Production 1 Production Management Unit 1 Notes For Mba 2nd Semester

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Production-1 - Production management unit 1 notes for mba

2nd semester
Masters of Business Administration (Dr. A.P.J. Abdul Kalam Technical University)
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OPERATIONS MANAGEMENT
UNIT 1
Definition, Objectives, Scope and Functions of

Production & Operation Management
Production (or Operations) management is an umbrella term which encompasses a gamut of
ideas within the managerial circles, mostly exemplified by the varied literal definitions of these
terms based on the source. But we9ll confine ourselves to straightforward (and understandable)
definition to answer the basic question 3 8What is operations management?
Production / Operations Management is defined as the process which transforms the

inputs/resources of an organization into final goods (or services) through a set of defined,
controlled and repeatable policies.

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By policies, we refer to the rules that add value to the final output. The value added can be in
different dimensions, but the industrial set-up is mostly concerned with the duo
of quality and throughput.
Difference between Production and Operations Management

Production and operations management are more similar than different: if manufacturing
products is a prime concern then it is called production management, whereas management of
services is somewhat broader in scope and called operations management (because
manufacturing services sounds absurd, right?).
The line between products-based and services-based organizations is blurring rapidly as well4
car manufactures need to service their cars and the retailers manufacture their own brand labels.
We will be referring to them jointly as POM from here on in this article, for the benefit and
convenience of all the parties involved.
The fuss about production and systems
 Productionis a term which has caught the fancy of every industrialist ever since
Adam Smith propounded the idea of <specialization of labor=.
It is best envisioned as a piece-wise process (think about a typical production line with every
worker doing one and only one task at a frenetic speed), and this piece-wise production enabled
better quality, higher throughput, lower individual dependency and lesser labor costs.
The production systems are frequently classified in the following buckets:
 Mass Production: Utilizes standardized discrete assemblies in a continuous

process, suitable for very large volumes of production4all outputs following
the same path. Generally associated with mind-numbing repetition, very
specific machinery and a labor force low on skill/creativity.
 Continuous Production: Non-flexible mode of production in which the whole
sequence of operations is pre-arranged in a definite set-up.
 Batch production: American Production and Inventory Control defines batch
production as <a form of manufacturing in which the job passes through the
functional departments in lots or batches and each lot may have a different
routing.= Enough said.
 Job Shop Production: Characterized by custom specifications by customers
for a limited quantity of products, use of general purpose machines and
comparatively more creative/skilled labor.

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 There are a few decision areas which are of utmost importance in POM, such as
design, quality, location selection, human resource allocation, supply chain
management and maintenance.
 The decisions arising from a POM perspective often decide the core priorities
of an organization: What makes us better than the competitors? Will we
compete on cost, quality, delivery time, design/form factor, ease of use, or
something else? Et cetera et cetera.
 There are some pre-defined objectives of production management, which can
be broken down into:
 Right quality,
 Right quantity,
 Right time and
 Right cost
 Production management can essentially be seen as an optimization problem: the
goal is to make the process as predictable as possible (as all of us do not share
the same enthusiasm for surprises).
 The objectives of operations management are a tad more extensive and take a
couple of things more into the fold: customer serviceand resource utilization.
 Almost all the things in operation management converge towards a single
focal point: the customer. Customer satisfaction is a barometer of things
moving in the right direction.
 Resource utilization is equally imperative: the process of obtaining the
output from input through the path of least resistance, i.e. through least
wastage and maximum utilization of resources.
 Scoring high on one usually leads to deterioration in performance of the
other (utilization v/s customer service), and their balance is usually the
nightmare of an operations manager 4 but is definitely a worthy goal to
look forward to.
Objectives of Production/Operations Management:

(i) Maximum customer satisfaction through quality, reliability, cost and delivery time.
(ii) Minimum scrap/rework resulting in better product quality.
iii) Minimum possible inventory levels (i.e.,optimum inventory levels).
iv) Maximum utilisation of all kinds of resources needed.
(v) Minimum cash outflow.
(vi) Maximum employee satisfaction.

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(vii) Maximum possible production (i.e., outputs).
(viii) Higher operating efficiency.
(ix) Minimum production cycle time.
(x) Maximum possible profit or return on investment.
(xi) Concern for protection of environment.
(xii) Maximum possible productivity.
Production Management v/s Operations Management

A high level comparison which distinct production and operations management can be done on
following characteristics:
 Output: Production management deals with manufacturing of products like

(computer, car, etc) while operations management cover both products and
services.
 Usage of Output: Products like computer/car are utilized over a period of time
whereas services need to be consumed immediately
 Classification of work: To produce products like computer/car more of capital
equipment and less labour are required while services require more labour and
lesser capital equipment.
 Customer Contact: There is no participation of customer during production
whereas for services a constant contact with customer is required.
SCOPE OF PRODUCTION AND OPERATION MANAGEMENT

Production and operations management concern with the conversion of inputs into outputs, using
physical resources, so as to provide the desired utilities to the customer while meeting the other
organizational objectives of effectiveness, efficiency and adaptability. It distinguishes itself from
other functions such as personnel, marketing, finance, etc., by its primary concern for
8conversion by using physical resources.9 Following are the activities which are listed under
production and operations management functions:
1. Location of facilities
2. Plant layouts and material handling
3. Product design
4. Process design
5. Production and planning control
6. Quality control
7. Materials management

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8. Maintenance management.
Location of facilities for operations is a long-term capacity decision which involves a long term
commitment about the geographically static factors that affect a business organization. It is an
important strategic level decision-making for an organization. It deals with the questions such as
8where our main operations should be based?9
Plant layout refers to the physical arrangement of facilities. It is the configuration of

departments, work centers and equipment in the conversion process. The overall objective of the
plant layout is to design a physical arrangement that meets the required output quality and
quantity most economically.
According to James Moore, <Plant layout is a plan of an optimum arrangement of facilities

including personnel, operating equipment, storage space, material handling equipment9s and all
other supporting services along with the design of best structure to contain all these facilities=.
8Material Handling9 refers to the 8moving of materials from the store room to the machine and
from one machine to the next during the process of manufacture9. It is also defined as the 8art
and science of moving, packing and storing of products in any form9. It is a specialized activity
for a modern manufacturing concern, with 50 to 75% of the cost of production.
Product design deals with conversion of ideas into reality. Every business organization have to
design, develop and introduce new products as a survival and growth strategy. Developing the
new products and launching them in the market is the biggest challenge faced by the
organizations.
Process design is a macroscopic decision-making of an overall process route for converting the
raw material into finished goods. These decisions encompass the selection of a process, choice of
technology, process flow analysis and layout of the facilities.
Production planning and control can be defined as the process of planning the production in
advance, setting the exact route of each item, fixing the starting and finishing dates for each item,
to give production orders to shops and to follow up the progress of products according to orders.
Planning is deciding in advance what to do, how to do it, when to do it and who is to do it.
Planning bridges the gap from where we are, to where we want to go. Routing may be defined as
the selection of path which each part of the product will follow, which being transformed from
raw material to finished products. Scheduling determines the programmer for the operations.
Scheduling may be defined as 8the fixation of time and date for each operation9 as well as it
determines the sequence of operations to be followed.
Dispatching is concerned with the starting the processes. It gives necessary authority so as to
start a particular work, which has already been planned under 8Routing9 and 8Scheduling9.

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Quality Control (QC) may be defined as 8a system that is used to maintain a desired level of
quality in a product or service9. It is a systematic control of various factors that affect the quality
of the product. Quality control aims at prevention of defects at the source, relies on effective feed
back system and corrective action procedure. Quality control can also be defined as 8that
industrial management technique by means of which product of uniform acceptable quality is
manufactured9. It is the entire collection of activities which ensures that the operation will
produce the optimum quality products at minimum cost.
The main objectives of quality control are: To improve the companies income by making the
production more acceptable to the customers i.e., by providing long life, greater usefulness,
maintainability, etc. To reduce companies cost through reduction of losses due to defects. To
achieve interchange ability of manufacture in large scale production. To produce optimal quality
at reduced price. To ensure satisfaction of customers with productions or services or high quality
level, to build customer goodwill, confidence and reputation of manufacturer. To make
inspection prompt to ensure quality control. To check the variation during manufacturing.
Materials management is that aspect of management function which is primarily concerned

with the acquisition, control and use of materials needed and flow of goods and services
connected with the production process having some predetermined objectives in view.
The main objectives of materials management are:
 To minimize material cost.

 To purchase, receive, transport and store materials efficiently and to reduce the
related cost.
 To cut down costs through simplification, standardization, value analysis,
import substitution, etc.
 To trace new sources of supply and to develop cordial relations with them in
order to ensure continuous supply at reasonable rates.
 To reduce investment tied in the inventories for use in other productive
purposes and to develop high inventory turnover ratios.
THE SCOPE OF OPERATIONS MANAGEMENT

Operations management has been gaining increased recognition in recent years because of the
following reasons:
(i) The application of operations management concepts in service operations.
(ii) The growing importance of quality.
(iii) The introduction of operation management concepts to other areas such as marketing and
human resources and

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(iv) The realization that the operations management function can add value to the end product.
Difference between Production and Operations

Management
Production Management
E.S.Buffa defines production management as follows: 8Production management deals with
decision-making related to production processes so that the resulting goods or services are
produced according to specifications, in the amount and by the schedule demanded and out of
minimum cost9.
FIG: Areas of Production Management
Operations Management
Joseph G .Monks defines Operations Management as the process whereby resources, flowing
with in a defined system, are combined and transformed by a controlled manner to add value in
accordance with policies communicated by management.

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Key Differences Between Production and Operation Management
1. Production Management can be defined as the administration of the set of

activities concerning the creation of goods or transformation of raw material
into finished goods. Conversely, Operations Management is used to mean that
branch of management which deals with the administration both production of
goods and provision of services to the customers.
2. In production management, the manager has to make decisions regarding the
design, quality, quantity and cost of the product manufactured by the
department. On the contrary, the scope of operations management is larger in
comparison to the production management wherein the operations manager
looks after the product design, quality, quantity, process design, location,
manpower required, storing, maintenance, logistics, inventory management,
waste management, etc.

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3. Production Management can only be found in the firms where production of

goods is undertaken. Unlike, one can find operations management in every
organization, i.e. manufacturing concerns, service-oriented firms, banks,
hospitals, agencies, etc.
4. The basic objective of production management is to provide the right quality
goods in the right quantity at right time and best price. In contrast, operations
management aims at making the best possible use of organization9s resources,
in order to fulfill the customer9s wants.
Conclusion
Production and Operations Management are so closely intertwined, that it is quite difficult to
differentiate the two. Production management covers administer all the activities which are
involved in the process of production. On the other hand, operations management entails all the
activities involved in the production of goods and delivery of services such as material
management, quality management, maintenance management, process management, process
design, product design and so on.
Productivity, Work Study, Productivity

Measurement, Factors affecting Productivity
PRODUCTIVITY
Productivity is an overall measure of the ability to produce a good or service. More specifically,
productivity is the measure of how specified resources are managed to accomplish timely
objectives as stated in terms of quantity and quality. Productivity may also be defined as an
index that measures output (goods and services) relative to the input (labor, materials, energy,
etc., used to produce the output). As such, it can be expressed as:
Hence, there are two major ways to increase productivity: increase the numerator (output) or
decrease the denominator (input). Of course, a similar effect would be seen if both input and
output increased, but output increased faster than input; or if input and output decreased, but
input decreased faster than output.
Organizations have many options for use of this formula, labor productivity, machine
productivity, capital productivity, energy productivity, and so on. A productivity ratio may be
computed for a single operation, a department, a facility, an organization, or even an entire
country.
Productivity is an objective concept. As an objective concept it can be measured, ideally against

a universal standard. As such, organizations can monitor productivity for strategic reasons such
as corporate planning, organization improvement, or comparison to competitors. It can also be
used for tactical reasons such as project control or controlling performance to budget.

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Productivity is also a scientific concept, and hence can be logically defined and empirically
observed. It can also be measured in quantitative terms, which qualifies it as a variable.
Therefore, it can be defined and measured in absolute or relative terms. However, an absolute
definition of productivity is not very useful; it is much more useful as a concept dealing with
relative productivity or as a productivity factor.
FACTORS AFFECTING PRODUCTIVITY

Factors influencing productivity can be classified broadly into two categories:
1. Controllable (or internal) factors

2. Un-controllable (or external) factors.
1. Controllable For Internal Factors
(I) Product factor: In terms of productivity means the extent to which the product meets output
requirements product is judged by its usefulness. The cost benefit factor of a product can be
enhanced by increasing the benefit at the same cost or by reducing cost for the same benefit.
(II) Plant and equipment: These play a prominent role in enhancing the productivity. The
increased availability of the plant through proper maintenance and reduction of idle time
increases the productivity. Productivity can be increased by paying proper attention to utilization,
age, modernization, cost, investments etc.
III) Technology: Innovative and latest technology improves productivity to a greater extent.
Automation and information technology helps to achieve improvements in material handling,
storage, communication system and quality control. The various aspects of technology factors to
be considered are:
 Size and capacity of the plant,

 Timely supply and quality of inputs,
 Production planning and control,

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 Repairs and maintenance,

 Waste reduction, and
 Efficient material handling system.
(IV) Material and energy: Efforts to reduce materials and energy consumption brings about
considerable improvement in productivity.
 Selection of quality material and right material.

 Control of wastage and scrap.
 Effective stock control.
 Development of sources of supply.
 Optimum energy utilization and energy savings.
(V) Human factors: Productivity is basically dependent upon human competence and skill.
Ability to work effectively is governed by various factors such as education, training, experience
aptitude etc., of the employees. Motivation of employees will influence productivity.
(VI) Work methods: Improving the ways in which the work is done (methods) improves
productivity, work study and industrial engineering techniques and training are the areas which
improve the work methods, which in term enhance the productivity.
(VII) Management style: This influence the organizational design, communication in

organization, policy and procedures. A flexible and dynamic management style is a better
approach to achieve higher productivity.
2. Uncontrollable (Or) External Factors
(I) Structural adjustments: Structural adjustments include both economic and social changes.
Economic changes that influence significantly are:
 Shift in employment from agriculture to manufacturing industry,

 Import of technology, and
 Industrial competitiveness.
(II) Natural resources: Manpower, land and raw materials are vital to the productivity
improvement.
(III) Government and infrastructure: Government policies and program are significant to
productivity practices of government agencies, transport and communication power, fiscal
policies (interest rates, taxes) influence productivity to the greater extent.

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Work Study
<Work study is a generic term for those techniques, method study and work measurement which
are used in the examination of human work in all its contexts. And which lead systematically to
the investigation of all the factors which affect the efficiency and economy of the situation being
reviewed, in order to effect improvement.=
Advantages of Work Study
1. It helps to achieve the smooth production flow with minimum interruptions.

2. It helps to reduce the cost of the product by eliminating waste and unnecessary
operations.
3. Better worker-management relations.
4. Meets the delivery commitment.
5. Reduction in rejections and scrap and higher utilization of resources of the
organization.
6. Helps to achieve better working conditions.
7. Better workplace layout.
8. Improves upon the existing process or methods and helps in standardization
and simplification.
9. Helps to establish the standard time for an operation or job which has got
application in manpower planning, production planning.
PRODUCTIVITY MEASUREMENT
1. Total Productivity Measure (TPM)
It is based on all the inputs. The model can be applied to any manufacturing organization or
service company.

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Total productivity =Total tangible output +Total tangible input
Total tangible output = Value of finished goods produced + Value of partial units produced +
Dividends from securities + Interest+ Other income
Total tangible input = Value of (human + material + capital + energy+ other inputs) used. The
word tangible here refers to measurable.
The output of the firm as well as the inputs must be expressed in a common measurement unit.
The best way is to express them in rupee value.
2. Partial Productivity Measures (PPM)
Depending upon the individual input partial productivity measures are expressed as
Partial productivity =Total output% Individual input
Labor productivity =Total output%Labour input (in terms of man hours)
Capital productivity =Total output% Capital input
Material productivity =Total output% Material input
Energy productivity =Total output% Energy input
One of the major disadvantages of partial productivity measures is that there is an over emphasis
on one input factor to the extent that other input are underestimated or even ignored.
Work Study Method

Work study is the investigation, by means of a consistent system of the work done in an
organization in order to attain the best utilisation of resources i.e. Materials, Machines, Men and
Money. All the technologies and management systems are related with productivity.
Work study is one of the basic techniques of improving productivity. In order to resolve this
aspect, work study aims:
(i) To have optimum utilization of resources i.e., 4 Ms.
(ii) To analyse the work in order to achieve work simplification and thereby improving
productivity of the system.

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(iii) To set time standards for various jobs.
(iv) To evaluate the work content through work measurement.
Role of Work Study:
 To eliminate unnecessary human movements.

 To standardise the method of doing a work.
 To determine the standard time for doing a task.
 To a systematic investigation of all factors.
 To minimise the unit cost of production.
 To minimise the material movement, and operator9s movement.
 To utilise facilities such as man, machine and materials most effectively.
Advantages of Work Study:
 Work study ensures higher productivity.

 Better service to customers.
 Better working conditions with less fatigue.
 Harmonious employer-employee relation.
 Higher wages to workers.
 Job satisfaction and job security to workers.
 Fast delivery schedule.
 Reduction in unit cost of production.
 Quality products to consumers.
 Uniform production flow.
Techniques of Work Study:

Basically, there are two techniques:
Method study and work measurement.
Thus, work study is the term used to embrace the techniques of Method Study and Work
Measurement which are used to ensure the best utilization of manpower and material resources
in carrying out specified activity.
The sequential order of the correct procedure to be adopted for having effective or purpose-
oriented results of method study include the following:
(i) Select the work/procedure to be analysed.

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(ii) Record all the relevant information related with the existing work system with the help of
various recording devices or techniques.
Work Study
(iii) Make critical examination of collected data/facts.
(iv) Develop and improve the method which is economical and practical after giving due
consideration to the alternative method possible.
vi) Maintain the latest standards of methods through periodic verification etc.
The logical order of correct procedure to be adopted for having effective results of work
measurement includes the followings:
(i) Divide the selected procedure into small work elements.
(ii) By direct observations record the relevant information regarding the various work elements.
(iii) In the light of relevant information examine the work critically.
(iv) Measure the work content in the terms of time of the work elements involved in method
being adopted.
(v) Define and design the new selected method.
(vi) Finally convert the work content time in standard time.
Objectives of Method Study:
Some important objectives of method study are:
(1) Better design of plant equipment and buildings.
(2) Less fatigue or workers by avoiding unnecessary movements of manpower.
(3) Better working conditions and environment for workers/employees.
(4) To have more effective utilisation of materials, machines and manpower and money.
(5) Better Product quality.

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(6) Efficient and fast material handling equipment.
(7) Leads to standardisation, rationalisation, simplification and specialisation.
(8) Efficient planning of the section.
(9) Streamlined working procedures.
Objectives of Work Measurement:
Effective planning and control of production, distribution and administration can not be achieved
unless these are based on facts. One of the most important of these facts is the time required for
job completion which can be obtained by motion study or work measurement.
Other objectives of work measurement are as follows:
(1) When two alternative methods which seem equally advantageous, one which requires less
time for completion of the job (i.e. faster) can be established.
(2) The man power required for a job or new plant can be determined on the basis of accurate
knowledge of the amount of work that has to be done so it helps in manpower economy.
(3) Work measurement data provides reliable basis to decide equipment.
(4) Provides requisite information for effective production planning and improving efficiency of
the system.
(5) Provides basis for fair and reliable incentive schemes.
(6) Decides realistic labour budgeting and provides a basis for standard costing system.
Advantages of Work Study:
(1) It is direct means of improving productivity.
(2) It results in uniform and improved production flow.
(3) It reduces the manufacturing cost.
(4) With its help fast and accurate delivery dates are possible.

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(5) It provides better service and consumer satisfaction.
(6) It improves employee-employer relations.
(7) It provides job satisfaction and job security to workers.
(8) Better working conditions are possible for workers.
(9) It is most important tool of analysis and can help in providing better wages to workers on
scientific basis.
(10) Most accurate method and yet provides a sound basis for production planning, control and
incentives for man power.
(11) Everyone concerned with industries is benefited from it such as worker, consumer and
management of the unit.
Work Measurement
Work measurement is concerned with the determination of the amount of time required to
perform a unit of work. Work measurement is very important for promoting productivity of an
organization. It enables management to compare alternate methods and also to do initial staffing.
Work measurement provides basis for proper planning.
Since it is concerned with the measurement of time it is also called 8Time Study9. The exact
examination of time is very essential for correct pricing. To find the correct manufacturing time
for a product, time study is performed. To give competitive quotations, estimation of accurate
labour cost is very essential. It becomes a basis for wage and salary administration and devising
incentive schemes.
Work measurement has been defined by British Standard Institution as, <The application of
techniques designed to establish the time for a qualified worker to carry out a specified job
at a defined level of performance=. This time is called standard or allowed time. Time study
may also be defined as <the art of observing and recording the time required to do each
detailed element of an industrial operation=.
Objectives of Work Measurement:
1. To compare the times of performance by alternative methods.

2. To enable realistic schedule of work to be prepared.
3. To arrive at a realistic and fair incentive scheme.

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4. To analyse the activities for doing a job with the view to reduce or eliminate
unnecessary jobs.
5. To minimise the human effort.
6. To assist in the organisation of labour by daily comparing the actual time with
that of target time.
Uses of Work Measurement:
1. Wok measurement is used in planning work and in drawing out schedules.

2. Wok measurement is used to determine standard costs.
3. Wok measurement is used as an aid in preparing budgets.
4. It is used in balancing production lines for new products.
5. Wok measurement is used in determining machine effectiveness.
6. To determine time standards to be used as a basis for labour cost control.
7. To establish supervisory objectives and to provide a basis for measuring
supervisory efficiency.
8. To determine time standards to be used for providing a basis for wage incentive
plans.
Techniques of Work Measurement:

Work measurement is investigating and eliminating ineffective time. It not only reveals the
existence of ineffective time. But it can be used to set standard times for carrying out the work so
that ineffective time does not evolve later. It will be immediately found out by the increased
standard time. For the purpose of work measurement, work may be regarded as repetitive work
and non-repetitive work.
The principal techniques of work measurement are classified under the following heads:
1. Time Study
2. Work Sampling
3. Pre-determined Motion Time System
4. Analytical Estimating
Production Technology: Types of Manufacturing

Processes
Production Technology
In the simplest sense, production technology is the machinery that makes creating a tangible
physical product possible for a business. To the small business, this means a workshop at the
very least, with more elaborate operations making use of machines and assembly lines. Choosing
a production scale model within a company9s capital means is important; simpler workshops

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tend to lead to lower production volume but cost less to assemble, while higher output operations
require more complex and costly machines, which are sometimes cost prohibitive.
Components of Production Technology
1. The Modern Artisan Workshop
The artisan workshop represents the basic minimum effective level of modern production
technology. An artisan workshop builds upon the traditional workshops of craftsmen from before
the industrial revolution and replaces most of the simple hand tools used with time-saving
electrically driven tools. These tools offer the skilled tradesperson the advantage he needs in
order to more quickly produce goods to the same level of quality he would otherwise make with
hand tools. The tablesaw, drill press and belt sander are all examples of modern variations on
simple hand tools used to save the modern craftsman time. Artisan workshops focus on low or
medium output of higher than average quality goods to maintain a competitive advantage over
large-scale factory-produced items of similar type.
2. CNC Machining and Extending the Artisan Workshop
A computer number-controlled or CNC machine 3 also referred to as computer-aided

manufacturing 3 further extends the capability of an artisan workshop, allowing the skilled
craftsman to program the device to perform highly detailed repetitive tasks such as router and
drill operation. CNC machines are expensive investments; however, when used to address the
more time-consuming steps of producing an item in the standard artisan workshop, they can
significantly improve the overall profitability of that manufacturing business. Because of their
high initial cost when compared to manually operated shop tools, CNC machines are generally
unavailable to all but the most successful small business. Investing in a CNC machine is a
pivotal decision for a small business and should be done with careful consideration of how much
the machine will actually boost profits when compared to continuing with the manual method.
3. Automated Assembly Line-Style Mass Production
Automated assembly-line mass production represents the apex of modern industrial production,
and is the driving force behind industrial titans such as automobile manufacturers and the makers
of household appliances. The higher the degree of mechanization and use of robotics in the
assembly line process, the fewer human workers are required to produce a product; however, in
replacing human laborers with robots, the initial investment cost rises dramatically. The
extremely high initial cost of automated assembly line mass production places such production
methods far beyond the grasp of small business owners as far as practicality is concerned.
Maintaining advanced automated assembly lines also requires the professional services of highly
skilled robotics technicians, again making practical implementation difficult for the small
business owner.
4. Practicality Considerations for Small Business

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When it comes to investing in production technology, a small business9s focus should be on

generating the best dollar return on capital investment within the confines of the company9s
reasonable budget. The IRS states that small businesses are a success when they generate profit
at least three out of every five years. This general rule means that for the small business person,
if it takes more than two years to pay off the initial capital investment in production technology,
the businesses likely exceeded its ideal maximum production technology budget. This doesn9t
mean that smaller to medium businesses have to abandon advanced production methods entirely;
instead, they can adapt some practices from larger-scale industry that suit their own needs and
capabilities. For example, small and medium businesses looking to capitalize upon the mass
production method of industrial manufacturing can take a page out of Henry Ford9s book and use
a simple conveyor belt line along with labor division to simplify and speed up the production
process while still using artisan shop-style manually operated tools.
TYPES OF MANUFACTURING PROCESS

The four main types of manufacturing are casting and molding, machining, joining, and shearing
and forming.

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1. Molding in Manufacturing
If the products you9re creating start out as liquid, chances are the manufacturer uses molding.
One popular type of molding is casting, which involves heating plastic until it becomes liquid,
then pouring it into a mold. Once the plastic cools, the mold is removed, giving you the desired
shape. You can also use casting to make plastic sheeting, which has a wide variety of
applications. There are four other types of molding: injection molding, which melts plastic to
create 3-D materials such as butter tubs and toys; blow molding, used to make piping and milk
bottles; compression molding, used for large-scale products like car tires; and rotational molding,
used for furniture and shipping drums.
2. Machining in Manufacturing
It would be difficult to make products like metal parts without the use of some type of machine.
Manufacturers use tools like saws, sheers and rotating wheels to achieve the desired result. There
are also tools that use heat to shape items. Laser machines can cut a piece of metal using a high-
energy light beam, and plasma torches can turn gas into plasma using electricity. Erosion
machines apply a similar principle using water or electricity, and computer numerical control
machines introduce computer programming into the manufacturing mix.
3. Joining in Manufacturing
You can only get so far with molds and machines. At some point you need to be able to put
multiple parts together to make one piece. Otherwise, just about all you can create is IKEA-like
furniture that needs to be assembled, part by part. Joining uses processes like welding and
soldering to apply heat to combine materials. Pieces can also be joined using adhesive bonding
or fasteners.
4. Shearing and Forming in Manufacturing

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When dealing with sheet metal, shearing comes into play. Shearing uses cutting blades to make
straight cuts into a piece of metal. Also known as die cutting, you9ll often see shearing used on
aluminum, brass, bronze and stainless steel. Another metal-shaping process is forming, which
uses compression or another type of stress to move materials into a desired shape. Although
forming is often used with metal, it also can be used on other materials, including plastic.
Plant location
Location of an industry is an important management decision. It is a two-step decision: first,
choice of general area or region and second, the choice of site within the area selected. Location
decision is based on the organisations long-term strategies such as technological, marketing,
resource availability and financial strategies.
The objective of plant location decision-making is to minimise the sum of all costs affected by
location.
Plant location is important because of the following:

(i) Location influences plant layout facilities needed.
(ii) Location influences capital investment and operating costs.
Location decisions are strategic, long-term and non-repetitive in nature. Without sound and
careful location planning in the beginning itself, the new facilities may create continuous
operating problems in future. Location decision also affects the efficiency, effectiveness, produc-
tivity and profitability.
The location decision should be taken very carefully, as any mistake may cause poor location,
which could be a constant source of higher cost, higher investment, difficult marketing and
transportation, dissatisfied and frustrated employees and consumers, frequent interruptions of
production, abnormal wastages, delays and substandard quality etc.
Therefore, it should be based upon a careful consideration of all factors that are essentially
needed in efficient running of a particular industry. The necessary factors in the selection of plant
location vary among industries and with changing technical and economical conditions.
Site selection is not an easy problem because if the selection is not proper then all money spent
on factory building, machinery and their installation etc., will go as waste and the owner has to
suffer a great loss. Therefore, while selecting a site, owner must consider technical, commercial,
financial aspects which may provide maximum advantages.
It is sometimes possible that all the requirements and features of ideal site may not be available
at one particular location but then it will be advantageous to find out suitable site with

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combinations of all essential requirements of the particular industry to be established as

explained in following paras.
Market Location:
To solve such problems a market analysis of the area is conducted and answers of the
following questions can be found out:
1. If there is a market which could be served and if retail price of product can be
reduced?
2. Whether quick delivery of the product can be made by better plant location to
the particular market?
3. Whether there is a competitor for the product in the market? Whether demand
for product may increase? Whether an additional plant is required to meet the
future demand?
4. What is the potential purchasing power of the market?
5. What are the buying habits of local people, and what must be done to fit your
service to these habits?
Economical Aspects:
Locational economics for an enterprise includes a consideration of the product to be manu-
factured, the processes and machinery to be used, and the service and facilities required.
To know this the following factors may be studied:
1. Product:
(a) Nature,
(b) Volume, and
(c) Value.
2. Production process:
(a) Continuous,
(b) Intermittent, and
(c) Interrupted.
3. Manufacturing machinery.

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4. Other manufacturing equipment9s.

5. Special manufacturing requirement.
6. Service:
(a) Steam,
(b) Gas,
(c) Water,
(d) Air or high pressure,
(e) Electricity, and
(f) Sewerage.
Factors affecting Plant Location

Eight Factors Affecting Plant Location
1. Selection of Region
The selection of a region or area in which plant is to be installed requires the consideration of the
following:
(i) Availability of Raw Materials: Proximity of sources of raw materials is the obvious
explanation of the location of majority of sugar mills in Uttar Pradesh. This means that the raw
material should be available within the economical distance. Easy availability of supplies
required for maintenance and operation of the plant should also be considered.
(ii) Proximity to Markets: Cost of distribution is an important item in the overhead expenses.
So it will be advantageous to be near to the center of demand for finished products. Importance
of this is fully realized if the material required for the manufacturing of products are not bulk and
fright charges are small.
iii) Transport Facilities: Since freight charges of raw materials and finished goods enter into the
cost of production, therefore transportation facilities are becoming the governing factor in
economic location of the plant. Depending upon the volume of the raw materials and finished
products, a suitable method of transportation like rail, road, water transportation (through river,
canals or sea) and air transport is selected and accordingly plant location is decided. Important
consideration should be that the cost of transportation should remain fairly small in comparison
to the total cost of production.

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(iv) Availability of Power, Fuel or Gas: Because of the wide spread use of electrical power the
availability of fuel or gas has not remained a deciding factor in most of the cases for plant
location. The location of thermal power plants (like Bokaro Thermal Plant) and steel plants near
coal fields are for cutting down cost of the fuel transportation. The reliability of continuous
supply of these facilities is an important factor.
(v) Water Supply: Water is required for processing as in chemical, sugar and paper industries
and is also used for drinking and sanitary purposes. Investigation for quality and probable source
of supply is important, since the cost of treating water is substantial so the chemical properties
like hardness, alkalinity and acidity.
(vi) Disposal Facility for Waste Products: Thorough study should be made regarding disposal
of water like effluents, solids, chemicals and other waste products likely to be produced during
the production process.
(vii) Availability of Labour: Potential supply of requisite type of labour governs plant location
to major extent. Some industries need highly skilled labour while other need unskilled and
intelligent labour. But the former type is difficult in rural areas in comparison with industrially
developed location.
2. Township Selection
The factors to be considered regarding township selection are:
(i) Availability of men power of requisite skill
(ii) Competitive wage rates of workers
(iii) Other enterprises which are complementary or supplementary regarding raw materials, other
input, labour and skill required.
(iv) Moderate taxes and the absence of restricting laws.
(v) Favourable cooperative and friendly attitude towards the industry.
(vi) Favourable living conditions and standards keeping in view the availability of medical and
educational facilities, housing, fire service, recreational facilities, cost of living etc.
3. Question of Urban and Rural Area
Question of urban and rural area should be decided in view of the following:
Advantages of Rural Area:

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(i) The initial cost of land, erection cost of building and plant is less in rural area as compared to
urban or city area.
(ii) Acquisition for additional area for extension work expansion of plant is possible without
much difficulty whereas urban area being congested; the additional land is not easily available.
iii) Rural areas are free form labour trouble which is most common in towns and cities.
(iv) Over crowding of working class population in cities is avoided.
Advantages of Urban Area:
(i) Better modes of transportation for collection and distribution of materials and finished
products.
(ii) Availability to requisite type of labour for special and specific jobs is there.
(iii) Utilities like water, power, fuels etc. are easily available.
(iv) Industries do not need to construct colonies to provide residential facilities to their workers
since houses are available on rental basis whereas in rural areas, houses have to be build for
workers.
4. Location of a Factory in a Big City
Generally factories are located in big cities for obvious reasons of skilled labour, market
proximity for both raw materials and end products.
Its advantages and disadvantages are mentioned below:
(i) Existence of educational and recreational facilities is advantageous for children and
dependents of workers.
(ii) Facilities for technical/ industrial education and training for children of workers are available.
(iii) Evening classes facilities are available.
(iv) Discussion opportunities and facilities for exchange of thoughts are available for interested
people in societies and clubs.
(v) All types of skilled man power is available.

