R.B. Khanna - Production and Operations Management-PHI Learning Private Limited (2015)

R.B.
Khanna
Production and
Operations Management
SECOND EDITION
R.B. KHANNA
Formerly Professor
Indian Institute of Planning and Management (11PM)
Jaipur
PHI Learning [;Ju1IT\Y7GJO@ ~D[illDG@dJ

Delhi-110092
2015
PRODUCTION AND OPERATIONS MANAGEMENT, Second Edition
R.B. Khanna
© 2015 by PHI Learning Private Limited, Delhi. All rights reserved. No part of this book may be
reproduced in any form, by mimeograph or any other means, without permission in writing from
the publisher.
ISBN-978-81-203-5121-9
The export rights of this book are vested solely with the publisher.
Fifth Printing (Second Edition) May, 2015
Published by Asoke K. Ghosh, PHI Learning Private Limited, Rimjhim House, 111, Patparganj
Industrial Estate, Delhi-110092 and Printed by Rajkamal Electric Press, 8-35/9, G.T. Kamal Road
Industrial Area, Delhi-110033.
To
my dear wife SARO J
who stood by patiently when the demands of this book
took priority over her demands for my time
Contents
Preface xiii
Preface to the First Edition xv
Part I: The Why of Production and Operations Management

1. Operations Management-An Introduction 3-14
Learning Objectives 3
1.1 Introduction 3
1.2 Difference between Products and Services 5
1.3 What is Operations Management? 6
1.4 Brief History of Operations Management 7
1.5 Impact of Information Technology and Globalisation 10
1.6 Organisation of This Book 11
Concept Quiz 11
Questions 14
2. Operations Strategy and Competitiveness 15-27

2.1 Introduction 15
2.2 Business Strategy 16
2.3 Competitive Priorities 16
2.4 Order Qualifiers and Order Winners 19
2.5 Developing an Operations Strategy 20
2.6 Productivity and Competitiveness 21
2.7 Latest Trends 23
2.8 Summary 24
Concept Quiz 25
Questions 27
Part II: The What of Production and Operations Management

3. Product and Service Design 31-43
3.1 Introduction 31
V
vi Contents
3.2 Traditional Approach 32

3.3 Concurrent Design 33
3.4 Steps in The Design Process 33
3.5 Design for Manufacture and Assembly (DFMA) 37
3.6 Design of Services 37
3.7 Classification of Services 39
3.8 Technology and Design 40
3.9 Summary 40
Concept Quiz 41
Questions 43
4. Reliability, Maintainability, Availability and Value Analysis 44-57

4.1 Introduction 44
4.2 Failures 45
4.3 Reliability 46
4.4 Maintainability 47
4.5 Availability 48
4.6 Maintenance 49
4.7 Value Analysis 51
4.8 Summary 53
Concept Quiz 54
Questions 56
Supplement 1: Dynamic Programming 58-67

Introduction 58
Definitions 58
Summary 65
Questions 65
Supplement 2: Replacement Models 68-76

Introduction 68
Replacement of an Equipment which Deteriorates Over Time 68
Replacement of Items that Fail Completely 71
Summary 73
Questions 73
5. Product Quality 77-95

5.1 Introduction 77
5.2 Quality of Design 78
5.3 Quality of Conformance to Design 79
5.4 Costs of Quality 80
5.5 Total Quality Management 82
5.6 Quality Improvement and Employees 85
5.7 Tools for Identifying Quality Problems and Causes 86
5.8 ISO 9000:2000 89
5.9 Summary 92
Concept Quiz 92
Questions 95
Contents vii
Part III: The How of Production and Operations Management
6. Process Design and Selection 99-118

6.1 Introduction 99
6.2 Factors Affecting Process Design 100
6.3 Processes Flow Structures 101
6.4 Process Selection 105
6.5 Group Approach 107
6.6 Other Manufacturing Technologies 108
6. 7 Process Design and Selection for Services 109
6.8 Summary 113
Concept Quiz 114
Questions 116
7. Work Study 119-147

7.1 Introduction 119
7.2 Behavioural Impact of Work Study 120
7.3 Method Study 120
7.4 Select 121
7.5 Record 121
7.6 Critical Examination 124
7.7 Develop 125
7.8 Install 125
7.9 Maintain 125
7.10 Ergonomics 127
7.11 Methods Improvement and Materials Handling 132
7.12 Work Measurement 132
7.13 Time Study 133
7.14 Activity Sampling 137
7.15 Predetermined Motion Time Systems 139
7.16 Synthetic Timings 140
7.17 Analytical Estimating 141
7.18 Summary 141
Concept Quiz 143
Questions 145
8. Process Quality-Statistical Quality Control 148-182

8.2 Process Capability 150
8.3 Six Sigma Quality 151
8.4 Process Control 151
8.5 Process Control for Attributes-p Charts 152
8.6 Process Control for Attributes-c Charts 154
8.7 Process Control for Variables-X and R Charts 155
8.8 Using Control Charts 160
8.9 Acceptance Sampling 162
8.10 Operating Characteristics Curve 163
viii Contents
8.11 Average Outgoing Quality Limit (AOQL) 166

8.12 Sampling Plans 167
8.13 Solution by Computer Package 168
8.14 Summary 175
Concept Quiz 177
Questions 179
Part IV: The Where of Production and Operations Management

9. Facility Location 185-209
9.2 The Why of Location Decision Problems 186
9.3 Factors Affecting Facility Location 186
9.4 Factor Rating Analysis and Forced Decision Matrix 189
9.5 Economic Analysis 192
9.6 Load Distance Methods 199
9.7 Locating Service Facilities 203
9.8 Summary 203
Concept Quiz 204
Questions 206
10. Facility Layout 210-238

10.2 Factors Affecting Layout 211
10.3 Basic Production Layout Formats 212
10.4 Process Layout 213
10.5 Systematic Layout Planning 217
10.6 Product Layout 219
10.7 Line Balancing 219
10.8 Machine Balancing in Group Technology 226
10.9 Service Layout 229
10.10 Summary 230
Concept Quiz 232
Questions 234
11. Capacity and Equipment Selection 239-256

11.2 Capacity 240
11.3 Decision Tree Analysis 240
11.4 Allocation of Capacities Through Linear Programming 244
11.5 Simulation 247
11.6 Economic Analysis for Equipment Selection 247
11.7 Equipment Balancing 248
11. 8 Summary 250
Concept Quiz 252
Questions 253
Contents ix
Supplement 3: Simulation 257-283
Introduction 257
Steps Involved in Monte Carlo Simulation 258
Summary 278
Questions 278
Part V: The When of Production and Operations Management

12. Forecasting 287-314
12.2 Types of Forecasts 288
12.3 Qualitative Methods of Forecasting 288
12.4 Time Series Analysis 289
12.5 Simple Moving Average 290
12.6 Weighted Moving Average 291
12.7 Exponential Smoothing 292
12.8 Causal Methods 295
12. 9 Linear Regression 295
12.10 Multiple Regression 298
12.11 Decomposition of Time Series 301
12.12 Measures of Forecasting Accuracy 304
12.13 Selecting A Forecasting Method 306
12.14 Summary 309
Concept Quiz 310
Questions 312
13. Aggregate Production Planning 315-337

13.2 Production Planning System 315
13.3 Aggregate Production Planning 317
13.4 Production Planning Strategies 318
13.5 Aggregate Planning Techniques 319
13.6 Linear Programming Approach 324
13. 7 Transportation Model Approach 327
13.8 Other Methods 330
13. 9 Aggregate Planning for Services 330
13.10 Yield Management 331
13.11 Summary 333
Concept Quiz 333
Questions 335
14. Material Management and Inventory Control 338-366

14.2 Material Management 339
14.3 Objectives of Materials Management Department 339
14.4 Centralisation Versus Decentralisation 341
14.5 Inventory Management 341
14.6 Costs Associated with Inventory 342
X Contents
14.7 EOQ Model 344

14.8 EOQ Model-Discounts and Price Breaks 346
14.9 EOQ Model-Eliminating the Instant Receipt Assumption 348
14.10 A Practical Approach-When Costs are not Known 349
14.11 Selective Inventory Control-ABC Analysis 352
14.12 Ordering Systems 356
14.13 Fixed Order Quantity System 357
14.14 Fixed Interval System 359
14.15 Other Systems 360
14.16 Simulation 360
14.17 Summary 360
Concept Quiz 361
Questions 363
15. Material Requirements Planning 367-386

15.2 Material Requirements Planning (MRP) 368
15.3 MRP System Structure 369
15.4 Master Production Schedule (MPS) 370
15.5 Bill of Materials 371
15.6 Inventory Status 372
15.7 MRP Procedure 373
15.8 Capacity Requirements Planning 375
15.9 Lot Size 377
15.10 Summary 380
Concept Quiz 382
Questions 384
16. Operations Scheduling 387-416

16.2 Approaches To Scheduling 388
16.3 Objectives 389
16.4 Loading 389
16.5 Priority Rules 393
16.6 n Jobs 2 Stations 397
16.7 n Jobs 2 Stations-Different Sequence 398
16.8 n Jobs m Stations 399
16.9 2 Jobs Through m Stations in Random Order 402
16.10 Monitoring and Control 402
16.11 Employee Scheduling for Services 405
16.12 Summary 406
Concept Quiz 407
Questions 410
17. Supply Chain Management 417-429

17.2 Supply Chain Management (SCM) 418
17.3 Information in the Supply Chain 419
Contents xi
17.4 Suppliers 421
17.5 Distribution 423
17.6 Distribution Centres and Warehousing 423
17.7 Transportation 425
17.8 Managing the Global Supply Chain 425
17. 9 Summary 425
Concept Quiz 427
Questions 429
18. Enterprise Resource Management 430-439

18.2 Enterprise Resource Planning (ERP) 431
18.3 ERP Implementation 433
18.4 ERP Implementation Methodology 434
18.5 ERP and Related Business Software 435
18.6 Summary 436
Concept Quiz 437
Questions 438
19. Just-in-Time Production System 440-451

19.2 Jit Philosophy 441
19.3 Elimination of Waste 441
19.4 Respect for People 446
19.5 JIT Implementation Requirements 447
19.6 Summary 448
Concept Quiz 449
Questions 451
20. Queuing Theory 452-475

20.2 Queuing and Cost Behaviour 453
20.3 Definitions for Queuing Systems 453
20.4 Single Channel, Single Server Queuing Model (M/M/1) 456
20.5 Economic Aspects of Queuing 461
20.6 Solution Through Computer Package (WinQSB) 462
20.7 Summary 469
Concept Quiz 470
Questions 472
21. Project Planning and Control I-Network Models 476-532

21.2 Network Analysis 477
21.3 Critical Path Method (CPM) 477
21.4 Definitions 479
21.5 Rules and Conventions 480
21.6 Drawing a Network 480
xii Contents
21.7 Calculating Earliest Start Time 482

21.8 Calculating Latest Finish Time (LFT) 483
21.9 Floats (Slacks), Critical Activities and Critical Path 485
21.10 Activity on Node (AON) Network 488
21.11 Crashing a Project 493
21.12 Resource Levelling 498
21.13 Control of Project Costs 500
21.14 Programme Evaluation and Review Technique (Pert) 502
21.15 Updating a Network 505
21.16 Difference Between Pert and CPM 509
21.17 Solution by Computer Packages 509
21.18 Solved Examples 513
21.19 Summary 521
Concept Quiz 522
Questions 524
22. Project Planning and Control II-Line of Balance 533-541

22.2 Summary 538
Concept Quiz 538
Questions 539
Part VI: The Who of Production and Operations Management
23. Human Resources in Operations Management 545-557

23.2 Human Resources and Operations Management 546
23.3 Acquisition of Human Resources 547
23.4 Training and Development 548
23.5 Performance and Retention 550
23.6 Latest Trends 553
23. 7 Summary 554
Concept Quiz 555
Questions 557
Case Studies 559-576

Appendix A-The Standard Normal Probability Distribution 577-578
Appendix B-Values of E-1 for Computing Poisson Probabilities 579
Appendix C-Table of Random Numbers 580-581
Answers to Concept Quiz and Selected Questions 583-600
Bibliography 601-604
Index 605-609
Preface
The overwhelming response to the first edition of the book has inspired me to present
the second edition. The changes in this book are based on the feedback and suggestions
from my colleagues and my readers which I gratefully acknowledge.
While essentially retaining the flavour of the first edition, I have added a concept quiz
to every chapter of the book. A section on Maintenance has been added to Chapter 4 and
a new section covering the nuances of Activity on Node Networks has been incorporated
in Chapter 21. This has been done keeping in view the fact that most computer softwares
which are in use today for network analysis and project management, draw networks in
an 'activity on node' format. This will help the reader to interpret computer solutions
with ease.
A separate section on short case studies has been introduced. The section contains
ten progressively built up case studies so that readers can exercise their minds on
real-life situations.
The text has been suitably amended and enhanced wherever needed.
A revised CD containing Power Point presentations for all chapters, answers to selected
questions and case notes for case studies is available as resource material for instructors.
I look forward to continuing support from my colleagues and readers and shall
welcome any suggestions for further improvement so that I can fully satisfy the
needs and requirements of my readers. The suggestions/feedback can be sent at
rbkhanna@gmail.com and phi@phindia.com.
R.B. KHANNA
xiii
Preface to the First Edition
Organisations exist to fulfil the needs of society, or we may say the needs of customers.
The fulfilment of these needs is through products and services. All organisations, are
engaged in the manufacture of products or the provision of services. The production or
operations activity employs the bulk of the assets, most of the manpower and a large
portion of the capital. It is imperative that these resources are managed properly.
Management students tend to view production and operations management as
something more suitable for engineering students than for themselves. But this is not true.
Engineers deal with technical aspects of production. They are rarely, if ever, concerned
with customers or come in direct contact with them. Production operations deal with
the designing of products and services, the procurement of the required resources and
the transformation of these resources to products or services. There are also inseparable
linkages to other managerial functions.
The success of an organisation depends on the success of its production or operations.
If production operations fail, the organisation loses its very reason for existence. Expertise
in marketing, finance and human resources alone is not enough to run a successful
organisation. The production function, even though viewed as a cost centre, is mainly
responsible for the profits of the company. The failure of the production or operations function
will result in the non-production of any thing that the organisation can market or sell.
There is a lot of literature available on the subject but most of it is of Western origin
and is replete with examples from the Western world. Some of these are difficult to relate
to, as they do not fit into the Indian environment. I have attempted to write this book
from an Indian's point of view. The language has been kept as simple as possible and
examples have been cited from the Indian context wherever possible.
The book adopts a novel approach to the subject. It attempts to answer the Why,
What, How, Where, When and Who of production operations management. Accordingly
the book is divided into six parts.
Part I deals with the 'Why' of production operations management. It explains the
importance of production operations management and its linkages with other managerial
functions. The part comprises an introductory chapter and a chapter dealing with
production operations strategy and its connection to the overall strategic framework of
the organisation.
xv
xvi Preface to the First Edition
Part II of the book deals with the 'What' of production operations management. It
delves on what to produce (the product). This part has chapters dealing with product
design; reliability, maintainability and value analysis; and product quality.
Part III of the book concentrates on the 'How' aspects-how to produce (the process).
It deals with process design and process selection for production systems and service
operations; work study and work measurement; and process quality control.
Part IV deals with the 'Where' aspects (the plant). It dwells on facility location; facility
layout and plant capacity.
Part V of the book deals with the 'When' of production operations management.
It covers the planning, scheduling and control aspects (the programmes). It contains
chapters dealing with forecasting; aggregate planning process; materials and inventory
control; materials requirement planning; and operations scheduling. The modern aspects
of supply chain management, enterprise resource planning and just-in-time production
are also covered in detail. Control techniques like network analysis and line balancing
receive due coverage in this section.
Part VI of the book deals with the 'Who' or the personnel aspect of production
operations management. It lays emphasis on the acquisition of the right kind of people,
their training and development and the steps necessary to ensure their performance and
retention in the organisation.
The book has annexures dealing with dynamic programming, simulation and
replacement models.
The text is suitably embellished with practical lifelike situations and examples.
Mathematical techniques are fully explained. Keeping in view the ever increasing use of
computers, I have attempted to explain the use of software and special packages designed
to handle production operations problems. The book contains over a hundred solved
problems.
The book is designed to fulfil the needs of management students and the mathematical
portions have been kept as simple as possible so that those with a non-mathematical
background can understand the techniques. It covers topics included in the Production
Operations Management course of most MBA programmes. The book would also serve
as a ready reference for practising managers.
Since the book is primarily designed to serve as a textbook, an instructor's manual
is available from the publisher on request. The CD contains PowerPoint slides for each
chapter and solutions for all the chapter-end numerical problems.
I would also like to thank my colleagues who provided the necessary encouragement
and my students who have inspired me to write this book.
Suggestions for improvement to the text are most welcome and shall be gratefully
acknowledged.
R.B. KHANNA
I keep six honest serving-men
(They taught me all I knew);
Their names are What and Why and When
and How and Where and Who.
RUDYARD KIPLING
Part I
The Why of Production and
PLANT
Operations Management-
An Introduction
LEARNING OBJECTIVES
• Explain the role of operations management in business
• Describe the differences between service and manufacturing operations
• Define operations management
• Describe the information flows between operations and other business functions
• Identify major historical developments and current trends in operations
management
1.1 INTRODUCTION
The reason for the existence of any organisation is to fulfil the needs of the customer.
These needs may be fulfilled through tangible products or intangible services. The
'customer' can be either outside or within the organisation. For instance, a lady wants to
look attractive. This is met through cosmetic products like lipstick, rouge, mascara, nail
enamel, etc. or she can seek a beautician's service. This phenomenon is diagrammatically
depicted in Figure 1.1.
Needs ~ Satisfiers (Products or

f ~ I services)
.__- - - Customer • • - - ~ -
Figure 1.1 Customer Satisfaction-Closed Loop.

3
4 Production and Operations Management
Within the organisation, the process of satisfying the needs of the customer can be
broken up into five stages.
Stage 1. The need of the customer is identified. A forecast of the requirement is made.
These explicit forecasts form inputs for the next stage.
Stage 2. The need is then analysed and a product or a service is designed. The inputs
in terms of materials and other resources required to produce the product or service are
estimated. These estimates become the inputs for the next stage.
Stage 3. The inputs required are procured from outside or from within the organisation
depending on their availability.
Stage 4. The inputs are then transformed into outputs in terms of products or services.
Stage 5. The product or service is then delivered to the customer.
Since the process starts with the customer and ends with the customer the process
can be depicted as a loop as shown in Figure 1.2.
i~-----1~_c_us_to_m_e_r_~I • f
Need Satisfiers
i t
Stage 1 Stage 5
Identify need and forecast Distribute product or
requirement deliver service
i
Explicit forecast
t
Product or service
i t
Stage 2 Stage 4
Analyse and design Transform into product or
product or service service
i
Resource estimates
Resources \materials , machines,
men, money, minutes)
I 'IProcu~!a~:s:urcesl t
Figure 1.2 From Customer to Customer-Closed Loop.
When organisations are set up, they are generally small and a single manager may
perform all the tasks mentioned earlier. As they grow larger, the Stage 1 and Stage 5
activities are performed by the marketing team and the Stages 2, 3 and 4 are placed under
the production or operations manager. Marketing team studies the customer's need through
market surveys and the interaction with the customers. Marketing personnel along with
the customers come up with a product concept. They also estimate the market demand
for the product or service in quantitative terms. So, there is a very close relationship
between marketing and production. The two departments must work hand in hand.
Production must produce the product or the service which will satisfy the customer's
Operations Management-An Introduction 5
need. The quality as well as the quantity of the product or service required is determined
by the marketing surveys. The market demand largely influences production capacities
and production runs. The other major functions of finance and human resource have an
equally important part to play. Even though capacity is available and there is adequate
demand for whatever is produced, adequate funds to support such operations may not
be available. Similarly, the non-availability of manpower in the required numbers and the
required skills will impose restrictions on the production and operations. All functions must
compliment each other to form an efficient and productive whole. Generally production
and operations employ the bulk of the workforce, use the bulk of the assets and the bulk
of the finance . It is imperative that production and operations are properly managed as
the profits of the organisation will come from the marketing and sale of the product or
service. The information flows between production and operations management and other
functions are shown in Figure 1.3.
Cu stomer
Prod uct service Needs
Finance Marketing Personnel
Sales and de mands Organisation s abil ity

re quirem ent meet sales and
de man d s
Ma npower
req uirement num bers
re quireme nts Pro duction operatio ns and skill s
Figure 1.3 Information Flows and Relationship between Production and

Operations and Other Functions.
1.2 DIFFERENCE BETWEEN PRODUCTS AND SERVICES

We have so far referred to products and services as satisfiers of needs of the customer.
Products are physical and tangible. They have an extrinsic and intrinsic value. For
instance, while the extrinsic value of lipstick is in the form of a coloured cream with
some chemical composition, its intrinsic value to a lady is that of a beauty enhancer. The
manufacturing process of products requires none or very limited customer participation.
The manufacturing processes are more machine intensive than labour intensive. Products
are generally standardised in nature and can often be mass-produced and stored.
On the other hand, services are intangible. Sometimes, the customer may form part
of the throughput of the system. For example, a patient at a dentist's clinic receives
professional dental service, which is the output of the system, but the patient also becomes
the throughput of the system as he or she is an integral part of the process. In contrast,
at a fast food restaurant, the output of the system are pizzas, burgers and so on, and the
throughputs may be the ingredients from which these are made. The customer is not a
part of the throughput or output, even though he is the receiver of the service. There
is greater participation of the customer in the provision of services. They are generally
labour intensive and are customised. Services have physical benefits, sensuous benefits
and psychological benefits. For example, when a customer goes to a fast food restaurant
for a pizza, the pizza is the physical benefit, the gastronomical delight provided by it
is the sensuous benefit, and the satisfaction of being in a restaurant with a particular
ambience and being served with courtesy are the psychological benefits.
The management of manufacturing of products is referred to as production management.
The functions dealing with the operation of services are covered under operations
management. However, the tasks involved in the production of products and provision
of services have so much similarity that the principles applied are common. Hereafter, we
shall loosely use the term operations management to cover both production management
and operations management.
1.3 WHAT IS OPERATIONS MANAGEMENT?

Production and operations management deals with the Stages 2, 3 and 4 of Figure 1.2.
Operations management designs and operates productive systems. Since its ambit extends
to large variety of functions, forming a comprehensive definition is difficult. Operations
management is the planning, scheduling and controlling of the activities that transform
inputs by way of raw materials, capital, machinery, labour, information and time into
outputs in the form of products and services of higher value than the inputs. It may
also be viewed as a value addition process. For instance, a metal sheet is formed into
different shapes and then assembled with thousands of components to form an aircraft.
The value of the aircraft is much more than the sum total of the raw inputs which go
into its manufacture. The transformation may be physical as in the case of the aircraft;
locational-transporting goods to a warehouse; physiological-healthcare; psychological-
entertainment and education; and so on. Some definitions of operations management are:
A field of study that focuses on the planning, scheduling, use and control of a manufacturing
or service organisation, through the study of design engineering, industrial engineering,
management information systems, quality management, production management,
accounting and other functions as they affect the operation
APICS Dictionary, 1995
... is concerned with the efficient conversion of an organisation's resources into the
goods and services that it has been set up to provide
Barnett, 1996
... is concerned with creating, operating and controlling a transformation system which
takes inputs of a variety of resources and produces outputs of goods and services
which are needed by the customer
Naylor, 1996
... is concerned with all activities involved in making a product or providing a service:
it is responsible for the transformation of various kinds of inputs to useful outputs
Waters, 1991
... is the management of systems or processes that create goods and/or provide services
Stevenson, 1993
Most of the definitions emphasise the transformational aspects of operations

management. As discussed earlier, operations management has interfaces with the rest
of the managerial functions and cannot be viewed in isolation. In order to understand
the functions of operations management, let us look at the historical perspective.
1.4 BRIEF HISTORY OF OPERATIONS MANAGEMENT

Since time immemorial, products and services were the needs of society. In the days
of yore, these needs were met on an individual basis. Skilled craftsmen made products
customised to individual needs or provided customised services. Each piece was made
by hand, often by a single skilled worker. In the late 1700s, the widespread production
of consumer goods was ushered in by the Industrial Revolution and brought with it the
need for operations management. Machines which could perform standard tasks at a
faster and more efficient pace appeared. Products began to be standardised and mass-
produced. Traditional craft methods were replaced by machines. Workers moved to a
central location called a factory and performed under the supervision of an overseer.
Technological advances brought about a lot of changes. James Watt's steam engine (1764)
revolutionised the working in textile mills. Steam power began to be extensively used.
In 1776, Adam Smith, in his treatise Wealth of Nations, advocated the division of
labour. He proposed that the production process should be broken down into small tasks,
each of which should be performed by a different worker. He professed that since the
worker would work on a limited, repetitive task, he would specialise in it and productivity
would improve. This gave rise to the development of specialised machinery.
In 1798, Eli Whitney introduced interchangeable parts. The manufacture of firearms,
clocks, sewing machines and other goods which were custom made one-at-a-time, shifted
to volume production of standardised parts. This gave rise to the need for standardisation,
measurement and quality inspections.
Throughout the 1800s, there were many technological advancements, but management
theory and practice were virtually non-existent.
In the early 1900s, Fredrick W. Taylor propounded the concepts of scientific
management. He maintained that there was a best method of performing a task which
could be identified through observation, measurement and analysis. He was of the view
that workers must perform tasks in a specified manner in order to improve productivity
and standards must be laid down for the amount of work to be performed in a day.
His philosophy assumed that the worker was motivated by economic considerations and
economic incentives such as differential rates of pay should be used to motivate workers
to follow standard methods. Taylor's ideas were extended by Frank and Lillian Gilbreth,
who introduced the concepts of work measurement through time and motion studies.
Henry Ford applied Taylor's scientific management successfully to the production of
the Model T in 1913. The assembly time was reduced from 728 minutes to 93 minutes.
A Model T chassis was pulled slowly along the floor with six workers moving alongside
it. The workers picked up parts that were kept in spaced piles on the floor and fitted
them to the chassis. The Model T could be produced in high volumes en masse due to
the short assembly time. Thus began the concept of mass production.
B Production and Operations Management
THE FIRST ASSEMBLY LINE

" ... It was then that the idea occurred to me that assembly would be easier, simpler,
and faster if we moved the chassis along, beginning at one end of the plant with a
frame and adding the axles and the wheels; then moving it past the stockroom, instead
of moving the stockroom to the chassis. I had Lewis who arranged the materials on
the floor so that what was needed at the start of assembly would be at that end of
the building and the other parts would be along the line as we moved the chassis
along. We spent every Sunday during July planning this. Then one Sunday morning,
after the stock was laid out in this fashion, Lewis and I and a couple of helpers put
together the first car, I'm sure, that was ever built on a moving line.
We did this simply by putting the frame on skids, hitching a towrope to the front
end and pulling the frame along until axles and wheels were put on. Then we rolled
the chassis along in notches to prove what could be done. While demonstrating this
moving line, we worked on some of the subassemblies, such as completing a radiator
with all its hose fittings so that we could place it very quickly on the chassis. We
also did this with the dash and mounted the steering gear and the spark coil."
-Charles Sorensen, Ford Motors.
{"Henry Ford Changes the World, 1908," Eye Witness to History
www.eyewitnesstohistory.com (2005).J
The period between the 1930s and 1960s saw the development of the human relations
movement. Elton Mayo carried out the famous Hawthorne studies and concluded that
productivity was not affected by the environment alone but worker motivation had
an important part to play. Motivation theories were developed by Maslow, Herzberg,
McGregor and others.
Operations Research emerged as a discipline during World War II through the efforts
of Professor P.M.S. Blackett and his famous team, the Blackett's Circus. Quantitative
techniques like linear programming, inventory control methods, queuing theory and Monte
Carlo simulation were developed. This gave rise to the management science school of
thought. Project management, forecasting, statistical sampling and quality control methods
have since been evolved.
The 1970s ushered in the era of computer usage in a big way. Computerised inventory
control systems and Material Requirements Planning (MRP) systems emerged.
The 1980s saw the Japanese challenging the US supremacy in production systems.
The Japanese successfully managed sick plants in US and proved that systems need
to be flexible. Just-in-time-a concept of manufacturing with near zero inventories-
highlighted the advantages of lean production methods. The mantra of TQM or Total
Quality Management is also a Japanese contribution.
Since the 1990s the world has undergone a major change because of the advent of
information technology. The World Wide Web has reduced the world to a global village.
There is now a paradigm shift. Production facilities can be set up anywhere in the world
and products marketed wherever they are required. E-commerce has emerged as the new
method of transacting the business. Greater integration between the suppliers, producers
and customers is now possible.
Major historical developments are listed in Table 1.1, and a summarised historical
perspective is given in Table 1.2.
Table 1.1 Major Historical Developments
Industrial revolution Late 1700s

