of the problem is to minimise the total facility activation costs and transportation
costs. According to the first limitation, each customer’s desire must be met. The second limitation limits
the capacity of each facility j: if facility j is activated, the capacity restriction can be observed; if it is not
activated, the demand satisfied by j is zero. The third constraint provides the variable upper bounds
which are not very significant and they provide a much tighter linear programming relaxation.
 One of the most crucial decisions for any business organisation is the selection of a facility location
since the selection decision has a major role to play in determining the operating cost, production
cost, and efficiency of the firm.
 Location decisions are an integral part of the strategic planning process of every organisation and
most of the organisations that are profit-oriented set up their location based on the profit potential
 Facility location is an important component of the supply chain function that has a major impact on
the efficiency of several activities involved with logistics.
 Selection of location decisions has a significant impact on the company’s long-term performance in
terms of productivity and capital
 The Alfred Weber theory was introduced on the subject of the location of plant and office in 1909
and it was initially published as a German essay and hereafter in 1929 it was translated into English
 Weber analysed other factors involved with the location of industries like rent and interest,
depreciation, and more elements that do not change and do not have an impact on the location of a
business unit in different regions.
 Weber believed that transportation costs are influenced by the distance to b covered and also by the
quantity to be transported.
 Selecting the right location for a plant contributes to the smooth and efficient working of the
organisation. Selection of plant location is a challenging job and many entrepreneurs commit
errors in selecting the wrong locations.
12
 Location decisions are an important aspect that involves strategic and logistical decision-making
for the production of products and they effectively contribute to the success of an enterprise.
 Selecting the appropriate facility location is of major importance in all types of business and it
involves several complexities while selecting the suitable location.
 The location of a new facility involves the efficiency of the flow of goods in the distribution system
through an efficient logistic facility.
 The selection of the facility location and allocation decisions are normally followed by a proper
facilities offered according to the customer’s demands for the location.
 Selecting the right warehouse location can make all the difference in the effectiveness, efficiency,
and profitability of the company since organisations are constantly looking for ways of being cost-
effective.
 Every business enterprise looks forward to newer markets and growth opportunities that prompt
them to look for new facility locations for their manufacturing units.
 The factor rating method is widely used as an analytical technique that includes a large variety of
factors in the analysis.
 The centroid approach is used to locate a single facility that takes into account the current facilities,
as well as the distance between them and the amount of commodities that must be shipped between
them.
 Linear programming (LP) is a powerful framework that is used by business entities for solving
optimisation problems. The program allows the specification of a set of decision variables, a linear
objective, and a set of linear constraints on these variables
6.9 GLOSSARY
 Facility location: This is a place where the various resources needed for manufacturing products
are brought together for the smooth working of the system
 Need for selecting of location: Is to look for an optimal location that aligns with the needs and
objectives of the organisation for minimising the costs and risks while maximising the opportunities
 Logistics Facilities: These are facilities that are involved with the movement of goods from raw
material sites to processing facilities, finished goods assembly plants, distribution centres, retailers,
and customers
 Warehouses: Are used for long-term storage to provide goods for future consumption and it has
become a core competency for business organisations.
 Factor rating method: This is a widely used analytical technique that includes a large variety of
factors in the analysis
 Centroid method: is used for locating a single facility location that takes into account the existing
facilities and it takes into consideration the distance between them and the number of goods to be
shipped between them
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6.10 CASE STUDY: RESEARCHING THE BEST OPTIMAL RESEARCH SOLUTION FOR
THEIR PROBLEMS
Case Objective
This case study aim to show how to research the best optimal research solution for their problems.
Nike Inc. is an important leader and a global manufacturer selling sports shoes, apparel, and equipment.
They have been able to retain their market position because of effective and efficient management
of operations management. Nike’s managers continuously work on improving their strategies and
approaches and they aim for maximising their profits and the best way to do it is by cutting costs.
However, in present times when prices and costs are so volatile and dependent on other factors, merely
cutting costs will not suffice.
Nike needs to streamline its whole process, reduce waste and at the same time improve quality. It
involves designing, manufacturing, delivering, and supporting products more efficiently and at lower
costs while systematically identifying and eliminating waste through the product life cycle. ‘It uses a
just-in-time system that gives internal and external customers what they want when they want it, and
at the lowest possible cost’.
During the 1990s Nike faced several problems with their manufacturing supplies. The problem was
investigated and it was found that the problem was a complex one. Nike was dependent on contracted
suppliers since they did not directly own any factories. The suppliers were spread across SE Asia the
people that the suppliers employed consisted majorly of people migrating from the rural farming
communities and they had no experience in the manufacturing processes. Since they were faced with a
lot of competition from the rival firms of Reebok, Puma, and Adidas, to make their supply chain better
they did not want to take any risks.
Nike decided to find ways through their operations research to find the best optimal research solution
for their problems. The company decided to implement a simple version of a linear cost model for
aggregate planning. Sometimes dual problem solutions may be easier than a primal solution; especially
when the number of decision variables is considered negligent or are in surplus. It helped in defining the
quantity to be optimised and in the process they went ahead with implementing the changes and it was
seen that the results of the implementation were successful. Since Nike implements a lot of innovative
approaches to handling business and they are they react to all shifting trends in its market.
The success story of Nike was highlighted in the journals and the report stated in the business
performance summary document that according to their FY10/11 the Sustainable Business, Nike has
shown tremendous results in eliminating waste, time loss, and material loss by implementing changes in
their processes throughout their factories. According to the report, once the changes were implemented,
the manufacturing units managed to cut defect rates by 50 % which was more than before. It stated
that the company improved on their delivery lead times by an average of 40% being faster. There was a
reduction in the introduction of new models by 30% and productivity increased from 10% to 20%.
Nike has taken the initiative of supporting the contracted factories by encouraging and providing them
with the resources and knowledge regarding the changing over to the new methods of working. They
have encouraged the transition by providing coaching, training, and technical help to the workforce
which has been hired by the factories and helped them to become specialised in their skills. They
successfully implemented the baseline methods and the new techniques which helped them with the
14
making of 11% of equipment, 57% of apparel, and 80% of footwear by the end of the year 2011 due to the
processes of lean.
Source: http://cmuscm.blogspot.com/2013/02/nike-strikes-gold
Questions
1. Why and how did Nike streamline its processes?

(Hint: Working at redesigning, initiating changes in processes, reducing waste, improving quality
and finding methods of lowering costs)
2. How did Nike take the initiative of implementing the new methods through operational research in
their factories across the globe?
(Hint: Implementing the dual problem solutions, Providing the coaching, training, guiding with new
technologies, skilled workforce and knowledge)

1. Explain the need for the selection of location.
2. What are the factors that affect the location of a plant according to Weber?
3. What are the mistakes committed while selecting a location?
4. What are the factors affecting location decisions?
5. Explain the importance of locating logistics facilities

1. Facility location is an important component of the supply chain function that has a major impact
on the efficiency of several activities involved with logistics. There are many aspects involved with
facility location like the location of manufacturing plants, availability of raw materials, assembly
locations, and other forms of distribution centres. The location of the facility is a place that is set up
for producing goods or services.
Selection of location decisions has a significant impact on the company’s long-term performance
in terms of productivity and capital. The need for selecting the location is to look for an optimal
location that aligns with the needs and objectives of the organisation for minimising the costs and
risks while maximising the opportunities. For the success of the business, it is necessary to be in the
right location for boosting the long-term performance and survival of the company. Selecting an
inappropriate location can lead the several problems like higher cost and investment, unfavourable
marketing and transportation, dissatisfied employees and consumers, interruptions of production
delays, wastages, bad quality, and more problems. The need for selection of location can arise due
to:
 Expansion of business or starting a new one
 Benefiting from a cost advantage
15
 Searching for a new location with additional facilities
 Availability of raw materials
 Mergers and acquisitions
 Talent attraction and retention
 Due to political or social changes
 Increase in product demand
 Availing tax benefits and other socio-economic reasons
Refer to Section Need for Selection of Location
2. The Alfred Weber theory was introduced on the subject of the location of plant and office in 1909
and it was initially published as a German essay and hereafter in 1929 it was translated into English.
According to Weber, the factors that affect the location of a plant can be classified into:
 Primary factors: These are also called the regional factors and they influence the distribution of
industrial units through different regions.
 Secondary factors: These are factors are also called the Agglomerative and deglomerating
factors and they relate to the redistribution of the industry from the original regions. The
agglomerating factors revolve around the advantages of the industries in a particular region
in the form of lesser cost of production, specialisation of labour, centralised purchases, uniform
production policies, and more. On the other hand, Deglomerating factors involve the different
negatives that are associated with the concentration of industries in a particular region min
form of congestion and housing issues, unhealthy competition, increase in local taxes, and more.
Weber analysed other factors involved with the location of industries like rent and interest,
depreciation, and more elements that do not change and do not have an impact on the location of
a business unit in different regions. He believed that the production costs differ from one region to
another region and the industries are situated in a place or region where there is the minimum cost
of production. Weber believed that two factors affect production regionally and they are:
 Transportation cost
 Labour costs
Weber believed that transportation costs are influenced by the distance to be covered and also by
the quantity to be transported. Normally the industries are located in places where labour, raw
material, and fuel are easy to obtain. He divided raw materials into two categories:
 Gross Raw Materials: These are materials that do not form part of the finished products but help
give a shape to the finished product like coal.
 Pure Raw Materials: These are materials that are directly converted into the finished product
like cotton, wool, iron ore, and more.
Weber believed that the industries requiring pure raw materials should be situated closer to
the consumption markets for saving on transportation costs. Weber introduced the following
mathematical equation to prove his point:
Material Index = Weight of Localised Gross Material/ Weight of finished commodity
Refer to Section Alfred Weber Location theory
3. Selecting the right location for a plant contributes to the smooth and efficient working of the
16
organisation. Selection of plant location is a challenging job and many entrepreneurs commit
errors in selecting the wrong locations. The most common errors are:
 Having an unprepared site selection team

 Lack of proper investigation concerning the different factors involved.
 Personal biases of likes and prejudices on part of important executives or stakeholders involved
in overriding certain facts.
 Lack of executive consensus and the reluctance of the executives to move from their established
traditional locations to new and better ones
 Incorrect search criteria without validating the overall operating objectives and criteria
 Narrowing the search area too rapidly to accelerate the process
 Failure to consider and validate all the issues concerning location factors, specifications, needs,
timing, and risks
 Improper labour market analysis of factors that should be quantified and interpreted during
the site selection process
 Failure to evaluate and understand community trends that affect most aspects of business
operations
 Poor understanding of environmental issues and risks, barriers to development, and other kinds
of variable construction costs
 Failure to capture and overlook available discretionary incentives
 No proper implementation of incentives and acceptance of overvaluation of incentives
Refer to Section Errors in Selection
4. Selecting the appropriate facility location is of major importance in all types of business and it
involves several complexities while selecting the suitable location. Several factors can influence the
choice of location that is:
 Proximity to the markets: The organisations prefer to locate their facilities close to their market
for being able to minimise their transportation costs and also be able to provide effective and
on-time delivery to their customers. It helps them in responding to the fluctuations in demand
and supply of materials
 Availability of skilled labour: It becomes challenging for organisations to find a suitable location
that has readily available appropriate skilled and unskilled labour. The processes can be made
simple by providing training to the workforce, simplifying processes, and also by moving the
importantly skilled workforce from one place to another.
 Availability of community amenities: The business entities prefer to be located in a place
that has a provision for an effective system of communication, community services, housing
facilities, shops, and other external amenities.
 Easy availability of resources: The organisations prefer a location which easy accessibility to
the suppliers and resources for minimising the costs and being readily available in the region.
 Availability of essential services: the location facility should have availability of electricity, fuel
and gas, communication, effective water drainage system, disposal of waste, and more services
that need to be considered whilst selecting a location.
17
 Room for expansion: There should be enough room for expansion if required while selecting the
appropriate location by the business enterprises. This is necessary for long-term survival that
would need changes and expansion.
 Safety requirements: Certain safety norms have to be considered for setting up specific plants
or manufacturing units that can present potential hazards to the surrounding neighbourhood
like certain chemical factories or nuclear power stations.
 Political, Socio-economic situation: The organisations must consider the political situation of
certain locations while taking their decisions. The socio-economic conditions of the region can
have a major impact on decisions related to facility location.
 Government regulations, grants, taxes, and import and export barriers: The organisations
need to consider the various government regulations and taxes involved before selecting their
facility location. It is beneficial for them to work on locations where the government offers
financial facilities in form of special grants, low-interest loans, reduced taxes, and other grants.
Refer to Section Factors Affecting Location Decisions
5. The location of a new facility involves the efficiency of the flow of goods in the distribution system
through an efficient logistic facility. In today’s competitive environment the efficiency involved with
the movement of goods from raw material sites to processing facilities, finished goods assembly
plants, distribution centres, retailers, and customers is very important. The logistic decisions are
involved with production costs, transportation costs, inventory carrying costs, warehousing, and
more factors involved with the final delivery of the product to the customers. The entire process
of logistics management starts from getting the raw materials from the supplier, moving towards
the production of goods in the factory; thereafter moving towards the distribution channels for
fulfilling the demand of the consumers for the finished products on time and cost-effectively. Every
organisation has various logistics demands and objectives, and each one has a different manner
of evaluating operational success. The distribution system is dependent on the latest technologies
and information systems for tracking shipments and transporting large quantities of goods and
services across the globe that is worth many millions of dollars.
The selection of the facility location and allocation decisions are normally followed by a proper
facilities offered according to the customer’s demands for the location. There are several qualitative
and quantitative models used for analysing the important issues that enable a facility location
model to become compatible with logistics and supply chain network requirements. The various
logistics facility location models concern decisions related to:
 Modes of transportation modes and capacities
 Setting up of transportation links
 Direct shipment of commodities from the facilities to customer locations
 The flow of material between facilities in form of semi-finished products being moved to other
plants for being transformed into end products
 Locating appropriate warehouses and providing multi-sourcing facilities between the
warehouses and customers
Refer to Section Locating Logistics Facilities
18
 https://www.iare.ac.in/sites/default/files/lecture_notes/IARE_OM_NOTES.pdf
 https://catalogimages.wiley.com/images/db/pdf/9781119497332.excerpt.pdf
 Discuss with the group the importance of selecting a facility location. Discuss the challenges and
problems associated with making a wrong selection of the facility.
19
UNIT
07 Facility Layout
Names of Sub-Units
Facility Layout, Factors Influencing Layout Decisions, Principles of Layout, and Computerised Relative
Allocation of Facilities Technique
Overview
The unit begins with an introduction to facility layout. Further, it discusses the factors influencing
layout decisions, principles of layout. The unit also explains the features of ideal layout.
Learning Objectives

 Explain the meaning and definition of facility layout
 Discuss types of layouts
 Understand the features of ideal layout
 Describe the Computerised Relative Allocation of Facilities Technique
Learning Outcomes

 Analyse the meaning of layouts
 Access types of layouts
 Describe the features of ideal layout and computerised relative allocation of facilities technique
JGI JAIN
 https://www.sciencedirect.com/science/article/pii/S1474667015359280
 https://www.rroij.com/open-access/facility-layout-planning-a-review.php?aid=54291
7.1 INTRODUCTION
The success of operations in an organisation depends on its facility layout design which is necessary
for smooth working and efficiency of operations that dictate the profitability of the company. Facility
location analysis should be carefully considered and planned during the product design and process
selection decisions for minimising material handling within the facility. A good layout acts as a
powerful tool for communicating and creating a positive image with the customers. Facility layouts
have extensive implications on the quality, productivity, and competitiveness of a business enterprise
since these decisions affect the efficiency of the workers, productivity, and the responsiveness of the
system for creating changes in product or service design, the volume of demand, and the product mix.
The facility layout design is critical for the efficiency of operations with minimising material handling
which reduces the mishandling or damaging of products, resulting in a reduction in costs and increasing
profits. The focus of facility layout is to improve the efficiency of the space and time management for
the workers moving from one location to the other and reducing the costs of operations.
The major objective of planning facility layout is maximising sales and profits where market opportunities
are best for them for gaining a competitive advantage. The facility layout planning should eliminate
bottlenecks in the facility to produce more efficiently run operations because the bottleneck results in
reducing the efficiency and effectiveness of the operations. Good facility layout should take into account
the improvement in interaction and communications between the workers and management that result
in improvement in the quality of the output. The other critical factor of the facility design process is to
facilitate reduction of cycle time and processing time that leads to a reduction in the waiting time for
the customers for their product orders. The facility layout design should ensure a smooth and steady
flow of production material, equipment, and manpower along with the safety of their workforce and not
put them at risk while performing their jobs.
7.2 LAYOUT
The physical arrangement of all resources within a facility refers to the layout of the place. Layout
design planning is a critical aspect involved in facilitating the efficient flow of material and customers
through the service or manufacturing system. It involves configuring and arranging the design of the
department within the facility and also the arrangement of other activity centres in each department.
There are many factors involved in designing the layout in terms of direct and indirect costs and other
operational costs. Therefore, it is essential to design a facility where the operations can be carried out
smoothly and cost-effectively. The movement of materials, utilisation of space, safety of the workers,
and more contribute to operational costs. Hence, the main objectives involved with a good layout are:
 Facilitate smooth movement of materials and information
 Identify and reduce bottlenecks and reduce machine interference
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UNIT 07: Facility Layout JGI JAIN
 Better working conditions for the workforce

 Efficiency in the utilisation of equipment and labour
 Make use of available space effectively and efficiently
Organisations need to incorporate various objectives early in the process of layout designing to find
effective solutions for various factors involved with operational management. There should be more on
material handling capabilities and flexibility with the amount of space in the layout.
7.2.1 Meaning and Definition

An effective and good layout provides convenience, safety, comfort, efficiency, and profits for the
company and the success of the business enterprise depends on the location and a good facility layout.
An effective layout contributes to the placement of different machines, resources and production
facilities located in the organisation. The efficiency of the place and system depends on how well the
various amenities and production facilities are located.
In the words of Moore, “Plant or Facility layout is the act of planning an optimum arrangement of
facilities, including personnel, operating equipment, storage space, material handling equipment and
all other supporting services along with the design of the best structure to contain these facilities.”
Poor layout design leads to major losses in regards to wastage and re-working, more efforts for material
handling, badly planned space utilisation, low morale of employees, and more reasons. It is essential
to study and analyse an effective layout design for a plant during the initial planning for growth,
diversification, and development of the plant facility and smooth working of the system.
In the words of James Lundy, “Layout identically involves the allocation of space and the arrangement
of equipment in such a manner that overall operating costs are minimised.”
7.2.2 Objectives of a Good Layout

An effective facility layout should be able to provide ideal coordination between raw material, equipment,
manpower, and final product at minimal cost under a safe and comfortable environment. The focus is
to provide optimum space for the organisation of equipment and facilitate the movement of goods and
create a safe and comfortable work environment.
According to Weiss and Gershon, “Facility layout must be considered very carefully because we do not
want to constantly redesign the facility.” They believed that, “Some of the goals in designing the facility
are to ensure a minimum amount of materials handling, to avoid bottlenecks, to minimise machine
interference, to ensure high employee morale and safety, and to ensure flexibility. Essentially, there are
two distinct types of layout. Product layout is synonymous with the assembly line and is oriented towards
the products that are being made. Process layout is oriented around the processes that are used to
make the products. Generally, product layout is applicable for high-volume repetitive operations, while
process layout is applicable for low-volume custom-made goods.” The objectives of a good layout are:
 Minimum material handling.
 To promote order in production towards a single objective.
 Elimination of bottlenecks.
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JGI JAIN
 Shorter production cycles and reduction in production delays.

 Improved and better-quality control.
 To increase the production capacity of the organisation.
 Facilitate extension or changes in the layout for accommodating new product line or upgradation
of technology.
 Efficient utilisation of labour.
 High employee morale.
 To promote the safety of the plant as well as its workers.
7.3 FACTORS INFLUENCING LAYOUT DECISIONS

Facility layout designing and implementation are influenced by several factors that vary from industry
to industry influencing the designing of the facility layout. The facility layout design needs to take into
account the overall objectives set by the organisation and management policies that affect the future
direction of the organisation. The designing of the layout accounts for optimum space needed for
the allocation of process and technology with proper safety measures to avoid mishaps. Factors that
influence plant layout decisions are:
1. Management policies: Plant layout decisions are implemented according to various managerial
policies and plans relating to ease of future expansion, size of the plant or facility, future volume of
production, employee facilities, integration of production processes, and other policies related to
sales and marketing, purchasing policies and more.
2. Plant location: The location of the plant or manufacturing unit has a major influence on the layout
of the plant. The layout design is affected by the topography, climatic conditions, size, and shape of
the location for the flow of material and work in and out of the space.
3. Nature of the product: The layout is influenced by the natural product or commodity to be produced.
The product layout is suitable for process industries where the method of production is carried out
in a sequence. Heavy and bulky items require a different kind of layout in comparison to small and
lighter products.
4. Volume of production: The layouts are defined based on the volume of production and system of
production classified as:
 Job production: Where unique, specific, and non-standardised products are produced according
to the orders received from the customers.
 Mass production: Where there is continuous production of standardised products on a large
scale.
 Batch production: Here, similar products are produced in batches based on the demand of
customers or of expected demand for products.
5. Availability of floor space: An important decisive factor in adopting a particular mode of layout is
the floor space. Process layout requires larger space in comparison to product layout. The limitation
of space leads to adopting product layout. On the other hand, more space may lead to the adoption
of process layouts.
4
6. Nature of manufacturing process: The type of manufacturing process undertaken by a business

enterprise will greatly affect the type of layout to be undertaken. In the case of the intermittent
type of production, functional layout is suitable and the synthetic type of production line layout is
preferred.
7. Service facilities for employees: The layout should provide adequate services for the comforts
and welfare of the employees. It should have proper provision for restrooms, drinking water, and
a lavatory. There should be sufficient space for the free movement of workers. The layout should
enable the safety of workers, following Occupational Safety and Health Association guidelines and
other legal restrictions.
7.4 PRINCIPLES OF LAYOUT

Good layouts have to be deliberately and carefully planned and worked out so that they provide
maximum benefits and satisfaction to the people involved in a form of senior management, shareholders,
employees, customers, and more. The focus of a good layout is to eliminate the bottlenecks and points of
congestion for faster movement of inventory, raw materials, and semi-finished parts from one point to
another. There needs to be proper utilisation of space and it should provide convenience to the workers.
It is necessary to keep the following principles in mind while designing a good facility layout. Figure 1
shows the principles of layout.
Principle of minimum movement
Principle of the utilisation of space
Principle of flexibility
Principle of interdependence and overall integration
Principle of safety
Principle of Smooth flow
Principle of supervision and employee satisfaction
Figure 1: Principles of Layout
Let us understand these principles in detail.

 Principle of minimum movement: There should be minimum distance movement for material and
labour for saving cost and time of transportation and material handling.
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JGI JAIN
 Principle of the utilisation of space: The space should be well utilised where there is the minimum
spacing between the machines and movement of people for carrying out all forms of tasks.
 Principle of flexibility: The layout should provide enough flexibility and be adaptable to changes
required for expansion or other forms of technological advancement.
 Principle of interdependence and overall integration: The various departments and units need to
be located near each other for interdependent operations and processes for minimising movement
of product. The various facilities need to be combined and integrated into a single operating unit for
reducing the cost of production.
 Principle of safety: The comfort and safety of the workers should be provided through an inbuilt
provision in the design of the layout.
 Principle of Smooth flow: The design of the facility needs to have a proper plan for reducing work
bottlenecks and for facilitating an uninterrupted flow of work throughout the facility.
 Principle of supervision and employee satisfaction: A good layout should facilitate effective
supervision of the workers through free movement and be able to boost the morale of the workforce
by providing them maximum satisfaction.
7.5 TYPES OF LAYOUT

The formats of a facility layout are established by the general pattern of workflow and the workstations
are arranged accordingly within the facility. The layouts are designed in a way for achieving the right
quantity and quality of output cost-effectively.
The different layout formats can be classified as:

 Process layout
 Product layout
 Fixed-position layout
 Hybrid layout
 Cellular layout
Let us discuss the types of layout in detail.
7.5.1 Process Layout

In process layout, the operations of similar nature are grouped to ensure maximum utilisation of
resources and facilities; the workstations are grouped according to their specialisation. Process
layout is also referred to as job-shop layout, where similar equipment or functions are grouped. The
organisations arrange their facilities with all drill machines located in one area, the lathe machines in
another area, and all milling machines in another area. This form of operation is very apt for the job
and a batch form of manufacturing system where a large range of products is manufactured in smaller
quantities. The advantages of process layout are:
6
Figure 2 shows the work travels to dedicated process centre.
Milling
Assembly and Test Grinding
Drilling Plating
Figure 2: Work Travels through Process Centre

 Flexibility in the use of equipment
 Flexibility in the pace of operations does not get affected by changes in the market demand pattern,
product mix, or internal change in marketing strategy
 Requires smaller investment
 Is not affected by machine breakdown or equipment failure
 Higher utilisation of resources
 Lesser interdependence of operations and requires effective specialised supervision
 Eliminates duplication of machines
 Setting up of equipment and maintenance costs are low
 Ensures high morale of workers because of the diversity of tasks
7.5.2 Product Layout

In product or line layout, the resources and activities are arranged according to the processing needs
of a single product, rather than being shared among different types of products. In product layout, the
design is made according to the sequence involved with the manufacturing process, and the materials
get transformed into products through a sequence of integrated operations. The flow of the product has
always been in a straight line or “L, S, or U” line-shaped, and the product does not backtrack towards
the beginning of the line. Product layout is often referred to an assembly line, production line, or flow-
line layout. The product layout design is effective when the design of the product is standardised with a
high demand for the product. The process of the product operations is standardised and repetitive and
the jobs are divided into a series of standard tasks that allow specialisation of labour and equipment.
The use of automatic conveyor belts is done in a straight-line arrangement of layout for handling the
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JGI JAIN
resources and materials. In product layout, operations take place in predetermined order and it is very
easy to decide where to locate different resource centres. The advantages of product layout are:
 High rate of output because the resources are dedicated to only a specific product.
 Lower inventories with the items moving from one operation to the next without interruption.
 High utilisation of both labour and machines due to simplified flow of work; less time is lost for
unproductive activities.
 There is a division of labour and the jobs can be divided into various standard tasks that can be
carried out by unskilled labour that can be trained.
 Reduced material handling costs with simplified production planning and control.
 Simplified flow of product through the system due to the placement of machines.
 Optimum floor space with less congestion.
 Low cost per manufacturing unit and labour procurement.
7.5.3 Fixed Position Layout

In fixed-position layout, the product stays stationary and the machines, workers, and materials keep on
changing position as required. Many products are very heavy or large and as such are difficult to move,
or can be moved at a high cost, such as aircraft, ships, locomotives, or tanks. The labour, equipment,
and machines are moved to a place where the various manufacturing activities take place. The fixed-
position layout is also referred to as project type layout and it minimises the product movement and the
demand for the product is relatively low. In a fixed-position layout, the focus is normally on the sequence
and schedule of activities, and availability of space. In this type of layout, tasks are arranged according
to their process and sequence requirement, and materials and machines are arranged and scheduled
accordingly. The advantages of fixed-position layout are:
 Cost is minimised and the chance of damage is reduced since there is continuity of the assigned
tasks and the product stays stationary and does not have to be moved from one production centre
to another.
 Requires low investment.
7.5.4 Cellular Layout

A cellular layout is a type of layout where machines are grouped into cells according to the process
requirements for a set of similar items that require similar processing. These groups are called cells and
in cellular layout, the equipment layout is configured to support cellular manufacturing. The processes
are grouped using group technology that identifies parts having similar design characteristics (size,
shape, and function) and similar process characteristics. The workers in cellular layouts are trained
for operating the equipment in the cell and are responsible for the output. The advantages of cellular
layout are:
 Improvement in the flow of material with a reduction in the distance for the inventory.
 Reduction of costs because the processing time is faster, less material handling and work-in-process
inventory, and reduced setup time.
8
 Offers increased flexibility because it involves the production of small batches.