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(vi) Repair, maintenance and service facilities for various utilities are available in abundance.
(vii) Banking facilities regarding finance (loan etc.) for industry in case of necessity are
available.
(ix) Big markets for sale of products available.
(x) Better transport facilities for movement of raw materials, finished products and workers are
available.
5. Location of an Industry in Small Town
There are some industries which are located in the rural areas or small towns specifically for the
want of raw material and cheap labour.
(i) Less labour trouble and co-ordinal employee-employer relation.
(ii) Suitable land for current and future requirements easily available.
(iii) Local bye laws do not impose problem in working of the unit.
(iv) No resistance from existing industries.
(v) Possibility of tax exemptions exist.
(vi) Not much congestion.
(vii) Lower rents in comparison to big cities and urban areas.
(viii) Lower wage rates for labour/ employees / workers.
(ix) Less fire risks.
(x) Noise not much problem.
6. Site Selection
The third step is to select the exact plant site with the following considerations:

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(i) The cheap availability of land for current and future requirements, soil characteristics sub soil
water, availability or possibility of economic drainage and waste disposal system are desirable
parameters.
(ii) The site should be easily accessible to various modes of transport as required so that apart
from input materials, employees can also reach the site conveniently.
(iii) The site should be free from zonal restrictions like from railways or civil aviation
restrictions.
7. Current Trends in Pant Location
(I) Location in Proximity of Cities: First tendency is to locate the industries or enterprises in
the proximity of cities rather than in rural or urban areas. These sub-urban sites offer today
practically all advantages, facilities and services available in cities and towns with the added
advantage of land required for future expansion on cheap rates.
(II) Planned Industrial Centers: While industrial towns may be planned and developed by big
industrial houses or govt., the late trend is to develop areas as industrial estates and sell these to
people interested in starting their units at various places. Noida and Faridabad are the examples
of this type of development.
(III) Competition for Development of Industries: In order to generate the employment

opportunities the state and central govt. offer concessions to attract industrialists to set up
industries in their states or territories.
8. The Design of Factory Plant Building
After a plant location has been decided upon, management9s next problem deals with the design
of building. A building is designed and built to protect the property and employees of an
organization. This basic fact is mostly overlooked in planning the requirement for building
structures.
For those plants where employees, materials and infrastructure facilities require protection, the
problems involved in designing and constructing effective and economical structures are many.
Types of Plant layout

Four Main Types of Plant Layout
1. Product or Line Layout

2. Process or Functional Layout.
3. Fixed Position Layout.

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4. Combination type of Layout.

If all the processing equipment and machines are arranged according to the sequence of
operations of the product, the layout is called product type of layout. In this type of layout, only
one product of one type of products is produced in an operating area. This product must be
standardized and produced in large quantities in order to justify the product layout.
The raw material is supplied at one end of the line and goes from one operation to the next quite
rapidly with a minimum work in process, storage and material handling. Fig. 8.3 shows product
layout for two types of products A and B.
Advantages offered by Product Layout:
(i) Lowers total material handling cost.
(ii) There is less work in processes.
(iii) Better utilization of men and machines,
(iv) Less floor area is occupied by material in transit and for temporary storages.
(v) Greater simplicity of production control.
(vi) Total production time is also minimized.
Limitations of Product Layout:
(i) No flexibility which is generally required is obtained in this layout.
(ii) The manufacturing cost increases with a fall in volume of production.
iv) A single machine break down may shut down the whole production line.
(v) Specialized and strict supervision is essential.
2. Process or Functional Layout
The process layout is particularly useful where low volume of production is needed. If the
products are not standardized, the process layout is more low desirable, because it has creator
process flexibility than other. In this type of layout, the machines and not arranged according to

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the sequence of operations but are arranged according to the nature or type of the operations.
This layout is commonly suitable for non repetitive jobs.
Same type of operation facilities are grouped together such as lathes will be placed at one place,
all the drill machines are at another place and so on. See Fig. 8.4 for process layout. Therefore,
the process carried out in that area is according to the machine available in that area.
Advantages of Process Layout
(i) There will be less duplication of machines. Thus, total investment in equipment purchase will
be reduced.
(ii) It offers better and more efficient supervision through specialization at various levels.
(iii) There is a greater flexibility in equipment and man power thus load distribution is easily
controlled.
(iv) Better utilization of equipment available is possible.
(v) Break down of equipment can be easily handled by transferring work to another
machine/work station.
vi) There will be better control of complicated or precision processes, especially where much
inspection is required.
Limitations of Process Layout
(i) There are long material flow lines and hence the expensive handling is required.
(ii) Total production cycle time is more owing to long distances and waiting at various points.
(iii) Since more work is in queue and waiting for further operation hence bottle necks occur.
(iv) Generally, more floor area is required.
(v) Since work does not flow through definite lines, counting and scheduling is more tedious.
(vi) Specialization creates monotony and there will be difficult for the laid workers to find job in
other industries.
3. Fixed Position Layout

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This type of layout is the least important for today9s manufacturing industries. In this type of
layout the major component remain in a fixed location, other materials, parts, tools, machinery,
man power and other supporting equipment9s are brought to this location.
The major component or body of the product remain in a fixed position because it is too heavy or
too big and as such it is economical and convenient to bring the necessary tools and equipment9s
to work place along with the man power. This type of layout is used in the manufacture of
boilers, hydraulic and steam turbines and ships etc.
Advantages Offered by Fixed Position Layout
(i) Material movement is reduced
(ii) Capital investment is minimized.
(iii) The task is usually done by gang of operators, hence continuity of operations is ensured
(iv) Production centers are independent of each other. Hence, effective planning and loading can
be made. Thus total production cost will be reduced.
(v) It offers greater flexibility and allows change in product design, product mix and production
volume.
Limitations of Fixed Position Layout
(i) Highly skilled man power is required.
(ii) Movement of machines equipment9s to production centre may be time consuming.
(iii) Complicated fixtures may be required for positioning of jobs and tools. This may increase
the cost of production.
4. Combination Type of Layout
Now a days in pure state any one form of layouts discussed above is rarely found. Therefore,
generally the layouts used in industries are the compromise of the above mentioned layouts.
Every layout has got certain advantages and limitations. Therefore, industries would to like use
any type of layout as such.
Flexibility is a very important factory, so layout should be such which can be molded according
to the requirements of industry, without much investment. If the good features of all types of
layouts are connected, a compromise solution can be obtained which will be more economical
and flexible.

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Factors affecting for Plant Layout

(1) Policies of management:
It is important to keep in mind various managerial policies and plans before deciding plant
layout.
Various managerial policies relate to future volume of production and expansion, size of the
plant, integration of production processes; facilities to employees, sales and marketing policies
and purchasing policies etc. These policies and plans have positive impact in deciding plant
layout.
(2) Plant location:

Location of a plant greatly influences the layout of the plant. Topography, shape, climate
conditions, and size of the site selected will influence the general arrangement of the layout and
the flow of work in and out of the building.
(3) Nature of the product:

Nature of the commodity or article to be produced greatly affects the type of layout to be
adopted. In case of process industries, where the production is carried in a sequence, product
layout is suitable. For example, soap manufacturing, sugar producing units and breweries apply
product type of layout. On the other hand in case of intermittent or assembly industries, process
type of layout best suited. For example, in case of industries manufacturing cycles, typewriters,
sewing machines and refrigerators etc., process layout method is best suited.
Production of heavy and bulky items need different layout as compared to small and light items.
Similarly products with complex and dangerous operations would require isolation instead of
integration of processes.
(4) Volume of production:

Plant layout is generally determined by taking into consideration the quantum of production to be
produced. There are three systems of production viz.,
(a) Job production:
Under this method peculiar, special or non- standardized products are produced in accordance
with the orders received from the customers. As each product is non- standardized varying in
size and nature, it requires separate job for production. The machines and equipment9s are
adjusted in such a manner so as to suit the requirements of a particular job.
Job production involves intermittent process as the work is carried as and when the order is
received. Ship building is an appropriate example of this kind. This method of plant layout viz.,
Stationery Material Layout is suitable for job production.

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(b) Mass production:
This method involves a continuous production of standardized products on large scale. Under
this method, production remains continuous in anticipation of future demand. Standardization is
the basis of mass production. Standardized products are produced under this method by using
standardized materials and equipment. There is a continuous or uninterrupted flow of production
obtained by arranging the machines in a proper sequence of operations. Product layout is best
suited for mass production units.
(c) Batch production:
It is that form of production where identical products are produced in batches on the basis of
demand of customers or of expected demand for products. This method is generally similar to
job production except the quality of production.
Instead of making one single product as in case of job production a batch or group of products is
produced at one time, It should be remembered here that one batch of products has no
resemblance with the next batch. This method is generally adopted in case of biscuit and
confectionary manufacturing, medicines, tinned food and hardware9s like nuts and bolts etc.
(5) Availability of floor space:

Availability of floor space can be other decisive factor in adopting a particular mode of layout. If
there is a scarcity of space, product layout may be undertaken. On the other hand more space
may lead to the adoption of process layout.
(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.
UNIT 2
Growing Importance of Services Sector in India

In India, the importance of services sector has been increasing continuously decade after decade.
With the continuous expansion of services sector, both in terms of volume and diversity, the
importance of services sector has been increasing at a high speed.

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The following are some of the importance’s of services sector in Indian economy:
(i) Contribution of GDP:

The share of total services sector in India9s GDP (at constant prices), which is constituted by
trade, hotels, transport, storage and communications, banking, insurance, real estate, community
and personal services, but excluding construction increased from 28.5 per cent in 1950-51 to
31.8 per cent in 1970-71 and then finally to 51.3 per cent in 2013-14.
But the share of total services sector, excluding construction, to India9s GDP at factor cost (at
current prices) increased rapidly from 30.5 per cent in 1950- 51 to 50.8 per cent in 2010-11 and
then to 55.7 per cent in 2011-12.
If construction is also included, then the same share of services sector increased from 56.8 per
cent in 2000-01 to 59.6 per cent in 2013-14. Among the major components of services sector, the
share of transport, Communication and trade in India9s GDP (at constant prices) increased from
11.0 per cent in 1950-51 to 18.6 per cent in 2013-14.
The share of community and personal services to GDP (at constant prices) marginally increased
from 8.5 per cent in 1950-51 to 12.9 per cent in 2013-14. The share of finance insurance, real
estate and business services increased from 9.0 per cent in 1950-51 to 19.8 per cent in 2013-14.
Thus it has been observed that the contribution of services sector into GDP of India has been
increasing at considerable proportion and thereby it has proved to be a major sector among all
the three sectors of the economy.
(ii) Higher CAGR and Rapid Growth of Services Sector:

The importance of services sector to Indian economy can also be traced from its attainment of
higher compound annual growth rate (CAGR). The CAGR of the services sector attained at 10.0
per cent for the period 2004-05 to 2011-12 has been found to be higher than the 8.6 per cent of
CAGR of Gross Domestic Product (GDP) of India during the same period, which clearly
indicates that the services sector has outgrown both the industry and agriculture sectors, showing
its supremacy among all three sectors of the economy in recent years. Such rapid growth of the
service sector has resulted considerable changes in the GDP of the country.
Moreover, the growth has been specifically marked in the public services, information
technology and financial services. Of late, India has just become a service oriented economy.
The country did not follow the traditional growth models and thereby skipped the manufacturing
growth stage to directly jump from agricultural growth stage to services growth stage.
However, the growth in services sector will definitely support growth process in agriculture and
industrial sector in reasonable proportion and thereby assist the economy in generating
employment and raising overall productivity.

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The ratcheting up of the overall growth rate (CAGR) of the Indian economy from 5.7 per cent in
the 1990s to 8.6 per cent during the period 2004-05 to 2009-10 was to a large measure due to the
acceleration of the growth rate (CAGR) in the services sector from 7.5 per cent in the 1990s to
10.3 per cent during the period 2004-05 to 2009-10.
The services sector growth was significantly faster than the 6.6 per cent for the combined
agriculture and industry sectors annual output growth during the same period. Although, the
agricultural sector has been a dominant player initially, but of late the share of services sector has
also been increasing over the years, which has been challenging the dominance of primary sector
or agriculture in the later stage of development.
(iii) Horizontally Higher Share of Services in GSDP:

The service sector has been contributing towards the gross state domestic product (GSDP) of
different states and union territories (UTs) satisfactorily in recent years. A comparison of the
shares of services in the GSDP of different states and union territories in 2011- 12 shows that the
services sector is the dominant sector in most states of India.
States and UTs such as Tripura, Nagaland, West Bengal, Mizoram, Maharashtra, Bihar, Tamil
Nadu, Kerala, Delhi and Chandigarh have recorded a higher share of services sector to its GSDP
which are again higher than all India shares (55.7 per cent) of its services sector.
Chandigarh with an 85 per cent share and Delhi with 81.8 per cent share top the list. This has
resulted a horizontal spread of higher share of services sector in GSDP of a number of states.
(iv) Employment Generation of Services Sector:

The important of services sector can also be realised from its contribution towards generation of
employment in India. Although the primary sector (mainly agriculture) is the dominant employer
followed by the services sector, the share of services sector has been increasing over the years
and that of the primary sector has been decreasing.
Between 1993-94 to 2009-10, there has been a sharp fall in the share of primary sector in
employment from 64.75 per cent in 1993-94 to 53.2 per cent in 2009-10.
But the consequent rise in share of employment of the other two sectors was almost equally
divided between secondary and tertiary sectors. However, while agriculture continues to be the
primary employment providing sector, the services sector (including construction) is in the
second place.
During the same period, the share of services and construction sectors in employment increased
from 19.70 per cent to 25.30 per cent and 3.12 per cent to 9.60 per cent respectively.
As per National Sample Survey Organisation (NSSO) report on Employment and

Unemployment Situation in India in 2009-10, on the basic usually working persons in the

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principal and subsidiary statuses, for every 1000 people employed in rural India, 679 people are
employed in the agriculture sector, 241 in the services sector (including construction) and 80
persons in the industrial sector.
Again in urban part of India, 75 persons are employed in the agriculture, 683 persons in the
services sector (including construction) and 242 persons in the industrial sector. Moreover,
construction, trade, hotels and restaurants and public administration, education and community
services are the three important employment providing service sectors.
Studies further reveals that the tertiary employment share have strong upward slopes in all the
income quintiles covered both in urban and rural areas with higher income quintiles having
higher share in each successive NSSO round. Thus tertiary employment growth is steadying
moving from being an absorber of low income of labour to providers of high income jobs.
State-wise, there are wide differences in the share in employment of different sectors in rural
India. It is found that some work-eastern states like Sikkim, Tripura and Manipur have a high
share of employment in the services sector and again some city states like Chandigarh and Delhi
also have very high shares of employment in services like 826 and 879 respectively out of 1000
employed people.
Moreover, among the major states, Kerala has a high share of employment in the rural services
sector at 511 persons out of 1000 persons. Construction; trade, hotels and restaurant; and public
administration, education and community services are the three major employment providing
services sectors in all these different states.
In urban India the shares of employment in services in most of the states varied like 833 in
Assam, 877 in Meghalaya, 732 in Bihar, 787 in Jharkhand, 711 in Kerala, 716 in Maharashtra,
743 in Rajasthan, 653 in Uttar Pradesh, 641 in Gujarat, 586 in Tamil Nadu and 683 in West
Bengal out of 1000 employed people.
(v) Contribution to India’s Services Trade:

The services sector is also playing an important role sector in raising the volume of exports in the
country. Thus India is moving towards a services-led export growth in recent years. During
2004-05 to 2008-09 as per the Balance of Payment (BoP) data, merchandise and services exports
grew by 22.2 and 25.3 per cent respectively.
Again India9s share of services exports in the world export of services, which increased from 0.6
per cent in 1990 to 1.0 per cent in 2000 and further to 3.3 per cent in 2011, has been increasing
faster than the share of merchandise exports in world exports. Services growth slowed in 2009-
10 as a result of the global recession, but the decline was less pronounced than the slowdown in
merchandise export growth and has recovered rapidly in 2010-11.
As per BoP data of the RBI, India9s services exports grew at a CAGR of 20.6 per cent during the
period 2004-05 to 2010-11, compared to the 19.7 per cent CAGR of merchandise exports during

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the same period. If we enter into the details of services sector, CAGRs of financial services (29.2
per cent) were at higher level while that of software at 21 per cent was at lower level.
In terms of size, software is a major services export category, accounting for 41.7 per cent of
total services exports in 2010-11. The CAGR for import of services was 20.2 per cent compared
to the CAGR of merchandise imports, at 21.4 per cent. Among the various items of services
imports, non-software services (22.6 per cent) and transportation (20.5 per cent had high
CAGRs.
Moreover, the overall openness of the economy reflected by total trade including services as a
percentage of GDP showed a higher degree of openness at 55.0 per cent in 2011-12 compared to
25.4 per cent in 1997-98 and 38.1 per cent in 2004-05.
(vi) Contribution towards Human Development:

Services sector has a lot of contribution towards human development in our country.
Accordingly, services sector has been rendering some valuable services, viz., health services,
educational facilities, IT and IT enabled services (ITes), skill development, health tourism,
sports, cultural services etc. which are largely responsible for human empowerment and
improvement of quality of life of the people in general.
(vii) Services Sector Growth and FDI Inflows:

Modest growth of services sector has made ample scope for the smooth inflow of FDI into the
country. FDI also plays a major role in the dynamic growth of the services sector. On the
positive side, at global level, medium term prospects for services are generally better than those
manufacturing sector with international investment in the services sector expected to grow
relatively faster.
Moreover, many transnational companies, which some years ago were mainly focused on their
home markets, are now pursuing their internationalization strategies involving ambitious
investments abroad. Developing and transition economies particularly in Asia are considered as
most attractive destinations. Accordingly, India has been largely considered as favoured
destination for increasing flow of FDI.
Although flow of foreign direct investment (FDI) into services sector of the country is
maintaining a positive trend but the ambiguity in classifying various activities under the services
sector poses differently in the measurement of flow of FDI into this sector.
However, the combined FDI share of financial and non- financial services, computer hardware
and software, telecommunications and housing and real estate can be broadly taken as rough
estimates of FDI share of services.
Such FDI share of services was 40.5 per cent of cumulative FDI equity in flows during the
period April 2000 to December 2012. Including the construction sector (6.5 per cent), the share
of services in FDI inflows increases to 47.0 per cent.

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If the shares of some other services like hotels and tourism, trading, information and
broadcasting, consultancy services, ports, agriculture services, hospital and diagnostic centres,
education, air transport including air freights and retail trading are included then the total share
of cumulative FDI inflows to the services sector would be around 58.4 per cent.
However, in terms of cumulative FDI equity inflows during April 2000 to December 2011, the
financial and non-financial services are found to be the largest recipients with 20.1 per cent, ($
31.7 billion), which is again followed by telecommunications with 7.9 per cent ($ 12.5 billion),
computer hardware and software with 6.9 per cent ($ 10.9 billion), housing and real estates with
6.9 per cent ($ 10.9 billion), and construction activities 6.5 per cent ($ 10.2 billion) share.
The shares of financial and non-financial services sector in total FDI inflows from these sourcing
countries are Mauritius 20.1 per cent Singapore 30.6 per cent, U.K 29.5 per cent, USA 21.9 per
cent and Japan 11.9 per cent.
(viii) Contribution towards Development of Infrastructure and Communication Services:

Services sector has also been playing an important role in developing expanding and
management of infrastructure with a special emphasis on development of transportation and
communication services. In a developing country like India the importance of development of
infrastructural facilities is quite high.
The contribution of transport, storage and communication to the GDP at factor cost (at current
prices) in India ranges from 8.2 per cent in 2006-07 to 7.1 per cent in 2011-12.
(ix) Contribution towards Growth of IT and ITeS:

The services sector has also paved the way for a continuous growth of its IT and IT enabled
services (ITeS) sector and thereby helping the economy of the country to attain higher growth
both in terms of GDP share, employment, exports etc. which has put India on the global map.
The IT and ITeS sector of the country has developed an image of a young and resilient global
knowledge power and has earned a brand identity in this sector.
The IT and ITeS industry has four major sub-components : IT services, business process
outsourcing (BPO), engineering services and research and development (R&D), and software
products. This IT and ITeS sector has been generating considerable amount of revenues and
employment in the economy.
As per NASSCOM estimates, India9s IT and BPM sector (excluding hardware) revenues were to
the tune of US $ 95.2 billion in 2012-13 and has been able to generate direct employment for
nearly 2.8 million persons and indirect employment of around 8.9 million persons in the country.
Moreover, as a proportion of national GDP, IT and ITeS sector revenues have grown
considerably from 1.2 per cent in 1997-98 to an estimated 7.5 per cent in 2011-12.

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Software exports from India in 2011-12 stands as US $ 69 billion as compared to US $ 59 billion

in 2010-11. It is also observed that exports continue to dominate the IT and ITeS industry and
constitute about 78.4 per cent of total industry revenue. Moreover, the CAGR of the domestic
sector has also been remained at high level of 12.8 per cent as compared to the 14.2 per cent for
exports during the Eleventh Plan period.
The growth rate of the domestic sector of IT-ITeS and exports sector in 2010-11 were 20.6 per
cent and 18.8 per cent respectively as compared to that of 9.7 per cent and 16.4 per cent growth
rate attained respectively in 2011-12. Consistent and growing demand from US is largely
responsible for increasing its share in total exports of India9s IT and ITeS services from 61.5 per
cent to 62.0 per cent in 2011-12.
Moreover, emerging markets of Asia Pacific and the rest of the world also contributed to overall
growth of IT and ITeS sector of the country. Thus the Twelfth Plan aims to harness the potential
of the software and services sector to contribute to country9s development and growth,
particularly in terms of investments, exports employment generation and contributive to GDP
and to retain India9s leadership position as a global IT-BPO destination.
(x) Contribution towards Development of Some Social Services:

Services sector is also playing an important role in the development and expansion of some
social services like sports, cultural services etc. Sports promotes physical fitness and develops
human personality which also played an important role in national identity, community bonding
and international bonding.
Moreover, cultural activities, or services include recreation and entertainment and radio and TV
broadcasting besides other related cultural services. To meet the objective of preserving and
promoting all forms of art and culture, a variety of activities are being undertaken by the
Government of India.
A total allocation of Rs 3,555 crore was made to this sector during the Eleventh Plan. However,
cultural activities are becoming increasing by important in the modern post industrial knowledge
based economy.
Throughout the world they have been recognized as an important component of growth and job
creation as well as a vehicle of cultural identity. India exported US $ 4 billion worth of creative
services in 2010 at a CAGR of 26 per cent.
As per the report of Ernst and young, the Indian media and entertainment industry is valued at
US $ 16.3 billion in 2010 and is projected to grow at a CAGR of 12 per cent in the next four
years (2011-14) to reach a value of US $ 26 billion.
Thus services sector has been playing an important role in promoting some valuable social
services for overall enrichment of the society. Thus services sector has attained a considerable

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size and dimension in its forms of activities and has been playing an important role in a highly
populous country like India.
However, the outlook and status of the services sector which had once fallen due to the global
economic slow-down and financial crisis faced by US, but the same sector has turned its heads
towards its revival and growth once again. The growing opportunities in this sector has been
generating employment to many across the nation and are also attracting FDIs for attaining
success in future.
However, the challenge faced by this sector will be to retain India9s competitiveness in those
areas where the country has made a mark viz. telecommunications, IT and ITeS etc. Besides,
India has to face another challenge to penetrate into some traditional areas such as tourism,
shipping where other countries have already established its mark.
However, India9s potential for success in the sector is very high. Thus these challenges faced by
India need to be addressed if the country wants to realize its pipe dream of attaining double digit
growth and generating large number of employment opportunities for its growing population in
the days to come.
Finally, in a country like India, having a large size of population and presently enjoying the merit
of population dividend in the form of growing proportion of working age population, the
prospect and potential of the services sector in generating income and employment for its people
is quite bright.
Moreover, the growing volume of income and employment generated by services of sector has
been working as booster or major force for the other two sectors, viz. industry and agriculture by
creating new demand for its product which in turn help these two sectors to attain higher growth.
Difference between Product and Service

1. Products Are Tangible: They are physical in nature such that they can be
touched, smelled, felt and even seen. Services are intangible and they can only
be felt not seen.
2. Need vs. Relationship: A product is specifically designed to satisfy the needs
and wants of the customers and can be carried away. However, with a service,
satisfaction is obtained but nothing is carried away. Essentially, marketing of a
service is primarily concerned with creation of customer relationship.
3. Perish-Ability: Services cannot be stored for later use or sale since they can
only be used during that particular time when they are offered. On the other
hand, it can be seen that products are perishable. For example, fresh farm and
other food products are perishable and these can also be stored for later use or
sale.

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4. Quantity: Products can be numerically quantified and they come in different

forms, shapes and sizes. However, services cannot be numerically quantified.
Whilst you can choose different service providers, the concept remains the
same.
5. Inseparability: Services cannot be separated from their providers since they
can be consumed at the same time they are offered. On the other hand, a
product can be separated from the owner once the purchase has been
completed.
6. Quality: Quality of products can be compared since these are physical features
that can be held. However, it may be difficult to compare the quality of the
services rendered by different service providers.
7. Return-Ability: It is easier to return a product to the seller if the customer is
not satisfied about it. In turn, the customer will get a replacement of the
returned product. However, a service cannot be returned to the service provider
since it is something that is intangible.
8. Value Perspective: The value of a service is offered by the service provider
while the value of the product is derived from using it by the customer. Value
of a service cannot be separated from the provider while the value of a product
can be taken or created by the final user of the product offered on the market.
9. Shelf Line: A service has a shorter shelf line compared to a product. A product
can be sold at a later date if it fails to sell on a given period. This is different
with regard to a service that has a short shelve line and should be sold earlier.
Table showing the differences between a product and service
Product Service
A product is tangible, it is physical and can be held, seen and

A service is intangible, can only be felt and not touched
movable
Product value is derived by the customer Value of service is offered by the service provider
Customer care of the product is limited Customer care forms critical component of marketing a service
A product can be stored for future use A service is perishable and cannot be stored for later use or sale
A service cannot be owned by the consumer once payment has been

product can be owned
made

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The quality of a product depends its nature Quality of a service depends on the service provider who shapes it
A product can be returned to the seller A service cannot be returned to the seller
It is easy to compare quality of products It is difficult to compare the quality of services offered
Products can be quantified numerically Services cannot be quantified in terms of numbers
Conclusion
Though the terms product and service are often used interchangeably, it can be observed that
they significantly differ. The major difference noted between the two is that a product is physical
in nature and it is tangible. On the other hand, it can be seen that a service is intangible and it
cannot be held therefore cannot be separated from the provider. Quality of the product is
determined by the customer while the quality of a service is determined by the provider. A
product can be stored for future use or sale and it can be returned to the buyer if the need arises.
However, a service can be consumed the moment it is offered and cannot be stored for future
use. A service cannot be returned to the service provider for any reason since it is not tangible.
Characteristics of Service, Classification of

Service
7 Important Characteristics of Services
(i) Perish-Ability
Service is highly perishable and time element has great significance in service marketing.
Service if not used in time is lost forever. Service cannot stored.
(ii) Fluctuating Demand
Service demand has high degree of fluctuations. The changes in demand can be seasonal or by
weeks, days or even hours. Most of the services have peak demand in peak hours, normal
demand and low demand on off-period time.
(iii) Intangibility
Unlike product, service cannot be touched or sensed, tested or felt before they are availed. A
service is an abstract phenomenon.
(iv) Inseparability

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Personal service cannot be separated from the individual and some personalised services are
created and consumed simultaneously.
For example hair cut is not possible without the presence of an individual. A doctor can only
treat when his patient is present.
(v) Heterogeneity
The features of service by a provider cannot be uniform or standardised. A Doctor can charge
much higher fee to a rich client and take much low from a poor patient.
(vi) Pricing of Services
Pricing decision about services are influenced by perish-ability, fluctuation in demand and
inseparability. Quality of a service cannot be carefully standardised. Pricing of services is
dependent on demand and competition where variable pricing may be used.
(vii) Service quality is not statistically measurable
It is defined in form of reliability, responsiveness, empathy and assurance all of which are in
control of employee9s direction interacting with customers. For service, customer9s satisfaction
and delight are very important. Employees directly interacting with customers are to be very
special and important. People include internal marketing, external marketing and interactive
marketing.
Classifications of Services
In order to be able to make a clear and relevant classification of services, we would first need to
understand the concept of the word itself. Services usually refer to processes and not
physical products. To understand more, read this article on difference between goods and
services. Some services may include people whereas other services (like online services) may
including objects which are managed by people.
Examples of services which include people can be a hair salon, education, theater, restaurants,
public transportation. On the other hand services that include objects include repairs and
maintenance, dry cleaning, banking, legal services, insurance, etc.
1. Classification of service based on Tangible Action

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Wherever people or products are involved directly, the service classification can be done based
on tangibility.
(i) Services for people 3 Like Health care, restaurants and saloons, where the service is
delivered by people to people.
(ii) Services for goods 3 Like transportation, repair and maintenance and others. Where services
are given by people for objects or goods.
2. Classification of services based on Intangibility
There are objects in this world which cannot be tangibly quantified. For example 3 the number of
algorithms it takes to execute your banking order correctly, or the value of your life which is
forecasted by insurance agents. These services are classified on the basis of intangibility.

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(i) Services directed at people9s mind 3 Services sold through influencing the creativity of
humans are classified on the basis of intangibility.
(ii) Services directed at intangible assets 3 Banking, legal services, and insurance services are
some of the services most difficult to price and quantify.
The most intangible form of service output is represented by information processing. The
customer9s involvement in this type is service is not required. Generally, customers have a
personal desire to meet face to face but there is no actual need in terms of the operational
process. Consultancy services can be an example of this type of services where
the relationship can be built or sustained on trust or telephone contact. However, it is more
indicated to have a face-to-face relationship in order to fully understand the needs of the
customer.
A more general classification of services based on the type of function that is provided through
them can be as follows:
 Business services.
 Communication services.
 Construction and related engineering services.
 Distribution services.
 Educational services.
 Environmental services.
 Financial services.
 Health-related and social services.
 Tourism and travel-related services.
 Recreational, cultural, and sporting services.
 Transport services.
 Other services not included elsewhere.
Product and Service Design

The starting point for any business or organization is to cater to the desires or wants of humans
(like us), which keep changing with time, cultural changes and any developments in a country.
For example, demand for different cell phones or choice of network connectivity. Human wants
are characterized with wants or desires which are multiple and grow continuously, while
businesses cater to these wants, can provide (potential) satisfaction, can create employment
opportunities and can improve the standard of living. Accordingly, organizations conduct
thorough planning on producing or servicing a product or service thus preparing a suitable design
reflective of their customers9 wants or desires. Key basic principles followed by organizations
which translate customers9 wants or desires that can cater to or create demand for product or
service includes the following:

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1. Refine existing products/services: Based on recommendations or changes

suggested by customers9 in accordance to the changing tastes and preferences
could lead businesses to change or improve existing products
2. Develop new products/services: Businesses can develop new products or
services in accordance to changes in technology, tastes and preferences and
develop or create new products/services (Refer to Demand-pull and Invention-
Push Innovations)
3. Formulate quality goals: Organizations should plan quality standards,
assurances and specifications to create quality-driven products/services
4. Construct prototypes for trials and tests: To target towards the right
audience, specifications for trials and testing of products/services should be
maintained (and mentioned)
5. Create document specifications: Documentation of production and operations
related activities should be maintained by the organization
6. Translate product/service specification into process
specifications: Documentation of product/services in accordance to their usage
and utility should be provided by the organizations
7. Formulate Cost targets: With reference to the above mentioned points,
organizations should take costs into consideration for identifying relevant risks,
benefits or consequences.
Design for a product and service can be created innovatively based on <Demand-Pull= or
<Invention-Push= theories. Demand-pull theories emerged from innovation studies conducted in
Europe during the 1960s. Demand-pull studies have characterized with conducting Research and
Development (R&D) and improving project management. These two characteristics enabled
understanding the needs of the customers and implementing manageable and measurable
business practices, which encouraged efficiency during production (or provisions) and were
further marketed as per the needs of the market. Alternatively, invention-push (also known as
technology push) pushed a new invention through R&D, production, sales functions onto the
market without considering whether it satisfies a customer9s need. The origins of technology
push can be linked with the Austrian economist, Joseph Schumpeter who argued that
development was the result of innovative ability of the entrepreneur and the introduction of new
methods of production. (Identify real-life examples for demand-pull and invention-push)
Design Choices
There are significant differences between product and service design. Service design is an
intangible aspect while product design is tangible. Services are generally created and delivered at
the same time and cannot be held in inventory like actual products. Also, services are relatively
visible to customers than products (with reference to actual production). Based on the
requirements or innovations introduced in the market there are multiple design choices in
products and services available for entrepreneur/s.