Scientific management Early 1900s
Human relations movement 1930s to 1960s
Management science Mid-1900s
Computer age 1970s
Just-in-time systems 1980s
Total Quality Management (TOM) 1980s
Reengineering 1980s
Flexibility 1990s
Time-based competition 1990s
Supply chain management 1990s
Global competition 1990s
Environmental issues 1990s
Electronic commerce Late 1990s-Early 21st Century
Table 1.2 Historical Perspective
Industrial Replaced traditional craft methods

revolution Substituted machine power for labour
late 1700s Major contributions:
James Watt (1764): Steam engine
Adam Smith (1776): Division of labour
Eli Whitney (1790): Interchangeable parts
Scientific Separated planning from doing
management Management's job was to discover worker's physical limits through
early 1900s measurement, analysis and observation
Major contributors:
Fredrick Taylor: Work study and work measurement
Henry Ford: Moving assembly line
Human Recognised that factors other than money contribute to worker productivity
relations Major contributions:
movement Understanding of the Hawthorne effect
1930s to 1960s Study of Western Electric plant in Hawthorne, Illinois intended to study
impact of environmental factors (light and heat) on productivity, but
found environmental changes had little effect on productivity. Workers
responded to management's attention to their social needs.
Motivation theories-Maslow, Herzberg, McGregor and others.
Management Developed new quantitative techniques
science Major contributions:
mid-1900s Inventory modelling, linear programming, project management,
forecasting, statistical sampling, and quality control techniques
Computer age Provided the tool necessary to support the widespread use of management
1970s science's quantitative techniques-the ability to process huge amounts of
data quickly and relatively cheaply.
Major contributions: Development of Material Requirements Planning
(MRP) systems for production control (Contd.)
Table 1.2 Historical Perspective (Contd.)
Developments Just-In-Time (JIT): Techniques designed to achieve high volume production

1980s using coordinated material flows, continuous improvement, and elimination
of waste
Japanese Total Quality Management (TOM): Techniques designed to achieve high

influence levels of product quality through shared responsibility and by eliminating the
root causes of product defects
Business process reengineering: 'Clean sheet' redesign of work processes
to increase efficiency, improve quality and reduce costs
1.5 IMPACT OF INFORMATION TECHNOLOGY AND GLOBALISATION

Information technology and globalisation have had a major impact on production and
operations management. It has helped to reduce costs, integrate suppliers with the
organisation and achieve higher customisation. Areas of major impact are discussed below.
Supply chain management: Information technology has made it possible to integrate the
supplier with the operations system. Take the example of Wal-Mart. As soon as an item
is lifted from the shelf of a Wal-Mart and its barcode read for billing, the information is
also conveyed to the supplier of the product. At the end of the day the supplier knows
precisely how much stock has to be sent to which branches thus saving costs and time
delays and ensuring the efficiency of the service. Baxter has introduced a concept of
delivering medical supplies to its customers at nursing stations rather than at a hospital
store.
Reduction in costs: It is possible to gather data of costs of materials from various sources
and also to compare it in real time. No longer does one have to carry out a manual search
for sources, call for quotations, or wait for replies in a slow postal system. The internet
gives access to ready information across the globe and materials can be obtained from
the cheapest source. Similarly, production processes can be performed globally wherever
labour costs or costs of production and operation are the lowest. This has resulted in the
considerable reduction of transaction and operations costs.
Customer relations management: It is possible to track the preferences of every
customer with the latest technology that is available. Data about customers can be mined
and systems designed not only to meet customer satisfaction but also to offer customer
delight. Greater customisation of products is possible. For instance, Dell Computers can
assemble and deliver computers according to the specifications suggested by the customer
in a matter of hours.
Decision making: Internet-based technologies ensure that timely and accurate information
is available to the decision maker at the right time. This enhances the quality and
timeliness of decisions. Information technology is helping to integrate the supply system,
the production and operations system and the customer. Decisions can be taken speedily
at appropriate levels. A flatter organisational structure is emerging where authority can
be delegated rather than following a strictly hierarchal chain of command.
Globalisation: Today, operations can be spread globally. Business Process Outsourcing

(BPO) is a common feature. Operations are carried out globally in such a manner that
costs are reduced. For instance, credit card companies and banks are outsourcing all their
telemarketing and related operations to India because Indian labour is cheaper than the
labour in USA or Europe. Information technology has made this possible.
New business processes: New and efficient business processes are evolving because
of information technology. For instance, a banking transaction on the internet is far
cheaper than a transaction on telephone or through an ATM. Designs can be developed
by different people working from different places. In the developed countries, there is a
marked shift to the provision of knowledge-based services than manufacturing.
1.6 ORGANISATION OF THIS BOOK

This book is organised into six parts. It follows the conceptual division of operations
management into five Ps namely Product, Process, Plant, Programmes and Personnel.
Part I: The WHY of Production/Operations. It gives an introduction to production and
operations management and covers why production operations management is important
to an organisation and its place in the organisation's strategy.
Part II: The WHAT of Production/Operations. It deals with the product/ service design,
quality and other related aspects. (Product)
Part III: The HOW of Production/Operations. It covers the production and operations
processes, work design, work measurement and quality control of processes. (Processes)
Part IV: The WHERE of Production/Operations. It includes the facility location and
facility layout and facility capacity. (Plant)
Part V: The WHEN of Production/Operations. It explores the scheduling and control
aspects of production and operations. (Programmes)
Part VI: The WHO of Production/Operations. It discusses the hwnan resource management
aspects of production and operations. (Personnel).
ICONCEPT QUIZ I
State True or False
1. Societal needs determine the objectives of an organisation.
2. The need of the customer is determined by the production deparbnent.
3. The marketing deparbnent of an organisation uses the bulk of its resources.
4. Products require high customer contact.
5. Adam Smith advocated the concept of division of labour.
6. The first assembly line was used at Ford Motors.
7. The production/operations function of a firm are independent of other functions

like marketing, finance and human relations.
8. The concept of just-in-time manufacturing was introduced by Eli Whitney.
9. Operations management is concerned with the sale and distribution of products.
10. Information technology has had a major impact on production and operations
management.
Tick the correct answer/answers.
1. Production/Operations Management deals with:
(a) Sale of products.
(b) Conversion of resources into products or services.
(c) Technical training of personnel.
(d) Determining needs of customers.
2. Marketing deals with:
(a) Procurement of raw materials.
(b) Design of products and services.
(c) Identifying customer needs.
(d) Transforming resources into products.
3. The concept of division of labour was first advocated by:
(a) Fredrick W. Taylor
(b) Henry Ford
(c) Elton Mayo
(d) Adam Smith
4. Operations Management is concerned with:
(a) Design of products and services.
(b) Procurement of required resources.
(c) Transformation of resources into products and services.
(d) All of the above.
5. Services:
(a) Are tangible.
(b) The customer always forms part of the throughput of services.
(c) Provide physical products.
(d) Cannot be stored.
6. The key objective of the transformation sub-system of an operations management
system is:
(a) Value addition to resource inputs.
(b) Maintain control over production processes.
(c) Generate feedback.
(d) Produce more products.
7. Identify the organisation which was the first to adopt the concepts of assembly
line in its production process:
(a) General Electric
(b) General Motors
(c) Boeing
(d) Ford Motors
8. Which of the following is not a part of the five Ps of Production/Operations:
(a) Product
(b) Promotion
(c) Plant
(d) Process
9. Information technology has helped firms to:
(a) Reduce cost of production.
(b) Reduce customisation of productions.
(c) Delay decision making.
(d) Increase product life cycle.
10. Just-in-time concept of production implies:
(a) Producing large quantities of the product so that it can be supplied whenever
demanded.
(b) Maintaining near zero inventories.
(c) Supplying a product as quickly as possible.
(d) Delaying delivery of the product for as long as possible.
Fill in the blanks:
1. Identifying the need of the customer is a function of the _ _ _ _ _ _ deparbnent.
2. Customer needs are satisfied through _ _ _ _ _ _ _ and _ _ _ _ __
3. Products are designed by the _ _ _ _ _ _ _ _ _ _ _ _ _ deparbnent.
4. Services provide and _ _ _ _ __
benefits.
5. Services require _ _ _ _ _ _ customer contact as compared to production of
products.
6. Services _________ be stored.
7. The customer is a part of the ________ of the service provided by a
beautician.
8. Before the Industrial Revolution, products were hand crafted by _ _ _ _ __
9. The introduction of interchangeable parts gave rise to the need for _ _ _ _ _ __

10. Customer relations management helps to track the _ _ _ _ _ _ _ of every
customer.
IQUESTIONS I
1.1 Describe the various stages involved in satisfying a customer's need. Which of
these stages form a part of production and operations management?
1.2 It is often said that the operations management is a transformation process. Do
you agree with this statement? Support your answer with reasons.
1.3 Marketing and operations cannot be separated into water tight comparbnents.
Comment.
1.4 What was the major contribution to operations management by F.W. Taylor?
1.5 Explain the concept of interchangeable parts. How has this affected operations?
1.6 Explain the interrelationship between the production operations function and
other functions in an organisation.
1.7 What is the impact of information technology on production operations management?
1.8 What are the main differences between products and services?
1.9 Describe the five Ps of production.
1.10 What has been the Japanese contribution to operations management?
Operations Strategy and
Competitiveness
However beautiful the strategy, you should occasionally look at the results.
WINSTON CHURCHILL
LEARNING OBJECTIVES
• Define the role of business strategy

• Explain strategy development
• Identify competitive priorities
• Explain the role of an operations strategy
• Explain the relationship between the business and operations strategy
• Describe how an operations strategy is developed
• Define productivity and identify productivity measures
• Compute productivity measures
2.1 INTRODUCTION
Strategy is the art and science of formulating, implementing and evaluating cross-functional
decisions that enable an organisation to achieve its objectives. The business strategy of an
organisation is concerned with the overall direction in which it is moving. The strategy
defines the long-term objectives of the organisation and its basic philosophy. Operations
strategy must emerge from the business strategy of the organisation. The operations
function of any organisation uses the bulk of the capital, a large part of the manpower,
a very large proportion of the fixed assets of the organisation and a major part of the
15
other resources. It is, therefore, imperative that operations strategy is correctly designed
so that it is compatible with the business strategy of the organisation and gives it a
lasting competitive edge.
2.2 BUSINESS STRATEGY

Formulation of business strategy begins with defining the mission of the organisation. A
mission statement is an enduring statement of purpose that distinguishes one business
firm from other similar firms. This identifies the scope of a firm's operations in production
and marketing terms. It is a statement which defines the role that an organisation plays in
the society, what business the firm is in, who its customers are, and how its core beliefs
shape its decision making. For example, the mission statement of Oil and Natural Gas
Corporation (ONGC) is: 'To stimulate, continue and accelerate efforts to develop and
maximise the contribution of the energy sector to the economy of the country.' ONGC
is not just in the business of oil and natural gas but is in the business of energy sector.
The next step is to carry out an environmental scan; by analysing the external
environment for business opportunities as well as competitive threats. Political, economic,
social and technological factors are considered. For instance, the significant social change
in the Indian social environment is the breakdown of the joint family system and the
emergence of nuclear families. There is also a phenomenal rise in the number of working
women. These changes have created a need for looking after the small children and
the elderly. An organisation may exploit the business opportunities afforded by these
social changes and decide to set up child care or geriatric centres. Similarly, the political
emergence of the European Union has resulted in the removal of trade barriers within the
Union and has opened up new business opportunities. An unstable political environment
may pose a threat to business because of unstable policies and an uncertain future.
The opportunities and threats have to be combined with an organisation's internal
strengths and weaknesses. The organisation must recognise its core competencies-things
that it does better than anyone else. Based on experience, knowledge and know-how,
core competencies provide an organisation with sustainable competitive advantage. Core
competencies generally constitute processes and a company's ability to do things better
than its competitors. They can also be defined as 'the collective learning in an organisation,
especially how to coordinate diverse production skills and integrate multiple streams of
technologies' (Prahlad and Hamel, HBR 1990). For example, Canon's core competency
is in the field of combining technologies related to fine optics, precision mechanics and
microelectronics. It is a combination of these technologies that helps Canon to produce
cameras, fax machines, copiers and calculators.
The final step in the formulation of business strategy is to put it all together. The factors
like mission of the organisation, the opportunities and threats posed by the environment
and the organisation's internal strengths and weaknesses come under the long range
plans for the organisation. A schematic view of the process is given at Figure 2.1.
2.3 COMPETITIVE PRIORITIES

Operations strategy is the long-range plan for the design and use of the operations
function to support the overall business strategy. It involves addressing the competitive
Operations Strategy and Competitiveness 17
Mission statement
WHAT is our business?
WHO are our customers?
HOW our core beliefs
influence our business?
Environmental scan
Political Internal strengths and
Economic weaknesses
Social
(Core competencies)
Technological analysis
(Opportunities and threats)
Business strategy
Long range plan of the
company
Figure 2.1 Developing Business Strategy.
priorities that support the business strategy. The first step is to identify competitive
priorities which mostly are cost, quality, time and flexibility.
Cost: Organisations that compete on cost attempt to maintain the competitive edge
through cost leadership, which implies their ability to offer the product at a cheaper cost
than their competitors. Low production costs enable companies to reduce the price. Bajaj
Auto is an excellent example and the scooter models produced by them were always
cheaper than those produced by other manufacturers. Costs can be cut down by looking
at all aspects of operations. Let us consider this aspect from the five P's point of view.
Product or service. The product or service should be so designed that costs are reduced to
the minimum. Value engineering is a useful tool in achieving this and aims at providing
the same functionality at a lower cost. For example, earlier water tanks, float valves and
other components of a toilet flush system were made of iron. They are being replaced
by plastic tanks, plastic float valves and plastic parts reducing the cost without affecting
the functionality of the product. The basic design of a product can also be altered to
reduce costs. For instance, instead of having a fuel tank at the base of a battery charger
and then pumping the fuel up, the tank was placed on top and gravity feed system
used to supply fuel to the charger, resulting in significant reduction of costs. Quality
improvements in the product reduce costs of returns, warranty, rework and salvage. All
waste must be cut down. A company which is competing on low cost may use a high
degree of product standardisation and offer little customisation.
Processes. A review of production and operation processes must be carried out. Technology
will help to improve processes or use totally different processes to reduce cost. For
instance, it may be possible to reduce costs by pressing a sheet of metal into shape rather
than forging or rolling it. Automation also helps to reduce costs.
Plant. The location, layout and capacity of the facility can have a major impact on costs.
Programmes. Materials management and the correct scheduling of orders and inventory
control can help to reduce costs. Production schedules can also be arranged to cut down
on costs.
Personnel. The costs can be reduced by employing personnel with the requisite skills
and training. There will be less wastage, fewer machine and tool faults, less rework and
salvage and lesser warranty costs as workers produce the right quality and the right
quantity of work.
Quality. Organisations often look at quality defensively. Quality does not mean reducing
the number of defectives or conforming to certain specifications. It aims at pleasing
the customer. The expectations and attitudes of the customer towards quality are to be
identified and efforts made to meet these needs of the customer. Higher performance
and a more consistent product can support a higher price for the product. Quality of
a product or a service can be ensured through its design features; following correct
manufacturing processes; ensuring quality of inputs; having the correct type of machinery
and plant and having quality conscious personnel. An organisation competing on quality
will ensure high performance design, and products or services with superior features,
high durability and excellent customer service, coupled with error-free delivery and close
tolerances in specifications.
Time: Some organisations compete on their ability to deliver faster than others. Domino's
Pizzas offers a free pizza if the delivery time is more than half an hour. Speed of delivery
is becoming a competitive priority with organisations. The internet and advances in
information technology have made significant contributions towards this aspect. Toyota
Motor Corporation is a classical example of interval reduction and just-in-time operations.
In the early 1980s, it found to its utter dismay that while manufacturing a car took just
48 hours, processing a customer's order took 25 to 30 days. It has now set up a global
network that connects the computers of its dealers and distributors to the computers at its
headquarters in Tokyo, and the production and scheduling computers at its manufacturing
units. It can now deliver a car in Japan in 48 hours. Integration with suppliers through
intranets speeds up the delivery of products and services. Timely delivery does not
imply rapid delivery only but delivery on time also. If items arrive too quickly they can
pose a problem at the receiving end in terms of inventory storage and holding costs.
Organisations must deliver exactly when expected-neither too early nor too late.
Flexibility: Customer needs keep changing. Customers desire a wide variety of products.
Manufacturing operations resist increases in variety as it tends to destabilise manufacturing
processes and makes the functioning inefficient. Flexibility is the ability to respond to
changing circumstances in terms of product improvement and product innovation. Today's
customers prefer highly customised products and services and an organisation that can
meet these requirements stands to gain a competitive edge over those who cannot. In
terms of product flexibility, an organisation competing on this priority should be able to
switch the production process from one item to the other and should be able to easily
customise outputs to meet the specific requirements of the customer. Organisations
require flexibility in terms of quantity also. They should be able to handle fluctuations
in demand in order to take advantage of changing market conditions.
No organisation can compete on the basis of all the factors discussed earlier. A
company must choose competitive priorities that fit in with its strengths, weaknesses and
its core competencies, and design its production and operations systems accordingly.
It must be appreciated that there are trade-offs between these competitive priorities.
Consider a company that makes and supplies ice-creams. Cost competitiveness dictates that
cheaper ingredients be used; quality requirements may necessitate the use of expensive
and fresh ingredients. If the company is to compete on the basis of time, it shall have
to invest in refrigerated vans and trucks for the door to door delivery. Obviously such
invesbnent will raise the cost of the ice-cream. Regarding the product flexibility, it will
have to offer a larger variety of ice-creams; there may even be a case for customising the
product by mixing different types of toppings and cream sauces on demand. This will
increase the cost and may also negate the philosophy of on-time door to door delivery.
Competitive priorities are summarised in Table 2.1.
Table 2.1 Competitive Priorities
Cost • Eliminate wasted labour, materials and facilities

• Emphasise efficient processes and high productivity
• Often limit the product range and offer little customisation
• May invest in automation to increase productivity
Quality • High performance design
(a) Superior features, high durability, and excellent customer service
• Product and service consistency
(a) Error free delivery
(b) Close tolerances
Time • Rapid delivery
• How quickly an order is received after the order is placed
• On-time delivery
(a) Sometimes items can arrive too quickly
(b) JIT firms try to avoid clutter of excess inventory
(c) Ability to deliver exactly when expected
(d) Neither too early nor too late
Flexibility • Product flexibility
(a) Easily switch the production process from one item to another
(substitution)
(b) Easily customise output to meet the specific requirements of a
customer
• Volume flexibility
(a) Rapidly increase or decrease the amount of product being produced
to match demand
2.4 ORDER QUALIFIERS AND ORDER WINNERS

No organisation can be successful if what it does best is not what the customers' desire.
An organisation must bear in mind the factors that influence the customers' decision to
buy a product or service. It is important for an organisation to identify order qualifiers
and order winners. Order qualifiers are those features provided by all manufacturers
which make the product to be considered for purchase by the customer. Order winner
is that feature which influences the final buying decision. For instance, when purchasing
a digital camera the customer may have a set of features in mind. A number of camera
models may qualify for purchase as they all sport the features desired. However, the
customer may now decide to choose the one that costs the least from amongst these
models. The set of features in this case are order qualifiers while the price is the order
winner. He has to choose the model with the maximum features offered or to choose
the model which offers the feature which he values most from amongst this lot. This
selection is based on the money that he is ready to pay.
The competitive priority that will influence the operations strategy will then depend
on the order qualifiers and the order winners.
2.5 DEVELOPING AN OPERATIONS STRATEGY

The operations strategy is designed on the basis of competitive priorities within the overall
framework of the business strategy and this leads to the design of operations structure
and infrastructure. Let us briefly discuss what is involved in operations strategy. We
shall use the five P's structure as a basis of our discussion.
Product or service: Operations strategy is driven by the types of products or services offered
by the organisation. Products may be made-to-order, made-to-stock or assembled-to-order.
Made-to-order products. They are manufactured or produced only when firm orders for
the projects exist. For example, Bharat Heavy Electricals Limited (BHEL) is engaged in
producing turbines for power plants, but they make the turbines for specific projects to
unique specifications whenever they get a firm order. Competitive priority is time and
the main issue is customer satisfaction.
Made-to-stock products. These are manufactured in bulk and an inventory of finished
products is maintained. Most fast moving consumer goods fall in this category. Examples
are readymade garments, toothpaste, television sets, standard vacation packages and
so on. As such products are kept in stock, it is important that demand is forecast with
accuracy so that unnecessary inventory holding costs are avoided.
Assembled-to-order products. They are produced in standard modules. Components are
made-to-stock and whenever a customer places an order, the product is assembled according
to his requirements. Computer systems are a typical example of assembled-to-order
products. Training and development courses are examples of an assembled-to-order service.
Processes: The choice of processes depends on the products or services provided by the
organisation. Manufacturing processes include job shop production or project approach,
batch production, flow production and continuous production. Project approach or job shop
production methods are generally applied to made-to-order products while batch, flow
and continuous production methods are applied to made-to-stock items. Services can also
be classified according to the process involved into personal services like hairdresser and
beautician; professional services like lawyers and architects; mass services like education
and transport services; service shops like cafeterias and clubs; and service factories like
banks and postal services. These shall be dealt in details when we study processes of
operations management.
Plant: Capacity, location and layout are major decisions which affect operations strategy.
The location may be dictated by the competitive priorities. The layout is often based on
the processes adopted. Capacity is an important factor when we consider competitive
priorities like speed of delivery and flexibility.
Programmes: The planning, scheduling and control of operations must conform to the
competitive priority of the organisation. Effective materials management can significantly
reduce costs. Vertical downward integration with the customers and upward vertical
integration with the suppliers can help in reducing time of delivery.
Personnel: Skilled and motivated personnel can be an asset for any organisation.
Special care must be taken towards their motivational and training aspects. Job design,
job enlargement, job enrichment and job rotation have significant role to play in keeping
workers motivated. Industrial relations, health and safety measures and remuneration
are some of the other aspects which need special attention.
2.6 PRODUCTIVITY AND COMPETITIVENESS

Productivity is often used as a measure of competitiveness. It may be defined as the ratio
of units of output to units of input.
p = Output
Input
Productivity may be measured partially in terms of the units of a single input like
labour productivity or machine utilisation and so on. For example, if 2 carpenters working
8 hours a day can produce 4 tables, then we can say that the labour productivity is:
Outputs = 4 tables
Inputs = 16 hours of labour (2 carpenters x 8 hours)
p = Output
Input
4 tables
= 16 h ours = 0.25 tables per hour
Productivity involving more than one factor can be computed by converting all the
outputs and inputs to money value in terms of rupees.
EXAMPLE 2.1
A furniture company produces 80 tables and uses 480 square metres of fibre board and
320 hours of labour. What is the productivity, if the tables are sold at ~400 each, the cost
of fibre board is ~50 per square metre and labour costs ~15 per hour?
Solution:
Output
80 tables selling at ~400 per table = ~32,000
Inputs
480 square metres of fibre board @ f50 per square metre = 24,000
320 hours of labour @ f15 per hour = 4,800
Total = 28,800
p = Output = 32,000 = 1 11
Input 28,800 ·
Is the productivity figure of 1.11 obtained in the previous example good or bad? It
is obvious that unless we can compare this figure with some norm we cannot offer any
judgement. Some comparative norm is required. This may be in the form of an industrial
norm or it may be a comparison drawn over time. For instance, if the productivity in
the previous week was 1 then we can say that the productivity has improved during
the current week. Generally productivity growth rates are compared. The productivity
growth rate is:
Growth rate = p2 - Pi
P1
where
P2 is the productivity at a given time
P 1 is the productivity of an earlier period
EXAMPLE 2.2
Last week the company produced 150 units in 200 hours of labour. This week the company
produced 180 units in 220 hours of labour. What is the growth rate?
Solution:
150
P1 = 200 = 0.75
180
P2 = 220 = 0.82
Growth rate = p2 - Pi
P1
= 0.8~.;~-75 = 0.093
or a growth rate of 9.3%.
EXAMPLE 2.3
The furniture company has provided the following data for 2005 and 2006. Compare the
labour, raw materials and total productivity.
2005 2006
Output Sales value of production ~24,000 ~36,000
Input Labour ~12,000 ~15,000
Raw 1naterials ~10,000 ~12,500
Capital equipment depreciation ~800 ~1,200
Others ~2,400 ~4,800
Solution:
2005 2006
Labour productivity 2.00 2.40
Raw materials productivity 2.40 2.88
Total productivity 0.87 1.07
2.7 LATEST TRENDS

Operations management evolved as a result of the industrial revolution in the late 1770s.
Today we live in a world dominated by information technology. The internet, computers
and advances in communication technology have brought about changes in organisations
and in the way they function. Operations can ill afford to ignore these changes. Some of
the significant trends and changes are:
Globalisation: The internet has opened access to global customers and global markets.
Equally, there are global sources of supply and the transformation facilities can be set
up anywhere on the globe. Political changes like the European Union have removed the
barriers to trade and business. Regional cooperation is ever on the increase. In Asian context,
the South Asian Free Trade Agreement (SAFTA) and our increasing participation with
Association of South East Asian Nations (ASEAN) is providing new avenues and vistas.
Focus will shift from mergers and acquisitions to partnerships with foreign companies.
Business process outsourcing will increase as it gives a competitive edge in terms of costs.
E-commerce and virtual companies: The traditional brick and mortar shops and stores
are being overshadowed by virtual companies which facilitate commerce through the
information and databases that they have. Groups or organisations can meet to fulfil a
need when it arises and then disperse when the need is fulfilled.
Greater customisation: The web has brought the customer closer to the operations.
The industrial revolution ushered in an era of mass production. The current buzzword
is mass customisation. Today's customers can immediately find those organisations which
can satisfy their needs and can also compare costs and so on. Companies which gear
themselves up to meet the customers' changing requirements are bound to succeed in
this new business environment.
Virtual integration: The internet has resulted in the quick sharing of information between
the suppliers and customers. The role of middlemen has been greatly reduced. A new form
of middlemen are the organisations which help to bring the supplier, manufacturer and
the customer together through the information that they can provide. Companies have to
concentrate on doing what they can do best instead of trying to do everything through
vertical integration. They will outsource those activities to others in which they do not have
expertise. A virtual integration through exchange of information will be achieved. Suppliers
and customers can be integrated with the company's information systems through extranets.
There will be greater collaboration in problem solving and synchronising of activities.
Speed and flexibility: The net has speeded up everything-speed of information, action,
decision making, delivery, communication and innovation. Product cycles and business
cycles are becoming shorter and companies will have to develop flexibility to adapt to
this changing scenario.
Emergence of service economies: The manufacture based economies of the developed
world are getting transformed into service economies. About 75% of the gross domestic
product of the US is provided by the service sector.
Technological advances and knowledge management: Technology is making rapid
advances. Organisations are now learning organisations. They will have to share, absorb and
manage knowledge so that they continue to sharpen and retain their core competencies and
best practices. Organisations which fail to keep pace with the changing world will perish.
Strategic decisions of today will shape the actions of tomorrow for any organisation.
In the rapidly changing environment, organisations have to keep a constant track of the
environment and evolve strategies or modify existing strategies to fit into the emerging
business environment. Business strategy and a matching operations strategy help an
organisation to have a sustainable competitive edge.
2.8 SUMMARY
Operations strategy compliments business strategy. The first step in developing business
strategy is to make a mission statement which explains what the business of the company
is, who its customers are and how its core beliefs influence its business decisions. The
next step is an environmental analysis which yields the business opportunities and the
existing threats in the environment. This is followed by an assessment of the company's
internal strengths and weaknesses. The mission, opportunities and threats, and the internal
strengths and weaknesses are combined to evolve the business strategy or the long-term
plans of the business.
The company must identify its competitive priorities. Companies generally compete
on the basis of cost, quality, time or flexibility. All priorities cannot be used as there are
trade-offs between these priorities. They also have to identify the order qualifiers and
the order winner. Order qualifiers are those attributes of the product or service which
qualify for consideration for purchase by the customer. The order winner is that particular
attribute which influences the buying decision and finally bags the order.
Operations strategy is based on competitive priorities within the overall framework of
business strategy and leads to the design of operations structure and infrastructure. Products
can be made-to-order, made-to-stock or assembled-to-order. Manufacturing processes
include job shop production, batch production, flow or mass production and continuous
production. Services may be designed as personal services, professional services, mass
services, service shops and service factories. Plant capacity, location and layout decisions
are influenced by the competitive priority adopted. Competitive priority is considered
during the planning, scheduling and controlling of operations. Personnel aspects like job
design, job rotation, job enrichment, job enlargement, motivation, remuneration, industrial
relations and health and safety are also designed as part of the operations strategy.
Productivity is the ratio of the outputs to the inputs and is the measure of competitiveness.
Globalisation and information technology have a major influence on operations.
There is a marked change from mass production to mass customisation. The future will
be dominated by virtual integration and virtual organisations. Economies of developed
nations are moving from manufacturing economies to service economies. Organisations
which adapt to the changing environment will survive and retain a competitive edge
over others.
ICONCEPT QUIZ I
State True or False
1. Formulation of business strategy begins with carrying out an environmental scan.
2. Core competencies provide a competitive advantage to a business firm.
3. Core competencies help us to identify opportunities and threats for a firm.
4. Core competencies are the products that the firm makes better than others.
5. Competitive priority is that feature of the product which influences the final
buying decision.
6. Order qualifiers are features of the product which qualify it for purchase
consideration by a customer.
7. Order winner is the feature of the product which influences the final buying
decision.
8. Firms which have time as their competitive priority ensure that products are
supplied to the customer as soon as possible.
9. Productivity is a measure of core competence.
10. Computer systems are an example of made-to-stock products.