 The cellular layout is suitable for batch manufacturing.
 The workers are responsible for their cell’s output and there is more autonomy and job ownership.
7.5.5 Hybrid Layout

The hybrid layout is a combination of process layout, product layout, and fixed-position layout and
its main focus is to take advantage of the good attributes of the process, product, and fixed layout,
while at the same time avoiding their shortcomings. In hybrid layout, a part of the operations is based
on process layout and part on product layout. Several manufacturing organisations are moving away
from pure process layout for taking advantage of low per-unit production costs derived from product
layout. The advantages of hybrid layout are:
 High utilisation contributes to low per-unit production cost.
 Workers have high morale due to various repetitive and simple tasks that are linked with skilled
activities that give them a feeling of accomplishment.
 The groups in the hybrid layout work together to reduce the total number of workstations and the
need to move products from workstation to workstation.
 There is low material handling costs and in-process inventory.
7.5.6 Service Facility Layout

Theservicefacilitylayoutisdesignedinamannerthatbringstogetherthecustomerandtheorganisation’s
services for the convenience of the customers. These facilities are designed with features like the easy
entrance to the facilities from freeways and other kinds of busy thoroughfares with well-organised
parking lots, well-marked entries and exits, powered doors, escalators and lobbies for customers, and
more. A good example of a service facility layout is the banks where the layouts are designed around
customers since these service facility layouts give importance to customer convenience. The service
layouts follow the conventional layouts as required.
7.5.7 Comparison of Product and Process Layouts

The product layout and process layout are two important ways to design the layout of the facility
depending on various factors involved with the manufacturing of different kinds of products. The
important differences between product layout and process layout are:
 The machines are set up systematically in the product layout, where the output of one machine is the
input of another machine. On the other hand, in process layout, the machines are set up in different
locations and a variety of products can be produced by changing the order of the processes.
 The product layout design is suitable for continuous and large-scale production of similar goods.
Whereas process layout is suitable when small scale and altered goods are to be produced, following
the customer’s choice and order.
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JGI JAIN
 The product layout has lower material handling costs since the output of one machine is the input
of another machine and it does not require any transportation. In process layout, the output of one
machine is the input of another machine, and transportation is required.
 In product layout, inventory is not required for continuing production, whereas in the process
layout, large inventories are required because of discontinuous production.
 In product layout, a small space is needed that is fully utilised because machines are kept one after
another in order. In process layout, large spaces or different locations are required to set up different
departments
 In product layout, the workers do not require any special skills and they can work on any machine.
In process layout, the workers require special skills to operate specific machines.
 The product layout requires minimum supervision and inspection during the sequence of operations.
In process layout, supervision and inspection are carried out several times during the sequence of
operations.
 The processes in product layout are rigid and cannot be expanded or shortened and the process gets
disrupted with the breakdown of the machines due to interconnected systems. In process layout,
there is easy and flexible changing of processes and the breakdown of machines does not affect the
final output
 The product layout is suitable for mass production with less job variety, whereas the process layout
is suitable for moderate production with more job variety.
 The production cost in product layout involves high fixed cost and low variable cost. In the process
layout, there are low fixed costs and high variable costs.
7.5.8 Features of other Layouts

Apart from the above-mentioned layouts, other layouts are very useful for use in various service
organisations like warehouses, retail layouts, storage layouts, and office layouts. Every layout has
certain advantages and limitations and layouts are much simpler for small retail establishments that
take into consideration the presence of customers and the opportunities to influence sales and attitudes
of the customers. Retail chains prefer the advantage of standardised layouts that makes the customers
more familiar with the store during shopping.
In warehouses and the store layout, the items that are ordered more frequently are placed close together
near the entrance of the facility, while those ordered less frequently remain in the rear of the facility.
The layouts for offices are designed in a manner that optimises the physical transfer of information and
there can be better communication using low-rise partitions and glass walls.
Organisations today look towards building smaller and more compact facilities with more automation
and robotics, which has a direct impact on the facility layout. In these situations, the machines are
placed closer to each other for reducing material handling. With the advancement of technology, there
is an increase in automated material handling systems that include automated storage and retrieval
systems (AS/AR) and automated guided vehicles (AGVs). The firms have a preference toward the use
of U-shaped lines that allow workers, supervisors, and material handlers to have a total view of the
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entire line and travel efficiently between the workstations. It has fewer walls and partitions in the
layout to avoid any form of obstructions. With the introduction of lean manufacturing and just-in-time
production, lesser space is required for storage of inventory throughout the layout.
7.6 FEATURES OF IDEAL LAYOUT

The ideal layout provides the framework and master plan required for arranging the departments,
machines, people, and more for a smooth and efficient workflow. The facility layout is needed for
carrying out the operations of the organisation. The characteristics of an ideal layout include:
1. Economising handling with minimum movement: The ideal layout should be cost-effective in
regards to handling the resources, work-in-progress, and finished stock with lesser handling of the
material by making use of conveyors, truck lifts, chutes, and hoists. The layout should be designed
for the minimum movement of people and equipment.
2. Efficient space utilisation: The space is used in an optimum manner for arranging the equipment,
machines, service points, and more where there is no wastage of space.
3. Provide accessibility and flexibility: The ideal layout facility needs to have adequate space between
equipment for manufacturing, maintenance, and servicing that should be available with no
obstructions. This requires easy accessibility of raw materials, machines, and the workforce and
their movement from one place to another without a problem. The layout should be designed in a
manner such that there is flexibility to adapt to changes in methods and processes of production.
4. Effective visibility and preservation of materials and equipment: The ideal layout should have
effective visibility so that there are no problems in terms of oversight and control. The layout must
take care of the safety of the workers and safeguard against fire, theft, and general deterioration
of equipment and materials. There should be proper and secure storage facilities with a system to
store flammable goods separately and safely.
5. Reduction in discomfort: The ideal layout should cater to the comfort of the people and the workers
by providing adequate lighting and ventilation and limiting the impact of heat, noise, vibrations,
and dust.
6. Ensures co-ordination: The ideal facility layout has provisions for effective coordination of tasks
between various departments, equipment, machines, and the workforce.
7. Adherence to statutory regulations: An ideal layout should adhere to the regulations and guidelines
required by the Factories Act for the wellbeing, safety, and welfare of employees to avoid any kind of
accidents or mishaps that result in absenteeism because of illness leading to decreased productivity.
7.7 COMPUTERISED RELATIVE ALLOCATION OF FACILITIES TECHNIQUE

Computerised Relative Allocation of Facilities Technique (CRAFT) is an improvement algorithm which
was developed by Armour and Buffa and is a significant tool and technique used for solving problems
related to layout designing in the manufacturing system. It provides the algorithm for a sequence
needed for the selection of machines and for minimising the total material handling and transportation
costs. The aim of the Computerised Relative Allocation of Facilities Technique (CRAFT) is to design a new
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layout based on certain defined design criteria and area limitations with one or multiple objectives. It
starts with the initial layout and thereafter it improves the layout by interchanging the department
pairwise for reducing the transportation costs. Normally, the result produced by craft may not
be optimum in terms of minimum cost of transportation but the result will be good and close to the
optimum requirement.
The requirements for Computerised Relative Allocation of Facilities Technique (CRAFT) are:
 Initial layout
 Flow data
 Cost per unit distance
 Total number of departments
 Fixed departments
 Area of departments
For designing the area of a new layout, there are many inputs needed in the form of distance matrices,
cost matrices, and flow matrices.
 The success of operations for an organisation depends on its facility layout design which is necessary
for smooth working and efficiency of operations that dictate the profitability of the company.
 The major objective of planning facility layout is maximising sales and profits where market
opportunities are best for gaining a competitive advantage.
 The other critical factor of the facility design process is to facilitate reduction of cycle time and
processing time that leads to a reduction in the waiting time for the customers for their product
orders.
 The physical arrangement of all resources within a facility refers to the layout of the place. Layout
design planning is a critical aspect involved in facilitating the efficient flow of material and
customers through the service or manufacturing system.
 Organisations need to incorporate various objectives early in the process of layout designing to find
effective solutions for various factors involved in operational management.
 An effective and good layout provides convenience, safety, comfort, efficiency, and profits for the
company; and the success of the business enterprise depends on the location and a good facility
layout.
 Pool layout design leads to major losses in regards to wastage and re-working, more efforts for
material handling, badly planned space utilisation, low morale of employees, and so on.
 An effective facility layout should be able to provide ideal coordination between raw material,
equipment, manpower, and final product at minimal cost under a safe and comfortable environment.
 Facility layout designing and implementation are influenced by several factors that vary from
industry to industry, influencing the designing of the facility layout.
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 Good layouts have to be deliberately and carefully planned and worked out so that they provide
maximum benefits and satisfaction to the people involved in form of senior management,
shareholders, employees, customers, and others.
 The formats of a facility layout are established by the general pattern of workflow and the
workstations are arranged accordingly within the facility.
 Organisations today look towards building smaller and more compact facilities with more
automation and robotics which has a direct impact on the facility layout. In these situations, the
machines are placed closer to each other for reducing material handling.
 The ideal layout provides the framework and master plan required for arranging the departments,
machines, people, and more for a smooth and efficient workflow.
7.9 GLOSSARY
 Layout: This is the physical arrangement of all resources of the organisation within a facility.
 Process layout: In process layout, the operations of similar nature are grouped to ensure maximum
utilisation of resources and facilities, the workstations are grouped according to their specialisation.
 Product layout: In the product, the resources and activities are arranged according to the processing
needs of a single product, rather than shared among different types of products.
 Fixed-position layout: In a fixed-position layout, the product stays stationary and the machines,
workers, and materials keep on changing position as required.
 Cellular layout: A cellular layout is a type of layout where machines are grouped into cells according
to the process requirements for a set of similar items that require similar processing.
 Hybrid layout: It is a combination of process layout, product layout, and fixed-position layout and
its main focus is to take advantage of the good attributes of the process, product, and fixed layout
and at the same time avoid their shortcomings.
 Computerised Relative Allocation of Facilities Technique (CRAFT): This is an improvement
algorithm developed as a significant tool and technique for solving problems related to layout
designing in the manufacturing system.
7.10 CASE STUDY: RED MANUFACTURING COMPANY
Case Objective
The primary purpose of this case study is improving efficiency in layout of the warehouse.
The Red Manufacturing Company is into the manufacturing of spring-loaded replacement spikes for
power rakes. They package the products in small individual containers due to the small size of the item
that is then packed into a larger carton of 25 counts for shipping. They have the packing operation for
this unit on the third floor of a multi-story building. Once the packaging is completed, the shipping
cartons are placed on semi-live skids and taken to the second floor using an elevator. The same elevator
is also used to move other materials to various floors in the plant for processing. On the second floor,
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packages are sorted according to the distribution factors. After sorting, all packages are placed on a
semi-live skid and moved to the first floor via the same elevator. On the first floor, the packages are
stored awaiting shipment (picked up by the assigned truck line).
The company aims to redesign its current facility by integrating all of its production and warehousing
activities in a new way, to reduce its logistics costs and time required. They want efficient methods of
elimination of duplicated operations within the warehouse, allowing an increase in the efficiency and
reducing the workforce. They are looking for efficiency in their packaging, picking of items, reduction
of buffer transfers, and improving their operations. The main goal of the company is to achieve a 25%
logistic cost reduction, while the payback of the investment should not be greater than two and a half
years.
Questions
1. What is the business of Red Manufacturing Company manufacturing?
(Hint: Spring-loaded replacement spikes for power rakes.)
2. How can they bring down the costs of their packaging operations?
(Hint: Improve on the process of packaging, movement of goods.)
3. Explain how the movement of packages is improved in the system?
(Hint: The boxes should be packed once and there should be elimination of redundant processes.)
4. What are the alternative solutions that can be effective in the systems of operations in the warehouse?
(Hint: The number of elevators should be increased for the process, improvements, and efficiency in
the logistic operations and packaging.)

1. Why is layout designing considered a critical factor in the success of the organisation?
2. What are the objectives of a good layout facility?
3. What are the factors that influence layout decisions?
4. What is the cellular layout?
5. What is the comparison between product and process layouts?

1. The physical arrangement of all resources within a facility refers to the layout of the place. Refer to
Section Layout
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2. An effective facility layout should be able to provide ideal coordination between raw material,
equipment, manpower, and final product at minimal cost under a safe and comfortable environment.
Refer to Section Layout
3. Facility layout designing and implementation are influenced by several factors that vary from
industry to industry influencing facility layout. Refer to Section Factors influencing Layout Decisions
4. A cellular layout is a type of layout where machines are grouped into cells according to the process
requirements for a set of similar items that require similar processing. Refer to Section Types of
Layout
5. The product layout and process are two important ways to design the layout of the facility depending
on various factors involved with the manufacturing of different kinds of products. Refer to Section
Types of Layout
 https://www.bdc.ca/en/articles-tools/blog/facility-layout-what-is-it-why-should-care
 https://hmhub-27-8.b-cdn.net/wp-content/uploads/2020/02/Unit-5-FACILITIES-LAYOUT-AND-
MATERIALS-HANDLING.pdf
 Discuss with the group: what are the factors that need to be considered for designing a facility
layout for manufacturing an automobile product and why?
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UNIT
08 Capacity Management
Names of Sub-Units
Introduction to Capacity Management: Concept of Capacity Management, Capacity, Capacity

Planning Concepts, External Sources of Operations and Supply Capacity, Planning Service Capacity,
Capacity Requirements Planning, Types of Capacity, Measurement of Capacity, Capacity Planning
using Overall Factors(CPOF)
Overview
The unit begins by explaining the meaning of capacity management. Further, it discusses the concept
of capacity management and definition of capacity. This unit will also shed light on the external
sources of operations and supply capacity. In the end, you will study the types of capacity.
Learning Objectives

 Explain the meaning of capacity management
 Describe the nature of capacity planning concepts
 Discuss determining capacity requirements
 State the importance of capacity planning using overall factors (CPOF)
 Explain the measurement of capacity
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Learning Outcomes

 Assess the importance of capacity management
 Appraise the tools and capacity planning concepts
 Evaluate the application of economies and diseconomies of scale
 Analyse the planning service capacity
 Examine the measurement of capacity
 https://www.investopedia.com/terms/c/capacity-management.asp
 https://www.marketing91.com/capacity-management/
8.1 INTRODUCTION
Capacity management is a strategy used by organisations to maximise production efficiency as a result
of total market demand for a product or service. Its objectives include locating and resolving bottlenecks
in the manufacturing process, as well as enhancing production speed by maximising available resources
and minimising time and capacity constraints.
It helps in overcoming challenges to meet short term and mid-term customer demand, manage supply
chain operations and formulate long term organisational plans. To accomplish so, an organisation
needs to assess the availability of its resources to ensure that the production output is met within the
time frame.
There is a clear link between product design, capacity and process choices.
 The value offered to the client is determined by product design.
 The value determines the market size, the market size defines volumes and hence capacity; and
 The capacity leads to the process.
The main goal of capacity planning should be to maximise the value supplied to the client. This is
reflected in lowering production costs, delivering products and services on schedule, and guaranteeing
that the products are of the greatest quality.
In the operations function, capacity planning has evolved into a strategic instrument. It informs our
long-term decisions on capacity, location and layout. It also aids in the management of supply and
demand, which influences how a company uses its resources and facilities in the near term.
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8.2 CAPACITY
Ability to achieve, store and produce is called capacity. For an organisation, capacity refers to a system’s
ability to deliver the output within a specified time frame. In operations management, capacity means
an amount of the input resources available to produce relative output over a period of time.
It is important to understand the distinction between theoretical and normal capability. Theoretical
capacity is the maximum amount of work that can be done in a short period of time under perfect
conditions. There are no equipment failures, maintenance requirements, setup times, bottlenecks, or
worker mistakes under these conditions. To an operations manager, however, this definition of capacity
may be completely useless. Since no equipment runs 24 hours a day, seven days a week, adjustments
must be made for maintenance, breakdowns, set-up times, and mistakes, among other things. As a
result, capacity is defined as the amount of production that can be estimated under typical conditions.
8.2.1 Definition of Capacity

When plants and equipment are run for an average amount of time to create a regular mix of output,
normal capacity indicates the maximum producible output. It is fairly uncommon for a facility to run
at more than 100% capacity as a result of this method of determining capacity. Capacity is stated
mathematically as:
(Maximum production rate/Hour) x (Number of hours worked/Period) = Capacity.
Where,
Number of units produced divided by time = production rate. The number or type of equipment a firm
has – the intensity with which this equipment is used – the production efficiency, the nature and the
extent of the supply chain; the product mix to be produced, demand levels and distribution capabilities
determine the firm’s capacity to produce, whether measured in output or input.
8.3 CAPACITY PLANNING CONCEPTS

Capacity planning is a method to determine the production capacity needed to meet the organisation’s
changing product demand. There are two terms extensively used in the context of capacity planning,
which are design capacity and effective capacity.
Demand for capacity is variable because it is based on changes in the output of an existing product
or the production of a new product. By introducing new materials, machinery, techniques and labour
force, capacity can be increased.
Capacity planning is used to determine the types of equipment and labour requirements, as well as
when they are required. In simple words, it is the ability to produce, store and achieve, as well as the
process of determining the best utilisation of resources.
The way in which companies or teams match personnel with the demands of a project is referred to as
capacity planning. Capacity is the maximum amount of work that can be completed in a given amount
of time. It is usually assessed in terms of the amount of work completed by personnel. In addition,
planning entails allocating work hours to a specific quantity of labour.
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For example, if a company has 20 employees who each work 20 hours per week, the company’s weekly
working capacity is 400. Without factoring in overtime, this means the company can handle a maximum
400 hours a week
Possible improvements from CP
Through put On - Time Delivery
CAPACITY Resource
Production Cost
PLANNING Utilisation
Fire fighting WIP & Lead Times

.
Given changes in product mix, equipment maintenance, programming and operational challenges,
labour concerns, and so on, it refers to the best level of output. It is frequently smaller than the entire
capacity of the design.
It is, in fact, the degree of output that is attained. Because of machine failures, workforce absenteeism,
inconsistency in raw material supply, abnormal delays in equipment delivery and power outages, it
cannot be more than sufficient capacity.
8.3.1 Economies and Diseconomies of Scale
Economies of Scale
Economies of scale can be defined as the long-term cost advantages that an organisation can achieve
by expanding its production. As a result, the benefits of large-scale expansion are known as economies
of scale. The lower average cost per unit achieves the cost advantage.
It is a long-term concept that is realised when an organisation’s sales increase. Because the lower
production costs, the organisation can save more and invest it in purchasing a large quantity of raw
materials, which can also be obtained at a discount.
When we talk about a company’s production size, we frequently hear that large-scale manufacturing
helps to lower production costs. Economies of scale relate to the lower costs per unit that result from a
higher overall production. This happens because the per-item production costs decrease with respective
to the total amount of products being created.
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Types of economies of scale
There are two types of economies of scale:

1. Internal economies of scale.
2. External economies of scale.
Internal Economies of Scale
These arise from the expansion of the plant size of the firm. These are specific to the individual firm.
These are unit cost advantages of expanding the scale of production in the long run. When firm accrues
economies of production it increases the output which leads to a drop in the cost of production. These
arise due to factors like entrepreneurial efficiency, talents of the management team, type of machinery,
etc. These economies arise within the firm and help the firm only.
Types of Internal Economies of Scale
Figure 1 shows the types of economies of scale
BULK - BUYING ECONOMIES
TECHNICAL ECONOMIES
TYPES OF
INTERNAL
ECONOMIES OF FINANCIAL ECONOMIES
SCALE
MARKETING ECONOMIES
MANAGERIAL ECONOMIES
Figure 1: Types of Economies of Scale
The different types of internal economies of scale in detail:

1. Bulk-buying economies: When a firm grows in size then it requires large quantities of production
input such as raw material. As the order size increases, the firm acquires the bargaining power over
suppliers. Then firm is able to purchase the material at discounted price, which results in lower cost
of production.
2. Technical economies: When a firm increases its scale of production, then it will be able to use
advanced machinery or better techniques for production purposes.
For example, the firm can use mass production techniques that can provide more efficiency for
production.
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3. Financial economies: Sometimes small firms are frequently seen as riskier than larger companies
with a proven track record. As a result, smaller businesses have a difficult time obtaining financing
at reasonable interest rates; larger businesses have an easier time finding potential lenders to
acquire funds at cheaper rates. This money is then used to grow the production scale, resulting in
low total costs on average.
4. Marketing economies: A firm’s marketing function incurs expenditures, such as the cost involved in
advertising and promotion, hiring sales agents and so on. Many of these expenses are fixed, and as
the company grows, it may spread marketing costs across a wider range of items. This results into
low average total cost.
5. Managerial economies: When a firm grows, managerial activities become more specialised. For
example, a larger firm divides its management into smaller departments that are specialised in
specific areas of business.
External Economies of Scale
These economies arise due to the expansion of the entire industry and benefit each member firm of the
industry.
Diseconomies of Scale
Diseconomies of scale, on the other hand, arise when output grows to the point that the cost per unit
begins to rise. Diseconomies of scales occur in different ways and due to the following reasons:
a. Ineffective leadership or management.
b. Issues with communication throughout the organisation.
c. As expansion can be overwhelming as motivation and morale have dwindled.
d. Changes can be perplexing if solid processes are not put in place.
e. If the company expands too quickly, it will lose its sense of direction.
f. Ineffective logistics or excessive inventory.
Examples of diseconomies of scale can be found in businesses that can expand and introduce new
systems. When new technology is introduced to a company that has never used that piece of technology
before, it can take a long time to train and install and can slow down business. For example, if a team
of 100 typewriters decides to switch to personal computers in the next year, it will take a long time to
properly introduce and train the employees on the concept of personal computers.
Types of diseconomies of scale
Diseconomies of scale are of two types:
1. Internal diseconomies of scale
2. External diseconomies of scale
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 Internal diseconomies of scale: These arise due to the growth of the firm itself. Therefore, it results
in a firm’s output and an increase in the long-run average cost.
Types of internal diseconomies of scale
Different types of diseconomies of scale in detail:

1. Managerial inefficiency: As a firm expands its production capacity, it also extends its control and
planning capabilities. This needs more administrative efficiency. Managerial responsibilities are
frequently assigned to lower level staff due to the difficulty of managing a larger organisation.
Because these individuals may lack the necessary experience to complete the task, low production
at a greater cost may follow.
2. Labour inefficiency: As a firm expands its production capacity, work areas become crowded,
which in turn leaves little space for each worker to work efficiently.
 External diseconomies of scale: These diseconomies arise due to a rise in the number of firms in an
industry, which leads to over-production.
Some of the factors of external diseconomies of scale are:
a. The demand for raw materials rises as the number of companies in a given industry grows. As
a result, raw material costs rise, raising the cost of production in the industry.
b. The demand for skilled labour increases, as the number of companies in a given industry grows.
Thus, an increase in the wages for skilled labour leads to an increase in the cost of production.
c. Increase in the number of companies in the industry leads to the problem of waste disposal.
Then, firms need to employ expensive waste disposal or recycling method, which result in a high
cost of production.
d. Increase in the number of firms also leads to the problem of excessive advertisement and
promotion, consequently increasing the cost of production.
Figure 2 shows economies of scale and diseconomies of scale presented in the graph.
Average
cost Falling Average Cost =
per unit(£) Economies of Sacale Cost
Curve
AC1
AC2
Rising Average Cost =

Diseconomies of Scale
Q1 Q2 Q3 Quantity of out put
This slide is 100% editable Adapt it to your Needs and capture your audience’s attention
Figure 2: Economies of Scale and Diseconomies of Scale
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8.3.2 Focused factory

A focused factory is one that the creators have built around a very specific set of resources. This type of
factory has a very narrow focus, which means it offers a limited range of operations. The vast majority
of specialised factories are mass-production plants.
With one set of inconsistent manufacturing practices, the typical factory seeks to complete too many
contradicting production tasks. Because its rules aren’t focused on the one crucial manufacturing task
necessary to compete in its sector, the plant is likely to be noncompetitive.
The danger of foreign competition, the problem of “blue-collar blues” in some industries, and the rising
complexity and irritation of factory life have refocused public attention on the industrial sector of the
economy.
Features of Focused Factory

 Process technology: Unproven and uncertain technologies are typically limited to one per factory.
Proven mature technologies are limited to what their managers can easily manage, which is usually
two or three (i.e, a foundry, metal working and metal finishing).
 Market demands: There is a consistent set of demands including quality, price, lead time and
reliability specification. A given plant can typically only perform admirably on one or two demands
at any given time.
 Product volumes: In general, these are of comparable quality, allowing tooling, order quantities,
materials handling techniques, and job contents to be approached with a consistent philosophy.
But what about the inevitable short runs, customer specials, and one-of-a-kind orders that must be
handled by every factory. The answer is usually to segregate them.
 Quality levels: It uses a common attitude and set of approaches to ensure that quality and
specifications are not over-specified or over-controlled. For equipment, tooling, inspection, training,
supervision, job content and material handling, a single frame of mind and set of mental assumptions
are sufficient.
 Manufacturing tools: At any given time, these are limited to one (or two at most). The task at which
the plant must excel to be competitive and focuses on a single set of internally consistent, doable,
and uncompromised success criteria.
8.3.3 Capacity flexibility

A certain amount of flexibility in production capacity is either inherent or may be achieved in many
production systems. In that instance, system costs might be reduced by coordinating capacity and
inventory management. We investigate such a make-to-stock production environment with flexible
capacity subject to periodic review under non-stationary stochastic demand in this study, where
positive fixed costs are allowed both for commencing production and for obtaining external capacity.
Our focus is on tactical-level capacity management, which refers to determining in-house production
capacity while executing optimal operational-level integrated capacity and inventory management. To
describe this very complex topic, we first create a basic model. Then we go through the features of the
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overall problem and how to solve certain specific problems. Finally, we provide numerous management
insights into the ideal capacity level, the impact of operating at a suboptimal capacity level, and the
benefit of flexible capacity.
8.4 EXTERNAL SOURCES OF OPERATIONS AND SUPPLY CAPACITY

 Capacity in supply chain management: It refers to an entity’s ability to produce output over a set
period of time. Some companies, especially those without a supply chain optimisation plan, will
overlook their supply chain capacity, assuming that they are already working at maximum capacity.
But, unfortunately, many of them aren’t.
 Capacity management: In this, many other areas of supply chain executives should be considered
in conjunction with the other factors that ensure business availability. Capacity, inventory and lead
times are the three factors. Business executives must also analyse where issues can occur in the
various areas. The following will be included:
 Sales: Whenever promised delivery dates cannot be met, goods get stocked without actually
determining what impact this will have on deliveries and overall customer service.
 Operations planning: When it comes to operations planning and control, some operations
managers make the mistake of reducing their raw material and component inventory levels without
considering its impact on the manufacturer’s process and overall capacity.
 Procurement: Whenever the company accepts a lead time extension from a supplier in exchange for
a reduction in the item price, without considering the impact on production capacity and inventory
levels.
8.5 PLANNING SERVICE CAPACITY

Although many of the same challenges apply to service capacity planning as they do to manufacturing
capacity planning and facility size may be done in much the same way, but there are a few key differences.
Service capacity is more time and place dependent, prone to more unpredictable demand variations,
and service quality is directly influenced by usage.
Time
Services, unlike products, cannot be saved for later use. It is necessary to have the capacity to provide
a service when it is required. If the current flight is full, a passenger cannot be assigned a seat that was
left empty on a prior airline aircraft. The consumer also couldn’t buy a seat on a specific day’s trip and
take it home to use at a later time.
Location
The capacity for service must be close to the consumer. Manufacturing involves the creation of items,
which are ultimately supplied to customers. In the case of services, on the other hand, the reverse is
true. The ability to supply the service must first be distributed to the consumer (either physically or by
another kind of communication, such as the telephone); only then can the service be created. A hotel
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room or rental vehicle accessible in another city is of little use to the consumer; it must be available
when the customer wants it.
Volatility of Demand
For three reasons, the volatility of demand in a service delivery system is substantially larger than
in a manufacturing production system. For starters, as previously stated, services cannot be stored.
This means that, unlike in production, inventories cannot calm demand. The second reason is that
consumers engage directly with the production system, and these customers have a variety of wants,
levels of knowledge with the process, and transaction requirements. As a result, the processing time
necessary for each client is more variable, and the minimum capacity required is also more variable.
The third reason for increased service demand volatility is because it is directly influenced by consumer
behaviour. Customer behaviour may be influenced by a variety of factors ranging from the weather to a
large event, all of which can have a direct impact on demand for various services. During spring break,
any restaurant near your university will most likely be nearly vacant. Alternatively, over Homecoming
weekend, attempting to get a stay at a local hotel would be difficult. Even shorter time frames, such as
the lunch-hour rush at a restaurant’s drive-through window or the rapid rise in pizza orders around
halftime on Super Bowl Sunday, can demonstrate this behavioural impact. Because of this instability,
service capacity is frequently designed in 10- to 30-minute intervals rather than the one-week increments
used in production.
Capacity Utilisation and Service Quality Planning
The day-to-day link between service consumption and service quality must be considered when setting
capacity levels for services. Nearly 70% of maximal capacity is the ideal working point. The queue
thickens in the crucial zone, and many clients are unlikely to be serviced.
8.6 CAPACITY REQUIREMENTS PLANNING

Capacity requirement planning is a process used by businesses to determine their future resource
requirements. In other words, it assists business owners in determining how much space, equipment,
and human resources they will require to achieve their objectives.
In this context, the term Capacity requirements planning is a process to determine in detail the amount
of labour and machine resources required to achieve the task of production.
It is one of the management tools, which helps the company to use its resources efficiently by making
its production process accurate.
It determines the company’s capacity to meet its production goals. Through this procedure, the
corporation can determine how many products it can produce and satisfy production goals.
Capacity requirement planning is part of the operational stage of the planning process, and it works
in tandem with an MRP system. A thorough capacity requirement plan gives the production cell an
operational picture and helps the operations manager identify all of the pieces that will be required to
achieve the output.
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Materials, machine production time, machine changeover time and tooling, maintenance and downtime,
as well as human availability and skill, may be considered by the operations manager for shift work to
be allocated and resources to be used efficiently. The operational team will inform the planning team
of their capacity to achieve the planning requirements, and the planning team will then work with the
procurement team to ensure that materials or components necessary for the manufacturing process
are made available on schedule and in full. After that, the planning team will validate the capacity and
material requirements plans and issue a work order, which will be forwarded to the production team.
What are the processes for developing a capacity plan?
Factors that affect capacity requirement planning
Hese are some of the factors affecting capacity requirement planning:

1. Type of product: Complex products take longer to develop, cause delays in the manufacturing
process, and necessitate the use of highly skilled people and the most efficient equipment. Simple
things take less time to create. As a result, it may be made in vast quantities in a short amount of
time.
2. Financial expenditure: Companies should have the capability to invest in machinery and workforce.
3. Availability of skilled workforce: The capacity of the output product is affected if the company has
the same qualified personnel or no skilled staff.
4. The capacity of the equipment: Equipment that is in good condition helps to speed up the production
process.
8.7 TYPES OF CAPACITY

There are three sorts of capacity that must be managed:
1. Capacity potential: It is long-term in nature and reflects the available capacity that may be used to
influence senior management’s strategy.
2. Immediately available capacity: It’s the greatest capacity that can be used in the short term (on a
day-to-day basis), thus it needs to be handled right away.
3. Capacity to perform: It refers to the portion of the total available capacity that may be used.
8.8 MEASUREMENT OF CAPACITY

The manufacturing unit’s capacity is measured in the number of units of output produced every
period. When a company produces many items, gauging capacity might be more difficult. In these
cases, capacity is measured in man-hours or machine-hours. The relationship between capacity and
production is as follows:
 Design capacity: The intended or engineered rate of output of products or services under normal
or full-scale operating circumstances is referred to as a facility’s designed capacity. The cement
factory, for example, has a design capacity of 100 TPD (tonnes per day). The sugar plant has a daily
capacity of 150 tonnes of sugarcane crushing.
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 System capacity: The maximum production of a certain product or product combination that a
system of employees and equipment can produce as a whole is known as system capacity. Because
of limitations in product mix, quality specifications and breakdowns, system capacity is less than
or equal to design capacity. Because of various factors impacting output, such as real demand,
downtime due to machine/equipment malfunction, and unlawful absence, the actual number is
much lower.
Because of long-term uncontrolled circumstances, the system capacity is less than the design
capacity. Because of short-term consequences such as equipment breakage and worker inefficiency,
real productivity is still lowered.
 Licensed capacity: Licensed capacity is defined as the capacity that has been granted a licence by
one or more regulatory agencies or government entities. The government sets a restriction on the
amount that can be produced.
 Installed capacity: Installed capacity refers to the amount of capacity available at the time of the
plant’s installation.
 Rated capacity: Rated capacity refers to the capacity based on the greatest production rate
determined via real experiments.
8.9 CAPACITY PLANNING USING OVERALL FACTORS (CPOF)

A company’s, a work centre’s, a machine’s, or a person’s capacity is a measure of their production
capabilities at any particular time. It is a vital factor to consider throughout the production planning
process because if anticipated production exceeds available capacity, the plan is unlikely to be
implemented. Each stage of the production planning process, in general, necessitates some computation
of the corresponding capacity needs and, if necessary, a change of the production plans to adhere to
capacity constraints.
The linked capacity planning stage is known as rough-cut capacity planning while the master production
schedule (MPS), or weekly scheduled production, is being produced. The term “rough-cut” refers to an
approximate estimate of capacity requirements. After the MPS has been utilised for material needs
planning, a more precise estimate is established through capacity requirements planning (CRP).
 There is a clear link between product design, capacity and process choices.
 The value offered to the client is determined by product design; the value determines market size;
the market size defines volumes and hence capacity; and capacity leads to the process.
 Theoretical capacity is the maximum amount of work that can be done in a short period of time
under perfect conditions.
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 There are no equipment failures, maintenance requirements, setup times, bottlenecks or worker
mistakes under these perfect conditions.
 To an operations manager, however, this definition of capacity may be completely useless.
 The way in which companies or teams match personnel with the demands of a project is referred to
as capacity planning.
 Capacity is the maximum amount of work that can be completed in a given amount of time.
 It is usually assessed in terms of the amount of work completed by personnel.
 In addition, planning entails allocating work hours to a specific quantity of labour.
 When we talk about a company’s production size, we frequently hear that large-scale manufacturing
helps to lower production costs.
 Economies of scale relate to the lower costs per unit that result from the higher overall production.
 Diseconomies of scale, on the other hand, arise when output grows to the point that the cost per unit
begins to rise.
8.11 GLOSSARY
 Capacity: A person’s or object’s capacity to hold or contain others.