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Choices in Product Design include
1. Standardization: The process of developing and implementing standards to

produce or provide a particular product or service is called standardization.
Accordingly, standardization involves establishing and formalizing guidelines
to interact with people and/or to bring about modernization, centralization
and/or homogenization of products/services
2. Customization: A process involved to make or alter something as per the
customers9 needs and requirements is called customization. In addition, a large-
scale system that produces these customized products/services is called mass
customization (Are Apple products mass customized or simply customized?).
These processes include producing multiple product items in large-scale to
cater to needs of different customers. (Any resemblance with the automobile or
food industry?)
3. Delayed Differentiation: A generic or family product that is later
differentiated into a specific end-product is called delayed differentiation or
postponement. For example, knitted sweaters by Benetton were initially white
and then dyed into different colours only as per changes in seasons or customer
preferences. Another example, colour of iPods, different apps in existing
mobile phones, etc.
4. Modular Design: Modular design is to organise a complex system as a set of
distinct components that can be developed independently and then plugged
together. For example, a personal computer consists of a monitor, CPU,
keyboard, mouse and other accessories whose functionalities are different but
are connected together for its relevant use. Similarly, an organisational set up
can also have complex systems like a hydro-electric set up has complex
components like the dam with water-run turbines generating heat in generators,
transformed into transformers (that are separate units placed at a designated
place away from the turbines) to create electricity in different voltages.
5. Robust Design: This design was formulated by Dr. Genichi Taguchi who
defined it as a process that reduces variation in a product without eliminating
the causes of the variation (also referred to as noise). There are three types of
variations 3 Internal, external and unit-to-unit variations. Internal variation can
be caused due to wear and tear of a machine and aging of materials whereas
external variation can be caused by factors relating to environmental conditions
such as temperature, humidity and dust and unit-to-unit variation are variations
caused in between certain processes like variations in material, processes and
equipment. (Identify examples from your projects and explain?)
Choices in service design are based on communication and interaction with individuals
supported by relevant media tools like newspapers, television, radio, Internet, face-to-face
interactions, etc. Key factors that influence communication and interaction in services are the

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degree of variation and degree of customer contact. Degree of variation refers to the potential
deviations in requirements of customers while degree of customer contact determines the level of
standardization required in a service to be able cater to the needs of diverse type of customers (in
terms of demographic characteristics, socio-economic environment, technology adaptation, etc).
Factors Affecting Service Operations

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Service Design and Development, Service

Blueprinting
New services can be of the following six types:
1. Radical innovations that are new to the world like guaranteed overnight courier
delivery by Federal Express
2. New services offered to customers having access to competitive products
3. New services offered to customers by a company which was not providing
those services earlier like Barnes and Noble booksellers offering coffee
services
4. Service‐line extensions like an airline offering additional routes
5. Service improvements like augmenting hotel rooms with internet facilities
6. Style changes like changing the colour of the servicescape, redesigning the
website, logo, etc.
Research published in BusinessWeek in 1993 indicated that only 56 percent of new

products and services remained in the market 5 years after those have been launched.
Professor Robert G. Cooper wrote in 2001 that the primary reasons for failure of new
products and services included:
1. No unique benefits offered

2. Insufficient demand
3. Unrealistic performance goals like market share, etc. for the new service

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4. Poor fit between the new service and others within the organisation9s portfolio
5. Poor location
6. Insufficient financial backing
7. Failure to take the necessary time to develop and introduce the new service
Professors Henard and Szymanski wrote in 2001 that the primary reasons for success of
new services are that the new service:
1. Meets customer needs, has advantage over the competition, and is

technologically sophisticated,2. Has dedicated R&D, dedicated human
resources and availability of marketing, predevelopment, technological and
launch proficiencies in the firm for new service development and
commercialisation, and3. Enjoys existence of the potential for absorption in the
market
Professor G. L. Shostack wrote in 1984 that as services are intangible, new service
development system should have the following four characteristics:
1. It must be objective, not subjective

2. It must be precise, not vague
3. It must be fact driven, not opinion driven
4. It must be methodological, not philosophical
As services are produced and consumed simultaneously, customers are heavily involved in the
production and consumption of services. Customers may be co-producing a service as in a self-
service restaurant. Therefore, both employee and customer representatives must be a part of the
New Benefits Provided
Few Large
High Sure failures:DVORAK keyboard Long Hauls:Satellite Radio

Change in customer Behaviour
Low Easy Sells:McDonald’s Vegetarian Menu Smash Hits:Google
new service design and development team from the very beginning. For instance, some hotels
involve their customers and service personnel in the design of their hotel rooms besides
architects, managers and other professionals.
Professor John T. Gourville wrote in 2004 that successful new product / services offer plenty of
new benefits while requiring little change in consumer behaviour. New offerings like Google
became successful as it provided a powerful search engine vehicle requiring no change in
customer9s way of searching the Internet.

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Figure 18-1: Criteria for success of New Offerings
Stages in New Service Development

Professors Zeithaml, Bitner, Gremler and Pandit, have published the stages of new service
development from various sources in their book entitled <Services Marketing= in 2008.
Stage 1: Business Strategy Review
At this stage we must review and understand the vision, mission, values and strategic orientation
of our company. The vision of transporting goods, i.e., cargo service would be different from the
vision of transporting mail, i.e., courier service. In 1997, Michael Treacy and Fred Wiersema
have written about three value disciplines that companies must choose from.
These include:
(i) The operationally excellent firm, which is efficient and delivers services at the lowest cost to
the customer,
(ii) The product/service leader, i.e., offering innovative services under a strong brand.
(iii) The customer intimate firm, that excels in customer attention and customer service. Next, we
must understand the strategic orientation that our company has decided to take to excel in the
marketplace. A strategy is essentially a means to reaching business goals that our company has
decided for itself. Generic strategies are game plans for operating and surviving in the
marketplace. Michael Porter has written about three generic strategies in 1980.
These are:
1. Cost leadership strategy, i.e., becoming the lowest cost provider of services,
2. Differentiation strategy, i.e., providing unique set of benefits to the customers which are not
offered by our competitors, and
3. Focus strategy, i.e., focusing on a niche or narrow market segment and fulfilling the needs of
that segment through its service offerings.
Stage 2: Developing New Service Strategy
We must decide the strategy that our company would like to take to grow in the marketplace and
align new service development in that direction. These include
(i) Intensive growth

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(ii) Integrative growth
(iii) Diversification.
For intensive growth, the company would strive to increase market share for its current services
in the current market or develop and launch new services in existing markets or take current
services to new markets. These strategies are depicted in the matrix. A company can increase its
market share by changing the style of operations and enhancing its customer intimacy, for
instance. Ordinarily, service businesses choose to grow by taking their current services to new
markets, i.e., new countries and cities and adapt the offering to the preferences of the customers
in the new market. You may have noticed how McDonald9s opened its outlets in various cities in
India, one after another. On the other hand, post offices in India started providing fixed deposit
services and passport related services in the same markets where they were offering postal
services. Similarly, a customs agent may launch courier services in the city where they are
located, as an example of growing their business by offering new services in existing markets.
Market
Current New
New New Service Development (Diversification)
Services
Current Increasing market share Market development
Ansoff9s Matrix indicating Intensive Growth Strategies
For integrative growth, the company would form joint ventures or alliances with other companies
in order to deliver complementary services, such as catering services for airlines. It might also
like to acquire other companies or merge with them.
Under the diversification strategy, the company develops and launches new services in new
markets. This step is risky as the company does not have prior experience with the new service in
the new market. However, once the intensive and integrative modes of growth have been
exhausted, a business would have no choice other than to diversify its business into new services
in new markets.
Knowledge about the above strategic orientation of our company will help us formulate the new
service strategy. We can now initiate the new service development process in alignment with the
new service strategy.
Stage 3: Idea generation

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The third stage of new service development is that of idea generation. This stage requires a
formal department to be set up in our company. The activities in this stage would include
conducting idea generation exercises like brainstorming and focus group discussion with
customers, observing customers in different situations wherein they receive the same benefit
through similar or ernative services and learning about the services provided by competitors. The
company must also place suggestion boxes and institute suggestion reward schemes to attract
suggestions from their employees. Listening to customers is the best way to receive ideas, not
only for improvements in the current services offering, but also for entirely new services. The
idea must align with the new service strategy; otherwise the idea must be dropped or shelved. It
must also undergo preliminary evaluation regarding the potential market for the benefit that
customers are willing to receive from the service. We must keep in mind that the quantum of
investments starts increasing rapidly from this point onwards for developing each idea. Unless
the idea has clear potential, it must be dropped, otherwise the company will face further losses if
the idea is allowed to be developed further and is dropped at a later stage due to lack of
feasibility.
Stage 4: Service Concept Development
An idea that appears feasible and profitable is taken up for development of the service concept.
The service concept is the description of the service in terms of the value it will provide
customers, the form and function of the service, the type and level of experience that customers
are likely to receive from the service, and the outcome of the service. The concept is developed
by involving customers, service personnel, service managers, suppliers and other professionals
such that it is acceptable to all and everybody agree that it is likely to provide much needed
benefits to the customers. The service concept is tested with customers and employees and is
dropped if it is not found to offer substantial benefits to customers in comparison to existing
alternate methods by which customers can satisfy their need.

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Figure : Blueprint of a Typical Restaurant Service
A blueprint of the service can also be drawn at this stage as elaborated in Figure 19-2. The
blueprint would help in laying out the service process and estimating various costs involved in
delivering the service to customers. This would help in estimating the profitability of the service
business and developing the business case as discussed in the following section.
Stage 5: Developing the Business Case
It is ensured that it will be possible to deliver the services in a manner acceptable to customers,
the customers are willing to purchase the service, and the service remains profitable with a three-
year ROI/ROCE that is greater than the prevailing bank interest rate. If the service does not seem
to be profitable, it must be dropped without incurring any further cost in developing the concept
further. The profitable business case is then developed for approval of the management and
representatives of the shareholders and investors.
Stage 6: Service Development and Testing
Once the business case for the service has been approved, it is taken up for development of the
actual service. The blueprint of the services is further developed and the service prototype is
tested with actual customers. For example, a bank can test new ideas by reorganizing current
branches for the test period and observing and collecting data from actual customers about the
benefits of the new idea. One bank found that installing TVs with CNN channel reduced the
perceived waiting time for the customers and then the same was taken up for implementation in
big branches. In this way all new concepts are tested and those ideas that do not provide
substantial benefits to customers are promptly dropped.

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Stage 7: Market Testing
Once the service prototypes have been tested, these are put together for a pilot test. Alternative
marketing mix elements or 7Ps options are tested at this stage. At first, the pilot service is offered
to the employees of the organisation and their feedback is collected. The service is then modified
according to the feedback received and is offered to actual customers for a short period and their
feedback collected. The feedback is analysed for effecting further modifications in the service
and tying up any loose ends. If the service passes the market testing phase and it is found that
customers are enthusiastic about the new service and the service is estimated to generate profits,
the service development is taken to the next stage.
Stage 8: Commercialisation
The plan for rolling out the new service is then drawn up. It is usually rolled out in a phased
manner by opening it up in the least risky markets and then quickly spreading it to other markets
if the feedback is favourable. Commercialisation has two important objectives. The first
objective is to elicit the support of the large number of service personnel who are going to
deliver the services. At this stage the new service is marketed to the employees of the
organisation as a new smart offering that generates profits and bonuses for the organisation. The
second objective is to monitor the service throughout the period that customers purchase and use
the service. Every interaction at the moment of truth and every detail is monitored and feedback
collected from the customers as to whether the latter9s needs are being fulfilled, whether they are
deriving benefits from the service and are satisfied and what modifications they would like to be
made in the service. The service is constantly modified based on the feedback collected.
Customers9 comfort with the price and other marketing mix elements is thoroughly ensured by
the service manager and adjustment and improvements are continuously made so that customers
feel a compelling need to purchase the service.
Stage 9: Post-launch evaluation
The service is reviewed for performance according to a pre-planned period of review.

Customers, employees, the market and the context keep changing with time. It is important to
effect necessary changes periodically in the service in line with the changes in the above
dimensions. The service blueprint comes in handy at this stage. It is also inspected for alternate
ways to gain further efficiency and pass on part of the benefits so accrued to the customers and
part of the same to the organisation. Customers and employees are requested for new ideas for
this new service and same are incorporated to be able to provide the latest to the customers and
to remain ahead of competitors in the marketplace.
Service Blue Printing

Service blueprints are diagrams that visualize organizational processes in order to optimize how
a business delivers a user experience. They are the primary tool used in service design.

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A service blueprint is an operational planning tool that provides guidance on how a service will
be provided, specifying the physical evidence, staff actions, and support systems / infrastructure
needed to deliver the service across its different channels. For example, to plan how you will
loan devices to users, a service blueprint would help determine how this would happen at a
service desk, what kinds of maintenance and support activities were needed behind the scenes,
how users would learn about what9s available, how it would be checked in and out, and by what
means users would be trained on how to use the device.
Service Blueprints may take different forms 3 some more graphic than others 3 but should show
the different means/channels through with services are delivered and show the physical evidence
of the service, front line staff actions, behind the scene staff actions, and support systems. They
are completed using an iterative process 3 taking a first pass that considers findings from
personas, journey maps, and location planning and then coming back to the blueprint to refine it
over time. Often blueprints raise questions that cannot be readily answered and so need to be
prototyped; for instance by acting out an interaction or mocking up a product. Generally, one
blueprint should be created for each core service, according to the right level of detail for each.
Effective service blueprinting follows five key high-level steps:
i) Find support: Build a core cross disciplinary team and establish stakeholder support.
(ii) Define the goal: Define the scope and align on the goal of the blueprinting initiative.
(iii) Gather research: Gather research from customers, employees, and stakeholders using a
variety of methods.
(iv) Map the blueprint: Use this research to fill in a low-fidelity blueprint.
(v) Refine and distribute: Add additional content and refine towards a high-fidelity blueprint
that can be distributed amongst clients and stakeholders.

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5-Step Framework for Service Blueprinting
1. Find Support
Level-set and educate on service blueprinting. First, pull together a cross disciplinary team that
has responsibility for a portion of the service and establish stakeholder support for the
blueprinting initiative. Support can come from a manager, executives, or clients.
2. Define the goal
Choose a scope and focus. Identify one scenario (your scope) and its corresponding customer.
Decide how granular the blueprint will be, as well as which direct business goal it will address.
While an as-is blueprint gives insight into an existing service, a to-be blueprint gives you the
opportunity to explore future services that do not currently exist.
3. Gather Research
Unlike customer-journey mapping where a lot of external research is required, service

blueprinting is comprised of primarily internal research.
(a) Gather customer research: Begin by gathering research that informs a baseline of customer
actions (or, in other words, the steps and interactions that customers perform while interacting
with a service to reach a particular goal). Customer actions can be derived from an existing
customer-journey map.

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(b) Gather internal research: Choose a minimum of two research methods that put you in
direct line of observation with employees. Use a multipronged approach 4 select and combine
multiple methods in order to reveal insights from different angles and job roles:
 Employee interviews
 Direct observation
 Contextual inquiry
 Diary studies
4. Map the blueprint
(a) Set up: It9s useful to organize a short workshop session (234 hours) to do steps 4 and 5. This
helps create a shared understanding amongst your team of allies and ensures that the blueprint
remains collaborative and unbiased. If all workshop participants are in the same physical
location, set up by hanging three oversized sticky notes on the wall side by side. Each member
should have a pad of post-its. The result of the workshop will be a low-fidelity version of an
initial blueprint.
While any mapping method is collaborative at its core, blueprinting can still be done
individually. If this is the case, be sure to share your blueprint with stakeholders and peers early
and often.
(b) Map customer actions: In a service blueprint, customer actions are depicted in sequence,
from start to finish. A customer-journey map is an ideal starting point for this step. Do note that a
blueprint9s focus is the employee experience, not the customer9s experience, thus this portion
does not need to be a fully baked customer-journey map 4 rather, you can include only the user
touchpoints and parallel actions.
(c) Map employees9 frontstage and backstage actions: This step is the core of a service-
blueprint mapping. It is easiest to start with frontstage actions and move downward in columns,
following them with backstage actions. Inputs should be pulled from real employee accounts,
and validated through internal research.
(d) Map support processes and evidence: Add the process that employees rely on to effectively
interact with the customer. These processes are the activities involving all employees within the
company, including those who don9t typically interact directly with customers. These support
processes need to happen in order to deliver the service. Clearly, service quality is often
impacted by these below-the-line interaction activities.
Layer in the evidence at each customer9s action step. Work your way through the first 5 steps
and ask <what props and places are encountered along the way?= Remember to include evidence
that occurs frontstage and backstage.
5. Refine and Distribute

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Refine by adding any other contextual details as needed. These details include time, arrows,
metrics, and regulations.
The blueprint itself is simply a tool that will help you communicate your understanding of the
internal organization processes in an engaging way. At this point, you need to create a visual
narrative that will convey the journey and its critical moments, pain points, and redundancies.
A good way to implement this step is to have another workshop with your core team. Having
built context and common ground throughout your mapping process, bring them back together
and evolve the blueprint into a high-fidelity format.
Service Capacity Planning

Ability of a service system to deliver the intended service and to match customer demand.
Service capacity is perishable and can be intangible. Service capacity cannot be inventoried &
hence cannot be transferred from one customer to other. We cannot prepare the service package
in advance to deliver it at the later point of time.
Service capacity has to be managed in a highly dynamic environment where service

organizations face more personalized demand due to the presence of customer than in
manufacturing sector. Meeting personalized demand directly affects the service quality perceived
by the customer.

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Capacity of a service is also attributed to the highest possible amount of output that may be
obtained in a specified period of time with a predefined level of staff, installations and equipment
(Lovelock, 1992). Managing capacity can be viewed as minimizing waiting time while avoiding
idle capacity to meet the demand in the most efficient way.
Elements of Service Capacity

Capacity of service organization effectively and to provide a good quality service. Many
strategies can be proposed to manage capacity in services if some organization understands the
importance of all the elements presented. Altering human resources can be good capacity
management strategy provided what kind of demand an organization is targeting to meet,
whether demand is seasonal or cyclical. Are there any opportunities to automate the service
where customers can utilize the technology from anywhere by avoiding personal visits to the
service organizations. It is equally important to understand the knowledge level of customer. For
example the internet penetration in India especially in rural India is very low. So, providing
service through online mode may not help in such situations. The number of facilities, their
locations and the possible considerations of facility expansion helps in managing the demand
fluctuations.
Dimensions of Quality
Important Dimensions of Quality formulated by David A. Garvin

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David A. Garvin, a specialist in the area of quality control, argues that quality can be used in a
strategic way to compete effectively and an appropriate quality strategy would take into
consideration various important dimensions of quality
Eight dimensions of product quality management can be used at a strategic level to analyze
quality characteristics. The concept was defined by David A. Garvin, formerly C. Roland
Christensen Professor of Business Administration at Harvard Business School (died 30 April
2017). Some of the dimensions are mutually reinforcing, whereas others are not4improvement
in one may be at the expense of others. Understanding the trade-offs desired by customers among
these dimensions can help build a competitive advantage.
Garvin9s eight dimensions can be summarized as follows:
1. Performance
It involves the various operating characteristics of the product. For a television set, for example,
these characteristics will be the quality of the picture, sound and longevity of the picture tube.
2. Features
These are characteristics that are supplemental to the basic operating characteristics. In an
automobile, for example, a stereo CD player would be an additional feature.
3. Reliability
Reliability of a product is the degree of dependability and trustworthiness of the benefit of the
product for a long period of time.
It addresses the probability that the product will work without interruption or breaking down.
4. Conformance
It is the degree to which the product conforms to pre- established specifications. All quality
products are expected to precisely meet the set standards.
5. Durability
It measures the length of time that a product performs before a replacement becomes necessary.
The durability of home appliances such as a washing machine can range from 10 to 15 years.
6. Serviceability

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Serviceability refers to the promptness, courtesy, proficiency and ease in repair when the product
breaks down and is sent for repairs.
7. Aesthetics
Aesthetic aspect of a product is comparatively subjective in nature and refers to its impact on the
human senses such as how it looks, feels, sounds, tastes and so on, depending upon the type of
product. Automobile companies make sure that in addition to functional quality, the automobiles
are also artistically attractive.
8. Perceived quality
An equally important dimension of quality is the perception of the quality of the product in the
mind of the consumer. Honda cars, Sony Walkman and Rolex watches are perceived to be high
quality items by the consumers.
Defining and Measuring Service Quality and

Customer Satisfaction
Every customer has an ideal expectation of the service they want to receive when they go to a
restaurant or store. Service quality measures how well a service is delivered, compared to
customer expectations. Businesses that meet or exceed expectations are considered to have high
service quality. Let9s say you go to a fast food restaurant for dinner, where you can reasonably
expect to receive your food within five minutes of ordering. After you get your drink and find a
table, your order is called, minutes earlier than you had expected! You would probably consider
this to be high service quality
9 practical techniques and metrics for measuring your service quality.
1. SERVQUAL
This is the most common method for measuring the subjective elements of service quality.
Through a survey, you ask your customers to rate the delivered service compared to their
expectations.
Its questions cover what SERVQUAL claims are the 5 elements of service quality: RATER.
 Reliability3 the ability to deliver the promised service in a consistent and

accurate manner.
 Assurance3 the knowledge level and politeness of the employees and to what
extend they create trust and confidence.

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 Tangibles3 the appearance; of e.g. the building, website, equipment, and

employees.
 Empathy3 to what extend the employees care and give individual attention.
 Responsiveness3 how willing the employees are to offer a speedy service.
2. Mystery Shopping
This is a popular technique used for retail stores, hotels, and restaurants, but works for any other
service as well. It consists out of hiring an 8undercover customer9 to test your service quality 3 or
putting on a fake moustache and going yourself, of course.
The undercover agent then assesses the service based on a number of criteria, for example those
provided by SERVQUAL. This offers more insights than simply observing how your employees
work. Which will probably be outstanding 4 as long as their boss is around.
3. Post Service Rating

This is the practice of asking customers to rate the service right after it9s been delivered.
With Userlike9s live chat, for example, you can set the chat window to change into a service
rating view once it closes. The customers make their rating, perhaps share some explanatory
feedback, and close the chat.
Something similar is done with ticket systems like Help Scout, where you can rate the service
response from your email inbox.
It9s also done in phone support. The service rep asks whether you9re satisfied with her service
delivery, or you9re asked to stay on the line to complete an automatic survey. The latter version
is so annoying, though, that it kind of destroys the entire service experience.
Different scales can be used for the post service rating. Many make use of a number-rating from
1 3 10. There9s possible ambiguity here, though, because cultures differ in how they rate their
experiences.
People from individualistic cultures, for example, tend to choose the extreme sides of the scale
much more often than those from collectivistic cultures. In line with stereotypes, Americans are
more likely to rate a service as <amazing= or <terrible=, while the Japanese will hardly ever go
beyond <fine= or <not so good=. Important to be aware of when you have an international
audience.
Simpler scales are more robust to cultural differences and more suited for capturing service
quality. Customers don9t generally make a sophisticated estimation of service quality.
<Was it a 7 or an 8…? Well… I did get my answer quickly… On the other hand, the service
agent did sound a bit hurried…= No. They think the service was <Fine=, <Great!=, or <Crap!=.

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That9s why at Userlike we make use of a 5-star system in our live chat rating, why Help Scout
makes use of 3 options (great 3 okay 3 not good), and the US government makes use of 4
smileys (angry 3 disappointed 3 fine 3 great). Easy does it.
4. Follow-Up Survey
With this method you ask your customers to rate your service quality through an email survey 3
for example via Google Forms. It has a couple advantages over the post-service rating.
For one, it gives your customer the time and space for more detailed responses. You can send a
SERVQUAL type of survey, with multiple questions instead of one. That9d be terribly annoying
in a post-service rating.
It also provides a more holistic overview of your service. Instead of a case-by-case assessment,
the follow-up survey measures your customers9 overall opinion of your service.
It9s also a useful technique if you didn9t have the post service rating in place yet and want a
quick overview of the state of your service quality.
But there are plenty of downsides as well. Such as the fact that the average inbox already looks
more like a jungle than a French garden. Nobody9s waiting for more emails 3 especially those
that demand your time.
With a follow-up survey, the service experience will also be less fresh. Your customers might
have forgotten about it entirely, or they could confuse it with another experience.
And last but not least: to send an email survey, you must first know their emails.
5. In-App Survey
With an in-app survey, the questions are asked while the visitor is on the website or in the app,
instead of after the service or via email. It can be one simple question 3 e.g. 8how would you rate
our service9 3 or it could be a couple of questions.
6. Customer Effort Score (CES)

This metric was proposed in an influential Harvard Business Review article. In it, they argue that
while many companies aim to 8delight9 the customer 3 to exceed service expectations 3 it9s more
likely for a customer to punish companies for bad service than it is for them
to reward companies for good service.
While the costs of exceeding service expectations are high, they show that the payoffs are
marginal. Instead of delighting our customers, so the authors argue, we should make it as easy as
possible for them to have their problems solved. That9s what they found had the biggest positive
impact on the customer experience, and what they propose measuring.

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Looking for better customer relationships?
Test Userlike for free and chat with your customers on your website, Facebook Messenger, and
Telegram.
Don9t ask: <How satisfied are you with this service?= 3 its answer could be distorted by many
factors, such as politeness. Ask: <How much effort did it take you to have your questioned
answered?=.
The lower the score, the better. CEB found that 96% of the customers with a high effort score
were less loyal in the future, compared to only 9% of those with low effort scores.
7. Social Media Monitoring

This method has been gaining momentum with the rise of social media. For many people, social
media serve as an outlet. A place where they can unleash their frustrations and be heard.
And because of that, they are the perfect place to hear the unfiltered opinions of your customers
3 if you have the right tools. Facebook and Twitter are obvious choices, but also review
platforms like TripAdvisor or Yelp can be very relevant. Buffer suggests to ask your social
media followers for feedback on your service quality.
Two great tools to track who9s talking about you are Mention and Google Alerts.
8. Documentation Analysis
With this qualitative approach you read or listen to your respectively written or recorded service
records. You9ll definitely want to go through the documentation of low-rated service deliveries,
but it can also be interesting to read through the documentation of service agents that always
rank high. What are they doing better than the rest?
The hurdle with the method isn9t in the analysis, but in the documentation. For live chat and
email support it9s rather easy, but for phone support it requires an annoying voice at the start of
the call: <This call could be recorded for quality measurement=.
9. Objective Service Metrics

These stats deliver the objective, quantitative analysis of your service. These metrics aren9t
enough to judge the quality of your service by themselves, but they play a crucial role in showing
you the areas you should improve in.
 Volume per channel. This tracks the amount of inquiries per channel. When
combined with other metrics, like those covering efficiency or customer
satisfaction, it allows you to decide which channels to promote or cut down.

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 First response time. This metric tracks how quickly a customer receives a
response on her inquiry. This doesn9t mean their issue are solved, but it9s the
first sign of life 3 notifying them that they9ve been heard.
 Response time. This is the total average of time between responses. So let9s
say your email ticket was resolved with 4 responses, with respective response
times of 10, 20, 5, and 7 minutes. Your response time is 10.5 minutes.
Concerning reply times, most people reaching out via email expect a response
within 24 hours; for social channels it9s 60 minutes. Phone and live chat require
an immediate response, under 2 minutes.
 First contact resolution ratio. Divide the number of issues that9s resolved
through a single response by the number that required more
responses. Forrester research showed that first contact resolutions are an
important customer satisfaction factor for 73% of customers.
 Replies per ticket. This shows how many replies your service team needs on
average to close a ticket. It9s a measure of efficiency and customer effort.
 Backlog Inflow/Outflow. This is the number of cases submitted compared to
the number of cases closed. A growing number indicates that you9ll have to
expand your service team.
 Customer Success Ratio. A good service doesn9t mean your customers always
finds what they want. But keeping track of the number that found what they
looked for versus those that didn9t, can show whether your customers have the
right ideas about your offerings.
 8Handovers9 per issue. This tracks how many different service reps are
involved per issue. Especially in phone support, where repeating the issue is
necessary, customers hate HBR identified it as one of the four most common
service complaints.
 Things Gone Wrong. The number of complaints/failures per customer inquiry.
It helps you identify products, departments, or service agents that need some
8fixing9.
 Instant Service / Queueing Ratio. Nobody likes to wait. Instant service is the
best service. This metric keeps track of the ratio of customers that were served
instantly versus those that had to wait. The higher the ratio, the better your
service.
 Average Queueing Waiting Time. The average time that queued customers
have to wait to be served.
 Queueing Hang-ups. How many customers quit the queueing process. These
count as a lost service opportunity.
 Problem Resolution Time. The average time before an issue is resolved.
 Minutes Spent Per Call. This can give you insight on who are your most
efficient operators.

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Some of these measures are also financial metrics, such as the minutes spent per call and number
of handovers. You can use them to calculate your service costs per service contact. Winning the
award for the world9s best service won9t get you anywhere if the costs eat up your profits.
Some service tools keep track of these sort of metrics automatically, like Talkdesk for phone
and Userlike for live chat support. If you make use of communication tools that aren9t dedicated
to service, tracking them will be a bit more work.
One word of caution for all above mentioned methods and metrics: beware of averages, they
will deceive you. If your dentist delivers a great service 90% of the time, but has a habit of binge
drinking and pulling out the wrong teeth the rest of the time, you won9t stick around long.

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A more realistic image shapes up if you keep track of the outliers and standard deviation as well.
Measure your service, aim for a high average, and improve by diminishing the outliers.
he Gaps Model Of Service Quality

The SERVQUAL Model (also called Gaps model) is an empiric model by Zeithaml,
Parasuraman and Berry to compare service quality performance with customer service quality
needs. It is used to do a gap analysis of an organization9s service quality performance against the
service quality needs of its customers.That9s why it9s also called the GAP model.
It takes into account the perceptions of customers of the relative importance of service attributes.
This allows an organization to prioritize.
There are five core components of service quality:
 Tangibles: physical facilities, equipment, staff appearance, etc.

 Reliability: ability to perform service dependably and accurately.
 Responsiveness: willingness to help and respond to customer need.

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 Assurance: ability of staff to inspire confidence and trust.

 Empathy: the extent to which caring individualized service is given.
The four themes that were identified by the SERVQUAL developers were numbered and
labelled as:
1. Consumer expectation 3 Management perception gap (Gap 1)
Management may have inaccurate perceptions of what consumers (actually) expect. The reason
for this gap is lack of proper market/customer focus. The presence of a marketing department
does not automatically guarantee market focus. It requires the appropriate management
processes, market analysis tools and attitude.
2. Service Quality Specification gap (Gap 2)
There may be an inability on the part of the management to translate customer expectations into
service quality specifications. This gap relates to aspects of service design.
3. Service delivery gap (Gap 3)
Guidelines for service delivery do not guarantee high-quality service delivery or performance.
There are several reasons for this. These include: lack of sufficient support for the frontline staff,
process problems, or frontline/contact staff performance variability.
4. External communication gap (Gap 4)
Consumer expectations are fashioned by the external communications of an organization. A

realistic expectation will normally promote a more positive perception of service quality. A
service organization must ensure that its marketing and promotion material accurately describes
the service offering and the way it is delivered
5. These four gaps cause a fifth gap (Gap 5)
which is the difference between customer expectations and perceptions of the service actually
received Perceived quality of service depends on the size and direction of Gap 5, which in turn
depends on the nature of the gaps associated with marketing, design and delivery of
services.So,Gap 5 is the product of gaps 1, 2, 3 and 4. If these four gaps, all of which are located
below the line that separates the customer from the company, are closed then gap 5 will close.
SERVQUAL Model of Measuring Service Quality

The SERVQUAL Model is an empiric model by Zeithaml, Parasuraman and Berry to
compare service quality performance with customer service quality needs. It is used to do a gap

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analysis of an organization9s service quality performance against the service quality needs of its
customers. That9s why it9s also called the GAP model.
It takes into account the perceptions of customers of the relative importance of service attributes.
This allows an organization to prioritize.
There are five core components of service quality:
1. Tangibles: physical facilities, equipment, staff appearance, etc.