1. The first step in developing business strategy is:
(a) To carry out an environmental scan.
(b) To carry out an assessment of the strengths and weaknesses of the organisation.
(c) To make a mission statement.
(d) None of the above.
2. Which of the following is not a competitive priority:
(a) Cost (b) Good machinery
(c) Quality (d) Flexibility
3. Productivity is:
(a) Input/Output (b) Output/Desired output
(c) Output/Input (d) Desired output/Input
4. Core competence is:
(a) The best product made by the firm.
(b) The best machine held by the company.
(c) The thing that the company does better than anyone else.
5. Firms which have time as their competitive priority:
(a) Deliver products at the earliest.
(b) Deliver products well before the due date.
(c) Deliver products as soon as they can after the due date.
(d) Deliver products when they are due.
6. Made-to-order products:
(a) Are manufactured in bulk and an inventory of finished products is maintained.
(b) Are produced in standard modules and an inventory of components is
maintained.
(c) Are produced only against firm orders.
7. Which of the following is not a combination for designing a business strategy:
(a) Strengths and opportunities. (b) Strengths and threats.
(c) Strengths and weaknesses. (d) Weaknesses and opportunities.
8. Banks are an example of:
(a) Service shops. (b) Professional services.
(c) Personal services. (d) Service factories.
9. Order qualifiers:
(a) Are the features of a product that influence the final buying decision.
(b) Are the credit worthiness and financial position of the buyer.
(c) Are the capabilities of the supplier to handle the order.
(d) Are the attributes of the product which qualify it for consideration for
purchase.
10. Cost should be reduced by:
(a) Using substandard materials. (b) Providing inferior quality.
(c) Reducing waste. (d) Using cheaper unskilled labour.
Fill in the blanks:
1. Value engineering aims at _ _ _ _ _ _ _ costs without affecting functionality.
2. Products that are manufactured in bulk and inventories are maintained are
classified as ____________ products.
3. Operations strategy must _ _ _ _ _ _ _ the business strategy.
4. An organisation gains a competitive edge by addressing competitive _ _ _ __
5. Organisation that have _ _ _ _ _ _ as a competitive priority can rapidly
increase or decrease their output to match demand.
6. Environmental scan helps us to identify _ _ _ _ _ _ and _ _ _ _ __
7. Things that an organisation does better than anyone else are called _ _ __
8. Productivity is often used as a measure of _ _ _ _ _ _ _ _ _ __

9. The particular attribute of a product that influences the buying decision and
finally bags the order is called _ _ _ _ _ _ _ _ _ __
10. Computers are a typical example of ___________ products.
IQUESTIONS I
2.1 Explain the strategy development process.
2.2 What do you understand by core competencies? Explain with the help of examples.
2.3 What are competitive priorities? Explain how a firm can compete on the basis
of cost with special reference to its operations.
2.4 A trade-off is necessary between different competitive priorities. Explain.
2.5 What do you understand by order qualifiers and order winners?
2.6 Describe the factors that influence the development of operations strategy.
2.7 What do you understand by productivity?
2.8 Explain the concept of virtual integration.
2.9 A toy manufacturer produces 2500 units of soft toys per month (20 days working)
sold at fllO each. The cost of synthetic fur is flO0 per metre, cost of labour is f160
per day (8 hours working) and the cost of sponge waste for filling is f50 per kg.
The manufacturer employs 20 workers per day, and uses 1000 metres of synthetic
fur and 250 kg of sponge waste per month. What is the labour productivity and
raw material productivity of the firm? What is the total productivity of the firm?
2.10 A company has provided the following data for 2005 and 2006. Compare the labour,
raw materials and total productivity. What is the growth rate?
2005 2006
Output Sales value of production f28,000 f40,000
Input Labour fl5,000 flS,000
Raw 1naterials fl2,000 fl5,000
Capital equipment depreciation fl,200 fl,000
Others f3,000 f4,000
Part II
The What of Production and
~
Q' 5 Ps of
0
LLJ
a.. Production
Operations
Management
Product and Service Design
Man never knows precisely what is right
So torn between a conviction and a doubt
He first makes windows to let in the light
And then hangs curtains to shut it out.
ANON
LEARNING OBJECTIVES
• Explain the strategic importance of product and service design
• Explain the traditional approach to product design
• Understand concurrent design and steps in the design process
• Distinguish between form and functional design
• Understand simplification, standardisation, modular design and usability
• Identify characteristics of services which affect design
• Understand the service design process
• Understand the impact of technology on design
3.1 INTRODUCTION
What should we produce? The product or service has to satisfy the needs of the customer.
An organisation which achieves customer's satisfaction and keeps pace with the customer's
changing requirements will always have a competitive edge over others. Design is a
critical process for the organisation. Essentially it encashes on the organisation's core
competencies and also identifies the core competencies that need to be developed. Product
31
design deals with form and functionality of the product. Service design deals with the
physical items, the sensuous benefits and the psychological benefits that the service will
provide to the customer.
The marketing team identifies the need of the customer and the operations designs
the product to satisfy it. Design affects the quality of the product and consequently
its ability to satisfy the customer's needs. Poorly designed products may not meet the
customer's needs. If the design has a very high cost it may not be viable to recover the
costs through pricing. An effective design should match the attributes of the product
or service with the customer's requirements in a simple and cost effective manner. The
design process itself should not take too much time, else competitors will capture the
market. The design must be workable and require the least amount of revisions.
3.2 TRADITIONAL APPROACH

Traditionally, organisations tend to work in water tight compartments. The product
or service design involves the customer, the marketing department, product or service
designers, production or operations team, the purchase department and the suppliers. A
sequential approach is followed as shown in Figure 3.1.
Performance Design
Customers
specifications engineer
Des ign
Product speci fi catio ns
co ncept
I Marketing
personnel
Ma nu facturing
e ngineer
Ma nufacturing
spec ifi cati o ns
Productio n Purchas e
Supp li er
perso nne l perso nne l
Figure 3.1 Product Design-Traditional Approach.
This approach suffers from lack of coordination and integration. The marketing team
identifies the customer's needs and passes on the requirement to the design team. They
invariably feel that the requirements as projected by the marketing team are unrealistic
in terms of available technology and resources. They produce a design based on their
perceptions. When the design is received by the manufacturing team, they modify it further
to suit manufacturing processes. The purchase department poses its own problems about
the difficulty of procuring materials as specified in the design. The suppliers add to the
confusion by expressing inability to supply to the specifications. Each team modifies the
design specifications to suit its requirements. This results in the product being substandard
and not in conformity with the customer's needs. The marketing department fails to sell
Product and Service Design 33
the substandard product and returns it for modifications and changes. It is better to form
design teams with representatives of all deparbnents involved and instead of sequential
design, use the concept of concurrent design to reduce the design cycle time.
3.3 CONCURRENT DESIGN

Design teams which have better integration and coordination are formed with representatives
of all the deparbnents concerned. Instead of following a sequential procedure where the
product concept leads to design specifications and then to manufacturing specifications
and detailed engineering and working drawings, different deparbnents work concurrently
on the design. For example, in case of items which are to be procured from suppliers,
the traditional approach is to wait till all specifications and drawings have been
finalised and calls for bids from suppliers. In concurrent design, the supplier is
given broad specifications of the item and is asked to prepare a prototype for testing.
Details are worked out by the supplier since he is part of the design team and is
aware of the other implications. This results in considerable reduction of development
time and resources. Concurrent design integrates the design and the manufacturing
processes. Often design engineers may not be aware of the limitations or strengths of
the manufacturing process. The inclusion of manufacturing engineers in the design team
leads to better workable designs and reduces costs and time of reworking on designs.
Trade-offs in costs and design choices can be considered at an early stage. The solution
is attained at a faster pace.
3.4 STEPS IN THE DESIGN PROCESS

Design process may involve some research, development and design activities. Research
is the discovery of novel products, services, techniques, ideas, information or systems.
Development is the improvement of existing products, services, techniques, ideas or
systems. Design can be defined as the translation of the requirements into a form suitable
for operations, production or use. Most designs pass through the stages discussed.
Conception or idea generation: The design process starts with draft specifications of
the product or service. Marketing team in consultation with the customer must draw up
product concept and performance specifications inasmuch detail as possible. Ideas for new
products and services or for improvements in existing products and services may come
from customers, research and development deparbnent, suppliers, salespersons, customer
complaints or suggestions, factory workers, and new technological developments. The
draft specifications should include the following:
1. Performance requirements including requirements of reliability and quality
2. Appearance or styling requirements
3. Probable quantity of product or service usage that is required
4. The time by which the product or service is required
5. The likely price at which product or service will sell. This may initially be in
the form of 'Price not to exceed ... '
6. Maximum cost of designing. This is important as the design cost has to be

recovered through the price of the product
7. Any special features that have to be incorporated such as statutory safety standards
The draft specifications form the basis of all subsequent activities and it is important
that these are prepared carefully.
Acceptance or feasibility study: The draft specification is tested for its feasibility and
then either accepted, modified or rejected. An integrated design team will be able to
perform this task much better than a team consisting solely of design engineers. The
feasibility study includes a market analysis, an economic analysis, and a technical and
strategic analysis. The market analysis assesses whether the market demand is sufficient
to justify developing the product or service and the long-term potential for the product.
The economic analysis determines the cost of production and its profitability depending
on its estimated selling price and sales volume. The technical analysis considers whether
the product can be produced by the existing facility or any new technology, new facilities
will be required. It determines whether the existing capacity is sufficient and the necessary
labour skills, raw materials and other infrastructural requirements are available. Strategic
aspects such as core competencies and competitive priorities that the company has laid
down must also be considered while launching a product.
Execution or preliminary design: Once the product or service is found feasible and
accepted for designing, the execution of the design is undertaken. This involves making
a number of models, testing them, modifying or revising them, retesting them and so
on till a viable design is produced. The design incorporates both form and functional
design. The models produced may not conform to the specifications or may not perform
as per the specifications. Generally such differences occur because of problems of scale.
The cost of producing a full-fledged scale model may be too much and it may not be
possible to make full scale models before the design is finalised.
Form design. This refers to the physical appearance of a product. It is concerned with
its shape, size, colour, aesthetics and market appeal of the product. The product must
'feel' right. For instance, the styling of car interiors may not add much to functionality
of the car but is an essential part of the market appeal of the car.
Functional design. The functional design is concerned with the performance of the product.
Reliability and maintainability are two important considerations at this stage. These will
be dealt in detail in a separate chapter.
Translation or production design: This stage of the design process deals with how the
product will actually be made or how the service will actually be operated. This also
includes aspects of after sales service. 'Difficult to execute' designs result in poor quality
products. Providing too many options and features in the product render its manufacture
an extremely difficult task. Some products become too complex because of a large number
of options and features, and the customer is unsatisfied with them. For example, modern
music systems and digital handy cams have so many features incorporated that their
instruction manuals run into over a hundred pages. The average customer does not use
most of the special features. They only add to the cost of the product.
Real Value , the firm that produces car and home fire extinguishers, launched vacuum
sealed airtight food containers in mid 1990s. The product consisted of a set of
containers and a gadget which could create vacuum in them. The cost of production
of the product dictated its market price. The customer found the price too high to
pay for keeping biscuits fresh. It was more economical to buy a smaller packet of
biscuits , open them and consume them without wanting to store them in vacuum sealed
containers . The product was not accepted by the market and was finally withdrawn .
How many Indian housewives do you think will store food for extended periods?
Sometimes the design engineers are not aware of the production facilities. The design has
then to be modified to make it viable to produce. This results in delays. Integrated design
teams with adequate representation from the production floor will overcome this problem.
Simplification, standardisation and modular design are some of the recommended approaches.
Simplification. It is the reduction of variety of unnecessary parts, materials and processes.
Designs are simplified by using lesser number of parts. Some of the parts can be moulded
together if there is no functional requirement to separate them. Nut and bolt fastenings
can be substituted by snap fasteners or insert snaps. The use of assembling tools can
be eliminated by such designs. For instance, in the earlier version of shoe polish tins, a
butterfly lever was riveted on the rim of the body of the tin. The edge of the butterfly
lever inserted itself between the body and the lid and a turn of the lever opened the tin.
The current design has a flexible metal sheet top. When pressed at a particular point on
the edge the tin opens. The new design has done away with the butterfly lever and its
riveting to the body. Similarly, earlier the caps of talcum powder containers were screwed
on. These have now been replaced by a snap on cap.
Simplification results in reduction of costs, increases the efficiency of the production
process and reduces the time required per unit. Productivity is increased and a simpler
design lends itself to better automation and production using robots.
Old design Polish tin design

Ex-website designer turned inventor, Mark
Sheahan, designed a revolutionary new
packaging technology called squeezeopen ™
after his mother, who suffered from arthritis,
complained about not being able to open a
shoe-polish tin. The novel concept is a new
form of easy to open container. It is senior-
friendly because it involves applying only
gentle pressure to the lid to open it, while
closing the container, by simply lightly
Notice the butterfly lever on the side pressing the cap to seal it, is equally as
of the tin. stress-free.
Standardisation. It is a tool to promote the use of minimum number of parts to serve the
maximum number of purposes consistent with the economical manufacture, minimum
whole life costs and the quality and reliability necessary to ensure optimum effectiveness.
Customers benefit from simplicity and convenience in buying standard products. Design
costs and time can be saved by using standardised components to make a product or a
family of products. For instance, most of the small components in all cars manufactured
by Maruti Udyog are standardised. The sizes of most nuts and bolts in all models of
Maruti vehicles are common. Standardisation leads to increased productivity by avoiding
unnecessary engineering design when a suitable component already exists, reduction of
inventories because fewer components are in the system and elimination of unnecessary
waste. For instance, light bulbs use standardised components. The glass bulb and the base
which fits into the bulb holder have standard dimensions and design. Only the filament
used is different to correspond to different luminosity of the bulb. While standardisation
reduces costs, product differentiation affords market advantage. At the design stage, we must
decide how much to standardise without losing the advantage of variety and uniqueness.
Modular design. It is the creation of products from some combination of basic, pre-
existing, subsystems. Common subassemblies can be combined to make a large variety
of products. Modular designs are common in the electronics and automobile industry.
Computer manufacturers can produce a large variety of computers by combining different
modules. Modular design is also easier to maintain and repair. Faulty modules can be
quickly replaced by new ones and then repaired at leisure in a workshop without affecting
the customer. For instance, TV sets and computers have cards with printed circuits and
components fitted to them. Restaurants and fast food establishments also prepare base
ingredients and mix them in different proportions as required by a recipe to produce a
large variety of items. This reduces inventory costs, as each separate product does not
have to be manufactured and stored; only the subassemblies and subsystems are stored
and assembled to produce products as and when required.
Usability-The new challenge. Too many gadgets are being launched which pay scant
attention to usability. The common user does not use all the features that a product may
offer. For instance, how many of us know how to use cross references or index feature
in MS Word? How many users actually use fields in a document? Simple to operate
products tend to sell better and a company needs to spend less on technical support.
Pre-operation or final design: Once the above stages have been completed, a pilot run
or test marketing is conducted. The product or service is provided in sufficient quantity
to check the design, the production process and the acceptability by the customer. It is
only after this that the specifications are frozen, that is, no further changes are made to
the design. A final design giving detailed engineering drawings, specification of materials
and process plans is prepared. The product or service is thereafter offered to the customer.
Usability challenges ahead

• Make it usable for all ages.
• Keep it simple. Complexity is often the flip side of innovation. In the old days
you could switch on a TV and start watching. You just had to position rabbit ears
antenna. In the digital era, you almost need an engineering degree to connect a
TV to a home-theatre system.
• To keep portable devices compact, buttons tend to serve more purposes than
one, confusing the user thoroughly. Make smart design decisions.
• Avoid having too many features. A lot of people want cellphones just to make
and receive calls.
3.5 DESIGN FOR MANUFACTURE AND ASSEMBLY (DFMA)

Design For Manufacture and Assembly (DFMA) ensures that a product can be produced
easily and economically. This is a term which integrates product and process design. It
incorporates most of the suggestions discussed earlier. The guidelines for DFMA are:
1. Minimise number of parts and components
2. Use common or standardised parts
3. Use modular design
4. Avoid the need for tools (for example, use snap together components)
5. Simplify operations
Computer software is available for designing. Computer Aided Design software
(CAD) can help to view the product from different angles. Software is also available,
which can test design for its strength and suggest materials for various components. A
correctly designed product is readily accepted by customers and will go a long way in
providing the organisation with a competitive edge.
3.6 DESIGN OF SERVICES

Design of services varies from the design of products because of the characteristics of
services. Services generally provide physical benefits, sensuous benefits and psychological
benefits. For instance, in a restaurant, the food, the tables, the chairs, the napkins and
so on are the physical benefits provided by it. The taste of the food, the aroma, the soft
music, the ambience created by soft lighting, the people and so on are the sensuous
benefit; and the status, satisfaction of dining at a posh place, the relaxation, comfort and
a sense of well being are the psychological benefits. Let us examine the characteristics of
services and how they affect the design of services.
Intangibility: Services are intangible and are experienced by the customer. It is obviously
difficult to design something that cannot be touched or seen. The expectations of the
customer vary according to his knowledge, experience, perception and preference. It is
difficult to standardise all services. The service provider or operator has to be flexible in
his approach to be able to provide the customer an 'experience' according to his or her
expectations. Designers begin by compiling information on how people think, feel and behave.
Perishability: Services cannot be stored. They have to be delivered as soon as they are
produced. It is important not only to know what to deliver but also where and when
to deliver.
Heterogeneity: Service output varies because services are based on the preference and
perception of the customer. The variance is also because of different persons providing
the service. While the demands of the customer vary, his experience is expected to be
consistent. This poses considerable design problems. Organisations can achieve consistency
in service by proper training of employees who provide the service. For example, Domino's
ensure that their pizzas are home delivered within half an hour. Hotels lay down stringent
housekeeping norms for their staff to ensure a consistent service experience throughout
their chain.
Service concept Service package
Customer i----
Desired service experience
Targeted customer - Physical items
Sensuous benefits
Psychological benefits
!
Design specifications Performance specifications
Activities
Facility
Provider skills
Cost and time estimates
- Customer requirements
Customer expectations
!
Delivery specifications
Schedule
Service
De live rabies
Location
Figure 3.2 Steps in Service Design.
Simultaneity: This occurs because the customer must be present while most services are
being provided. Often the customer becomes the throughput of the system. For instance,
a hairdresser styles the hair of the customer. The customer, in this case becomes a part
of the throughput of the system. There is greater contact between the customer and the
service provider. The customer does not make a distinction between the service and
its delivery. The service design has not only to consider what is to be delivered, where
and when, but also how it is to be delivered. 'How' decisions must take into account the
degree of customer participation that the service will permit. It should also consider what
activities will be performed in the presence of the customer (front-room activities) and
what will be performed out of the customer's sight (back-room activities).
Service concept: The design process starts with service concept which describes the
target customer and the desired service experience. It also describes how the organisation's
service will be different from others in the field and on what basis will it compete with
the others. For example, while Domino's Pizza stresses on home delivery within half an
hour, Pizza Hut emphasises on the freshness of its pizzas made from dough prepared daily.
Service package: Based on the service concept, the next step is to create a service
package. This includes the physical items, the sensuous benefits and the psychological
benefits that the service will provide. For example, a management institute may provide
air-conditioned class rooms, equipped with the best and most comfortable furniture, the
latest training aids like computer projection systems, a well stocked library, an ultra
modern computer centre, a cafeteria and so on in terms of physical items. It may have
highly qualified faculty members who employ the latest audio video training aids for
teaching. This provides the sensuous benefit. The institute may have a brand name and
adopt a stringent screening system for admission. Being a member of such an elite group
would provide the psychological benefit.
The physical, the sensuous, and the psychological benefits must be compatible with
the service being provided. It would be pointless to provide very comfortable chairs and
tables in a fast food restaurant where the customer is expected to be served quickly and
is expected to leave quickly after service. Similarly, self help service would be totally
out of place in a restaurant which specialises in serving made-to-order meals from an
exclusive menu of exotic dishes.
Performance specifications: After defining the service package, performance specifications
are developed. They outline customer requirements and customer expectations.
Design specifications: The design specifications include the activities to be performed
by the service provider so that the service can be consistent. They also include the special
skills that the service provider should acquire. A cost and time estimate is included at
this stage. The location, layout and other details of the service facility are also considered.
So the design specifications include the physical, sensuous and psychological benefits
that are to be provided.
Delivery specifications: These outline the work schedule, the deliverables of the service
and the location at which the work is to be carried out.
Service design is influenced by factors such as the nature of service in terms of labour
intensity, contact with the customer, interaction with the customer, and customisation
provided-choice, fixed or adaptation.
3. 7 CLASSIFICATION OF SERVICES
Services can be classified into the following categories:
Personal services: In such services contact and interaction with the customer is very high
and invariably the customer is part of the throughput of the system. A high degree of
adaptive customisation is provided. The customer is treated on a personal and individual
basis. Such services are labour intensive. Examples are beautician, dental practice, driving
school, optician, sports coaching and so on.
Professional services: There is low contact and high interaction with the customer in
such services but the customer is not part of the throughput. Adaptive customisation is
provided. Examples are accountant, architect, solicitors, finance consultants and so on.
Mass services: In mass services the contact with customer is high but the interaction with
the customer is low. Choice is provided to the customer and the service is customised.
Bus service, coach service, hotel, rail service and so on are examples of such services.
Service shops: Clinics, cafeterias, service stations and so on fall in the category of service
shops. In such services the contact and interaction with the customer is high. The services are
not as labour intensive as personal services. The degree of customisation varies. For instance,
the college offers fixed courses. Within each course there is no customisation possible, however,
the students may take several courses of his choice in addition to the mandatory courses.
Service factories: These are characterised by low contact and low interaction with
the customer. Only an adaptive degree of customisation is offered to the client. Labour
intensity in such services is of a low order. Banks, postal services and so on are examples
of service factories.
3.8 TECHNOLOGY AND DESIGN

The advent of computers and information technology has revolutionised the design
process. The product cycle is becoming shorter and new products hit the market at a
much rapid pace than before. Companies like 3M innovate at a rapid pace. Twenty-five
percent of 3M's revenue comes from new products every year. Computer Aided Design
(CAD), Computer Aided Engineering (CAE), Computer Aided Manufacture (CAM) and
Collaborative Product Commerce (CPC) are being commonly used.
Computer Aided Design (CAD): It is a software system that uses computer graphics
to help in creation, modification and analysis of a design. The software generates
2 dimensional or 3 dimensional images based on plan and elevation views. The images
can be rotated to view the object from any angle. The design can be modified. Built
libraries exist in the software to guide on the materials to be used, the colour scheme and
so on. The design can be modified. Once the design is finalised the software generates
drawings with dimensions and material specifications.
Computer Aided Engineering (CAE): Some CAD packages incorporate computer aided
engineering also. They are capable of analysing the design for its engineering strengths
and flaws. A finite element analysis can be performed. The components can be subjected to
various tests virtually on the computer and analysed for their performance. For instance,
the package can be used to test whether a car body and chassis will be able to withstand
a collision or an accident. Autocad is a software with which the design can be optimised
from an engineering point of view.
Computer Aided Manufacture (CAM): Computer aided manufacture refers to the control
of the manufacturing process by computers. CAD/CAM converts the CAD designs into
instructions for computer-controlled machines which may be coupled with robotics to
produce the product as designed.
Collaborative Product Commerce (CPC): CPC incorporates internet technology to
share CAD generated product design files between various agencies concerned that
are geographically separated. The teams work on the design concurrently in real time,
reducing the time required for design, approval, making of prototypes, testing and
finalising. The design engineers, the production engineers, the suppliers of raw materials
and subassemblies, and all others concerned with the product can use a common virtual
space to view, modify and test designs and can interact with each other in real time even
when they are not co-located.
Quality of design and quality of manufacture contribute to the success of any product.
The product should be reliable, easily maintainable and have value. These aspects of the
product or service are discussed in a subsequent chapter.
3.9 SUMMARY
A product or service which fails to satisfy the customer will be rejected by the customer.
It is important that products and services are correctly designed.
Traditionally, designing has followed a step by step process. Nowadays concurrent
design integrates the various agencies into a single design team. The team understands
the problems of designing, manufacturing and procuring of the right materials. The
design cycle time is reduced, wastages and cost are cut down and the firm gains a
competitive edge.
The design process consists of idea generation, feasibility study, preliminary design,
production design and final design. The ideas are subjected to a market analysis to
consider the market potential and market share of the product, an economic analysis to
study the profitability of the product and a technical analysis to examine the viability of
production. If the product is found feasible, prototypes of the product are made, tested
and modified till the desired results are obtained. The final design is evolved after pilot
runs or test marketing is conducted. It includes detailed engineering drawings and
specifications.
The design of services is affected by the characteristics of services. Services are
intangible and can only be 'experienced' by the customer. They are heterogeneous as the
output is based on the customer's preferences and perceptions. The customer is often
the throughput of the system. The service design has not only to consider what is to be
delivered, where and when, but also how it is to be delivered. 'How' decisions must take
into account the degree of customer participation that the service will permit. It should
also consider front-room activities and back-room activities.
The design of services begins with a concept which details the service experience and
the target customers. The service package consisting of the physical, the sensuous and
the psychological benefits is designed. This leads to performance specifications, design
specifications and delivery specifications.
Services can be classified into personal services, professional services, mass services,
service shops and service factories.
Information Technology developments have ushered in computer aided design,
computer aided engineering, computer aided manufacture and collaborative product
commerce.
I CONCEPT QUIZ I
State True or False
1. Design process starts with making a prototype.
2. Manufacturing engineers produce a product concept.
3. Concurrent design teams also include the supplier's representatives.
4. Form design refers to the performance of the product.
5. Production design deals with how the product will actually be made.
6. Simplification results in increase in costs.
7. Standardisation leads to increased productivity.
8. Modular designs are more difficult to maintain and repair.
9. Services provide physical items, sensuous benefits, and psychological benefits.
10. In mass services the contact with customer is high but the interaction is low.