 Production: The capacity to bend or be bent readily without breaking:
 Flexibility: The act of creating or developing items to be sold.
 Procurement: The act of purchasing products or services, generally for commercial purposes, is
known as procurement.
8.12 CASE STUDY: DALMIA CEMENTS BHARAT LTD
Case Objective
The primary purpose of this case study was to determine how the Dalmia Cements planned to double
its capacity
G Naga Shridhar reports on Dalmia Cements’ plans to double its capacity. By the conclusion of the
2009 fiscal year, Dalmia Cements Bharat Ltd (DCBL) would have increased its production capacity to 12
million tonnes by commissioning three greenfield projects. “Work on three upcoming projects in Kadapa
(Andhra Pradesh), Ariyalur (Tamil Nadu), and Cuttack (Orissa) are moving along nicely,” according to
him.
Mr. Puneet Dalmia, Director, Dalmia Cements Bharat Ltd, told Business Line that these projects will
assist in raising the company’s capacity from 5.5 million to 12 million tonnes. The Kadapa (2.25 million
tonnes) and Cuttack (2.25 million tonnes) plants will begin production in September 2008, while the
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Ariyalur project will begin production in March 2009. According to him, the corporation has committed
more than $500 million to these initiatives.
The expanded capacity would be used to serve markets in Tamil Nadu, Karnataka, Kerala, Orissa, the
Western Region and Jharkhand, due to high demand in the domestic market. “We currently service
these markets,” Mr Dalmia added, “and the increased capacity will go there as well.” Though DCBL,
which ranks seventh among India’s top cement producers, exports oil well cement (used in the drilling
process) to the Gulf area, he says the company’s primary focus is on domestic markets.
On the demand-supply mismatch in the market, Mr. Dalmia said boosting local capacity is the only
option. “Though there has been discussion of importing cement from Pakistan, I believe that cement is a
long-term local enterprise for which capacity should be established within the country. On a long-term
basis, I am optimistic. The market would be at rest in the next ten years,” he stated.
He noted that the country’s capex pipeline will enable extra capacity development of 100 million tonnes
in the next two to four years, with surplus capacity observable in the next 18 months. This year, the
Tiruchy-based firm expects to generate revenue of Rs 1,200 crore. Mr. Dalmia stated, “By the end of
2009-10, we would have crossed 2,000 crore.”
Questions
1. What are some of the most important aspects of capacity management?
(Hint: The capacity management method should encompass both the operating and development
environments, including hardware, human resources, networking equipment, peripherals and
software, and should address performance, memory and physical space.)
2. What is the significance of capacity management?
(Hint: Capacity management allows you to control demand based on business goals, ensuring that
important operations always have adequate capacity to function efficiently.)
3. What methods do you use to handle capacity management?
(Hint: Provide enterprise-wide resource capacity visibility. Make real-time data-driven decisions in
advance to close the capacity vs. demand gap. Increase profitability by anticipating billable resource
consumption. With advanced strategic planning, you can cut down on bench time.)
B. Essay Type Questions

1. What is capacity?
2. Explain capacity planning concepts.
3. Describe a focused factory.
4. What do you mean by capacity flexibility?
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B. Hints for Essay Type Questions

1. It’s important to understand the distinction between theoretical and normal capability. Theoretical
capacity is the maximum amount of work that can be done in a short period of time under perfect
conditions. Refer to Section Capacity
2. The way in which companies or teams match personnel with the demands of a project is referred to
as capacity planning. Capacity is the maximum amount of work that can be completed in a given
amount of time. Refer to Section Capacity Planning Concept
3. With one set of inconsistent manufacturing practices, the typical factory seeks to complete too many
contradicting productions tasks. Because its rules aren’t focused on the one crucial manufacturing
task necessary to compete in its sector, the plant is likely to be noncompetitive. Refer to Section
Focused Factory
4. A certain amount of flexibility in production capacity is either inherent or may be achieved in many
production systems. In that instance, system costs might be reduced by coordinating capacity and
inventory management. Refer to Section Capacity Flexibility
 https://www.tutorialspoint.com/itil/capacity_management.htm
 https://www.invensislearning.com/blog/capacity-management/
 Discuss with your friends about the advantages of capacity management.
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UNIT
09 Forecasting and Aggregate Planning
Names of Sub-Units
A Framework for Forecasting, Forecasting Methods, Improving Forecasting Accuracy, Sales and
Operations Planning, Aggregate Operations Plan, Aggregate Planningand Master Production Schedule
(MPS) Flow Chart, Aggregate Planning Strategies, and Relevant Costs in Aggregate Production Plan
Overview
This unit describes the Framework for Forecasting, Forecasting Methods, and Improving Forecasting
Accuracy. Further, this unit elaborates the Sales and Operations Planning, Aggregate Operations
Plan, Aggregate Planning and Master Production Schedule (MPS) Flow Chart. Towards the end, this
unit explains the Aggregate Planning Strategies, and Relevant Costs in Aggregate Production Plan.
Learning Objectives

 Explain the meaning of Framework for Forecasting
 Describe the nature of Methods of Forecasting
 Discuss Aggregate Operations Plan Requirements
 State the importance of Relevant Costs in Aggregate Production Plan
 Explain the Aggregate Planning Strategies
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Learning Outcomes

 Assess the importance of Framework for Forecasting
 Appraise the tools and Methods of Forecasting
 Evaluate the Aggregate Planning Strategies
 Analyse the relevant Costs in Aggregate Production Plan
 Examine the Time Flexible Strategy
 https://online.ben.edu/programs/mba/resources/aggregate-planning-and-forecasting
 https://www.getapp.com/resources/what-is-forecasting-in-operations-management/
9.1 INTRODUCTION
Aggregate planning is concerned with defining the amount and schedule of output for the medium term
future. An aggregate plan usually takes 3 to 18 months to complete. As a result, the plan is an outgrowth
of the long-term strategic plan.
There is an essential distinction since the planning horizon may have an immediate influence on the
volume requirements of the organisation. Allow me to define the term “production” before I continue.
Don’t be fooled into thinking that manufacturing is simply about tangible commodities. Services
necessitate the conversion of inputs to outputs, i.e. production.
As a result, the aggregate plan is a crucial tool for determining what will be required to achieve this
change. This includes capacity, which includes facilities and manpower, raw materials, which are either
consumed directly in the manufacturing of the product or consumed as part of the process (think
tongue depressors in a doctor’s office), and inventory levels, which are required to meet delivery dates
while minimising costs. Capital expenditures were removed from my definition since they would stretch
beyond the planning time range of 3 to 18 months.
9.2 A FRAMEWORk FOR FORECASTINg

Hundreds, if not thousands, of choices are made every day by supply chains, which are living creatures.
You’ll need the correct bits of information to make the finest selections possible. The majority of supply
chain choices are based on demand forecasts. As a result, your demand prediction is vital information
for making the best judgments.
Your supply chain should be able to increase its service quality, plan better, eliminate waste, and lower
total costs with the help of a useful forecast. Because demand forecasts are used to trigger particular
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UNIT 09: Forecasting and Aggregate Planning JGI JAIN
actions, they must be done at the appropriate aggregate level, tracked with relevant indicators, and
backed up by a thorough review process.
I purposefully use the term ‘helpful’ rather than ‘correct.’ A prediction might be correct, but it won’t
help you make the best judgments. In other words, anticipating demand is always a means to an end
rather than an end in itself. When establishing a forecasting process, you must consider four factors:
granularity, temporality, metrics, and method (I call this the 4-Dimensions Forecasting Framework).
We’ll go over each of these characteristics one by one and build up our demand forecasting procedure
based on your preferences. Setting up your forecasting process according to this paradigm should be
simple once you know the kind of decisions you need to make (e.g., how much to produce, where to
deploy inventories, whether to open or close plants).
9.3 FORECASTINg METHODS

Business forecasting’s art have been around since the first trading posts. Almost every business owners
consider this process to be about as reliable as reading tea leaves. Still, many executives succeed or fail
based on their ability to foresee the future.
Forecasting is essential in setting goals, budgeting, pricing, sales estimates, production capacity, and
business model infrastructure assessment. There are three main planning tools available. They are the
“Top-Down,” and “Bottom-Up” approach. Which method is best for your business?
Financial analysts use main four different types of forecasting methodologies. Although there are wide
range of frequently used quantitative budget forecasting methods. Let us discuss these methods.
1. Straight-line
2. Moving average
3. Simple linear regression
4. Multiple linear regression
Let’s discuss in detail:

a. Straight-Line: This method is one of the simplest and easy-to-follow forecasting methods. Future
revenue growth is predicted by financial analyst by using historical figures.
b. Moving Average: Moving average a smoothing technique which looks into the underlying pattern
of a set of data to establish an estimate of future values. The 3-month and 5-month are the most
common types of moving averages.
c. Simple Linear Regression: Regression analysis is a widely used method to analyse the relationship
between variables for prediction purposes.
d. Multiple Linear Regression: For forecasting revenue, the company use the method of multiple linear
regression where two or more independent variables are required for a projection. For example,
we run a regression on promotion cost, advertising cost, and revenue to identify the relationships
between these variables.
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9.3.1 Top-Down Approach

The entire market that the business operates within is assessed by top-down financial analysis. It begins
by calculating the present market size available to the business, taking into account current market
trends, before generating projections about how the company will do in the market. The strengths and
weaknesses of the business are then analysed with the potential of the wider market.
When it comes to revenue potential, Top-down forecasts offer a broader perspective and are a great
way to get a more informed idea of the demographics and audience you are targeting. It observes the
existing market and the potential for market growth to predict how much share of market, the business
will be able to capture over a set period.
Suppose, you have a business of eco-friendly kitchen proucts. Top-down forecasting involves assessing
the overall market for eco-friendly kitchen products and determining market capacity of how many
customers are interested to buy every month. This is done through processes like market research and
competitor analysis.
Then, you can predict how many of those buyers (what percentage of the market capacity) would buy
from your business specifically (your market share), and how much revenue you can expect to make per
sale.
So, you start from the top and look at the entire market, and can proceed towards predicting your
business’ share in the market – hence ‘top-down’.
Advantages of Top-Down Approach
There is optimistic view in top-down approach. In actual business data it is a less grounded therefore,
it allows a business to forecast a more favourable prediction of their potential market share. It is an
easier way to offer a more positive outlook for directors or potential investors, since it assesses the
performance based on percentage of market share, despite being based on actual business activities.
It is much quicker and easier to execute than bottom-up, as you don’t require to analyse every minor
detail of your business’ activities.
9.3.2 Bottom-Up Approach

Bottom-Up approach focuses more on the product and services and the activities of the business while
less concerned about entire market It involves assessing factors like production capacity, marketing
costs, hiring costs and more. Factors or activities having impact on finance will be considered under
bottom-up forecasting.
It focuses on the needs of business in order to compete in the market, by examining its activities. This
include cash flow forecasting and analysing sales, cost of good sold, operational costs, staffing and so
on, in order to get an idea of how your money is spent and how this will impact future financial reports.
A business will be able to offer a more accurate answer to ‘What-if’ questions like, what if the business
were to increase production capacity? What if we spent less on marketing? What if we doubled our
workforce? after bottom-up financial forecasting.
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Through bottom-up forecasting, you will be able to understand of how each individual factor influences
the bigger picture.
Starting with low-level corporate data and moving “up” to revenue, bottom-up forecasting is a way of
anticipating a firm’s future performance. The value of all goods and services sold by a corporation in
a certain period is referred to as revenue. Earnings (also referred to as Sales or Income). This strategy
begins with precise customer or product data and then expands to revenue. This lesson will walk you
through how it works and why it’s so popular in financial modelling. What is Financial Modeling and
How Does It Work? To anticipate a company’s financial performance, financial modelling is done in
Excel. What is financial modelling, how to develop a model, and why? as well as estimation.
Advantages of Bottom-Up Forecasting
Some of the advantages of bottom-up forecasting:

1. It offers more realistic results.
2. It uses real sales data from the business and offers more focused look at how the activities of the
business may impact their financial growth.
3. It allows more detailed analysis of specific products or strategies.
4. The factors like marketing, hiring costs, production costs and so on, bottom-up forecasting allows
for greater input, and output, across departments.
5. It increases the market spend by finding ways to reduce labour costs.
Therefore, bottom-up forecasting is a better method when predicting which specific products or services
present the best opportunities or which areas of the business should be prioritised.
9.4 IMPROVINg FORECASTINg ACCURACY

Due to the importance of the advantages it brings, many firms use some form of forecasting. Most
businesses, on the other hand, are dissatisfied with the accuracy of their forecasting process and want
to know how they may increase forecasting accuracy.
Supply Chain Management is a large umbrella term that encompasses a number of complicated
operations that are all working toward the same goal: customer happiness. A client can purchase things
by walking into your store or browsing your website. What if your store is out of stock and the item is
no longer available? Customers may wait for backorders, but for a variety of reasons, they may instead
go for a similar product at another retailer, resulting in a sales loss. In either situation, the consumer is
dissatisfied, resulting in a loss for the business. So, to simplify things, ensuring supply matches demand
is required to achieve customer pleasure and profit.
The forecasting approach can be used to solve this equation. Forecasting is the practice of making
predictions about the future based on historical and current facts. Forecasting is an excellent way to
make sure you have the proper quantity of inventory on hand for the months ahead. Various supply chain
forecasting technologies can estimate future demand weeks to months in advance. In all circumstances,
there will be some degree of uncertainty in the forecast.
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9.5 SALES AND OPERATIONS PLANNINg

S&OP (sales and operations planning) is an integrated business management approach that helps the
executive and leadership team maintain focus, alignment, and synchronisation across the organisation’s
every departments. A sales plan, manufacturing plan, inventory plan, customer lead time (backlog)
plan, new product development plan, strategic initiative plan, and consequent financial plan are all
part of the S&OP process.
The frequency of planning and the length of the planning horizon are determined by the industry.
Short product life cycles and strong demand fluctuation necessitate a more stringent S&OP than those
that are used consistently. When done correctly, the S&OP approach may also help with supply chain
management.
A well-implemented S&OP process examines customer demand and supplier resources on a regular
basis and “re-plans” quantitatively across a pre-determined rolling horizon. While the re-planning
process assists the management team in understanding how the organisation reached its present level
of performance, its major focus is on future actions and projected results.
Richard (Dick) Ling and Andy Coldrick wrote a chapter in the 3rd edition of Orlicky’s MRP called “New
Developments in Sales and Operations Planning” about how the planning process becomes more client
centric.
9.6 AggREgATE OPERATIONS PLAN

Aggregate planning is a marketing activity that creates an aggregate plan for the production process
six to eighteen months in advance to inform management of the quantity and timing of materials
and other resources to be procured, allowing the organisation’s total cost of operations to be kept to a
minimum during that time.
The amount of outsourcing, item subcontracting, labor overtime, numbers to be employed and dismissed
in each period, and the amount of inventory to be retained in stock and backlogged in each period are all
determined. All of these actions are carried out in accordance with the company’s ethics, policies, and
long-term commitment to the community, country, and society.
Certain pre-required inputs are unavoidable in aggregate planning. They include Details on the available
resources and facilities.
 Forecast of demand for the time period for which planning is required.
 The cost of various options and resources. This comprises inventory holding costs, ordering costs,
and manufacturing costs incurred through different production methods such as subcontracting,
backordering, and overtime.
 Organisational policies governing the use of the aforementioned options.
“Aggregate Planning is concerned with matching production supply and demand over a medium time
period, up to around 12 months in the future.” The word “aggregate” means that the planning is done
for a single overall output measure or, at most, a few aggregated product categories. In the face of
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variable or unpredictable demand, aggregate planning aims to define overall output levels in the short
to medium term. Aggregate planning might aim to impact both supply and demand.
9.7 AggREgATE PLANNINg AND MASTER PRODUCTION SCHEDULE (MPS) FLOW CHART
Manufacturing Resource Planning (MRP) includes two key functions: aggregate planning (AP) and
master production scheduling (MPS) (MRP II). The efficacy of the entire production planning and control
(MPC) system will be substantially enhanced if the two tasks are properly interfaced. There are several
practical difficulties that must be addressed. For both aggregate planning and master production
scheduling, this article examines practical concerns such as forecast horizons, planning horizons,
planning time buckets, and replanning frequencies. It also outlines two strategies for bridging the
gap between the two planning activities. There are illustrative examples as well as actual applications
offered.
9.8 AggREgATE PLANNINg STRATEgIES

Theactofestablishing, assessing, andmaintainingapreliminary, estimatedtimetableofanorganisation’s
total operations is known as aggregate planning. Targeted sales estimates, production levels, inventory
levels, and customer backlogs are all part of the overall strategy. This timetable is designed to meet the
demand predicted at the lowest possible cost. When done correctly, aggregate planning should reduce
the impact of myopic, day-to-day scheduling, in which little amounts of material are ordered one week,
with people laid off, and bigger amounts are bought the next week, with workers rehired. This longer-
term view on resource consumption can assist reduce short-term need fluctuations and save money.
Aggregate planning, to put it simply, is an attempt to balance capacity and demand in such a way that
expenses are kept to a minimum. Because planning at this level covers all resources “in the aggregate,”
such as a product line or family, the word “aggregate” is employed. The entire number of people, hours
of machine labour, or tonnes of raw materials are all examples of aggregate resources. Gallons, feet,
and pounds of output, as well as aggregate units occurring in service sectors such as hours of service
supplied, number of patients seen, and so on, are examples of aggregate units of output.
Aggregate planning makes no distinction between sizes, colours, features, or other factors. For example,
aggregate planning in the automobile industry would evaluate the overall quantity of automobiles
anticipated rather than specific models, colours, or extras. When determining aggregate units is
problematic (for example, when output variation is severe), comparable units are generally used. These
comparable units might be determined by value, cost, or labour hours, among other factors.
Aggregate planning is classified as intermediate-term (rather than long- or short-term). As a result,

most aggregate plans are for 3 to 18 months.
Future short-term planning, such as production scheduling, sequencing, and loading, is built on the
basis of aggregate plans. The aggregate plan has been characterised as “disaggregated” in the master
production schedule (MPS) used in material requirements planning (MRP).
The process of creating an aggregate plan begins with determining demand and determining current
capacity. Capacity is defined as the total number of units that can be produced in a given time period
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(this requires that an average number of units be computed since the total may include a product
mix utilising distinctly different production times). The total number of units required is indicated as
demand. If the two aren’t balanced (equal), the company must determine whether to raise or decrease
capacity to meet demand or demand to meet capacity. A variety of approaches are available to do this.
In cases when demand must be increased to match capacity, the following options are available:
1. Changing price to boost demand at times when demand is lower than peak. For example, matinée
movie theatre costs, off-season hotel rates, weekend telephone service rates, and pricing for
commodities with seasonal demand.
2. Demand is shifted via advertising, direct marketing, and other types of promotion.
3. You can place a backorder. Demand is transferred to a period when capacity is not completely
used by deferring delivery on present orders. This is only a method of demand smoothing. In order
to discourage walk-in clients, service sectors might calm demand by accepting reservations or
arranging appointments. This is referred to as “partitioning” demand15 by some.
4. The establishment of new demand A new, but complementary, demand for a product or service
is developed. When clients are forced to wait at a restaurant, they are typically steered to the bar,
which is a complimentary (but not complimentary) service. The installation of video arcades into
movie theatres and the development of services at convenience shops are two further examples.
The following are some options for increasing or decreasing capacity to fit current demand:
a. Hire/layoff: Firms can maintain a balance between capacity and demand by recruiting extra
workers as needed or laying off workers who are not currently required to fulfil demand.
b. Overtime: Firms can produce a temporary boost in capacity without the added expenditure of
recruiting new workers by requesting or forcing people to work extra hours per day or an extra day
per week.
c. Temporary or part-time work: Using casual labourers or temporary workers (workers who are
considered permanent but only work when needed, on an on-call basis, and typically without the
benefits given to full-time workers).
d. Inventory: In periods of low demand, finished-goods inventory can be built up and then utilised
to satisfy demand during periods of strong demand. No additional employees are required, no
temporary or casual labour is required, and no overtime is required.
e. Subcontracting: Frequently, companies prefer to have a different manufacturer or service provider
offer the product or service to the subcontracting company’s clients. Additional capacity is
temporarily achieved by subcontracting work to a different supplier.
f. Cross-training: Employees that have been cross-trained may be able to do jobs in many operations,
giving them more flexibility when it comes to scheduling capacity.
g. Other approaches: While well-known options such as adjusting staff size and utilisation, inventory
buildup/backlogging, and subcontracting are well-known, there are other, more creative
approaches that are used in business. Sharing staff with counter-cyclical organisations and striving
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to identify exciting and relevant tasks for employees to complete during slow periods are two of
these approaches.
9.8.1 Chase Strategy

The chase strategy refers to the notion that you are chasing the demand set by the market. Production
is set to match demand and doesn’t carry any leftover products. This is a lean production strategy,
saving on costs until the demand – the order – is placed. Inventory costs are low, and the cost of goods
for products sold is kept to a minimum and for a shorter length of time.
The chase strategy is common in industries where perishables are an issue or with a company that
doesn’t have a lot of extra cash on hand and doesn’t want the added risks of loss, theft or unsold products.
The production schedule is based on orders and immediate demand.
9.8.2 Time Flexible Strategy

Because of its capacity to respond quickly to changes, strategic flexibility may be a valuable asset to a
company. Depending on the nature of change and its influence on the organisation, strategic flexibility
may be employed as both an offensive and defensive technique.
When a new player enters the market with a new product, for example, it creates a significant shift in
an existing organisation’s external environment. It is a defensive mechanism to safeguard a current
organisation’s assets if it takes actions when a new competitor enters the market, such as investing
more in research and development (R&D) and/or sales. On the other hand, it is an attack mechanism
if the company takes these activities as a preventive measure before a possible new player enters the
market.
There are four important components that must be considered while establishing strategic flexibility,
depending on the external change:
1. The length of time you have to react to a significant change;
2. The variety of alternatives that are accessible;
3. The organisation’s stance on the change; and
4. The region of flexibility that was constructed as a focal point.
Managers must consider these four factors when developing a strategy; yet, this is a difficult task
because there are still many unknowns in both the internal and external contexts. Psychological and
organisational biases exacerbate potential problems, making it even more difficult for managers to
see changes and take necessary action in a timely manner. Managers are responsible for identifying
changes and allocating suitable resources to deal with them; hence, having a professional management
team guarantee that the best decisions are taken and that resources are not wasted on worthless
initiatives that might be harmful to the firm.
The capacity to display strategic flexibility may boost an organisation’s value by allowing it to react to
change more rapidly and so better manage risk.
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9.8.3 Level Strategy

This is concerned with making goods in similar quantities over an equal time period. This is done to deal
with a surge in market demand by filling back orders or sending excess products to inventory.
A thorough overview of a company’s policies, goals, and activities may be characterised as a business
level strategy definition, with the focus on how to give value to consumers while preserving a competitive
edge.
Your company’s overall strategy will influence your market position as well as the direction of your
income. It will also have an impact on the efficiency with which you can serve your consumer base. The
most effective plan will include multiple forms of business-level strategy, as stated below. But first, you
must figure out a few things in order to establish consumer base
1. How you will apply these strategies
2. What do your target clients care about the most? (For example, cost savings, brand recognition,
product quality, and so on.)
3. Are you aiming for a wide or a specific market?
4. What are your available resources?
5. How do you set yourself out from the competition?
6. Does your company have the potential to lead and sustain itself in terms of product quality and
competitive price in the marketplace?
9.8.4 Sub-Contracting
Subcontracting is the process of delegating, or outsourcing, a portion of a contract’s duties and tasks
to a third-party subcontractor.
Subcontracting is especially common in industries like construction and information technology, where
complicated projects are the norm. The general contractor for the project hires subcontractors, but
he or she retains overall responsibility for the project’s completion and execution within the project’s
constraints and deadlines. This can put subcontractors at risk of noncompliance.
In the construction business, for example, when a government agency or a firm wants to develop or
repair infrastructure, the contract is normally awarded to a contractor. The contractor is a company
owner who negotiates the arrangement and works for a set price under a contract. When the work
to be done is in a specialised sector like electrical, plumbing, insulation, or more contemporary fields
like energy optimisation and smart wiring infrastructure, the contractor may need to contract out to
another party. The contractor will outsource the task to a specialist subcontractor in this situation.
A subcontractor, also known as a freelancer, independent contractor, or vendor, is a sort of contractor

who works in a particular field. While the contractor maintains contacts with clients (such as businesses
or the government), the subcontractor collaborates with a contractor to provide their particular skill
set in exchange for a fee. The subcontracting individual or firm reports to the principal contractor, who
is in charge of overseeing the project from start to finish.
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9.9 RELEVANT COSTS IN AggREgATE PRODUCTION PLAN

APP (acronym for aggregate production planning) is a valuable tool for operations management. It has
to do with determining production, inventory, and personnel levels to meet changing demand during a
six-month to one-year planning horizon. Aggregate production plans are required to maximise labour
potential and are an important component of operations management. Aggregate production plans
make it easier to balance supply and demand while also lowering expensesThe aggregate production
planning process applies upper-level projections to lower-level, production-floor scheduling and is most
effective when used for periods of 2 to 18 months in the future. Plans are either “chasing” plans, in which
the workforce is adjusted to meet demand, or “level” plans, in which labour is relatively constant and
demand variations are handled by stockpiles and back orders.
Buy These Notes in PDF Format
The phrase “aggregate production planning” refers to the process of determining the total quantities of
items to be created or produced in a plant or other manufacturing facility over a medium-term planning
period, such as a month or quarter. The total quantities of each product or set of products to be made in the
plan period of delving into detail of scheduling different manufacturing operations necessary to achieve
the projected production levels are included in the aggregate plan output.The aggregate production
will not indicate details such as the dates when material bought in response to a specific client order
will be available for delivery. The aggregate production plan is used to set overall production goals as
well as to plan for the availability of other inputs and supporting activities needed to accomplish those
goals. The aggregate plans are then used to create more detailed production schedules, such as daily
and weekly production schedules, as well as client delivery timetables. Aggregate Production Planning’s
main goal is to evaluate company policies and management inputs related to operations, distribution
and marketing, materials, accounting and finance, engineering, and human resources in order to lower
prices and increase revenue, improve customer service, reduce inventory investment, reduce changes
in production rates, reduce changes in work-force levels, and increase plant and equipment utilisation.
Costs relevant to aggregate production planning:
a. Material costs, direct labor expenses, and overhead charges are the most basic production costs.
These expenses are usually split into two categories: variable and fixed.
b. Costs connected with fluctuations in the production rate, costs associated with hiring, training, and
laying off employees, as well as overtime pay.
c. In Inventory-related expenses, Aggregate production planning models can help with decision-
making and evaluating ideas in union negotiations.
 By definition, aggregate planning is concerned with defining the amount and schedule of output for
the medium-term future.
 An aggregate plan usually takes 3 to 18 months to complete. As a result, the plan is an outgrowth of
the longer-term strategic plan.
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 Hundreds, if not thousands, of choices are made every day by supply chains, which are living
creatures.
 You’ll need the correct bits of information to make the finest selections possible Due to the importance
of the advantages it brings, many firms use some form of forecasting.
 Most businesses, on the other hand, are dissatisfied with the accuracy of their forecasting process
and want to know how they may increase forecasting accuracy.
 Aggregate planning is a marketing activity that creates an aggregate plan for the production
process six to eighteen months in advance to inform management of the quantity and timing of
materials and other resources to be procured, allowing the organisation’s total cost of operations to
be kept to a minimum during that time.
 The capacity to display strategic flexibility may boost an organisation’s value by allowing it to react
to change more rapidly and so better manage risk.
 A thorough overview of a company’s policies, goals, and activities may be characterised as a
business level strategy definition, with the focus on how to give value to consumers while preserving
a competitive edge.
 Aggregate Planning is concerned with matching production supply and demand over a medium
time period, up to around 12 months in the future.”
9.11 gLOSSARY
 Forecasting: It is a situation of what is likely to happen in the future, especially in connection with
a particular situation.
 Aggregate Planning: It is a method for developing an overall manufacturing plan that ensures
uninterrupted production at a facility
 Production: It is the process of making or growing goods to be sold.
 Inventory: It is the amount of goods and materials owned by a company at a particular time,
including parts, products being made, and finished products.
9.12 CASE STUDY: TOYOTA kIRLOSkAR
Case Objective
The case study highlights the how Toyota-Kirloskar look at the higher level of automation.
Because of its larger capacity, Toyota-Kirloskar may boost automation in its second plant, requiring
fewer personnel to manage the operations. The current facility at Bidadi, 40 kilometres from Bangalore,
has a production capacity of 60,000 automobiles and is one of Toyota Motor Corporation’s least
automated facilities. The new facility, which will be built close to the existing one, would produce mass
market small automobiles with a production capacity of one lakh units.
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Higher Automation
Mr Shekar Viswanathan, Toyota Kirloskar Motor’s Deputy Managing Director (Commercial), told
Business Line that the automaker was looking into the potential of automating the second factory to a
greater degree than the present facility in order to crank out more automobiles. “Plans to have a higher
level of automation in the new production are under review,” Mr Viswanathan added, citing the new
factory’s bigger volume.
If the cost of automating the new facility is significantly greater, the corporation may choose to automate
at a lower level and hire additional personnel. Mr Viswanathan stated that the corporation is taking
advantage of the car industry’s slump to multi-skill its employees. It is slowing down the assembly line
so that the same number of workers can perform multiple activities, and it is learning more about how
to take advantage of the lower output due to the slowing of the vehicle market. Toyota has significantly
reduced production at its facility and expects it to restore to full capacity in a few months.
Mr Viswanathan said that kaizen (continuous improvement) was a successful practise in both the
downturn and when the facility was operating at full capacity. During the downturn, he claims, workers
will have the chance to expand their skill sets, allowing them to do a wide range of duties.
Revival in H2
The car business in India is likely to rebound by the second half of this calendar year, according to Toyota
Kirloskar Motor (TKM). Mr Hiroshi Nakagawa, TKM’s Managing Director, stated that the recession had
not touched India as it did in other areas of the world. He stated that the tiny vehicle project is on track,
but that it is too early to discuss cost. Mr Nakagawa, speaking on the sidelines of the 18th International
Engineering and Technology Fair in Tokyo, said Toyota has taken into account the fact that when the
small car is released in 2010, numerous other automobile manufacturers would also be launching
comparable vehicles around the same time. “By the time we introduce our own automobile, there will
be enough competition.”
“However, we aim to carve out our own space in the market,” he added. He stated that after Toyota
begins selling more of these tiny vehicles, it would begin working on exporting them, albeit the nations
to which they will be shipped have yet to be determined. Mr Vikram Kirloskar, the company’s Vice-
Chairman, stated that one of the reasons for pursuing a “top-down” strategy in releasing mid-sized and
multi-purpose vehicles in India was to better understand the market before selling volume-driven tiny
cars. Mr Sandeep Singh, TKM’s Deputy Managing Director (Marketing & Sales), stated that by the time
the new automobile is released, the business would have 150 dealers spread over 100 cities.
In the run-up to the automobile introduction, he stated TKM’s marketing and sales section was also
being bolstered.
Questions
1. What is aggregate forecasting, and how does it work?
(Hint: An estimate of sales for a grouping of items or product families produced by a facility or
company, sometimes time phased. The aggregate forecast is used for sales and production planning
(or sales and operations planning) and is expressed in units, dollars, or both.)
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2. What is the link between aggregate planning and demand forecasting?

(Hint: Aggregate planning necessitates demand forecasting (i.e., we need to forecast demand before
we can create an aggregate plan). - Aggregate planning is used to determine how to satisfy expected
demand; hence, a prediction is required as an input to the aggregate planning issue.)
3. What is the relationship between forecasting and planning?
(Hint: Forecasting is the practise of projecting future performance of an organisation based on past
and present performance and data, whereas planning is the process of thinking about the future
course of action in advance. Information, aim, and forecast are used to plan.)
4. What are the advantages and disadvantages of planning and forecasting?
(Hint: The following are some of the most typical advantages of good planning, budgeting, and
forecasting: Market developments and their real-time effects were easier to identify and analyse. As
market changes (greater risks/new possibilities) occur, possible plan and forecast revisions may be
made.)

1. What is Framework for Forecasting?
2. Discuss Forecasting Methods.
3. Explain Improving Forecasting Accuracy.
4. What do you mean by Sales and Operations Planning?
5. State the advantage of bottom-up forecasting.