2. Reliability: ability to perform service dependably and accurately.
3. Responsiveness: willingness to help and respond to customer need.
4. Assurance: ability of staff to inspire confidence and trust.
5. Empathy: the extent to which caring individualized service is given.
The four themes that were identified by the SERVQUAL developers were numbered and
labelled as:
1. Consumer expectation – Management Perception Gap (Gap 1):

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Management may have inaccurate perceptions of what consumers (actually) expect. The reason
for this gap is lack of proper market/customer focus. The presence of a marketing department
does not automatically guarantee market focus. It requires the appropriate management
processes, market analysis tools and attitude.
2. Service Quality Specification Gap (Gap 2):
There may be an inability on the part of the management to translate customer expectations into
service quality specifications. This gap relates to aspects of service design.
3. Service Delivery Gap (Gap 3):
Guidelines for service delivery do not guarantee high-quality service delivery or performance.
There are several reasons for this. These include: lack of sufficient support for the frontline staff,
process problems, or frontline/contact staff performance variability.
4. External Communication Gap (Gap 4):
Consumer expectations are fashioned by the external communications of an organization. A

realistic expectation will normally promote a more positive perception of service quality. A
service organization must ensure that its marketing and promotion material accurately describes
the service offering and the way it is delivered
5. These four gaps cause a fifth gap (Gap 5)
Which is the difference between customer expectations and perceptions of the service actually
received Perceived quality of service depends on the size and direction of Gap 5, which in
turn depends on the nature of the gaps associated with marketing, design and delivery of
services. So, Gap 5 is the product of gaps 1, 2, 3 and 4. If these four gaps, all of which are
located below the line that separates the customer from the company, are closed then gap 5 will
close.
How to measure Service Quality?
1. Mystery Shopping
This is a popular technique used for retail stores, hotels, and restaurants, but works for any other
service as well. It consists out of hiring an 8undercover customer9 to test your service quality 3 or
putting on a fake moustache and going yourself, of course.
The undercover agent then assesses the service based on a number of criteria, for example those
provided by SERVQUAL. This offers more insights than simply observing how your employees
work. Which will probably be outstanding 4 as long as their boss is around.

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2. Post Service Rating
This is the practice of asking customers to rate the service right after it9s been delivered.
With Userlike9s live chat, for example, you can set the chat window to change into a service
rating view once it closes. The customers make their rating, perhaps share some explanatory
feedback, and close the chat.
Something similar is done with ticket systems like Help Scout, where you can rate the service
response from your email inbox.
It9s also done in phone support. The service rep asks whether you9re satisfied with her service
delivery, or you9re asked to stay on the line to complete an automatic survey. The latter version
is so annoying, though, that it kind of destroys the entire service experience.
Different scales can be used for the post service rating. Many make use of a number-rating from
1 3 10. There9s possible ambiguity here, though, because cultures differ in how they rate their
experiences.
3. Follow-Up Survey
With this method you ask your customers to rate your service quality through an email survey 3
for example via Google Forms. It has a couple advantages over the post-service rating.
For one, it gives your customer the time and space for more detailed responses. You can send a
SERVQUAL type of survey, with multiple questions instead of one. That9d be terribly annoying
in a post-service rating.
It also provides a more holistic overview of your service. Instead of a case-by-case assessment,
the follow-up survey measures your customers9 overall opinion of your service.
It9s also a useful technique if you didn9t have the post service rating in place yet and want a
quick overview of the state of your service quality.
4. In-App Survey
With an in-app survey, the questions are asked while the visitor is on the website or in the app,
instead of after the service or via email. It can be one simple question 3 e.g. 8how would you rate
our service9 3 or it could be a couple of questions.
Convenience and relevance are the main advantages. SurveyMonkey offers some great tools for
implementing something like this on your website.

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5. Customer Effort Score (CES)
This metric was proposed in an influential Harvard Business Review article. In it, they argue that
while many companies aim to 8delight9 the customer 3 to exceed service expectations 3 it9s more
likely for a customer to punish companies for bad service than it is for them to reward companies
for good service.
While the costs of exceeding service expectations are high, they show that the payoffs are
marginal. Instead of delighting our customers, so the authors argue, we should make it as easy as
possible for them to have their problems solved.
That9s what they found had the biggest positive impact on the customer experience, and what
they propose measuring.
6. Social Media Monitoring
This method has been gaining momentum with the rise of social media. For many people, social
media serve as an outlet. A place where they can unleash their frustrations and be heard.
And because of that, they are the perfect place to hear the unfiltered opinions of your customers
3 if you have the right tools. Facebook and Twitter are obvious choices, but also review
platforms like TripAdvisor or Yelp can be very relevant. Buffer suggests to ask your social
media followers for feedback on your service quality.
7. Documentation Analysis
With this qualitative approach you read or listen to your respectively written or recorded service
records. You9ll definitely want to go through the documentation of low-rated service deliveries,
but it can also be interesting to read through the documentation of service agents that always
rank high. What are they doing better than the rest?
The hurdle with the method isn9t in the analysis, but in the documentation. For live chat and
email support it9s rather easy, but for phone support it requires an annoying voice at the start of
the call: <This call could be recorded for quality measurement=.
8. Objective Service Metrics
These stats deliver the objective, quantitative analysis of your service. These metrics aren9t
enough to judge the quality of your service by themselves, but they play a crucial role in showing
you the areas you should improve in.

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 Volume per channel. This tracks the amount of inquiries per channel. When
combined with other metrics, like those covering efficiency or customer
satisfaction, it allows you to decide which channels to promote or cut down.
 First response time. This metric tracks how quickly a customer receives a
response on her inquiry. This doesn9t mean their issue is solved, but it9s the
first sign of life 3 notifying them that they9ve been heard.
 Response time. This is the total average of time between responses. So let9s
say your email ticket was resolved with 4 responses, with respective response
times of 10, 20, 5, and 7 minutes. Your response time is 10.5 minutes.
Concerning reply times, most people reaching out via email expect a response
within 24 hours; for social channels it9s 60 minutes. Phone and live chat require
an immediate response, under 2 minutes.
 First contact resolution ratio. Divide the number of issues that9s resolved
through a single response by the number that required more responses.
Forrester research showed that first contact resolutions are an important
customer satisfaction factor for 73% of customers.
 Replies per ticket. This shows how many replies your service team needs on
average to close a ticket. It9s a measure of efficiency and customer effort.
 Backlog Inflow/Outflow. This is the number of cases submitted compared to
the number of cases closed. A growing number indicates that you9ll have to
expand your service team.
 Customer Success Ratio. A good service doesn9t mean your customers always
finds what they want. But keeping track of the number that found what they
looked for versus those that didn9t, can show whether your customers have the
right ideas about your offerings.
 8Handovers9 per issue. This tracks how many different service reps are
involved per issue. Especially in phone support, where repeating the issue is
necessary, customers hate HBR identified it as one of the four most common
service complaints.
 Things Gone Wrong. The number of complaints/failures per customer inquiry.
It helps you identify products, departments, or service agents that need some
8fixing9.
 Instant Service / Queuing Ratio. Nobody likes to wait. Instant service is the
best service. This metric keeps track of the ratio of customers that were served
instantly versus those that had to wait. The higher the ratio, the better your
service.
 Average Queueing Waiting Time. The average time that queued customers
have to wait to be served.
 Queueing Hang-ups. How many customers quit the queueing process. These
count as a lost service opportunity.
 Problem Resolution Time. The average time before an issue is resolved.

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 Minutes Spent Per Call. This can give you insight on who are your most
efficient operators.
Some of these measures are also financial metrics, such as the minutes spent per call and number
of handovers. You can use them to calculate your service costs per service contact. Winning the
award for the world9s best service won9t get you anywhere if the costs eat up your profits.
Some service tools keep track of these sort of metrics automatically, like Talk desk for phone
and User like for live chat support. If you make use of communication tools that aren9t dedicated
to service, tracking them will be a bit more work.

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UNIT 3
Types of Production Planning

If you work in a manufacturing plant as a supervisor you have heard the words
<production planning= many times. This is the procedure that they use to decide just
how many goods to manufacture. For the company to be successful efficiency is
important. They do not want to over produce products and then have them just sit in
the warehouse. That is profits down the drain, so to speak. A company wants to make
sure that they are producing enough products to meet the demands. There are many
different forms of production planning that goes under various titles in the world of
business. There are three main types that many businesses use.
1. Batch Production Planning
This type of production planning involves producing many identical individual

products from the same batch of raw material. For example, a seamstress would take
some cloth and produce five individual identical dresses. In a manufacturing plant that
produces many different products this can advance the efficiency of the employees
and machines to produce one large batch of an individual product at the same time. In
a factory, for example, the machines may be set up to produce a group of peas in cans,
followed by a group corn in cans. Setting up the machines to follow this schedule is
more efficient than changing the machines to produce a can one at a time as they are
needed.
2. Job-or Project-Based Production Planning
This type is generally used in smaller businesses where one team or one person does
the production of services or goods. A jewelry maker that makes custom engagement
and wedding rings is an example of this type of production planning. Film production
is a team so this is the type of planning they would use. Job-and project planning is
very customizable to meet the requirements of the business and the customer. It
should not be used if you are creating a flow of production that is consistent.
3. Continuous or Mass Production Planning
This one is used often to create products that are massed-produced and generally used
by large factories to produce a steady flow of products. For this process to be cost-

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efficient, a demand for this product must be regular. The production services must
also be streamlined. This is so the products go from one-step of the making the
product to the next step effortlessly. This requires demanding pre-planning of
production flow and layout.
Conclusion: In production planning, determining the right method for a business will
normally depend on mathematical calculations and market forecasting. Some
companies will use production planning software to capitalize on the company9s
production capacity and to measure planning strategies cost-effectiveness. Through
control, the methods of planning are often made to make the most of on the
company9s potential.
Process of Production planning and Control

(PPC) Routing, Scheduling, Loading, Just-in-time
(JIT)
Procedures for Production Planning
(i) Planning
(ii) Routing
(iii) Scheduling
(iv) Dispatching
(v) Follow-up or checking the progress
(vi) Inspection
1. PLANNING
For planning of productive operations in detail, the planning department will receive
full information from management about the quantity to be produced and the dates
when delivery has been promised to customers. The planning department will also get
the necessary engineering and drawing specifications from the engineering
department.

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2. ROUTING
Routing involves the determination of the path that work shall follow and the order in
which various operations will be carried out. The objective of routing is to
find out the best and the cheapest sequence of operations. While preparing the route
card, it must be kept in mind that machines in the plant are operated at their full
capacity; and manpower and other facilities are best utilized.
3. SCHEDULING
Scheduling is the determination of the time that should be required to perform each
operation and also the time necessary to perform the entire series, as routed, making
allowance for factors concerned. It involves the preparation of a time-table, indicating
the total time needed for the manufacture of a product as also the time expected to be
spent at each machine and process.
In preparing schedules, the persons concerned will have to take into consideration the
various types of orders on hand and the dates by which their completion has been
promised. Some orders may be such as will require over-time work; because
completion is not possible according to the delivery dates set for them, in the regular
course of production.
4. LOADING
Loading involves assigning jobs to work centers and to various machines in the work
centers. If a job can be processed on only one machine, no difficulty is presented.
However, if a job can be loaded on multiple work centers or machines, and there are
multiple jobs to process, the assignment process becomes more complicated. The
scheduler needs some way to assign jobs to the centers in such a way that processing
and setups are minimized along with idle time and throughput time.
Two approaches are used for loading work centers: infinite loading and finite loading.
With infinite loading jobs are assigned to work centers without regard for capacity of
the work center. Priority rules are appropriate for use under the infinite loading
approach. Jobs are loaded at work centers according to the chosen priority rule. This is
known as vertical loading.

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Finite loading projects the actual start and stop times of each job at each work center.
Finite loading considers the capacity of each work center and compares the processing
time so that process time does not exceed capacity. With finite loading the scheduler
loads the job that has the highest priority on all work centers it will require. Then the
job with the next highest priority is loaded on all required work centers, and so on.
This process is referred to as horizontal loading. The scheduler using finite loading
can then project the number of hours each work center will operate. A drawback of
horizontal loading is that jobs may be kept waiting at a work center, even though the
work center is idle. This happens when a higher priority job is expected to arrive
shortly. The work center is kept idle so that it will be ready to process the higher
priority job as soon as it arrives. With vertical loading the work center would be fully
loaded. Of course, this would mean that a higher priority job would then have to wait
to be processed since the work center was already busy. The scheduler will have to
weigh the relative costs of keeping higher priority jobs waiting, the cost of idle work
centers, the number of jobs and work centers, and the potential for disruptions, new
jobs and cancellations.
5. DISPATCHING
Dispatching literally means sending something towards a particular destination. Here,
it means taking all such steps, as are necessary to implement the programme of
production chalked out as per routing and scheduling steps.
In particular, dispatching refers to:
(i) Procurement of necessary tools, jigs and fixtures etc.; before they are actually
required by the workmen.
(ii) Giving workers the necessary work orders, instructions, drawings etc. for initiating
the work.
6. Follow-Up (or Checking the Progress)

Follow-up is the control aspect of production planning and control. It involves taking
steps to check up whether work proceeds according to plans and how far there are
variances from standards; and also taking necessary corrective steps to set things in
order.
7. Inspection

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Inspection is the quality control aspect of production planning and control. It ensures
that goods produced are of the right quality. The inspectors may inspect materials,
semi-finished and finished products either at the work bench or in special laboratories
or testing rooms.
To ensure maintenance of high standards of quality, a programme of SQC (Statistical

Quality Control) may be fused with a system of production planning and control.
8. Just-In-Time (JIT)
Just-In-Time (JIT) Manufacturing is a philosophy rather than a technique. By
eliminating all waste and seeking continuous improvement, it aims at creating
manufacturing system that is response to the market needs.
The phase just in time is used to because this system operates with low WIP (Work-
In-Process) inventory and often with very low finished goods inventory. Products are
assembled just before they are sold, subassemblies are made just before they are
assembled and components are made and fabricated just before subassemblies are
made. This leads to lower WIP and reduced lead times. To achieve this organizations
have to be excellent in other areas e.g. quality.
According to Voss, JIT is viewed as a <Production methodology which aims to

improve overall productivity through elimination of waste and which leads to
improved quality=.
JIT in Production and Operation Management

JIT provides an efficient production in an organization and delivery of only the
necessary parts in the right quantity, at the right time and place while using the
minimum facilities=.
Benefits of JIT
The most significant benefit is to improve the responsiveness of the firm to the
changes in the market place thus providing an advantage in competition. Following
are the benefits of JIT:
(i) Product cost: is greatly reduced due to reduction of manufacturing cycle time,
reduction of waste and inventories and elimination of non-value added operation.
(ii) Quality: is improved because of continuous quality improvement programs.

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(iii) Design: Due to fast response to engineering change, alternative designs can be
quickly brought on the shop floor.
(iv) Productivity improvement.
(v) Higher production system flexibility.
(vi) Administrative and ease and simplicity.
Master Production Schedule

A Master Production Schedule is a Schedule of the completions of the end items and
these completions are very much planned in nature. Master production schedule acts
as a very distinct and important linkage between the planning processes. With the help
of this schedule, one can know the requirements for the individual end items by date
and quantity. In companies, MPS are generally produced in order to know the number
of each product that is to be made over some planning horizon. This schedule forms a
very unique part of the company9s sales program which deals with the planned
response to the demands of the market.
A master production schedule is also in management language referred to as the

master of all the schedules as this schedule provides the production, planning,
purchasing & top management, the most needed information required for planning
and control of the whole manufacturing process or the operation.
Master production scheduling plays an important role in the balancing of demand with
the supply i.e. satisfying customers according to the limits of the factory and the
supplier9s base. MPS is used to know the number of the items that are to be produced,
the planned inventories of raw materials, finished products and parts etc.
MPS tells the company what is to be made or produced and also refers to the time in
which this production of the products is to be completed. It must be kept in mind that
MPS does not act as a sales forecast or as a manufacturing schedule or a wish list or a
final assembly schedule. MPS can be linked only with the final products and not with
the planning involving the production of parts or the components, as these listings
require very detailed planning 3 so these are left to the other plans that will follow this
schedule.
In MPS, inputs are used to draw a master production schedule and the inputs used are
3 orders from customers, production plan from aggregate planning, forecast, resources

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that are available, inventory levels and the capacity constraints. While drawing a
MPS, quantities of individual items must be equal to the aggregate quantities from the
production plan and also the total requirements for a product must be allocated
overtime in a very good manner.
MPS outputs include 3 the amounts that are to be produced, due dates, quantity that is
available to promise with the projected available balance. MPS is a schedule that
expresses the operations plan of production for a specific period of time only and is
stated in terms of the end items, which may be either shippable products or the highest
level assemblies used to make them.
The main steps in master production schedule can be summarized as 3

1. Forming a preliminary MPS.
2. Performing rough 3 cut capacity planning.
3. Resolving differences.
Objectives of Master Production Schedule (MPS)
1. Keeping the inventories at the desired level by making perfect use of

the resources that are available with the company.
2. Setting up due dates for the availability of the end items and also
providing the required information regarding resources and also the
materials 3 which act as the supporting pillars of the aggregate
planning.
3. Maintaining properly, the desired level of customer service.
4. Setting particular schedules for the production of the parts and the
components that are used as the inputs to materials requirements
planning, in the end items.
Aggregate Production Planning, Materials

Requirement Planning, Scheduling
AGGREGATE PRODUCTION PLANNING
Aggregate production planning, abbreviated as APP, is useful for operation
management. It is associated with the determination of production, inventory, and
personnel levels to fulfil varying demand over a planning perspective that ranges from
a period of six months to one year. Aggregate production plans are needed to exploit
workforce opportunity and represent a crucial part of operations management.

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Aggregate production plans facilitate matching of supply and demand while reducing
costs. Process of Aggregate production planning applies the upper-level predictions to
lower-level, production-floor scheduling and is most successful when applied to
periods 2 to 18 months in the future. Plans generally either <chase= demand, adjusting
workforce accordingly, or are <level= plans, meaning that labour is comparatively
constant with fluctuations in demand being met by inventories and back orders.
Concept of aggregate production planning denotes to the process of determine the

overall quantities of products to be manufactured or produced in a plant or other
manufacturing facility during a medium term planning period such as a month, or a
quarter. The aggregate plan output comprises of the total quantities of each product or
a group of product to be manufactured in the plan period of going into details of
scheduling of different manufacturing activities required to attain the planned
production levels. The aggregate production will also not specify details such as the
dates when material ordered against individual customer order will be ready for
delivery. The aggregate production plan is designed to establish overall production
targets and as input for planning availability of other inputs and supporting activities
to meet the production targets. The aggregate plans then form the basis of more
comprehensive production such as daily and weekly production schedules and
customer delivery schedules.
Importance of Aggregate Planning

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Aggregate planning plays an important part in achieving long-term objectives of the

organization. Aggregate planning helps in:
 Achieving financial goals by reducing overall variable cost and

improving the bottom line
 Maximum utilization of the available production facility
 Provide customer delight by matching demand and reducing wait time
for customers
 Reduce investment in inventory stocking
Techniques of Aggregate Planning
Various techniques are used to perform the task of aggregate planning. Usually, there
are two categories: Informal trial-and-error techniques and mathematical techniques.
In practice, informal techniques are more commonly used. However, a substantial
amount of research has been done to mathematical techniques, but still, they are not as
extensively used, they often serve as a basis for comparing the effectiveness of
alternative techniques for aggregate planning.
There are several steps in general procedure for aggregate planning:
 Determine demand for each period.

 Determine capacities (regular time, overtime, subcontracting) for each
period.
 Identify company or departmental policies that are pertinent (e.g.,
maintain a safety stock of 5 percent of demand, maintain a reasonably
stable workforce).
 Determine unit costs for regular time, overtime, subcontracting, holding
inventories, back orders, layoffs, and other relevant costs.
 Develop alternative plans and compute the cost for each activity.
If satisfactory plans emerge, select the one that best satisfies objectives.
Aggregate planning as an Operational Tool
Aggregate planning helps achieve balance between operation goal, financial goal and
overall strategic objective of the organization. It serves as a platform to manage
capacity and demand planning.

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In a scenario where demand is not matching the capacity, an organization can try to
balance both by pricing, promotion, order management and new demand creation.
In scenario where capacity is not matching demand, an organization can try to balance
the both by various alternatives such as.
 Laying off/hiring excess/inadequate excess/inadequate

excess/inadequate workforce until demand decrease/increase.
 Including overtime as part of scheduling there by creating additional
capacity.
 Hiring a temporary workforce for a fix period or outsourcing activity to
a sub-contrator.
MATERIALS REQUIREMENT PLANNING
Material requirements planning (MRP) is a production planning, scheduling, and

inventory control system used to manage manufacturing processes. Most MRP
systems are software-based, but it is possible to conduct MRP by hand as well.
An MRP system is intended to simultaneously meet three objectives:
 Ensure materials are available for production and products are available
for delivery to customers.
 Maintain the lowest possible material and product levels in store
 Plan manufacturing activities, delivery schedules and purchasing
activities.
MRP INPUTS
The information input into MRP systems comes from three main sources: a bill of
materials, a master schedule, and an inventory records file. The bill of materials is a
listing of all the raw materials, component parts, subassemblies, and assemblies
required to produce one unit of a specific finished product. Each different product
made by a given manufacturer will have its own separate bill of materials. The bill of
materials is arranged in a hierarchy, so that managers can see what materials are
needed to complete each level of production. MRP uses the bill of materials to
determine the quantity of each component that is needed to produce a certain number
of finished products. From this quantity, the system subtracts the quantity of that item
already in inventory to determine order requirements.

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The master schedule outlines the anticipated production activities of the plant.
Developed using both internal forecasts and external orders, it states the quantity of
each product that will be manufactured and the time frame in which they will be
needed. The master schedule separates the planning horizon into time <buckets,=
which are usually calendar weeks. The schedule must cover a time frame long enough
to produce the final product. This total production time is equal to the sum of the lead
times of all the related fabrication and assembly operations. It is important to note that
master schedules are often generated according to demand and without regard to
capacity. An MRP system cannot tell in advance if a schedule is not feasible, so
managers may have to run several possibilities through the system before they find
one that works.
MRP PROCESSING

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MRP PROCESSING
Using information culled from the bill of materials, master schedule, and inventory
records file, an MRP system determines the net requirements for raw materials,
component parts, and subassemblies for each period on the planning horizon. MRP
processing first determines gross material requirements, then subtracts out the
inventory on hand and adds back in the safety stock in order to compute the net
requirements.

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The main outputs from MRP include three primary reports and three secondary
reports. The primary reports consist of: planned order schedules, which outline the
quantity and timing of future material orders; order releases, which authorize orders to
be made; and changes to planned orders, which might include cancellations or
revisions of the quantity or time frame. The secondary reports generated by MRP
include: performance control reports, which are used to track problems like missed
delivery dates and stock outs in order to evaluate system performance; planning
reports, which can be used in forecasting future inventory requirements; and exception
reports, which call managers9 attention to major problems like late orders or excessive
scrap rates.
SCHEDULING
Scheduling is the process of arranging, controlling and optimizing work and

workloads in a production process or manufacturing process. Scheduling is used to
allocate plant and machinery resources, plan human resources, plan production
processes and purchase materials.
It is an important tool for manufacturing and engineering, where it can have a major
impact on the productivity of a process. In manufacturing, the purpose of scheduling
is to minimize the production time and costs, by telling a production facility when to
make, with which staff, and on which equipment. Production scheduling aims to
maximize the efficiency of the operation and reduce costs.
In some situations, scheduling can involve random attributes, such as random

processing times, random due dates, random weights, and stochastic machine
breakdowns. In this case, the scheduling problems are referred to as stochastic
scheduling.
Overview on Scheduling
Scheduling is the process of arranging, controlling and optimizing work and

workloads in a production process. Companies use backward and forward scheduling
to allocate plant and machinery resources, plan human resources, plan production
processes and purchase materials.
Forward scheduling is planning the tasks from the date resources become available to
determine the shipping date or the due date.

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Backward scheduling is planning the tasks from the due date or required-by date to
determine the start date and/or any changes in capacity required.
The benefits of production scheduling include:
 Process change-over reduction

 Inventory reduction, leveling
 Reduced scheduling effort
 Increased production efficiency
 Labour load levelling
 Accurate delivery date quotes
 Real time information
Aggregate Planning
An organization can finalize its business plans on the recommendation of demand
forecast. Once business plans are ready, an organization can do backward working
from the final sales unit to raw materials required. Thus annual and quarterly plans are
broken down into labor, raw material, working capital, etc. requirements over a
medium-range period (6 months to 18 months). This process of working out
production requirements for a medium range is called aggregate planning.
Factors Affecting Aggregate Planning
Aggregate planning is an operational activity critical to the organization as it looks to

balance long-term strategic planning with short term production success. Following
factors are critical before an aggregate planning process can actually start;
 A complete information is required about available production facility

and raw materials.
 A solid demand forecast covering the medium-range period
 Financial planning surrounding the production cost which includes raw
material, labor, inventory planning, etc.
 Organization policy around labor management, quality management,
etc.
For aggregate planning to be a success, following inputs are required;
 An aggregate demand forecast for the relevant period

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 Evaluation of all the available means to manage capacity planning like

sub-contracting, outsourcing, etc.
 Existing operational status of workforce (number, skill set, etc.),
inventory level and production efficiency.

for customers
 Able to meet scheduling goals there by creating a happy and satisfied
work force
Aggregate Planning Strategies
There are three types of aggregate planning strategies available for organization to
choose from. They are as follows.
1. Level Strategy
As the name suggests, level strategy looks to maintain a steady production rate and
workforce level. In this strategy, organization requires a robust forecast demand as to
increase or decrease production in anticipation of lower or higher customer demand.
Advantage of level strategy is steady workforce. Disadvantage of level strategy is
high inventory and increase back logs.
2. Chase Strategy
As the name suggests, chase strategy looks to dynamically match demand with
production. Advantage of chase strategy is lower inventory levels and back logs.
Disadvantage is lower productivity, quality and depressed work force.
3. Hybrid Strategy
As the name suggests, hybrid strategy looks to balance between level strategy and
chase strategy.

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Economic Order Quantity (EOQ)

Economic order quantity (EOQ) is the ideal order quantity a company should purchase for its inventory
given a set cost of production, demand rate and other variables. This is done to minimize variable
inventory costs, and the equation for EOQ takes into account storage, ordering costs and shortage costs.
The full equation is:
EOQ = √(2SD / H), or the square root of (2 x S x D / H).
S = Setup costs (per order, generally includes shipping and handling)
D = Demand rate (quantity sold per year)
H = Holding costs (per year, per unit)
EOQ applies only when demand for a product is constant over the year and each new
order is delivered in full when inventory reaches zero. There is a fixed cost for each
order placed, regardless of the number of units ordered. There is also a cost for each
unit held in storage, commonly known as holding cost, sometimes expressed as a
percentage of the purchase cost of the item.
The economic order quantity is computed by both manufacturing companies and

merchandising companies. Manufacturing companies compute it to find the optimal
order size of raw materials inventory and
merchandising companies compute it to find the optimal order size of ready to use
merchandise inventory.
The ordering and holding costs
The two significant factors that are considered while determining the economic order
quantity (EOQ) for any business are the ordering costs and the holding costs.
Ordering costs
The ordering costs are the costs that are incurred every time an order for inventory is
placed with the supplier. Examples of these costs include telephone charges, delivery
charges, invoice verification expenses and payment processing expenses etc. The total
ordering cost usually varies according to the frequency of placing orders. Mostly, it is

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directly proportional to the number of orders placed during the year which means If
the number of orders placed during the year increases, the annual ordering cost will
also increase and if, on the other hand, the number of orders placed during the year
decreases, the annual ordering cost will also decrease.
Holding costs
The holding costs (also known as carrying costs) are the costs that are incurred to hold
the inventory in a store or warehouse. Examples of costs associated with holding of
inventory include occupancy of storage space, rent, shrinkage, deterioration,
obsolescence, insurance and property tax etc. The total holding cost usually depends
upon the size of the order placed for inventory. Mostly, the larger the order size, the
higher the annual holding cost and vice versa. The total holding cost is some time
expressed as a percentage of total investment in inventory.
ABC Analysis
ABC analysis is a method of analysis that divides the subject up into three categories:
A, B and C.
Category A represents the most valuable products or customers that you have. These
are the products that contribute heavily to your overall profit without eating up too
much of your resources. This category will be the smallest category reserved
exclusively for your biggest money makers.
For example, a software company might engineer different pieces of software, but one
is a niche software that can be sold at a significantly higher price than the others.
That9s why it accounts for about 60% of the overall revenue, although the company

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sells far less of these products compared to other software categories. Hence, this
specific software is a category A product.
Category B represents your middle of the road customers or products. Many wrongly
approach this group as those who contribute to the bottom line but aren9t significant
enough to receive a lot of attention.
Yet, category B is all about potential. The members of this category can, with some
encouragement, be developed into category A items.
Category C is all about the hundreds of tiny transactions that are essential for profit
but don9t individually contribute much value to the company. This is the category
where most of your products or customers will live. It is also the category where you
must try to automate sales as much as possible to drive down overhead costs.
THE PARETO PRINCIPLE

ABC analysis is based on what is called the Pareto Principle, an economic principle
created by the economist Vilfredo Pareto. Pareto gained notoriety for saying that most
economic productivity comes from only a small part of the economy. Essentially, it
shows that there is an unequal relationship between your input and your output.
For example, a business might get 80% of its results from only 20% of its staff. This
demonstrates that 20% of the staff are more productive than the other 80% of the
team.
Another common example of the Pareto Principle suggests that you get 80% of your
sales from only 20% of your customers. In this case, these 20% would be your
category A customers, hence, those who make the biggest contribution to your
revenue. Basically, only 20% of your customers are valuable enough that losing one
would significantly hurt the business.
You can bring the Pareto Principle even further into ABC analysis when you
consider lifetime value. The relationship between your input and output plays a major
contribution in a customers9 lifetime value. It also forms the foundation of ABC
analysis by providing guidelines for breaking down customers into different groups
(A, B and C).

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WHY USE ABC ANALYSIS?

The main use of ABC analysis is to improve your ability to deal with large and
complex data sets by breaking them down into three segments. These segments define
the priority of the data within whatever area you are using them in.
Once the data is broken down into segments, it is easier to focus on the data and use it
in a meaningful way. Breaking down the data into these segments makes specific
issues in the data more obvious. It also helps in prioritizing the different segments.
For example, ABC analysis can be used to segment your customers and break down
customer-specific data.
First, you would divide the customers into each of the three categories based on the
sales volume the customer provides. Then, you would consider how that volume
relates to your margin contribution.
If you segment the customers successfully, the customers with the most value will go
into the high priority category A, while less important customers would be placed in
the bottom category C. Customers that are somewhere in between will stay in
category B.
The segmentation allows you to pinpoint your most valuable customers. It then allows
you to examine them separately so that you can form a plan of action. When you can
look at things in three different categories, it is easier to allocate your resources in a
more strategic way than it is if you9re flitting back and forth between charts or just
trying to make sense of heaps of raw data. The benefit of taking this extra step is that
it makes it easier to analyze the data strategically which in turn makes it easier to
maximize your profits.
JIT,VED
`Just-in-time9 is a management philosophy and not a technique.
It originally referred to the production of goods to meet customer demand exactly, in

time, quality and quantity, whether the `customer9 is the final purchaser of the product
or another process further along the production line.
It has now come to mean producing with minimum waste. <Waste= is taken in its
most general sense and includes time and resources as well as materials. Elements
of JIT include:

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 Continuous improvement
 Attacking fundamental problems 3 anything that does not add value
to the product.
 Devising systems to identify problems.
 Striving for simplicity 3 simpler systems may be easier to
understand, easier to manage and less likely to go wrong.
 A product oriented layout 3 produces less time spent moving of
materials and parts.
 Quality control at source 3 each worker is responsible for the quality
of their own output.
 Poka-yoke 3 `foolproof9 tools, methods, jigs etc. prevent mistakes
 Preventative maintenance, Total productive maintenance 3 ensuring
machinery and equipment functions perfectly when it is required,
and continually improving it.
 Eliminating waste. There are seven types of waste:
 Waste from overproduction.
 Waste of waiting time.
 Transportation waste.
 Processing waste.
 Inventory waste.
 Waste of motion.
 Waste from product defects.
 Good housekeeping 3 workplace cleanliness and organisation.
 Set-up time reduction 3 increases flexibility and allows smaller batches.
Ideal batch size is 1item. Multi-process handling 3 a multi-skilled
workforce has greater productivity, flexibility and job satisfaction.
 Levelled / mixed production 3 to smooth the flow of products through
the factory.
 Kanbans- simple tools to `pull9 products and components through the
process.
 Jidoka (Autonomation) 3 providing machines with the autonomous
capability to use judgement, so workers can do more useful things than
standing watching them work.
 Andon (trouble lights) 3 to signal problems to initiate corrective action.
VED stands for vital, essential and desirable. This analysis relates to the classification
of maintenance spare parts and denotes the essentiality of stocking spares.

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The spares are split into three categories in order of importance. From the view-points
of functional utility, the effects of non-availability at the time of requirement or the
operation, process, production, plant or equipment and the urgency of replacement in
case of breakdown.
Some spares are so important that their non-availability renders the equipment or a
number of equipment in a process line completely inoperative, or even causes extreme
damage to plant, equipment or human life.
On the other hand some spares are non-functional, serving relatively unimportant
purposes and their replacement can be postponed or alternative methods of repair
found. All these factors will have direct effects on the stocks of spares to be
maintained.
Therefore, it is necessary to classify the spares in the following categories:
V:
Vital items which render the equipment or the whole line operation in a process totally
and immediately inoperative or unsafe; and if these items go out of stock or are not
readily available, there is loss of production for the whole period.
E:
Essential items which reduce the equipment9s performance but do not render it
inoperative or unsafe; non-availability of these items may result in temporary loss of
production or dislocation of production work; replacement can be delayed without
affecting the equipment9s performance seriously; temporary repairs are sometimes
possible.
D:
Desirable items which are mostly non-functional and do not affect the performance of
the equipment.
As the common saying goes <Vital Few 4 trivial many=, the number of vital spares
in a plant or a particular equipment will only be a few while most of the spares will
fall in 8the desirable and essential9 category.