1. Form design is concerned with:
(a) The physical appearance of the product.
(b) The performance of the product.
(c) The reliability of the product.
(d) The maintainability of the product.
2. A feasibility study consists of:
(a) A technical analysis. (b) An economic analysis.
(c) A market analysis. (d) All of the above.
3. Which of the following is not a part of professional services:
(a) Low customer contact.
(b) High interaction with the customer.
(c) The customer is a part of the throughput of the system.
(d) Adaptive customisation is provided.
4. Which of the following is not an example of mass services:
(a) Bus services. (b) Rail services.
(c) Banking services. (d) Hotel services.
5. Marketing deparbnent is responsible for:
(a) Design specifications. (b) Manufacturing specifications.
(c) Performance specifications. (d) Material specifications.
6. Which of the following deparbnents may not be represented on a concurrent
design team:
(a) Marketing deparbnent. (b) Design engineering deparbnent.
(c) Manufacturing deparbnent. (d) HR deparbnent.
7. Production design deals with:
(a) What to produce. (b) Where to produce.
(c) When to produce. (d) How to produce.
8. Postal services are an example of:
(a) Service shops. (b) Professional services.
(c) Personal services. (d) Service factories.
9. CAD is a software system which helps in:
(a) Programming computerised numerically controlled machines.
(b) Programming robots to move materials between machines.
(c) Creation, modification and analysis of a design.
10. Design for manufacture and assembly (DFMA) involves:
(a) Making the maximum number of products.
(b) Use the maximum number of parts.
(c) Use the maximum number of tools.
Fill in the blanks:
1. Product design deals with _ _ _ _ _ _ and _ _ _ _ _ _ _ of the product.
2. Concurrent design integrates the _ _ _ _ _ _ and _ _ _ _ _ _ _ processes.
3. _ _ _ _ _ _ is the discovery of novel products, services, techniques, ideas,
information or systems.
4. The _ _ _ _ _ _ _ _ _ _ _ considers whether the product can be produced
by the existing facility or not.
5. _ _ _ _ _ _ _ _ is concerned with the physical appearance of a product.
6. Services provide _______, _______ and _ _ _ _ _ _ benefits.
7. Modular designs are common in _ _ _ _ _ _ _ industry.
8. The reduction of variety of unnecessary parts, materials and processes is achieved
through _ _ _ _ _ _ __
9. A balance must be drawn between _________ and the advantage of
variety and uniqueness at the design stage.
10. The final design includes detailed engineering drawings and _ _ _ _ _ __
IQUESTIONS I
3.1 Explain the concurrent design process. How does it differ from the traditional
approach to product design?
3.2 Explain the difference between form design and functional design.
3.3 What are the different kinds of analysis carried out in a feasibility study for new
products?
3.4 What steps would you take to make a design simple?
3.5 Explain modular design? What are the advantages of modular design?
3.6 Usability is posing a major challenge in today's world of complex products.
Comment.
3.7 Write a short note on design for manufacture and assembly.
3.8 What are the characteristics of services that influence their design? Explain the
effect on design of each characteristic.
3.9 What do you understand by the service package while designing a service?
3.10 How do you classify services?
Reliability, Maintainability,
Availability and Value Analysis
Simplicity is prerequisite for reliability
EDSGER DIJKSTRA
LEARNING OBJECTIVES
• Explain failure and why products or systems fail
• Understand what is reliability and how it can be built in product design
• Understand maintainability and its effects on product design
• Understand the concept of product or system availability
• Understand value engineering and its importance in product design
4.1 INTRODUCTION
Products must be robust and should satisfy the customer's needs. They have to meet the
performance standards expected of them. Despite the best efforts, products and equipments
do fail to perform. This may be due to failure of some components or the failure of the
product itself. In such circumstances, it is imperative that the functionality of the product
be restored at the earliest. The product must lend itself to easy maintenance and repairs.
Ideally, products should be so reliable that they never fail and so cheap that they can
be discarded if they fail. In case they are not failure-proof, they have to be so rugged
that they require no preventive maintenance. If they are not cheap enough to discard,
they should be so simple that they can be repaired easily. However, ideals can rarely be
achieved and viable trade-offs have to be made.
44
Reliability, Maintainability, Availability and Value Analysis 45
Organisations have to compete on the basis of cost also. However, this must be done
without impairing the functions of the product. Costs can often be reduced by using
different materials or different processes for manufacture. Value engineering is a tool
which addresses this aspect.
4.2 FAILURES
What is failure? When a product, system or component no longer performs its required
function, it is said to have failed. The definition assumes that the required function is
clearly defined and the conditions under which the required function will be executed
are also clearly spelt out. Sometimes failure may not be attributable to the product or
its components. It may be attributable to faulty operation of the product by the user.
For instance, running a grinder mixer empty is likely to damage it, or running a water
heater when it is empty is likely to cause damage to the heating element.
Types of failure: Failure is not necessarily total. It could be partial, gradual or sudden.
In the case of partial failure, the item does not work as well as expected. If a refrigerator
does not cool to the degree expected of it, it is because of failure or wrong setting of the
thermostat. Gradual failure takes place progressively over a period of time and can often
be avoided by proper inspections and maintenance. The fan belt of a car fails over time.
Proper inspection can reveal any fraying or other damage and the belt can be replaced
before failure occurs. Sudden failure cannot be easily predicted by inspections and occurs
very rapidly. For example, electric light bulbs fuse suddenly.
Why does a product, system or service fail? Items fail due to:
Weakness. It is inherent in the product or service itself. When the item is in normal use,
the stress on it may cause any of the types of failures described earlier. The cause of
such failure may be poor design, faulty materials, faulty processes or faulty operations.
Misuse. This implies application of stresses which are beyond the normal capability
of the product or service to handle. For example, if a fast food restaurant designed to
produce thirty pizzas an hour suddenly gets a group of 100 customers all wanting pizza,
the service will break down.
Failure of all parts of a product may not be critical. The failure of pilot lamps or
of the speedometer on the dashboard of a car has no effect on its performance. At the
design stage, critical parts must be identified and higher reliability built in them. Failure
rates generally follow a typical bath tub curve as shown in Figure 4.1. Failures occur
more often at the introduction stage or nearing the end of the life of the product.
t
Number of failure s
Product life -
Figure 4.1 Failure Rate .

4.3 RELIABILITY
The aim of making a product reliable is to ensure that it can be used without failures.
While a failure-proof product is an unachievable chimera, the user would like a product
to perform for a particular period without any failures. Reliability means different things
to different groups. From the designer's point of view, reliability is the quality of product
performance under specific environmental conditions. From the user's point of view, it is
the quantum of dependence that may be placed on a guarantee of failure-free performance
of a product for a specific purpose and duration. From the maintainer's view point,
reliability of a product is its susceptibility to quick and effective repairs after failure.
Reliability can be defined as the probability of successful performance of a product
or a component over a specific period of usage under specified conditions. Successful
performance implies no more than a specified number of failures. The number of failures
specified may often be zero. For instance, a car battery may be guaranteed to function
for 36 months. The specified conditions may lay down that the battery is maintained at
a particular level of charge and the electrolyte maintained at a certain specific gravity.
This may also involve periodic topping up of the battery. Reliability of a product is a
function of the reliability of its components. If components function in series then the
failure of a single component will result in the failure of the product.
If a product consists of three parts, each having a reliability of 0.9 and if the parts
function in series as shown in Figure 4.2 then the reliability of the product is:
Figure 4.2 Components in Series.
Reliability of the product= R1 x R2 x R3

= 0.9 X 0.9 X 0.9 = 0.729
If a product consists of components which work in parallel as shown in Figure 4.3,
the product will function as long as at least one part is functional. The probability that
at least one part is functional is equal to 1 minus the probability that all parts will fail.
The reliability is given as:
Reliability = 1 - (1 - R1)(1 - R2)(1 - R3)
= 1 - (1 - 0.9)(1 - 0.9)(1 - 0.9)
= 0.999
Figure 4.3 Components in Parallel.

From the calculations, it is obvious that the reliability can be improved by using
components in parallel even if it implies adding redundant components to the product.
While using components in parallel, the cost of adding more components must be taken
into account. A trade-off between costs and number of parallel redundant components
must be made. Dynamic programming can be used to solve such problems. The method
is explained in the supplement at the end of this chapter.
Reliability can also be defined as the length of time a product or service is in
operation before it fails. This is called the Mean Time Between Failures (MTBF) and is
the reciprocal of the failure rate. If a refrigerator thermostat fails once in five years, its
failure rate would be 1/5 = 0.2 per year and the MTBF would be 1/0.2 = 5 years.
Reliability can be achieved by using proven and tested designs. Modular designs
ensure that proven components and modules are used in design. The simplest possible
design should be used. If the number of components is few and their design is simple,
the probability of failure is lowered. Components used must have high reliability. It is
easier to carry out reliability tests on components than on the whole assembled product.
Wherever there is likelihood of failure, use redundant parts working in parallel. The
probability of all parts failing in parallel is given by F'Z, where F is the probability of
failure and n is the number of parts. Correct methods of operating the product must also
be specified so that the failure does not occur due to incorrect usage.
4.4 MAINTAINABILITY
No product or equipment can be made fault free and is bound to fail sooner or later. In
order to ensure high availability, it is necessary that the product be restored to acceptable
levels of working as soon as possible. Maintainability is the ease with which a product
can be repaired or maintained. The object of maintainability is to design and develop
systems and products which can be maintained in the least time and at the least cost,
with minimum expenditure of engineering support resources without adversely affecting
its performance characteristics.
Maintainability can be defined as the probability that a system or product can be
restored to operational effectiveness within a given period with prescribed maintenance
procedures. Maintainability can be improved if the following factors are kept in mind
at the design stage:
Accessibility: Parts and components should be easily accessible, especially those which
require to be periodically maintained. For instance, the battery of the Maruti Omni has
very poor accessibility. It is located under the rear seat and four screws and the seat
have to be removed in order to access it. The only saving grace is that it has such a high
reliability that it hardly ever needs to be accessed except during periodic servicing and
maintenance performed by the professionals.
Standardisation: Standardisation of components make them easily available and helps
to reduce the inventory.
Monitoring facilities: Monitoring devices should be inbuilt at the design stage, especially
for critical failures. For instance, in a car, if the brake fluid level is low, a light indicator
on the dashboard panel glows red.
Procedures: Correct operating procedures should be laid down in the user manual so
that the product will not be damaged by improper use. These manuals should be simple
to understand and follow. In case of complex products, a trained operator may have to
demonstrate the use of the product to the user.
Safety: Safety devices should be incorporated in the product. Not only should the
product be safe in handling but should also have inherent safety measures designed in so
that it cannot be used improperly. In a food processor cum mixer, the mixer unit cannot
be operated till the lid of the processor unit is properly fixed and locked in position.
Availability of literature and training: The user must be provided with adequate
instructions on the use of the product. This should also include fault finding and simple
maintenance and repairs that can be performed by the user himself. If necessary, the user
must be trained to use the product.
A quantitative measure of maintainability is the Mean Time To Repair (MTTR). It is
the average time taken to restore the system or product to serviceable level.
4.5 AVAILABILITY
Availability can be defined as the probability that the product or system will be capable
of rendering adequate performance at any randomly selected time. It is a combination
of reliability and maintainability. If the mean time to repair of a product is very high, it
may adversely affect its availability. Consider the two cases given in Table 4.1:
Table 4.1
Product No. of failures MTTR (days) Product non-availability Availability (%)

per year (days in a year)
A 6 3 18 95
B 3 12 36 90
Availability is influenced both by the frequency of failures as well as the mean time
to repair.
Syst em ava1.1a b"l"ty MTBF

1 1 = MTBF + MTTR
Availability of a system or product can be improved by making the product reliable,

improving the maintainability of the system or product or replacing the product at the
right time. As the life of a product increases, the wear and tear on it increases and the
maintenance costs increase. A product should only be used till the time its operation is
economic. The economic life of a system or product can be determined through replacement
models. Even in the case of products that fail suddenly, replacement models help us to
determine the best strategy for replacement. Replacement models are explained in the
supplement at the end of this chapter.
4.6 MAINTENANCE
The overall availability of a product or equipment is dependent on its reliability and its
maintainability. All products, no matter what their quality are prone to failures. This
applies equally to machinery and equipments used in the production processes both
for service and manufacturing organisation. Any non-availability due to partial or total
failure leads to economic loss. Maintenance of these facilities and equipment is undertaken
with the aim of ensuring that these are in good working condition at all times, and if
breakdown takes place they are brought back to a satisfactory working state as soon as
possible. Maintenance extends not only to equipment and machinery but also to land,
buildings and other facilities. The objectives of maintenance are to maximise availability,
preserve the value of assets and to ensure uninterrupted production processes with
minimum cost. Maintenance may be broken down to two types-preventive maintenance
and breakdown maintenance.
Preventive maintenance: Continuous usage of machines lead to deterioration, changes
in dimensions of components, and weakening of members owing to impact, fatigue and
corrosion. This results in the inability of the machine to take full load, reduction in speed
and deterioration in the quality of output. The objectives of preventive maintenance are
as follows:
(a) Minimise possibility of unanticipated production interruptions by locating source.
(b) Make plant and machinery always available and ready to use.
(c) Maintain value of equipment by periodic inspections, repairs and overhaul.
(d) Reduce work content of maintenance jobs.
(e) Ensure safety of life and limbs of workmen.
Preventive maintenance is carried out periodically or when indicated by monitoring
devices. For instance an indicator on the dashboard of a car may light up when the
brake fluid level falls lower than the required level. Preventive maintenance generally
consists of inspection, cleaning, lubrication, adjusbnents and replacement of any parts
or components that may be required. For example, the fan belt of a car may be replaced
if it is found to be frayed on inspection; or spark plugs of the car may be replaced after
20000 km even though they are still working to ensure that they do not suddenly fail.
Preventive maintenance reduces the number of breakdowns and consequent loss due to
the equipment becoming unavailable for use.
Breakdown maintenance: This is a reactive process and undertaken after a machine
breaks down. Breakdowns can result in disruption of the production process and resulting
losses due to delays, payment of wages for idle time, and material wastages. Breakdowns
may also lead to accidents and injuries. While most breakdowns can be prevented by
good preventive maintenance, it must be appreciated that preventive maintenance also
involves costs. As the costs on preventive maintenance increase the costs on breakdown
maintenance will decrease. A balance has to be struck between the two so that equipment
is operated at the least total cost.
Total productive maintenance: Traditionally, maintenance has always been viewed as a
task of the maintenance engineers. Operators operated the equipment and the engineers
maintained it. In the 1970's the concept of total productive maintenance was introduced.
The concept is in line with the philosophy of total quality management and lean production
methods. It advocates that operators should maintain their equipment themselves and
maintenance engineers should be called in only for high-level maintenance tasks and
serious breakdowns. There should be total employee involvement in maintenance tasks.
TPM has basically 3 goals-zero product defects, zero unplanned failures and zero
accidents. Total productive maintenance emphasises on eight issues also known as the
eight pillars of TPM. Since it was first introduced in Japan the terms are in Japanese.
These are:
1. 5S approach. Cleanliness is achieved through the 5S approach. Cleaning and
organising helps the team to uncover problems and recognising problems is the
first step to improvement. The elements of the 5S approach are described below:
(a) Sieri (Sort). Separate all things that are not necessary and eliminate them or
tidy them away.
(b) Seiton (Straighten). Arrange the essential things in order so that they can be
quickly and easily accessed and put away.
(c) Seiso (Sweep). Keep machines and working environment clean.
(d) Seiketsu (Schedule). Make cleaning and checking a routine practice; maintain
a pleasant environment.
(e) Shitsuke (Sustain). Standardise the previous four steps and constantly improve
them.
2. Jishu Hozen (Autonomous maintenance). Jishu Hozen aims at developing the
worker to undertake small maintenance tasks himself so that the more qualified
maintenance crews are free to take on high level complex maintenance tasks. The
first step is to train the workers on how to clean the machines and discover areas
of equipment malfunction. If during the cleaning some abnormality is observed,
for example, loose electrical connection or damaged insulation, it is rectified or
flagged for rectification. The second step involves locating those areas of the
machine that are difficult to clean, lubricate or inspect. Accessibility to such
areas is improved-for instance a screwed on cover may be replaced by a snap
on cover or the cover may be eliminated altogether. The operator is trained to
look for and eliminate forced deterioration.
3. Kobetsu Kaizen (Individual improvements). Kaizen is a process of continuous
small improvements. While the western philosophy is "If it ain't broken, don't
fix it", Kaizen advocates, "Do it better, make it better, improve it even if it isn't
broken, because if we don't, we can't compete with those who do." Kaizen reduces
waste; improves space utilisation, product quality, use of capital, communications,
production capacity and employee retention; and provides immediate results.
Instead of focusing on large, capital intensive improvements, Kaizen focuses on
creative invesbnents that continually solve large numbers of small problems.
4. Planned maintenance. This helps us to produce defect-free products for total
customer satisfaction by having trouble-free machines. It improves the efficiency
of the maintenance deparbnent.
5. Quality maintenance. It focuses on setting targets to ensure quality of products.
It identifies the parts of the equipment that affect product quality and then aims
at eliminating non-conformances to quality of design through ensuring the correct
functioning of these parts.
6. Training. Employees learn the "know how" of how to overcome problems
while working on the job. However, they do not know why problems occur. It is
only this knowledge that can help them to prevent problems from occurring in
the first place. Training aims to impart skill and knowledge operators to operate
and maintain their equipment.
7. Office TPM. Office TPM is followed to improve productivity, infuse efficiency
in the productive functions and to identify and eliminate losses. It addresses 12
types of loss-processing loss; cost loss in areas such as procurement, accounts,
marketing and sales leading to high inventories; communication loss; idle loss;
set-up loss; accuracy loss; loss on account of office equipment breakdown;
communication channel breakdown; time spent on retrieval of information; non-
availability of correct on-line stock status; customer complaints due to logistics;
and emergency dispatches and purchases.
8. Safety, health and environment. This aims at achieving zero accidents and
defects.
TPM seeks to maximise the effectiveness of equipment throughout its life.
4. 7 VALUE ANALYSIS
Value analysis, looks at a function that the product or service fulfils and explores the
possibilities of performing that function in cheaper ways. This is done by optimising
their basic design as opposed to work study which attempts to find better ways of
doing a task. Cost of a system can be reduced by using different materials, improving
the design or the manufacturing processes. However, these changes should not affect the
basic functions of the system.
Value analysis originated during the Second World War, when shortages of materials
were a serious problem for companies engaged in the war effort. Pioneering work was
done by Mr. Lawrence Miles of GEC and he is credited with having saved his company
$200 million in 17 years. Miles defined value analysis as ' ... a philosophy implemented by
the use of a specific set of techniques, a body of knowledge and a group of learned skills.
It is an organised creative approach which has for its purpose the efficient identification
of unnecessary cost, that is, cost which provides neither quality, nor use, nor life, nor
appearance, nor customer features.'
Value analysis and value engineering are synonymous and often used interchangeably.
Value engineering is generally the term applied to the application of this technique to a
product, process or system in the design or concept stage and value analysis is applied
to existing products, processes and systems.
Value is difficult to define precisely. It is commonly associated with worth, price
or cost but has a different connotation when applied in value analysis. We can think
of different types of value, such as economic value, moral value, aesthetic value, social
value, political value, religious value and so on. Of these, only the economic value can
be computed subjectively. Value can be mathematically represented as:
where V is value
F is function
and C is cost.
In order to maximise value, we should maxnnise the function to the extent necessary
for the end-use and minimise the cost without affecting the necessary level of function.
Approach and basic steps: Value analysis requires a questioning attitude. While carrying
out value analysis following questions are asked:
What is the item? An item for value analysis should be carefully selected so that it
gives the greatest return for the cost incurred in analysis. Some items likely to give good
returns are:
1. Items of high usage
2. Fairly complex items where simplification of some parts would enhance value
3. Imported items as cost savings will be in terms of foreign exchange
4. Proprietary or monopoly items do not improve because of lack of competition
5. Items that have been in use for a long time without review of their value
6. Items designed in a hurry
What does it cost? The answer can be obtained through objective data.
How many parts does it have? Costs can often be reduced by reducing the number of
parts.
What does it do? This question pertains to the functional value. This question should
be answered explicitly. It is suggested that the answer to this question be recorded in two
words, a verb and a noun. For example, a lamp gives light; a structural beam supports
weight and so on.
How many functions are required? In case of multifunction items, determine how many
are currently required and how many will be required in the future.
Which is the primary function? In a multifunctional product, the functions must be
prioritised and the primary or main function is identified.
What else would do the job? The answer to this question is arrived at through value
analysis techniques. Alternatives are generated at this stage.
What will be the alternatives cost? The cost of each of the alternatives is then determined
to find what will best serve the purpose.
Value analysis at its best

In an automobile industry, a pressed sheet metal part with spring prongs was being
used to cover holes on the dashboard. This was an imported component. With import
restrictions , the firm had to find an indigenous substitute. During discussions , no one
had any idea as to the need for the hole in the first place . The matter was referred
to the foreign collaborator. His reply read:
'Holes meant to take electric cigarette lighter not supplied on Indian model. Eliminate
holepunching .'
Ignorance is bliss!!
EKC concept: Alternatives may emerge by analysis based on the EKC concept, that is:
Eliminate. An item or a part may be totally eliminated.
Keep. An item, component or subassembly may warrant to be kept, as it is, in its present
form.
Change. An item may have to be changed for enhancement of its value.
MISSS concept: The following steps can be followed in case of items that need to be
changed:
Modify. Slight modifications in design, shape, size, specifications, colour, etc.
Incorporate. Enhance value by incorporation or addition of some parts.
Subdivide. Sometimes a composite, complicated item can be obtained at a cheaper rate
by procuring smaller, simpler components and assembling them ourselves.
Substitute. Complete or partial substitution can be effected, cutting down cost and
enhancing value.
Simplify. Change design, size or shape fully to enhance value.
Examples of value analysis

1. Water flushing tanks used in toilets were earlier made of cast iron. The float valve
and components inside the tank were made of iron or brass. This was substituted
by a plastic body and plastic components. This led to significant cost reduction.
The weight of the tank has also reduced. While the ruggedness was affected to
an extent, the cheaper cost of replacement outweighs this drawback. This is a
typical case of reduction of cost through change of materials.
2. A firm was manufacturing 5 lakh door hinges per year by the process of stamping
and forming. Various alternative processes like casting, forging, welding, and
rolling were considered. Possibility of using plastic hinges instead of steel hinges
was also explored. Finally it was decided to manufacture hinges by the rolling
process resulting in a saving of cost of ?1 per hinge. (1980 prices).
3. Caustic soda and caustic potash manufactured by a chemical unit, were being
packed in a mild steel drum (24 gauge) of capacity 150 kg. The cost of each
drum was ?36 and the annual consumption was 1,00,000. The drum was replaced
by a polythene bag of 50 kg capacity through value analysis. The cost of the
polythene bag was ?3.10 each. The change resulted in saving of 33% costs in
packing and also facilitated storage and handling.
4. During the Second World War, USA was to build 1000 landing crafts each having
a 200 gallon capacity petrol tank costing $520 each. Through value analysis, it was
decided to use four 50 gallon standard drums instead at a total cost of $80 each.
4.8 SUMMARY
A faultless product is almost unachievable but it should be capable of being easily restored
to its normal functionality in case of failure.
Products, services or systems are said to have failed when they can no longer deliver
the performance expected of them. Total or partial failures may occur due to the stress
on parts and subcomponents or due to the mishandling by the user. Some items like
electronic parts and so on are subject to sudden failure. Failure of some items may not
affect the performance of the system. Critical items whose failure will affect performance
must be identified.
Reliability is the probability of successful performance of a product, service or system
over a specified period of usage under specified conditions. Reliability can be measured as
the mean time between failures. It can be built in at the design stage through the use of
simple, proven and tested designs and modularisation. Redundant parts working in parallel
can also improve reliability. However, a trade-off exists between costs and redundancy
and dynamic programming is a technique that can be employed to solve such problems.
Along with reliability, it is important to ensure that the functionality of the system
can be easily and quickly restored on failure. It has two aspects, firstly maintenance
should aim at avoiding failure through periodic checks and repairs/replacements and
secondly, it should aim at quick repairs once a system fails. It is measured as the mean
time to repair. Maintainability can be improved through good accessibility, standardisation,
monitoring facilities, documentation and user training.
Availability or the probability that the system will be capable of desirable performance
at any randomly selected time is a function of reliability and maintainability.
Value engineering for products at design stage and value analysis of existing products
aims at reducing costs without adversely affecting the functional value of a product.
Reduction in costs can be achieved by using different materials, processes or simplifying
designs. Value analysis identifies the primary function being performed by a system and
then generates alternative ways of performing the same function. The alternatives are
evaluated on the basis of cost and a cheaper alternative found. It uses Elimination, Keep
or Change the concept (EKC), and in case of change considers Modifying, Incorporating,
Subdividing, Substituting or Simplifying designs (MISSS concept).
I CONCEPT QUIZ I
State True or False
1. Products can be made failure proof.
2. Products fail only because they are not used properly.
3. Failure can always be prevented through proper inspection.
4. Failure of all parts of a product may not be critical.
5. Reliability is the life of a product.
6. Reliability is the failure-free performance of the product during its life time.
7. Reliability of a product is a function of the reliability of its components.
8. Maintainability is the ease with which a product can be repaired or maintained.
9. Availability is the probability that the product or system will perform satisfactorily
at any random selected time.
10. Availability is affected by the frequency of failures and the mean time to repair.

1. Reliability can be improved:
(a) Through value analysis.
(b) By having redundant components in series.
(c) By having redundant components in parallel.
(d) By reducing its cost.
2. Value analysis:
(a) Attempts to reduce costs by using different materials, designs and processes.
(b) Attempts to perform the function fulfilled by the product in a cheaper way.
(c) Attempts to find different uses for a product.
3. Reliability can be improved by:
(a) Adding additional components to a product.
(b) Adding additional components to a product to work in series.
(c) Adding additional components to a product to work in parallel.
(d) Installing safety devices in the product.
4. Reliability is:
(a) The ability of a product to perform without failure.
(b) The ability of the product to function properly throughout its life.
(c) The probability of the product to perform successfully over a specified period
of usage.
(d) The probability of the product to perform successfully over a specified period
of usage under specified conditions.
5. Reliability can be measured as:
(a) Mean time to repair.
(b) Mean time between failures.
(c) Mean time between failures divided by mean time to repair.
(d) Mean time to repair divided by the mean time between failures.
6. Maintainability can be measured as:
(c) Mean time between failures divided by mean time to repair.
(d) Mean time to repair divided by the mean time between failures.
7. Availability can be measured as:
(c) Mean time between failures divided by the sum of mean time between failures
and mean time to repair.
(d) Mean time to repair divided by the sum of mean time between failures and
mean time to repair.
8. Value analysis:
(a) Determines the value of a product.
(b) Explores methods of reducing the cost of the product by reducing its functions.
(c) Explores cost reduction through use of different materials.
(d) Explores methods of reducing the cost of the product without affecting its
functions.
9. Maintainability:
(a) Is the ease with which a product can be manufactured.
(b) Is the ease with which components can be accessed.
(c) Is the ease with which parts can be satisfied.
(d) Is the ease with which a product can be repaired.
10. Failure occurs because:
(a) A product is stressed beyond its normal capacity.
(b) The product is misused.
(c) The product is designed poorly.
Fill in the blanks:
1. Failures occur more often at the_ _ _ _ _ _ _ _ or _ _ _ _ _ _ __
2. Reliability of a product is a function of the _ _ _ _ _ _ _ of its components.
3. Reliability is defined as the mean time _ _ _ _ _ _ _ _ _ _ __
4. Maintainability is the ease with which a product can be _ _ _ _ __
5. Redundant parts working in parallel improve_ _ _ _ _ __
6. Maintainability is measured as the mean time _ _ _ _ _ _ _ _ _ _ __
7. Value analysis aims at reducing costs without affecting _ _ _ _ _ _ _ __
8. Availability is a function of _ _ _ _ _ _ _ and _ _ _ _ _ _ __
9. Alternatives in value analysis emerge through an analysis based on _ _ _ _ _ __
concept.
10. Value analysis aims at performing the same function with _ _ _ _ _ _ costs.
I QUESTIONS I
4.1 What are the causes of equipment failure?
4.2 What do you understand by reliability? How can the reliability of an equipment
be improved?
4.3 What is maintainability? How does accessibility affect maintainability?
4.4 What steps would you take to improve maintainability?
4.5 What do you understand by value analysis? Explain with the help of an example.
4.6 How would you select an item for value analysis?
4.7 What are the basic steps involved in value analysis?
4.8 Explain the EKC and MISSS concepts in relation to value analysis. Illustrate your
answer with examples.
Supplement 1
Dynamic Programming
INTRODUCTION
Managers are often faced with problems where decisions are to be taken at different
stages or at different points of time. The success of the solution depends on the set of
sequential decisions taken. Dynamic programming provides a solution to multiperiod or
multistage problems in which the problem parameters change with time.
Dynamic programming is a very flexible approach and is also applicable to stochastic
or probabilistic problems. The technique involves recursive optimisation. It involves
breaking a problem into smaller subproblems called stages, and developing optimal
policies or optimal decisions for each stage. The problem is generally tackled backwards
starting with the last stage and optimising each stage in turn, so that when the first stage
is reached the entire solution is optimised.
The solution procedure is based on Bell's principle of optimality which states that
'an optimal policy has the property that whatever the initial state and initial decisions
are, the remaining decisions must constitute an optimal policy with regard to the state
resulting from the first decision.' It implies that regardless of the earlier decisions taken
which lead to a particular state, the remaining decisions that will be taken shall constitute
an optimal policy or the remaining decisions will yield optimal results.
DEFINITIONS
Some of the terms that are used with regard to dynamic programming are:
1. Stage: Each problem is broken into subproblems or stages. A stage corresponds
to a point in time or a situation where a decision must be made.
2. State: States are associated with each stage and represent the various possible
conditions of the system. Usually, state variables are used to describe the states
of the system.
3. Policy: A decision rule which, at any stage, determines the decision for each
possible state. The effect of the policy decision at each stage is to transform the
current stage into a state associated with the next stage.
58
Supplement I: Dynamic Programming 59
4. Optimal policy: A policy that optimises some criterion or objective. Usually, the
optimal policy optimises a return function which measures the quality of the
possible decisions at each stage.
EXAMPLE 1 Sangeet Electronics is a manufacturer of high fidelity music systems. It

has developed revolutionary circuitry for sound clarity free of wow and flutter. The firm
ensures that their components have the highest reliability possible. The design department
has come up with a new circuit which has three vital components connected in series.
While, the components provide a very sound quality, their reliability is low because of the
sensitive nature of material used. In order to improve the reliability of the circuit it has
been decided to add components in parallel to the original circuit. This would introduce
a certain amount of redundancy in the circuit but would ensure its smooth operation by
increasing reliability. At the same time the cost of the equipment would go up.
Table 1 gives the reliability and cost of the three components:
Table 1 Reliability and Cost of the Components

Component Reliability Cost per unit
A 0.5 t2,000
B 0.7 t3,000
C 0.6 t1 ,000
The total budget available for the circuit is ~10,000. The design engineers have also
found that not more than three components in parallel can be added to the circuit. Some
economies of scale may occur when more than one unit per component is used in the
circuit. The revised cost estimates are given in Table 2.
Table 2 Revised Cost Estimates

Cost of components in t
No . of units A B C
1 2 ,000 3 ,000 1,000
2 4 ,000 5 ,000 2 ,000
3 5,000 6 ,000 3 ,000
How should the circuit be designed for maximum reliability?