1. Hundreds, if not thousands, of choices are made every day by supply chains, which are living
creatures. You’ll need the correct bits of information to make the finest selections possible. The
majority of supply chain choices are based on demand forecasts. As a result, your demand prediction
is vital information for making the best judgments. Refer to Section A Framework for Forecasting
2. Financial analysts use four different types of forecasting methodologies. The financial analyst
job description that follows is an example of all the abilities, education, and experience that are
necessary to get recruited for an analyst position in a bank, institution, or firm. Refer to Section
Forecasting Methods
3. The importance of the advantages it brings, many firms use some form of forecasting. Most
businesses, on the other hand, are dissatisfied with the accuracy of their forecasting process and
want to know how they may increase forecasting accuracy. Refer to Section Improving Forecasting
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Accuracy
4. S&OP (sales and operations planning) is an integrated business management approach that
helps the executive/leadership team maintain focus, alignment, and synchronisation across the
organisation’s many departments. A sales plan, manufacturing plan, inventory plan, customer
lead time (backlog) plan, new product development plan, strategic initiative plan, and consequent
financial plan are all part of the S&OP process. Refer to Section Sales and Operations Planning
5. Bottom-Up approach focuses more on the product and services and the activities of the business
while less concerned about entire market. Refer to Section Forecasting Methods
@ 9.15 POST-UNIT READINg MATERIAL
 https://www.academia.edu/6465224/Forecasting_in_Operations_Management
 https://www.wisdomjobs.com/e-university/production-and-operations-management-tutorial-295/
aggregate-planning-9612.html
 Discuss with friends about the process of Sales and Operations Planning.
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UNIT
10 Inventory Management
Names of Sub-Units
Inventory, Inventory Management, Inventory Costs, Economic Order Quantity (EOQ), Techniques of
Inventory Control, Inventory Models
Overview
The unit begins by explaining the meaning of inventory management. Further, it discusses the types of
Inventory. The unit explains the importance of inventory management. It also discusses the functions
of inventory management.
Learning Objectives

 Explain the meaning of inventory management
 Describe the types of inventory
 Discuss importance of inventory management
 State the functions of inventory management
 Explain the enterprise benefits of inventory management
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Learning Outcomes

 Assess the importance of inventory management
 Appraise the types of inventory
 Evaluate the importance of inventory management
 Analyse the functions of inventory management
 Examine the benefits of inventory management
 https://www.investopedia.com/terms/i/inventory-management.asp#
10.1 INTRODUCTION
Inventory management aids businesses in determining which goods to order and when to order it. It
keeps track of merchandise from purchase to sale. It monitors and reacts to trends to guarantee that
there is always adequate stock to satisfy client requests and that shortages are detected early. Inventory
becomes income if it is sold. Inventory ties up cash before it sells, despite the fact that it is represented as
an asset on the balance sheet. As a result, having too much inventory costs money and lowers cash flow.
Inventory turnover is one indicator of successful inventory management. Inventory turnover is an

accounting metric that shows how frequently stock is sold over time. A company always wants to store
sufficient amount of inventory that could be sold, as dead stock or unsold inventory result into low
inventory turnover.
10.2 INVENTORY
All of the commodities, goods, merchandise, and materials retained by a firm for the purpose of reselling
in the market to make a profit are referred to as inventory. Inventory is a bridge between manufacturing
and order fulfilment, which act as a central point for all business operations and serves as a primary
source of revenue generation. Although inventory is described in numerous ways, it only depends on the
management which affects order fulfilment capabilities of an organisation.
For instance, business should collect all crucial data which influence their future purchasing and
fulfilment operations for maintaining track of raw materials, safety stock , finished goods or packing
materials. This is significant to understand purchasing trends and rates at which the items will be
sold so that the company restock the inventory and prioritised which item needs to be re-purchased.
All this information plays crucial role in improving customer relations, cash flow and profitability by
decreasing the unnecessary wastage of inventory.
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UNIT 10: Inventory Management JGI JAIN
Inventory is:
i. A tangible or intangible asset,
ii. A tangible or intangible asset that may be realised for revenue generation or has a market value, or
iii. A process asset that is intended for market sale.
10.2.1 Types of Inventory

1. Raw Materials: Raw materials are used by the manufacturers to ultimately reach to final goods.
These raw products are found in stock which have not been used in either work-in-progress or
finished goods inventory for example sugarcane for producing sugar, leather to make belts and
artificial flowers for interior designer business. As the product finished, the raw elements, such as
the oil needed to make shampoo, are usually indistinguishable from their previous state.
2. Components: Components are comparable to raw materials in that they are the materials that a
firm utilises to make and finish things, with the exception that they, like screws, remain recognisable
after the product is finished.
3. Work In Progress (WIP): Work-in-progress (WIP) is a manufacturing and supply-chain management
word that refers to partially finished items that are awaiting completion. Raw material, labour, and
overhead expenditures for items in various phases of manufacturing are referred to as WIP.
4. Finished Goods: Items that are ready to sale are known as finished products.
5. Maintenance, Repair and Operations (MRO) Goods: MRO is inventory — usually in the form of
supplies — that aids in the production of a product or the operation of a business.
6. Packing and Packaging Materials: Packing materials are divided into three categories. The
primary packaging protects and makes the product useable. Secondary packaging refers to the
final packaging of a product, which may contain labels or SKU information. Bulk packaging for
transportation is referred to as tertiary packaging.
7. Safety Stock and Anticipation Stock: The additional inventory that a corporation buys and keeps to
handle unexpected situations is known as safety stock. Safety stock has a cost of ownership, but it
helps to maintain customer happiness. Similarly, anticipation stock is made up of raw materials or
completed goods that a company buys in response to sales and production trends. A company may
acquire safety stock if the price of a raw material is rising or if peak sales season is coming.
8. Decoupling Inventory: Extra products or work-in-progress (WIP) are stored at each production
line station to prevent work stoppages, which is referred to as decoupling inventory. While all
organisations maintain safety stock, decoupling inventory is only applicable to companies that
make items and is beneficial if segments of the line work at different speeds.
9. Cycle Inventory: Companies order cycle inventory in lots to ensure that the proper amount of stock
is available at the lowest possible cost of storage. In the “Essential Guide to Inventory Planning,” you
may learn more about cycle inventory calculations.
10. Service Inventory: Service inventory is a notion in management accounting that relates to how
much service a company can deliver in a certain time frame. In a given week, a hotel with ten rooms,
for example, has a service inventory of 70 one-night stays.
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10.3 INVENTORY MANAGEMENT

Inventory management refers to the management of non-capitalised assets, often known as inventory,
and stock goods. It plays a significant role in any business operation with manufacturing and selling of
products and services. Inventory is important for business like manufacturing company, a retail store,
an e-commerce business, a restaurant, an FMCG firm, or a freight/logistics company. Any shortage in
inventory can create problem in the process of manufacturing. Inventory management is a component
of supply chain management that oversees the movement of items from producers to warehouses and
from these locations to points of sale. Keeping a precise record of each new or returned product as it
enters or leaves a warehouse or point of sale is an important part of inventory management.
Inventory management may be used by small to large enterprises to keep track of their commodities
movement. There are a variety of inventory management systems, and choosing the appropriate one
may lead to the delivery of the right items in the right amount, at the right time.
Inventory control is a subset of inventory management that focuses on lowering total inventory costs
while increasing the capacity to distribute items to consumers in a timely way. In certain nations, the
terms are interchangeable.
Figure 1 shows the movement of goods from manufacturing to warehouse and to ultimately reach point
of sale:
Points of sale
Orders Produces Stores Sells (distributors and
Manufacturer Raw materials Finished goods Warehouse retailers)
Management Tracking
Inventory Management System
Meets consumer Increases sales

demands
Figure 1: Movement of Raw Material to Finished Goods
10.3.1 Importance of Inventory Management

Inventory management is important not only for e-commerce and online retail brands. It allows business
to fulfil the orders timely and efficiently. Businesses can balance the quantity of goods coming in and
leaving out with effective inventory management. The better a company’s inventory management is, the
more money it may save on operations. Therefore, to understand better there are following importance
of inventory management:
 Enhance level of profit in business: If the inventory is managed properly then it can bring inevitable
outcome for small business which increases the profit level. This is because the inventory which
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are stocked is actually selling and the other stock are considered as obsolete and thus abandoned.
Therefore, with the help of inventory management the flow of business practice becomes more
efficient.
 Minimise labour costs: Proper inventory management planning and techniques helps in reducing
labour costs in small businesses. Labour costs include time spent counting stock and transportation
of stock.
 Organised Warehouse: Proper inventory management leads to an organised warehouse centre.
An organised warehouse is important for efficient present and future fulfilment plans. Since this
helps in reducing cost and improved product fulfillment for the businesses using warehouse for
managing inventory.
 Good Inventory Planning and ordering: For smooth flow of business operation, it is important to
maintain a balance between the demand and supply. Thus, inventory management provides a better
planning and ordering of stock items. For example, a particular item has a huge demand in the
market but not having enough material to supply the same can make business operation disturbed.
Therefore, a proper inventory management helps in mitigating these issues, and allows warehouse
managers to restock inventory when needed.
10.3.2 Functions of Inventory Management

Inventory management is a critical component of every organisation’s strategic management.
The primary goal of inventory management is to establish the appropriate number and kind of input
items, in-process products, and final products in order to streamline production and sales processes
while lowering costs.
Inventory management is critical for ensuring that the company has enough items on hand to fulfil
customer demand. If it is not handled properly, the firm may lose money on prospective sales that
cannot be fulfilled, or you may waste money managing too much inventory. These sorts of mistakes
may be avoided with the use of an inventory management system. Following are some of the function
of inventory management:
 Maintain all layouts and keep track of storage space
 Maintain technology responsibility for different materials
 Ensure timely availability
 Develop policies, plans and standards
 Maintain purchase procedure, ordering policies and physical verification of goods
10.3.3 Benefits of Inventory Management

The two main benefits of inventory management are that it ensures you’re able to fulfill incoming or
open orders and raises profits. Inventory management also:
 Saves Money: Understanding stock trends allows you to know how much and where you have
something in stock, allowing you to make better use of it. This helps in holding less stock at each
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location (store, warehouse), and fulfil orders from anywhere. All these result into lowering inventory
costs and reducing quantity of unsold products before it becomes obsolete.
 Improves Cash Flow: You spend money on merchandise that sells when you use good inventory
management, so money is continually flowing through the firm.
 Improve customer satisfaction: Customer satisfaction gets improved as it provides comprehensive
view of your stack-at-hand. Proper inventory management leads to orders being fulfilled more
quickly and delivered to customers faster.
10.4 INVENTORY COSTS

The expenses of ordering and holding goods, as well as the associated documentation, are included in
inventory costs. This cost is considered by management when deciding how much inventory to maintain
on hand. This can lead to changes in the order fulfilment rate for consumers, as well as changes in the
flow of the manufacturing process. The following are the several types of inventory expenses.
1. Ordering Costs: These expenses include the procurement department’s salaries, as well as related
payroll taxes and benefits, as well as perhaps equivalent labour costs incurred by the industrial
engineering team in the event that new suppliers must be pre-qualified before delivering parts to
the firm. These expenses are usually grouped together in an overhead cost pool and assigned to the
amount of units produced each quarter.
2. Holding Costs: These costs are connected to the amount of space needed to store inventory, the
cost of the money needed to buy inventory, and the risk of inventory obsolescence-related loss.
The majority of these expenses are grouped together in an overhead cost pool and assigned to the
number of units produced in each month. Holding expenses are comprised of the following items:
 Cost of space: The warehouse facility, which includes warehouse depreciation, insurance,
utilities, maintenance, warehouse workers, storage racks, and goods handling equipment, is
likely the greatest inventory expense. There may also be fire suppression and burglar alarm
systems, as well as the expenditures of maintaining them.
 Cost of money: The money used to pay for inventory are always subject to interest charges. This
cost indicates the foregone interest revenue connected with the allocated cash if the firm has no
debt.
 Cost of obsolescence: Some inventory products may never be utilised or may be destroyed
while in storage, necessitating their disposal at a reduced or free cost. This can be a significant
expenditure depending on how perishable the inventory is or how quickly technological
developments affect inventory prices.
3. Administrative Costs: The accounting department pays the salaries of a cost accounting team,
which is in charge of accumulating inventory costs and cost of goods sold, responding to other
inventory analysis requests, and defending their findings to internal and external auditors. The cost
of cost accounting employees is deducted from the expense account when it is incurred.
10.5 ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity (EOQ) is a computation that businesses use to determine their optimal order
size, which allows them to satisfy demand without going over budget. EOQ is calculated by inventory
managers to reduce holding costs and surplus inventory.
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It makes no difference if you sell jelly beans, appliances, furniture, or aero planes. Finding the most cost-
effective order quantity for any product you buy will almost certainly have an influence on your bottom
line. Measuring and adhering to the EOQ may assist any company that controls inventory.
Economic order quantity is a helpful indicator for companies that purchase and store goods for
manufacture, resale, internal usage, or any other reason.
Businesses that use EOQ consider all expenses associated with purchasing and delivery, as well as
product demand, purchase discounts, and holding costs.
Purchasing and determining the right inventory levels may be difficult for even the most experienced
business owners and managers. When heavy discount are offered by the vendors to but more, then EOQ
can help in deciding where the line should be drawn.
The economic order quantity formula is used by EOQ (found below). As a consequence, you’ll get a data-
driven outcome that may help you improve your company’s profitability.
10.6 TECHNIQUES OF INVENTORY CONTROL

Inventory control is a science-based art of ensuring that a company has enough inventory on hand
to satisfy both internal and external demand obligations in a cost-effective manner. Uncontrolled
inventory, according to Gopalan and Sandhilya, might become an organisation’s disease. “Managing
inventory investment levels is like to keeping the water level in a bathtub with an open drain. The water
is constantly gushing forth. If the water is introduced too slowly, the tub will quickly become empty. The
tub overflows if water is poured in too quickly. The specific objects in inventory, like the water in the tub,
change throughout time, but the level may not.
The fundamental financial issues are determining the appropriate level of inventory investment and
determining how much inventory must be bought each quarter to sustain the level.
In truth, stock management is mostly the responsibility of the production manager. The finance
manager’s main concern is that the resulting stock balance is an investment that requires funding. As
a result, the finance manager should anticipate the production manager handing over an ideal stock
number.
In order to achieve the aim of wealth and profit maximisation, the financial manager acts as a type of
watchdog over other functional areas. As a result, top-level management should maintain a bird’s-eye
perspective of inventory using the cost-benefit analysis premise of “neither too much nor too little.”
Management must make critical judgments about how much to purchase and when to order it, as well
as what safety stocks to hold and what stock-out probabilities and levels are acceptable.
The ABC analysis, the EOQ model, safety stocks, and the re-order point are the key production-oriented
inventory control methodologies and strategies for efficiently managing inventories.
10.6.1 ABC
The ABC analysis is extensively utilised for unfinished goods, manufactured products, spare parts,
components, completed things, and assembly items, and it has become an integral aspect of a firm. The
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management separates the things into three categories: A, B, and C, with A being the most valuable and
C being the least valued.
The Pareto Principle is used to analyse ABC inventory. According to the Pareto Principle, the top 20%
of goods create 80% of sales volume. This indicates that the top 20% of the things will earn 80% of the
income for the company. The 80/20 rule is another name for it.
This approach is useful for determining which inventory products create the highest percentage of
annual consumption. It assists managers in optimising inventory levels and maximising the utilisation
of stock management resources.
Figure 2 shows the inventory into three category
• Expensive Inventory
A • Accurate Control Required
ABC
B • Moderate Value Inventory
Analysis • Moderate Control
• Low Cost Inventory

C • Minimum Control Required
Figure 2: ABC Analysis
10.6.2 FSN
FSN analysis, which stands for Fast-moving, Slow-moving, and Non-moving in inventory management,
is also known as the FSN analysis. FSN is one of the inventory management approaches, and it involves
categorising things based on their consumption rate, quantity, and rate of usage.
Fast-moving inventory, as the term implies, consists of merchandise that moves fast and requires
frequent replenishment. In general, stock in this category has an inventory turnover ratio of greater
than three and accounts for about 10-15% of overall inventory.
Inventory moving slowly through the supply chain and has an inventory turnover ratio of 1.3 referred
as slow-moving inventory. It usually accounts for 30-35 percent of the overall supply.
Non-moving inventory is defined as inventory that moves infrequently, has a low inventory turnover
ratio, and accounts for 60-65 percent of total stock.
10.6.3 SDE
SDE stands for Scarce, Difficult and easily available. The SDE analysis is a standard tool for inventory
control and optimisation. This is only one of several optimisation approaches that take into consideration
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demand and supply changes, as well as replenishment factors to calculate how much inventory to
maintain to protect against such variations.
10.6.4 VED
VED analysis is a strategy for inventory management that categorises inventory according to its
functional relevance. It divides stock into three categories depending on its value and requirement for a
company’s production or other operations. The VED (Vital, Essential, and Desirable) analysis stands for
vital, essential, and desirable.
10.6.5. Two Bin Technique

The storing of items in two bins, one for working stock and the other for reserve stock, is known as two-
bin inventory control. The amount of inventory held in the reserve stock bin corresponds to the amount
expected to be used during the ordering lead time for that item. To make advantage of this method,
reorder products as soon as the working stock bin is depleted, so that new components arrive before the
reserve stock bin is depleted. The number of commodities held in the reserve stock bin may be adjusted
to fine-tune the inventory investment.
10.7 INVENTORY MODELS

It first aids in determining the nature of the problem. Goods management models benefit your
organisation by ensuring that the right amount of inventory is kept on hand while lowering expenses.
The goal of inventory management, also known as inventory control, is to get the most out of your
inventory while spending the least amount of money possible. You want to make sure you have enough
merchandise in stock to keep your customers happy, but you also don’t want to waste money on stuff
that won’t sell.
10.7.1 Single Period Model

A single period inventory model is a business scenario that firms with seasonal or one-time orders
encounter. Because the product has no value after the time it is needed, there is only one opportunity to
get the amount correct when ordering. Single-period model is designed for those goods that are highly
perishable. These models designed for products have following characteristics:
 The products that are sold at their regular price during single time period
 These products have huge demand but follows a known probability distribution.
10.7.2 Fixed Order Quantity Model

When inventory hits a reorder point, replenishment stock is ordered, and the replenishment quantity is
fixed regardless of external events. FOQ stands for Fixed Order Quantity.
10.7.3 Fixed Time Period Model

Inventory is counted and reorders are placed at pre-determined times, such as once a week or once
a month, in this inventory management system. In cases where vendors make recurrent visits to
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consumers and accept orders for their whole line of products, or when buyers wish to combine orders
to save on shipping expenses, placing orders on a regular basis is preferable. Order numbers fluctuate
from period to period depending on utilisation rates in Fixed-Time Period models. In comparison to a
fixed-order quantity system, this inventory management method necessitates a larger degree of safety
stock.
A fixed-time-period model counts inventory at regular intervals, such as once a week or once a month.
When vendors make recurrent visits to consumers and accept “orders for their whole line of products, or
when buyers wish to combine purchases to save on shipping expenses, counting inventories and placing
orders on a regular basis is advantageous. Other businesses work on a set schedule to make it easier to
organise their win count.
Employees are aware that distributor X calls every two weeks, and that all of Distributor X’s items must
be tallied at that time. A convenient time interval can be set, or if just one item is involved, the EOQ
formula can be used to estimate the time.
We can establish how many times per year we should make the order once the EOQ for the item has been
computed.
10.7.4 Optional Replenishment Model

The Optional Replenishment Model (ORM) is a type of replenishment system that allows you to a
replenishment approach that is similar to the fixed order period model but is optional. No order is
placed in this model until inventory has decreased below a certain level before the end of the order
period. When review and ordering expenses are high, it is appealing to defend against putting extremely
little orders. Inventory Model with a Fixed Reorder Cycle Inventory Model with Fixed Reorder Quantity
Hybrid Inventory System is another option. Models of Independent Demand Item Management are also
available.
A form of inventory control system that combines the properties of periodic and fixed quantity
inventory systems is an optional replenishment system. It’s employed when the expenses of verifying
and evaluating inventory are high, the review might be erroneous or problematic (for example, with
hazardous chemicals, scrap materials, pig iron, and so on), or obtaining fresh supplies is expensive and/
or complex. When the optional replenishment method is utilised, a specific amount of the stock (for
example, s) is defined as low, while another amount (say, S) is set as desired. The company conducts a
regular examination of the warehouse’s stock availability.
The stock quantity is then compared to s and S. If the current stock amount is less than s, further stock
is ordered. Aside from that, no orders are placed.
 Inventory management aids businesses in determining which goods to order and when to order it.
It keeps track of merchandise from purchase to sale.
 The practice monitors and reacts to trends to guarantee that there is always adequate stock to
satisfy client requests and that shortages are detected early.
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 Work-in-progress (WIP) is a manufacturing and supply-chain management word that refers to

partially finished items that are awaiting completion.
 Inventory management refers to the management of non-capitalised assets, often known as
inventory, and stock goods.
 Inventory management is a component of supply chain management that oversees the movement
of items from producers to warehouses and from these locations to points of sale.
 Businesses can balance the quantity of goods coming in and leaving out with effective inventory
management.
 Overstock occurs when a company has too much inventory. Overstocked enterprises have money
locked up in inventory, which restricts cash flow and may result in a budget deficit.
 Overstocked inventory, also known as dead stock, typically sits in storage, unable to be sold, eroding
a company’s profit margin.
 Economic order quantity (EOQ) is a computation that businesses use to determine their optimal
order size, which allows them to satisfy demand without going over budget.
 EOQ is calculated by inventory managers to reduce holding costs and surplus inventory
 Purchasing and determining the right inventory levels may be difficult for even the most experienced
business owners and managers.
 The Optional Replenishment Model (ORM) is a type of replenishment system that allows you to A
replenishment approach that is similar to the fixed order period model but is optional.
10.9 GLOSSARY
 Inventory: A comprehensive catalogue of items or stock on hand, including work in progress, raw
materials, finished goods on hand, and so on
 Intangible: Anything that exists but can’t be felt, described precisely, or valued precisely
 Replenishment: To restore fullness or completion, as by restoring what is missing, depleted, etc.
 Administrative: Tied to a country’s, company’, or other organisation
10.10 CASE STUDY: ABC LTD INVENTORY MANAGEMENT
Case Objective
The primary purpose of this case study was to determine inventory management by opening
warehouses
ABC ltd was an online retail store started in 2001, with an aim to earn huge profits. The company wanted
to offer his customers wide range of selection of products in every respect, but did not want to spend
time and money on opening stores and warehouses and dealing in any inventories. Therefore, company
decided to open its own warehouses to satisfy its customers. The company had opened six warehouses at
different places. However, opening warehouses was very costly. Then the company started outsourcing
inventory management for providing superior customer service. Though the company knew, that it
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could damage the brand reputation. Now, the company realised that, every item need not to be stocked
for offer. Only those items were stocked which were popular and frequently purchased. If in any situation
any unpopular product is ordered then the company directly requests to the distributor and it reaches
to the customer. Therefore, the entire shipment process is done smoothly.
Questions
1. What are the challenges that an online retail store can have?
(Hint: There are variable cost incurred during multiple delivery of item)
2. What Could be the benefit of inventory management?
(Hint: Inventory management helps in saving time and unnecessary cost of business)
1. What do you mean by inventory?

2. Explain the inventory management.
3. Discuss the importance of inventory management.
4. Describe the concept of Economic Order Quantity (EOQ)

1. All of the commodities, goods, merchandise, and materials retained by a firm for the purpose of
reselling in the market to make a profit are referred to as inventory. Inventory is a bridge between
manufacturing and order fulfilment, which act as a central point for all business operations and
serves as a primary source of revenue generation. Refer to Section Inventory
2. Inventory management refers to the management of non-capitalised assets, often known as
inventory, and stock goods. Inventory management is a component of supply chain management
that oversees the movement of items from producers to warehouses and from these locations to
points of sale. Keeping a precise record of each new or returned product as it enters or leaves a
warehouse or point of sale is an important part of inventory management. Refer to Section Inventory
Management
3. Inventory management is important not only for e-commerce and online retail brands. It allows
business to fulfil the orders timely and efficiently. Businesses can balance the quantity of goods
coming in and leaving out with effective inventory management. The better a company’s inventory
management is, the more money it may save on operations. Refer to Section Introduction
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4. Economic order quantity (EOQ) is a computation that businesses use to determine their optimal
order size, which allows them to satisfy demand without going over budget. EOQ is calculated by
inventory managers to reduce holding costs and surplus inventory. Refer to Section Economic Order
Quantity (EOQ)
 https://www.orderhive.com/inventory-management.html
 https://www.cips.org/knowledge/procurement-topics-and-skills/operations-management/
inventory-management/
 Discuss with your friends about the uses of inventory management.
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UNIT
11 MRP and ERP
Names of Sub-Units
Materials Requirement Planning (MRP), Factors and Problems in MRP Implementation, MRP and
MPS, Inputs to MRP, Manufacturing Resource Planning, Proces MRP Explosion, Enterprise Resource
Planning (ERP), How ERP Works in Practice?, Electronic Connectivity between Organisations.
Overview
The unit begins by explaining the Materials Requirement Planning (MRP). Further, it discusses the
factors and problems in MRP implementation. The unit explains the MRP and MPS as well as inputs to
MRP. Also, it describes the manufacturing resource planning, its explosion and ERP. Towards the end,
it elaborates how ERP works in practice? and electronic connectivity between organisations.
Learning Objectives

 Explain the meaning of MRP
 Describe the factors and problems in MRP implementation
 Discuss MRP and MPS with their inputs
 State the manufacturing resource planning and its explosion
 Explain the concept of Enterprise Resource Planning (ERP)
 Analyse electronic connectivity between the organisations
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Learning Outcomes

 Assess the importance of MRP and ERP
 Appraise the factors and problems in MRP implementation
 Evaluate the application of MRP and MPS
 Analyse the manufacturing resource planning
 Examine the electronic connectivity between the organisations
 https://www.tutorialspoint.com/management_concepts/enterprise_resource_planning.htm
 https://www.investopedia.com/terms/e/erp.asp
11.1 INTRODUCTION
Material requirements planning is abbreviated as MRP. Its primary goal is to determine what type
of material you require, how much you require and when you require it, allowing you to assure the
maximum possible production rate in your manufacturing facility.
Enterprise Resource Planning (ERP), on the other hand, is a more frequent business software category,
especially among large companies. The capabilities of this software are far more comprehensive.
HR, Customer Relationship Management (CRM), accounting, inventory management and warehouse
management are examples of standard ERP modules. Back-office operations that successfully link to
other systems are among these functions.
11.2 MATERIALS REQUIREMENT PLANNING (MRP)

MRP stands for material requirements planning and it is a technique for determining the materials and
components required to make a product. It entails three main steps: inventorying existing resources and
components, determining which extra ones are required and arranging their manufacture or acquisition.
MRP, which is mostly accomplished using specialised software, ensures that the correct inventory is
accessible for the manufacturing process precisely when it is required and at the lowest feasible cost.
It also improves the efficiency of manufacturing operations and also brings flexibility and profitability.
It has the potential to increase production worker productivity, enhance product quality and reduce
material and labour costs.
MRP helps an organisation in adapting more quickly to the growth in the demand for their products.
It enables them to minimise and eliminate any kind of manufacturing delays and inventory stock outs
because delays can result in loss of customers. This can lead to reduced revenue growth and stability.
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MRP is widely employed by manufacturers and has unquestionably been a crucial facilitator in the
expansion and widespread availability of inexpensive consumer products, raising the standard of life
in most nations.
11.2.1 Objectives of MRP

An MRP system’s goals are to calculate the amount and time of material requirements, as well as to
maintain priorities current and accurate.
 Determine the quantity and timing of material requirements: Your company uses MRP to determine
what to order (by looking at the BOM), how much to order (by using the lot size rule for the specific
item), when to place the order (by looking at when the material is needed and backward-scheduling to
account for lead time) and when to schedule delivery (by looking at when the material is needed and
backward-scheduling to account for lead time) (it schedules the material to arrive just as it is needed).
 Maintain priorities: MRP is also used by your firm to maintain priorities and accuracy. Requirements
alter throughout time. Customers alter purchase amounts and/or delivery dates. Suppliers supply
late or in insufficient amounts. Manufacturing produces unanticipated scrap. When equipment
fails, production is delayed. You utilise an MRP system to adapt to changes in the daily environment,
restructure priorities and maintain plans current and viable in an ever-changing context.
11.2.2 Benefits of MRP

Following are the benefits of MRP:
1. Accurate lead times and product costs: “How long does it take?” and “How much does it cost?” are
straightforward client inquiries that many manufacturers struggle to answer.
Manufacturers who have used MRP systems have the following answers:
 Without calling the production manager, calculate the product cost and lead time.
 With only a few clicks, notify production of a confirmed consumer order in one environment.
There will be no emails or phone calls.
 A single location to track a customer’s order from proposal to delivery.
 Stay on top of the production process and correct problems as soon as possible.
2. Real-time accurate inventory and stock overview: A number of manufacturing companies have
been encouraged to use MRP best practises to improve stock and inventory management:
Inventory control, stock movements, stock lot and serial number tracking, shipments and much more
are all represented by the stock in MRP. All transactions in other parts have a direct impact on the stock.
 Concentrate on ordering only what’s required and when it is needed, which reduces inventory
turnaround time, frees up cash and decreases inventory investment.
 Preventing stock-outs by optimising the minimum and maximum stock levels.
 Stock and inventory transactions, such as production booking, inventory valuation, write-offs,
balance calculation, product pricing and so on, may all be automated.
Customers that use MRP software claim an average inventory decrease of 14%.
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3. Accurate planning and reliable production schedule: The MRP system aids production managers
in precisely planning production and compiling a dependable production schedule.
When will you be able to get your hands on the materials? The MRP system will offer the production
manager with all of the relevant information on when the materials will be available.
How long does it take to complete the manufacturing process? The MRP System keeps track of each
operation’s timetable (such as assembly, testing and packaging).
In addition, the system keeps track of preparation time, hourly productivity, operation cost, defect
rate and so on for each activity. The production manager may now schedule production with only a
few clicks.
The MRP system keeps track of scheduled tasks and work orders.
 Each member of the team has access to the information they require.
 Employees may use their personalised timetables to keep track of their work.
 From a master production schedule, management can remain on top of processes and observe
how client orders or activities are carried out.
4. Accurate material planning and purchasing: An effective purchasing process is required to focus
on minimising inventory, having what’s needed when it is needed and having what’s needed for
production available:
 All suppliers are handled from a central location.
 All purchase conditions, including delivery and pricing terms, are centrally controlled and
available when planning production.
 After the client order is received, purchase requests may be rapidly fulfilled.
 Purchase orders can be simply raised and suppliers may be emailed from a single location.
There’s no need to contact procurement by email or phone.
 Keep track of all manufacturing phases and material availability.
5. Streamlined team reporting: An effective MRP system organises team reporting, allowing you to
track what has been completed and when. Reporting can be done in three ways:
1. The old-fashioned method of printing a document and marking an order as completed when the
manager returns it.
For real-time reporting, there are two choices:
 Full desktop view: workers may see drawings, attachments, all information, material
locations and start and stop reports.
 Simplified kiosk view for a tablet or smartphone: the employee sees what they need to
perform and clicks start and end.
6. Regulatory demand for traceability and transparency: The MRP System enables you to satisfy
regulatory requirements while also ensuring quality and audibility.
 Complete visibility into the production process, from vendors through end-product finishing.
 Keep track of patches, product lines and versions.
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 Kept track of quality standards and material expiration dates.