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However, the decision regarding the stock of spares to be maintained will depend not
only on how critical the spares are from the functional point of view (VED analysis)
but also on the annual consumption (user) cost of spares (ABC 4 analysis) and,
therefore, for control of spare parts both VED and ABC analyses are to be combined.
FSN
This analysis classifies inventory based on quantity, the rate of consumption and
frequency of issues and uses. Here is the basic depiction of FSN Analysis:
F stands for Fast moving, S for Slow moving and N for Non-moving items.
 Fast Moving (F): Items that are frequently issued/used

 Slow Moving (S): Items that are issued/used less for a certain period
 Non-Moving (N): Items that are not issued/used for more than a certain
duration
The non-moving items (usually, not consumed over a period of two years) are of great
importance. It is found that many companies maintain huge stocks of non-moving
items blocking quite a lot of capital.
Moreover, there are thousands of such items. Scrutiny of these items is made to
determine whether they could be used or to be disposed off. The classification of fast
and slow moving items helps in arrangement of stocks in stores and their distribution
and handling methods.
ABC Analysis, VED Analysis, SDE Analysis, HML

and FSN Analysis
ABC Analysis
In order to exercise effective control over materials, A.B.C. (Always Better Control)
method is of immense use. Under this method materials are classified into three
categories in accordance with their respective values. Group 8A9 constitutes costly
items which may be only 10 to 20% of the total items but account for about 50% of
the total value of the stores.

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A greater degree of control is exercised to preserve these items. Group 8B9 consists of
items which constitutes 20 to 30% of the store items and represent about 30% of the
total value of stores.
A reasonable degree of care may be taken in order to control these items. In the last
category i.e. group 8Q9 about 70 to 80% of the items is covered costing about 20% of
the total value. This can be referred to as residuary category. A routine type of care
may be taken in the case of third category.
This method is also known as 8stock control according to value method9, 8selective
value approach9 and 8proportional parts value approach9.
If this method is applied with care, it ensures considerable reduction in the storage
expenses and it is also greatly helpful in preserving costly items.
VED Analysis
Vital essential and desirable analysis is used primarily for the control of spare parts.
The spare parts can be divided into three categories:
(i) Vital
(ii) Essential
(iii) Desirable
(i) Vital: The spares the stock out of which even for a short time will stop production
for quite some time and future the cost of stock out is very high are known as vital
spares.
(ii) Essential: The spare stock out of which even for a few hours of days and cost of
lost production is high is called essential.
(iii) Desirable: Spares are those which are needed but their absence for even a week
or so will not lead to stoppage of production.
The criterion for this analysis is the availability of the materials in the market. In
industrial situations where certain materials are scarce (specially in a developing
country like India) this analysis is very useful and gives proper guideline for deciding
the inventory policies.

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The characteristics of the three categories – SD and E – are:

S:
Refers to scarce items, items which are in short supply. Usually these are raw
materials, spare parts and imported items.
D:
Stands for difficult items, items which are not readily available in local markets and
have to be procured from faraway places, or items for which there are a limited
number of suppliers; or items for which quality suppliers are difficult to get.
E:
Refer to items which are easily available in the local markets.
HML Analysis
H-M-L analysis is similar to ABC analysis except the difference that instead of
<Annual Inventory Turnover=, cost per unit criterion is used.
The items under this analysis are classified based on their unit prices. They are
categorized in three groups , which are as follows
H-High Price Items

M-Medium Price Items
L-Low Price Items
Objectives of hml analysis
 Determine the frequency of stock verification

 To keep control over the consumption at the department level
 To evolve buying policy, to control purchase
 To delegate the authority to different buyer
 Determine the frequency of stock verification
 To keep control over the consumption at the department level
 To evolve buying policy, to control purchase
 To delegate the authority to different buyer

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FSN Analysis:
Here the items are classified into fast-moving (F), slow-moving (S) and Non-moving
(N) items on the basis of quantity and rate of consumption. The non-moving items
(usually, not consumed over a period of two years) are of great importance. It is found
that many companies maintain huge stocks of non-moving items blocking quite a lot
of capital.
Moreover, there are thousands of such items. Scrutiny of these items is made to
determine whether they could be used or to be disposed off. The classification of fast
and slow moving items helps in arrangement of stocks in stores and their distribution
and handling methods.
KANBAN
KANBAN is a concept that relates to obtaining materials or required items <just in
time= for their introduction into the assembly or process. The system of JIT or the just
in time process was initiated by the Japanese firm Toyota in the 1940s.
KANBAN is a system to signal a need for action. This can be done by cards on a
board (which is the traditional way) or by other devices that are used as markers,
indicating the need to take action. Taiichi Ohno, the man who conceptualized the JIT
system, says KANBAN is the means to achieve JIT.
Toyota felt the need in the 1940s to reduce costs by introducing proper inventory
stocking techniques of required assembly parts. First, they studied supermarkets to
understand how supermarkets ensure their shelves are always stocked with the
materials that the customers want and in the required amount. Customers could
always be assured of a constant supply of product and only pick up the number of
items that they immediately required. They knew a future supply of wanted product
would be available whenever desired. Toyota reasoned that if they could ensure this
same supermarket guarantee of required parts for their assembly lines, there would be
less of a need to maintain high inventories which in turn, drive up costs and storage
requirements. Toyota also began maintaining strict controls on defective products,
which in turn were kept from entering the process.
KANBAN controls the rate of production by passing the demand for raw materials
through a system of customer-store processes, which ensures that materials are
received only when required. With Kanban, each process identifies only those
products that are required for that exact process until that process is complete. Each
subsequent process continues by only using products that are required for the next

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step of processing, and so on. Thus, production is equalized in all processes and
stabilizes the production by fine-tuning inventory demand and requirement processes.
The Three Bin System
A very simple method of implementing KANBAN is the use of a three bin system.
One bin is available on the floor of the production unit using the product. A second
bin is available at the inventory department of the factory where the production staff
obtains raw materials. Finally, a third bin is available at the premises of the supplier
who has been selected to deliver the materials. Each bin contains cards with detailed
information showing inventory numbers available within the bins and the date which
they were received.
During the process, the factory floor uses the materials from the bin and, once the bin
is depleted, its KANBAN card is returned to the inventory department. The inventory
department immediately replaces the bin with a full bin obtained from the supplier or
vendor. In turn, the inventory department sends the empty bin to the vendor or
supplier for replenishment of materials. Suppliers and vendors stay on top of
replenishing needed materials at their location, keeping them ready for the next
exchange. This three bin method, therefore, doesn9t require on-site storage of
materials until they are required.
Such bins, represented by KANBAN cards, are created for each of the items required
in the production process. The number of KANBAN cards depends upon the actual
number of the items required during each stage of the process. The control during the
assembly is achieved by identifying every KANBAN card needed to complete the
assembly or production. Hence, KANBAN is considered an effective tool in the Just
In Time inventory process within an assembly line production.

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Types of inventories
An inventory is a stock of goods maintained for the purpose of future production or
sales. In broad sense, the term inventory refers to all materials, parts, supplies, tools,
in-process or finished products recorded in the books by an organization and kept in
its stocks, warehouse or plant for some period of time. It is a list or schedule of
materials held on behalf of an enterprise.
Types/Classification of Inventory
1. Direct Inventories
Direct inventories are those inventories that play a major role in the production and
constitute a vital part of finished goods. These inventories can be easily assigned to
specific physical units. Direct inventories may be categorized into four groups.
(i) Raw materials
Raw materials are the physical resources to be used in the manufacture of finished
products. They include materials that are in their natural or raw form. For example,
cotton in the case of textile mill, sugarcane in the case of sugar factory, oil seeds in
the case of an oil mill etc. The chief objective of keeping raw material is to ensure
uninterrupted production in the event of delays in delivery and also to enjoy the
economies of large scale buying.
(ii) Semi-finished Goods
Semi-finished goods are those materials which are not cent per cent (100%) complete
in all respects i.e., some processing still remains to be done before the product can be
sold. For example, a person who is engaged in the manufacture of furniture, may
purchase unpolished furniture from market and sell it after polishing the same.
(iii) Finished Goods
Finished goods are complete products that are ready for sale or distribution. For
instance, in case of a hosiery factory, sweaters, shawls etc. are finished products.
(iv) Spare Parts

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Spare parts means duplicate parts of a machine. Usually, almost all the industrial
concerns maintain spare parts of various machines which they use for manufacture.
This will enable them to ensure smooth running of machines which in turn provide for
uninterrupted production.
2. Indirect Inventories
Indirect inventories include those items which are necessary for manufacturing but do
not become component of the finished goods. They normally include petrol,
maintenance materials, office materials, grease, oil lubricants etc. These inventories
are used for ancillary purposes to the business and cannot be assigned to specific,
physical units. These inventories may be used in the factory, the office or the selling
and distribution divisions.
Factors affecting Plant Location

Eight Factors Affecting Plant Location
1. Selection of Region
The selection of a region or area in which plant is to be installed requires the
consideration of the following:
(i) Availability of Raw Materials: Proximity of sources of raw materials is the

obvious explanation of the location of majority of sugar mills in Uttar Pradesh. This
means that the raw material should be available within the economical distance. Easy
availability of supplies required for maintenance and operation of the plant should
also be considered.
(ii) Proximity to Markets: Cost of distribution is an important item in the overhead

expenses. So it will be advantageous to be near to the center of demand for finished
products. Importance of this is fully realized if the material required for the
manufacturing of products are not bulk and fright charges are small.
iii) Transport Facilities: Since freight charges of raw materials and finished goods enter
into the cost of production, therefore transportation facilities are becoming the
governing factor in economic location of the plant. Depending upon the volume of the
raw materials and finished products, a suitable method of transportation like rail, road,
water transportation (through river, canals or sea) and air transport is selected and
accordingly plant location is decided. Important consideration should be that the cost

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of transportation should remain fairly small in comparison to the total cost of

production.
(iv) Availability of Power, Fuel or Gas: Because of the wide spread use of electrical
power the availability of fuel or gas has not remained a deciding factor in most of the
cases for plant location. The location of thermal power plants (like Bokaro Thermal
Plant) and steel plants near coal fields are for cutting down cost of the fuel
transportation. The reliability of continuous supply of these facilities is an important
factor.
(v) Water Supply: Water is required for processing as in chemical, sugar and paper
industries and is also used for drinking and sanitary purposes. Investigation for quality
and probable source of supply is important, since the cost of treating water is
substantial so the chemical properties like hardness, alkalinity and acidity.
(vi) Disposal Facility for Waste Products: Thorough study should be made regarding
disposal of water like effluents, solids, chemicals and other waste products likely to be
produced during the production process.
(vii) Availability of Labour: Potential supply of requisite type of labour governs plant
location to major extent. Some industries need highly skilled labour while other need
unskilled and intelligent labour. But the former type is difficult in rural areas in
comparison with industrially developed location.
2. Township Selection
The factors to be considered regarding township selection are:
(i) Availability of men power of requisite skill
(ii) Competitive wage rates of workers
(iii) Other enterprises which are complementary or supplementary regarding raw

materials, other input, labour and skill required.
(iv) Moderate taxes and the absence of restricting laws.
(v) Favourable cooperative and friendly attitude towards the industry.

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(vi) Favourable living conditions and standards keeping in view the availability of
medical and educational facilities, housing, fire service, recreational facilities, cost of
living etc.
3. Question of Urban and Rural Area
Question of urban and rural area should be decided in view of the following:
Advantages of Rural Area:
(i) The initial cost of land, erection cost of building and plant is less in rural area as
compared to urban or city area.
(ii) Acquisition for additional area for extension work expansion of plant is possible
without much difficulty whereas urban area being congested; the additional land is not
easily available.
(iii) Rural areas are free form labour trouble which is most common in towns and
cities.
iv) Over crowding of working class population in cities is avoided.
Advantages of Urban Area:
(i) Better modes of transportation for collection and distribution of materials and
finished products.
(ii) Availability to requisite type of labour for special and specific jobs is there.
(iii) Utilities like water, power, fuels etc. are easily available.
(iv) Industries do not need to construct colonies to provide residential facilities to their
workers since houses are available on rental basis whereas in rural areas, houses have
to be build for workers.
4. Location of a Factory in a Big City
Generally factories are located in big cities for obvious reasons of skilled labour,
market proximity for both raw materials and end products.

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(i) Existence of educational and recreational facilities is advantageous for children and
dependents of workers.
(ii) Facilities for technical/ industrial education and training for children of workers
are available.
(iii) Evening classes facilities are available.
(iv) Discussion opportunities and facilities for exchange of thoughts are available for
interested people in societies and clubs.
(v) All types of skilled man power is available.
(vi) Repair, maintenance and service facilities for various utilities are available in
abundance.
(vii) Banking facilities regarding finance (loan etc.) for industry in case of necessity
are available.
(ix) Big markets for sale of products available.
(x) Better transport facilities for movement of raw materials, finished products and
workers are available.
5. Location of an Industry in Small Town
There are some industries which are located in the rural areas or small towns
specifically for the want of raw material and cheap labour.
(i) Less labour trouble and co-ordinal employee-employer relation.
(ii) Suitable land for current and future requirements easily available.
(iii) Local bye laws do not impose problem in working of the unit.

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(iv) No resistance from existing industries.
(v) Possibility of tax exemptions exist.
(vi) Not much congestion.
(vii) Lower rents in comparison to big cities and urban areas.
(viii) Lower wage rates for labour/ employees / workers.
(ix) Less fire risks.
(x) Noise not much problem.
6. Site Selection
The third step is to select the exact plant site with the following considerations:
(i) The cheap availability of land for current and future requirements, soil
characteristics sub soil water, availability or possibility of economic drainage and
waste disposal system are desirable parameters.
(ii) The site should be easily accessible to various modes of transport as required so
that apart from input materials, employees can also reach the site conveniently.
(iii) The site should be free from zonal restrictions like from railways or civil aviation
restrictions.
7. Current Trends in Pant Location
(I) Location in Proximity of Cities: First tendency is to locate the industries or

enterprises in the proximity of cities rather than in rural or urban areas. These sub-
urban sites offer today practically all advantages, facilities and services available in
cities and towns with the added advantage of land required for future expansion on
cheap rates.
(II) Planned Industrial Centers: While industrial towns may be planned and
developed by big industrial houses or govt., the late trend is to develop areas as
industrial estates and sell these to people interested in starting their units at various
places. Noida and Faridabad are the examples of this type of development.

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(III) Competition for Development of Industries: In order to generate the

employment opportunities the state and central govt. offer concessions to attract
industrialists to set up industries in their states or territories.
8. The Design of Factory Plant Building
After a plant location has been decided upon, management9s next problem deals with
the design of building. A building is designed and built to protect the property and
employees of an organization. This basic fact is mostly overlooked in planning the
requirement for building structures.
For those plants where employees, materials and infrastructure facilities require
protection, the problems involved in designing and constructing effective and
economical structures are many.
Inventory Control Techniques: EOQ, ABC and

others
Five Techniques of Inventory Control
1. Economic Order Quantity
A problem which always remains in that how much material may be ordered at a time.
An industry making bolts will definitely would like to know the length of steel bars to
be purchased at any one time.
This length is called <economic order quantity= and an economic order quantity is one
which permits lowest cost per unit and is most advantages.
This can be calculated by the following formula:
Q = √2AS/I
Where Q stands for quantity per order
A stands for annual requirements of an item in terms of rupees
S stands for cost of placement of an order in rupees; and

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I stand for inventory carrying cost per unit per year in rupees.
2. Inventory Models
Inventory models determine when and how inventory to carry.
(i) Inventory models handle chiefly two decisions:
 How much to order at one time.

 When to order this quantity to minimize total costs.
(ii) Lowest-cost decision rules for inventory management pertain to either buying
products from outside or producing then within the company.
(iii) Single inventory models assume no delivery delay and that demand is known.
(iv) Probabilistic models handle situations of risks and uncertainty.
3. ABC Analysis
In order to exercise effective control over materials, A.B.C. (Always Better Control)
method is of immense use. Under this method materials are classified into three
categories in accordance with their respective values. Group 8A9 constitutes costly
items which may be only 10 to 20% of the total items but account for about 50% of
the total value of the stores.
A greater degree of control is exercised to preserve these items. Group 8B9 consists of
items which constitutes 20 to 30% of the store items and represent about 30% of the
total value of stores.
A reasonable degree of care may be taken in order to control these items. In the last
category i.e. group 8Q9 about 70 to 80% of the items is covered costing about 20% of
the total value. This can be referred to as residuary category. A routine type of care
may be taken in the case of third category.
This method is also known as 8stock control according to value method9, 8selective
value approach9 and 8proportional parts value approach9.
If this method is applied with care, it ensures considerable reduction in the storage
expenses and it is also greatly helpful in preserving costly items.

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4. Material Requirements Planning
MRP is a computational technique that converts the master schedule for end products
into a detailed schedule for raw material and components used in the end products.
The detailed schedule indentifies the quantities of each raw material and component
items. It also tells when each item must be ordered and delivered so as to meet the
master schedule for the final products.
5. VED Analysis
Vital essential and desirable analysis is used primarily for the control of spare parts.
The spare parts can be divided into three categories:
(i) Vital
(ii) Essential
(iii) Desirable
(i) Vital: The spares the stock out of which even for a short time will stop production
for quite some time and future the cost of stock out is very high are known as vital
spares.
(ii) Essential: The spare stock out of which even for a few hours of days and cost of
lost production is high is called essential.
(iii) Desirable: Spares are those which are needed but their absence for even a week
or so will not lead to stoppage of production.
Types of Plant layout

Four Main Types of Plant Layout

2. Process or Functional Layout.
3. Fixed Position Layout.
4. Combination type of Layout.

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If all the processing equipment and machines are arranged according to the sequence
of operations of the product, the layout is called product type of layout. In this type of
layout, only one product of one type of products is produced in an operating area. This
product must be standardized and produced in large quantities in order to justify the
product layout.
The raw material is supplied at one end of the line and goes from one operation to the
next quite rapidly with a minimum work in process, storage and material handling.
Fig. 8.3 shows product layout for two types of products A and B.
Advantages offered by Product Layout:
(i) Lowers total material handling cost.
(ii) There is less work in processes.
(iii) Better utilization of men and machines,
(iv) Less floor area is occupied by material in transit and for temporary storages.
(v) Greater simplicity of production control.
(vi) Total production time is also minimized.
Limitations of Product Layout:
(i) No flexibility which is generally required is obtained in this layout.
(ii) The manufacturing cost increases with a fall in volume of production.
iii) If one or two lines are running light, there is a considerable machine idleness.
(iv) A single machine break down may shut down the whole production line.
(v) Specialized and strict supervision is essential.
2. Process or Functional Layout

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The process layout is particularly useful where low volume of production is needed. If
the products are not standardized, the process layout is more low desirable, because it
has creator process flexibility than other. In this type of layout, the machines and not
arranged according to the sequence of operations but are arranged according to the
nature or type of the operations. This layout is commonly suitable for non repetitive
jobs.
Same type of operation facilities are grouped together such as lathes will be placed at
one place, all the drill machines are at another place and so on. See Fig. 8.4 for
process layout. Therefore, the process carried out in that area is according to the
machine available in that area.
Advantages of Process Layout
(i) There will be less duplication of machines. Thus, total investment in equipment
purchase will be reduced.
(ii) It offers better and more efficient supervision through specialization at various
levels.
(iii) There is a greater flexibility in equipment and man power thus load distribution is
easily controlled.
(iv) Better utilization of equipment available is possible.
(v) Break down of equipment can be easily handled by transferring work to another
machine/work station.
(vi) There will be better control of complicated or precision processes, especially

where much inspection is required.
Limitations of Process Layout
(i) There are long material flow lines and hence the expensive handling is required.
(ii) Total production cycle time is more owing to long distances and waiting at various
points.

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(iii) Since more work is in queue and waiting for further operation hence bottle necks
occur.
(iv) Generally, more floor area is required.
(v) Since work does not flow through definite lines, counting and scheduling is more
tedious.
(vi) Specialization creates monotony and there will be difficult for the laid workers to
find job in other industries.
3. Fixed Position Layout
This type of layout is the least important for today9s manufacturing industries. In this
type of layout the major component remain in a fixed location, other materials, parts,
tools, machinery, man power and other supporting equipment9s are brought to this
location.
The major component or body of the product remain in a fixed position because it is
too heavy or too big and as such it is economical and convenient to bring the
necessary tools and equipment9s to work place along with the man power. This type
of layout is used in the manufacture of boilers, hydraulic and steam turbines and ships
etc.
Advantages Offered by Fixed Position Layout
(i) Material movement is reduced
(ii) Capital investment is minimized.
(iii) The task is usually done by gang of operators, hence continuity of operations is
ensured
(iv) Production centers are independent of each other. Hence, effective planning and
loading can be made. Thus total production cost will be reduced.
(v) It offers greater flexibility and allows change in product design, product mix and
production volume.
Limitations of Fixed Position Layout

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(i) Highly skilled man power is required.
(ii) Movement of machines equipment9s to production centre may be time consuming.
(iii) Complicated fixtures may be required for positioning of jobs and tools. This may
increase the cost of production.
4. Combination Type of Layout
Now a days in pure state any one form of layouts discussed above is rarely found.
Therefore, generally the layouts used in industries are the compromise of the above
mentioned layouts. Every layout has got certain advantages and limitations.
Therefore, industries would to like use any type of layout as such.
Flexibility is a very important factory, so layout should be such which can be molded
according to the requirements of industry, without much investment. If the good
features of all types of layouts are connected, a compromise solution can be obtained
which will be more economical and flexible.
UNIT 4

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Introduction to Logistics and Supply chain

Management
The term <Supply Chain Management= was coined in 1982 by Keith Oliver of
Booz, Allen and Hamilton Inc. But the discipline and practice has been in existence
for centuries.
The terms Logistics and Supply Chain Management are used interchangeably these
days, but there is a subtle difference that exists between the two.
8Logistics9 has a military origin, and used to be associated with the movement of
troops and their supplies in the battlefield. But like so many other technologies and
terminologies, it entered into the business lexicon gradually and has now become
synonymous with the set of activities ranging from procurement of raw materials, to
the delivery of the final polished good to the end consumer.
In a typical business scenario, many organizations work in tandem (knowingly or

unknowingly) to get the final product in hand of the end consumer. The supply chain
is a network of these organizations that coalesce with each other (downstream or
upstream) to make the final shipment successful.
A group of farmers, a cotton mill, a designer and a tailor is the least number of
stakeholders you can expect from a regular shirt you wear every day
Introduction to Logistics and Supply Chain Management (SCM)

Logistics is generally seen as a differentiator in terms of the final bottom line of a
typical <hard and tangible goods= organization; enabling either a lower cost or
providing higher value.
While a lower cost is mostly a one-time feel good factor and has been the traditional
focus area in logistics, high value comes into the picture much later and may be
tangible or intangible in a good9s initial stages.
So while an organization like Zappos may look costly at a first glance, the
extraordinary customer service due to robust policies is a value which more than
offsets the slightly higher cost.
Logistics is concerned with both materials flow and information flow. While the
materials flow from the supplier to consumer, the information flows the other way

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round. It is not only concerned with inventory and resource utilization, customer
response also falls under the ambit of logistics.
n simple terms, logistics can be seen as a link between the manufacturing and
marketing operations of a company. The traditional organizations used to think of
them separately, but there is a definite value addition in integrating the two due to the
interdependence and feedback channel between the two.
The level of coordination required to minimize the overall cost for the end consumer
gets tougher to achieve as the number of participants in a supply chain increase, as an
extremely efficient flow of material and information is required for optimization.
Logistics cover the following broad functional areas: network design,

transportation and inventory management.
Manufacturing plants, warehouses, stores etc. are all facilities which form key
components in the network design. Transportation: the cost and consistency
(reliability) required out of the transportation network determines the type and mode
of the movement of goods and also affects the inventory.
Buffer (or safety) stock is the reserve stock held to safeguard against shortages or
unexpected surge in demand, to avoid <stock-outs=. Fewer inventories with negligible
stock-outs 4 the hallmark of an efficient logistical system
Basic concepts of Logistics and SCM
Inventory Planning
Organizations want to minimize the inventory levels due to its almost linear
relationship with the cost. Yet if the demand is forecasted accurately, there would
ideally be no need for inventory and the goods will move seamlessly from warehouses
to customers.
 That would have been awesome, but it is deep into the ideal world
zone. In the real world, the forecasted numbers can only take you so far
and some inventory has to be maintained to satiate any surges in
demand; the cost of unhappy consumers who are not serviced is often
huge, and is immeasurable in most cases.

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 Yet overstocks lead to increase in working capital requirements,

insurance costs and blocked resources which could have been
productive someplace else.
 Making a business forecast has largely been a gut-based process, but is
changing rapidly in the era of data-based decision making. The forecast
depends on the historical baseline for sales, seasonality (soft drinks
have higher sales volume in May), recent trends (Samsung is losing out
to competitors when it comes to phones, a declining trend), business
cycles (economies go through expansion and contraction every few
years), promotional offers (up to 50% off can drive the average
fashionista mad) etc.
Transportation
The kind of transportation employed by an organization is a strategic decision (it

usually accounts for around 1/3rdof the total logistics cost) based on the required level
of risk exposure, customer service profiles, geographic area covered etc. Truck
shipments take more time for delivery compared to air transport (customers with
relaxed turnaround times); is cheaper but necessitates maintenance of higher inventory
levels.
 Transportation serves the purpose of not just product movement, but

storage as well (not very intuitive). Time spent for delivery means
saved time for warehousing, and many times the cost to offload and
reload shipments can be greater than the cost of letting the goods stay
in the transportation vehicles itself.
 Two basic thumb rules apply for transportation decisions: truck load
(TL) shipments are better than less-than-truckload (LTL) shipments as
storage space is a perishable commodity (just like a commercial airline
does not want to fly with empty seats), and the cost per kilometer
decreases as the distance increases (two 500 km shipments is usually
more expensive than a single 1000 km shipment).
 The factors which determine the economies of transportation decisions
include but are not limited to: distance between the starting and
destination points, and density (higher density products take less space
4 space constraints outweigh weight constraints by a huge margin),
stow ability (spherical packaging will lead to more empty spaces

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compared to cubical) and volume of the goods. Different modes of

transport serve different strategic ends (rail, road, air, water etc).
 FlipKart has eKart for its logistical operations and warehousing,
whereas smaller e-commerce players generally outsource their
operations to specialized logistics players such BlueDart, DHL and
now Delhivery.
Packaging
The end goals differ: can either be done for end consumers or for logistical
considerations. The packaging will then depend on the end goal; form factor plays the
lead role when packaging goods for the end consumers, while function plays the lead
role in packaging for logistical operation.
Warehousing
It is the back-end building for storing goods. Based on the needs of the organization, it
can be in-house or outsourced.
 Primary functions of a warehouse are product movement and storage.

Activities such as offloading of the goods coming from the suppliers,
the intermediate packaging (if required), and shipping to other
destinations (retailers or end consumers) are handled in the warehouse.
Similarly, they can also serve as a storage house for handing peak
consumer demand to avoid stock out of items, and acts as a buffer
between the starting point (usually manufacturing plant) and ending
point (think about a typical retail outlet).
Different distribution strategies can be adopted by an organization based on its needs
and infrastructure in place, namely:
 Cross-Docking: Relies on minimal processing at the warehouse level

and facilitate seamless connection between <incoming= and <outgoing=
goods through technologies such as bar code scanners; becoming
increasingly important due to established structured communication
between retailers and manufacturers; best for high velocity goods with
predictable demand patterns.

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 Milk Runs: The delivery guy is out to deliver items from a single
supplier to multiple retailers or to pick up items from multiple suppliers
for a single retailer (An Indian Doodhwala can literally teach a thing or
two about this, hence the naming we think).
 Direct Shipping: A supplier directly ships to a particular retailer
without any intermediaries. Mostly happens with big-name stores with
huge good volumes, and very frequent replenishments. Big savings on
time.
 Hub and Spoke Model: Hub serves as the central node for nearby
places, and the spokes depend on the hub for their needs (think of a
metropolitan and various tier-2 cities in its proximity).
 Pooled Distribution: Region is the most important factor driving this
strategy. Delivers to every destination point in a geographical area,
smart for handling peak time loads and LTL shipments. Plus one for the
planet as a bonus!
Human : Arteries :: Logistics : Information
Traditional paper-based information systems are increasingly on their way out, and
electronic exchanges are making rapid inroads into the logistical process flow. The
initial investment in electronic systems is recouped quickly by cost savings due to
better operational efficiency and enhanced customer service. Advances in electronic
data interchange (EDI), artificial intelligence and wireless communication is partly
responsible for this intelligent shift.
 The principal information flow can be subdivided in two main streams:

one for planning (looking into the future) and the other for operational
flows (in the past and present). Plans are to be made for production,
storage and movement of goods. Manufacturing constraints (internal)
and expected sales (external) are the key areas focused upon. Operating
flows refer to the information generated (or required) to serve the
orders to the customer.
 Enterprise Resource Planning (ERP) is a fancy term used by IT people
for one-stop, integrated packages to support multiple functions across
an organization. It serves as a central destination to capture data which
aids in making optimal decisions, while also serving as a repository to
better understand the current business scenario and plan for any future
needs.

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Green Supply Chain Management: Lean Practices
Green is the new way to go about things, and the myth that profits and environment
cannot go hand in hand is evaporating fast. Commitment to lean practices is a promise
to do away with inefficiencies in the system to reduce wastes and have a minimal
impact on the environment.
The emphasis on continuous product flows, standardization within the

organization/industries and a greater integration between producers and consumers 4
all these have contributed to efficient supply chains with gradually decreasing waste
levels.Information is often the key differentiator when it comes to successful supply
chain practices, and the organizations that share information with each other based on
the premise of trust and long-term business viability will often have decisive
competitive advantage over organizations that do not share critical information
upstream and downstream.
The best part is everybody winning 4 organizations, end consumers and Mother
Nature.
Conceptual Model of SCM

Supply chain acts as a connecting chain of materials from the suppliers to the
manufacturer to the distributor to the retailer to the ultimate customers. In a supply
chain the flow of demand information is in a direction opposite to the flow of
materials. Thus, the information flow on demand is from the customer to the retailer
to the distributor to the manufacturer to the supplier.
It may be noted that the supply chain is not a linear chain but takes the form of a
network. It consists of a network of facilities and distribution options that perform the
functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products to
customers in the right time and of the right quantity and quality.
The complete SCM has three sections at the macro level Supply Relationship
Management: The segment of the chain which is concerned with the supply of raw
materials ,components and sub-assemblies .This segment is called the SRM which
plays the role of supplier relations. The Conversion system within a factory which is
done by the production and operations management function. This macro system is
often called the Internal Supply Chain Management or ISCM.

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CRM or customer relations management macro system. The CRM Sytem takes care
of the market, Selling, Call centre and order management. The management of the
three macro level systems have been very efficiently taken care by leading software
corporations like the SAP. ,Oracle ,BAAN and other Enterprise Resource Planning
Systems. Since the Customer Relationship management is focused towards the
marketing ,Sales and service.
Supply chain management can be seen as the process of strategically managing the
procurement, movement and storage of materials, parts and finished inventory and
related information flows through the organization and its marketing channels in such
a way that current and future profitability are maximized through the cost effective
fulfillment of orders.
Supply chain management (SCM), thus , is the process of trying to appropriately

manage this network of activities and flows. More formal definitions of SCM include
the following points:

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SCM coordinates and integrates all the supply chain activities into a seamless process
and links all of the partners in the chain, including departments within an organization
as well as the external suppliers, transporters, third-party companies, and information
system providers.
SCM enables manufacturers to actively plan and collaborate across a distributed

supply chain, to ensure that all parties are aware of commitments and schedules. By
actively collaborating as a virtual corporation, manufacturers and their suppliers can
source, produce, and deliver products with minimal lead time and expense.
Conceptual Model of SCM
In sum, we can say that SCM works in a demand driven situation, encourages flow-
type production with small batches, reduces idle inventory and idle time in any
business by improving overall customer- centric approach.
The conceptual model of SCM is based on the five basic elements called Pillars of
SCM. It includes:
 Customization philosophy
 Outsourcing of items in which the supplier has competency
 Multi-tier supplier partnership
 Third or Fourth party logistics
 Use of modern IT systems
Supply Chain Drivers

Supply Chain Capabilities are guided by the decisions you make regarding the five
supply chain drivers. Each of these drivers can be developed and managed to
emphasize responsiveness or efficiency depending on changing business
requirements. As you investigate how a supply chain works, you learn about the
demands it faces and the capabilities it needs to be successful. Adjust the supply chain
drivers as needed to get those capabilities.