Solution: The total budget available for the circuit is ~10,000. The design engineers have
also found that not more than three components in parallel can be added to the circuit.
A B C
Table 3
No. of units Cost of components in ~
A B C
1 2,000 3,000 1,000
2 4,000 5,000 2,000
3 5,000 6,000 3,000
Component Reliability
A 0.5
B 0.7
C 0.6
Reliability, if one unit of each component is used = 0.5 x 0.7 x 0.6 = 0.21
The reliability of each component is given in the previous calculations. If two
components are put in parallel, then the probability that at least one will work is given
by
1-(Probability that both fail)
or 1-(Probability of failure)" where n is the number of components.
Let us work out the probability that at least one component will work.
Table 4
Probability of at least one functioning

Number of components used A B C
1 0.5 0.7 0.6
2 1 - 0.52 = 0.75 1 - 0.32 = 0.91 1 - 0.42 = 0.84
3 1 - 0.53 = 0.875 1 - 0.33 = 0.973 1 - 0.4 3 = 0.936
Let us divide the problem in three stages. We must have at least one component of each
type for the circuit to work. Let us start with component C as stage 3. The maximum
available budget for component C is ~5,000, as ~5,000 would be required for providing
at least one unit of A and one unit of B.
Stage 3: At this stage, we only consider the reliability of component C
Table 5
No. of units 2 3 d. (
Budget (~) (No. of units of C) (Reliability)
1,000 0.6 1 0.6
2,000 0.6 0.84 2 0.84
3,000 0.6 0.84 0.936 3 0.936
4,000 0.6 0.84 0.936 3 0.936
5,000 0.6 0.84 0.936 3 0.936
Supplement 1: Dynamic Programming 61
If the budget available is ~1,000, we can use only one unit of component C giving
a reliability of 0.6. If the budget available at this stage is ~2,000, we have a choice of
either using one unit of component C or two units of component C in parallel. The latter
option gives a reliability of 0.84 which is higher than 0.6 given by using one unit of C.
d* column indicates the best option given a certain budget at the beginning of this stage
and f* column indicates the reliability achieved. Similarly a budget of ~3,000 gives us
the option of using one unit, two units or three units of component C. Three units in
parallel give a reliability of 0.936. As no more than three units can be used, availability
of additional budget does not add to the reliability.
Stage 2: The minimum budget at this stage is ~4,000 (minimum amount required
for one unit each of B and C) and the maximum budget is ~8,000 (since one unit of A
would cost ~2,000). At this stage, we consider the combined reliability of components
Band C.
Table 6
No. of 2 3 d* 1*
Budget units of B (No. of units of B) (Reliability)
4,000 0.7 X 0.6 = 0.42 1 0.42
5,000 0.7 X 0.84 = 0.588 0.588
6,000 0.7 X 0.936 = 0.655 0.91 X 0.6 = 0.546 0.655
7,000 0.7 X 0.936 = 0.655 0.91 X 0.84 = 0.764 0.973 X 0.6 = 0.584 2 0.764
8,000 0.7 X 0.936 = 0.655 0.91 X 0.936 = 0.852 0.973 X 0.84 = 0.817 2 0.852
The figures in the rows represent the reliability that would result for different states.
For instance, if we were to enter this stage with a budget of ~4,000, then we would
have to use one unit of component B and one unit of component C (It is obligatory to
have at least one component of each type). We would get a reliability of 0.7 from one
unit of component B and 0.6 from one unit of component C. The combined reliability
would be 0.42 as these components would work in series. If we consider a budget of
~5,000 at this stage, then we have a choice of using one unit of component B and two
units of component C. The reliability of one unit of component Bis 0.6 and the reliability
of two units of component C is 0.84 (from stage 3). The combined reliability of this
combination is 0.588. This is reflected in the optimal decision column (d") and the
reliability is reflected in the optimal reliability column (() against the row showing the
entering state as ~5,000. With a budget of ~6,000, we have the option to use one unit
of component B (cost ~300) and three units of component C (cost ~3,000) or two units
of component B (cost ~5,000) and one unit of component C (cost ~1,000). The former
combination gives an overall reliability of 0.655 while the latter combination gives a
reliability of 0.546. The better of the two is reflected in the column d* and f. Similarly
combinations for availability of other budgets are worked out and optimal values reflected
in columns d* and f*. Next we consider Stage 1, where we consider the number of units
of component A to be used.
Stage 1: The budget at this stage is ~10,000.
Table 7
No. of 2 3 d. (
units Budget (No . of units) (Reliability)
10,000 0.5 X 0.852 = 0.426 0.75 X 0.655 = 0.491 0.875 X 0.588 = 0.515 3 0.515
If one unit of component A is used, it costs ~2,000. The balance amount, that is, ~8,000
is the budget available at Stage 2 (for incorporating components Band C). If we consult
the table for Stage 2, for an entering state of ~8,000 budget the optimal reliability is 0.852
(from column f*), and is obtained by using two units of component B (from column d*
at a cost of ~5,000) and three units of component C (cost ~3,000). Similarly, if two units
of component A are used in parallel, then the budget at Stage 2 is ~6,000, which gives
an optimal reliability of 0.655. If three units of component A are used then the budget
entering Stage 2 is ~5,000 which gives an optimal reliability of 0.588. As can be seen from
the previous table the best option is to use three units of component A. The budget for
Stage 2 is ~5,000. If we consult the table for Stage 2 and a budget of ~5,000, we find
that the optimal decision is to use one unit of component B (from column d * of table for
Stage 2). The budget available for Stage 3 is ~2,000. From the table for Stage 3, we
find that the optimal decision for an entering budget of ~2,000 is to use two units of
component C.
The optimal circuit is:
Component A three in parallel
Component B 1
Component C two in parallel
Reliability 0.515
Dynamic programming can also be used to deal with production scheduling problems.
Let us illustrate a production problem with an example.
EXAMPLE 2 ABC Company produces electric generators. Its production facility can
produce up to five generators a week. The unit has limited storage space and can store
at the most four generators. The cost of production is ~20,000 per unit and the cost of
set up is ~1,30,000. The cost of holding inventory is ~10,000 per unit per week. The firm
has a weekly demand of three units for the next six weeks. At the end of six weeks the
firm desires to have no inventory. What is the optimal production schedule?
Solution:
Let us divide the problem into six stages representing the six weeks. Let us start with the
sixth week. We could start the week with no inventory or inventory of up to three units
as the demand in the sixth week is only three units. We can tabulate our computations as
given in Table 8.
Stage 6
Table 8
Make inventory 0 2 3 d* f*
(Make)
0 13+6=19 3 19
13+4=17 2 17
2 13+2=15 15
3 0 0 0
The figures in the cells represent the cost incurred (in 0000s of f). For instance, if we
enter this stage with 0 inventory, we will have to produce three units in the week.
This will involve a set-up cost of fl,30,000 and a production cost of f60,000-a total of
fl,90,000. Similarly, if the entering state is one unit in inventory, then two units have
to be manufactured at this stage at a cost of 1,30,000 + 40,000 = fl,70,000. Now let us
consider Stage 5 (or week 5) with the data given in Table 9.
Stage 5
Table 9
Make
inventory 0 2 3 4 5 d* i*
0 19+0+ 19=38 21 +1 +17=39 23+2+15= 40 3 38
17+0+19=36 19+1 +17=37 21 +2+15=38 23+3+0=26 5 26
2 15+0+ 19=34 17+ 1 + 17=35 19+2+ 15=36 21+3+0=24 4 24
3 0+0+ 19=19 15+ 1 + 17=33 17+2+15=34 19+3+0=22 0 19
4 0+1+17=18 15+2+15=32 17+3+0=20 0 18
If we enter this stage with an inventory of zero, we have the choice of manufacturing
three, four or five units in the week. We cannot manufacture less than three as our weekly
demand is three units. If we manufacture three units we have to spend fl,90,000 to
manufacture three units (1,30,000 + 60,000), we shall spend nothing on inventory holding
costs as all units will be sold in the week and we shall have to spend another fl,90,000
as we shall be entering stage 6 with an inventory of zero. If we manufacture four units
we have to spend f2,10,000 to manufacture four units (1,30,000 + 80,000), we shall spend
fl0,000 on inventory holding costs as one unit will be carried forward to the next week
and we shall have to spend another fl,70,000 as we shall be entering stage 6 with an
inventory of 1. Similarly, other values in Table 9 have been computed.
Stage 4
Table 1O
Make
0 19+0+38=57 21+1+26= 48 23+2+24= 49 4 48
17+0+38=55 19+ 1 +26=46 21 +2+24=47 23+3+ 19=45 5 45
2 15+0+38=53 17+1+26=44 19+2+24=45 21 +3+ 19=43 23+4+18=45 4 43
3 0+0+38=38 15+ 1 +26=42 17+ 2+24=43 19+3+ 19=41 21 +4+ 18=43 0 38
4 0+1+26=27 15+2+24=41 19+3+19=41 21 +4+ 18=43 0 27
Stage 3
Table 11
Make
0 19+0+48=67 21 + 1 +45=67 23+2+43=68 3,4 68
17+0+48=65 19+ 1 +45=65 21 +2+43=66 23+3+38=64 5 64
2 15+0+48=63 17+1+45=63 19+2+43=64 21 +3+38=62 23+4+27=54 5 54
3 0+0+48=48 15+ 1 +45=61 17+2+43=62 19+3+38=60 21 +4+27=52 0 48
4 0+1+45=46 15+2+43=60 19+3+38=60 21 +4+27=52 0 46
Stage 2
Table 12
Make
0 19+0+68=87 21 + 1 +64=86 23+2+54=89 4 86
17+0+68=85 19+ 1 +64=84 21 +2+54=77 23+3+48=74 5 74
2 15+0+68=83 17+ 1 +64=82 19+2+54=75 21 +3+48=72 23+4+46=73 4 72
3 0+0+68=68 15+ 1 +64=80 17+2+54=73 19+3+48=70 21 +4+46= 71 0 68
4 0+ 1 +64=65 15+2+54=71 19+3+48=70 21 +4+46=71 0 65
Stage 1
Table 13
Make
inventory 2 3 4 5 d* 1*
0 19+0+86=105 21 + 1 + 74=96 23+2+72=97 4 96
The production schedule is:

Week 1 4
Week 2 5
Week3 0
Week4 4
Week 5 5
Week 6 0
Total cost f9,60,000.
Supplement I: Dynamic Programming 65
Suppose we wanted a schedule for only 5 weeks, with zero inventory at the end of
fifth week. We do not have to calculate the tables again. We can assume that Stage 6 is
Stage 5 and so on till Stage 2 becomes Stage 1 with the proviso that the entering state is
one with zero inventory. The production schedule can now be worked out starting with
the current Stage 2 and state 0. We get:
Week 1 4
Week 2 5
Week 3 0
Week 4 3
Week 5 3
Total cost ~8,60,000.
SUMMARY
Dynamic programming addresses multistage or multiperiod decision problems. The
problem is broken into subproblems or stages. States are associated with each stage.
The states represent various possible conditions of the system. The problem is solved
in a recursive manner. The final stage is taken first and optimal decisions computed for
various states. The problem is worked backwards through each successive stage.
The technique is based on Bellman's principle of optimality and ensures that irrespective
of the initial state and initial decisions, the subsequent decisions constitute an optimal
policy. Given an entering state and a stage, irrespective of how that state and stage has
been arrived at, all future decisions from that point onwards will be optimal and will
ensure an optimal solution thereafter.
Dynamic programming is broad in its scope and can be applied to linear as well as non-
linear problems, discrete or continuous variables, and deterministic or stochastic problems.
It does not have a general formulation and each problem has to be formulated and
modelled uniquely. This requires ingenuity, experience and insight. The number of state
variables must be kept relatively low to prevent excessive computational effort. In spite
of these shortcomings, dynamic programming is sometimes the only viable optimisation
approach to a problem.
IQUESTIONS I
1. Define stage, state and optimal policy as used in dynamic programming.
2. State and explain Bellman's principle of optimality.
3. What is dynamic programming? In what areas of management can it be applied
successfully?
4. A DVD sub assembly consists of four electronic components arranged as shown:
The components can be purchased from three different vendors, who have
supplied the following reliability data:
Component Vendor
1 2 3
A 0.92 0.94 0.95
B 0.90 0.86 0.80
C 0.95 0.90 0.93
D 0.95 0.93 0.95
If the company decides to buy all the components from one vendor only, which
vendor would you recommend?
Would your answer change if all parts were in series?
5. A company makes three types of products A, B and C. The raw material required
and the cash return for each product are shown below. 12 kg of raw material
are available. What product mix will maximise the cash return. Fractional units
of the product are meaningless, the product must be measured in integer values.
Product Raw material (kg) Profit per unit (000s)

A 4 10
B 3 7
C 2 4
6. Mr. Paisewala wishes to invest f50,000 among three possible invesbnent schemes.
He can invest all, part or none of his money in any scheme, but he has to invest
in multiples of fl0,000. The expected returns for each scheme are the following.
How should he invest his funds to get maximum returns?
Amount of investment (000s) Expected returns (000s)
A B C
0 0 0 0
10 8 9 12
20 15 14 16
30 21 25 24
40 26 30 28
50 30 34 32
7. A contractor has to supply the following units of item at the end of each month:
Month Jan. Feb. Mar. Apr. May Jun.
Units 85 180 300 375 375 285
Production during a month is available for supply at the end of the month. The
stock holding cost per unit per month is fl and the production cost per unit is f2.
The set-up cost whenever a batch is produced is f600. Determine when batches
should be made and of what size, in order to minimise the cost of production.
8. Hamara Udyog produces large industrial equipment. The firm has received the
following orders for its equipment:
Month Sep. Oct. Nov. Dec.
Units 2 3 4 3
The cost of production involves a set-up cost of f50,000 and an average variable
cost of f30,000 per unit. Inventory holding cost is f5,000 per unit per month. Due
to restrictions of storage space not more than five units can be held in inventory.
Assume that the firm has no inventory at the beginning of September and does
not wish to have any inventory at the end of December. What production schedule
should be followed to minimise costs?
9. An advertising agency wishes to launch an advertising campaign through three
available media-print, radio and television. The agency has a total of fS0,000
for the campaign and is restricted to spend in multiples of fl0,000. Audience
reach of the media for various outlays is given in the following data, in tens of
thousands:
Outlay 0 1 2 3 4 5 6 7 8
Print 0 2 5 8 10 12 14 15 16
Radio 0 2 5 8 11 13.5 15.5 17 18
TV 0 3 6 9.5 13 15 17 19 20
How should the agency allocate funds for different media so as to maximise
audience reach?
10. A shoe store sells rubber shoes for protective use in snow. Past experience has
indicated that the selling season is only four months long and lasts from October
to January. The sales division has forecast the following demand for the next
season:
Month Oct. Nov. Dec. Jan.
Demand 40 20 30 40
All shoes sold by the store are purchased from outside sources. The unit
purchase price is flOO per pair; however the supplier sells only in lots of 10
pairs. The inventory holding cost is f20 per pair per month and the ordering
cost is f250 per order. The opening inventory is zero and it is desired that the
closing inventory should also be zero. Assuming that the demand occurs at a
constant rate throughout the month and the holding cost is based on the end
of the month inventory, find an ordering policy which will minimise total costs
using dynamic programming.
Supplement 2
Replacement Models
INTRODUCTION
The problems of maintenance and replacement are experienced in systems that degrade
with time. The efficiency of machines reduces as they grow older. Mechanical parts suffer
from wear and tear affecting the performance of the equipment. Rubber parts wear out
and replacements add to the maintenance costs. Some equipments, especially electronic
equipments fail without notice (e.g. bulbs fuse suddenly without warning). Often technology
changes may dictate replacements. Even human beings have to be replaced in a system.
Manpower attrition may be due to retirements, people leaving the organisation, or death.
Systems have to be designed to tackle such problems. The economic life of equipment
must be calculated before a decision on whether a repairment or replacement is needed.
Replacement models address such problems.
REPLACEMENT OF AN EQUIPMENT WHICH DETERIORATES

OVER TIME
The simplest replacement model deals with equipment whose efficiency deteriorates
with time. Replacement decisions of such items are based on the economic life cycle cost
concept or average monthly/ annual operating costs over an optimum life cycle period.
The cost of maintenance and operation increases with time. The salvage value of the item
decreases with time. These two costs form the major decision criteria for such models.
Let us study the model with the help of an example.
EXAMPLE 1 A manufacturing concern is considering replacement of a lathe machine

which costs fl,25,000. The estimated resale value and the maintenance cost (in 000s of
rupees) of the machine, based on past experience with similar machines are given in
Table 1.
Table 1 Maintenance Costs and Resale Value
Year 2 3 4 5 6
Maintenance cost ~ 2 5 8 12 18 25
Resale value ~ 100 80 60 40 30 20
When should the machine be replaced?
68
Supplement 2: Replacement Models 69
Solution: If the machine is replaced at the end of the first year, we would have incurred
maintenance cost for the first year and would also lose the capital value which is the
difference between the cost of the machine and its resale value (assuming that the value of
money remains constant over time). If replaced in the second year, the maintenance costs
incurred till the end of the second year are the sum of the maintenance costs incurred
in the first and the second year. The capital cost is the cost of the machine less its resale
value. The costs for each successive year are tabulated in Table 2.
Table 2 The Costs for Successive Years
Replacement Maintenance Cumulative Resale Capital Total cost Average
at the end cost (f) maintenance value cost (f) (~) cost ~)
of year cost (f) ~) 125-d C + e f/a
a b C d e g
2 2 100 25 27 27
2 5 7 80 45 52 26
3 8 15 60 65 80 26.67
4 12 27 40 85 112 28
5 18 45 30 95 140 28
6 25 70 20 105 175 29.16
From the previous table, it can be seen that average cost is the lowest for year 2. Hence
the machine should be replaced after two years.
EXAMPLE 2(a)
Machine A costs fS0,000. Annual operating costs are f2,000 for the first year, and they
increase by f15,000 every year. Determine the age at which to replace the machine
assuming that it has no resale value. What will be the average yearly cost of operating
and owning the machine, if the optimal replacement policy is followed?
Solution: The following are the tabulated costs:
Table 3
Replacement Operating Cumulative Capital cost Total cost Average
at the end cost (f) operating of machine (~) cost ~)
of year cost (f) (~) C + d e/a
a b C d e
2,000 2,000 80,000 82,000 82,000
2 17,000 19,000 80,000 99,000 49,500
3 32,000 51,000 80,000 1,31,000 43,667
4 47,000 98,000 80,000 1,78,000 44,500
5 62,000 1,60,000 80,000 2,40,000 48,000
As can be seen from the previous table, the minimum average annual cost occurs when
the machine is replaced at the end of three years. The average annual cost of owning
and operating the machine will be f43,667.
EXAMPLE 2(b) Another machine B costs fl,00,000. Annual operating costs for the first
year are f4,000 and they increase by f7,000 every year. The firm has a machine of type
A which is one year old. Should the firm replace it with B and if so, when?
Solution: The costs for machine Bare tabulated:

Table 4
Replacement Operating Cumulative Capital cost Total cost Average

at the end cost (f) operating of machine (~) cost ~)
of year cost (f) (~) C + d e/a
a b C d e
4,000 4,000 1,00,000 1,04,000 1,04,000
2 11,000 15,000 1,00,000 1, 15,000 57,500
3 18,000 33,000 1,00,000 1,33,000 44,333
4 25,000 58,000 1,00,000 1,58,000 39,500
5 32,000 90,000 1,00,000 1,90,000 38,000
6 39,000 1,29,000 1,00,000 2,29,000 38,167
The average cost of machine Bis ~38,000 per annum which is less than the average
cost of machine A. Machine A should therefore be replaced with machine B.
Machine A is one year old. In the second year ~17,000 [see Example 2(a)] will be
spent on operating cost. This being less than the average per annum cost of machine B,
we should retain machine A. In the third year the operating cost of machine A is ~32,000
which is still less than the average cost of owning and operating machine B. Hence,
retain machine A for the third year also. In the fourth year the average cost of operating
machine A is ~47,000 which is more than the average annual cost of machine B. Hence
machine A should be replaced by machine B after 3 years.
EXAMPLE 2(c) When the firm is just ready to replace machine A with another machine
of the same type, it receives information that machine B will become available in a year.
What should the firm do?
Solution: It is obvious that machine Bis superior to machine A as its per annual average
cost is lesser. The firm will replace machine A with another machine of the same type after
three years [see Example 2(a)]. The firm now has a choice to either replace machine A
with another machine A or to retain machine A for another year and then replace it with
machine B. We have already seen from the solution to Example 2(b) that if machine A
is one year old it should be replaced by machine B only after 3 years. Let us tabulate
the costs for both options for the next three years.
Table 5
Replace machine A with machine B Retain machine A for one more year and replace
with machine B thereafter when it becomes
available
Year 1 Cost ~82,000 Year 1 Cost ~47,000 (4th year for A)
Year 2 Cost ~17,000 Year 2 Cost ~38,000 (Average annual
Year 3 Cost ~32,000 Year 3 Cost ~38,000 cost of B)
Total ~1,31,000 Total ~1,23,000
As the option of retaining machine A for the fourth year and then replacing by
machine B is cheaper, it should be adopted.
REPLACEMENT OF ITEMS THAT FAIL COMPLETELY

The second type of replacement problem is concerned with items that either work or
fail completely. The failure of bulbs in a hotel is a typical example. It is sometimes more
economical to replace the whole group even if some of them are functioning satisfactorily,
than to replace each as it fails. The organisation can ill afford to lose goodwill by having
equipment that does not work. They have to replace failures as they occur, but it may
be profitable at some stage to replace the whole group.
EXAMPLE 3 Atithi is a five star hotel located in Aurangabad, a famous tourist centre.
There are 75 rooms located on three floors. In addition, it has conference halls, banquet
halls, lounges, swimming pool complex, a health club, a sauna, and well manicured
lawns for parties. Mr. I M Hospitable, the manager is faced with a major problem. He
gets complaints of fused bulbs not only in the rooms, but also in the corridors and
other places. Most of the light fittings are fancy fittings and require the services of an
electrician to change the fused bulbs. Mr. Hospitable estimated that the hotel had about
1000 light points. He has employed a full time electrician at ~6,000 per month. He feels
that he does not have enough work for the electrician and could perhaps dispense with
his services, hiring a part time electrician as and when required. He saw the Laxman
Sylvania ad on TV one day- Ghar ke pure badal daloonga (I'll change all the bulbs in my
house). He wondered if doing this would be easier than replacing bulbs whenever they
got fused, which was almost an every day affair.
Solution: Let us consider Mr. Hospitable's problem. Past data has revealed that, out
of 100 new light bulbs, on an average: 90 last for at least 1 month; 75 last for at least 2
months; 50 last for at least 3 months; 20 last for at least 4 months; 0 last for more than
5 months.
The cost of a new bulb is ~10. However, if we buy bulbs in bulk, a quantitative
discount is given and the cost of buying 1000 bulbs at a time is ~9,000.
The problem can now be stated as: Should each bulb be replaced as it fails, or should
the whole group of bulbs be replaced after some interval of time?
Average bulb life
From the previous data it can be seen that: By the end of month 1, 10 lamps will have
failed; by the end of month 2, a further 15 lamps will have failed; by the end of month
3, a further 25 lamps will have failed; by the end of month 4, a further 30 lamps will
have failed; by the end of the month 5, a further 20 lamps will have failed.
With the details mentioned just before, we can draw a failure table as shown in
Table 6.
Table 6 Failure Probability of Lamps
Life in months 2 3 4 5
Probability of failure 0.10 0.15 0.25 0.30 0.20
Expected mean life of a lamp = 1 x 0.10 + 2 x 0.15 + 3 x 0.25 + 4 x 0.30 + 5 x 0.20

= 3.35 months
Individual replacement
Since the total number of bulbs is 1000
Numbers replaced per month are = 1000 + 3.35 = 299 under steady state conditions.
Average monthly cost of individual replacements = cost of electrician and cost of
bulbs.
Average monthly cost is 6,000 + 2,990 = f8,990
Average cost to replace an individual bulb is f30.
Group replacement
As it is necessary to ensure that all 1000 bulbs are functional at all times, group replacement
will involve replacing individual bulbs as they fail and replacing the entire group after
sometime. We will therefore, need to calculate the rate at which individual replacements
are necessary.
At the end of the first month, 10% or 100 bulbs would have failed and been replaced.
At the beginning of the second month we would have 900 original bulbs and 100
replacements. By the end of the second month, out of the 900 originals 150 would have
failed and out of the 100 bulbs replaced, at the end of the first month 10 would have
failed since they are one month old. Thus in the second month we will have to replace
160 bulbs. By the end of the third month, 250 out of the 750 original bulbs will fail,
15 out of the 100 bulbs replaced at the end of the first month would fail (15% fail
because they are two months old) and 16 bulbs out of the 160 replaced by the end of
the second month would fail (10% fail because they are one month old). We would thus
have to replace 250 + 15 + 16 = 281 bulbs. A complete table for six months is given in
Table 7.
Table 7 Failure and Replacement of Lamps

Month First Next 100 Next 160 Next 281 Next 377 Next 350 Total
1000 replaced replaced replaced replaced replaced failure in
in 1st month in 2nd month in 3rd month in 4th month in 5th month the month
100 100
2 150 10 160
3 250 15 16 281
4 300 25 24 28 377
5 200 30 40 42 38 350
6 20 48 70 57 35 230
Let us assume that 5 electricians hired for the full day will be required to replace all the
1000 bulbs in one day at a cost of fl,000
Cost of replacing 1000 bulbs= 9,000 (cost of bulbs) + 1,000 (cost of labour) = fl0,000
Cost of replacing all bulbs at the end of first month = Cost of bulbs replaced as they
fail + Cost of replacing 1000 bulbs. Let us depict these costs in Table 8.
Table 8 Cost of Individual and Group Replacement of Bulbs
Month at the end No. of bulbs Cumulative Cost of cumulative Cost of Total cost Average cost
of which all bulbs replaced number of number of bulbs replacing (<) (<)
are replaced bulbs replaced @ ~0 1000 bulbs
replaced per bulb (<) (<)
100 100 3,000 10,000 13,000 13,000
2 160 260 7,800 10,000 17,800 8,900
3 281 541 16,230 10,000 26,230 8,743
4 377 918 27,540 10,000 37,540 9,385
5 350 1,268 38,040 10,000 48,040 9,608
The policy of replacing individual bulbs even when a full time electrician is employed
will cost ~8,990 at an average. As can be seen from the table the lowest average monthly
cost is ~8,743 and this occurs if we replace individual bulbs as they fuse and replace all
bulbs at the end of the 3rd month irrespective of whether they are working or not. Since
this is a cheaper option we should adopt this policy.
SUMMARY
As the equipment ages, the maintenance and operating costs increase while the salvage
value decreases. Some equipments suffer from sudden failures, for example electric bulbs;
electronic components and so on. Replacement models help in finding economic life of
an equipment and assist the decision maker in making decisions about new acquisitions.
The economic life of equipment which deteriorates with time is based on its average
operating and maintenance cost. The cost at the end of any year is calculated as a sum
total of the cost of operations and maintenance incurred up to that time and the capital
cost which is the cost of the equipment less its salvage or resale value. Average cost per
year is calculated on this basis. The economic life of the equipment is the number of
years where the equipment has the least average cost per year.
In case of equipment which fails suddenly, the decision maker has to decide whether
to replace components as they fail or to carry out a group replacement at some point
of time. Here again average costs per period are worked out to determine the most
economical policy.
In case discounted values of money are to be used, all costs should be converted to
their present value using discounting factors based on the discount rate.
IQUESTIONS I
1. What is replacement? Describe some important replacement situations and replacement
policies.
2. Explain the different types of replacement models.
3. A firm is considering the replacement of a machine whose cost is ~1,22,000 and
the scrap value is ~10,000. The maintenance costs are given:
Year 1 2 3 4 5 6 7 8
Maintenance costs (000s) 2 5 8 12 18 25 32 40
When should the machine be replaced?
4. The data on operating costs per year and resale prices of equipment whose purchase
price is ~10,000 are the following:
Year Operating cost (~) Resale value (~)
1 1,500 5,000
2 1,900 2,500
3 2,300 1,250
4 2,900 600
5 3,600 400
6 4,500 400
7 5,500 400
What is the optimum period of replacement?