 Subcontractor standards that are transparent.
7. Saving time on dull tasks: The MRP System’s main goal is to enable all team members to save time
and operate more efficiently in one place.
 Tasks are accurately assigned and reporting is simplified.
 Documents, such as quotes, invoices, waybills, picking lists, shipments and purchase orders may
all be exported automatically.
 For internal communication, avoid using e-mail and the phone.
 Helps maintain track of what’s important and prevents human mistakes.
 Saves time by eliminating the need to enter data into several applications.
11.3 FACTORS AND PROBLEMS IN MRP IMPLEMENTATION

Let us understand the factors in MRP Implementation.
 Supplier Lead Time: You cannot guarantee a finished product if you do not have the tools to make it.
As a result, you must factor supplier lead times into your production planning.
 On-Hand Inventory: You save money and make better use of the stuff you currently have on hand
if you do not have to buy more. If you constantly know what you have on hand, you can meet your
commitments to your clients while maintaining high levels of customer satisfaction.
 Current Forecasting: Knowing what you have already anticipated might help you see modifications
that need to be made now and in the future to keep demand and inventory in sync.
 Open PO, SO or WO: Until you include open purchase orders, sales orders and work orders in progress,
you will not have a true picture of your inventory or income. A thorough examination of all of these
elements may provide you with a precise estimate of the return on investment you are receiving.
 Work and Machine Centre Capacity: Before you commit to increased sales, be sure your employees
and equipment are in good operating shape. If you have this on your radar at all times, you will not
overpromise again.
 BOM and Sub Assembly Dependencies: If you have sophisticated BOMs that demand additional
care, be sure to include this into the insight you have access to so that it is maintained on track at all
times, just like your work and machine capacity.
 Order History and Season: Knowing what you have accomplished in regard to seasonal trends
or expected downtime will help you manage cash flow and make your manufacturing operations
profitable.
Inventory management is critical for profitability and efficiency. Good control procedures have become
even more critical as a result of just-in-time (JIT) manufacturing: if you do not keep huge stockpiles, you
need to know what you have and be able to reorder it as needed. However, the advantages of excellent
inventory control goes beyond pure production savings and include elements like reducing wastage and
expenditure, both of which can have a negative influence on the bottom line.
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Modern MRP programmes are capable of delivering these efficiencies, but they must be specifically
developed for the task. Resource planning software is not a “set it and forget it” solution and if it is
not kept up to date, the associated MRP issues will lead to even more manufacturing challenges in the
future.
Customers have always been ruthless, but never more so than in today’s world of rapid criticism and
social media sharing. In this environment, producers must guarantee that quality control is developed
and integrated from the beginning to the end. Though it is not simple to do, having systems capable of
anticipating or responding to production problems promptly and effectively is critical. Again, smart
resource planning will assist – especially with errors resulting from communication difficulties or
recurrent causes – so that the company can identify and resolve them swiftly.
Manufacturers used to get practically everything they required from local vendors, whether it was raw
materials or components. However, in today’s world, it is conceivable and frequently advantageous to
source from further away, for example, to save money. However, there may be a variety of concerns
with this worldwide supply chain, such as price swings, dependability issues and quality control, to
name a few. To monitor suppliers, get information around the clock and respond quickly if and when
problems arise, you will need sophisticated controls. Manufacturing ERP software now provides the
data, connectivity and automation needed to make rapid and efficient choices.
Businesses create a lot of data, yet it is all too common for this precious resource to be exploited
inefficiently, if at all. Everything from the cost of raw materials to the performance of suppliers is now
easily available. However, if the company has ‘MRP difficulties,’ such as limited or obsolete IT systems,
the chance to get insights from such data might be squandered and any advantages gained from
these insights could be lost. However, data may give firms actual and demonstrable advantages when
properly collected and analysed by current fit-for-purpose ERP software.
“Continuous change is here to stay,” as the phrase goes and the rate of change today appears to be
increasing every year. The speed with which information is transmitted, the rising creation of data, the
expansion of consumer expectations and the relative simplicity with which new goods may be put into
the market are all drivers of change in the twenty-first century.
Manufacturers must have good control of their processes to deal with these elements; otherwise, isolated
‘quick fixes’ to adapt to shifting needs might lead to costly production difficulties. This makes investing
in the correct manufacturing ERP systems mission-critical because processes can only be controlled
while also adapting to new challenges and changing surroundings with the right technology.
Finally, we must all recognise the significance – and inevitability – of being more linked. In a company
environment where everything is connected smoothly, software that is future-oriented is required.
Even small manufacturers are opting for today’s established ERP systems to be successful, rather than
depending on handmade spreadsheets or software patches. Companies are also looking for dependable
IT partners to help them prosper and survive in the changing manufacturing business.
11.4 MRP AND MPS

Manufacturing planning systems and inventory planning systems include Master Production Scheduling
(MPS) and Material Requirements Planning (MRP). These are two different software solutions that help
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simplify the manufacturing process. And since demand is the most important factor in any inventory
planning system, let’s start with demand and then look at the differences and applications of Master
Production Scheduling and Material Requirements Planning.
Demand
Any inventory planning and production system are driven by demand.
There are two different sorts of demand, which are as follows:

 Independent Demand Item: The item relates to direct client demand, which indicates that the
desire originates directly from the customer and such things are referred to as Top-level items.
These objects are often sold and have a Bill of Materials (BOM).
 Dependent Demand Item: Lower Level Objects are stuff that must be manufactured and other
similar items. Dependent demand items include raw materials and subassemblies that are
required for manufacture. Bill of Materials for these items (BOM).
Let us understand Material Requirements Planning and Master Production Scheduling:

 Material Requirements Planning (MRP): Requirements for Materials Planning strategies for
products with a cyclical demand. MRP creates production plans for things that need to be made.
It makes plans for what materials we have, how much we’ll need and how much we’ll buy and use.
 Master Production Scheduling (MPS): Master Production Scheduling is used to schedule things that
have their demand. MPS plans for products based on direct demand/sales orders and projections
from customers. During the manufacture of elements, inventory costs, production expenses,
capacity, working hours, inventory levels, available storage and so on are all taken into account.
MPS does not operate on a daily basis; instead, it operates on a weekly basis, based on orders and
forecast periods.
MPS and MRP run in parallel to respond to change requests. For example, a pen is an MPS item, whereas
individual parts/components, such as the cap, barrel and refill are MRP products. MRP runs more often
to obtain the action messages needed to build and manage the production schedule. MPS does not
operate on a daily basis; instead, it operates on a weekly or longer basis, dealing with modification
requests by producing freshly altered products.
11.5 INPUTS TO MRP

Following are the inputs to MRP:
1. Supplier lead time: You must factor supplier lead time into your production planning.
2. On-hand inventory: If resource material is already in stock, there is no need to acquire fresh. This
helps you save money. This allows you to make the most of the supplies you currently have on hand.
It is also simple to keep consumers’ commitments.
3. Current forecasting: If the organisation has information about what has previously been forecasted,
it can warn the organisation to make necessary modifications. This helps to align demand and
supply.
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4. Work and machine centre capacity: To conduct MRP, a knowledgeable person is required. We
should make material available to customers whenever they want it. When the capacity at work
is understood, the material available for dispatch may be planned. We can make commitments to
customers based on this computation.
5. Order history and season: Seasonal tendencies should be understood. This insight aids in optimising
production rates by demand.
11.6 MANUFACTURING RESOURCE PLANNING

Manufacturing Resource Planning II, i.e., MRP II is a business-oriented information system. The system
is built to consolidate, integrate and analyse data to make better decisions in factory scheduling, design
engineering, inventory management and cost control.
The integrated information system helps in making a good decision by centralising, integrating and
processing information that is related to the manufacturing process.
Material requirements planning (MRP) is a computer-based, time-phased system for planning and
regulating a company’s production and inventory functions from material procurement through
completed goods distribution. Because of the level of detail needed and the accompanying computational
cost, all MRP systems are computer-based. MRP is time-phased because it specifies not only what and
how much needs to be created or purchased, but also when it needs to be made or purchased.
The MRP system is made up of three main parts, each of which serves as an input. The master production
schedule, bill-of-materials and inventory status file are all examples. Each module has a distinct function
that is intertwined with the goals of the others and generates a variety of usable outputs.
11.7 PROCESS MRP EXPLOSION

Material requirements planning is abbreviated as MRP. The term harkens back to the restricted
capabilities of original MRPs, which were only good for calculating raw material requirements on a
timetable. Modern MRP systems, on the other hand, include a variety of modules that cover a wide
range of business operations, from scheduling to accounting and inventory control.
The first stage in the MRP process is to examine the MPS and determine which, how many and when
components are required to satisfy the MPS. MRP explosion is the name for this procedure. MRP employs
a network representation of product assembly known as Bill of Materials throughout the explosion
(BOM).
A bag is made up of two major pieces, according to the BOM: a body and a strap. Sewing 12 zips on a
leather body are how a body is made. Two hooks are attached to the ends of a leather strap to make
a strap. We also include the production lead time for each activity next to it. Actual processing times
should not be confused with lead times. Transportation and line wait times, as well as processing times,
all contribute to lead times. Assembly of a strap to a body, for example, can take 5-6 minutes, but the
lead time can be a day due to waiting. In summary, a bill of materials (BOM) is a diagram that shows the
items needed in assembly and manufacturing procedures, as well as the lead times for these operations.
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When MRP reaches the raw material level (the BOM tree’s leaves), a schedule of how many components
are required and when they are needed becomes accessible. This list of raw material requirements is
forwarded to the procurement department, which places orders for raw materials from the supply
chain’s upstream firms. For those upstream enterprises, the raw material purchase timetable becomes
an MPS. MRP explosion information aids in the planning of activities, ensuring that the proper number
and kind of inputs are available for use and that sufficient time is allotted for them.
MRP explosion must be automated for discrete product manufacturers with several tiers in their BOM.
Computerization not only speeds up the process, but also makes it more disciplined and eliminates
human mistakes. Enterprise resource planning (ERP) applies MRP theory to SCs across a firm’s or
multiple businesses’ numerous production sites.
MRP is the first conceptual depiction of complex production systems’ underlying network structure.
It allows you to plan a huge number of tasks in a methodical and coordinated manner through this
network. Because MRP is essentially a specialised database system, all of the benefits of database
systems also apply to MRP. MRP simplifies information and makes accurate data available rapidly.
Standardisation and product development can both benefit from streamlining.
BOM is important to product developers, for example, since it is frequently used as a starting point for
design changes. Many design improvements are achieved by removing or standardising certain pieces.
Assume that Tex-Bag also makes suitcases and that the suitcases have zips. The same zip can be used
in bags and luggage if the design team can standardise zips (for example, their length). The complexity
of procedures is reduced as a result of this standardisation; there are fewer products to label, buy, store
and move.
11.8 ENTERPRISE RESOURCE PLANNING (ERP)

Enterprise resource planning (ERP) is a management and integration technique used by firms to
manage and integrate important areas of their operations. Many ERP software systems are beneficial
to businesses because they assist them in implementing resource planning by unifying all of the
operations required to manage their businesses into a single system. Planning, purchasing, inventory,
sales, marketing, finance, human resources and other functions may all be integrated with ERP software.
An enterprise resource planning system may be thought of as the glue that holds a company’s numerous
computer systems together. Without an ERP system, each department would have its system that was
tailored to its needs. Each department instals its own ERP software in the system but all systems may be
accessed through one application with an interface.
ERP solutions make it easier for various departments to communicate and exchange data with the rest
of the firm. It gathers data on the activity and condition of various divisions and makes it available in
other sections of the system, where it might be useful. Let us understand the advantages of ERP in detail.
11.9.1 Advantages of ERP

ERP is utilised by organisations having objectives like expanding the business operations and minimising
expenses. Although the advantages sought and obtained by one firm may differ from those sought and
accomplished by another, there are a few that are worth highlighting.
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Integrating and automating corporate operations reduces redundancy, boosts accuracy and boosts
output. Departments with related operations may now coordinate activities to get better outcomes
sooner.
Advanced reporting of real-time data from a single source system is beneficial to some firms. Accurate
and accurate reporting enables businesses to properly plan, budget, predict and communicate the
condition of their operations to internal and external stakeholders, such as shareholders.
ERP enables organisations to instantly access the information that customers, vendors and business
partners require, resulting in higher customer and employee satisfaction, faster reaction times and
enhanced accuracy. As the firm becomes more efficient, affiliate charges are frequently lowered.
Departments are better able to interact and exchange information; a new synergistic workforce
may boost productivity and boost employee happiness by allowing workers to understand how each
functional area contributes to the company’s goal and vision. Simultaneously, administrative and
manual chores are reduced, allowing employees to devote their time to more important work.
11.9 HOW ERP WORkS IN PRACTICE?

The technology and systems that firms employ to manage and integrate their key business activities
are referred to as Enterprise Resource Planning (ERP). Enterprise resource planning software is a
centralised system that combines procedures across the organisation. Within a single interface, such
programmes allow users to engage, exchange information and collaborate across departments.
An ERP encourages open communication inside a company, resulting in enhanced synergies across
various business sectors, as well as increased efficiency as procedures are streamlined and information
is readily available to those who need it. Decrease in expenses connected with old and inefficient
technology for those who require it; and reduction in costs associated with obsolete and ineffective
technology for those who require it.
ERP implementation can be costly, but the return on investment (ROI) can be realised rapidly. Certainly,
the benefits realised (such as higher productivity and lower administrative expenses) may significantly
surpass the expenditures of ERP implementation.
ERP systems operate on the basis of a well-defined data structure. Information entered in one department
is immediately accessible to authorised users throughout the organisation. This standardised framework
ensures that everyone is on the same page. Consider a local food distribution system with several sites
that frequently share stock and workers. When quality, sales and employee data is input into the ERP
system from these locations, it is structured to show where location came from.
Then, across departments, real-time data is integrated into business processes and workflows. Leaders
can determine whether one location is substantially better at preventing spoiling than a sibling site a few
towns away and investigate why, while operations can ensure that staffing levels are in line with traffic
patterns. Finance may assist CEOs to determine whether or not to combine by comparing sales to rents.
When a corporation has modules for each main business function and assures fast correct data entry,
ERP systems provide the maximum value. And the more people who have access to it, the better.
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When a corporation employs different suppliers’ business systems, connectors are usually available to
have data flow into the ERP automatically. This real-time data may then be used to improve any process
or workflow within the ERP instance.
11.10 ELECTRONIC CONNECTIVITY BETWEEN ORGANISATIONS

Through the use of current technology, such as smartphones and computer systems, electronic
connection allows for wireless communication.
It is critical for team members to maintain track of their unique development processes in software
development. This process is rather stress-free because of electronic communication. Team members
may easily collaborate and contribute code to a single remote repository thanks to platforms like
GitHub. Electronic connection tools speed up the development process while also improving the quality
of the finished product or programme.
 Material requirements planning is abbreviated as MRP.

 Its primary goal is to determine what type of material you require, how much you require and when
you require it, allowing you to assure the maximum possible production rate in your manufacturing
facility.
 Enterprise resource planning (ERP), on the other hand, is a more frequent business software
category, especially among large companies.
 HR, customer relationship management (CRM), accounting, inventory management and warehouse
management are examples of standard ERP modules.
 Back-office operations that successfully link to other systems are among these functions.
 MRP stands for material requirements planning and it is a technique for determining the materials
and components required to make a product.
 It entails three main steps: inventorying existing resources and components, determining which
extra ones are required and arranging their manufacture or acquisition.
 MRP, which is mostly accomplished using specialised software, ensures that the correct inventory is
accessible for the manufacturing process precisely when it is required and at the lowest feasible cost.
 It has the potential to increase production worker productivity, enhance product quality and reduce
material and labour costs.
 Inventory management is critical for profitability and efficiency.
 Good control procedures have become even more critical as a result of just-in-time (JIT)
manufacturing: if you do not keep huge stockpiles, you need to know what you have and be able to
reorder it as needed.
 Modern MRP programmes are capable of delivering these efficiencies, but they must be specifically
developed for the task.
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 Resource planning software is not a “set it and forget it” solution and if it is not kept up to date, the
associated MRP issues will lead to even more manufacturing challenges in the future.
 Customers have always been ruthless, but never more so than in today’s world of rapid criticism
and social media sharing.
 In this environment, producers must guarantee that quality control is developed and integrated
from the beginning to the end.
 Though it is not simple to do, having systems capable of anticipating or responding to production
problems promptly and effectively is critical.
 Again, smart resource planning will assist – especially with errors resulting from communication
difficulties or recurrent causes – so that the company can identify and resolve them swiftly.
 Manufacturing planning systems and inventory planning systems include Master Production
Scheduling (MPS) and Material Requirements Planning (MRP).
 These are two different software solutions that help simplify the manufacturing process. And since
demand is the most important factor in any inventory planning system, let’s start with demand
and then look at the differences and applications of Master Production Scheduling and Material
Requirements Planning.
 Master Production Scheduling is used to schedule things that have their demand.
 MPS plans for products based on direct demand/sales orders and projections from customers.
 During the manufacture of elements, inventory costs, production expenses, capacity, working hours,
inventory levels, available storage and so on are all taken into account.
 MPS does not operate on a daily basis; instead, it operates on a weekly basis, based on orders and
forecast periods.
 Manufacturing Resource Planning II (MRP II) is a business-oriented information system.
 The system is built to consolidate, integrate and analyse data to make better decisions in factory
scheduling, design engineering, inventory management and cost control.
 By centralising, integrating and processing information linked to the manufacturing process, the
integrated information system aids management decision-making.
 Material requirements planning is abbreviated as MRP.
 The term harkens back to the restricted capabilities of original MRPs, which were only good for
calculating raw material requirements on a timetable.
 Modern MRP systems, on the other hand, include a variety of modules that cover a wide range of
business operations, from scheduling to accounting and inventory control.
 The first stage in the MRP process is to examine the MPS and determine which, how many and when
components are required to satisfy the MPS.
 MRP explosion is the name for this procedure.
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 MRP employs a network representation of product assembly known as Bill of Materials throughout
the explosion (BOM).
 Enterprise resource planning (ERP) is a management and integration technique used by firms to
manage and integrate important areas of their operations.
 Many ERP software systems are beneficial to businesses because they assist them in implementing
resource planning by unifying all of the operations required to manage their businesses into a single
system.
 Planning, purchasing, inventory, sales, marketing, finance, human resources and other functions
may all be integrated with ERP software.
11.12 GLOSSARY
 Enterprise Resource Planning: It is a form of software used by businesses to handle day-to-day

operations including accounting and procurement
 Inventory Management: It is the process of a company’s inventory being ordered, stored, used and
sold
 Warehouse: It is a huge structure used to store raw materials or produced items
 Implementation: It is an instance or act of putting something into practice
11.13 CASE STUDY: MATERIALS MANAGEMENT
Case Objective
The aim of this case is to elaborate how on material is managed in the organisation.
Companies found it challenging to retain a consistent supply of the materials needed to keep the
machines roaring and the goods rolling off the assembly line while manufacturing was in its infancy.
Some organisations elected to order a huge number of inventories, which cost them more in storage
space and occasionally resulted in a significant amount of wasted inventory or they tried to estimate
when they needed to reorder based on current production levels. While both systems had some success,
neither took into account supply and demand fluctuations. Up to World War II, these conditions were
known as “Push” systems and were frequent.
“Pull” systems are the polar opposite of “Push” systems. Reorders in a “Pull” system are based on need
rather than anticipation. If a grocer has twelve cartons of orange juice on the shelf and all but three
have been sold, he knows he needs to return to the warehouse and get another nine cartons. He does
not try to predict how long the cartons will last and he does not stockpile 30 cartons just in case. “Pull”
methods were popular in manufacturing because they allowed corporations to save money on surplus
inventory, but they were not completely foolproof. They were sometimes unable to obtain supplies before
they ran out due to communication delays and long lead periods.
The reorder-point idea was established during World War II. Researchers saw a need for a materials
management approach that took into account supply and demand variations (as the “Pull” method did),
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but also allowed for orders. Notes must be placed in sufficient time for the products to arrive before
the stock runs out. The Restock-Point takes into account the time it takes to create such materials so
that enterprises do not have to reorder at the last minute. Instead, they make an order when their stock
reaches a specific level (determined using intricate mathematical calculations).
While researchers were refining “Pull” methods, another innovation in materials management was
discovered. Period Batch Control was a breakthrough that allowed firms to specify a definite lead time
for their products. Companies were able to do this by planning the development of the many components
that made up the final product. For example, materials might arrive one week and components would
be built and ready to be transformed into sub-assembly parts two weeks later.
Batch Control began crudely, but the automobile sector achieved remarkable success in the 1970s by
computerising the scheduling required for generating these set lead-times. Batch management is now
an important part of Materials Requirements Planning (MRP), which employs software to calculate
lead times so that “Pull” systems may be accommodated more effectively.
Materials management, of course, has a long history, beginning with an inefficient approach of
predicting how much stock will be required. Today’s better, technology-based strategy allows businesses
to notify vendors as soon as they reach the reorder point and those reorder points are more precise than
ever owing to improved batch control procedures. Since its inception, this mix of technology and tried-
and-true materials management practises has proven to be a valuable benefit to enterprises.
Efficient materials management not only keeps the business running smoothly, but also helps
organisations build better connections with their supply chain partners, save expenses and meet client
requests. Because of the competitive environment in which most businesses now operate, all of these
factors have grown increasingly crucial. These advantages are no longer discretionary; they have
become a must for businesses that have achieved success in their sectors.
Questions
1. In ERP, what is the material management module?

(Hint: One of the most important components of ERP software is material management. The
material management module keeps track of inventory, number of commodities, raw materials,
finished goods and material requirements.)
2. What does the term “material management” mean?
(Hint: A fundamental material management definition, according to the non-profit Construction
Industry Institute, is “the planning and regulating of all material and equipment so that they are
requested in advance, purchased at a fair cost and accessible when needed.” This term encompasses
a wide range of materials, not only those that are intended for direct use.)
3. What function does material management play?
(Hint: Material management is the role in charge of properly planning, coordinating and regulating
operations relating to a manufacturing company’s material flow.)
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1. Define Materials Requirement Planning (MRP).

2. Explain the concept of Master Production Scheduling (MPS).
3. Discuss the Process MRP Explosion.
4. Outline the concept of Enterprise Resource Planning (ERP)?

1. Material requirements planning is abbreviated as MRP. Its primary goal is to determine what type
of material you require, how much you require and when you require it, allowing you to assure
the maximum possible production rate in your manufacturing facility. Refer to Section Materials
Requirement Planning (MRP)
2. Master Production Scheduling is used to schedule things that have their demand. MPS plans
for products based on direct demand/sales orders and projections from customers. During the
manufacture of elements, inventory costs, production expenses, capacity, working hours, inventory
levels, available storage and so on are all taken into account. MPS does not operate on a daily basis;
instead, it operates on a weekly basis, based on orders and forecast periods. Refer to Section MRP
and MPS
3. Material requirements planning is abbreviated as MRP. The term harkens back to the restricted
capabilities of original MRPs, which were only good for calculating raw material requirements on a
timetable. Modern MRP systems, on the other hand, include a variety of modules that cover a wide
range of business operations, from scheduling to accounting and inventory control.
The first stage in the MRP process is to examine the MPS and determine which, how many and when
components are required to satisfy the MPS. MRP explosion is the name for this procedure. MRP
employs a network representation of product assembly known as Bill of Materials throughout the
explosion (BOM). Refer to Section MRP Explosion Process
4. Enterprise resource planning (ERP) is a management and integration technique used by firms to
manage and integrate important areas of their operations. Planning, purchasing, inventory, sales,
marketing, finance, human resources and other functions may all be integrated with ERP software.
Refer to Section Enterprise Resource Planning (ERP)
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 https://www.geniuserp.com/blog/what-is-the-difference-between-mrp-and-erp
 https://abas-erp.com/en/products/mrp
 https://www.cips.org/knowledge/procurement-topics-and-skills/operations-management/
material-requirements-planning/
 https://searcherp.techtarget.com/definition/material-requirements-planning-MRP
 Discuss with your team the difference between MRP and ERP
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UNIT
12 Lean Concepts
Names of Sub-Units
Introduction to Lean Concepts, Visual Management, Seven Hidden Wastes, Kanban, Line Balancing,
Single Piece Flow, Single-Minute Exchange of Die (SMED), Poka-Yoke, why Analysis, Total Productive
Maintenance (TPM), Change in Mindset after Implementing TPM and Overall Equipment Effectiveness
(OEE)
Overview
The unit begins by explaining the meaning of lean concepts, visual management and seven hidden
wastes. Further, it discusses the Kanban, line balancing and single piece flow. The unit also explains
the Single-Minute Exchange of Die (SMED), Poka-Yoke, why Analysis and Total Productive Maintenance
(TPM). Towards the end, it elaborates change in mindset after implementing TPM and overall
equipment effectiveness (OEE).
Learning Objectives

 Explain the meaning of lean concepts and seven hidden wastes
 Describe the Kanban, line balancing and single piece flow
 Define the concept of visual management
 State the Single-Minute Exchange of Die (SMED)
 Explain the poka-yoke and why analysis
 Elaborate the Total Productive Maintenance (TPM)
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Learning Outcomes

 Assess the importance of lean concepts
 Appraise the line balancing and single piece flow
 Evaluate the visual management
 Analyse the Single-Minute Exchange of Die (SMED)
 Examine the Total Productive Maintenance (TPM)
 https://www.leanproduction.com/tpm/
 https://www.investopedia.com/terms/k/kanban.asp
12.1 INTRODUCTION
Lean is a manufacturing/operations concept that originated in the mid-twentieth century with the
Toyota Production System. It is based on the notion of defining value from the perspective of the
customer and continually improving the way value is delivered by decreasing the use of inefficient
or non-value-adding resources. Lean emphasises keeping value with less effort, with the end goal of
providing optimal value to consumers through a waste-free value generating process. This is achieved
by allowing each person to realise his or her full potential and hence contribute to the greatest degree
possible.
The notion of empowerment is built on treating people with respect. In addition to the eventual client,
respect for people extends to labour, suppliers and society. The goal of lean is to maximise value delivery
while reducing waste for the end user. The objective of Lean is to improve human potential by allowing
people to continuously improve work. Lean leaders provide problem-solving training. They support
employees’ professional and personal growth, allowing them to be proud of their work.
Lean is a collection of operational ideas, structures and procedures used in enterprises to achieve
continuous improvement. Lean does this by focusing relentlessly on increasing customer value while
eliminating the eight wastes.
12.2 LEAN CONCEPTS

To understand the history of Lean, we must go back to the dawn of modern manufacturing. Henry Ford
was the first to completely incorporate the “mass-production” manufacturing system, which produces
large quantities of standardised things. Flow production, which involves the continuous movement
of parts through the manufacturing process, was pioneered by Ford. Ford used mass production to
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make and assemble the components of his vehicles in minutes rather than hours or days. In contrast
to handmade manufacturing, mass production yielded perfectly fitted, interchangeable components.
Because of this technique, the Ford Motor Company was able to produce about 15 million Model T vehicles
between 1908 and 1927. The US military utilised Ford’s mass manufacturing technologies throughout
WWII.
In 1926, Sakichi Toyoda founded the Toyoda Automatic Loom Works. After a few years, the company
changed its name to Toyota and began producing automobiles. In 1950, Sakichi’s nephew, Eiji Toyoda,
paid a three-month visit to Ford’s Rouge facility in Dearborn, Michigan. At the time, the Dearborn
factory was Ford’s most sophisticated and biggest manufacturing facility. It produced almost 8000
vehicles every day, compared to Toyota’s annual production of about 2500 vehicles.
After studying Ford’s manufacturing technique, Eiji Toyoda realised that the mass production approach
used by Ford could not be used by Toyota. The Japanese market was too small and diverse for mass
manufacturing. Customers’ requirements ranged from little vehicles to the most luxurious autos. Ford’s
mass-production approach prioritised quantity over the voice of the customer. Toyota collaborated with
Taiichi Ohno to develop a new production system. They realised that by accurately scaling machines for
the actual quantity required and including self-monitoring technology, they could manufacture things
faster, for less money, with better quality and most importantly, with more variety! Ohno had to strike a
balance between output and quality.
He came up with a number of innovative notions as a consequence of his attempts, which became
known as.
12.2.1 Application of Lean Concept

Using Lean ideas, companies may save time, energy and money by finding and removing bottlenecks.
You can resolve a bottleneck in a variety of methods, depending on the type of bottleneck. If a lack of
resources are the cause of the bottleneck, you may need to recruit more people or invest in technology
to make your current resources go further.
JIT manufacturing is an on-demand manufacturing method that allows producers to start making
a product as soon as a client places an order. This eliminates the need for enterprises to stockpile
unnecessary goods, reducing the risk of overstocking or product damage during storage.
This reduces the need for enterprises to stockpile surplus goods, reducing the danger of overstocking or
damage to components or objects during storage.
Just-in-time manufacturing is an on-demand method that allows producers to start producing a

product only when a consumer has ordered it. JIT helps in minimising the need to stock up inventory
reduces the danger of overstocking or damage to components or goods while being kept.
To understand lean concepts, you must understand the terms mentioned below:
 Value Stream Mapping: Value stream mapping is a technique adopted from Lean manufacturing.
Businesses use it to produce a visual depiction of all the components that go into delivering a product
or service, with the purpose of analysing and improving the entire process.
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Value stream mapping is used in a variety of industries, including manufacturing, finance and
healthcare. To offer an overview of the business, this concept depicts all of the relevant personnel,
processes, information and inventories in a flow chart.
 Overall Equipment Effectiveness (OEE): The overall equipment effectiveness (OEE) statistic measures
how much of the planned production time is actually spent productively. Consider the following
scenario: You set aside an hour to concentrate on a project, but you spend 20 minutes of that time
on the phone with a customer, resulting in a 67 percent OEE (40 minutes of actual production time,
divided by 60 minutes of planned production time).
OEE evaluates the proportion of “good parts” generated in manufacturing (“good parts” refers
to goods that meet the company’s quality guidelines). If components of your project are poorly
constructed, they will not contribute to the “excellent parts” or overall OEE score.
 Error Proofing: Poka-yoke, or error proofing, is a typical process analysis method that is founded on
the principle of prevention. Poka-yoke, according to Business. Map, a project management software
business, focuses on ensuring that the necessary circumstances exist before any procedure is
implemented. Defects and human mistakes are less likely to occur as a result of this procedure.
12.3 VISUAL MANAGEMENT

If you’ve ever worked on a project with more than one team, you’ve undoubtedly seen the following
scenario: You make a detailed record of actions and send all of the papers to your teammates. Despite
all of this clearly written information, the project’s processes remain a mystery to others, proving that
having more knowledge does not necessarily imply understanding; sometimes we simply need to see it.
According to a research commissioned by 3M Corp., visual aids increase learning by up to 400 percent,
humans digest visuals 60,000 times faster than words and the average person only recalls about one-
fifth of what they hear.
While visual communication isn’t new (think cave drawings and smoke signals), it wasn’t until the Gantt
chart — a type of bar chart that’s still used to illustrate a project schedule — that business started
to embrace the idea of using visual controls for production. Traffic lights, signage and lane markers
help drivers, color-coded clothing helps store staff be identified and our phones glow with notifications,
among other things.
Visual management is intended to provide vital information in such a simple visual way that it requires
little explanation. With great visual management, anybody in a workplace should be able to see the
current state and progress of work, navigate the area, track how their team is performing vs. target,
be aware of any challenges and much more. By providing fast visual signals, organisations may boost
productivity by making information visible and actionable.
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Figure 1 shows the lean visual management boards:
Figure 1: Visual Management Boards

Source: https://www.magiboardstrade.com/
12.4 SEVEN HIDDEN WASTES

Lean manufacturing refers to the management concept which is based on the Toyota Production System
which focuses on the waste eliminations, or “Muda,” from a manufacturing system. It takes into account
a range of wastes, including waste generated by excessive human movement and attempts to integrate
each part of the production process into a holistic, efficient process that reduces costs and raises overall
revenue. In the lean manufacturing system, overproduction, inventory, motion, errors, over-processing,
waiting and transportation are all emphasised as wastes. Let us understand these wastes in detail.
1. Overproduction: The most serious of the wastes, may lead to a slew of other wastes, as well as excess
inventories. Storage, wasted resources and lost capital are all apparent consequences of stocking
too much of a product that isn’t utilised.
Depending on the item in question, overproduction might have disastrous environmental
implications. More raw materials are used than are needed; the product may spoil or become
obsolete, necessitating its disposal; and, if the product contains hazardous materials, more
hazardous materials are wasted than are needed, resulting in additional emissions, waste disposal
costs, worker exposure and potential environmental issues.
2. Inventory: Overproduction, depending on the item in issue, might have devastating environmental
consequences. More raw materials are used than are required; the product may spoil or become
obsolete, requiring its disposal; and, if the product contains hazardous materials, more hazardous
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materials are wasted than are required, resulting in increased emissions, waste disposal costs,
worker exposure and potential environmental issues.
3. Motion: Wasteful motion is defined as any movement that may be reduced, whether by a human or a
machine. If the excess motion is used to add value that might have been added with less motion, it is
wasted. Motion means anything from a worker on the factory floor bending over to pick something
up to increased wear and tear on machinery, which leads to capital depreciation and replacement
of the machine.
Excessive movement has a lot of detrimental effects on the environment. One obvious example is
the waste of materials used to fix old gadgets; another example may be the health resources used by
overworked employees who wouldn’t have needed them if motion was decreased.
4. Defects: When a product fails to match the design standards or the customer’s expectations, it
is called a defect. Damaged items must be replaced; handling them necessitates paperwork and
human labour; they risk losing customers; and the resources spent on the damaged product are
squandered since it is not used.
The wasted raw materials, the defective product components that need to be disposed of or recycled
(wastes more resources in the repurposing process) and the extra space and greater energy
consumption necessary to cope with flaws are all environmental costs of defects.
5. Over-processing: Over-processing refers to any part of the manufacturing process that isn’t
required. When you paint an area that will never be seen or add features that will never be utilised,
you are over-processing. In essence, it refers to giving the customer more value than they require.
The extra components, labour and raw materials utilised in production have an influence on the
environment. Time, energy and emissions are wasted when time, energy and emissions are used
to create something that isn’t needed in a product; simplicity and efficiency minimise these wastes,
helping both the company and the environment.
6. Waiting: Waiting refers to the time wasted as a result of slowed or halted output in one step of the
manufacturing process while another is underway. If one task takes longer than the next, the time
spent waiting by the person in charge of the following work is wasted. To make up for the lost time,
the most time-consuming activity must be made more efficient, additional employees must be hired
to help, or the workflow must be better managed or scheduled.
During the waiting period, waste of labour and energy from lighting, heating and cooling has
an environmental impact. Furthermore, as a result of an accident, material may degrade and
components may be ruined.
7. Transport: The transportation of objects from one area to another is referred to as “transport.”
Because transportation adds no value to the goods, keeping these costs as low as feasible is crucial.
This might involve putting one factory closer to another in the industrial chain, or lowering
transportation costs by using more efficient modes of transportation. Handling supplies, hiring
staff to manage transportation, training, putting in place safety measures and making use of extra
space all take time and resources. Transportation can create a time loss because one portion of the
production chain must wait for the material to arrive.
Gas emissions, transportation packing, possible product damage on the route and a plethora of other
wastes involved with carrying hazardous commodities are among the environmental costs of waiting.
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12.5 KANBAN
The Japanese term “Kanban,” which means “visual board” or “sign,” has been used to describe a
technique since the 1950s. Toyota was the first to develop and implement a scheduling system for just-
in-time manufacturing. On the other hand, the capitalised term “Kanban” is well-known and associated
with the creation of the “Kanban Method,” which was first developed in 2007.
It began as a lean production scheduling system based on the Toyota Production System (TPS).
In the late 1940s, Toyota began employing “just in time” manufacturing in its production. A pull system
underpins the plan. This implies that rather than the old push approach of making things and pushing
them to market, production is driven by customer demand.
Their one-of-a-kind manufacturing strategy laid the foundation for Lean manufacturing, sometimes
known as just Lean. Its main purpose is to save waste while maintaining efficiency. The main goal is to
give more value to clients while lowering costs.
Kanban was quickly recognised by key software companies as a technique to enhance the delivery of
goods and services at the turn of the century.
Kanban moved beyond the car sector and was successfully applied to other complex business areas
such as IT, software development, R&D and others, with a greater emphasis on efficiency and the use of
computer technology advancements.
The Kanban Method, as we know it now, was initially introduced in early 2007. It is the result of years
of testing, knowledge and cooperation by prominent members of the Lean and Agile communities,
including David Aderson, Dan Vacanti, Darren Davis, Corey Ladas, Dominica DeGrandis, Rick Garber
and others.
To begin developing your Kanban system, create the most basic Kanban board with three fundamental
columns - “Requested,” “In Progress,” and “Done.” When developed, administered and functioning
effectively, it functions as a real-time information repository, indicating system bottlenecks and
anything else that might disturb smooth working practises.
12.6 LINE BALANCING