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The five drivers provide a useful framework for thinking about supply chain
capabilities. Decisions made about how each driver operates will determine the blend
of responsiveness and efficiency a supply chain is capable of achieving. The five
drivers are illustrated in the diagram below:
1. PRODUCTION: This driver can be made very responsive by building

factories that have a lot of excess capacity and use flexible
manufacturing techniques to produce a wide range of items. To be even
more responsive, a company could do their production in many smaller
plants that are close to major groups of customers so delivery times
would be shorter. If efficiency is desirable, then a company can build
factories with very little excess capacity and have those factories
optimized for producing a limited range of items. Further efficiency
can also be gained by centralizing production in large central plants to
get better economies of scale, even though delivery times might be
longer.
2. INVENTORY: Responsiveness can be had by stocking high levels of
inventory for a wide range of products. Additional responsiveness can

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be gained by stocking products at many locations so as to have the

inventory close to customers and available to them immediately.
Efficiency in inventory management would call for reducing inventory
levels of all items and especially of items that do not sell as
frequently. Also, economies of scale and cost savings can be gotten by
stocking inventory in only a few central locations such as regional
distribution centers (DCs).
3. LOCATION: A location decision that emphasizes responsiveness
would be one where a company establishes many locations that are
close to its customer base. For example, fast-food chains use location to
be very responsive to their customers by opening up lots of stores in
high volume markets. Efficiency can be achieved by operating from
only a few locations and centralizing activities in common locations.
An example of this is the way e-commerce retailers serve large
geographical markets from only a few central locations that perform a
wide range of activities.
4. TRANSPORTATION: Responsiveness can be achieved by a
transportation mode that is fast and flexible such as trucks and
airplanes. Many companies that sell products through catalogs or on the
Internet are able to provide high levels of responsiveness by using
transportation to deliver their products often within 48 hours or less.
FedEx and UPS are two companies that can provide very responsive
transportation services. And now Amazon is expanding and operating
its own transportation services in high volume markets to be more
responsive to customer desires. Efficiency can be emphasized by
transporting products in larger batches and doing it less often. The use
of transportation modes such as ship, railroad, and pipelines can be
very efficient. Transportation can also be made more efficient if it is
originated out of a central hub facility or distribution center (DC)
instead of from many separate branch locations.
5. INFORMATION: The power of this driver grows stronger every year
as the technology for collecting and sharing information becomes more
wide spread, easier to use, and less expensive. Information, much like
money, is a very useful commodity because it can be applied directly to
enhance the performance of the other four supply chain drivers. High
levels of responsiveness can be achieved when companies collect and
share accurate and timely data generated by the operations of the other

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four drivers. An example of this is the supply chains that serve the
electronics market; they are some of the most responsive in the
world. Companies in these supply chains, the manufacturers,
distributors, and the big retailers all collect and share data about
customer demand, production schedules, and inventory levels. This
enables companies in these supply chains to respond quickly to
situations and new market demands in the high-change and
unpredictable world of electronic devices (smartphones, sensors, home
entertainment and video game equipment, etc.).
Supply Chain Performance Measurement

Supply chain performance measure can be defined as an approach to judge the
performance of supply chain system. Supply chain performance measures can broadly
be classified into two categories:
1. Qualitative Measures
For example, customer satisfaction and product quality.

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2. Quantitative Measures
For example, order-to-delivery lead time, supply chain response time, flexibility,
resource utilization, delivery performance.
Here, we will be considering the quantitative performance measures only. The

performance of a supply chain can be improvised by using a multi-dimensional
strategy, which addresses how the company needs to provide services to diverse
customer demands.
QUANTITATIVE MEASURES
Mostly the measures taken for measuring the performance may be somewhat similar
to each other, but the objective behind each segment is very different from the other.
Quantitative measures is the assessments used to measure the performance, and
compare or track the performance or products. We can further divide the quantitative
measures of supply chain performance into two types. They are −
(i) Non-financial measures
(ii) Financial measures
(i) Non 3 Financials Measures
The metrics of non-financial measures comprise cycle time, customer service level,
inventory levels, resource utilization ability to perform, flexibility, and quality. In this
section, we will discuss the first four dimensions of the metrics −
(a) Cycle Time
Cycle time is often called the lead time. It can be simply defined as the end-to-end
delay in a business process. For supply chains, cycle time can be defined as the
business processes of interest, supply chain process and the order-to-delivery process.
In the cycle time, we should learn about two types of lead times. They are as follows
−
 Supply chain lead time

 Order-to-delivery lead time

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The order-to-delivery lead time can be defined as the time of delay in the middle of
the placement of order by a customer and the delivery of products to the customer. In
case the item is in stock, it would be similar to the distribution lead time and order
management time. If the ordered item needs to be produced, it would be the
summation of supplier lead time, manufacturing lead time, distribution lead time and
order management time.
The supply chain process lead time can be defined as the time taken by the supply
chain to transform the raw materials into final products along with the time required to
reach the products to the customer9s destination address.
Hence it comprises supplier lead time, manufacturing lead time, distribution lead time
and the logistics lead time for transport of raw materials from suppliers to plants and
for shipment of semi-finished/finished products in and out of intermediate storage
points.
Lead time in supply chains is governed by the halts in the interface because of the
interfaces between suppliers and manufacturing plants, between plants and
warehouses, between distributors and retailers and many more.
Lead time compression is a crucial topic to discuss due to the time based competition
and the collaboration of lead time with inventory levels, costs, and customer service
levels.
(b) Customer Service Level
The customer service level in a supply chain is marked as an operation of multiple

unique performance indices. Here we have three measures to gauge performance.
They are as follows −
 Order fill rate − The order fill rate is the portion of customer demands
that can be easily satisfied from the stock available. For this portion of
customer demands, there is no need to consider the supplier lead time
and the manufacturing lead time. The order fill rate could be with
respect to a central warehouse or a field warehouse or stock at any level
in the system.
 Stockout rate − It is the reverse of order fill rate and marks the portion
of orders lost because of a stockout.

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 Backorder level − This is yet another measure, which is the gauge of

total number of orders waiting to be filled.
 Probability of on-time delivery − It is the portion of customer orders
that are completed on-time, i.e., within the agreed-upon due date.
In order to maximize the customer service level, it is important to maximize order fill
rate, minimize stockout rate, and minimize backorder levels.
(c) Inventory Levels
As the inventory-carrying costs increase the total costs significantly, it is essential to

carry sufficient inventory to meet the customer demands. In a supply chain system,
inventories can be further divided into four categories.
 Raw materials
 Work-in-process, i.e., unfinished and semi-finished sections
 Finished goods inventory
 Spare parts
Every inventory is held for a different reason. It9s a must to maintain optimal levels of
each type of inventory. Hence gauging the actual inventory levels will supply a better
scenario of system efficiency.
(d) Resource Utilization
In a supply chain network, huge variety of resources is used. These different types of
resources available for different applications are mentioned below.
 Manufacturing resources − Include the machines, material handlers,

tools, etc.
 Storage resources − Comprise warehouses, automated storage and
retrieval systems.
 Logistics resources − Engage trucks, rail transport, air-cargo carriers,
etc.
 Human resources − Consist of labor, scientific and technical
personnel.
 Financial resources − Include working capital, stocks, etc.

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In the resource utilization paradigm, the main motto is to utilize all the assets or
resources efficiently in order to maximize customer service levels, reduce lead times
and optimize inventory levels.
(ii) Finanacial Measures
The measures taken for gauging different fixed and operational costs related to a
supply chain are considered the financial measures. Finally, the key objective to be
achieved is to maximize the revenue by maintaining low supply chain costs.
There is a hike in prices because of the inventories, transportation, facilities,

operations, technology, materials, and labor. Generally, the financial performance of a
supply chain is assessed by considering the following items −
 Cost of raw materials.

 Revenue from goods sold.
 Activity-based costs like the material handling, manufacturing,
assembling rates etc.
 Inventory holding costs.
 Transportation costs.
 Cost of expired perishable goods.
 Penalties for incorrectly filled or late orders delivered to customers.
 Credits for incorrectly filled or late deliveries from suppliers.
 Cost of goods returned by customers.
 Credits for goods returned to suppliers.
In short, we can say that the financial performance indices can be merged as one by
using key modules such as activity based costing, inventory costing, transportation
costing, and inter-company financial transactions.
Supply Chain efficiency, Core and Reverse

Supply Chain
Supply chain efficiency is related to whether a company9s processes are harnessing
resources in the best way possible, whether those resources are financial, human,
technological or physical. Notice that the definition of efficiency says nothing about
improving customer service. You might have a very efficient supply chain that
minimizes costs for materials and packaging but leaves your customers fuming when

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the product they receive is not up to their specifications. The term efficiency is also a
very abstract one. People have different definitions, and again…what may be deemed
<efficient= in one part of your supply chain may adversely affect another area of your
business.
Five WAYS TO IMPROVE SUPPLY CHAIN EFFICIENCY
1. Communicate Efficiently
Making a commitment to weekly big picture meetings and daily task force meetings
gives your team an opportunity address upcoming logistics situations in advance. We
suggest face-to-face meetings whenever possible to avoid miscommunications and
vague overviews.
2. Train Your Workforce Comprehensively

A training program should teach your professionals more than where the break room
is and what daily tasks they should perform. Take the opportunity to share your
company9s comprehensive plan to increase productivity while reducing costs. Teach
them about the importance of internal and external customer service.
Give your workforce an incentive to act in accordance with your business9 vision,
mission and values. Sharing this and training will drive a successful organization by
creating aligned goals while improving supply chain productivity.
3. Increase Information Sharing and Visibility

Make your logistics processes more transparent to your workforce and your clients.
Eliminate slow, unreliable spreadsheets to provide information. Share the most up-to-
date information through current technology solutions.
Other ways to increase information sharing include taking advantage of big data
analytics available to you, measuring supply chain metrics regularly and involving
employees in finding inefficiencies in the system. By informing your workforce and
your clients, you create opportunities for innovation.
4. Analyze Information to Meet Customer Needs

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Extend the belief that supply chains begin at the warehouse and end in a store because
all products sent through your supply chain eventually reach an end user. Analyze
transportation data to better inform your customer of trends and opportunities.
5. Nurture Innovation in Partnerships

Supply chain managers should evaluate which suppliers possess capabilities they can
tap into to help produce innovations in products, services or go-to-market strategies.
They should play a key role by becoming less of a process executer and more of a
process enabler. Looking for opportunities to improve current processes by leveraging
supplier capabilities empowers both parties while benefiting the ultimate consumer.
Reverse Supply Chain
Reverse Supply Chain stands for all operations related to the reuse of products and
materials. It is <the process of planning, implementing, and controlling the efficient,
cost effective flow of raw materials, in-process inventory, finished goods and related
information from the point of consumption to the point of origin for the purpose of
recapturing value or proper disposal. More precisely, reverse logistics is the process of
moving goods from their typical final destination for the purpose of capturing value,
or proper disposal. Remanufacturing and refurbishing activities also may be included
in the definition of reverse logistics.= The reverse logistics process includes the
management and the sale of surplus as well as returned equipment and machines from
the hardware leasing business. Normally, logistics deal with events that bring the
product towards the customer. In the case of reverse logistics, the resource goes at
least one step back in the supply chain. For instance, goods move from the customer
to the distributor or to the manufacturer.
When a manufacturer9s product normally moves through the supply chain network, it
is to reach the distributor or customer. Any process or management after the sale of
the product involves reverse logistics. If the product is defective, the customer would
return the product. The manufacturing firm would then have to organise shipping of
the defective product, testing the product, dismantling, repairing, recycling or
disposing the product. The product would travel in reverse through the supply chain
network in order to retain any use from the defective product. The logistics for such
matters is reverse logistics.

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Supply
Chain efficiency, Core and Reverse Supply Chain
Supply chain efficiency is related to whether a company9s processes are harnessing
resources in the best way possible, whether those resources are financial, human,
technological or physical. Notice that the definition of efficiency says nothing about
improving customer service. You might have a very efficient supply chain that
minimizes costs for materials and packaging but leaves your customers fuming when
the product they receive is not up to their specifications. The term efficiency is also a
very abstract one. People have different definitions, and again…what may be deemed
<efficient= in one part of your supply chain may adversely affect another area of your
business.
Five WAYS TO IMPROVE SUPPLY CHAIN EFFICIENCY
1. Communicate Efficiently
Making a commitment to weekly big picture meetings and daily task force meetings
gives your team an opportunity address upcoming logistics situations in advance. We
suggest face-to-face meetings whenever possible to avoid miscommunications and
vague overviews.
2. Train Your Workforce Comprehensively

A training program should teach your professionals more than where the break room
is and what daily tasks they should perform. Take the opportunity to share your
company9s comprehensive plan to increase productivity while reducing costs. Teach
them about the importance of internal and external customer service.
Give your workforce an incentive to act in accordance with your business9 vision,
mission and values. Sharing this and training will drive a successful organization by
creating aligned goals while improving supply chain productivity.

lOMoARcPSD|2719630
3. Increase Information Sharing and Visibility

Make your logistics processes more transparent to your workforce and your clients.
Eliminate slow, unreliable spreadsheets to provide information. Share the most up-to-
date information through current technology solutions.
Other ways to increase information sharing include taking advantage of big data
analytics available to you, measuring supply chain metrics regularly and involving
employees in finding inefficiencies in the system. By informing your workforce and
your clients, you create opportunities for innovation.
4. Analyze Information to Meet Customer Needs

Extend the belief that supply chains begin at the warehouse and end in a store because
all products sent through your supply chain eventually reach an end user. Analyze
transportation data to better inform your customer of trends and opportunities.
5. Nurture Innovation in Partnerships

Supply chain managers should evaluate which suppliers possess capabilities they can
tap into to help produce innovations in products, services or go-to-market strategies.
They should play a key role by becoming less of a process executer and more of a
process enabler. Looking for opportunities to improve current processes by leveraging
supplier capabilities empowers both parties while benefiting the ultimate consumer.
Reverse Supply Chain
Reverse Supply Chain stands for all operations related to the reuse of products and
materials. It is <the process of planning, implementing, and controlling the efficient,
cost effective flow of raw materials, in-process inventory, finished goods and related
information from the point of consumption to the point of origin for the purpose of
recapturing value or proper disposal. More precisely, reverse logistics is the process of
moving goods from their typical final destination for the purpose of capturing value,
or proper disposal. Remanufacturing and refurbishing activities also may be included
in the definition of reverse logistics.= The reverse logistics process includes the
management and the sale of surplus as well as returned equipment and machines from
the hardware leasing business. Normally, logistics deal with events that bring the
product towards the customer. In the case of reverse logistics, the resource goes at
least one step back in the supply chain. For instance, goods move from the customer
to the distributor or to the manufacturer.

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When a manufacturer9s product normally moves through the supply chain network, it
is to reach the distributor or customer. Any process or management after the sale of
the product involves reverse logistics. If the product is defective, the customer would
return the product. The manufacturing firm would then have to organise shipping of
the defective product, testing the product, dismantling, repairing, recycling or
disposing the product. The product would travel in reverse through the supply chain
network in order to retain any use from the defective product. The logistics for such
matters is reverse logistics.
International Supply Chain

International Supply Chain is defined as the distribution of goods and services
throughout a trans-national companies9 global network to maximize profit and
minimize waste. Essentially, global supply chain-management is the same as supply-
chain management, but it focuses on companies and organizations that are trans-
national. Global supply-chain management has six main areas of
concentration: logistics management, competitor orientation, customer
orientation, supply-chain coordination, supply management, and operations
management. These six areas of concentration can be divided into four main areas:
marketing, logistics, supply management, and operations management. Successful
management of a global supply chain also requires complying with various
international regulations set by a variety of non-governmental organizations (e.g. The
United Nations).
Global supply chain management can be impacted by several actors who impose
policies that regulate certain aspects of supply chains. Governmental and non-
governmental organizations play a key role in the field as they create and enforce laws
or regulations which companies must abide by. These regulatory policies often
regulate social issues that pertain to the implementation and operation of a global
supply chain (e.g. labour, environmental, etc.). These regulatory policies force
companies to obey the regulations set in place which often impact a company9s profit.
Operating and managing a global supply chain comes with several risks. These risks
can be divided into two main categories: supply-side risk and demand side risk.
Supply-side risk is a category that includes risks accompanied by the availability of
raw materials which effects the ability of the company to satisfy customer demands.
Demand-side risk is a category that includes risks that pertain to the availability of the
finished product. Depending on the supply chain, a manager may choose to minimize
or take on these risks. Successful global supply-chain management occurs after
implementing the appropriate framework of concentration, complying with

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international regulations set by governments and non-governmental organizations, and

recognizing and appropriately handling the risks involved while maximizing profit
and minimizing waste.
Inbound and Outbound SCM

Inbound logistics refers to the transport, storage and delivery of goods coming into a
business. Outbound logistics refers to the same for goods going out of a business.
Inbound and outbound logistics combine within the field of supply-chain
management, as managers seek to maximize the reliability and efficiency of
distribution networks while minimizing transport and storage costs. Understanding the
differences and correlation between inbound and outbound logistics can provide
insight for developing a comprehensive supply-chain management strategy.
Supply-Chain Partners
Companies work with different supply-chain partners on the inbound and outbound
side of logistics. The inbound side concerns the relationship between companies and
their suppliers, while the outbound side deals with how companies get products to
their customers. Regardless of the source or destination, companies may work directly
with third-party distributors on either side as well. A wholesaler, for example, might
work with a distributor to receive products from an international supplier, while using
their own fleet to deliver goods to their domestic customers.
Damage and Liability

Transport agreements between suppliers and customers specify which party is
financially responsible for the cost of any damage occurring in transit at different
points, according to specific terms. For example, Free on Board (FOB) shipping terms
specify that the recipient 4 the one on the inbound side of logistics 4 is responsible
for shipping costs after the shipment is loaded onto a transport carrier, or when it
reaches a specified location. The International Chamber of Commerce defines several
alternative terms, such as <Delivered Duty Paid,= which specifies that international
suppliers deliver goods to buyers after providing for all import costs and
requirements.
Tools and Materials

Inbound logistics cover anything that your company orders from suppliers, which can
include tools, raw materials and office equipment in addition to inventory. Outbound
logistics, on the other hand, deals almost exclusively with your end products. Tools,
materials and equipment only fall into the outbound category if your company sells

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them as a main line of business. Inbound logistics for a furniture manufacturer, for
example, can include wood, cloth materials, glue, nails and safety glasses, while the
manufacturer9s outbound logistics would likely only cover finished furniture products.
Supply Chain Integration

Vertical integration occurs when one company acquires or merges with its own
suppliers or customers. A vertical integration strategy can greatly increase supply-
chain efficiency and produce competitive cost advantages, due to the single source of
strategic control over multiple players in the supply chain. A fully integrated supply
chain can synchronize both inbound and outbound logistics with automatic ordering
and order-fulfillment systems, shared fleet vehicles and drivers, and close cooperation
between managers at different child companies on pricing agreements, volume
contracts, delivery terms and even custom product design.
Bullwhip Effect in SCM

The bullwhip effect on the supply chain occurs when changes in consumer demand
causes the companies in a supply chain to order more goods to meet the new
demand. The bullwhip effect is a distribution channel phenomenon, rather problem, in
which demand forecasts yield supply chain inefficiencies. This mostly happens when
retailers become highly reactive to consumer demand, and in turn, intensify
expectations around it. This results into inefficient asset allocations and high
inventory fluctuations, moving down in the supply chain.
 The bullwhip effect usually flows up the supply chain, starting with the
retailer, wholesaler, distributor, manufacturer and then the raw
materials supplier.
 This effect can be observed through most supply chains across several
industries; it occurs because the demand for goods is based on demand
forecasts from companies, rather than actual consumer demand.
 The bullwhip effect can be explained as an occurrence detected by the
supply chain where orders sent to the manufacturer and supplier create
larger variance then the sales to the end customer.
 These irregular orders in the lower part of the supply chain develop to
be more distinct higher up in the supply chain.

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How Do we minimize the

bullwhip effect?
Every industry has its own unique supply chain, inventory placements, and
complexities. However, after analyzing the bullwhip effect and implementing
improvement steps, inventories in the range of 10 to 30 percent can be reduced and 15
to 35 percent reduction in instances of stock out situations and missed customer orders
can be achieved. Below are some of the methods to minimize the bullwhip effect.
1. Accept and understand the bullwhip effect
The first and the most important step towards improvement is the recognition of the
presence of the bullwhip effect. Many companies fail to acknowledge that high buffer
inventories exist throughout their supply chain. A detailed stock analysis of the
inventory points from stores to raw material suppliers will help uncover idle excess
inventories. Supply chain managers can further analyze the reasons for excess
inventories, take corrective action and set norms.
2. Improve the inventory planning process
Inventory planning is a careful mix of historical trends for seasonal demand, forward-
looking demand, new product launches and discontinuation of older products. Safety
stock settings and min-max stock range of each inventory point need to be reviewed
and periodically adjusted. Inventories lying in the entire network need to be balanced
based on regional demands. Regular reporting and early warning system need to be
implemented for major deviations from the set inventory norms.

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3. Improve the raw material planning process
Purchase managers generally tend to order in advance and keep high buffers of raw
material to avoid disruption in production. Raw material planning needs to be directly
linked to the production plan. Production plan needs to be released sufficiently in
advance to respect the general purchasing lead times. Consolidation to a smaller
vendor base from a larger vendor base, for similar raw material, will improve the
flexibility and reliability of the supplies. This, in turn, will result in lower raw material
inventories.
4. Collaboration and information sharing between managers
There might be some inter-conflicting targets between purchasing managers,

production managers, logistics managers and sales managers. Giving more weight to
common company objectives in performance evaluation will improve collaboration
between different departments. Also providing regular and structured inter-
departmental meetings will improve information sharing and decision-making
process.
5. Optimize the minimum order quantity and offer stable pricing
Certain products have high minimum order quantity for end customers resulting in
overall high gaps between subsequent orders. Lowering the minimum order quantity
to an optimal level will help provide create smoother order patterns. Stable pricing
throughout the year instead of frequent promotional offers and discounts may also
create stable and predictable demand.
Push and pull Systems in SCM

 Push: Control information flow is in the same direction of goods flow
 Semi push or Push-pull: Succeeding node makes order request for
preceding node. Preceding node reacts by replenishing from stock that
is rebuilt every fixed period.
 Pull: Succeeding node makes order request for preceding node.
Preceding node reacts by producing the order, which involves all
internal operations, and replenishes when finished.
 Semi-pull or pull-push: Succeeding node makes order request for
preceding node. Preceding node reacts by replenishing from stock that

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is rebuilt immediately. There are several levels of semi-pull systems as

a node can have stock at several layers in an organization.
Push-based supply chain
Push-based supply chain, products are pushed through the channel from production up
to the retailers. This means that production happens based on demand forecast.
Under the push supply chain, the logistics are driven by long-term projections of
customer demand. For example, at the end of the summer season, clothing brands start
to manufacture more warm clothes. This type of planning becomes valuable to
companies as it helps plan them for events in the future and be prepared when winter
comes. This gives the companies time to meet their needs in time and also gives them
time to figure out other logistics like where to store the inventory.
But instead of responding to actual demand, a push strategy relies on predictions that
are often wrong. High variable expenses, divestments, discounting, missed sales,
stock shortages, high levels of debt, and rescheduled production cycles are other
drawbacks of this approach.
A push-model supply chain is one where projected demand determines what enters the
process. For example, warm jackets get pushed to clothing retailers as summer ends
and the fall and winter seasons start. Under a push system, companies have
predictability in their supply chains since they know what will come when long before
it actually arrives. This also allows them to plan production to meet their needs and
gives them time to prepare a place to store the stock they receive.
Pull-based supply chain
Pull-based supply chain, procurement, production, and distribution are demand-driven

rather than based on predictions. Goods are produced in the amount and time needed.
Under the pull supply chain, the process of manufacturing and supplying is driven by
actual customer demand. In this type of supply chain logistics, inventory is acquired
on a need-basis. The benefits of this type of planning include less wastage in the case
of lower demand. The problem, however, is that the company might not have enough
inventory to meet rising demands due to unforeseen factors. For example, an auto
repair shop that only orders parts that it needs. In this case, the business waits until it
gets an order to procure the parts required for the repair.

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A pull strategy is related to the just-in-time school of inventory management that

minimizes stock on hand, focusing on last-second deliveries. Under these strategies,
products enter the supply chain when customer demand justifies it. One example of an
industry that operates under this strategy is a direct computer seller that waits until it
receives an order to actually build a custom computer for the consumer.
With a pull strategy, companies avoid the cost of carrying inventory that may not sell.
The risk is that they might not have enough inventory to meet demand if they cannot
ramp up production quickly enough.
Pull System: Dependent on Demand and limitations to WIP
The Pull System is a lean manufacturing method that uses the Just-in-Time strategy of
not producing goods until an order is received. Instead of forecasting demand, the pull
system produces 8as needed9.
This is particularly useful for companies that deal with high demand uncertainty, low
product mix, and low importance of economies of scale.
Push System: No dependency on Demand nor limits on WIP
A company using the push system will forecast demand and employ the Material
Requirements Planning (MRP) process to produce goods and services ahead of time.
This is related to the Just-in-Case concept.
This forecast may not always be accurate and will require inventory stockpiling, but it
remains a useful strategy for products that tend to have a lot of work in progress
(WIP) or long lead times.
The push system is particularly useful for products with low demand uncertainty or
with high importance of economies of scale in reducing costs.
Push and Pull Strategies in Practice
In real life, no businesses rely entirely on either push or pull logistics, but instead
employ a mixture of the two to make the best use of them. Modern-day supply chain
operations are very complex and consist of some steps from getting the raw materials
to the delivery of the final product to the end consumer. The process roughly consists
of the following steps:

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 Determining the availability of raw materials. Even before the product

can begin to be made, it is important to plan where and how the raw
materials can be acquired cheaply.
 Processing the raw materials in a factory to yield the final products.
This step varies from company to company like food-based products,
cloth-based products, etc.
 Then the finished product is taken to a storage facility or a distribution
facility.
 The packaged product is taken to a retail store or shipped directly to the
customer as needed.
 Most supply chains in the world resembles this basic outline. Now,
push and pull strategies can be employed by planners by taking into
account the expected demand and other factors. The most successful
shipping companies like Walmart and Amazon conduct a lot of
research into the various factors that determine demand and incorporate
that knowledge into their supply chain.
Use of pull, push, and hybrid push-pull strategy
 A push-based supply chain strategy is usually suggested for products

with low demand uncertainty, as the forecast will provide a good
indication of what to produce and keep in inventory, and also for
products with high importance of economies of scale in reducing costs.
 A pull-based supply chain strategy, usually suggested for products with
high demand uncertainty and with low importance of economies of
scales, which means, aggregation does not reduce cost, and hence, the
firm would be willing to manage the supply chain based on realized
demand.
 A hybrid push3pull strategy, usually suggested for products which
uncertainty in demand is high, while economies of scale are important
in reducing production and delivery costs. An example of this strategy
is the furniture industry, where production strategy has to follow a pull-
based strategy, since it is impossible to make production decisions
based on long-term forecasts. However, the distribution strategy needs
to take advantage of economies of scale in order to reduce
transportation cost, using a push-based strategy.

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Latest Trends in Production and Operation Lean

Manufacturing, Agile Manufacturing
There are a number of recent trends in productions and operations management, as the
discipline is evolving and the world of business is changing.
1. Sustainability
Consumers are growing ever more aware of the impact that companies have on the
environment and they are able to use their purchasing power to incentivize companies
to reduce the negative impact on the environment. This leads to greater adoption of
operations management practices like Lean Production and Just-In-Time, whereby
products are made to order rather than large amounts of raw materials and inventory
being stocked and wasted. It is also in the interest of companies to implement these
practices as it enables faster incrementally changes to their product to better suit
customer needs 3 which can be a source of competitive advantage.
Total Quality Management (TQM) also reduces the amount of waste in the production
process and is a continual commitment to improving the quality of products. This also
means products are more durable and have a longer life-time, which means there is
less consumer-end waste.
2. Ethics
Similarly, globalization has made consumers very aware of the impact that companies
have on society and the world. With some companies more economically powerful
than a lot of countries (World Bank, 2016 The world9s top 100 economies: 31
countries; 69 corporations), they have the power to positively impact the world, and
consumers are beginning to expect that from them. This is putting pressure on
companies to audit their supply chains to maintain good and ethical standards and
practices. Nike and Primark were both negatively affected by poor supply chain
management when their suppliers9 workers were seen to be treated poorly.
3. Servitization
Manufacturing organizations are now looking to servitize their offerings. In other

words, companies are giving away their goods as a means to sell a service. Rolls-
Royce is a good example of this: they give their airplane engines away for free by
charging a fee for the maintenance. In fact, Rolls-Royce actually charge airlines
<Power by the Hour=, which means that the airlines only pay whilst the airplane is in

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the sky. Rolls-Royce has sufficient confidence in the quality of their engines that it
absorbs the maintenance costs.
In brief, the recent trends of operations management are:
(1) Lean and agile production methods with Total Quality Management to react to
changes in customer needs and increasing quality expectations, whilst also satisfying
the customers9 environmental concerns.
(2) A greater focus on supply chain management to maintain high ethical standards all
around the world, due to globalization.
(3) The servitization of goods, whereby, manufacturers are using products to sell
services.
Lean Manufacturing
Sometimes called <lean production,= lean manufacturing is a series of methods
designed to minimize the waste of material and labor while maintaining or increasing
levels of production. This results in a net improvement in total productivity.
Lean manufacturing9s roots lie in Japanese manufacturing with the Toyota Production
System. Lean principles pioneered by Toyota include <just-in-time= manufacturing,
where inventory is kept at low <as-needed= levels; automation supervised by human
workers to maintain quality control (known as jidoka); minimization of downtime and
transportation, and others.
Ultimately, lean manufacuring is about eliminating that which does not add value, and
delivering the best possible product to the customer as quickly and with as few
barriers as possible.
Benefits of Lean Manufacturing
Lean manufacturing improves efficiency, reduces waste, and increases productivity.

The benefits, therefore, are manifold:
 Increased product quality: Improved efficiency frees up employees

and resources for innovation and quality control that would have
previously been wasted.

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 Improved lead times: As manufacturing processes are streamlined,

businesses can better respond to fluctuations in demand and other
market variables, resulting in fewer delays and better lead times.
 Sustainability: Less waste and better adaptability makes for a business
that9s better equipped to thrive well into the future.
 Employee satisfaction: Workers know when their daily routine is
bloated or packed with unnecessary work, and it negatively affects
morale. Lean manufacturing boosts not only productivity, but employee
satisfaction.
 Increased profits: And, of course, more productivity with less waste
and better quality ultimately makes for a more profitable company.
Agile Manufacturing
Agile manufacturing is a term applied to an organization that has created the

processes, tools, and training to enable it to respond quickly to customer needs and
market changes while still controlling costs and quality.
An enabling factor in becoming an agile manufacturer has been the development of

manufacturing support technology that allows the marketers, the designers and the
production personnel to share a common database of parts and products, to share data
on production capacities and problems particularly where small initial problems may
have larger downstream effects. It is a general proposition of manufacturing that the
cost of correcting quality issues increases as the problem moves downstream, so that it
is cheaper to correct quality problems at the earliest possible point in the process.
Agile manufacturing is seen as the next step after lean manufacturing in the evolution
of production methodology. The key difference between the two is like between a thin
and an athletic person, agile being the latter. One can be neither, one or both. In
manufacturing theory, being both is often referred to as leagile. According to Martin
Christopher, when companies have to decide what to be, they have to look at the
customer order cycle (COC) (the time the customers are willing to wait) and the
leadtime for getting supplies. If the supplier has a short lead time, lean production is
possible. If the COC is short, agile production is beneficial.

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Advantages
 Companies can respond quickly to change. This is done by

retaining some mass production properties while remaining
flexible. This is called mass customization.
 New designs are based on the customers’ needs which mean
that the customer will have a wider variety to choose from.
 Since the company is constantly changing according to the
customers’ needs, their customers may be more satisfied.
Disadvantages
 Highly skilled personnel are required to operate an agile

manufacturing company.
 Shortages will occur if there is a sudden grows in demand both
with respect to volume or variety.
 Maintenance cost is expensive.
 On the other hand, if the demand suddenly drops during a high
production rate, the products could not be sold.
 Installation costs are high because of interchangeability.
 Management of these systems is hard and intensive planning
and management is required.