5. The following table gives the running costs and the resale price in thousands of
rupees of an equipment whose purchase price is ~50,000.
Year 1 2 3 4 5 6 7 8
Resale value 35 25 17 12 8 5 5 5
At what year is replacement due?
6. A fleet owner finds from his past records that the costs per year of running a truck
whose purchase price is ~6,00,000 are the following:
Year 1 2 3 4 5 6 7 8
Resale value (000s) 300 150 75 37.5 20 20 20 20
At what age should the truck be replaced?
7. The truck owner in Question 6 has three trucks, two of which are two years old
and the third is one year old. He is considering replacing them with a new type
of truck with 50% more capacity than the old ones at a unit price of ~8,00,000.
He estimates that the running cost and the resale price will be the following:
Year 1 2 3 4 5 6 7 8
Resale value (000s) 400 200 100 50 30 30 30 30
Assuming that the loss of flexibility due to fewer trucks is of no importance and
that he will continue to have sufficient work for three of the old trucks what
should his policy be?
8. Machine A costs ~45,000 and the operating costs are estimated at ~1,000 for the
first year, increasing by ~10,000 per year in the second and the subsequent
years. Machine B costs ~50,000 and the operating costs are ~2,000 for the first
year, increasing by ~4,000 per year in the second and the subsequent years. If
you now have a machine of type A should you replace it with B? If so, when?
Assume that both the machines have no resale value.
9. An electric company which generates and distributes electricity conducted a study

on the life of electric poles. The appropriate life data is given in the following
table:
Year after installation 1 2 3 4 5 6 7 8 9 10
Percentage poles failing 1 2 3 5 7 12 20 30 16 4
If the company now installs 5000 poles and follows a policy of replacing poles
only when they fail, how many poles are expected to be replaced each year
during the next ten years?
If the cost of replacing individually is f160 per pole, and if we have a group
replacement policy, it costs f80 per pole, find out the optimal period for group
replacement.
10. Perfect machine tools has 40 lathes in service. The cost of repairing a breakdown
is fl0,000 per lathe. A preventive maintenance programming, costs f300 per lathe
per month can prevent the breakdowns. Historical records indicate the possibility
of a breakdown as follows:
Months until breakdown 1 2 3 4 5 6 7 8
Probability of breakdown 0.10 0.05 0.10 0.15 0.20 0.25 0.10 0.05
What is the expected breakdown cost per month? If preventive maintenance is
followed how often should the lathes be serviced?
11. The management of a large hotel is considering the periodic replacement of light
bulbs fitted in its rooms. There are 500 rooms in the hotel and each room has
six bulbs. The management is presently following a policy of replacing bulbs as
they fail and replacing the whole lot every four months. The cost of replacing
individual bulbs as they fail is f30 and the cost of replacing the whole lot is
f30,000. Is the hotel following the most economic policy? If not what policy
should the hotel adopt? The mortality rate of bulbs is the following:
Month of use 1 2 3 4 5
Percentage of bulbs failing by that month 10 25 50 80 100
12. A computer has a large number of components all of which have to be fully
working and failures have to be replaced to maintain operational efficiency. If
the component is replaced individually, then the cost of a single replacement is
f20 whereas if all the components are replaced concurrently, the cost of a single
component is f7. Determine the best replacement policy, with the given mortality
data:
Mortality statistics: Observed number 500
End of week 1 2 3 4 5 6
No. of components servicing 455 375 250 75 15 0
13. When should the following type of machine be replaced:

Cost price fl0,000
Operating cost fl,000 first year, increasing by f200 every year
Resale value f5,000 first year, decreasing f500 every year
14. The maintenance cost and the resale price of machine A whose purchase price
is flO ,000 are the following:
Year 1 2 3 4 5 6 7
Maintenance cost (00s off) 15 19 23 29 36 45 55
Resale price (00s of f) 50 25 12.5 6 4 4 4
(a) Suggest optimal period for replacement of the machine

(b) When this machine is two years old, another machine B, which is a new
model of machine A, is available. The optimal period of replacement of
this machine is 4 years with an average cost of f3,600. Should we change
machine A with B? If so, when?
Product Quality
Quality is never an accident; it is always the result of high intention, sincere effort, intelligent
direction and skillful execution; it represents the wise choice of many alternatives.
WILLIAM A. FOSTER
LEARNING OBJECTIVES
• Explain the importance of quality as a competing priority
• Understand the difference between quality of design and quality of conformance
to design
• Understand the relationship between cost and quality
• Understand the concept of total quality management
• Appreciate the role of employees with regards to quality
• Explain the seven qual ity control tools
• Understand the significance of ISO 9000 : 2000 and why organisations want
ISO 9000 Certification
5.1 INTRODUCTION
Quality is one of the competing priorities that many organisations adopt. It can be defined
as the totality of features of a product or service that bear on its ability to satisfy the
customer's stated or implied needs. Quality should satisfy both actual and perceived
needs. Often the customer bases his or her choice on seemingly irrational premises. For
instance, we may choose to open a bank account with a bank which offers us a cheque
book with our names printed on the cheques. While this may be no indicator of the
quality of the service provided, yet it becomes an order winner as the customer associates
quality with the printed cheque book.
77
Quality is important for both the customer and the supplier. If a product's quality is
unsatisfactory, it results in additional costs for inspection, testing, scrap, rework and the
handling of complaints and warranty claims on the supplier's part. In service industries
too, errors, checking enquiries and complaint handling lead to loss of efficiency and
productivity. Repeat sales and future markets are also affected. Quality must therefore,
be ensured in all areas of marketing, design, purchasing, production or operations and
distribution. The entire organisation should excel on all dimensions of products and services
that are important to the customer and strive to achieve Total Quality Management
(TQM). TQM has two fundamental goals:
1. Careful design of the product or service
2. Ensuring the organisation's systems consistently produce the design
5.2 QUALITY OF DESIGN

The design of a product or service must incorporate the features and attributes that would
satisfy the customer's need. Design quality lends value to a product in the market place
and becomes an important strategic issue. The most important feature of the design,
with regard to quality, is the specification. This describes the product or service in a
comprehensive statement of all its aspects which are needed to fulfil the customer's
requirement. The maximum tolerable variation that can be accepted from the specified
attribute is to be mentioned in the specification. For instance, the diameter of a particular
shaft may be specified as 640 mm ±0.04 mm. This implies that the mean diameter of the
shaft should be 640 mm but a variation of ±0.04 mm is acceptable. Specifications can be
written in many forms and are limited only by the ingenuity of the person writing the
specifications. The common dimensions of design quality for a product are:
Performance: This includes the primary operating characteristics of a product. Consumers
judge the quality of a product by comparing its performance with that of similar products
offered by other competitors in the market. For instance, performance characteristics for
a car will include its pick up, fuel efficiency, ease of handling and so on.
Features: These are secondary characteristics which are in addition to the primary
characteristics covered under performance. These often influence the consumer's perception
of quality. Additional features help to satisfy varying needs of the consumer. For example,
the provision of an advanced music system, excellent upholstery and seating, strong
headlights, dynamic streamlining and so on are the features that may be built into a
car. Different models and variants of the basic car can have different features to cater
to customer preferences.
Reliability: This refers to the probability of a product's failure within a specified
time period. Products with high reliability are preferred over those with low reliability,
especially in case of high value products like cars, airplanes and the like.
Durability: It indicates the operational life of a product. Some products are prone
to complete failure after some time and must be totally replaced (e.g., light bulbs),
while others may fail partially and may be restored to their original performance through
repairs.
Product Quality 79
Serviceability: This is an indicator of the ease with which a product can be repaired
after it fails. If a product can be repaired easily and speedily, it improves the availability
of the product and reduces its repair costs. This important aspect is often overlooked at
the design stage.
Response: It is the speed, competence and courtesy displayed in attending to customer's
problems.
Aesthetics: These satisfy the sensory needs. They are related to sound, look, feel, aroma,
colour and so on.
Reputation: This includes past performance and other intangibles. Reputation largely
contributes to perceived quality in the customer's mind. Brand image is a major component
of reputation.
The dimensions of quality for a service are somewhat different. Service quality is
judged by the time taken to provide the service and the manner of interaction between
the service provider and the customer. Some of the dimensions of service quality are:
Timeliness: It is the assurance that the service will be provided at the desired time. For
instance, a courier service may promise delivery anywhere in India in 24 hours. Does it
really deliver within the stipulated 24 hours?
Completeness: It indicates the degree to which the customer is provided with everything
that he asks for.
Courtesy: It is a measure of how customers are treated by the service employees. For
example, are the bank tellers polite to their customers?
Consistency: It implies that the same level of service is provided to each customer
each time. For instance, the mail is delivered regularly at the same time every day by
the posbnan.
Accessibility and convenience: It is the ease with which a service can be availed. A
typical example of non-conformance to this quality dimension is the enquiry system of
the Indian Railways or the fault complaint cells of BSNL. One has to struggle to reach an
operator who can respond to queries or take complaints as the lines are perpetually busy.
Accuracy: It is the correctness with which the service is provided. Does the quarterly
bank statement always reflect the correct balance?
5.3 QUALITY OF CONFORMANCE TO DESIGN

It is the degree to which the product or service design specifications are met. While
elaborate and stringent specifications may be laid down, the conformance to these
specifications is dependent on the process which transforms a set of inputs into desired
outputs through certain actions, methods and operations. Quality cannot be inspected into
a product; it must be built in. In an organisation, processes take place in all functional
areas and it is essential to have an effective system to manage each process. Statistical
Process Control (SPC) is a useful tool to ensure quality of conformance. We shall deal
with SPC in a subsequent chapter.
5.4 COSTS OF QUALITY

A product or a service that satisfies the customer's needs must be produced in a cost
effective manner. Quality entails costs. The traditional approach has been that production
makes a product and quality control inspects it, segregating those units which do not
meet the quality standards. This is often a wasteful approach. Units which are not made
right or not made of the right quality, have to be either scrapped or reworked resulting
in additional costs. The new philosophy is to ensure that the product is made right, the
first time, every time; so that the additional costs can be avoided. The aim is to prevent
defectives rather than repairing or replacing them. However, prevention too comes with
a cost. The costs associated with quality can be broken up as:
Failure costs: These are the costs associated with getting it wrong, that is, producing
an item which is below quality standards. These costs can be further subdivided into
internal failure costs and external failure costs.
Internal failure costs. These costs occur when below quality standard products are produced
and detected before they leave the manufacturer's premises. These include:
1. Cost of scrapping defective items
2. Cost of reworking defectives to correct them
3. Cost of re-inspecting the item for quality after rework
4. Cost of downgrading. Products of poor quality or defects have to be sold at a
lower price as seconds
5. Wastage costs associated with unnecessary work and holding of stocks as a result
of errors, poor organisation and faulty materials
6. Costs associated with failure analysis-an attempt to establish causes of quality
failure in the product
External failure costs. These are the costs that are incurred when defectives or below
quality products are supplied to the customer. These include:
1. Cost of repairing and servicing of the returned products or carrying out repairs
and servicing in the field
2. Costs incurred on account of warranty claims
3. Costs of handling and processing of complaints of customers
4. Costs of handling of returned products and investigating into their failure,
including costs of transportation
5. Costs of liability litigation and other claims, which may include change of
contract
6. Loss of goodwill due to effect on reputation and brand image which directly
affects future sales
Appraisal costs: These are the costs associated with inspection and evaluation of
materials, processes, intermediates, products and services to ensure conformance to design
specifications. These are costs of checking that it is right. These are:
Verification costs. These include costs of verifying and checking whether the materials,
process set ups, running processes, intermediaries, and final products and services are
as per agreed specifications.
Product Quality 81
Quality audits. These are costs associated with checking that the quality system put in
place is functioning satisfactorily.
Inspection equipment. Costs associated with calibration and maintenance of equipment
used for quality checks, like instruments, gauges, meters and so on.
Vendor rating. Costs incurred on the assessment and approval of suppliers of all products
including materials, components and subassemblies and services.
Prevention costs: These are the costs associated with the design, implementation and
maintenance of the quality system of an organisation. They are costs of ensuring that it
is right, first time. Prevention costs include:
Product or service requirements. Costs incurred on the determination of quality requirements
and laying down specifications of incoming materials, processes, intermediaries and
finished products and services.
Quality planning and quality assurance. It is the cost of creating systems and procedures
to ensure quality.
Appraisal equipment. Cost of designing and procuring instruments, tools and accessories
required to carry out quality appraisal.
Training. Costs associated with development, preparation and conduct of quality training
programmes for operators, supervisors and managers.
The relationship between the costs of prevention, appraisal and failure is shown in
Figure 5.1.
Failure costs
Increasing
quality costs
I
Appraisal costs
Prevention costs
Figure 5.1 Relationship between Costs of Quality and Organisational Capability.
As the organisation's capability to satisfy customer requirements improves, the total

cost of quality reduces. It can be seen that the cost of failures reduces rapidly but the
cost of prevention increases to an extent. The appraisal costs also reduce. However, there
is no magical optimal that can be achieved.
Changing Focus of Quality Management
Time Early 1900s 1940s 1960s 1980s and beyond

Focus Inspection Statistical sampling Organisational Customer driven
quality focus quality
Old concept of quality New concept of quality

Inspect for quality after production Build quality into the
process.
Identify and correct causes
of quality problems
5.5 TOTAL QUALITY MANAGEMENT

Total Quality Management (TQM) is an approach to the management of quality throughout
the entire organisation. It is 'a way of managing to improve efficiency, flexibility and
competitiveness of a business as a whole.' TQM is often defined as a philosophy and
a set of guiding principles that represent the foundations of a continuously improving
organisation. It is an application of quantitative methods and human resources to improve
all the processes within an organisation and exceed customer needs now and in the
future. The principles of TQM are as follows:
1. Committed and involved management.
2. Focus on customers-both internal and external.
3. Effective involvement and utilisation of entire work force.
4. Continuous improvement of business and production processes.
5. Treating suppliers as partners.
6. Fact-based decisions.
Committed and involved management: It is imperative that the top management
is committed to the cause of total quality management. If the top management lacks
commitment towards quality, the organisation will merely pay lip service to quality.
The top management must develop a clear vision and set long-term goals. Quality goals
should be included in the business plan and an annual quality improvement programme
should be established. Managers must take part in quality improvement programmes.
They should be visibly and actively engaged in the quality effort and should participate
in training the employees on quality management. The top management should also
ensure their attendance at award and recognition ceremonies related to quality as this
can act as an inspiration and motivate the employees.
Focus on customers: Since quality is aimed at satisfying customer needs, it is important
to focus on the customer and his stated or implied needs. Traditionally, companies have
focussed on product-out. They have considered the product as the mission of the firm.
Companies make what they feel is a good product; and employees tend to believe that
they have only to follow production manuals and procedures with little regard to the
customer or his complaints. However, TQM focuses on market-in. It shifts the emphasis to
Product Quality 83
feedback from the market. The job is well done only when the customer is fully satisfied.
Every employee has a customer whom he must satisfy. The concept of customer is not
restricted to external customers who may be the end-users of the product. Internally, each
step in a process serves all subsequent processes and the philosophy is that all those who
use the 'product or output' of any employee are his customers. He, in turn, may be a
customer of other employees. For instance, a machine operator is the 'customer' as far
as the maintenance crew is concerned. If they do not maintain the machine properly, the
operator may fail to use it satisfactorily thus adversely affecting output. The employees
thus have external as well as internal customers and it is imperative that each employee
satisfy both his external and internal customers. For achieving total quality management,
all employees irrespective of their level or functions must aim at customer satisfaction.
Quality is everyone's business. The quality of in-process items is just as important as
the quality of the finished product and the final product is bound to be of high quality
if the quality of in-process items is maintained.
Effective involvement and utilisation of the entire work force: TQM is an organisation's
wide challenge. All employees must be trained in TQM, statistical process control and
other appropriate quality improvement skills. Since the output of each employee is used
by someone else downstream of him in the process, it is important that the employees
understand their customer's needs irrespective of whether the customer is internal or
external. Employees should be motivated to accomplish desired goals and should be
empowered to make necessary changes to effect improvements in the processes. Employees
should come not only to do their jobs but also to think about how to improve their jobs.
Continuous improvement of the business and production processes: The organisation
must strive to continually improve its business and production processes. Generally,
organisations are organised on a functional basis with vertical chains of responsibility
and authority within the function. However, processes cut horizontally across functions.
For example, the order filling process may be initiated by a sales executive from the
marketing deparbnent. The order may then have to be vetted by the finance deparbnent
to determine the credit worthiness of the customer. The production deparbnent would
have to check if the items ordered are in stock or they may have to be produced. The
order has to be assembled and dispatched to the customer by shipping and logistics. An
invoice will have to be raised by the finance and the account for the particular order will
be closed after the final payment is received by them. The order filling process can be
improved only if all concerned deparbnents cooperate, exchange information, and work
concertedly. Unfortunately, in most functional organisations no one is responsible for
the entire process. The adoption of a work team approach consisting of members from
the concerned deparbnent can go a long way to achieve improvement. The process of
improvement should not be a one-time measure but a continuous process. The Kaizen
approach of "do it better, make it better, improve it even if it isn't broken, because if we
don't, we can't compete with those who do" should be followed as against the Western
philosophy which advocates "if it ain't broke, don't fix it."
Treating suppliers as partners: Traditionally, an adversarial relationship has existed
between suppliers and customers with a feeling of mistrust that each one is being short
changed by the other. Sometimes organisations encourage purchases from a large number
of suppliers in order to promote competition amongst them and to bring down prices.
However, most quality problems originate from variations both in the process and in
the materials. The focus should shift to quality and life-cycle costs rather than price.
Organisations should nurture fewer suppliers and have long-term partnering relationships
with them. This will ensure quality, lesser variations and a better understanding between
the organisation and its suppliers.
Fact-based decisions: Decisions should be based on facts. Performance measures such
as uptime, percent nonconforming, customer complaints and so on should be established
for each functional area. This is necessary to measure the continuous quality activity.
Let us look at the role of various functions in TQM that contribute to the productive
process.
Senior management: Senior management has an important role to play in TQM. A
clear understanding of quality and commibnent to a defined quality policy is a must
for them. They should ensure that correct quality systems and attitudes prevail in the
organisation. They should also support and encourage continuous quality improvement.
All levels of management ensure conformance to product design by controlling labour,
materials, equipment and processes.
Marketing: It is responsible for studying the customer's requirements and translating
it into product and service specifications. It also determines the quality characteristics
valued by the customer and the price that he is willing to pay for it. The marketing
deparbnent should also collect information about competitor's operating level and develop
strategies that will negate the competition by the analysis of customer complaints, sales
staff reports, warranty claims and product liability (the errors and defects can be pin pointed
and removed). Marketing team downgrades the products or services of inferior quality.
Research and development/Engineering: Research and development department
explores new ideas for products while engineering creates a design to meet customer
expectations. They set appropriate specifications for the product, its materials, components,
subassemblies and intermediaries. Then prototypes are produced and tested. Rework and
warranty claims are analysed to rectify designs or specifications for continuous quality
improvement.
Purchasing: A product is as good as the materials used to produce it. The purchase
deparbnent is responsible for acquiring materials and services of the required quality.
Towards this end, the deparbnent develops sources and carries out vendor rating. Suppliers
must be integrated with own quality systems through extranets.
Production/operations: It must ensure that the products and services meet customer
requirements. Quality of conformance to design is their main concern. Other responsibilities
are process control to ensure quality, training and development of associated personnel,
and proper handling and storage of materials during the production process.
After sales and technical services: After sales support is responsible for providing
the customer with proper instructions on how to install and use the product, through
personal assistance where necessary. If the product fails to function properly, it is their
responsibility to arrange for replacement or repairs as required. They come in direct
Product Quality 85
contact with the customer and provide valuable feedback for the product improvement
and development.
Packing, storing and shipping: They ensure proper packing methods and materials,
proper storage and selection of the appropriate shipping modes so that the customer
receives the products in good shape at the right time and place.
Human resources: The human resource deparbnent provides personnel in the required
numbers with the requisite abilities and skills. It is not only responsible for the recruibnent
and selection of the right personnel but is also responsible to conduct training as required.
Personnel must be well informed on the quality practices followed in the organisation,
and be trained to identify quality problems and to come up with viable solutions to
correct them.
Total quality management can only be achieved when all functions of the organisation
at all levels are committed to quality performance. A sense of pride should be inculcated
in every individual towards the task that he performs and the feeling of commibnent
to quality be permeated from the top management downwards. Employees tend to pay
more attention to anything that the boss is interested in. Continuous quality improvement
is to be encouraged through suggestions from workers and the like.
5.6 QUALITY IMPROVEMENT AND EMPLOYEES

Employees play a major role in quality improvement. They have to work towards
satisfaction of external and internal customers. Even the best of quality systems will fail if
the employees are not committed to it. Employees should be motivated and be imparted
training to acquire the necessary attributes and skills required for achieving quality.
Employee commibnent and willing participation can be ensured by giving them a say in
matters related to quality improvement. Some of the measures adopted by organisations
are discussed as follows:
Employee suggestions: The simple suggestion box provides a good opportunity to
employees to voice their concerns about quality. However, management should ensure
that the suggestion box does not degenerate to a complaint box. Employees should be
adequately trained to identify quality-related problems and suggest viable solutions to
them. These suggestions are to be considered and implemented if found viable. Announcing
the names of those who give suggestions at periodic meetings will encourage others
also. Awards can be instituted for the best suggestion received on a weekly, monthly or
quarterly basis. Escorts Farm Tractors at Faridabad display the name of the employee
who has given the best suggestion prominently on a board placed near the entrance to
their premises. Such recognition satisfies the ego needs of the worker and acts as an
incentive for others.
Quality circles: This concept originated in Japan during the 1960s. A quality circle is a
small, voluntary group of 8 to 10 employees and their supervisor from the same work
deparbnent. The supervisor acts as a moderator or facilitator for the group. The group
meets generally once a week in a designated place during working hours and works on
problems and projects of their choice related to the work place. The problems can either
be quality specific or be concerned with productivity, costs, safety and other work-related
issues. The supervisor neither directs the group nor makes decisions. The group arrives
at decisions by group consensus. Quality circles follow an established procedure for
identifying, analysing and solving problems. The procedures followed by quality circles
are diagrammatically represented in Figure 5.2.
Organisation
8-10 members
Same area
Su pe rviso r/ mode rator Training
Presentation Group processes
Implementation Data collection
Monitoring
Problem analysis
Problem identification
Solution
List alternatives
Problem results
Consensus
Brainstorming
Problem analysis
Cause and effect
Data collection and
analysis
Figure 5.2 Quality Circle Process.
Quality circles have been successfully used in India by many industries. The Steel
Authority of India Limited (SAIL) uses quality circles successfully in all its steel plants.
The steel plant at Bhilai has shown remarkable improvements through quality circles.
Process improvement teams: Unlike quality circles where the group is from the same
functional area and improvements to functional areas are addressed, process improvement
teams focus on business processes. The team is composed of members from cross-functional
areas or even cross-functional businesses which are related to the business process. For
instance, the process improvement team may include supplier's representative. The
composition of the team is based on the functions which make up the business process.
For example, a process improvement team for customer services may include members
from packing, distribution, manufacturing and human resource departments. The team
focuses on the process as a whole and analyses the functions that make up the process.
The goal of a process improvement team is to measure and evaluate the process with a
view of improving it. Flowcharts are used extensively to help analyse the process.
5. 7 TOOLS FOR IDENTIFYING QUALITY PROBLEMS AND CAUSES

Seven simple tools to help identify problems and their causes can be used. They are
called the 7 Q C tools.
Product Quality 87
Checksheet: These are simple forms used to record the appearance of common defects
and the number of occurrences. A sample checksheet is given in Table 5.2
Table 5.1 A Sample Checksheet
Defect type No. of defects Total

Broken zipper ,I ,I ,I 3
Ripped material ,I ,I ,I ,I ,I ,I ,I 7
Missing buttons ,I ,I ,I 3
Faded colour ,I ,I 2
Histogram: A graph that shows the frequency of data related to a quality problem
(see Figure 5.3).
F,eqoency l
I
A B C D E
Figure 5.3 Histogram.
Pareto analysis: A diagram for tallying the percentage of defects occurring due to
different causes to identify major quality problems [see Table 5.2 and Figure 5.4].
Table 5.2 Pareto Analysis
Cause No . of defects Percentage

Poor design 90 60
Wrong part dimensions 30 20
Defective parts 15 10
Incorrect machine setup 12 8
Operator errors 3 2
Total 150
Flowchart: A diagram showing the steps in a process. It helps to identify where the
problems may exist in a process. This is shown in Figure 5.5.
Scatter diagram: A graph showing the relationship between two variables in a process.
It helps to identify patterns that may cause quality problems [Refer Figure 5.6].
Statistical process control chart: A chart as shown in Figure 5.7, gives statistical upper
and lower control limits. If the process stays within these limits, it is said to be under
control.
100
90
80
70
60
50
40
30
20
10
Poor design Wrong part Defective Incorrect Operator

dimensions parts machine errors
setup
Figure 5.4 Pareto Analysis Chart.
Operation Operation Operation
Operation Operation
Figure 5.5 Flowchart.
. . . ..
.
. .. ....... ..
.
. .
. .... .....
.
. . . . .. . . .
Figure 5.6 Scatter Diagram.