Line balancing is called load balancing/ production levelling, or Heijunka (Japanese). Line balancing
refers to the technique for matching factory output with customer demand by adjusting cycle times.
Using the line balancing strategy, several sources of waste (jap. Muda) are reduced.
(Assembly) flow lines are used in manufacturing operations to convey goods from one station to the next
in a step-by-step procedure. Each station requires a certain amount of time to perform the appropriate
operations before the product can be sent to the next. If stations instantly send things after finishing
an operation, stockpiles and waiting times are established between stations if processing times differ.
12.7 SINGLE PIECE FLOW

One-piece flow, also known as continuous flow, is the efficient movement of objects from one process
step to the next by organising workflow around the product and its requirements rather than the
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organisation or equipment. We’ll use a river as an example to illustrate flow. The aim of water is to
transport people from point A to point B. The stones and dams that reroute water are equivalent to any
waste or stop in manufacturing. When attempting to implement flow, we look at our layouts, machines,
processes, rules, culture and knowledge to identify what could be impeding it.
12.8 SINGLE-MINUTE EXCHANGE OF DIE (SMED)

SMED (Single-Minute Exchange of Die) is a method of dramatically reducing the time it takes to replace
equipment. The purpose of the SMED system is to make as many changeover operations “external”
(done while the equipment is running) as feasible while simplifying and streamlining the remainder.
The Single-Minute Die Exchange is designed to cut changeover times down to “single” digits (i.e., less
than 10 minutes).
Some of the benefits of a good SMED programme are as follows:

 Lower manufacturing costs: faster changeovers result in less equipment downtime. Due to faster
changeovers, smaller batch sizes allow for more frequent product changes.
 Better customer response: smaller lot sizes allow you more flexibility in scheduling.
 Lower inventory levels: inventory levels are lower since lot sizes are smaller.
 High-quality and consistent startups: standardised changeover processes improve consistency
and quality.
Basics of SMED
Shigeo Shingo, a Japanese industrial engineer, established SMED with the goal of supporting businesses
in substantially lowering changeover times. His ground-breaking strategy reduced changeover times
by 94 percent (i.e., from 90 minutes to less than 5 minutes) across a wide range of industries.
It may be difficult to imagine changeover times improving by a factor of 20, but consider the simple
example of a tyre replacement:
For many people, a single tyre replacement might easily take 15 minutes. In less than 15 seconds, a
NASCAR pit crew may change four tyres.
SMED employs many of the same methods as NASCAR pit crews (completing as many operations as
possible before the pit stop begins; utilising a coordinated team to execute several jobs in tandem; and
developing a standardised and highly simplified process). The shift from a 15-minute tyre changeover
to a 15-second tyre changeover is known as a SMED trip. SMED’s transitions are made up of “elements,”
or stages.
The elements are separated into two groups:

 Internal Elements: work that has to be done while the machine is turned off.
 External Elements: tasks that can be carried out while the machine is running.
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12.9 POKA-YOKE
Have you ever accidentally microwaved your face? No? You’ve never gotten microwave energy on your
face by opening the microwave door while it’s cooking? I’m sure you haven’t since the microwave shuts
down whenever you open the door. A switch activates when the door is opened, signaling the microwave
to turn off and this switch is an excellent daily example of poka-yoke.
Poka-yoke, which translates as “mistake-proofing” in Japanese, is a device or system that stops a person
from doing an activity incorrectly. Poka-yoke is a waste-reduction process that lowers or eliminates
quality faults that cause rework and scrap, as well as potential safety issues.
Poka-yoke is very useful for lowering the cost of quality, which is the premise that the longer it takes
to identify a problem, the more expensive it is to fix it. The fact of being human is that no matter how
simple or tough a task is, we will never attain 100 percent success. Poka-yoke does not alter human
nature, but it does lessen the likelihood of failure, which helps to improve quality and reduce workplace
stress.
Poka-yoke can be used in a number of different ways. For example, guide pins, limit switches, counters,
alarms and checklists. They can solve the problem by looking at the physical properties of the goods,
such as their shape and colour.
12.10 WHY ANALYSIS

A why analysis is initiated for recognising appropriate solutions to an issue/problem that address its
root cause(s). Organisations should not just band aid just by taking light actions instead it must perform
why analysis to go deep and identify how to really prevent the issue from happening again in future.
Why Analysis was originally developed by Sakichi Toyoda, who was the founder of Toyota Industries
Corporation in the 1930s. This concept reached the audience when Taiichi Ohno, the architect of the
Toyota Production System popularised the 5 Whys concept. Figure 2 shows Why analysis:
5 WHY ANALYSIS
Problem / Defect-Poor Team Performance
Players Coach Management
1st Why Terrible decision making Late substitutions Absence of good signings
2st Why Lack of cooperation Inaccurate substitutions Poor training ground
3st Why Playing out of position Unfamiliar tactics No support
4st Why Too many fouls Rift with key players Persistent criticism
5st Why Lack of communication Routine training Lack of motivation
Figure 2: Why Analysis
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12.11 TOTAL PRODUCTIVE MAINTENANCE (TPM)

TPM (Total Productive Maintenance) is a holistic approach to equipment upkeep that aims for optimal
results:
 No failures
 No minor pauses or slowdowns and there will be no defects
 Safe working environment
 No mishaps
TPM emphasises proactive and preventive maintenance to increase equipment efficiency. It emphasises
the need of enabling operators to participate in the repair of their equipment, blurring the boundaries
between production and maintenance.
When a TPM programme is adopted, it creates a shared responsibility for equipment, which encourages
production workers to participate more. In the right environment, this might be quite beneficial in
enhancing productivity (increasing up time, reducing cycle times and eliminating defects).
Traditional Tpm Pillars
The traditional TPM technique, which dates back to the 1960s, has a 5S foundation and eight supporting
activities (sometimes referred to as pillars).
The 5S Foundation
Figure 3 shows 5S:
5S is a workplace organisation techique composed for five primary

phases: Short, Set In Order, Shine, Standardise and Systematise.
SORT SET IN ORDER SHINE STANDARDIZE SYSTEMATIZE
Keep only necessary Arrange items to Clean the work Set standards
Maintain and
items in the promote efficient area so it is neat for a consistently
review standards.
workplace. workflow. and tidy. organised workplace.
Figure 3: 5S
Source: https://www.globaltranz.com/what-is-5s/
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The goal of 5S is to create a neat and orderly working environment. It consists of five elements:
 Sort: get rid of anything that isn’t absolutely essential from the work space.
 Straighten up the remaining items to organise them.
 Clean and examine the work area to make it shine.
 Establish criteria for completing the three steps outlined above.
 Maintain: Make sure the standards are adhered to on a regular basis.
It should be quite evident how 5S establishes a basis for well-running equipment. Fleaks, metal shavings
from unforeseen wear, material spills, hairline cracks in mechanisms are the emergent problems and
are much easier to discover in a clean and well-organised work space.
12.11.1 Eight Pillars of TPM
The Eight TPM Pillars
TPM’s eight pillars are primarily concerned with proactive and preventative methods for increasing
equipment dependability. Table 1 shows 8 pillars of TPM:
Table 1: The 8 pillars of TPM
PILLAR WHAT IS IT? HOW DOES IT HELP?

Autonomous Operators are responsible  Provides operators with a better sense of “ownership”
Maintenance for routine maintenance over their equipment.
such as cleaning,  Provides operators with a better understanding of their
lubrication and inspection. equipment.
 Maintains equipment cleanliness and lubrication.
 Recognises emerging difficulties before they turn into
failures.
 Allows maintenance staff to focus on higher-level re-
sponsibilities.
Planned Schedules maintenance  Significantly minimises the occurrence of unexpected
Maintenance chores based on failure stops.
rates that have been  Allows most maintenance to be scheduled for periods
forecasted and/or when the equipment is not in use.
measured.
 Improved inventory control of wear-prone and fail-
ure-prone parts reduces inventory.
Quality Incorporate error detection  Focuses on quality concerns through improvement pro-
Maintenance and prevention into your grammes aimed at eliminating fundamental causes of
manufacturing processes. faults.
To remove recurrent  Decreases the amount of faults.
sources of quality faults,
 Saves money by discovering flaws early on (it is expen-
employ Root Cause Analysis.
sive and unreliable to find defects through inspection)..
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PILLAR WHAT IS IT? HOW DOES IT HELP?

Focused Encourage small groups  Cross-functional teams identify and tackle recurring
Improvement of staff to collaborate problems.
proactively to enhance  Brings together a company’s collective capabilities to
equipment operating on a build an engine for continual progress.
regular basis.
Early Equipment TPM-acquired practical  Maintenance is easier and more robust owing to prac-
Management knowledge and tical evaluation and staff engagement prior to instal-
understanding of industrial lation.
equipment is used to  New equipment reaches targeted performance levels
improve the design of new considerably sooner due to fewer starting concerns.
machinery.
Training and Fill in the knowledge gaps  Operators learn how to repair equipment on a regular
Education required to meet TPM basis and spot potential problems.
objectives. Operators,  Maintenance employees learn proactive and preventa-
maintenance employees and tive maintenance procedures.
supervisors are all affected.
 TPM concepts, as well as employee mentoring and de-
velopment, are taught to managers.
Safety, Health, Maintain a healthy and safe  Reduces possible health and safety issues, making the
Environment work environment. workplace safer.
 Is focused on achieving the aim of an accident-free
workplace.
TPM in TPM approaches may be  TPM advantages are extended outside of the factory
Administration applied to administrative floor by reducing waste in administrative tasks.
operations.  Improved administrative procedures help to support
production (i.e., order processing, procurement and
scheduling).
12.11.2 Three Zeros of TPM

Total Productive Maintenance, or TPM, is a comprehensive approach for long-term improvement that
is employed by some of the world’s greatest manufacturers. “Aiming for zero” is one of the approach’s
main ideas.
We utilise data to understand the performance of a process in terms of safety, quality, cost and delivery
in the process model (SQCD). We may utilise this information to identify critical issues that need to be
examined and resolved; this is a targeted improvement, which is one of TPM’s pillars (workstreams).
This technique, on the other hand, is based on historical data, such as breakdowns, flaws and accidents.
If we are “aiming for zero,” we must also consider avoiding these problems by shifting our attention
away from SQCD outputs and toward proactive maintenance of labour, machine and material inputs.
This is where the other TPM pillars come into play.
The Heinrich/Bird Triangle, which is often utilised in accident prevention, may be used to mimic TPM’s
three zeros: Zero Breakdowns, Zero Defects and Zero Accidents.
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Zero Breakdowns
Breakdowns occur as a result of at least one of the following factors: poor fundamental conditions,
failure to follow operating instructions, uncontrolled degradation, insufficient skills and inherent
design flaws. The pillars of autonomous maintenance (AM), planned maintenance (PM) and training
and education (T&E) are working together to try to avoid breakdowns by correcting these difficulties.
Using the Heinrich triangle model, we can observe focused improvement (FI) addressing difficulties that
have already occurred (at the top of the triangle), while AM, PM and T&E tackle the base, preventing
problems from growing.
Zero Defects
Defects are produced by a variety of factors, including poor equipment condition, a lack of skills, a lack
of standards and out-of-spec material, to name a few. Reliable machine performance and hence the
activities of the AM, PM and T&E pillars, are critical for progress toward zero faults. Furthermore, the
pillars of Early Management (EM) and Quality Maintenance (QM) attempt to eliminate design flaws that
may lead to the formation of defects, while Early Management (EM) sets the circumstances that would
result in defect-free manufacturing.
QM and EM work at the base of the triangle with the other pillars, employing the Heinrich triangle
model once more.
Zero Accidents
To achieve zero accidents, all potential dangers and concerns must be avoided. Naturally, this cannot
be the responsibility of a single pillar and it is the combined effect of all pillars that creates a zero-
accident environment. Risk assessments, hazard spotting and other activities fall within the Safety,
Health and Environment (SHE) pillar. There is also the Office TPM pillar, which contributes to the goal
of zero accidents.
12.12 CHANGE IN MINDSET AFTER IMPLEMENTING TPM

According to Hartmann (2000), the installation of Total Productive Maintenance (TPM) fails at least
every second time. Following are the reasons for this:
 lack of understanding of the total effort required
 lack of management support
 lack of sufficient TPM staff, union resistance and insufficient training
 shift in priorities
 lack of persistence
 failure to develop a good installation strategy, or simply choosing the wrong approach
Implementing TPM, according to ChoyDS(2003), is a significant organisational shift that may have an
impact on the organisation’s structure, work-floor management system, personnel duties, performance
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assessment, incentive systems, skill development and information technology use. It’s no surprise that
most businesses’ success rates for large-scale change are less than 30%, which is why the TPM is tough
to execute.
12.13 OVERALL EQUIPMENT EFFECTIVENESS (OEE)

Overall Equipment Effectiveness (OEE) takes into account not just availability, but also performance and
quality. In other words, OEE addresses all losses caused by the equipment, such as not being available
when needed due to breakdowns or set-up and adjustment losses, not running at maximum efficiency
due to reduced speed or idling and minor stoppage losses and not producing first-pass quality output
due to defects and rework or start-up losses. TPM’s main goal is to cost-effectively maximise 3 Overall
Equipment Effectiveness by eliminating or reducing all of these six losses.
OEE = A x PR x Q = Overall Equipment Effectiveness,
Where
 A- Availability of the machine.
 PR- Performance Rate and PR=RE X SR Rate efficiency (RE):
 Q- Refers to quality rate.
 Lean is a manufacturing/operations concept that originated in the mid-twentieth century with the
Toyota Production System.
 It is based on the notion of defining value from the perspective of the customer and continually
improving the way value is delivered by decreasing the use of inefficient or non-value-adding
resources.
 Lean emphasises keeping value with less effort, with the end goal of providing optimal value to
consumers through a waste-free value generating process.
 Lean aims to maximise human potential by allowing people to continuously improve their work.
 Lean leaders contribute to this goal by providing problem-solving training.
 They support employees’ professional and personal growth, allowing them to be proud of their work.
 Lean is a collection of operational ideas, structures and procedures used in enterprises to achieve
continuous improvement.
 JIT manufacturing is an on-demand manufacturing method that allows producers to start making
a product as soon as a client places an order.
 This eliminates the need for enterprises to stockpile unnecessary goods, reducing the risk of
overstocking or product damage during storage.
 Value stream mapping is a technique adopted from Lean manufacturing.
 Businesses use it to produce a visual depiction of all the components that go into delivering a product
or service, with the purpose of analysing and improving the entire process.
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 Value stream mapping is used in a variety of industries, including manufacturing, finance and
healthcare.
 To offer an overview of the business, this concept depicts all of the relevant personnel, processes,
information and inventories in a flow chart.
 Visual management is intended to provide vital information in such a simple visual way that it
requires little explanation.
 With great visual management, anybody in a workplace should be able to see the current state and
progress of work, navigate the area, track how their team is performing vs. target, be aware of any
challenges and much more.
 By providing fast visual signals, organisations may boost productivity by making information
visible and actionable.
 Line balancing, also known as load balancing, production levelling, or Heijunka (Japanese), is a
technique for matching factory output with customer demand by adjusting cycle times. Using the
line balancing strategy, several sources of waste (jap. Muda) are reduced.
 Total Productive Maintenance, or TPM, is a comprehensive approach for long-term improvement
that is employed by some of the world’s greatest manufacturers. “Aiming for zero” is one of the
approach’s main ideas.
 Breakdowns occur as a result of at least one of the following factors: poor fundamental conditions,
failure to follow operating instructions, uncontrolled degradation, insufficient skills and inherent
design flaws.
 The pillars of autonomous maintenance (AM), planned maintenance (PM) and training and
education (T&E) are working together to try to avoid breakdowns by correcting these difficulties.
12.15 GLOSSARY
 Lean Concepts: It is a framework for organising human activities to maximise value while
minimising waste.
 Visual Management: It aims to increase communication and response effectiveness.
 Implementation: It is the act of putting a plan or system into action.
 Equipment: It is the collection of tools, clothes and other items required for a certain task.
12.16 Case Study:
12.16 CASE STUDY: E-COMMERCE-WATCH ON ENCRYPTION CODE COMPLIANCE
Case Objective
The aim of this case is to discuss e-commerce watch on encryption code compliance.
IAs a result of the current Blackberry scandal, online banking and e-commerce activities, including
credit card purchases may be subject to government surveillance.
15
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The Department of Telecom is currently taking efforts to guarantee that all Internet service providers
adhere to the encryption code that has been established. If they utilise more than a 40-bit encryption
code to safeguard transactions, all Internet-based service providers are required by law to give a
decryption key to the government.
Encryption codes are a means to jumble information transmitted over the internet so that only the
intended receiver knows the key to decrypt it and restore it to its original state.
However, as the Blackberry case revealed, a few service providers are not rigorously adhering to the
law and have failed to send the decryption code. Last week, telecom companies that provide Blackberry
services informed the Department of Transportation that the government had singled out one provider
for allegedly breaking encryption regulations.
Most e-commerce websites, such as those that sell airline and movie tickets and banking application
websites, utilise encryption codes that are more than 128 bits. To make the transactions safe, a higher
code is necessary. The issue with utilising stronger encryption codes is that without the decryption
codes, Indian security services find it hard to follow any individual transaction.
The Internet Service Providers, on the other hand, described the Department of Transportation’s
regulation as outdated and stated that they have previously requested that the permissible levels be
raised from 40 bits to at least 128 bits to keep up with new technology. “The present encryption regulations
were enacted at a time when the country’s Internet services were just getting started. When technology
allows for more secure transactions and very complicated transactions, it is incredibly unjust to hold to
the same standards. If the Department of Transportation insists on 40-bit encryption, the Internet will
be sent to the dark ages “Internet Service Providers Association President Rajesh Chharia said.
On two points, industry experts argued the Department of Transportation’s approach was unworkable.
To begin with, no corporation will provide its proprietary codes to leaky government agencies because
this may render e-commerce applications insecure and hence worthless. Second, the mechanism for
supplying decryption keys in digital form has not been clearly forth under the present guidelines.
So, even if someone dared to offer the code to the government, they’d have no idea how to submit it.
The encryption code is unrestricted in industrialised nations such as the United States. Their security
services monitor the situation using cutting-edge technologies.
“The Department of Transportation should invest in putting up monitoring centres that can accomplish
the work without reducing the extent of Internet services,” stated Elxess Consulting Services’
Mr. Amitabh Singhal.
Questions
1. What exactly does the lean model imply?
(Hint: LEAN is an abbreviation that stands for Leadership at Neosho Memorial Regional Medical
Center. Get rid of the trash. Now is the time to act. The list goes on and on.)
2. What is the lean idea and why should you learn about it?
(Hint: Lean focuses on reducing waste as much as possible while maintaining quality and efficiency.
In a continuous improvement process, it works by deleting or altering any steps of a critical process
that do not provide value, reducing waste throughout an entire value stream.)
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3. What are the tenets of the lean philosophy?

(Hint: Lean is a corporate strategy that focuses on delivering value to consumers by eliminating
product-related biases and notions from the workplace. The organisation notices a gain in efficiency,
increased quality, time effectiveness and production when the waste is recognised and eliminated.)
1. Explain the concept of lean and its application.

2. What is visual management?
3. Explain about Kanban.
4. Define SMED.
5. What is Poka-Yoke?
1. To understand the history of Lean, we must go back to the dawn of modern manufacturing. Henry
Ford was the first to completely incorporate the “mass-production” manufacturing system, which
produces large quantities of standardised things. Flow production, which involves the continuous
movement of parts through the manufacturing process, was pioneered by Ford. Refer to Section
Lean Concepts
2. Visual management is intended to provide vital information in such a simple visual way that it
requires little explanation. With great visual management, anybody in a workplace should be able to
see the current state and progress of work, navigate the area, track how their team is performing vs.
target, be aware of any challenges and much more. By providing fast visual signals, organisations
may boost productivity by making information visible and actionable. Refer to Section Visual
Management
3. The Japanese term “Kanban,” which means “visual board” or “sign,” has been used to describe a
technique since the 1950s. Toyota was the first to develop and implement a scheduling system for
just-in-time manufacturing. Refer to Section Kanban
4. SMED (Single-Minute Exchange of Die) is a method of dramatically reducing the time it takes to
replace equipment. The purpose of the SMED system is to make as many changeover operations
“external” (done while the equipment is running) as feasible while simplifying and streamlining the
remainder. The Single-Minute Die Exchange is designed to cut changeover times down to “single”
digits (i.e., less than 10 minutes). Refer to Section Single-Minute Exchange of Die (SMED)
17
5. Poka-yoke, which translates as “mistake-proofing” in Japanese, is a device or system that stops a

person from doing an activity incorrectly. Poka-yoke is a waste-reduction process that lowers or
eliminates quality faults that cause rework and scrap, as well as potential safety issues. Refer to
Section Poka-Yoke
 https://blog.planview.com/lean-manufacturing-concepts-and-how-to-use-them/
 https://www.processexcellencenetwork.com/lean-six-sigma-business-performance/articles/12-
essential-lean-concepts-and-tools
 https://insights.btoes.com/resources/what-is-lean-definition-tools-and-examples
 Discuss with your team the benefits of the lean concept.
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UNIT
13 Quality Management
Names of Sub-Units
Introduction to Quality, Total Quality Management, Little q vs. Big Q, Seven Quality Control (QC) Tools,
ISO Standards, Cost of Quality, Responsibility for Quality and Juran Quality Trilogy.
Overview
The unit begins by explaining the meaning of quality management. Further, it discusses Total Quality
Management. The unit explains Little q vs Big Q, Seven Quality Control (QC) Tools. It also discusses ISO
standards, cost of quality, responsibility for quality and Juran’s quality trilogy.
Learning Objectives

 Explain the meaning of quality and TQM
 Describe the nature of ISO standards
 Discuss seven quality control tools
 State the importance of Little q BIG Q
 Explain the cost of quality
JGI JAIN
Learning Outcomes

 Assess the quality and its dimensions
 Appraise the evolution of TQM
 Evaluate Seven Quality Control tools.
 Differentiate between little q and BIG Q.
 Examine the cost of quality and Juran’s quality trilogy
 https://cleartax.in/s/total-quality-management
 https://www.whatissixsigma.net/jurans-quality-trilogy/
13.1 INTRODUCTION
The adjective “quality” has a subjective connotation. “The totality of qualities and characteristics of a
product or service that bear on its capacity to meet stated or implied demands,” according to the ISO
definition. Simply put, when a product “complies with the specifications established by the client,” it is
said to be of excellent quality. Quality may be described as “delivery of trustworthy information within
a specified period of time, under accepted circumstances, at acceptable expenses and with appropriate
aftercare” when applied to analytical work. The “accepted conditions” should contain a specification
for the precision and accuracy of the data, which is directly tied to “fitness of use” and may vary by
application.
In many circumstances, however, the data’s trustworthiness is not questioned, and the request for
specifications are deleted. Many laboratories use well-established processes and procedures that are
difficult to modify and come with built-in defaults. Furthermore, not all future applications of the data
and reports can be predicted, therefore precise precision and accuracy criteria cannot be promised.
The assembly and administration of all operations aiming at the creation of quality by various types of
organisations are known as quality management. In this situation, this entails the establishment and
appropriate operation of a “Quality System” in laboratories. The institute’s directorate should make a
statement of quality objectives and policy for the organisation or department in question. The internal
organisation and responsibilities for the proper operation of the Quality System are also defined in this
statement.
Quality Management may be thought of as a broader understanding of the term “Good Laboratory
Practice” (GLP). As a result, the fundamentals of the current Guidelines are inextricably linked to those
of GLP.
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UNIT 13: Quality Management JGI JAIN
13.2 QUALITY
The activities in this handbook are centred on the term “quality” since it is intended to improve the
performance of a laboratory. The product’s quality, in this case, the analytical results, must be
acceptable. To determine if the product meets the quality criteria, it must first be defined. Only then can
it be determined whether the product is adequate or whether and what remedial measures are required.
Let us understand the definition and dimensions of quality.
13.2.1 Definitions of Quality

Quality can be defined in a variety of ways. Some are more concerned with objective facts, while others
are more concerned with subjective sentiments, but they are all interconnected. There are various
meanings available in dictionaries. Furthermore, based on their surroundings and standards, each
quality expert defines it differently.
Quality may be described as a fundamental instrument for evaluating a natural attribute of an item
or service that allows it to be compared to other similar goods or services. The term quality has a wide
range of connotations, but it essentially refers to a collection of an object’s intrinsic features that allow
it to meet stated or implicit demands.
Furthermore, a customer’s impression of a product or service determines its quality.
Product Features
One meaning of quality is that it refers to the characteristics of a product. A luxury automobile created
for elegance, for example, comes with plenty of luxurious comfort: matching walnut burl veneers, exotic
leather seats, luxury instrument panel, whitewall tyres, top-of-the-line performance and a great service
package that treats the car’s owners like royalty. Higher quality can result in the ability to demand a
premium price in this situation, hence product attributes will have a significant impact on firm revenues.
Freedom from Deficiencies
Another meaning of quality is a product or service that is devoid of flaws. Consider a tiny automobile
that requires few repairs, has no engine difficulties, has a rust-resistant paint finish and requires little
maintenance. In this situation, defect-free production has a significant influence on lowering corporate
expenses since greater quality implies less rework, fewer warranty claims and no customer complaints.
As a result, addressing consumers’ demands requires a combination of product features and defect-free
functionality. As a result, we should define quality in the context in question, such as the quality of postal
service, dental care, a product, life and so on.
Production Perspective
Conformance to requirements is a definition of quality. The degree to which a product satisfies design
standards and provides a satisfaction factor that meets all of a customer’s expectations. Products are
made and regulated in accordance with market-accepted normative norms, so that in the event of
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a regulatory inspection, the product may demonstrate that it fulfils the requirements set out by the
relevant certifying bodies.
Quality may be defined as a measure of excellence or a condition of being devoid of flaws, inadequacies
and major differences in production. Quality is achieved via a tight and constant dedication to specified
standards to create product consistency and meet specific client needs.
If an automotive manufacturer discovers a flaw in one of their vehicles and issues a product recall,
consumer trust and, as a result, production will suffer as a result of the loss of faith in the vehicle’s
quality.
Value Perspective
Quality involves giving value to the consumer, which includes providing product or service conditions
that meet or exceed the client’s expectations while being inexpensive. Quality also considers how
much trash a product generates for the environment or human civilization while yet allowing the
manufacturer to retain customer satisfaction.
13.2.2 Dimensions of Quality

A product’s capacity to meet or exceed consumer expectations is characterised by quality. As consumer
expectations shift, the notion of quality must shift as well. We shall define some of the characteristics
used to describe what quality means to customers in this blog. These are the dimensions:
1. Product performance: This refers to the product’s primary qualities. In general, if the performance
meets or surpasses the total expectations, your product is called high quality. Your quality rating
will suffer if the performance rating falls short of the customer’s expectations.
2. Aesthetics: Aesthetics refers to the aspects of a product’s look, feel, smell, or taste (if applicable).
Because aesthetic and style preferences are not universal, it will be hard to match everyone’s quality
standards in this area.
3. Special Features: This dimension encompasses all of the product’s extra features that go beyond its
fundamental functionality. This is generally what gives the buyer an extra degree of attractiveness.
4. Conformance: How effectively the product complies with the design criteria as well as any industry
norms and regulations. The requirements, as well as the acceptable deviations, are set during the
product design phase.
5. Dependability: This refers to how well you can rely on the product’s performance. It is not of good
quality if the item’s performance is unpredictable and you cannot rely on it. When a product’s (or a
company’s) performance regularly meets or exceeds expectations, it is said to be of high quality.
6. Durability: This refers to a product’s capacity to operate over time. When a product’s performance
does not deteriorate as it is used, it is said to be of good quality. Customers are more likely to spend
extra for things that will last longer.
7. Perceived Quality: This refers to the customer’s perception of the product’s quality. It’s worth
noting that perception isn’t necessarily the same as quality and a company’s reputation may have a
significant impact on how goods are regarded.
4
8. Serviceability: This refers to your company’s ability to manage service-related issues including
customer complaints and product repairs. This can also include the product’s simplicity of repair,
which might influence whether or not a consumer would purchase it.
9. Consistency: The final characteristic of product quality is that the quality does not fluctuate. This
includes fluctuation over time and for all of the company’s goods.
13.3 TOTAL QUALITY MANAGEMENT (TQM)

Total Quality Management (TQM) is a management framework based on the idea that quality must be
maintained in all aspects of a company’s operations.
This means that everyone in the company is responsible for the output quality, which leads to fewer
mistakes and continuous improvement in operations. Simply said, TQM’s ultimate objective is to do the
right thing the first time, every time.
TQM is based on eight basic concepts that influence strategy and actions across a business.
1. Customer focus
2. Total employee commitment
3. Process-oriented thinking
4. Integrated systems
5. Quality as a strategy
6. Continuous Improvement
7. Fact-based decision making
8. Effective communication
13.3.1 Evolution of TQM

Total Quality Management (TQM) may be traced back to the mid-nineteenth century, although some
argue that the importance of quality was reawakened with the industrial revolution. Inspection was
used to monitor and ensure quality in the early days. With the passage of time, this technique evolved
into Quality Control, then Quality Assurance and most recently, Total Quality Management. It’s critical
to remember that TQM is a dynamic, not a static, process focused on ongoing attempts to enhance
quality.
TQM can never be deemed complete in this aspect because there are no deadlines or objectives to meet,
but it should become a way of life. 2008 (Mehra& Ranganathan). The goal of this assessment is to provide
a quick overview of how the notion of TQM came to be.
Interpretation of the TQM Concept
Every year, the definitions and explanations of TQM evolve. According to ISO 8402, Dale (1999) described
TQM as “a management style of an organisation oriented on quality, based on the engagement of all
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its members and aiming at long-term success via customer satisfaction, as well as advantages to all
members of the business and society.” It is also described as an umbrella of thoughts and ideas from
diverse settings connected to the quality area by Dale et al. (2001). TQM, on the other hand, is defined
by Dahlgaard et al. (1999) as “a corporate culture characterised by enhancing customer satisfaction via
ongoing improvements engaging all personnel in the firm.” “TQM may be considered as a technique for
increasing a company’s competitiveness, efficiency and adaptability,” Oakland (1989) argues.
Others, such as Hellsten&Klefsjö [2000], define TQM as “a continually changing management system
consisting of values, processes and tools, with the goal of increasing external and internal customer
satisfaction with less resources.”
13.4 LITTLE q VS. BIG Q

Quality leaders have learnt through time that quality management encompasses more than only
activities directly connected to goods or services—activities that are crucial to achieving and maintaining
consistently high product and service quality, as well as satisfying customers. “Big Q” refers to these
additional quality management initiatives. ISO 9001 has evolved through time to include some of these
wider principles in its criteria.
Little q and Big Q
Joseph M. Juran discovered Big Q notions many years ago. Understanding these principles is crucial to
comprehending how world-class quality management must be designed for a business to be sustainable.
The term “Big Q” refers to the strategic management of quality in all company processes, goods and
services as they relate to all relevant interested parties. Little q, on the other hand, refers to a considerably
smaller focus on product quality, centred on the core clients.
Big Q is sometimes referred to as complete quality management, continuous improvement, or Six Sigma
quality, but it’s important to think of tiny q as tactical and Big Q as strategic.
Tiny q comes in the definition of Big Q, but it includes organisational culture issues and supports
administrative operations that aren’t covered by little q. Despite the fact that Big Q concepts have been
around for a long time, many businesses are unaware of the benefits that may be realised by addressing
Big Q procedures.
In the current edition of ISO 9001, Big Q is more prominent (if in a subtle way). Several of the new
standards should prompt an organisation’s QMS to be rethought in a way that allows for long-term
success.
Engagement of senior managers, workforce capabilities, knowledge and process management, as

well as risk-based thinking, the significance of recognising the demands of interested parties and the
organisation’s context are all elements in ISO 9001:2015 that drive the QMS toward a Big Q attitude.
If a business is merely aiming to gain certification, each of these principles can be considered narrowly.
However, from a managerial standpoint, such a minimalist approach is unhelpful. If the company wants
to be successful for more than a few years, it will need to take a more strategic strategy.
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13.5 SEVEN QUALITY CONTROL (QC) TOOLS

The seven quality tools were created by Kaoru Ishikawa, a Japanese engineering professor. During
Japan’s postwar period, when the government moved to statistical quality control as a way of quality
assurance, they were applied via the country’s industrial training programme. Their objective was to
create simple, user-friendly tools that people from a variety of backgrounds and skill sets could use
without requiring substantial training.
These quality management solutions are still the gold standard for resolving a wide range of quality
concerns today. They’re typically utilised in combination with today’s most popular process improvement
approaches, such as Six Sigma, TQM, continuous improvement processes and Lean management.
Let us understand the tools.