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 Due to short life-cycles, machinery and workers need to keep up-

to-date because of new technologies.
 The complex machinery could add to the cost if there is a
breakdown, which will increase the production down time.
SCM Technologies
Elements of a new business and technical architecture for SCM software have been
emerging over the course of the past five years. This emerging architecture, shown in
Figure 4 and summarized in Figure 5, is based on business and technical concepts that
are enumerated and described below. The architecture and its various elements offer
great promise in addressing the issues previously discussed.
1. Convergence: The emerging business and technical architecture for

SCM solutions is based on convergence of business processes and time.
What does this mean? To draw an analogy, when Steve Jobs introduced
the first iPhone in 2007, he started by saying he was introducing three
devices: 1) a music player; 2) an Internet-connection device; and 3) a
phone. (He could have added a fourth device4the camera.) And, he
said, the three are incorporated into a single device based on a single
architecture. This is known as convergence, and it immediately
disrupted the individual markets for music players, Internet-connection
devices, phones, and cameras. Likewise, the business architecture of
tomorrow will see increasing process convergence and collapsing of
time boundaries between planning and execution.
These concepts are not far-fetched; leading companies such as Procter & Gamble are
already collapsing their demand, supply, sales and operations planning (S&OP), and
channel management processes into a single process executed by a single team and
supported by a single technology. This was first reported by the website Logistics
Viewpoints in 2015. The days of having to buy separate software solutions for
demand, supply, S&OP, and channel management are numbered.
2. Digital twin: Supply chain management software operates by first

creating a computer data model of the real world. Logic and algorithms
are then run against the model to arrive at answers and decisions. These
answers are then operationalized into the real world. The quality of
answers or decisions generated by the software depends heavily on the

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quality of the data model, or how well the model represents reality at
the point in time at which the answers are generated. This is true across
the decision-making landscape of SCM4manufacturing, distribution,
transportation, and warehousing.
In today9s digital world, it has become common to refer to these data models as
<digital twins.= In other words, the data model needs to be an identical twin of the real
world at all points in time. This can only happen when the model is very robust4that
is, it is flexible enough to represent all real-world entities and scenarios4and it can be
brought up-to-date instantaneously. This second point is a core tenet of the digital
enterprise and a key promise of the Internet of Things. Previously, there was a lag, or
latency, between what was going on in the real world and what was represented by the
model, such that suboptimal answers were often generated by the software. Because
supply chain resources4things and people4can now transmit their status
instantaneously, computer models will increasingly be synchronized with the real
world, thereby enabling the digital twin.
In-memory computing (IMC) is one of the core enabling technologies behind the
digital twin. IMC allows data models to be stored in memory, versus on a physical
hard drive. This provides the speed necessary for enabling the digital twin. While
IMC has been used for supply chain software for a couple of decades now, recent
advances allow it to be scaled to handle much larger problems, including those that
require the processing of a large number of digital signals from the Internet of Things.
3. Extensible data model: Future SCM software will have general-

purpose data models with extensibility across functional domains,
meaning the data model can represent manufacturing, distribution, and
warehousing, for example. At the dawn of packaged SCM software in
the 1990s, pioneers set this as a key objective. For a number of
technical and business reasons, this objective was not achieved.
Instead, SCM software evolved toward built-for-purpose, proprietary
data models. For each new problem space in SCM, a new data model
and new set of software was developed. This contributed to the <bingo
board= problem described in Figure 2.
Supply chain software requires robust data models that can precisely represent myriad
relationships and use cases across diverse environments. Precision has become more
important as supply chains increasingly have to deliver products when, where, and
how consumers desire them. The combination of the digital twin and an extensible

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data model provides the means to deliver much more precision when synchronizing
operations across, for example, retail, distribution, and manufacturing.
4. Artificial intelligence: Future SCM software will be characterized by

its ability to <self-learn.= This means it will adapt and make decisions
by itself, without human intervention. This will be made possible by
artificial intelligence (AI) and, more specifically, machine learning,
which is software that can learn from data versus being completely
driven by rules configured by humans. AI allows software to take on
more of the decision-making load associated with managing supply
chains. This is most prominent in fields such as robots and self-driving
trucks, where actions are self-directed based on the software9s ability to
learn. In SCM software, AI will start by providing suggestions to
humans, and then eventually be used to automate decisions.
The state of the art of learning in SCM software today is manual trial-and-error. When
new situations arise that the software currently does not cover, the software is either
reconfigured or the code itself is modified to accommodate the new situation. Either
way is expensive and time consuming. Those responses are also ineffective given that
supply chains and supply chain problems are highly dynamic and changing all the
time. Machine learning will be critical to providing increasingly sophisticated
response algorithms as part of the control engineering loop shown in Figure 6. For
example, as part of today9s S&OP process, software provides decision options that
can be applied when demand and supply do not match. These options4change a
price, run overtime, or increase supply, to name a few examples4are rigidly defined.
By contrast, machine learning promises to learn and come up with new response
options, including sophisticated multivariate options.
5. Streaming architecture: Streaming architecture has emerged in the

past five years to help solve problems requiring real-time processing of
large amounts of data. This architecture will be increasingly important
to SCM software, as solutions need to enable the digital twin in order to
support supply chains9 precise synchronization across time and
function. There are two major areas in streaming architecture:
streaming and stream processing. Streaming is the ability to reliably
send large numbers of messages (for example, digital signals from IoT
devices), while stream processing is the ability to accept the data, apply
logic to it, and derive insights from it. The digital twin discussed earlier
is the processing part of the streaming architecture.

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6. Control engineering logic: Control engineering is an engineering

discipline that processes data about an environment and then applies
algorithms to drive the behavior of the environment to a desired state.
For example, manufacturing continuously processes data about the state
of machines, inbound materials, and progress against the order backlog,
and then runs algorithms that direct the release of materials to achieve
production goals. This is known as a control loop. The key concepts are
shown in Figure 6, with a <control= loop executing continuously, and a
<learning= loop adjusting the control algorithms based on results from
each pass of the control loop.
This concept is embedded in just about all functions related to supply chain
management. S&OP, for example, has an objective function: a financial goal;
resources and people must be mobilized to achieve that objective function. When
there is a deviation (in control engineering this is known as the <error=) between the
objective function and what is actually happening, corrective action must be taken.
This corrective action could be something like reducing prices, increasing inventory,
or working overtime. In the future, these corrective actions will be increasingly aided
by artificial intelligence. Whether it9s in supply, manufacturing, distribution,
warehousing, or order management, much of the work involved in SCM is focused on
reducing the <error= between what the objective is and what is actually happening in
the real world.
7. Workflow and analytics: Workflow defines the steps a worker carries

out to accomplish a particular activity, task, or unit of work. In regard
to software, this often means the sequence of screens, clicks, and other
interactions a user executes. In most cases today, these steps are rigid
and predefined; changing them requires configuration or even software
code changes, which could take weeks or months.
Having a common, flexible workflow engine across SCM functional domains is
critical to achieving convergence in supply chain software. This provides the ability to
support many different use cases and interactions with the software, not just within
functional domains but also across domains.
Integrated into each workflow are both logic and analytics. These analytics help
predict things like demand, the impact of a promotion, or the precise arrival of an
inbound ship, to name just a few possibilities. Analytics are now headed in the
direction of prescribing answers to problems. For example, predicting demand is

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important, but it9s equally important to know what to do when the prediction does not
match the plan. This is where prescriptive analytics can help4providing insights into
what to do when reality does not match the operational plan. Artificial intelligence can
also enable prescriptive analytics by continuously learning from past decisions.
Analytics used to be an offline, after-the-fact activity to determine what had

happened. In other words, it had its own workflow that was separate from operational
workflows. While this is helpful for looking in the rear view mirror, it is limited in its
ability to help with what is currently happening. Analytics that are built in-line to
operational workflows provide a dynamic, up-to-the minute view, versus the offline
model, which might provide a week-old or even a month-old view.
8. Edge computing: Cloud computing, a centralized form of computing

often accessed over the Internet, is now being augmented with localized
computing, also known as <edge computing.= (The term refers to being
<out on the edge= of the cloud, close to where <smart= machinery is
located.) Edge computing has rapidly evolved to address issues
associated with processing data from the billions of microprocessor-
equipped devices that are being connected to the Internet of Things.
The growth of edge computing is necessary for a number of reasons:
1. Network latency is a real concern. Latency refers to the turnaround

time for sending a message and receiving a response. The turnaround
time for sending and receiving information to and from the cloud may
take 100-200 milliseconds. With localized, or edge, computing, the
turnaround time may be 2-5 milliseconds. In real-time production or
warehousing environments, this is a critical requirement. Furthermore,
the variability in response times in cloud computing is much higher
than with localized computing.
2. Machines, inventory, and connected <things= generate millions of
digital signals per minute. Sending all of these to the cloud is
impractical. Thus, edge computers play a critical role in determining
what needs to be sent to the cloud, and what can be filtered or thrown
out. For example, a machine might report on its capacity every second.
If the reported information has not changed, or changed only within a
small band, there may be no need to send it along to the cloud.

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3. Some machines, inventory, and things operate in environments with no

Internet connection or with Internet connections that are unstable. For
example, ships at sea may not have Internet connections until they are
close to port, while warehouses in emerging markets may have
unreliable network connections. In situations like these, an edge
computer can be used to process the signals locally; these signals are
then forwarded to the cloud when a connection is available.
SCM technical architectures will increasingly be a mix of edge and cloud computing.
For example, in Figure 4, the area labeled <Edge Computing= will be local to where
the devices are located, and the rest of the diagram will be run in the cloud.
9. Domain-specific <apps=: While a certain set of capabilities can be

abstracted into a domain-independent infrastructure there is still the
need for unique use cases in different domains such as manufacturing,
transportation, and warehousing. Often, though, companies encounter
new use cases that cannot be handled by existing software. Rather than
engage in costly and time-consuming configuration or reprogramming,
they increasingly are taking a cue from the consumer world, where an
entire <app economy= has been built on common smartphone
infrastructures. This type of thinking has started to find its way into
enterprise software, so that leading end user companies as well as
packaged-software companies are currently migrating their
infrastructures to this type of structure.
For example, many companies want to <own= the data associated with their customers
because the decisions they make based on that data are increasingly the battleground
of competitive differentiation. These companies are creating environments where
internal staff and external software providers can develop <value-add= apps that are
useful in mining and making decisions against customer data. An example is an
inventory-replenishment app that looks at customer data for a given category and
augments inventory-deployment decisions with an algorithm that provides new
insights based on a unique combination of weather, local events, holidays, and chatter
in social media.
10. Business strategy orchestration: One of the persistent

challenges in supply chain management is how to achieve continual
synchronization between function-based operational areas and the
overall business goals of the enterprise. This includes synchronization

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both within and across functional areas. For example, at the enterprise
level, the goal could be high growth and low margin, low growth and
high margin, or all points in between. Furthermore, these goals may
differ by business unit, product line, and even by product and customer.
These goals must be translated into operational policies, which then
must be configured into SCM software.
As time goes on, SCM software will increasingly have an orchestration layer that
creates and maintains alignment of the policies that govern each functional area. This
will happen through two key constructs: the strategy dashboard, which maintains
business goals and translates them to operational policies; and the control tower,
which provides cross-functional visibility for the entire supply chain as well as control
mechanisms to steer supply chain decisions. Over the past five years, control towers
have captured the imagination of SCM professionals and C-level executives, with
many companies attempting to create control room-type environments, even in
boardrooms.
Information and Communication Technology in

Logistics Management
Information Technology, or IT, is the study, design, creation, utilization, support,
and management of computer-based information systems, especially software
applications and computer hardware.
IT is not limited solely to computers though. With technologies quickly developing in

the fields of cell phones, PDAs and other handheld devices, the field of IT is quickly
moving from compartmentalized computer-focused areas to other forms of mobile
technology.
Supply chain management (SCM) is concerned with the flow of products and
information between supply chain members9 organizations. Recent development in
technologies enables the organization to avail information easily in their premises.
These technologies are helpful to coordinates the activities to manage the supply
chain. The cost of information is decreased due to the increasing rate of technologies.
In an integrated supply chain where materials and information flow in a bi-directional,
Manager needs to understand that information technology is more than just
computers.

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At the earliest stage of Supply Chain (the late80s) the information flow between
functional areas within an organization and between supply chain member
organizations were paper based. The paper based transaction and communication was
slow. During this period, information was often over looked as a critical competitive
resource because its value to supply chain members was not clearly understood. An IT
infrastructure capability provides a competitive positioning of business initiatives like
cycle time reduction, implementation, implementing redesigned cross-functional
processes. Several well know organizations that are involved in supply chain
relationship through information technology have ripe huge gain through integration.
Three factors have strongly impacted this change in the importance of information.
First, satisfying and pleasing customer has become something of a corporate
obsession. Serving the customer in the best, most efficient and effective manner has
become critical. Second information is a crucial factor in the managers9 abilities to
reduce inventory and human resource requirement to a competitive level and finally,
information flows plays a crucial role in strategic planning.
In the development and maintenance of Supply chain9s information systems both

software and hardware must be addressed. Hardware includes computer9s input/output
devices and storage media. Software includes the entire system and application
programme used for processing transactions management control, decision-making
and strategic planning.
Recent development in Supply chain management software
1. Base Rate, Carrier select & match pay (version 2.0) developed by
Distribution Sciences Inc. which is useful for computing freight costs,
compares transportation mode rates, analyze cost and service
effectiveness of carrier.
2. A new software programme developed by Ross systems Inc. called
Supply Chain planning which is used for demand forecasting,
replenishment & manufacturing tools for accurate planning and
scheduling of activities.
3. P&G distributing company and Saber decision Technologies resulted in
a software system called Transportation Network optimization for
streamlining the bidding and award process.
4. Logitility planning solution was recently introduced to provide a
programme capable managing the entire supply chain.

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How IT can be applied in Supply Chain Management?
1. Electronic Commerce
It is the term used to describe the wide range of tools and techniques utilized to
conduct business in a paperless environment. Electronic commerce therefore includes
electronic data interchange, e-mail, electronic fund transfers, electronic publishing,
image processing, electronic bulletin boards, shared databases and magnetic/optical
data capture. Companies are able to automate the process of moving documents
electronically between suppliers and customers.
2. Electronic Data Interchange

Electronic Data Interchange (EDI) refers to computer-to-computer exchange of
business documents in a standard format. EDI describe both the capability and
practice of communicating information between two organizations electronically
instead of traditional form of mail, courier, & fax. The benefits of EDI are:
1. Quick process to information.

2. Better customer service.
3. Reduced paper work.
4. Increased productivity.
5. Improved tracing and expediting.
6. Cost efficiency.
7. Competitive advantage.
8. Improved billing.
Though the use of EDI supply chain partners can overcome the distortions and
exaggeration in supply and demand information by improving technologies to
facilitate real time sharing of actual demand and supply information.
3. Bar coding and Scanner

Bar code scanners are most visible in the check out counter of super market. This
code specifies name of product and its manufacturer. Other applications are tracking
the moving items such as components in PC assembly operations, automobiles in
assembly plants.
4. Data warehouse

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Data warehouse is a consolidated database maintained separately from an

organization9s production system database. Many organizations have multiple
databases. A data warehouse is organized around informational subjects rather than
specific business processes. Data held in data warehouses are time dependent,
historical data may also be aggregated.
5. Enterprise Resource planning (ERP) tools

Many companies now view ERP system (eg. Baan, SAP, People soft, etc.) as the core
of their IT infrastructure. ERP system have become enterprise wide transaction
processing tools which capture the data and reduce the manual activities and task
associated with processing financial, inventory and customer order information. ERP
system achieve a high level of integration by utilizing a single data model, developing
a common understanding of what the shared data represents and establishing a set of
rules for accessing data.
Benefits of IT application in Supply Chain Management
1. Streamlining
Communicate and collaborate more effectively with suppliers worldwide.
2. Connecting
Make the connection between what your customers want and what you produce.
3. Analyzing
Analyze your supply chain and manufacturing options and choose the plan that makes
best use of your assets.
4. Synchronizing
Synchronize the flow of your batch production by managing the capacity of vessels,
tanks, and lines-and the flow between them.
5. Communicating
Improve your communication and collaboration with suppliers worldwide.

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6. Designing
Create the optimal supply chain network and adapt the network to keep pace with
changes in your business.
7. Transforming
Transform processes inside the warehouse and across the supply chain to meet
demands for new efficiencies.
8. Understanding
Get a better understanding of your warehouse labor activities and implement the
changes you need to optimize worker performance.
9. Maximizing
Maximize warehouse profits by using advanced costing, billing, and invoicing
capabilities.
10. Optimizing
Optimize your day-to-day fleet performance to reduce costs and improve customer
satisfaction.
Conclusion
World is shrinking day by day with advancement of technology. Customers9
expectations are also increasing and companies are prone to more and more uncertain
environment. The IT field is evolving and developing every day. New technologies in
computers and mobile devices are shaping the way the world communicates with one
another, gets work done, and spends free time. Companies will find that their
conventional supply chain integration will have to be expanded beyond their
peripheries. The strategic and technological innovations in supply chain will impact
on how organizations buy and sell in the future. However clear vision, strong planning
and technical insight into the Internet9s capabilities would be necessary to ensure that
companies maximize the Internet9s potential for better supply chain management and
ultimately improved competitiveness. Internet technology, World Wide Web,
electronic commerce etc. will change the way a company is required to do business.
These companies must realize that they must harness the power of technology to
collaborate with their business partners. That means using a new breed of SCM

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application, the Internet and other networking links to observe past performance and
historical trends to determine how much product should be made as well as the best
and cost effective method for warehousing it or shipping it to retailers.
Demand Forecasting in Supply Chain, Simple

Moving Average, Weighted Moving Average,
Exponential Smoothening Method
Demand Forecasting facilitates critical business activities like budgeting, financial
planning, sales and marketing plans, raw material planning, production planning, risk
assessment and formulating mitigation plans. Outlined below are the impacts of
Demand Forecasting on Supply Chain Management:
(i) Improved supplier relations and purchasing terms: Demand Forecasting drives
the raw material planning process which facilities the Purchasing Managers to release
timely purchase plan to suppliers. Visibility and transparency of raw material demand
improve supplier relations and empowers Purchasing Managers to negotiate favorable
terms for their companies.
(ii) Better capacity utilization and allocation of resources: Based on the current
inventory levels, raw material availability and expected customer orders, production
can be scheduled effectively. This leads to improved capacity utilization and judicious
allocation of manufacturing resources.
(iii) Optimization of inventory levels: A proper Demand Forecast provides vital

information for driving the desired raw material, WIP and finished goods inventory
levels. This reduces the Bullwhip effect across the Supply Chain, leading to
optimization of inventory levels and reduction in stock-out or over-stocking
situations.
(iv) Improved distribution planning and logistics: Apart from small businesses, this is
particularly evident in businesses dealing with multiple SKUs and wide distribution
networks. Distribution and Logistics Managers are enabled to balance inventory
across the network and negotiate favorable terms with Transporters.
(v) Increase in customer service levels: With optimized inventory levels and improved
Distribution Planning and Logistics, customer service metrics like on-time delivery

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(OTD), on-time in-full (OTIF), case-fill/fill-rate, etc. are improved due to right sizing
and right positioning of inventory.
(vi) Better product lifecycle management: Medium to long range Demand Forecasts
provide better visibility of new product launches and old product discontinuations.
This drives synchronized raw material, manufacturing and inventory planning to
support new product launches and most importantly, reducing the risk of obsolescence
of discontinued products.
(vii) Facilitates performance management: Management can set KPIs and targets
for various functions like Sales, Finance, Purchase, Manufacturing, Logistics, etc.
based on the medium to long range plans derived from the Demand Forecasting
process. Organizational efficiency, effectiveness, and improvement initiatives can be
designed for key areas of the company.
Moving Averages Method of Sales Forecasting
In this method the sales forecasting is obtained by taking average of past sales over a
desired number of past periods (may be years, months or weeks). Extending the
moving average to include more periods may increase the smoothening effect but
decreases the sensitivity of forecast.
1. Simple Moving Average

A simple moving average is formed by computing the average price of a security over
a specific number of periods. Most moving averages are based on closing prices.
The simple moving average (SMA) calculates an average of the last n prices, where n
represents the number of periods for which you want the average:
Simple moving average = (P1 + P2 + P3 + P4 + … + Pn) / n
For example, a four-period SMA with prices of 1.2640, 1.2641, 1.2642, and 1.2641
gives a moving average of 1.2641 using the calculation [(1.2640 + 1.2641 + 1.2642 +
1.2641) / 4 = 1.2641].
2. Weighted Moving Averages

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The moving averages as calculated in the preceding part are known as un-weighted
because the same weight is assigned to each of the numbers whose average is being
ascertained. Some enterprises base their forecast on a weighted moving average.
Let us assume that the number of customers who visit during two weeks interval
provides a sound basis for third week forecast and let us further assume that first week
is less important than second and consequently we assign weights of 0.4 to first week
and 0.6 to second week. The weighted average for 9th week would be
0.4 X 549 + 0.6(474) = 220 + 284 = 504
Similarly the weighted moving averages for other weeks are enlisted in the
following table:
A forecast based on weighted moving averages for number of customers.
Advantages of the Moving Average Method
(i) This technique is simpler than the method of least squares.
(ii) This method is not affected by personal prejudice of the people using it.
(iii) It the period of moving average is equivalent to the period of the cycle. The cyclic
variations are eliminated.
(iv) If the trend in the data if any is linear the moving average gives a good picture of
long term movement in data.

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(v) The moving average technique has the merit of flexibility i.e., if a few years are
added the entire calculations are not changed due to adoption of new conditions.
Limitations of the Moving Average Method
(i) It does not result in mathematical relations which may be used for sales
forecasting.
(ii) There is a tendency to cut corners which results in the loss of data at the ends
(iii) A great deal of care is needed for the selection of the period of moving average
since the wrong periods selected would not give the correct picture of the trend.
(iv) In case of the sharp turns in the original graph, the moving average would reduce
the curvature.
(v) It is very sensitive even to small movement in the data.
3. Exponential Smoothing and Moving Average Method

This method of sales forecasting is a modification of the moving average method or in
better words it IS an improvement over the moving average method of forecasting.
This method tries to eliminate the limitations of moving averages and removes the
necessity of keeping extensive past data it also tries to remove the irregularities in
demand pattern.
This method represents a weightage average of the past observations. In this case most
recent observations is assigned the highest weightage which decreases in geometric
progression as we move towards the older observations.
Since the most recent observations which are likely to reflect more up- to-date
information or average of the series are given more weightage so it becomes one of
the most accurate statistical method of sales forecasting. This method keeps a running
average of demand and adjusts it for each period in proportion to the difference
between the latest actual demand figure and the latest value of the average.
When there is no trend in the demand for a product or service, sales are forecasted for
the next period, by means of the exponential smoothing method by using the
expression

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Forecast for the next period = a (latest actual demand) + (1 3 α) old estimate of latest
actual demand where a represents the value of a weighting factor which is referred to
as a smoothing factor.
This method follows the equation
Fn= Fn -1 + α (D n-1 3 F n-1)
where Fn= forecast for the next period
Fn-1 = forecast for previous period
D n-1 = demand in previous period.
If a is equal to 1. then the latest forecast would be equal to previous period actual
demand In practice, the value of a is generally chosen between 0.1 and 0.3. The
application of technique is demonstrated by using data of moving averages method of
sales forecasting on page 78. In the application of the method, we would use the value
of a as 0.10.
If the actual demand for 3rd week is 487, the forecast for the 4th week will be
0.10(487) + (1.00 3 0.10)550 = 544
Similarly, if the actual demand for 4th week is 528 customers, the forecast for the 5th
week will be
0.10 (528) + (1.00 3 0.10) (544) = 542
If this procedure had been applied during the entire 8 week period the results are
shown in the following table. The unadjusted forecast error is also indicated under
column D = B 3 C. If the value of a is not given; it can be determined by an
approximate relation of a.
α = 2/ Number of periods in moving average + 1

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The weight factors a is concerned, it can assume a minimum value 0 and a maximum
value of 1. The greater the value of a, the greater is the weight placed on recent data.
When the value of a is 1, the forecast will be equal to the demand experienced during
the last period.
Although the value of a varies from product to product but most organization have
found that a value between 0 06 to 0.20 usually proves to be satisfactory.
When attempting to find out what value of a should be used for a product or service
the organization/enterprise can select various values, examine the past forecasts with
the use of these values and adopt for future use the one which would have minimized
forecast errors in the past.
In this way we go close of the description of exponential smoothing as it is applied

when a trend in sales/service is available. In case trend exist, a trend adjustment can
be made with this technique but its application becomes bit difficult.
Aggregate Planning
An organization can finalize its business plans on the recommendation of demand
forecast. Once business plans are ready, an organization can do backward working
from the final sales unit to raw materials required. Thus annual and quarterly plans are
broken down into labor, raw material, working capital, etc. requirements over a
medium-range period (6 months to 18 months). This process of working out
production requirements for a medium range is called aggregate planning.
Factors Affecting Aggregate Planning

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Aggregate planning is an operational activity critical to the organization as it looks to

balance long-term strategic planning with short term production success. Following
factors are critical before an aggregate planning process can actually start;
 A complete information is required about available production facility

and raw materials.
 A solid demand forecast covering the medium-range period
 Financial planning surrounding the production cost which includes raw
material, labor, inventory planning, etc.
 Organization policy around labor management, quality management,
etc.
For aggregate planning to be a success, following inputs are required;
 An aggregate demand forecast for the relevant period

 Evaluation of all the available means to manage capacity planning like
sub-contracting, outsourcing, etc.
 Existing operational status of workforce (number, skill set, etc.),
inventory level and production efficiency.

for customers
 Able to meet scheduling goals there by creating a happy and satisfied
work force
Aggregate Planning Strategies
There are three types of aggregate planning strategies available for organization to
choose from. They are as follows.
1. Level Strategy

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As the name suggests, level strategy looks to maintain a steady production rate and
workforce level. In this strategy, organization requires a robust forecast demand as to
increase or decrease production in anticipation of lower or higher customer demand.
Advantage of level strategy is steady workforce. Disadvantage of level strategy is
high inventory and increase back logs.
2. Chase Strategy
As the name suggests, chase strategy looks to dynamically match demand with
production. Advantage of chase strategy is lower inventory levels and back logs.
Disadvantage is lower productivity, quality and depressed work force.
3. Hybrid Strategy
As the name suggests, hybrid strategy looks to balance between level strategy and
chase strategy.

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UNIT 5
Total Quality Management (TQM)

Total Quality Management (TQM) is the continual process of detecting and reducing
or eliminating errors in manufacturing, streamlining supply chain management,
improving the customer experience, and ensuring that employees are up to speed with
their training. Total quality management aims to hold all parties involved in the
production process accountable for the overall quality of the final product or service.
A total approach to quality is the current thinking of today; which is popularly called
total quality management (TQM).
TQM is a philosophy that believes in a company-wide responsibility toward quality

via fostering a quality culture throughout the organization; involving continuous
improvement in the quality of work of all employees with a view to best meeting the
requirements of customers.

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Advantages of TQM
(i) Sharpens Competitive Edge of the Enterprise
TQM helps an organization to reduce costs through elimination of waste, rework etc.
It increases profitability and competitiveness of the enterprise; and helps to sharpen
the organization9s competitive edge, in the globalized economy of today.
(ii) Excellent Customer Satisfaction
By focusing on customer requirements, TQM makes for excellent customer

satisfaction. This leads to more and more sales, and excellent relations with
customers.
(iii) Improvement in Organisational Performance

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Through promoting quality culture in the organization, TQM lead to improvements in

managerial and operative personnel9s performance.
(iv) Good Public Image of the Enterprise
TQM helps to build an image of the enterprise in the minds of people in society. This
is due to stress on total quality system and customers9 requirements, under the
philosophy of TQM.
(v) Better Personnel Relations
TQM aims at promoting mutual trust and openness among employees, at all levels in
the organization. This leads to better personnel relations in the enterprise.
Limitations of TQM
The philosophy of TQM suffers from the following major limitations
(i) Waiting for a Long Time
TQM requires significant change in organization; consisting of:
1. Change in methods, processes etc. of organization.

2. Change in attitude, behaviour etc. of people
Launching of TQM and acceptance of the philosophy of TQM requires a long waiting
for the organization. It is not possible to accept and implement TQM overnight.
(ii) Problem of Labour Management Relations
Success of TQM depends on the relationships between labour and management;

because participation of people at all levels is a pre-requisite for TQM programme
implementation. In many organizations, here and abroad, labour-management
relations are quite tense. As such, launching, acceptance and implementation of TQM
programme is nothing more than a dream for such organizations.
Basic Principles of TQM

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In TQM, the processes and initiatives that produce products or services are thoroughly
managed. By this way of managing, process variations are minimized, so the end
product or the service will have a predictable quality level.
Following are the key principles used in TQM
(i) Top management 3 The upper management is the driving force behind TQM. The
upper management bears the responsibility of creating an environment to rollout TQM
concepts and practices.
(ii) Training needs 3 When a TQM rollout is due, all the employees of the company
need to go through a proper cycle of training. Once the TQM implementation starts,
the employees should go through regular trainings and certification process.
iii) Customer orientation 3 The quality improvements should ultimately target

improving the customer satisfaction. For this, the company can conduct surveys and
feedback forums for gathering customer satisfaction and feedback information.
(iv) Involvement of employees 3 Pro-activeness of employees is the main contribution

from the staff. The TQM environment should make sure that the employees who are
proactive are rewarded appropriately.
(v) Techniques and tools 3 Use of techniques and tools suitable for the company is one
of the main factors of TQM.
(vi) Corporate culture 3 The corporate culture should be such that it facilitates the
employees with the tools and techniques where the employees can work towards
achieving higher quality.
(vii) Continues improvements 3 TQM implementation is not one time exercise. As long
as the company practices TQM, the TQM process should be improved continuously.
Deming’s 14 Principles, Continuous

Improvement (Kaizen)
Kaizen, also known as continuous improvement, is a long-term approach to work that
systematically seeks to achieve small, incremental changes in processes in order to
improve efficiency and quality. Kaizen can be applied to any kind of work, but it is

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perhaps best known for being used in lean manufacturing and lean programming. If a
work environment practices kaizen, continuous improvement is the responsibility of
every worker, not just a selected few.
Kaizen can be roughly translated from Japanese to mean <good change.= The
philosophy behind kaizen is often credited to Dr. W. Edwards Deming. Dr. Deming
was invited by Japanese industrial leaders and engineers to help rebuild Japan after
World War II. He was honored for his contributions by Emperor Hirohito and the
Japanese Union of Scientists and Engineers.
In his book <Out of the Crisis,= Dr. Deming shared his philosophy of continuous
improvement:-
Deming has given his views on management and its relationship with quality in his 14
points for management.
These points are summarized as under
1. Create consistency of purpose towards improvement of product and

service with an aim to become competitive and thus to stay in business
and to provide jobs.
2. Adopt the new philosophy for economic stability. Management needs
to take leadership for change and we no longer live with delays,
mistakes, defective materials and defective workmanship.
3. Eliminate the need for mass inspection by building quality into the
product in the first place.
4. End the practice of awarding business on price tag alone. Rather total
cost should be minimized. Select a single supplier for any item on a
long term relationship of trust and loyalty.
5. Improve constantly the system of production and service, to improve
quality and productivity and thus leading to the decrease in cost.
6. Institute better methods of training and education for all the employees
including management to make effective use of all the employees.
7. Adopt and institute better leadership to help the people to perform a job
in a better way.
8. Drive out fear so that everyone works for the company effectively
without any tension.

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9. Break down barriers between different departments. People in different

departments must work as a team to tackle the problems of production
that may be encountered with the product or service.
10. Eliminate slogans, exhortations and numerical targets for the
workforce. They never help the workers to do the job in a better way.
Let the workers develop their own slogans and work accordingly.
11. Eliminate work standards and numerical quotas. Eliminate
management by objectives and also eliminate management by numbers.
These are usually a guarantee of inefficiency and high costs. A person,
in order to hold a job, will try to meet a quota at any cost including
doing damage to his company.
12. Remove barriers in taking pride in workmanship. Usually,
incompetent supervisors, defective materials and faulty equipment9s are
stumbling blocks in the way of good performance. These barriers must
be eliminated.
13. Introduce a vigorous programme of education and self
development. Both the management and the work force will have to be
educated in the new knowledge and understanding, including teamwork
and statistical techniques.
14. Take proper action to accomplish the transformation. Top
management has to constitute a team with a plan of action to carry out
the quality mission.
Quality Philosophies: Juran’s

Juran was a great Founding Father of quality, and was responsible for the famous
Juran Trilogy concept. Juran9s approach to quality control had Japanese roots. While
Japan was price-competitive with the rest of the world, the quality of product did not
measure up. This quality philosophy consists of three steps: Quality Planning, Quality
Control and Quality Improvement.

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1. Quality Planning
The quality planning phase is the activity of developing products and processes to
meet customers9 needs. Involves building an awareness of the need to improve,
setting goals and planning for ways goals can be reached. This begins with
management9s commitment to planned change. It also requires a highly trained and
qualified staff. It deals with setting goals and establishing the means required to reach
the goals. Below are the steps in the quality planning process:
 Establish quality goals

 Identify the customers: those who will be impacted by the efforts to
meet the goals
 Determine the customer9s needs
 Develop processes that can produce the product to satisfy customers9
needs and meet quality goals under operating conditions.

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 Establish process controls, and transfer the resulting plans to the

operating forces
(ii) Quality Control
This process deals with the execution of plans and it includes monitoring operations
so as to detect differences between actual performance and goals. means to develop
ways to test products and services for quality. Any deviation from the standard will
require changes and improvements. It is outlined with three steps:
 Evaluate actual quality performance

 Compare actual performance to quality goals
 Act on the difference
(iii) Quality Improvement
It is a continuous pursuit toward perfection. Management analyses processes and

systems and reports back with praise and recognition when things are done right this
is the process is for obtaining breakthrough in quality performance, and it consists of
several steps:
 Establish the infrastructure needed to secure annual quality

improvement
 Identify the specific needs for improvement- the improvement projects
 Establish project teams with clear responsibility for bringing the project
to a successful conclusion
 Provide the resources, motivation, and training needed by the teams to-
diagnose the cause, stimulate establishment of remedies, and establish
controls to hold the gains.
 PDCA Cycle
 Plan, Do, Check, Act (PDCA) 3 is a well-known and respected approach to
helping teams plan and implements a solution to a problem, often testing it on a
micro scale and reviewing the results before agreeing how to proceed.