Product Quality 89
27
24
Number of
defects
l 21
18
UCL = 23.35
12.67
15
12
9
6
3 LCL = 1.99
2 4 6 8 10 12 14 16
Sample number -
Figure 5.7 Statistical Process Control Chart.
Cause and effect diagram: Also called the herring bone diagram, it is a diagrammatic
representation of causes and effects as depicted in Figure 5.8.
Control Inte rm itte nt

Energy On/Of use Efficiency
source Initial
White
Continuous
use
Ni Cd Bty Convenience
Procure portable Size
light
Purchase date Field

Brightness
Combination
Regular
Figure 5 .8 Cause and Effect Diagram.
5.8 ISO 9000:2000

The International Organisation for Standards was established in Geneva, Switzerland in
1947 to develop common international standards in international trade, communications
and manufacturing. It is a non-governmental organisation whose standards often become
laws through treaties and in practice ISO acts as a consortium with strong links to
governments. National standard bodies of over 120 countries are its members. ISO first
published its quality standards in 1987 and later revised them in 1994. They were later
revised in 2000. The quality standards of 1994 formed the ISO 9000 series. The series
comprised ISO 9000, ISO 9001, ISO 9002, ISO 9003 and ISO 9004. Whereas ISO 9000 and
ISO 9004 are only established guidelines for operations, ISO 9001, 9002 and 9003 were
well-defined standards.
ISO 9000:1994 Standards

GUIDELINES FOR USE
9000: Quality Management and Quality Assurance Standards-Guidelines for Selection
and Use
9004: Quality Management and Quality System Elements-Guidelines
QUALITY SYSTEMS
9001: Model for Quality Assurance in Design, Production, Installation and Servicing
9002: Model for Quality Assurance in Procurement, Production and Installation
9003: Model for Quality Assurance in Final Inspection Test
Design/
Procurement Production Installation Servicing
Development
I. ISO 9002 I• ISO 9003

.I
I. ISO 9001 .I
The new ISO 9000:2000 has done away with the previous ISO 9002 and ISO 9003
standards. The new series consists of:
ISO 9000:2000 Describes the fundamentals of a quality management system and
specifies terminology. It presents guidelines.
ISO 9001:2000 Specifies requirements for a quality management system
ISO 9004:2000 Guidelines for performance improvement
The ISO 9001:2000 standard was revised in 2008 to ISO 9001:2008 but there is no
addition or amendment in the requirements. Only some rearrangement/rectification in
the requirements has been made for the clear and easy understanding of or interpretation
of clause requirements in standard.
ISO 9000 is a standard for a quality system and not for a product and is location
specific, implying that a particular facility of an organisation at a specific location may
be ISO 9000 certified while other facilities at other locations are not certified.
The ISO 9000:2000 standards are based on eight quality management principles. ISO
chose these principles because they can be used to improve organisational performance
and achieve success. These principles are:
Focus on your customers: Organisations rely on customers and so must understand
customer's needs and requirements. Organisations must exceed customer expectations.
Provide leadership: Organisations rely on leaders. The leaders must establish a unity of
purpose and set the direction for the organisation. They must also create an environment
that encourages people to achieve the organisations objectives.
Product Quality 91
Involve your people: Organisations rely on people. They must encourage the involvement
of people at all levels and must help them to develop and use their abilities.
Use a process approach: Organisations must use a process approach to manage activities
and related resources.
Take a systems approach: Organisations must identify interrelated processes and treat
them as a system. They must use a systems approach to manage these interrelated processes.
Encourage continual improvement: Organisations must make a permanent commibnent
to continually improve their overall performance.
Get the facts before you decide: Organisations must base their decisions on the analysis
of factual information and data.
Work with your suppliers: Organisations depend on their suppliers to help them create
value. They must maintain a mutually beneficial relationship with suppliers.
Most companies in the world today want to do business with companies and organisations
that have ISO 9000 certification. The certification ensures that the company irrespective
of language barriers, cultural and social differences, and technological variations has a
quality system that meets uniform standards. The ISO 9000:2000 is the only standard that
carries third party certification. A third party called a registrar, accredited by a national
body, is the only authorised entity that can award an ISO 9000 certification. ISO 9000
certification is only awarded after he is satisfied that the organisation meets the ISO 9001
requirements. The certification is recognised worldwide.
Organisations seeking ISO 9000 certification begin the process by carrying out a gap
analysis. They carry out a check to see what requirements of the ISO 9001 standard they
already have and what more needs to be done. The organisation then fills the gaps by
developing, documenting, implementing, monitoring and improving each process. Customer
satisfaction is a major requirement. In order to be certified, an organisation must identify
and review customer requirements, ensure that these are met, and be able to measure
and monitor customer satisfaction. Whenever the standard of customer satisfaction is not
met, corrective and preventive action is taken.
Before an organisation is certified, various audits of its quality management system
are carried out. The first party audit is carried out by the organisation itself to check that
it has complied with all the requirements of ISO 9001. The second party audit is carried
out by a customer of the firm, and the third party audit is carried out by a registrar.
When the registrar is satisfied that all requirements of ISO 9001 have been complied with,
the organisation is awarded an ISO 9000 certification. The certification is normally valid
for three years subject to success of 5 surveillance audits. After certification, surveillance
audits are conducted at 6 to 12 months interval in addition to internal audits carried out
by teams of employees of the organisation to verify that the quality management system
is functioning properly.
ISO 9000 is important because of its systematic orientation. It is often felt that quality
can only be created if workers are motivated and have the right attitude. But unless the
right attitude is institutionalised and supported with right policies, procedures, records,
technologies, resources and structures, desired quality standards will never be achieved. A
quality system ensures a quality attitude and ISO 9000 lays emphasis on the establishment
of a quality system.
5.9 SUMMARY
Quality can provide a competitive edge to an organisation. It is defined as the totality
of features and attributes that satisfy a customer's stated and implied needs. The quality
of design and conformance to design are the determining factors.
Various cost associated with quality are failure costs, appraisal costs and prevention
costs. Failure costs are incurred because of getting it wrong. Appraisal costs are incurred
to check that it is right, and prevention costs are the costs associated with getting it right,
the first time. As the organisation's ability to satisfy customer's requirements improves,
the failure and appraisal costs come down, while there may be some increase in the
prevention costs.
Quality cannot be inspected in, it must be built in. The focus of quality concept is
now shifting to 'getting it right the first time'. Organisations are now moving towards
total quality management which emphasises that every employee no matter what his
level or his function contributes to quality. TQM focuses on market-in, that is, a system
of constant feedback from internal as well as the external customers. Every function in
the organisation has a role to play in ensuring that quality standards are achieved.
Employees participation is ensured in TQM through suggestions, quality circles and
process improvement teams. A quality circle is a voluntary group of 8 to 10 employees
from the same function who identify, analyse and suggest solutions to problems related to
the work place. The supervisor normally acts as a moderator. Process improvement teams
are cross-functional groups comprising of representatives from all functions involved in
a process. The team analyses processes and comes up with methods to improve them.
TQM makes use of tools like histograms, Pareto analysis, checklists, flowcharts,
scatter diagrams, control charts and cause and effect diagrams to analyse the causes of
non-conformance to quality specifications. The tools help to pinpoint weaknesses so that
remedial measures can be taken.
ISO 9000:2000 is an international quality standard. ISO 9000 certified companies have
quality management systems in place which fulfil the requirements listed in ISO 9001:2000.
Certified organisations enjoy a competitive edge over others as the certification is proof
that they follow a quality system that is universally accepted. The certification process
involves first party audit by the organisation itself, a second party audit by one of its
customers and a third party audit by the registrar. Periodic surveillance audits are carried
out in addition to the internal quality audits by the organisation even after certification
to ensure that the quality management system is functioning properly.
I CONCEPT QUIZ I
State True or False
1. Quality is a perception of the customer.
2. Quality cannot be inspected into a product.
3. Quality is getting it right the first time, every time.
4. Failure cost is the cost of checking that 'it is right'.
Product Quality 93
5. Cost of repairing and servicing is a part of quality appraisal costs.
6. Quality circles are groups of people specially employed by the organisation to
tackle quality problems.
7. Process improvement teams consist of people from the same deparbnent.
8. Completeness is a quality dimension for a product.
9. An ISO 9000 certified product has high quality.
10. Internal customers are the end users of a product.

1. Which of the following is not an internal failure cost:
(a) Cost of scrapping defective items.
(b) Cost of downgrading to 'seconds'.
(c) Cost of warranty claims.
(d) Cost of reworking defectives.
2. Prevention costs are the costs associated with:
(a) Getting it wrong.
(b) Checking that it is right.
(c) Handling of returned products.
(d) Design, implementation and maintenance of the quality system of an
organisation.
3. Which of the following is not a quality dimension of a product:
(a) Performance (b) Reliability
(c) Consistency (d) Durability
4. Which of the following is not a quality dimension of services:
(a) Timeliness (b) Accuracy
(c) Courtesy (d) Serviceability
5. A component of prevention cost is:
(a) Cost associated with calibration and maintenance of equipment used for
quality checks like instruments, gauges, meters and so on.
(b) Costs of creating systems and procedures to ensure quality.
(c) Cost of liability litigation and other claims.
(d) Cost of checking that the quality system is functioning satisfactorily.
6. Quality circle is a group of people from:
(a) Quality assurance deparbnent.
(b) Different deparbnents involved in a process.
(c) The same deparbnent.
7. A cause and effect diagram:

(a) Shows relationship between two variables in a process.
(b) Shows the steps involved in a process.
(c) Shows the frequency of data related to a quality problem.
8. The International Organisation for Standards is located at:
(a) New Delhi (b) London
(c) Geneva (d) Paris
9. ISO 9000 certification is given by:
(a) The International Organisation for Standards.
(b) State government.
(c) Government of India.
(d) Registrar.
10. ISO 9000 certification is for:
(a) Life time.
(b) Three years.
(c) Three years subject to 5 successful surveillance audits .
(d) Ten years.
Fill in the blanks:
1. Quality is the totality of features and attributes that satisfy a _ _ _ _ _ stated
and implied needs.
2. Quality cannot be _ _ _ _ _ in, it must be ______ in.
3. The costs incurred because of getting it wrong are called _ _ _ _ _ _ __
4. The costs associated with getting it right are called _ _ _ _ _ _ _ __
5. The costs associated with checking that it is right are called _ _ _ _ __
6. A statistical process control chart gives the statistical upper and lower
7. The ISO 9000 is a standard for _ _ _ _ _ _ _ _ _ _ of an organisation.

8. The first party audit of an organisation seeking ISO 9000 certification is carried
out by _ _ _ _ _ _ _ _ _ _ __
9. The second party audit of an organisation seeking ISO 9000 certification is carried
out by _ _ _ _ _ _ _ _ _ __
10. The third party audit of an organisation seeking ISO 9000 certification is carried
out by _ _ _ _ _ _ _ _ _ __
Product Quality 95
I QUESTIONS I
5.1 Define quality. What are the dimensions of product quality?
5.2 Explain the difference between quality of design and quality of conformance to
design.
5.3 What are the different costs associated with quality?
5.4 Quality cannot be inspected in a product, it must be built in a product. Comment.
5.5 Explain the principles of TQM.
5.6 TQM focuses on market-in. Explain the market-in concept in relation to TQM.
5.7 What is the role of employees in quality improvement?
5.8 What are quality circles?
5.9 Write a short note on the 7 QC tools.
5.10 Compare and contrast ISO 9000:1994 and ISO 9000:2000.
5.11 What steps would you take to obtain an ISO 9000:2000 certification for your
organisation?
5.12 Why do organisations strive to get ISO 9000 certification?
Part III
The How of Production and
1-...
~
Q 5 Ps of
0
er Production
a..
Operations
Management
Process Design and Selection
I always eat my peas with honey,
I've done it all my life,
They sure taste kind of funny,
But it makes them stick to the knife.
ANON
LEARNING OBJECTIVES
• Understand the factors affecting process design
• Understand common process structures-job shop, batch, flow and continuous
methods
• Identify and appreciate factors that influence process selection
• Group approach to production
• Other manufacturing technolog ies
• Understand process design and selection for services
6.1 INTRODUCTION
Production operations involve the transformation of resource inputs into products or
services. A process is a set of actions which transforms inputs into outputs. A process
also involves flow of materials and information. The manufacture of the final product or
the operation of the final service may involve a large number of processes. The choice of
a process must be made judiciously as a wrong choice will result in wasteful effort and
additional costs. Process design defines the tasks that need to be done and how they need
to be done by the various functions in an organisation. Process design is an outcome of
99
the overall operations strategy. If goods are made-to-order, the processes used will differ
from those used when goods are made-to-stock or assembled-to-order. For instance, if
an organisation produces a number of items in small quantities, the process must be so
designed that it can easily switch from one product to another.
The process selected should also be compatible with the product design. The capability
of the process for executing the product design and conforming to its quality requirements
is to be ensured. The process should also be capable of producing the entire range of
product mix of the organisation.
Process selection influences the capacity of a plant as some processes are cost
effective only when run at certain volumes. The choice of the process affects the plant
layout, equipments and the design of work systems. The process dictates whether similar
functions are to be performed at one place or the functions are to be arranged to conform
to the processing requirements. For instance, mass produced assembled goods can be
manufactured on an assembly line. Highly customised goods may require the plant to
be more labour intensive and less automated. The common basic processes are:
Conversion: For instance, iron ore to iron, crude oil to gas and so on.
Fabrication: This process alters the shape and form of the material. For example, a steel
sheet may be changed into a car fender.
Assembly: Subcomponents and parts are assembled into products. For example, an
engine cylinder, piston and piston rings may be assembled to form an engine subassembly.
Testing: While this is not a basic process, it is used so often as a stand alone process, that
it has been included here. Testing may be carried out on any of the quality dimensions
of a product or service.
6.2 FACTORS AFFECTING PROCESS DESIGN

Several factors affect process design decisions. The capital intensity, the degree of vertical
integration, flexibility, and the quality level and degree of customer contact are some of
the important issues that must be taken into consideration while making process design
decisions.
Capital intensity: Processes may be labour-intensive or capital-intensive. Automation,
though costly, increases productivity. However, the cost of automation must be weighed
against the advantages accrued. If the organisation is not producing products in large
volumes, automation may prove costly. Customised, hand crafted furniture and machine
made standardised furniture will require different processes. The degree of automation
will vary with the degree of standardisation of the product and the volume in which it
is to be produced.
Vertical integration: Vertical integration is the degree to which an organisation will
produce the inputs and control the outputs of its production processes. Control over
suppliers (inputs) is called backward vertical integration whereas control over distribution
channels (outputs) is called forward integration as shown in Figure 6.1. Vertical integration
is an important factor in process design. Should an organisation produce all the required
inputs in terms of subcomponents, components, subassemblies and intermediaries or
Process Design and Selection 101
Backward
vertical
integration
D Suppli e rs
Manufa cturers
Wholesalers or Dealers il Forward

vertical
integration
Retailers
Customers
Figure 6.1 Vertical Integration.
should it outsource their production? Make-or-buy decisions depend on various factors.

The organisation may prefer to outsource if the cost of procuring them is less than
the cost of manufacturing them. The organisation has to outsource when it lacks the
know-how, skills and technology to produce an item. Sometimes the organisation has
to produce its own inputs even though the costs are higher if the outsourced products
are of low quality and reliability. Process design will vary according to the degree of
vertical integration that the organisation enjoys.
Flexibility: This can be one of the competitive priorities for an organisation. Flexibility
is necessary both in terms of product variety and product volume. It is the ability of
the production processes to adjust according to changes in demand, technology, resource
availability and product variety and volume. The choice of production processes depends
on the degree of flexibility desired by the organisation.
Quality level and degree of customer contact: Another factor influencing process design
is the quality level desired and the amount of customer contact that is provided. If
products are highly customised, there will be a high degree of customer contact and the
processes will have to be flexible so that they can respond to the customer's requirements.
6.3 PROCESSES FLOW STRUCTURES

A process flow refers to how an organisation organises material flow using the basic
processes listed earlier. There are four major process flow structures.
Job shop or project: Job, 'one-off', project or 'make-complete' refers to processes where
the complete task is handled by a single worker or a group of workers. A hair dresser
styling the hair of a client, a tailor making a suit, bridge construction, ship building,
building of generator turbines and so on are all examples of this type of process. These
examples range from small scale involving use of low technology to large scale, often
relying on higher technology. The term project generally refers to such large one-of-a-
kind tasks such as ship building and so on.
Low technology jobs. Consider the case of the tailor who produces made-to-order suits. The
tailor takes measurements, cuts the cloth, cuts the lining, stitches the suit, and finishes it.
He uses multi-skills. His task is labour intensive and equipment (sewing machine, iron,
etc.) is available whenever he needs it. He completes one suit before starting on another
suit. Value is added faster to the product. When using job approach for low technology
jobs the organisation is simple. The process has inherent flexibility to handle a high
degree of flexibility and it is easy to provide customisation. Tasks are generally labour
intensive and the workers are multi-skilled.
High technology jobs. In contrast, high technology one-of-a-kind jobs or projects involve
large sums of money and take considerable time to complete. A project may be defined as
a unique activity involving time and resources. It has a definite beginning and a definite
end. Customer interaction for projects is high and customisation is provided. Take the case
of ship building. Ships are built to specific orders. They take considerable time and involve
heavy capital outlays. The job is completed by teams of workers performing different
tasks on it. Generally a matrix organisation is adopted for projects. The teams of workers
are specialised in their own fields and latest technology may be used. Projects involve a
certain degree of risk as they span a longer time period and involve large financial outlays.
Batch production: It is the process used when small to moderate volumes of a variety
of products have to be made. The products essentially pass through similar operations. In
this method, the process is divided into parts or operations and an operation is performed
on the complete batch before it is passed on for the next operation. Value addition is
slower but a certain degree of specialisation of labour is possible. Batch production
is generally used for made-to-order products but can also be used for made-to-stock
products. In order to understand the difference between batch production and job shop
method, let us consider that five units of a particular product are to be made by a number
of workers. In job shop method, the workers will be divided into five groups and each
group will be responsible for making a unit of the product. On the contrary, using batch
production, the process would first be divided into parts. Suppose the fabrication of the
product required lathe work, drilling and painting. The complete batch of five units will
first be sent to the machine shop for lathe work. When the lathe work on all five units
is completed, the batch will move to the drilling shop and then the five units are moved
to the painting shop. Figure 6.2 gives a schematic representation of batch production.
Batc h 1 Batc h 1
Operatio n 1
Units 1-1 00 Units 1- 100
Batch 1
Operation 2 Operation 3
Units 1-100
Units 1-100
Figure 6.2 Schematic Representation of Batch Production.

Managing batch production poses complex problems. If drilling machines are not
available when the batch has passed through the lathe shop because some other work
is being performed on them, the batch will have to be stored and will have to wait in
a queue till the machines become available. As the number of products and batches
increase, with different sequence of operations for each, tracking flow of batches becomes
extremely difficult and complex. Often production is managed by crisis and meeting
delivery schedules and deadlines becomes difficult.
Though organisationally difficult to handle, batch production results in specialisation.
The workers perform the same operations and become skilled and specialised in their
tasks. There is high utilisation of equipment. For instance, in the previous example, the
drilling machines or the lathes and so on will rarely be idle as some batch or the other
is passing through these operations. Supervision is relatively easy as a group performs
only one type of operation. The non-availability of a single resource for a process does
not stop processing, since others are available. This method permits flexibility as task
processing sequences and priorities can be easily changed.
Job shop and batch methods are also classified as intermittent production methods
while flow and continuous methods are classified as continuous production methods.
Flow method: In the flow method of production, material flows from one operation to the
next without any delay or storage between operations and the operations are performed
continuously adding rapid value to the task. Unlike batch production where the batch
is passed on to the next operation only after the whole batch has passed through the
current operation, in flow methods each unit is passed from one operation to the next
as soon as processing of an operation is complete. An assembly line is a typical example
of flow methods. The material flows along a moving assembly line and passes through
different work stations at which operations are carried out. The line halts for a certain
length of time during which the operations required to be performed at each workstation
are completed. The line then moves so that the next item takes the place of the previous
item. In order to ensure smooth flow of work, the time that is required to complete the
operations at each workstation must be equal, and there should be no movement off
the flow line. For instance, inspection should be physically located on the flow line and
should adhere to the same time constraints as the other processes.
Flow methods can be successfully used when the demand for the product is fairly
stable and constant. Too many fluctuations in demand will require frequent setting up and
balancing of the flow line resulting in increased costs. Such fluctuations are often overcome
by making for stock during lean periods and using it to supplement the production during
peaks. The cost of holding inventory will have to be borne if such a policy is adopted.
The product is to be standardised as a flow line is inherently inflexible. Materials should
follow specifications and be delivered on time at the place required. Work station operations
should be well defined and constant so that the balance of the line can be maintained.
Flow methods are capital intensive. The initial setting up of the flow line is costly
and requires specialist equipment. The workers do not need much skills and have to
perform repetitive tasks throughout the day. For instance, in an assembly line where
cars are being assembled, only tyres may be added to the car at a particular workstation.
The workers at this station may be just tightening four nuts on each tyre, repetitively
throughout the day. This is a cause for boredom and frustration at work and may lead
to problems such as increased lateness, absenteeism, poor quality and in extreme cases,
disruption of the flow line to break monotony.
In Figure 6.3, the assembly line stops for 4 minutes to enable workers at each work
station to complete their task. This is known as cycle time. It implies that a finished unit
will be produced every four minutes.
Time Workstation 1 Workstation 2 Workstation 3 Finished units

09:00 Unit 1
09:04 Unit 2 Unit 1
09:08 Unit 3 Unit 2 Unit 1
09:12 Unit 4 Unit 3 Unit 2 Unit 1
Flow of work
Figure 6.3 Schematic Representation of Flow Method (assembly line).
The advantages of the flow method are its efficiency, low per unit cost, speed and
easy control. Its disadvantages are the high cost of equipment, low utilisation of human
skills and inflexibility to adapt to changes in technology, volume or product design.
Customisation is difficult and the product is standardised.
Typical examples of flow lines or assembly lines are automobile industry, television
industry, telephones, watches and so on.
Continuous flow: This structure is used for highly standardised products produced in
very high volumes. As the name suggests, production is continuous without any shut
downs as the start-up for such processes is very expensive. The system is highly automated
and operates 24 hours a day. The output is also not counted in discrete units but is
measured on a continuous scale. Typical examples are steel factories, cement factories,
paint factories, oil refineries, chemical works and so on. The worker's role is mainly to
monitor the equipment.
The advantages of this system are its enormous capacity, efficiency and ease of
control. However, such systems entail very high invesbnent in plant and equipment.
The system is highly inflexible and can respond neither to demand fluctuations nor to
product variations. Replacing technology or upgrading it is also cumbersome due to the
very heavy sunk costs involved.
Table 6.1 Types of Processes
Job shop Batch Flow Continuous
Type of product Customised Variable Standard Highly standardised
Volume Very low Low High Very high
Variety of products Infinite Many Few Very few
Labour intensiveness Very high High Low Very low
Worker skills Multi-skills High Low Varies
Advantages Customisation Flexibility, quality, Efficiency, speed, High efficiency, large
easy supervision low cost capacity, ease of control
Disadvantages Non-repetitive, Costly, slow, difficult Capital investment Very inflexible, high
expensive to schedule and manage high, inflexible initial capital investment
Examples Ship building, Education, bakeries, print Automobiles, fast Iron, cement, chemicals,
construction shop, fabrication work food, computers oil refineries
6.4 PROCESS SELECTION

Process selection depends on a number of factors: Variety and volume, initial capital
investment and economic analysis.
Variety and volume: The relationship between process structure and volume requirements
is often represented on a product-process matrix shown in Figure 6.4. The matrix shows
that as the volume increases and the product becomes more standardised, it is economical
to use specialised plant and equipment, and structures like flow methods and continuous
methods. When the product becomes more customised and the volumes required decrease,
batch methods or job shop production methods are more feasible. Examples of food
service systems have been included to help the reader to understand the differences
in the various structures. If Maruti Udyog decides to customise its cars, it will have to
reposition itself on the matrix. The volumes will become much lower and a job shop
technique may be adopted where a team produces the customised made-to-order car.
Standardised Continuous
commodity (Sugar mill)
products
Flow
Few
standardised (Automobiles,
products McDonalds)
Multiple products , Batch

limited (Fabrication ,
customisation coffee shop)
possible
None
High Job shop
customisation (Printer's shop ,
Thai restaurant)
Low volume , Low vo lume High volume Very high

often one-of- volumes
a-kind
Figure 6.4 Product-process Matrix.
Investment: Investment is very high in setting up continuous and flow production as

compared to job shop and batch production methods. Moreover, the continuous and flow
systems have inbuilt inflexibility. They are not amenable to changes in product, volume or
technology. Equipment must be selected with utmost care. Some of the factors that should
be kept in mind while selecting equipment are its cost, output rate and quality of output,
requirements of labour skills and training, set-up requirements, ease of maintenance and
operation, obsolescence and the impact equipment would have on the overall system.
Economic analysis: An economic analysis must be carried out while making a choice
of processes. Often the choice involves make-or-buy decisions. Such decisions cannot be
solely based on economic factors and costs. We should also consider other factors such as
quality requirements, reliability of supplies in terms of volumes and time frame, political
expediency, administrative convenience, and technical feasibility. If other factors are nearly
the same, economic analysis becomes the deciding factor. Break even analysis helps to
determine economically viable solutions. The analysis is based on costs, volume and profit.
Costs can be divided into fixed costs and variable costs. Fixed costs are independent of the
level of production and may include overheads like rent of buildings, rent of machinery
and so on. Variable costs are direct costs incurred in producing a unit of the item and
include costs of raw materials, costs of direct labour and so on. The revenue earned is
the product of the sale price per unit and the number of units produced (assuming that
they all will be sold). The break even point is that level of production where the revenue
equals costs. Let us understand the concept with the help of an example.
EXAMPLE 6.1 Suppose a manufacturer has identified the following options for
obtaining a machine part: buy the part at f200 per unit, make it on a lathe at a cost of
f75 per unit or make the part on a sophisticated automatic machine at a cost of f15 per
unit. The lathe costs f80,000 and the automatic machine costs f2,00,000. What is the best
option for the manufacturer?
Solution: Let x be the number of parts produced or bought. If the part is bought,
Cost= 200 xx
If the part is made on the lathe,
Cost = 80,000 + 75x
If the part is made on automatic machine,
Cost = 2,00,000 + l5x
If the part is sold for f300, then
Revenue = 300x
Let us plot these relationships graphically as shown in Figure 6.5.
Let us find the break even point when we buy the part or manufacture it on the
lathe.
200x = 80,000 + 75x
X = 640
Let us also find out the break even point when we make the part on the lathe or
make it on the automatic machine.
80,000 + 75x = 2,00,000 + l5x
X = 2000
This implies that if the requirement is less than 640, we should buy the part. If it is
between 640 and 2000, we should make the part on the lathe. If the requirement is more
than 2000, we should make the part on the automatic machine.
9 ,00 ,000
8,00 ,000
7,00 ,000
6,00 ,000
B~ -
5,00 ,000
NY
4,00 ,000
~
Make on
3,00 ,000
~ lat he
--~-- ~
..... -..:..·.:.:.:..·l·.:.. - . : . . · -
- --:-.--:- .......
2,00 ,000 . . .. · · · · ·· Make on -
... automatic
1,00 ,000 mac hine -
~
t
0 !
I
I
I
0 500 640 1 000 1500 2000 2500 3000

Number of parts (volume)
Figure 6.5 Comparative Revenue and Costs .
6.5 GROUP APPROACH

The group approach, also referred to as group technology or cellular manufacturing attempts
to combine the benefits of batch production and flow methods. Jobs or products which
pass through similar operations are identified and grouped into families. Machines and
equipment required to carry out these operations are grouped together to form a group or
a cell and are laid out together in an area reserved for the group. The group consists of
a team of workers who work solely in the group. The workers share a common product
output target and are responsible for achieving it. The group develops multi-skills and
workers work in close cooperation with each other to achieve their target. The groups
are independent of each other and have the autonomy to pace their work according to
their perceived requirements. A typical cell layout is shown in Figure 6.6.
Such an approach reduces set-up time, as the family of products dealt with by the
group have similar operations to be performed on them even though the sequence may
be different. This method of manufacture is often used to classify products into families.
Routing cards-cards which show the sequence of operations involved in manufacturing
a product-are examined and sorted out into sets. The complete set of route cards is first
sorted out into first operation sets (sets A, B, C ... ). This implies that all products in
set A will first undergo operation A before being passed on to the next operation. The
products within each set are then sorted out on the basis of the second operation. Thus
there may be products which follow routing AB, AC, AD, etc. These are further sorted
out on the basis of third operation (sets ABC, ABO, ABE ... ) and then by the fourth
operation and so on. From this sorting, groups will emerge with common processing
characteristics. These are then grouped into a family. All equipment and machines required
for processing the family are placed together in a cell.
Group technology provides some flexibility similar to batch methods. However, it
is easier to control as management only has to schedule and control entry or exit into
or from a cell. The detailed routing or processing within the cell is responsibility of the
Direction
of part
movement
within cell
Key : ---- Paths of three workers

S = Saw moving within cell
L Lathe - - Material movement
HM = Horizontal milling machine
VM Vertical milling machine
D Drilling machine
G = Grinder
Figure 6.6 Typical Cell Layout.
team. The method also provides job enrichment to the workers and vastly reduces the
monotony and boredom of doing repetitive low skilled task on the flow line.
The layout of machines within a cell is according to the technical needs of the family.
Material flow through the cell is simplified and its velocity increased as compared to the
batch method where products compete for resources and queues form between operations.
In group technology the cells are balanced to keep up with the required output rate.
6.6 OTHER MANUFACTURING TECHNOLOGIES