1. Stratification: Stratification analysis is a quality control technique that divides data, objects and
people into discrete categories. Using stratification to separate your data might help you figure out
what it means, exposing patterns that would not otherwise be obvious when it’s all thrown together.
Stratification enables you to make sense of your data before, during and after it is gathered, whether
you see the equipment, goods, shifts, materials, or even days of the week.
Consider whether information about your data’s origins may impact the ultimate outcomes of
your data analysis to get the most out of the stratification process. Make sure that information is
collected as part of your data collection.
2. Histogram: To manage quality, quality specialists are frequently entrusted with evaluating and
understanding the behaviour of various groupings of data. This is when tools like the histogram,
which are used for quality control, come into play.
The histogram may help you depict the frequency distribution of data across different groups in a
sample in a clear and straightforward manner, allowing you to quickly and readily discover areas
where your procedures could be improved. Each bar in a histogram represents a group and the
height of the bar shows the frequency of data inside that group, similar to a bar graph.
Histograms are very useful for categorising the frequency of your data into groups like age, days of
the week, physical measures, or any other category that may be used to group your data.
3. Check sheet (or tally sheet): Quantitative and qualitative data can be collected using check sheets.
A tally sheet is a type of spreadsheet that is used to collect quantitative data. A check sheet captures
data in the form of a check or tally marks that show how many times a given value has happened,
allowing you to rapidly identify faults or mistakes in your process or product, defect trends and even
specific defect causes.
Check sheets make it straightforward to capture preliminary frequency distribution data while
measuring out operations thanks to their simple setup and easy-to-read visuals. When producing
histograms, bar graphs and other quality tools, this image may be utilised as a preliminary data
collecting tool.
4. Cause-and-effect diagram (also known as a fishbone or Ishikawa diagram): The fishbone
diagram, invented by Kaoru Ishikawa, aids users in identifying the different elements (or causes)
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that contribute to an effect, which is frequently portrayed as a problem to be solved. Cause-and-

effect diagram works by outlining a quality-related problem on the right side of the diagram, with
distinct root causes and sub causes branching off to the left.
The causes and subcauses of a fishbone diagram are commonly divided into six categories:
measurements, materials, persons, environment, procedures and machines. These categories might
assist you to figure out what’s causing your problem while keeping your diagram tidy and organised.
5. Pareto chart (80-20 rule): The Pareto chart follows the 80-20 rule when used as a quality control
tool. This concept implies that 20% of significant elements, frequently referred to as the “critical
few,” are responsible for 80% of a process’s or system’s issues. Eighty percent of minor variables are
responsible for the remaining 20% of issues.
The Pareto chart is a mix of a bar and line graph that shows individual values in descending order
using bars and the cumulative total using a line.
The Pareto chart’s objective is to show the relative significance of various parameters, helping you
to identify and focus your efforts on the elements that have the greatest influence on a particular
area of a process or system.
6. Scatter diagram: The scatter diagram is the most helpful of the seven quality tools for displaying
the relationship between two variables, making it perfect for quality assurance experts seeking to
figure out cause and effect linkages.
Each dot represents a common crossing point, with dependent values on the Y-axis and independent
values on the X-axis. When these dots are connected, they can show the link between the two
variables. The higher the correlation in your graph, the closer the variables are related.
When used to define links between quality faults and likely reasons such as environment, activity,
personnel and other variables, scatter diagrams may be a valuable quality control tool. You can
deploy focused solutions after the link between a specific issue and its source has been identified.
7. Control chart (also called a Shewhart chart): This quality improvement technique, named after
Walter A. Shewhart, can assist quality assurance experts in determining whether or not a process
is stable and predictable, making it simple to detect elements that could contribute to variances or
faults.
Control charts provide an average or mean, as well as upper and lower control limits based on
historical data, using a centre line. You may establish whether your current process is controlled
or impacted by certain variables by comparing historical data to data acquired from your present
process.
13.6 ISO STANDARDS

Standards span a wide variety of activities, including the creation of products, the management of
processes, the delivery of services and the provision of resources.
Standards are the distilled wisdom of experts in their fields who understand the needs of the companies
they represent, such as manufacturers, dealers, buyers, consumers, trade groups, users and regulators.
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As an example,
 Quality management standards to improve productivity and decrease product failures.
 Environmental management guidelines to aid in the reduction of environmental effects, waste
reduction and sustainability.
 Workplace health and safety regulations to help decrease workplace accidents.
 Energy management guidelines to aid in the reduction of energy use.
 Food safety regulations to help avoid food contamination.
 Information technology security guidelines to keep sensitive data safe.
13.7 COST OF QUALITY

COQ is a methodology that allows an organisation to identify how much of its resources are spent on
activities that avoid poor quality, assess the quality of the firm’s goods or services and result from
internal and external failures. Having this information helps a company to calculate the amount of
money it may save by adopting process changes.
The costs of supplying low quality products or services are referred to as the cost of poor quality (COPQ).
There are three types of classifications:
1. Expenses incurred to establish the degree of compliance to quality criteria are known as appraisal
costs.
2. Internal failure costs are the expenses associated with faults discovered before the product or
service is delivered to the consumer.
3. Costs connected with faults discovered after the consumer obtains the goods or service are known
as external failure costs.
Costs associated with quality-related operations may be classified into three categories: prevention,
assessment and internal and external failure costs. Let us understand these costs.
1. Appraisal costs: Appraisal expenses are connected with quality measurement and monitoring
operations. These expenses are related to suppliers’ and customers’ assessments of acquired
materials, processes, products and services to verify that they meet requirements.
2. Internal failure costs: Internal failure costs are incurred when faults are found prior to the delivery
of a product or service to the client. These expenses arise when work outcomes fall short of design
quality criteria and are discovered before being passed on to the client.
3. External failure costs: Customers find faults, which results in external failure costs. These expenses
arise when products or services that do not meet design quality requirements are not discovered
until after they have been delivered to the consumer.
13.8 RESPONSIBILITY FOR QUALITY

Isn’t it true that each person involved in the process is responsible for its quality?
 The Production Department is in charge of quality, while the Quality Control Department is in
charge of providing the tools, methods and consulting experience (i.e, Black Belts) to help other
departments improve their quality and processes.
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 Everyone gets a short answer. However, the supervisor/manager of the specific department in issue
is ultimately responsible for quality.
 The company’s management is responsible for quality. Only when all departments are committed to
obtaining quality can it be realised.
 In whatever he/she does, everyone. Aside from that, it’s a case of “anybody, anybody, nobody.”
 Quality is the responsibility of everyone in the company, based on the principle of process ownership.
 We should all be accountable for the quality of our own work and the processes in which we
participate. We ought to do so.
Not rely on someone else to hunt for and locate what we’ve overlooked.
 The quality of the product is determined by the process, input material, equipment, personnel,
systems, data and so on. As a result, everyone is accountable for a portion of the cake.
 Quality is the responsibility of those who undertake work that affects adherence to product
standards.
 Recall seeing a mirror with a question on the back side “Who is in charge of quality? Look on the
reverse of the card for the answer.”
13.9 JURAN QUALITY TRILOGY

Dr. Joseph M. Juran proposed the Juran Trilogy, commonly known as the Quality Trilogy, in 1986 as a
way to manage quality. Quality control was the typical approach to quality at the time, but the Trilogy
has since formed the foundation for most quality management best practices across the world.
The Juran Trilogy is, in essence, a global method of thinking about the quality that applies to all
departments, levels and product and service lines. The core idea is that quality management is made
up of three universal processes:
Every day, in every organisation—even among the worst performers—improvement occurs. In the near
run, that is how businesses survive. Every company engages in improvement activities on a daily basis
to create incremental changes. Breakthrough improvement is not the same as a daily improvement.
To achieve substantial changes and outcomes, breakthrough requires unique tactics and leadership
backing.
The Juran Quality by Design model is a way for developing creative design features that answer to
customer wants, as well as the process features that will be utilised to build those new designs. The term
“Quality by Design” relates to an organisation’s product or service development methods.
The operational forces are unable to eliminate faults or waste under traditional accountability patterns.
What they can do is exercise control—to keep things from growing worse, as demonstrated. The graph
depicts a rapid random rise that has increased the failure rate to almost 40%. This surge was caused by
an unanticipated occurrence, such as a power outage, a process failure, or a human mistake.
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 The adjective “quality” has a subjective connotation.

 The totality of qualities and characteristics of a product or service that bear on its capacity to meet
stated or implied demands,” according to the ISO definition.
 Simply put, when a product “complies with the specifications established by the client,” it is said to
be of excellent quality.
 Quality may be described as “delivery of trustworthy information within a specified period of time,
under accepted circumstances, at acceptable expenses and with appropriate aftercare” when
applied to analytical work.
 The “accepted conditions” should contain a specification for the precision and accuracy of the data,
which is directly tied to “fitness of use” and may vary by application.
 The activities in this handbook are centred on the term “quality” since it is intended to improve the
performance of a laboratory.
 The product’s quality, in this case, the analytical results, must be acceptable.
 To determine if the product meets the quality criteria, it must first be defined.
 Only then can it be determined whether the product is adequate or whether and what remedial
measures are required.
 Quality can be defined in a variety of ways.
 Some are more concerned with objective facts, while others are more concerned with subjective
sentiments, but they are all interconnected.
 There are various meanings available in dictionaries. Furthermore, based on their surroundings
and standards, each quality expert defines it differently.
 Another meaning of quality is a product or service that is devoid of flaws.
 Consider a tiny automobile that requires few repairs, has no engine difficulties, a rust-resistant
paint finish and requires little maintenance.
 As a result, addressing consumers’ demands requires a combination of product features and defect-
free functionality.
 As a result, we should define quality in the context in question, such as the quality of postal service,
dental care, a product, life and so on.
 Total Quality Management (TQM) may be traced back to the mid-nineteenth century, although some
argue that the importance of quality was reawakened with the industrial revolution.
 Inspection was used to monitor and ensure quality in the early days.
 With the passage of time, this technique evolved into Quality Control, then Quality Assurance and
most recently, Total Quality Management.
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 It’s critical to remember that TQM is a dynamic, not a static, process focused on ongoing attempts
to enhance quality.
 The term “Big Q” refers to the strategic management of quality in all company processes, goods and
services as they relate to all relevant interested parties.
 Little q, on the other hand, refers to a considerably smaller focus on product quality, centred on the
core clients.
 Big Q is sometimes referred to as complete quality management, continuous improvement, or Six
Sigma quality, but it’s important to think of tiny q as tactical and Big Q as strategic.
 Standards span a wide variety of activities, including the creation of products, the management of
processes, the delivery of services and the provision of resources.
 Standards are the distilled wisdom of experts in their fields who understand the needs of the
companies they represent, such as manufacturers, dealers, buyers, consumers, trade groups, users
and regulators.
 COQ is a methodology that allows an organisation to identify how much of its resources are spent on
activities that avoid poor quality, assess the quality of the firm’s goods or services and result from
internal and external failures.
 Having this information helps a company to calculate the amount of money it may save by adopting
process changes.
13.11 GLOSSARY
 Quality: It is a trait or quality of someone or something.

 Instrument: It is a tool or item used to do a certain task, such as a dentist’s tools.
 Dimensions: It refers to the length, width, height or depth of something.
 Dependability: It is the quality of being able to be relied on.
13.12 CASE STUDY: TOYOTA CONTRACT WORkERS
Case Objective
The aim of this case is to describe the case of Toyota Contract Workers.
While life-long employment has been the norm for certain Japanese workers, recessionary economic
systems have made this trend difficult, if not impossible, for some businesses. Organisations headed
by Toyota Motor Corporation have formed a new category of temporary professional employees for the
Japanese labour market in an effort to abolish the expensive life-time employment contract while also
avoiding layoffs.
The contracts for these temporary workers will be for a maximum of one year. Employees such as
automobile designers will not be awarded long-term contracts. Rather than connecting compensation
to seniority and general business success, the corporation will pay these individuals a wage based on
individual merit.
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“As the economic environment around Japanese corporations experienced rapid transformation,”
Toyota says, “it was inevitable that the inflexible organisational structure of the past would put
constraints on company growth.”
Tatsuro Toyoda, Toyota President, intends to steadily raise the number of white-collar contract employees
in Japan. Toyota’s example may be followed by other Japanese companies. The number of white-collar
contract employees is growing, and these people are simpler to fire than permanent staff. In the blue
and white-collar categories, contract employees climbed from 14% in 1989 to 19% in 1993. During cyclical
economic situations, these temporary employees will act as a safety valve. The procedures will limit
the number of white-collar professionals who are blamed for many Company pay cuts. Executives
believe that Japan “must fundamentally change the life time employment structure,” according to a top
Japanese group.
Questions
1. What category of employees were formed by Toyota?

(Hint: Organisations headed by Toyota Motor Corporation have formed a new category of temporary
professional employees for the Japanese labour market in an effort to abolish the expensive life-
time employment contract while also avoiding layoffs.)
2. Differentiate between blue and white-collar workers.
(Hint: suit-and-tie workers are white-collar workers and manual labourers are blue-collar workers)

1. What do you mean by Quality?
2. Explain the meaning of Dimensions of Quality.
3. Discuss the Total Quality Management (TQM).
4. Describe the Evolution of TQM.

1. The activities in this handbook are centred on the term “quality” since it is intended to improve the
performance of a laboratory. The product’s quality, in this case, the analytical results, must clearly
be acceptable. To determine if the product meets the quality criteria, it must first be defined. Only
then can it be determined whether the product is adequate or whether and what remedial measures
are required. Refer to Section Quality
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2. A product’s capacity to meet or exceed consumer expectations is characterised as quality. As

consumer expectations shift, the notion of quality must shift as well. We shall define some of
the characteristics used to describe what quality means to customers in this blog. These are the
dimensions:
 Product performance
 Aesthetics
 Special Features
 Conformance
 Dependability
 Durability
 Perceived Quality
 Serviceability
 Consistency
Refer to Section Quality
3. Total Quality Management (TQM) is a management framework based on the idea that quality must
be maintained in all aspects of a company’s operations.
This means that everyone in the company is responsible for the output quality, which leads to fewer
mistakes and continuous improvement in operations. Simply said, TQM’s ultimate objective is to do
the right thing the first time, every time. Refer to Section Total Quality Management (TQM)
4. Total Quality Management (TQM) may be traced back to the mid-nineteenth century, although some
argue that the importance of quality was reawakened with the industrial revolution. Inspection
was used to monitor and ensure quality in the early days. With the passage of time, this technique
evolved into Quality Control, then Quality Assurance and most recently, Total Quality Management.
It’s critical to remember that TQM is a dynamic, not a static, process focused on ongoing attempts
to enhance quality. Refer to Section Total Quality Management (TQM)
 https://en.wikipedia.org/wiki/Quality_management
 https://corporatefinanceinstitute.com/resources/knowledge/strategy/quality-management/
 https://www.industries.veeva.com/ultimate-guide-to-quality-management
 Discuss with the team about the advantages of quality management.
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UNIT
14 Analytics in Operations Management
Names of Sub-Units
Analytics in Operations Management, Integrated Model for Selection of Facility Location, Applications
of DoE for Manufacturing System Design, Analytical Tools in Sourcing, Tools for Aggregate Production
Planning and Control, Study of Dashboard for SQC, SPC, TQM and TPM – Capturing Deviations and
Processes for Optimisation
Overview
The unit begins by explaining the analytics in operation management and integrated model for
selection of facility location. It also describes the applications of DoE for manufacturing system design
and analytical tools in sourcing. Further, it outlines the tools for aggregate production planning and
control. Towards the end, it elaborates the study of dashboard for SQC, SPC, TQM and TPM – capturing
deviations and processes for optimisation.
Learning Objectives

 Explain the meaning of analytics in operations management
 Describe the integrated model for selection of facility location
 Discuss the applications of DoE for manufacturing system design and analytical tools in sourcing.
 List the tools for aggregate production planning and control
 State the dashboard for SQC, SPC, TQM and TPM
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Learning Outcomes

 Assess the meaning of analytics in operations management
 Appraise the integrated model for selection of facility location
 Evaluate the tools for aggregate production planning and control
 Analyse the dashboard for SQC, SPC, TQM and TPM
 https://michael.hahsler.net/SMU/EMIS3309/slides/Evans_Analytics2e_ppt_01.pdf
 https://www.managementstudyguide.com/aggregate-planning.htm
14.1 INTRODUCTION
Every time a client interacts with a website or gadget, data is created and saved. Companies with
foresight see the value of utilising that data. It helps them to improve client experiences and profitability,
among many other advantages.
Simultaneously, every time an employee utilises a company-issued tablet or gadget to do their duties, data
is generated. Every purchase leaves a data trail, whether it comes from customers or the procurement
department.
I. To summarise, in the age of big data, leading businesses must evaluate data quickly and simply. That’s
the key to boosting workplace productivity, gaining a competitive edge and pleasing consumers.
II. The practice of employing data analysis and business intelligence to increase efficiency and simplify
day-to-day operations in real-time is known as operational analytics.
III. Operational analytics is a subset of business analytics that is aided by data mining, artificial
intelligence and machine learning. It needs a large group of business and data analysts. It also
necessitates the use of the appropriate instruments (think Tableau and Looker).
Thus, operational analytics is better suited to large firms than small businesses—at least for the time
being. Let us look at some of the revolutionary benefits of operational analytics now that we have gotten
our definitions out of the way.
14.2 ANALYTICS IN OPERATIONS MANAGEMENT

Operational analytics is a type of business analytics that focuses on monitoring a company’s current and
real-time operations. It employs real-time data analysis and business intelligence to boost productivity
and streamline daily operations. Operational analytics uses data mining, artificial intelligence and
machine learning to provide organisations with more transparency and help them make better
decisions.
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UNIT 14: Analytics in Operations Management JGI JAIN
In today’s business world, companies must have real-time data and complete transparency into consumer
behaviour and company processes so that owners can keep track of their day-to-day operations and
take the required steps to boost customer happiness and the bottom line.
On a worldwide scale, the businesses link their operations with their supply chain partners and
coordinate their technical resources with their manpower resources. Big Data Analytics (BDA) brings
new capabilities and possibilities for Operations Management as a result of this (OM). All of these
company linkages result in the development of a vast quantity of real-time data, including various
storage formats that can be utilised to improve operational choices. The goal of this project is to use
Text analytics to determine current market trends and future deployment of BDA in OM, as well as to
outline the research needs on the subject.
Figure 1 shows the benefits of operational analytics:
Reduce costs, Better decision Competitive

improve profits making advantage
Customer Better employee

satisfaction encouragement
Figure 1: Benefits of Operational Analytics
Following are the example of operational analytics:

 Demand planning
 Margin analysis
 Revenue analysis
14.3 INTEGRATED MODEL FOR SELECTION OF FACILITY LOCATION

A supply chain is a system of facilities that are designed to buy, produce and distribute items in the
correct amounts, at the correct place and at the correct time. A facility site establishes the basis from
which operational efficiencies may be obtained and provides infrastructure for the supply chain. The
proper placement of a facility is a critical component in the firm’s long-term success and strategic
importance for improved performance and competitiveness. Researchers try to figure out how to solve
location challenges in the most efficient way possible. The increasing complexity of socio-economic
concerns in location selection difficulties necessitates more investigation.
The realisation of the necessity to examine more factors to achieve more realistic solutions and
configure strongly integrated location models is critical for successful decision-making. The goal of this
study is to employ integrated methodologies to identify facility locations in the supply chain. To suit the
connection between strategic and tactical decisions, integrated facility placement analysis is important
in supply chain activities. The dynamic and unpredictable character of supply chain elements is taken
into consideration using a combination of mathematical optimisation and simulation methodologies to
deliver optimal solutions.
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For a multi-plant, multi-warehouse capacitated site allocation problem, mathematical modelling and
simulationare developed andshown. Foralocation–inventory issue, a Mixed Integer Linear Programming
(MILP) model is proposed and shown. To choose the optimum site, an integrated multi-criteria decision-
making strategy will be developed, taking into account both qualitative and quantitative considerations.
For location selection, an integrated K-Means clustering and ranking heuristics are suggested and
implemented.
A K-Means clustering technique sorts the locations into appropriate and unsuitable categories. The best
appropriate site is chosen using a systematic rating method. A typical pump manufacturing unit serves
as an example of the suggested paradigm. For the selection of a facility site, an integrated fuzzy C-
Means clustering and TOPSIS technique is proposed and developed. TOPSIS is utilised to define and rank
each site alternative and the fuzzy C- Means clustering technique is employed to select viable locations.
This unit outlines an analytical strategy for optimising facility location, capacity acquisition and
technology selection decisions all at the same time. When there is a lot of interaction between various
structural decisions, such as in global manufacturing organisations, the proposed technique might be
effective. In these instances, a sequential optimisation technique will almost certainly result in sub-
optimal facility designs, necessitating the use of an integrated model. We propose a simple model as well
as a formal characterisation of the facility location and technology acquisition dilemma. We discuss the
model’s analytical features, which led to the creation of a solution process. We provide the results of a
set of experiments and conclude that the suggested algorithm’s computing performance is fairly good.
Facility location models are:

 Minsum model: This model is designed to reduce or minimise the average distances and embrace
location issues of private companies.
 Minmax model: This model is designed to minimise maximum distances and focus on location issues
arising in the public sector.
 Single-stage model: This model focus on distribution systems covering a single stage explicitly.
 Multi-stage model: In this model, the flow of goods comprising various hierarchical stages has to
be examined.
 Single-product model: This model is featured by the fact that demand, cost and capacity for various
products can be aggregated into one homogeneous (Similar) product.
 Multi-product model: This model is implemented when the products are heterogeneous and their
effect on the design of the distribution system has to be evaluated.
 Location model: This model is based on an assumption demand is inelastic and is independent
of spatial decisions. If demand is elastic, then the relation between, for example, distance and
demand have to be considered. Cost minimisation should be replaced through, for example, revenue
maximisation, in the latter case.
14.4 APPLICATIONS OF DOE FOR MANUFACTURING SYSTEM DESIGN

The foundations and significant practical features of the design of experiments (DoE) in manufacturing
are discussed in this unit. It leads a potential reader through the primary forms of DoE suited for
production testing, starting with the basic vocabulary involved in DoE. Pre-process choices and test
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preparation are given special consideration. The most popular DoEs, such as full and fractional
factorials, as well as unique, DoEs, such as Taguchi DoE, sieve DoE, split-plot DoE and Group Method of
Data Handling (GMDH), are described. For several specific DoEs, appropriate examples are provided.
Design of Experiments (DOE) is a statistical tool used in the creation and optimisation of numerous
types of systems, processes and products. It is a versatile tool that may be used for a variety of tasks,
including design for comparisons, variable screening, transfer function discovery, optimisation and
resilient design. DoE enables the researchers how to design, organise and perform experiments, as well
as how to analyse and interpret results, using examples.
In addition, this unit indicates that in the last 20 years, DoE applications have grown quickly in both
manufacturing and non-manufacturing industries. It was the most widely used instrument in the
scientific fields of medicine, engineering, biochemistry, physics and computer science, accounting for
about half of all uses.
The DoE is a mathematical framework for designing and performing experiments, as well as evaluating
and interpreting the results. It is a type of applied statistics that are used to perform scientific
investigations of a system, process or product in which input variables (Xs) are changed to see how they
affect the measured response variable (Y). DoE has been a highly valuable instrument for improving
product quality and dependability over the past two decades.
1. Used in various sectors as part of the decision-making process for new product development,
manufacturing process improvement and quality assurance
2. Employed in administration, marketing, healthcare, pharmaceutical
3. Food industry
4. Energy and architecture, in addition to engineering
5. Chromatography
6. Used for both physical processes and computer simulation models
14.5 ANALYTICAL TOOLS IN SOURCING

Strategic sourcing analysis is a systematic and collaborative technique for leveraging suppliers and
organisational strategy to achieve long-term cost savings. It is a collaborative process in which entities
collaborate with internal stakeholders and suppliers to match objectives with the organisation’s buying
priorities.
When you use a strategic sourcing strategy, you’re looking at the big picture to see how you can offer
greater long-term value to the business for the same or less money. This differs from the more prevalent
tactical sourcing method, which is more reactive and focuses on discovering quick and easy ways to
decrease costs right away. Strategic sourcing, on the other hand, focuses on developing long-term,
collaborative relationships with suppliers and other valuable partners to realise long-term cost savings.
Unfortunately, many governments employ a tactical strategy.
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It is critical to consider if the advantages of strategic sourcing are appropriate for your company. The
following are some of the benefits of using this strategy:
 Better expenditure alignment with strategy and organisational goals
 Long-term partnerships with suppliers based on trust
 Long-term savings have increased and company procedures have been optimised.
Strategic sourcing allows companies to take a proactive and efficient approach to source. Your firm may
obtain a competitive advantage and enhance its performance and long-term savings by integrating its
goals with its sourcing strategy.
1. Make an effort to locate: Customers may use Seek Out to get a leg up on the competition when
it comes to finding hard-to-find and varied talent for Digital Transformation. Their experience in
search, messaging, machine learning/AI and natural language processing provides them with a
unique perspective on the industry. The Seek out a robot, which is driven by AI, also assists you in
finding the proper talent as quickly as possible.
2. Vettery: Vettery matches skilled job searchers with exciting organisations using machine learning
and real-time data. Its mission is to improve and automate the hiring process, make hiring more
rewarding for everyone and make the workplace a happier and more accountable place to work.
3. A precious stone: Gem is a one-stop recruitment tool that connects to LinkedIn, Gmail, Outlook
and your applicant tracking system. They make it possible for top-tier recruitment teams to locate,
engage and develop elite talent. Recruiters use Gem to create contact lists, identify email addresses
and automate follow-ups.
4. Buster the phantom: Your sales and marketing procedures are automated using Phantom Buster.
Without writing a word of code, you can scrape important data from LinkedIn, Twitter, Instagram,
Facebook and the entire web, automate steps to engage with prospects, enrich your CRM with that
data and create complex workflows.
5. Textio: Textio is the company that invented enhanced writing. With Textio, you can turn your
scribbled thoughts into rich language with a single keyboard. Textio’s data-driven prediction engine
makes extremely effective writing that sounds like you based on the words you enter. No more
agonising minutes looking at a blank paper, trying to come up with the ideal phrase—just scribble
down your thoughts, press the Tab key and let the words flow.
6. Crystal: Crystal is a programme that uses a person’s social media accounts to construct a personality
profile. You may get a description of a person on (among other places) LinkedIn after making an
account and installing the plugin. Crystal, for example, shows you how to appropriately address the
individual in issue and how to put up your emails to them.
7. Contact Out: Contact Out is a sourcing tool that allows you to look for a person’s email address or
phone number. They hold over 50 million phone numbers and over 1.1 billion emails. Contact Out
says that this covers approximately 75% of all LinkedIn users’ email addresses and 10% of their
phone numbers.
14.6 TOOLS FOR AGGREGATE PRODUCTION PLANNING AND CONTROL

A company’s business strategy might be finalised based on demand prediction recommendations.
Following the completion of business strategies, an organisation might move backward from the end
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sales unit to the raw materials necessary. As a result, annual and quarterly plans are split down into
labour, raw material, working capital and other medium-term requirements (6 months to 18 months).
Aggregate planning is the process of determining production requirements for a medium-term period.
Factors Affecting Aggregate Planning
Aggregate planning is a crucial operational activity for the company as it tries to strike a balance
between long-term strategic planning and short-term production success. Before an aggregate planning
process can begin, the following elements must be met:
 Complete knowledge of available manufacturing facilities and raw materials.
 A reliable demand prediction for the medium term is available.
 Financial planning for manufacturing costs, such as raw materials, labour, inventory planning and
so on.
 Organisational policies relating to labour management, quality management and so forth.
 The following inputs are necessary for successful aggregate planning:
 An aggregate demand prediction for the relevant period
 Evaluation of all possible capacity planning tools, such as subcontracting, outsourcing and so on.
Existing workforce operating state (number, skill set and so on), inventory level and production efficiency
Aggregate planning ensures that an organisation’s labour, inventory and production rate are all
planned by its strategic goals and objectives.
Aggregate planning as an Operational Tool

 Aggregate planning aids in achieving a balance between the organisation’s operational, financial
and overall strategic goals. It acts as a management platform for capacity and demand forecasting.
 A business might strive to balance demand and capacity by using price, marketing, order
management and new demand generation in a case where demand does not meet capacity.
 When capacity does not equal demand, an organisation might try a variety of approaches to balance
the two, such as:
 Laying off/hiring excess/inadequate excess/inadequate labour till demand drops/rises
 By including overtime as part of the schedule, more capacity is created.
 Using temporary labour for a certain length of time or delegating work to a subcontractor.
Importance of Aggregate Planning
Aggregate planning is critical to accomplishing the organisation’s long-term objectives. Aggregate

planning aids in the following areas:
 Achieving financial objectives by lowering total variable costs and boosting the bottom line
 Utilisating existing manufacturing facilities to the fullest extent possible
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 Making consumer happy through matching demand and lowering customer wait times
 Reducing the amount of money you spend on inventory storage
 Accomplishing the scheduled goals, resulting in a contented and happy workforce
Production Control
Production control aims to employ a variety of control approaches to obtain the best performance out
of the production system and meet the overall production planning goals.
As a result, the following are the production control objectives:

 Organise production plans and regulate inventory management
 Optimal resource and manufacturing process utilisation
The following are some of the benefits of effective production control:

 Ensures that all manufacturing processes run smoothly
 Enables cost reductions in manufacturing, consequently boosting the bottom line
 Ensures that resources are not squandered
 Maintains a high level of quality throughout the production process
Production control cannot be the same throughout the board. The following elements influence
production control:
 Nature of production (job-oriented, service-oriented, etc.)
 Nature of operation
Size of the business
Production planning and control are critical for client satisfaction and an organisation’s overall
performance.
14.7 STUDY OF DASHBOARD FOR SQC, SPC, TQM AND TPM – CAPTURING DEVIATIONS AND
PROCESSES FOR OPTIMISATION
The phrase “Statistical Quality Control” (SQC) refers to a set of statistical methods utilised by quality
experts. SQC is a tool for analysing and resolving quality issues. Statistical quality control is the use of
statistical approaches to the monitoring and maintenance of product and service quality. All of SQC’s
tools are beneficial in assessing service quality. SQC analyses quality issues with a variety of tools.
 Statistical Descriptive
 Process Control Statistical (SPC)
 Descriptive Acceptance Sampling
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Statistics entails explaining the qualities and connections of high-quality products. SPC entails inspecting
a random sample of process output for characteristics. Acceptance batch sampling by inspection is a
type of sampling.
 Statistics: Statistics refers to the collection of a sufficient amount of data to produce trustworthy
results. Statistics is a branch of mathematics that deals with data to form conclusions. Its approaches
are widely used in quality control, production planning and management, business charting and
linear programming, among other fields.
 Quality: Quality is a relative concept that is usually defined in terms of the product’s intended usage.
As a result, quality is defined as suitability for a certain purpose.
 Control: A control system measures, checks or inspects a phenomenon. It tells you when to inspect,
how frequently you should inspect and how much you should inspect. Control determines an item’s
quality attributes, compares them to set quality standards and distinguishes faulty items from
those that are not.
The phrase “Statistical Quality Control” (SQC) refers to a set of statistical methods utilised by quality
experts. SQC is a tool for analysing and resolving quality issues. Statistical quality control is the use of
statistical approaches to the monitoring and maintenance of product and service quality.
SPC is an industry-standard system for monitoring and managing quality during the production
process. During production, quality data in the form of Product or Process measurements are collected
in real-time.
After that, the data is displayed on a graph with pre-set control limits. The capability of the process
determines control limitations, but the demands of the customer define specification limits.
On an X Bar Range Chart, there are control limits.
When data falls inside the control boundaries, it means everything is working as it should. Any
fluctuation within the control boundaries is most likely due to a common cause like natural variation,
which is to be expected in any process. If data exceeds the control limits, and assignable reason is most
likely the source of product variation and something in the process should be modified to correct the
problem before defects develop.
TQM AND TPM
Total Quality Management (TQM) and Total Productive Maintenance (TPM) have acquired a lot of
traction in the Indian manufacturing industry as a way to meet the issue of transitioning from a
protected economy to a global market. These two improvement initiatives are being embraced and
adapted to help Indian organisations achieve world-class performance standards. TQM and TPM are
complimentary to one another and many organisations are using them at the same time to create
synergy. In the context of the Indian manufacturing industry, this research tries to give empirical data
on the comparative contributions of two drivers to increase company performance. It also seeks to prove
that when TQM and TPM are used together, they have a synergetic impact. The research emphasises
that combining applications yields much greater results than using separate drivers. The data for the
study was gathered utilising a questionnaire as a research tool and statistical analysis was performed
using Microsoft Excel 2000.
9
 Every time a client interacts with a website or gadget, data is created and saved.
 Companies with foresight see the value of utilising that data.
 It helps them to improve client experiences and profitability, among many other advantages.
 Simultaneously, every time an employee utilises a company-issued tablet or gadget to do their
duties, data is generated.
 Every purchase leaves a data trail, whether it comes from customers or the procurement department.
 Operational analytics is a type of business analytics that focuses on monitoring a company’s current
and real-time operations.
 It employs real-time data analysis and business intelligence to boost productivity and streamline
daily operations.
 Operational analytics uses data mining, artificial intelligence and machine learning to provide
organisations more transparency and help them make better decisions.
 A supply chain is a system of facilities that are designed to buy, produce and distribute items in the
correct amounts, at the correct place and at the correct time.
 The foundations and significant practical features of the design of experiments (DOE) in
manufacturing are discussed in this chapter.
 It leads a potential reader through the primary forms of DOE suited for production testing, starting
with the basic vocabulary involved in DOE.
 A company’s business strategy might be finalised based on demand prediction recommendations.
 Following the completion of business strategies, an organisation might move backward from the
end sales unit to the raw materials necessary.
14.9 GLOSSARY
 Aggregate Planning: It is when the company’s demand and present capacity are established, that
an aggregate plan is created
 DOE: It stands for the Design of Experiments
 Optimisation: It refers to making the greatest or most efficient use of a situation or resource
 Deviations: It refers to the deviation from what is typical or expected or from what society approves
of
 Operations Management: It is a business approach that aims to achieve the best level of efficiency
feasible inside a company
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14.10 CASE STUDY: P&G PLANNING TO SET UP 3RD FACILITY IN INDIA
Case Objective
The aim of this case is to describe the P&G planning to set up 3rd facility in India.
Following significant volume gains in the shampoo market due to price cuts in recent months, Procter
& Gamble has begun considering the possibility of establishing its third production plant in the nation.
Ariel and Tide detergents are currently manufactured in Mandideep, Madhya Pradesh and Whisper
sanitary napkins and the Vicks line of goods are being manufactured in Kundaim, Goa. All of its shampoo
brands, including Head & Shoulders, Pantene and Rejoice, are imported from outside markets.
“P&G is considering this attractive prospect,” a company representative said when asked if the business
was looking for a location to set up a production plant for shampoos and other goods, maybe in Himachal
Pradesh. A decision has not yet been taken, but the Himachal Pradesh facility is now being assessed. ‘’
She stated that the corporation currently imports its shampoo brands, but declined to say if the new
facility will make shampoos.
According to analysts following the industry, the business, which imports shampoos from Thailand and
other Asian nations, has opted to invest in a new production base due to recent volume increases in
shampoos and detergents despite sluggish value growth. The amount of money set aside for this new
institution, however, could not be determined.
Mr. Rajesh Jain, CEO of Pranav Securities, stated, “The majority of shampoo marketers use third-
party contract production to keep prices down and get logistical advantages. However, as places like
Himachal Pradesh give backward area subsidies as well as income tax refunds, the benefits of third-
party production are dwindling”.
Another FMCG expert believes that the company’s production plant will provide it with a cost edge over
competitors, notably Hindustan Lever Ltd. (HLL)
“Production outsourcing has grown less appealing as a result of the impending introduction of a value
added tax and MRP-based excise charges next year. P&G’s action demonstrates that the company is
betting on a lengthy run in India: he added.
Another expert claimed that FMCG businesses’ desire to invest in capacity expansion suggested that
they were betting on the market’s present downturn to end shortly. “Besides, why would corporations
invest unless they were certain that growth would continue, even if at reduced prices?” he asked.
For the 12 months ending June 2004, Procter & Gamble Hygiene and Health Care Ltd. (PGHH) – P&G’s
publicly traded unit – reported a 30% increase in revenue to 577.24 crores, with a 35% increase in net
profit to 92.17 crores.
While PGHH is responsible for the Vicks and Whisper product lines, P&G Home Products is responsible
for shampoo and detergent brands in India.
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Questions
1. What are the most important responsibilities of operations management?
(Hint: Planning, scheduling, purchasing, managing, quality control and inventory control are the
seven key activities of operation management in the industrial organisation. In each of these areas,
operations managers should make several decisions that impact the effectiveness of the business.)
2. What is an example of operations management?
(Hint: For example, if a company creates furniture, acquiring wood and fabric, employing and
training staff and purchasing cutting tools and other fabrication equipment are all operations
management choices.)

1. Outline analytics in operations management.
2. Describe aggregate production planning.
3. Explain analytical tools in sourcing.
4. Analyse applications of DoE for manufacturing system design.

1. Operational analytics is a type of business analytics that focuses on monitoring a company’s current
and real-time operations. It employs real-time data analysis and business intelligence to boost
productivity and streamline daily operations. Operational analytics uses data mining, artificial
intelligence and machine learning to provide organisations with more transparency and help them
make better decisions. Refer to Section Analytics in Operations Management
2. A company’s business strategy might be finalised based on demand prediction recommendations.
Following the completion of business strategies, an organisation might move backward from the
end sales unit to the raw materials necessary. As a result, annual and quarterly plans are split down
into labour, raw material, working capital and other medium-term requirements (6 months to 18
months). Aggregate planning is the process of determining production requirements for a medium-
term period. Refer to Section Tools for Aggregate Production Planning and Control
3. Strategic sourcing analysis is a systematic and collaborative technique for leveraging suppliers
and organisational strategy to achieve long-term cost savings. It is a collaborative process in
which entities collaborate with internal stakeholders and suppliers to match objectives with the
organisation’s buying priorities. Refer to Section Analytical Tools in Sourcing
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4. The foundations and significant practical features of the design of experiments (DoE) in
manufacturing are discussed in this chapter. It leads a potential reader through the primary forms
of DoE suited for production testing, starting with the basic vocabulary involved in DoE. Pre-process
choices and test preparation are given special consideration. The most popular DoEs, such as full
and fractional factorials, as, well as unique DoEs, such as Taguchi DoE sieve DoE, split-plot DoE and
group method of data handling (GMDH), are described. Refer to Section Applications of DoE for
Manufacturing System Design
 https://mitsde.com/media/student%20corner/Next-Gen-Learning/Sample%20PPT_Facility%20
Location%20and%20Layout.pdf
 Discuss with your friends integrated model for selection of facility location.
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UNIT
15 Introduction to Supply Chain

Management
Names of Sub-Units
Supply Chain Management (SCM), Importance of Supply Chain Management, SCM Flow Diagram,
Three flows in SCM, Drivers of SCM, Bullwhip Effect, Coordination in Supply Chain, Two Views of
Supply Chain, Use of IT in Supply Chain
Overview
The unit begins by explaining the Supply Chain Management (SCM) and its importance. Further, it
discusses the three main flows of SCM, which are Material (Product) Flow, Information Flow and
Financial Flow. The unit covers the application of Bullwhip Effect. It also outlines the basic uses of
information technology in Supply Chain Management (SCM).
Learning Objectives

 Explain the meaning of Supply Chain Management (SCM) and its importance
 Describe the SCM flow diagram
 Discuss three main flows of SCM and drivers of SCM
 State the Bullwhip effect and coordination in Supply Chain
 Explain the Coordination in Supply Chain
 Uses of IT in SCM
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Learning Outcomes

 Assess the importance of Supply Chain Management (SCM)
 Appraise the Coordination in Supply Chain
 Evaluate the application of Three Flows in SCM
 Analyse the uses of IT in Supply Chain
 Examine the three main flows of SCM
 https://www.tutorialspoint.com/supply_chain_management/supply_chain_management_
tutorial.pdf
 https://www.investopedia.com/terms/s/scm.asp
15.1 INTRODUCTION
Supply Chain Management may be described as the control of the flow of goods and services from the
point of manufacture to the point of consumption. It also includes the transportation and storage of
raw materials used in work-in-progress, inventories and completely furnished items.
Supply chain management’s major goal is to keep track of and connect the production, distribution and
transportation of goods and services. Companies having a solid and tight grip over internal inventory,
production, distribution, internal productions and sales may do this.
Supply chain management essentially combines demand and supply management. It employs a variety
of tactics and methodologies to examine the complete chain and perform efficiently at every phase.
Every unit involved in the process should strive to reduce expenses and assist organisations in improving
their long-term performance while also adding value to their stakeholders and consumers. This method
can help reduce rates by eliminating superfluous costs, moves and handling.
It is important to understand that supply chain management and supply chain event management
are not the same thing. Supply Chain Event Management addresses the reasons that might disrupt an
efficient supply chain’s flow; various situations are evaluated and remedies are designed appropriately.
15.2 SUPPLY CHAIN MANAGEMENT (SCM)

The term “supply chain management” refers to a variety of methods for efficiently integrating the
movement of products, funds and information. Typically, these things are outsourced from a variety
of sources. Suppliers, manufacturers, wholesalers, distributors and retailers are among these sources.
Until they reach the buyer, items may transit through multiple hands.
Within and beyond the company, SCM organises and integrates this back and forth. Its goal is to improve
customer service without sacrificing the organisation’s goal of lowering supply chain expenses. There
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UNIT 15: Introduction to Supply Chain Management JGI JAIN
are several checkpoints along the way, but the first is the design and plan, which must be monitored
as any other project to track progress and address any difficulties that develop before they become
problems that increase the operation’s cost.
15.2.1 Importance of SCM

Supply chain management is a difficult job that pays off handsomely. Here are a few examples of how
well-executed SCM might help your company or project.
 Keeps Businesses Competitive: SCM is vital to every organisation since it allows them to remain
competitive. Markets evolve, and as the marketplace becomes more global, the requirement for
greater efficiency becomes increasingly important. As management objectives shift, there is a shift
away from conventional partnerships to combine and coordinate all business operations throughout
a value chain of numerous organisations.
 Paces with Technology: The development of the supply chain has also been aided by advances in
information technology and the increased use of outsourcing. As a result, a more collaborative
network is required so that diverse businesses may work together in harmony.
 Creates Productive Environments: Supply chain ecosystems have emerged as a result of these
developments in company management. Multinational corporations, joint ventures, strategic
alliances and other collaborations, as well as technical improvements, have all led to increased
supply chain collaboration. Companies must adjust as supply networks become more holistic and
cooperative.
 Proactive Strategy: Supply chain management, on the other hand, is not just reactive; it also helps
firm’s foster innovation and productivity by aiding with organisational learning. The more complex
a company’s supply chain becomes, the more adaptable it must be. This encourages creative
thinking, which leads to greater productivity and creativity.
 Satisfies Customers: Customer service is also a plus. Customers want quality and items to be
accessible when and when they want them, as well as delivered on time. After they’ve made the
purchase, supply chain management will assist with sales support.
 Reduces Operating Costs: The buyer is not the only one who gains. As previously said, SCM is
critical in lowering operating expenses. When used correctly, it may reduce the costs of purchasing,
production and overall supply change. This strengthens a company’s financial position by raising
earnings leverage, lowering fixed assets and boosting cash flow.
15.3 SCM FLOW DIAGRAM

The comprehensive and specific steps necessary to ensure end-to-end product delivery are shown in
supply chain management workflows, often known as flow charts. Material management, product
production, inventory management, order fulfilment and product delivery are just a few of the steps
involved in getting a product to a customer or consumer. Most firms’ supply chain management
procedures may be improved in a variety of ways, and workflows and flow charts can assist identify
such changes. Each step in the supply chain management process should be analysed separately, as well
as how that step influences the entire supply chain and customer experience.
Process modelling and flow charts work hand in hand with supply chain management. Flow charts are
meant to assist businesses in completing a process as effectively as possible with the fewest possible
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errors, much as supply chain management aims to deliver items to clients as rapidly as possible with
the fewest potential faults. Flow charts, or workflows, that map out supply chain-specific tasks will
provide managers with a new perspective on their operations, allowing them to build more effective
distribution channels, improve warehouse management and eliminate order mistakes. All of these
characteristics will improve the customer experience and lower supply chain expenses in the long run.
Figure 1 shows the SCM flow diagram:
Raw Material Factory Retail
Customer
Supplier Distribution
Figure 1: SCM Flow Diagram
15.4 THREE FLOWS IN SCM

Let’s talk about the three supply chain flows now that you have a better grasp of your supply chain.
The management of these three flows is what supply chain management is all about:
 Material (Product) Flow
 Information Flow
 Financial Flow
Let us understand these three flows in detail.

 Material (Product) Flow: This diagram given below depicts the physical product flow from the
supplier to the buyer. This flow is normally unidirectional, meaning it only goes one way from
supplier to consumer; but, when a customer returns a product, the flow might occasionally go in
the opposite direction. A typical material flow starts with raw material suppliers, and then moves
through manufacturers, warehouses and finally distribution to the end client.
 Information Flow: The movement of information from a supplier to a customer, and from
the customer back to the source is known as information flow. In the supply chain, this flow is
bi-directional, meaning it moves in both directions. Quotations, purchase orders, delivery status, bills
and customer complaints are examples of the types of information that travel between customers
and suppliers. There must be regular interaction between the provider and the customer for the
supply chain to be effective. Other participants in the information network, such as distributors,
dealers, retailers and logistic service providers, are frequently engaged.
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 Financial (Money) Flow: Finally, financial flow refers to the transfer of funds from a client to a
supplier. When a consumer gets and inspects a product, he or she usually pays and the money is
returned to the provider. Occasionally, funds move in the other way (from supplier to consumer) in
the form of debit.
All three flows must be managed efficiently with the least effort for a supply chain to be efficient and
successful. You will be in a strong position to uncover various inefficiencies and figure out how to
drastically enhance your organisation if you understand your supply chain and how items, information
and money flow through it.
Figure 2 shows the three flows:
Material Flow
Inbound Outbound
Consumer
Vendor Sourcing Storage/ Operations Storage/ Consumer
Distribution
Transportation Transportation
Information Flow
Material Flow
Figure 2: Three Flows in SCM
15.5 DRIVERS OF SCM

The decisions you make about the five supply chain drivers will influence your supply chain capabilities.
On the basis of the changes in the business objectives, each driver of SCM can be created and controlled
for focusing on responsiveness or efficiency. As you learn more about how a supply chain works, you
will have a better understanding of the challenges it encounters and the talents it needs to succeed. To
achieve those capabilities, adjust the supply chain drivers as needed.
The five drivers serve as a helpful foundation for considering supply chain capabilities. The mix of
responsiveness and efficiency that a supply chain can achieve is determined by the decisions made
regarding how each driver functions.
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The five drivers are:

1. Production: Building facilities with a lot of extra capacity and using flexible production processes
to manufacture a wide range of things can make this driver particularly responsive. To be even
more responsive, a corporation might produce in several smaller factories located near significant
client groups, resulting in shorter delivery times. If efficiency is desired, a corporation can construct
factories with very little surplus capacity and optimise them to produce a restricted variety of
products. Even though delivery times may be longer, more efficiency can be obtained by centralising
manufacturing at big central plants to achieve superior economies of scale.
2. Inventory: Stocking large amounts of inventory for a wide selection of items will help you be more
responsive. Stocking items in many places increases responsiveness by putting inventory close to
clients and making it available right away. Inventory levels of all goods, especially those that do not
sell as frequently, should be reduced for efficiency in inventory management. Stocking goods in only
a few central locations, such as regional distribution hubs, can also provide economies of scale and
cost benefits (DCs).
3. Location: A responsive placement choice would be one in which a corporation opens a number of
sites near to its consumer base. Fast-food businesses, for example, exploit locations to be particularly
responsive to their consumers by building a large number of locations in high-volume regions.
Operating from a few places and centralising activity in common areas can increase efficiency.
The way e-commerce businesses service broad geographical markets from a few core sites that
undertake a wide range of operations is an illustration of this.
4. Transportation: A quick and flexible form of transportation, such as trucks and airplanes, may
provide responsiveness. Different organisations sell things with the help of catalogues, social media
ads or the Internet which enables them to achieve high responsiveness by relying on transportation.
Transportation helps them to deliver their product in as little as 48 hours. FedEx and UPS are two
firms that may provide transportation services that are quite responsive. And now, to be more
responsive to consumer demands, Amazon is growing and running its transportation services in
high-volume regions. Transporting items in larger batches and less often can increase efficiency.
Ships, railroads and pipelines may all be incredibly efficient routes of transportation.
Transportation can also be more efficient if it originates from a single hub facility or Distribution
Centre (DC) rather than from several different branch sites.
5. Information: As technology for collecting and sharing information becomes more widely available,
easier to use and less expensive, the strength of this driving becomes stronger every year.
Information, like money, is a valuable commodity because it can be used to improve the performance
of the other four supply chain drivers directly. Companies may attain high levels of responsiveness
by collecting and sharing accurate and timely data created by the activities of the other four drivers.
The supply chains that serve the electronics sector are an example of this; they are among the most
responsive in the world. Manufacturers, wholesalers and huge retailers all gather and exchange
data on customer demand, production schedules and inventory levels in these supply chains. In the
fast-changing and unpredictable world of electronic gadgets, this allows enterprises in these supply
chains to adjust swiftly to crises and new market needs (smartphones, sensors, home entertainment
and video game equipment, etc.).
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15.6 BULLWHIP EFFECT

In supply chain management, the bullwhip effect (also known as “whiplash” or “whipsaw”) refers to the
phenomena of rising inventory variations in reaction to swings in customer demand as one proceeds
farther up the supply chain. In other words, inventory fluctuates in increasingly larger “waves” in
response to client demand, which serves as the whip’s handle. The raw material provider receives the
greatest “wave” of the whip, creating the most demand fluctuation in response to changing consumer
demand.
Figure 3 shows the Bullwhip effect:
Supplier
Manufacturer
Wholesaler
Retailer
Customer
Customer Demand Supplier
Figure 3: Bullwhip Effect
The bullwhip effect can be created by a variety of circumstances, but the following are some of the more
prevalent ones:
 Forecast errors: Demand projections for businesses are used to make decisions at every link of the
supply chain. Forecasting errors lead to miscalculations, which are amplified as they go up the
supply chain.
 Order batching: Placing small orders frequently results in less of a bullwhip impact than placing
bigger orders less frequently. The retailer submits orders with its supplier once a month (rather
than numerous times throughout the month) with order batching, resulting in irregular demand
for the provider over time.
 Lead time: The period between when an order is placed and when it is received is known as lead
time. When it comes to inventory management, failing to account for lead time can result in product
overstocking, which leads to a shift in supplier demand over time, known as the bullwhip effect.
 Sales and price discounts: Sales and price reductions result in a boom-and-bust cycle. During the
promotional time, a lot of merchandise moves, followed by a drop in sales. The bullwhip effect occurs
as a result of this cycle reverberating throughout the supply chain.
7
JGI JAIN
The bullwhip effect may be seen in all supply chains and is at the basis of many enterprises’ boom-
and-bust cycles. It may have negative consequences for a business if left unchecked, which is why
proactive management is critical, as we’ll see below.
15.7 COORDINATION IN SUPPLY CHAIN

The word “coordination” refers to duties carried out by numerous agents to increase total supply chain
profitability. This also includes tasks to prevent items from harming both local and overall earnings.
To maximise the profitability of the firm, it is critical to cooperate with the various departments of
Supply Chain Management. Large quantities of items in the shop or a lack of products are the result of
poor supply chain management coordination. The following factors may be exacerbated by a lack of
coordination:
 It will raise the cost of product manufacture.
 It will raise the expense of maintaining goods inventories.
 It will lengthen the supply chain’s lead times for replenishment.
 The cost of transportation will rise as a result.
 It will raise the labour costs connected with shipping and receiving items at different locations.
 When there is a strong demand for a product, it will restrict its availability.
 It will cause issues in relationships, and everyone in the supply chain will believe they have done
everything correctly.
So, the fundamental thing to be considered in Supply Chain Management is ensuring the coordination
of activities.
15.8 TWO VIEWS OF SUPPLY CHAIN

A supply chain is a series of operations and flows that occur inside and across stages to fulfil a customer’s
product requirement. There are two ways to look at supply chain processes.
 Cycles view and
 Push/pull view
It specifies the processes involved as well as the process owners. A supply chain’s process is separated
into a succession of cycles. Cycles are done at the point where two phases of a supply chain meet.
The supply chain process may be divided into four stages, including:
 Customer order cycle
 Replenishment cycle
 Manufacturing cycle
 Procurement cycle
Each cycle takes place at the crossroads of two phases of the supply chain. When making operational
choices, a cycle perspective of the supply chain is quite valuable. Each member of the supply chain’s tasks
8
and responsibilities are clearly defined. It aids the designer in considering the necessary infrastructure
to support the procedures.
Push/Pull View
Processes in a supply chain are classified according to whether they are started in response to a customer
order (pull) or in advance of a customer order (push) (push). The time of process execution in relation to
end consumer demand is used to categorise processes.
Customer demand is known with certainty at the time of execution of a pull procedure. In the event of a
push process, demand is unknown at the time of execution and must be projected.
As a result, the pull process is a reactive process.

 Pull process (reactive process)
 Push process (speculative process)
Push and pull processes are separated in a supply chain by a push/pull barrier. When making strategic
supply chain decisions, this tool comes in handy. It forces a more holistic view of supply chain activities
in relation to client order. The supply chain will be improved if the pull process is increased.
15.9 USE OF IT (INFORMATION TECHNOLOGY) IN SUPPLY CHAIN

The importance of IT in supply chain management (SCM) cannot be overstated. IT gives the tools to
gather important data, break it down for proper analysis and execute it for optimal supply chain
efficiency. Data is critical to supply chain performance because it provides the foundation upon which
supply chain managers can make choices.
The key to effective supply chain management is real-time or near-real-time data. Decision-makers may
plan, manage and adapt operations to fulfil goals in procurement, inventory, manufacturing and other
areas with information about the different phases of the supply chain.
In the last several decades, business operations have been digitalised, and it has become a need rather
than an option. What’s to stop you? IT combines numerous supply chain procedures carried out by
diverse firms. It improves the efficiency of corporate operations and eliminates bottlenecks. Companies,
particularly in manufacturing, are getting closer to attaining on-time procurement, shorter inventory
and improved efficiency. IT enables enterprises in the supply chain to satisfy customer demands.
Following are the advantages of IT in the supply chain:

 Increased Control over Production: In supply chain management, information technology improves
visibility and responsibility. To improve the overall efficiency of the manufacturing process, a
manufacturing business must have clear visibility into the present stage of in-production items,
be able to anticipate any future difficulties or delays, and be able to align production schedules
accordingly.
 Better Inventory Management: All producers confront the difficulty of maintaining adequate
inventory levels. Excess inventory increases the risk of waste and increases the demand for working
capital funds, whereas too little inventory can cause production stoppages and loss of revenue due
to stockouts.
9
 Increased Collaboration between Supply Chain Partners: Manufacturers can improve

collaboration with their important partners by using IT-enabled, real-time information exchange.
Manufacturers may also track activity across the whole supply chain, including supplier end and
distributor processes, with visibility into both.
 More Effective Order Tracking and Delivery: Customer satisfaction is largely determined by the
timely delivery of products. Client satisfaction levels that are greater lead to increased customer
retention and repeat business. Technology solutions can help increase delivery speed and keep
customers informed about when their products will be delivered.
 Supply Chain Management may be described as the control of the flow of goods and services from
the point of manufacture to the point of consumption.
 The term “supply chain management” refers to a variety of methods for efficiently integrating the
movement of products, funds and information.
 SCM is vital to every organisation since it allows them to remain competitive. Markets evolve, and as
the marketplace becomes more global, the requirement for greater efficiency becomes increasingly
important.
 The comprehensive and specific steps necessary to ensure end-to-end product delivery are shown in
supply chain management workflows, often known as flow charts.
 The movement of information from a supplier to a customer, and from the customer back to the
source is known as information flow.
 The decisions you make about the five supply chain drivers will influence your supply chain
capabilities.
 In supply chain management, the bullwhip effect (also known as “whiplash” or “whipsaw”) refers
to the phenomena of rising inventory variations in reaction to swings in customer demand as one
proceeds farther up the supply chain.
 The word “coordination” refers to duties carried out by numerous agents to increase total supply
chain profitability.
 A supply chain is a series of operations and flows that occur inside and across stages to fulfil a
customer’s product requirement.
15.11 GLOSSARY
 Coordination: It is the act of coordinating the efforts of all those involved in a plan or activity in a
systematic manner
 IT: It is the science and activity of storing and transmitting data using computers and other
electronic devices
 Proactive Strategy: It is companies way to forecast future needs, as well as potential difficulties
and threats
 Forecast: It means to predict (with the use of data) what will most likely happen in the future
10
15.12 CASE STUDY: IBM EVOLVES AS A GLOBALLY INTEGRATED SUPPLY CHAIN
Case Objective
The aim of this case is to describe how IBM evolves as a Globally Integrated Supply Chain.
IBM’s worldwide supply chain includes hundreds of thousands of suppliers and is utilised to handle all
of the company’s product and service offerings, including mainframe computers, servers and other
hardware, as well as software, services and spare parts. It is no small challenge to orchestrate a supply
chain of this scale and complexity while attaining end-to-end visibility and seamless integration. In
many ways, it sprang out of the company’s evolution.
Mike Ray, Vice President of Business Integration and Strategy for IBM’s Integrated Supply Chain,
remarked, “Last year, IBM celebrated its 100th anniversary, I bring this up because, in many ways, the
adjustments we’ve made to the supply chain throughout the years can be traced back to the company’s
evolution.”
For example, there was a period when IBM, as a multinational corporation, allowed each of its business
units to function independently. Ray admits that the supply chain was comparable. “It was distinguished
by a widely dispersed infrastructure as well as broadly dispersed procurement processes.” The supply
chain evolved dramatically as IBM grew into a worldwide and integrated company. All of our supply
chain procedures, from purchasing to production and shipping, are now completely integrated on a
worldwide scale. Nothing is done locally in the system.”
Along with this corporate and supply chain integration came the realisation that the supply chain had
to run in a circular and networked form, rather than the earlier, linear one if it was to be effective. IBM,
like other multinational corporations, has gone through years of business and supply chain growth
and change. In an ever-changing global environment, today’s problems necessitate the organisation
to remain competitive and flexible. This approach necessitates a set of strong best business and supply
chain practises that will allow the organisation to achieve its objectives.
Questions
1. What does supply chain management imply?
(Hint: Supply chain management refers to the management of a product’s or service’s full
manufacturing cycle, from raw materials through delivery of the end product to the customer.)
2. What is the importance of Supply Chain Management?
(Hint: Supply chain management is critical since it may aid in the achievement of numerous
company goals. Controlling manufacturing processes, for example, may enhance product quality
while lowering the danger of recalls and litigation and assisting in the development of a strong
consumer brand.)
3. What methods do businesses use to connect their supply chains?
(Hint: Essentially, supply chain integration implies that all stakeholders’ information and
communication systems may smoothly share information during the planning, execution and
completion of transportation and logistics activities throughout a product’s life cycle.)
11

1. Define the term supply chain management.
2. Describe the importance of supply chain management.
3. Evaluate the three flows in SCM in details.
4. Explain the uses of IT in supply chain.

1. The term “supply chain management” refers to a variety of methods for efficiently integrating the
movement of products, funds and information. Typically, these things are outsourced from a variety
of sources. Suppliers, manufacturers, wholesalers, distributors and retailers are among these
sources. Until they reach the buyer, items may transit through multiple hands. Refer to Section
Supply Chain Management (SCM)
2. Supply chain management is a difficult job that pays off handsomely. Here are a few examples of
how well-executed SCM might help your company or project. Keeps Businesses Competitive
SCM is vital to every organisation since it allows them to remain competitive. Markets evolve, and as
the marketplace becomes more global, the requirement for greater efficiency becomes increasingly
important. Refer to Section Supply Chain Management (SCM)
3. Let’s talk about the three supply chain flows now that you have a better grasp of your supply chain.
The management of these three flows is what supply chain management is all about:
 Material (Product) Flow
 Information Flow
 Financial Flow
Refer to section Three Flows in SCM
4. The importance of IT in supply chain management (SCM) cannot be overstated. IT gives the tools to
gather important data, break it down for proper analysis and execute it for optimal supply chain
efficiency. Data is critical to supply chain performance because it provides the foundation upon
which supply chain managers can make choices. Refer to Section Use of IT in Supply Chain
12
 https://www.toppr.com/guides/business-environment/business-functions/supply-chain/
 Discuss the basic components of supply chain management system with friends.
13

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UNIT

Introduction to Operations Management, Operations Management, Importance of Operations

In this unit, you will learn to:

At the end of this unit, you would:

Pre-Unit Preparatory Material

1.2 OPERATIONS MANAGEMENT

involved in producing certain products is called production management. If these management

1.2.1 Importance of Operations Management

1.2.2 Functions of Operations Management

Various functions involved in operations management are:

1.2.3 Activities Part of Operations Management

1.3 RELATIONSHIP BETWEEN OPERATIONS AND OTHER FUNCTIONS IN THE

1.4 OPERATIONS MANAGEMENT IN MANUFACTURING AND SERVICES

1.5 OPERATIONS PERFORMANCE OBJECTIVES

1.6 PRODUCTION AND OPERATIONS

1.6.1 Nature of Production and Operations

1.6.2 Differences between Production and Operations Management

1.7 SYSTEMS APPROACH TO OPERATIONS MANAGEMENT

 Communication system: Communication is important in all phases of the managerial process.

Conclusion 1.8 CONCLUSION

 A set of interconnected management activities involved in producing certain products is called

1.10 CASE STUDY: STRATEGIC DECISION MAKING

The Operation Research Solution

1.11 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1.12 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

@ 1.13 POST-UNIT READING MATERIAL

1.14 TOPICS FOR DISCUSSION FORUMS

In this unit, you will learn to:

At the end of this unit, you would:

Pre-Unit Preparatory Material

2.2 FAMOUS CONTRIBUTIONS

2.2.1 Eli Whitney

2.2.2 F.W. Taylor

2.2.3 Gilbreth Couple

2.2.4 Henry Ford

2.2.5 Henry L. Gantt

2.2.6 Edwards Deming

Production And Operations Management

2.3 FOCUS SHIFT OF OPERATIONS MANAGEMENT FROM THE 1960S

2.4 CONTEMPORARY FACTORS AFFECTING OPERATIONS MANAGEMENT

2.5 DECISION MAKING AT THREE LEVELS

2.6 FIVE BASIC PROCESS CATEGORIES

2.7 PRODUCT SERVICE BUNDLING

Commercial Operations Management Areas

Brand Brand Management

Metrics & Performa nce

Production Product Management

Innovation Channel & Sales

People Talent & Skills Management

2.8 OPERATIONS MANAGER

2.8.1 Responsibilities of an Operations Manager

2.8.2 Challenges Faced by Operations Managers

Conclusion 2.9 CONCLUSION

2.11 CASE STUDY: ALIGNING OPERATIONAL STRATEGIES

2.12 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

2.13 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay-type Questions

@ 2.14 POST-UNIT READING MATERIAL

2.15 TOPICS FOR DISCUSSION FORUMS

03 Strategic Operations Management