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
 PDCA encourages an engaged, problem-solving workforce 3 the method is not
limited to managers, but can be used across the organizational structure, using
combined knowledge and experience. This helps business to innovate through
creative problem solving.
 The easiest way to think of it is a prototyping model. But it can be used for
larger projects, where testing is not feasible 3 for example, if a business has
already bought new, expensive equipment to solve a problem, then the
implementation has to be on a large scale.
 Usually the Problem Solving Group (PS) has already identified what they want
to solve and the changes they would like to make. This may include how
outcomes will be measured, or a specification. PDCA would then drop into any
planning and implementation phases.
 The 4 steps of the PDCA Cycle
 Plan
 This first stage clarifies the objectives of the chosen solution, and will identify
which processes need to change (the problem will have already been defined,
and a solution proposed using other problem solving techniques).

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The PS group will plan how the solution is tested, and forecast what is expected to
happen during the PDCA the cycle. This will result in a set of outputs, and usually set
a baseline for improvement.
Focused work at this stage includes agreeing what data is to be collected, what
resources are needed, and the actions that will take place and when. The PS group will
then decide where the trial run will be held. At this stage 8before9 data is collected for
later comparison in the 8Check9 step.
Do
This involves physically implementing the solution, and collecting data for analysis in
the next step, observation and project management.

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This step should also include oversight to ensure that the solution is implemented as
per the specification.
Check
This step is about analyzing 8before9, 8during9, and 8after9 data to see what can be
learned. (Another name for this step is 8Study9). 8During9 data is easy to overlook, but
any plan is implemented in phases, and if issues are to be found and identified
quickly, these actions need to be measured.

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Not only will the process be observed qualitatively as well as quantitatively, feedback
can be gathered from the end users of the solution.
The data from the observations, and feedback from staff is analyzed, and compared to
the baseline. Issues and successes are identified.
Act
If the 8Check9 demonstrates that the 8Plan9 phase was implemented effectively and
improvements can be seen on the baseline, then a new baseline is created and the
cycle returns to 8Plan9, using the new baseline.

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If 8Check9 results infer that there has been no improvement from the 8Do9 phase, then
the existing baseline continues in place. In either scenario, if 8Check9 reveals
something different from expected (whether it has out-performed or underperformed),
then it identifies that more learning is needed.
This may even result in the returning to the overarching problem solving technique,
and the process of problem identification and definition, using the chosen problem-
solving model. Adjustments or corrective actions should not be undertaken at this
stage, and should never be done without a formal 8Plan9 phase. Additionally, the
baseline should not be changed from verified one, discovered in 8Act9.
Advantages
 Staff is more willing to try a new solution, if they know it is not a fait
accompli 3 especially if modifications are based on user9s feedback and
views, as well as measurement.
 The method creates acceptance and ownership in the end user as
confidence in the solution grows quickly, as mistakes are rectified as
part of the process.

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 The model allows potential solutions to be implemented on a small

scale, and ascertain how effective they are.
 Importantly this model provides an opportunity for learning why
something isn9t working before it is fully implemented.
 It involves a wide range of people across the organization, and provides
a range of perspectives.
Quality Management, Dimension and Cost of

Quality, Continuous Improvement (Kaizen)
Quality management ensures that an organization, product or service is consistent. It
has four main components: quality planning, quality assurance, quality control and
quality improvement. Quality management is focused not only on product and service
quality, but also on the means to achieve it. Quality management, therefore, uses
quality assurance and control of processes as well as products to achieve more
consistent quality.
QUALITY MANAGEMENT SYSTEM

What are the 7 quality management principles?
The ISO 9000:2015 and ISO 9001:2015 standards are based on seven quality
management principles that senior management can apply for organizational
improvement:
 Customer focus.

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 Engagement of people.
 Process approach.
 Evidence-based decision-making.
 Relationship management.
A quality management system (QMS) is a collection of business processes focused
on consistently meeting customer requirements and enhancing their satisfaction. … It
is expressed as the organizational goals and aspirations, policies, processes,
documented information and resources needed to implement and maintain it.
An Example of Quality Management
The most famous example of TQM is Toyota9s implementation of the Kanban system.
A kanban is a physical signal that creates a chain reaction, resulting in a specific
action. Toyota used this idea to implement its just-in-time (JIT) inventory process. To
make its assembly line more efficient, the company decided to keep just enough
inventory on hand to fill customer orders as they were generated.
Therefore, all parts of Toyota9s assembly line are assigned a physical card that has an
associated inventory number. Right before a part is installed in a car, the card is
removed and moved up the supply chain, effectively requesting another of the same
part. This allows the company to keep its inventory lean and not overstock
unnecessary assets.

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EIGHT DIMENSIONS OF QUALITY
Eight dimensions of product quality management can be used at a strategic level to

analyze quality characteristics. The concept was defined by David A. Garvin,
formerly C. Roland Christensen Professor of Business Administration at Harvard
Business School (died 30 April 2017). Some of the dimensions are mutually
reinforcing, whereas others are not4improvement in one may be at the expense of
others. Understanding the trade-offs desired by customers among these dimensions
can help build a competitive advantage.
Garvin9s eight dimensions can be summarized as follows:-
 Performance: Performance refers to a product9s primary operating

characteristics. This dimension of quality involves measurable
attributes; brands can usually be ranked objectively on individual
aspects of performance.
 Features: Features are additional characteristics that enhance the
appeal of the product or service to the user.
 Reliability: Reliability is the likelihood that a product will not fail
within a specific time period. This is a key element for users who need
the product to work without fail.
 Conformance: Conformance is the precision with which the product or
service meets the specified standards.
 Durability: Durability measures the length of a product9s life. When
the product can be repaired, estimating durability is more complicated.
The item will be used until it is no longer economical to operate it. This
happens when the repair rate and the associated costs increase
significantly.
 Serviceability: Serviceability is the speed with which the product can
be put into service when it breaks down, as well as the competence and
the behaviour of the serviceperson.
 Aesthetics: Aesthetics is the subjective dimension indicating the kind
of response a user has to a product. It represents the individual9s
personal preference.
 Perceived Quality: Perceived Quality is the quality attributed to a
good or service based on indirect measures.
COST OF QUALITY

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Cost of quality is a methodology that allows an organization to determine the extent to

which its resources are used for activities that prevent poor quality, that appraise the
quality of the organization9s products or services, and that result from internal and
external failures. Having such information allows an organization to determine the
potential savings to be gained by implementing process improvements.
There are four costs your organization needs to examine: prevention, appraisal,
internal failure, and external failure. These costs cover your entire operation,
including your quality management system (QMS).
Planned costs4design, implementation, and maintenance4occurring prior to the

operation of your organization9s QMS are the preventive costs.
Measuring and monitoring activities should be listed as appraisal costs. Duffy further
explains these costs <are associated with the suppliers9 and customers9 evaluation of
purchased materials, processes, products, and services to ensure that they conform to
specifications.=
CONTINUOUS IMPROVEMENT (KAIZEN)

philosophy behind kaizen is often credited to Dr. W. Edwards Deming. Dr. Demming
improvement:-
1) Create constancy of purpose toward improvement of product and service, with the
aim to become competitive and to stay in business and to provide jobs.
(2) Adopt the new philosophy.

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(3) Eliminate the need for inspection on a mass basis by building quality into the
(4) End the practice of awarding business on the basis of price tag. Instead, minimize
total cost.
(5) Improve constantly and forever the system of production and service to improve
quality and productivity and thus constantly decrease costs.
(6)Institute training on the job.
(7) Institute leadership. The aim of supervision should be to help people and machines
and gadgets to do a better job.
(8) Drive out fear so that everyone may work effectively for the company.
(9) Break down barriers between departments. People in research, design, sales and
production must work as a team to foresee problems of production and use of the
product or service.
(10) Eliminate asking for zero defects and new levels of productivity. Such
exhortations only create adversarial relationships as the bulk of the causes of low
quality and low productivity belong to the system and thus lie beyond the power of
the work force.
(11) Remove barriers that rob the hourly worker of his right to pride of workmanship.
(12) Remove barriers that rob people in management and in engineering of their right
to pride of workmanship.
(13) Institute a vigorous program of education and self-improvement.
(14) Put everybody in the company to work to accomplish the transformation. The
transformation is everybody9s job.
In Western civilization, kaizen is often broken down into four steps: assess, plan,
implement and evaluate. In Western workplaces, a <kaizen blitz= is synonymous with
a concentrated effort to make quick changes that will help achieve a short-term goal.

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Deming’s 14 Principles, Continuous

Improvement (Kaizen)
philosophy behind kaizen is often credited to Dr. W. Edwards Deming. Dr. Deming
improvement:-
Deming has given his views on management and its relationship with quality in his 14
points for management.
These points are summarized as under
1. Create consistency of purpose towards improvement of product and

service with an aim to become competitive and thus to stay in business
and to provide jobs.
2. Adopt the new philosophy for economic stability. Management needs
to take leadership for change and we no longer live with delays,
mistakes, defective materials and defective workmanship.
3. Eliminate the need for mass inspection by building quality into the
4. End the practice of awarding business on price tag alone. Rather total
cost should be minimized. Select a single supplier for any item on a
long term relationship of trust and loyalty.
5. Improve constantly the system of production and service, to improve
quality and productivity and thus leading to the decrease in cost.

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6. Institute better methods of training and education for all the employees
including management to make effective use of all the employees.
7. Adopt and institute better leadership to help the people to perform a job
in a better way.
8. Drive out fear so that everyone works for the company effectively
without any tension.
9. Break down barriers between different departments. People in different
departments must work as a team to tackle the problems of production
that may be encountered with the product or service.
10. Eliminate slogans, exhortations and numerical targets for the
workforce. They never help the workers to do the job in a better way.
Let the workers develop their own slogans and work accordingly.
11. Eliminate work standards and numerical quotas. Eliminate
management by objectives and also eliminate management by numbers.
These are usually a guarantee of inefficiency and high costs. A person,
in order to hold a job, will try to meet a quota at any cost including
doing damage to his company.
12. Remove barriers in taking pride in workmanship. Usually,
incompetent supervisors, defective materials and faulty equipment9s are
stumbling blocks in the way of good performance. These barriers must
be eliminated.
13. Introduce a vigorous programme of education and self
development. Both the management and the work force will have to be
educated in the new knowledge and understanding, including teamwork
and statistical techniques.
14. Take proper action to accomplish the transformation. Top
management has to constitute a team with a plan of action to carry out
the quality mission.
Quality Circles
A quality circle is a volunteer group composed of workers, usually under the
leadership of their supervisor, who are trained to identify, analyze and solve work-
related problems and present their solutions to management in order to improve the
performance of the organization, and motivate and enrich the work of employees.
When matured, true quality circles become self-managing, having gained the
confidence of management.

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Participative management technique within the framework of a company wide quality

system in which small teams of (usually 6 to 12) employees voluntarily form to define
and solve a quality or performance related problem. In Japan (where this practice
originated) quality circles are an integral part of enterprise management and are called
quality control circles.
<A Quality Circle is volunteer group composed of members who meet to talk about
workplace and service improvements and make presentations to their management
with their ideas.= (Prasad, L.M, 1998).
Quality circles enable the enrichment of the lives of the workers or students and
creates harmony and high performance. Typical topics are improving occupational
safety and health, improving product design, and improvement in the workplace and
manufacturing processes.
Objectives of Quality Circle
The perception of Quality Circles today is 8Appropriateness for use1 and the tactic
implemented is to avert imperfections in services rather than verification and
elimination. Hence the attitudes of employees influence the quality. It encourages
employee participation as well as promotes teamwork. Thus it motivates people to
contribute towards organizational effectiveness through group processes. The
following could be grouped as broad intentions of a Quality Circle:
1. To contribute towards the improvement and development of the

organization or a department.
2. To overcome the barriers that may exist within the prevailing
organizational structure so as to foster an open exchange of ideas.
3. To develop a positive attitude and feel a sense of involvement in the
decision making processes of the services offered.
4. To respect humanity and to build a happy work place worthwhile to
work.
5. To display human capabilities totally and in a long run to draw out the
infinite possibilities.
6. To improve the quality of products and services.
7. To improve competence, which is one of the goals of all organizations?

8. To reduce cost and redundant efforts in the long run.

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9. With improved efficiency, the lead time on convene of information and

its subassemblies is reduced, resulting in an improvement in meeting
customers due dates.
10. Customer satisfaction is the fundamental goal of any library. It
will ultimately be achieved by Quality Circle and will also help to be
competitive for a long time.
BENEFITS OF QUALITY CIRCLES
There are no monetary rewards in the QC9s. However, there are many other gains,
which largely benefit the individual and consecutively, benefit the business. These
are:
(i) Self-development: QC9s assist self-development of members by improving self-

confidence, attitudinal change, and a sense of accomplishment.
(ii) Social development: QC is a consultative and participative programme where

every member cooperates with others. This interaction assists in developing harmony.
(iii) Opportunity to attain knowledge: QC members have a chance for attaining new
knowledge by sharing opinions, thoughts, and experience.
(iv) Potential Leader: Every member gets a chance to build up his leadership
potential, in view of the fact that any member can become a leader.
(v) Enhanced communication skills: The mutual problem solving and presentation
before the management assists the members to develop their communication skills.
(vi) Job-satisfaction: QC9s promote creativity by tapping the undeveloped

intellectual skills of the individual. Individuals in addition execute activities diverse
from regular work, which enhances their self-confidence and gives them huge job
satisfaction.
(vii) Healthy work environment: QC9s creates a tension-free atmosphere, which

each individual likes, understands, and co-operates with others.
(viii) Organizational benefits: The individual benefits create a synergistic effect,

leading to cost effectiveness, reduction in waste, better quality, and higher
productivity.

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7QC Tools and its Advancements

The seven basic tools of quality is a designation given to a fixed set of graphical
techniques identified as being most helpful in troubleshooting issues related to quality.
They are called basic because they are suitable for people with little formal training in
statistics and because they can be used to solve the vast majority of quality-related
issues.
Once the basic problem-solving or quality improvement process is understood, the

addition of quality tools can make the process proceed more quickly and
systematically. Seven simple tools can be used by any professional to ease the quality
improvement process: flowcharts, check sheets, Pareto diagrams, cause and effect
diagrams, histograms, scatter diagrams, and control charts.
1. FLOWCHARTS
Flowcharts describe a process in as much detail as possible by graphically displaying
the steps in proper sequence. A good flowchart should show all process steps under
analysis by the quality improvement team, identify critical process points for control,
suggest areas for further improvement, and help explain and solve a problem.
The flowchart is a simple production process in which parts are received, inspected,
and sent to subassembly operations and painting. After completing this loop, the parts

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can be shipped as subassemblies after passing a final test or they can complete a
second cycle consisting of final assembly, inspection and testing, painting, final
testing, and shipping.
2. CHECK SHEETS
Check sheets help organize data by category. They show how many times each
particular value occurs, and their information is increasingly helpful as more data are
collected. Check sheets minimize clerical work since the operator merely adds a mark
to the tally on the prepared sheet rather than writing out a figure. By showing the
frequency of a particular defect (e.g., in a molded part) and how often it occurs in a
specific location, check sheets help operators spot problems.
The check sheet example shows a list of molded part defects on a production line
covering a week9s time. One can easily see where to set priorities based on results
shown on this check sheet. Assuming the production flow is the same on each day, the
part with the largest number of defects carries the highest priority for correction.
3. PARETO DIAGRAMS
The Pareto diagram is named after Vilfredo Pareto, a 19th-century Italian economist
who postulated that a large share of wealth is owned by a small percentage of the
population. This basic principle translates well into quality problems4most quality
problems result from a small number of causes. Quality experts often refer to the
principle as the 80-20 rule; that is, 80% of problems are caused by 20% of the
potential sources.

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A Pareto diagram puts data in a hierarchical order, which allows the most significant
problems to be corrected first. The Pareto analysis technique is used primarily to
identify and evaluate nonconformities, although it can summarize all types of data. It
is perhaps the diagram most often used in management presentations.
4. CAUSE AND EFFECT DIAGRAMS
The cause and effect diagram is sometimes called an Ishikawa diagram after its
inventor. It is also known as a fish bone diagram because of its shape. A cause and
effect diagram describes a relationship between variables. The undesirable outcome is
shown as effect, and related causes are shown as leading to, or potentially leading to,
the said effect. This popular tool has one severe limitation, however, in that users can
overlook important, complex interactions between causes. Thus, if a problem is
caused by a combination of factors, it is difficult to use this tool to depict and solve it.
A fish bone diagram displays all contributing factors and their relationships to the
outcome to identify areas where data should be collected and analyzed. The major
areas of potential causes are shown as the main bones, e.g., materials, methods,
people, measurement, machines, and design. Later, the subareas are depicted.
Thorough analysis of each cause can eliminate causes one by one, and the most
probable root cause can be selected for corrective action. Quantitative information can

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also be used to prioritize means for improvement, whether it be to machine, design, or

operator.
5. HISTOGRAMS
The histogram plots data in a frequency distribution table. What distinguishes the
histogram from a check sheet is that its data are grouped into rows so that the identity
of individual values is lost. Commonly used to present quality improvement data,
histograms work best with small amounts of data that vary considerably. When used
in process capability studies, histograms can display specification limits to show what
portion of the data does not meet the specifications.
After the raw data are collected, they are grouped in value and frequency and plotted
in a graphical form. A histogram9s shape shows the nature of the distribution of the

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data, as well as central tendency (average) and variability. Specification limits can be
used to display the capability of the process.
6. SCATTER DIAGRAMS
A scatter diagram shows how two variables are related and is thus used to test for
cause and effect relationships. It cannot prove that one variable causes the change in
the other, only that a relationship exists and how strong it is.
In a scatter diagram, the horizontal (x) axis represents the measurement values of one
variable, and the vertical (y) axis represents the measurements of the second variable.
7. CONTROL CHARTS
A control chart displays statistically determined upper and lower limits drawn on
either side of a process average. This chart shows if the collected data are within

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upper and lower limits previously determined through statistical calculations of raw
data from earlier trials.
The construction of a control chart is based on statistical principles and statistical

distributions, particularly the normal distribution. When used in conjunction with a
manufacturing process, such charts can indicate trends and signal when a process is
out of control. The center line of a control chart represents an estimate of the process
mean; the upper and lower critical limits are also indicated. The process results are
monitored over time and should remain within the control limits; if they do not, an
investigation is conducted for the causes and corrective action taken. A control chart
helps determine variability so it can be reduced as much as is economically justifiable.
In preparing a control chart, the mean upper control limit (UCL) and lower control
limit (LCL) of an approved process and its data are calculated. A blank control chart
with mean UCL and LCL with no data points is created; data points are added as they
are statistically calculated from the raw data.
CONCLUSION: Many people in the medical device manufacturing industry are

undoubtedly familiar with many of these tools and know their application, advantages,
and limitations. However, manufacturers must ensure that these tools are in place and
being used to their full advantage as part of their quality system procedures.

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Flowcharts and check sheets are most valuable in identifying problems, whereas cause
and effect diagrams, histograms, scatter diagrams, and control charts are used for
problem analysis. Pareto diagrams are effective for both areas. By properly using
these tools, the problem-solving process can be more efficient and more effective.
ISO 9000-2000 Clauses

ISO
ISO is an independent, non-governmental international organization with a

membership of 162 national standards bodies.
Through its members, it brings together experts to share knowledge and develop
voluntary, consensus-based, market relevant International Standards that support
innovation and provide solutions to global challenges.
ISO 9000
The ISO 9000 family of quality management systems standards is designed to help
organizations ensure that they meet the needs of customers and other stakeholders
while meeting statutory and regulatory requirements related to a product or service.
ISO 9000 deals with the fundamentals of quality management systems, including the
seven quality management principles upon which the family of standards is based.
ISO 9001 deals with the requirements that organizations wishing to meet the standard
must fulfill.
Five Objectives of ISO 9000
1. Gives businesses with useful, globally recognized models for operating

a quality management system.
2. Achieve, maintain and aim to regularly enhance product quality (the
standards define <product= as the output of any process. Therefore, this
word will also apply to <services,= whether internal or external to the
business).
3. Primary objective of getting these standards is to boost the goodwill of
organization. Customer can compare the quality of two companies , one
is with ISO standard and other is without ISO standard . Goodwill
could be in form of rise in sale or more promotion of product of
company.

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4. To create a compliance standard which is followed 24 hours-a-day, 7

days-a week, 52 weeks-a-year.
5. Offer confidence to internal management as well as other workers that
requirements for quality are being fulfilled and maintained, and that
quality improvement is taking place.
ISO 2000
Quality system standards adopted in 1987 by international organization for

standardization; revised in 1994 and 2000.
Technical specifications and criteria to be used as rules, guidelines, or definitions of

characteristics to ensure that materials, products, processes, and services are fit for
their purpose.
ISO 9000:2000 Standards
 Fundamental Requirements
 Guidelines for Performance Improvement
ISO 9000:2000
1. Customer Focus
2. Leadership
3. Involvement of people
4. System approach to management
5. Continuous improvement
6. Factual approach to decision making
7. Mutually beneficial supplier relationship
ISO 9000-2000 clauses

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Six Sigma

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Six Sigma is a business management strategy which aims at improving the quality of
processes by minimizing and eventually removing the errors and variations. The
concept of Six Sigma was introduced by Motorola in 1986, but was popularized by
Jack Welch who incorporated the strategy in his business processes at General
Electric. The concept of Six Sigma came into existence when one of Motorola9s
senior executives complained of Motorola9s bad quality. Bill Smith eventually
formulated the methodology in 1986.
Quality plays an important role in the success and failure of an organization.

Neglecting an important aspect like quality, will not let you survive in the long
run. Six Sigma ensures superior quality of products by removing the defects in
the processes and systems. Six sigma is a process which helps in improving the
overall processes and systems by identifying and eventually removing the hurdles
which might stop the organization to reach the levels of perfection. According to
sigma, any sort of challenge which comes across in an organization9s processes is
considered to be a defect and needs to be eliminated.
Organizations practicing Six Sigma create special levels for employees within the
organization. Such levels are called as: <Green belts=, <Black belts= and so on.
Individuals certified with any of these belts are often experts in six sigma
process. According to Six Sigma any process which does not lead to customer
satisfaction is referred to as a defect and has to be eliminated from the system to
ensure superior quality of products and services. Every organization strives hard to
maintain excellent quality of its brand and the process of six sigma ensures the same
by removing various defects and errors which come in the way of customer
satisfaction.
The process of Six Sigma originated in manufacturing processes but now it finds its
use in other businesses as well. Proper budgets and resources need to be allocated for
the implementation of Six Sigma in organizations.
Following are the two Six Sigma methods
 DMAIC
 DMADV
DMAIC focuses on improving existing business practices. DMADV, on the other
hand focuses on creating new strategies and policies.
DMAIC has Five Phases

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D 3 Define the Problem. In the first phase, various problems which need to be
addressed to are clearly defined. Feedbacks are taken from customers as to what they
feel about a particular product or service. Feedbacks are carefully monitored to
understand problem areas and their root causes.
M 3 Measure and find out the key points of the current process. Once the problem
is identified, employees collect relevant data which would give an insight into current
processes.
A 3 Analyze the data. The information collected in the second stage is thoroughly
verified. The root cause of the defects are carefully studied and investigated as to find
out how they are affecting the entire process.
I 3 Improve the current processes based on the research and analysis done in the
previous stage. Efforts are made to create new projects which would ensure superior
quality.
C 3 Control the processes so that they do not lead to defects.
DMADV Method
D 3 Design strategies and processes which ensure hundred percent customer

satisfactions.
M 3 Measure and identify parameters that are important for quality.
A 3 Analyze and develop high level alternatives to ensure superior quality.
D 3 Design details and processes.
V 3 Verify various processes and finally implement the same.
Total Productive Maintenance (TPM)

Total Productive Maintenance (TPM) is a system of maintaining and
improving the integrity of production and quality systems through the
machines, equipment, processes, and employees that add business value to
an organization.

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TPM focuses on keeping all equipment in top working condition to avoid

breakdowns and delays in manufacturing processes.
Objective of TPM
 Improving the effectiveness of machines

 Improving the efficiency, reliability and effectiveness of
maintenance of machine
 Scheduling maintenance for avoiding early maintenance
 Involving operation team also in smaller scale maintenance,
such as machine checklist inspection before starting and after
closing the machines
 Arrangement of training for amending the skills of employees
The 8 pillars of TPM
1. Autonomous Maintenance: Operators monitor the condition of

their own equipment and work areas
2. Process & Machine Improvement: Team leaders collect
information from operators and work areas, then prioritize
preventative maintenance and improvements
3. Preventative Maintenance: Operators and team leaders share
preventative maintenance tasks and schedules
4. Early Management of New Equipment: Team leaders
anticipate and plan for parts of equipment lifecycles and report to
mangers, based on maintenance reports
5. Process Quality Management: Shared responsibility for
operation and maintenance encourages quality improvement
ideas from all areas of work
6. Administrative Work: Managers prioritize data from the
previous pillars and share outcomes with team leaders and work
areas
7. Education & Training: Continuous improvement includes
operator and work area education and training which improves
morale, retention and efficiency
8. Safety & Sustained Success: Facility-wide safety is prioritized,
which positively impacts sustained success of the TPM program

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As maintenance is traditionally considered an inevitable and <not-for-profit=

function, TPM is considered the most difficult lean manufacturing tool to
implement. Shifting cultural beliefs within a facility, from the CEO to
machinists and janitors, may take years but the pay off for both the finished
product and employee morale is worth the investment.
Benefits of TPM
Acknowledges the Importance of Maintenance to the Organization
For too long, maintenance has been viewed as a cost center that does not
provide value to the organization. Thankfully, times are changing. With
approaches like TPM and reliability centered maintenance (RCM),
maintenance is now viewed as vitally important to the business. TPM’s
maintenance-oriented approach helps to reinforce the perception that
maintenance is something that adds value to the organization.
Less Unplanned Downtime
As machine operators become more familiar with their equipment, they can
more easily recognize when things seem out of the ordinary. Because they
are on the front lines and able to spot problems sooner, operators can alert
the maintenance team before equipment breaks down. Maintenance can then
be planned for a time when it will not interrupt production.
Safer Work Environment
TPM also brings focus to workplace safety. Introducing or improving safety-

related maintenance tasks means that employees are able to work in low-risk
environments. When accidents are reduced and potentially dangerous
situations are avoided, employees’ attitudes become more positive, which can
improve job satisfaction and productivity.
Lower Maintenance Costs
Unplanned downtime is costly. TPM’s focus on proactive and preventive

maintenance reduces maintenance costs in many ways. For example,
equipment that is regularly cleaned, lubricated, and inspected should
experience fewer unexpected breakdowns, requiring less maintenance
resources.

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Reduced Backlog
With everyone contributing to maintenance, less pressure is placed on the

maintenance team. Over time, the backlog of preventive maintenance jobs
and maintenance requests will shrink, freeing up the maintenance team to
work on capital improvements and other projects.
Predictable maintenance activities allow for better control over MRO inventory
stocking levels, ensuring less overstock or expedited inventory purchases.
Operators can identify emerging problems with their equipment before they
become major failures, resulting in potentially low-cost, less significant repairs.
TPM can also help lower production costs. When equipment is not
available, there is a domino effect that can result in stopped production,
defective product, idle employees, and employee overtime, not to mention the
increased stress of <catching up= when the problem is fixed. When
maintenance is viewed as a team effort, production losses due to poor
maintenance can be minimized.
5S
Ever notice how much better you work when the space you work in is organized? The
5S approach is a Japanese process that9s about promoting an efficient, effective
workplace that helps companies eliminate waste.
Benefits of 5S
 Reduced costs
 Higher quality
 Increased productivity
 Greater employee satisfaction
 A safer work environment
The 5S Approach to Waste Elimination for Lean Businesses. The steps are:
1. Sort
2. Set
3. Shine
4. Standardize

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5. Sustain
Often, these steps are represented on a process chart where the first four steps are
located around the perimeter of the chart and the fifth step (sustain) is placed inside
the process. This is because the first four steps lead into each other, while =sustain= is
something that must be done at every step.
There are five 5S phases. They can be translated from the Japanese as <sort=, <set in
order=, <shine=, <standardize=, and <sustain=. Other translations are possible.
1. Sort (Seiri)
Sort is sorting through all items in a location and removing all unnecessary items from
the location.
Goals:
 Reduce time loss looking for an item by reducing the number of items.
 Reduce the chance of distraction by unnecessary items.
 Simplify inspection.
 Increase the amount of available, useful space.
 Increase safety by eliminating obstacles.
Implementation:
 Check all items in a location and evaluate whether or not their presence
at the location is useful or necessary.
 Remove unnecessary items as soon as possible. Place those that cannot
be removed immediately in a 8red tag area9 so that they are easy to
remove later on.
 Keep the working floor clear of materials except for those that are in
use to production.
2. Set in order (Seiton)

Set is putting all necessary items in the optimal place for fulfilling their function in the
workplace.
Goal:

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 Make the workflow smooth and easy.

Implementation:
 Arrange work stations in such a way that all tooling / equipment is in

close proximity, in an easy to reach spot and in a logical order adapted
to the work performed. Place components according to their uses, with
the frequently used components being nearest to the workplace.
 Arrange all necessary items so that they can be easily selected for use.
Make it easy to find and pick up necessary items.
 Assign fixed locations for items. Use clear labels, marks or hints so that
items are easy to return to the correct location and so that it is easy to
spot missing items.
3. Shine/Seiso
Shine is sweeping or cleaning and inspecting the workplace, tools and machinery on a
regular basis.
Goals:
 Prevent deterioration.
 Keep the workplace safe and easy to work in.
 Keep the workplace clean and pleasing to work in.
 When in place, anyone not familiar to the environment must be able to
detect any problems within 50 feet in 5 sec.
Implementation:
 Clean the workplace and equipment on a daily basis, or at another

appropriate (high frequency) cleaning interval.
 Inspect the workplace and equipment while cleaning.
4. Standardize (Seiketsu)
Standardize is to standardize the processes used to sort, order and clean the
workplace.
Goal:

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 Establish procedures and schedules to ensure the repetition of the first

three 8S9 practices.
Implementation:
 Develop a work structure that will support the new practices and make
it part of the daily routine.
 Ensure everyone knows their responsibilities of performing the sorting,
organizing and cleaning.
 Use photos and visual controls to help keep everything as it should be.
 Review the status of 5S implementation regularly using audit
checklists.
5. Sustain/Self-discipline (Shitsuke)
Sustain or sustain the developed processes by self-discipline of the workers. Also
translates as <do without being told=.
Goal:
 Ensure that the 5S approach is followed.

Implementation:
 Organize training sessions.

 Perform regular audits to ensure that all defined standards are being
implemented and followed.
 Implement improvements whenever possible. Worker inputs can be
very valuable for identifying improvements.
 When issues arise, identify their cause and implement the changes
necessary to avoid recurrence.

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Definition, Objectives, Scope and Functions of

Production / Operations Management is defined as the process which transforms the

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Difference between Production and Operations Management

The fuss about production and systems

The production systems are frequently classified in the following buckets:

 Mass Production: Utilizes standardized discrete assemblies in a continuous

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Objectives of Production/Operations Management:

(ii) Minimum scrap/rework resulting in better product quality.

iii) Minimum possible inventory levels (i.e.,optimum inventory levels).

iv) Maximum utilisation of all kinds of resources needed.

(v) Minimum cash outflow.

(vi) Maximum employee satisfaction.

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(vii) Maximum possible production (i.e., outputs).

(viii) Higher operating efficiency.

(ix) Minimum production cycle time.

(x) Maximum possible profit or return on investment.

(xi) Concern for protection of environment.

(xii) Maximum possible productivity.

Production Management v/s Operations Management

 Output: Production management deals with manufacturing of products like

SCOPE OF PRODUCTION AND OPERATION MANAGEMENT

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Plant layout refers to the physical arrangement of facilities. It is the configuration of

According to James Moore, <Plant layout is a plan of an optimum arrangement of facilities

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Materials management is that aspect of management function which is primarily concerned

The main objectives of materials management are:

 To minimize material cost.

THE SCOPE OF OPERATIONS MANAGEMENT

(i) The application of operations management concepts in service operations.

(ii) The growing importance of quality.

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Difference between Production and Operations

FIG: Areas of Production Management

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Key Differences Between Production and Operation Management

1. Production Management can be defined as the administration of the set of

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3. Production Management can only be found in the firms where production of

Productivity, Work Study, Productivity

Productivity is an objective concept. As an objective concept it can be measured, ideally against

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FACTORS AFFECTING PRODUCTIVITY

1. Controllable (or internal) factors

1. Controllable For Internal Factors

 Size and capacity of the plant,

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 Repairs and maintenance,

 Selection of quality material and right material.

(VII) Management style: This influence the organizational design, communication in

2. Uncontrollable (Or) External Factors

 Shift in employment from agriculture to manufacturing industry,

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Advantages of Work Study

1. It helps to achieve the smooth production flow with minimum interruptions.

1. Total Productivity Measure (TPM)

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