Automation is defined as technology that performs a task or a set of tasks based on
programmed commands. The advent of computers, information technology and advanced
information systems has resulted in increased use of automation in manufacturing
processes. Automation is used to control, monitor and execute manufacturing activities.
It increases productivity and improves the quality of the product. It also reduces wastage
of material and scrap. However, it involves high investment, is less flexible and requires
technical manpower to operate automated systems. Automation is being increasingly used
in manufacturing. Some of the current trends are described:
Computer Aided Manufacture (CAM): In computer aided manufacturing, computers
are used to control the processing equipment or to support manufacturing operations.
Machines are programmed through in built computers and Computerised Numeric
Controlled (CNC) machines form the hub of such systems. The machines can perform a
variety of tasks based on the instructions fed in them. They can even change the type
of operation to be performed without human intervention. Though such machines are
expensive, they ensure consistent product quality, reduced labour costs, improvement in
production rate and better control and management of equipment and materials.
Flexible Manufacturing System (FMS): FMS is a computer controlled system consisting
of a number of workstations and automated material handling equipment which can
transfer the work from one workstation to the other. The workstation's machines are
automated and programmable. They are capable of selecting, positioning, and activating
a large variety of tools according to the programmed instructions. When a machine has
finished a batch, the programmed instructions transfer the batch to the next workstation
and a new batch which may require different processes is positioned at the first machine.
The machine automatically repositions and retools in accordance with the programme.
FMS can produce a moderate variety of products in small volumes, quickly and with
high quality. Direct labour costs are reduced. However, the system requires very large
capital invesbnent in equipment, planning and control systems. The machines have
robotics integrated with them so that a variety of tasks like drilling holes, bending metal
in various directions and so on can be performed. Because of the high cost of machines,
the product design must be relatively stable and products must use the same family of
components.
Computer Integrated Manufacturing (CIM): CIM is based on a shared database and
integrates all functions connected with manufacturing. These include engineering design,
manufacturing engineering, factory production and information systems related to supply
chain management and production planning data including materials requirement planning
data. With the help of intranets and extranets, suppliers, salespersons and through them
customers, design deparbnent, production deparbnent, billing, accounting and all other
business functions are integrated. CIM is capable of controlling and monitoring all
functions from receipt of an order to the ultimate despatch of the manufactured item and
billing. Let us take the example of an auto manufacturer. When the salesman takes an
order from a customer, the data along with the customer's preference is passed on to the
design and production deparbnents. The suppliers of raw materials and accessories also
receive the same data. If the customer wants blue seats in his car, the supplier ensures
that these are made available since he has access to information about what is in stock
with the production agency. The system has resulted in customisation without the usual
delays associated with it.
6. 7 PROCESS DESIGN AND SELECTION FOR SERVICES

The connotations for process design for services are vastly different as compared to products.
Often the process is the service itself. Services provide a customer with physical, sensuous
and psychological benefits. The psychological aspect must be given its due weightage.
Services are judged on attributes like timeliness, courtesy, accessibility, accuracy and
THE FUTURE OF MANUFACTURING-3 D PRINTING
The industrial revolution ushered in an era of mass

production of goods, creating economies of scale which Object lesson
caused major changes in economies and societies. Her., Opnnt r or
Production shifted from skilled craftsmen working on a
customised single piece of a product at home, to workers
working in a factory producing mass standardised products. _.
-
.
·1
A new technology has emerged which is reversing this \ .• ' . ,: ..j
trend. Three dimensional printing or additive technology
as it is called , makes it possible to produce a single
.. '
item and thousands of items at the same unit cost of
production thus negating the effect of economies of scale.
This is how it works. First a design is created on the
computer screen and suitably tweaked to meet personal
requirements. Then you press print. A printer like machine
comes to life and builds up the object gradually, either
by depositing material from a nozzle, or by selectively
solidifying a thin layer of plastic or metal dust using tiny
drops of glue or a tightly focussed beam . Products are
built up progressively, layer by layer. Eventually, the
object pops out. Small objects can be made at home
on a machine, called a 'fabber'(fabricator), similar to
a desktop printer. For larger items like aircraft parts,
automobile panels and so on, a larger machine and a
bit more space is required.
If the object produced is not to your liking, the design
can be modified with a few mouse clicks and another
piece produced . The technology has improved and is
shifting from producing prototypes to producing actual
use products with runs of 1000 items.
Advantages . It cuts cost by getting rid of production lines.
Waste is reduced . Often only one-tenth of the material
used conventionally is required. For instance, in the aircraft
industry, parts are machined from costly aerospace grade
solid titanium billets. The machine waste or swart cannot
be reused . In the 3 D printing process titanium powder
is used and solidified in layers in the shape required.
The extra powder can be blown away and reused . The
technique allows the creation of parts in shapes that
conventional techniques cannot achieve. It enables the
production of a single item quickly and cheaply. Mass
customisation is possible as changes required from one
item design to the next are just a few mouse clicks away.
The technology is already being used. Shapeways, a
New York based company, prints more than 10,000
unique products every month from materials that range
from stainless steel to glass, plastics and sandstone.
Customers include individuals and shopkeepers, many
ordering jewellery, gifts and gadgets to sell in their stores.
Maybe we shall soon have 'fabbers' in our homes
churning out products as and when required, tailor made
to our needs. Larger fabbers may become publically
available at malls!
consistency. An important factor in the provision of services is the amount of customer

contact. If the face-to-face customer contact is high, the degree of customisation increases
and consequently the production efficiency decreases. On the other hand services like
mail order service may involve no face-to-face contact with the customer. The worker
skills required in each situation will also be different. Figure 6.7 shows the relationship
between customer contact, worker skills and type of operations involved in a matrix.
High
EJ
B
Production
efficiency
B Face-to-face
tight
specification
Face-to-face
loose
specification
Face-to-face
total
customisation
Low
Low Contact High
Worker
Clerical Assisting Verbal Procedural Trade Diagnostic
skills
Paper Demand Scripting Capacity
Focus Flow control Client mix
handling management calls management
Mail order Online share Phone Making a bank Shoemaker,
Example Legal , medical
service trading banking draft Dentist
Figure 6.7 Relationship Between Customer Contact and Worker Skills.
From the previous matrix it is obvious that if we are dealing with a mail order service,
we do not require workers with highly diagnostic skills. Services provided through
the internet require that the service provider should be able to assist the customer and
answer all his or her queries. Services which involve telephonic contact with the customer
require operators who are skilled in making teleconversation. The BPO Centres in India
provide a good example of such services. The operators are specially trained to be able
to understand teleconversation and answer queries with aplomb and politeness that the
customer expects. Services which involve face-to-face contact but where the specifications
of how a service is to be provided are tight and rigid, operators need only procedural
skills. A customer at a bank requesting for a bank draft is a good example of such a
service. The procedure is laid down. Neither the customer nor the operator can change
it much. The customer fills up a form giving details of the draft he wants and also the
mode of payment by which he will be clearing the dues. The bank clerk fills out the
draft and it is signed by the authorised signatories of the bank. In this case the operator
should be fully familiar with the procedures involved. In case of services where there is
face-to-face contact but the specifications of how the service is provided are loose, the
operators need to have trade skills. They should be able to understand the customer's
requirements and also be able to inform the customer about any limitations that the
service may entail. Examples of such services are a car sales agency or a full order
restaurant. When face-to-face contact involves total customisation, the diagnostic skills
of the operator must be high. He should be able to analyse the problem being faced by
the customer and should offer solutions for the same.
There are three broad approaches to delivering on-site service. These are the production
line approach, the self service approach and the personal attention approach.
The production-line approach: The approach has been pioneered by McDonald's
where the delivery of fast food is treated as a manufacturing process rather than as a
service process. The approach overcomes some of the inherent drawbacks of services.
Service implies subordination of the server to the served. Manufacturing, on the other
hand concentrates on things rather than people. McDonald's orientation is towards the
efficient production of results and not on the attendance on others. It aims at the rapid
delivery of a uniform, high quality mix of prepared foods in an environment of obvious
cleanliness, order and cheerful courtesy. Everything is built into the system through
attention to total design and facilities planning. The attendant has no other choice but
to operate it exactly as the designers intended. McDonald's can be classified as a face-
to-face service with tight specifications. For instance, a wide-mouthed scoop is used to
pick up precise amount of French fries for each order size. The employee never touches
the product.
The self-service approach: Automatic teller machines, salad bars, buffet counters and so
on shift some of the burden of service to the customer. The customer feels that he is in
control, but the customer has to be trained in what to do as he acts as a partial employee
of the organisation. The customer should also be able to correct himself in case he makes
a mistake. ATM machines give elaborate instructions to the customer and provide him
ample opportunity to correct himself in case he makes an error.
The personal attention approach: Hotel services provided to guests is a typical example
of personal attention approach. Good hotels treat the customer as king and look after all
his requirements. The Marriot Hotel advertisement slogan sums it up rather well-"Our
new desk clerk lent his cufflinks to a guest for a crucial meeting. Instantly we knew we
hired the right guy." Some businesses create personal customers, making note of their
birthdays and wedding anniversaries and send cards and flowers to their customers
on such occasions. The 'feel good' that is created in the customer goes a long way to
promoting the business.
A well designed service system is consistent with the operating focus of the organisation.
It is robust, user-friendly and offers consistent performance.
6.8 SUMMARY
A process is a set of actions which transforms inputs into outputs. It involves flow of
materials and information. Process design spells out the tasks that need to be done and
how they need to be done by the various functional deparbnents of the organisation.
Process choice affects selection of plant and equipment, its capacity and layout. Common
processes are conversion, fabrication assembly and testing.
Process design is affected by the amount of vertical integration adopted by a firm.
This influences the decisions to make or buy subassemblies and components. Process
design is also affected by the flexibility desired in terms of product variation, product
volume, the desired level of quality and the degree of customer contact.
Main process flow structures are job shop, batch methods, flow methods and
continuous methods. Job shop or project involves the production of one-of-a-kind
product. Typical examples are ship building, construction activity and so on. Batch methods
are used when a moderate variety of products is to be produced in modest volumes.
The batch is processed as a whole and is passed on for the next operation only when
the previous operation has been performed on the complete batch. An assembly line
is a typical example of flow methods. Material flows continuously along a flow line
and various operations performed on it as required. The flow method is used for
standardised products required to be produced in large volumes. It is often referred to
as mass production. Continuous methods are used for producing commodities like sugar,
cement, steel and so on. Production process is carried out 24 hours a day, every day
without a break to avoid costly start-ups. The output is continuous and is measured rather
than counted in discrete numbers. It is ideal for large volumes of highly standardised
products.
The selection of the process is based on the volume and variety requirements, the
initial invesbnent that the firm can make and an economic analysis to compare different
methods.
Group technology tries to combine the benefits of batch and flow methods. Products
are divided into families requiring similar operations, though not necessarily in the same
order. Machines and equipments capable of performing these operations are placed
together in a specific area and a group of workers is assigned to them. This forms a cell.
The cell is responsible for processing all jobs that enter the cell. The workers acquire
multiple skills and enjoy autonomy of working within the cell.
Other manufacturing techniques are Computer Aided Manufacture (CAM) which
uses computerised numerically controlled machines capable of performing a variety of
operations; Flexible Manufacturing Systems (FMS) which use computers and robotics
to automate the manufacturing system and Computer Integrated Manufacturing (CIM)
which integrates all systems through databases, intranets and extranets.
The process design for services is markedly different from manufacturing as in
services often the process is the service. A major factor affecting service process design
is the degree of contact with the customer. The three approaches generally followed
when designing processes for services are-product approach, self service approach and
personal attention approach. The correct choice of process increases production efficiency
and makes the conversion process cost effective.
ICONCEPT QUIZ I
State True or False
1. Testing is one of the processes.
2. A hair dresser follows a job shop production method.
3. Batch production is used when large quantities of standardised products are to
be produced.
4. Flow method of production can be successfully used when the demand for the
product has large fluctuations.
5. Steel plants use the continuous flow method of production.
6. In the batch production method, an operation is performed on the entire batch
before it is sent for the next operation.
7. In the flow method of operation each unit is passed to the next operation as soon
as the preceding operation is completed.
8. In the batch method value is added rapidly.
9. Cellular manufacturing methods are used to produce families of products which
pass through similar operations albeit in different sequence.
10. Process selection influences the capacity of a plant.
1. The job shop method of production is used for:

(a) Standardised mass produced products.
(b) Standardised commodities.
(c) One-of-a-kind customised products.
(d) Moderate volumes of a variety of products.
2. The batch method of production is used for:
3. The flow method is used for:
4. The continuous flow method is used for:
5. Which of the following is not a factor affecting process design:
(a) Capital intensity.
(b) Fabrication.
(c) Vertical integration.
(d) Quality level and degree of customer contact.
6. Flow methods:
(a) Are capital intensive.
(b) Require highly skilled workers.
(c) Result in high customisation.
(d) Result in a highly motivated work force.
7. A computer aided manufacturing (CAM) system uses:
(a) Computerised numerically controlled (CNC) machines.
(b) Computerised work stations, robotics and automated material handling
equipment.
(c) A shared database and integrates all functions connected with manufacturing.
8. Which of the following is not a characteristic of batch production:
(a) Easy to handle and organise.
(b) High utilisation of equipment.
(c) Highly skilled and specialised workers.
(d) It is an intermittent method of production.
9. Which of the following is not a characteristic of flow production:
(a) Standardised product. (b) Fairly stable and constant demand.
(c) Capital intensive method. (d) Customised products.
10. For production of a very high volume of a highly standardised product, the most
suitable method of production is:
(a) Flow method. (b) Batch method.
(c) Continuous flow method. (d) Job shop or project methods.
Fill in the blanks:

1. Project may be defined as a ______ activity involving time and resources.
2. _ _ _ _ _ _ _ _ is the process used to produce small to moderate volumes
of a variety of products.
3. In batch production, an operation is performed on _ _ _ _ _ _ before it is
passed on to the next operation.
4. In flow production, an operation is performed on _ _ _ _ _ _ before it is

passed on to the next operation.
5. Computer integrated manufacturing is based on an ___________
6. McDonalds treats the delivery of fast food as a._ _ _ _ _ _ _ _ _ __
7. The _________ approach is followed in automated teller machines.
8. Hotel services provided to guests is an example of _________ approach.
9. A process involves flow of _______ and ________
10. Group technology tries to combine the benefits of _ _ _ _ _ and _ _ _ _ _ __
methods.
IQUESTIONS I
6.1 Describe the factors that affect process design.
6.2 Explain job shop method of production.
6.3 What do you understand by batch method of production? How does it differ
from the job shop method?
6.4 What is flow production? How is it different from continuous production?
6.5 Explain the concept of cellular manufacturing.
6.6 Explain the difference between CAM, CIM and FMS.
6.7 What are the main approaches to process design for services?
6.8 What are the main factors that affect process design for services?
6.9 Compare and contrast different production processes.
6.10 (a) Urvashi Plastics has produced a new toy which costs f5 per unit to produce and
can be sold for f15 per unit. The plastic injection mould for the toy has cost
the company f5,000. How many units must be sold to break even?
(b) If Urvashi Plastics procures a better mould which costs f9,000, the production
cost can be reduced to f2 per unit. How many units of the toy must Urvashi
Plastics sell if it has to break even, assuming that the selling price per unit
is still f15?
6.11 (a) Mona Electricals have designed a new electric steam iron. The initial invesbnent
for plant and equipment is f2,50,000. Labour and material costs per unit are
flO0. The selling price per unit is f500. What volume of sale is necessary for
Mona Electricals to break even?
(b) Mona Electricals have a choice of selecting another manufacturing process.
The initial invesbnent will decrease by f50,000, but the production cost per
unit will increase to f150 per unit. What is the break even point for this
process? Which process will you recommend?
6.12 Gati Computers is planning the manufacture of a new computer for which it needs
an optical mouse. The product can be produced in-house using Process A or
Process B or it can be outsourced and procured from a supplier. Cost data is as
following. For what levels of demand should each process be chosen?
Fixed cost Variable cost

Process A fS0,000 flO0
Process B f2,00,000 f40
Supplier 0 f200
6.13 Computech is set to manufacture mother boards for its new range of servers. The
company is evaluating three methods of production, process A, process B and
outsourcing. The cost data is given. Determine for what level of demand each
process should be chosen.
Fixed cost Variable cost

Process A f2,00 ,00,000 f4,000
Process B f6,00,00,000 f2,000
Supplier 0 f6,000
6.14 Baat Cheet, a telecompany has offered the following plans:

(a) Plan A. Call charges fl.20 per minute regardless of how many minutes of
talk time are used.
(b) Plan B. A flat rate of flO0 per month for 70 minutes of talk time and f0.70
per minute for any time over 70 minutes.
(c) Plan C. A flat rate of f120 per month for 120 minutes of talk time and f0.50
per minute for any time over 120 minutes.
A customer decides to purchase Plan A initially and then upgrade as required.
How much talk time per month would she need to use before she upgrades
from Plan A to Plan B? At what usage rate should she switch from Plan B to
Plan C?
6.15 ABC Manufacturing Company has always purchased a certain component from a
supplier for f50 per unit. It has now got some spare capacity and can produce
the component in-house for f40 with an annual fixed cost of f2,500. Currently
ABC Manufacturing uses 300 units of the component per year. Should ABC
Manufacturing make the component or buy it?
A new supplier has been located who offers discounts. His terms are f52 per
unit for the first 100 units and f45 per unit for each additional unit. Should ABC
Manufacturing make the component in-house, purchase it from the old supplier
or purchase it from the new supplier?
Develop a set of rules that can be used to decide when to manufacture, when
to buy from old supplier and when to buy from the new supplier.
6.16 Jeevan Raksha Insurance Company offers your organisation three group health
insurance plans. In Plan A, you will have to pay a fixed premium of f900 per
employee annually irrespective of the number of claims filed or the amount of
each claim. In Plan B, you will pay a fixed premium of f300 per employee and
in addition flO0 per claim filed. In Plan C you will pay f600 per employee and
f30 per claim filed. Which health insurance plan should your company opt for?
How would the average number of claims filed annually per employee affect
your decision?
Work Study
Develop scientific methods for doing work.
Establish goals for productivity.
Establish systems of rewards for meeting the goals.
Train the personnel in how to use the methods and thereby meet the goals.
F.W. TAYLOR
LEARNING OBJECTIVES
• Explain what is work study and its importance
• Understand behavioural aspects of carrying out a work study
• Define method study and explain the steps involved
• Understand method study with the help of an example
• Explain ergonomics and its effects on productivity
• Understand the role of materials handling in methods improvement
• Appreciate the importance of work measurement
• Understand the method of computing standard time from a time study
• Understand the method of carrying out activity sampling
• Familiarise oneself with indirect methods of work measurement, namely
Predetermined Motion Time Systems (PMTS), synthetic timing and analytical
estimating
7 . 1 INTRODUCTION
Productivity has always been a concern for production and operations managers. Higher
productivity can be achieved through better utilisation of available resources. F.W. Taylor
advocated in his Scientific Management Theory that there is a best method for doing
119
any task and we must establish it. Work study is a group of management techniques,
particularly method study and work measurement which have a special reference to
improving human performance.
Work study can be defined as a general term for those techniques particularly method
study and work measurement which are used in the examination of human work in all its
context 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.
We have seen in the previous chapter that process design defines the activities to be
performed and how they have to be performed. Work study attempts to find out improved
ways of performing these activities. Method study deals with the review of methods,
layout and equipment and work measurement measures work load in terms of time
standards so that productivity standards that may be expected of a worker performing
a certain task can be laid down.
7.2 BEHAVIOURAL IMPACT OF WORK STUDY

Work study involves observing the worker at work. The methods used by the worker are
observed and recorded. In a work measurement study, the time taken by the worker to
carry out an operation is recorded. These observations have a behavioural impact on the
worker. The worker associates such studies related to his productivity with a feeling of
insecurity. Often the worker fears that if he is found to be inefficient, his services would be
terminated. He may, therefore, not perform according to his normal manner but may work
faster or slower than he normally does. He may also adopt methods which are not routinely
followed. Such observations will mislead the work study analyst and defeat the very purpose
of the study. In extreme cases, the workers union may even force the study to be cancelled.
It is important that the workers are taken into confidence and briefed about the aim
of the study, its purpose and how the analyst will conduct it so that all misgivings are
put to rest. Workers must be reassured that the study will not result in the loss of job.
7.3 METHOD STUDY

Method study, as the name implies, is the study of ways of doing things. It is defined as:
The systematic analysis and design of work methods and systems through the application
of innovatory techniques to achieve improved utilisation of resources.
ISi
The systematic recording and critical examination of existing and proposed ways of
doing work, as a means of applying and developing easier and more effective methods
and reducing costs.
BSI
The process is often described by its main steps:
1. Select (the work to be studied)
2. Record (all relevant information about that work)
3. Examine (the recorded information)
4. Develop (an improved way of doing things)
5. Install (the new method as standard practice)
6. Maintain (the new standard proactive)
Work Study 121
7.4 SELECT
Selection of a task to be studied is a managerial responsibility. The analyst should be given
a specific problem to study. Some of the indicators of possible need for work study are
bottlenecks leading to long queues of work-in-progress and inordinate delays in delivery
schedules, unbalanced work flow, under utilisation of equipment and people, poor or
inconsistent quality and injuries or accidents. A cost benefit analysis should be carried
out before a method study is undertaken. The savings likely to be achieved through the
study should exceed the cost that will be incurred on the conduct of the study. A study
must not be undertaken for any task where there is any form of industrial unrest, as the
workers will suspect the motives of the study.
Once the task has been selected, all persons connected with the task must be informed
of the study. The reasons for the study and the benefits likely to accrue from it should
be explained to them to overcome the psychological resistance to the study.
7.5 RECORD
After selection of the task to be studied, the next step is to record all the facts by direct
observation. Care should be taken while recording that important factors do not get
overlooked or ignored. Facts should preferably be recorded at the time and place of
occurrence. Different methods for recording are available and the analyst should select
the one that is most appropriate.
Process charts: Process charts are the most commonly used recording technique. Five
symbols used on the chart are given in Figure 7.1.
Operation When an operation is performed, the part, material , product or

document is modified or changed. It predominantly furthers the
process . Example: Assembling or dismantling parts, tilling up a
form , etc .
0
Inspection It represents verification of quantity or quality. Example: Checking
of a draft document by a clerk, checking a product for its dimensions.
D
Storage
Transport
It represents retention of materials , products or documents . Example :
Documents tiled in a tiling cabinet.
Represents movement of workers, materials , products or documents

V
from place to place, without furthering the process. Example:
Material flowing on a conveyer belt, a worker moving to and from r=>
the tool store.
Delay Delay occurs when the immediate performance of the ne xt planned

action cannot take place. Example : Worker waiting for a lift, a
letter awaiting signatures . D
Figure 7.1 Process Chart Symbols.
Flow process chart: It is a diagrammatic representation of all operations, inspections,

movements, delay and storage which occur when a task is being carried out. All the
five symbols given earlier are used in a flow process chart. The chart can be used to
represent either the activities of a person, or flow of material or document or a product
but only one at a time on one chart. Care should be taken that while preparing a chart,
there is no confusion about the object being charted. An example of a flow process chart
is given in Figure 7.2. The chart shows the activities involved when a personal assistant
takes dictation and types a draft letter for his director.
Outline process chart: An outline process chart is similar to a flow process chart except
that only operations and inspections are shown on the chart. Movement, delays and
storages are not recorded. Only two symbols-operation and inspection-are used in an
outline process chart. It gives a bird's eye view of the task being performed.
Two handed process chart: Two handed process charts use the same symbols as process
charts. The activities performed by both the hands are shown on the same chart. The
activities of the left hand are shown on the left side of the chart and the activities of the
right hand are shown on the right side of the chart.
Multiple activity chart: The chart is used to show the time relationships between two
or more workers, machines or materials. A vertical column is erected for each, and
the work performed is recorded as shading. Time is mentioned on the left and a brief
description of the work on the right. From the chart, the ratio of working to non-working
time is determined.
Activity: Typing a letter

Chart begins: Call bell rings
Chart ends: Draft placed in director's in tray
Charted by: I M Clever
Date: 24 May 06
0 DV c:> D
0.5 min
9 m
Collect note book and pencil
Walk to director's office
---- ~- ...._
4 min
2 min
Director busy on telephone
Dictation -- -
--
2 min
1 min
3 min
9 m
Someone comes to meet director
Sharpen pencil
Dictatio n taken
Walk back to own office
.
.-..
-
--
26 min Insert paper in type writer .-...
._
Type draft
2 min
4 min
Read through draft
Correct 6 mistakes at!!'
-
==-
9 min Go to director's office --
0.5 min Place draft in director's tray -
.-
Figure 7.2 Flow Process Chart.
Work Study 123
Simultaneous motion chart (SIMO chart): In this chart the movement of two or more parts
of the worker's body are recorded. The movements are generally of a very short duration
and the chart is prepared by a frame by frame analysis of a cine film or video tape. The
duration of such movements may be in milliseconds. The technique was introduced by
Frank and Lillian Gilbreth. The symbols used on such charts are called therbligs (derived
from Gilbreth spelt in reverse). Some of the motions classified by therbligs are search
(a hand or body movement of person trying to find or locate an object), grasp (gaining
control over an object), release (letting go of an object), position (causing an object to
orient or line-up) and so on. In some cases, SIMO charts do not use therbligs but use
Predetermined Motion Time Systems (PMTS) codes. The codes carry the time required
for the performance of the activity with them. PMTS charts are generally prepared as a
means of work measurement.
Travel charts: These indicate the frequency of trips between points and are useful for
modifying layouts. For instance, if the clerk makes too many moves to a filing cabinet
and back in a day, and the clerk's desk is at one end of the room while the filing cabinet
is at the other, it may be worthwhile to position the filing cabinet closer to the clerk's
desk. The travel chart is usually in the form of a matrix. Journeys begin from the left
hand row title to the column headings. Figure 7.3 shows a travel chart. If the crosses are
added up in rows it gives the number of outward trips and the sum of crosses in the
columns gives the number of inward trips.
A B C D E
A xx X XXX
B X XXX X xxxx
C X X xx
D X X XXX
E X XXX X XXX
Figure 7.3 Travel Chart.
Flow diagram: The flow diagram is a scale diagram of the workplace showing various
locations where the activities are carried out. The symbols used are the same as for a
process chart, but these are placed on the diagram at the location where a particular
operation or inspection or delay or storage takes place. The chart can be drawn for worker,
material, product or document and like the process chart, the object being charted should
remain the same on one chart. The chart helps us to identify bottlenecks or places of
high activity at the workplace and helps to improve the layout.
String diagram: Here a scale diagram mounted on a board is used. The various locations
associated with activities are marked with pins. A string is wound on these pins to
indicate the movements being made. Supplementary pins are added to facilitate showing
change in direction. The string is then wound out and measured to give the total distance
travelled during a cycle of the work under consideration. The string has advantage over
paper and pencil as repetitive journeys between points can be recorded with ease.
Recording of the present method being used helps to understand the various activities
involved and becomes an important input for the next step which is critical examination.
7.6 CRITICAL EXAMINATION

The record is critically examined and analysed. Normally the process of developing a
new method goes hand in hand with the critical examination. While it may appear that
we should tackle delays to start with, this is not true. Often a change or modification
or even elimination of an operation will remove delays and movements. The critical
examination is carried out systematically through an interrogative pattern.
Purpose
What is being done?
Why is it being done?
What else can be done?
What should be done?
Place
Where is it being done?
Why is it being done there?
Where else can it be done?
Where should it be done?
Sequence
When is it being done?
Why is it being done then?
When else can it be done?
When should it be done?
Person
Who is doing it?
Why is it he/she doing it?
Who else can do it?
Who should be doing it?
Means
How is it being done?
Why is it being done that way?
How else can it be done?
How should it be done?
The questions are asked in the same given order. If the purpose is eliminated, all other
issues become redundant. Similarly, a change in the place where the task is performed
may lead to an alteration of sequence, person and means of performing it. The critical
examination leads to the understanding of the present system. An analysis shows the
bottlenecks within the system or activities where the improvement is possible.
Work Study 125
7.7 DEVELOP
The next step is to develop the new method of doing the task so that the productivity
can be improved. This involves creative thinking on the part of the analyst. The process
of development cannot be systematised. It will depend on the ingenuity, experience and
background of the analyst. The first two questions in the steps of critical examination
help in analysis and the last two questions are the first step to developing a new method.
Brain storming can be used to generate new ideas. Sometimes the new methods may
involve technical issues which are unfamiliar to the analyst. In such cases it is best to
co-opt technical persons. After the new method is developed, it should be recorded in
the same manner as the old method and the two are to be compared. A summary of the
advantages should be prepared along with the cost of new installation.
7.8 INSTALL
The new method should be installed after approval. The method should be documented and
first presented to the supervisor and management. The idea has to be sold and management
and supervisors convinced of its usefulness. It should then be disseminated to workers.
Implementing the change is not easy. There will be some resistance to the changing of
old tried and tested methods, howsoever inefficient they may be. Without goodwill, the
best of methods cannot succeed. At this stage, senior workers are to be involved so that
they become committed to the change. Training in the new method must be imparted
to the workers and the benefits should be perceived by them. The new method will be
willingly adopted only when the worker develops faith and confidence in it.
7.9 MAINTAIN
Invariably the new method may regress to a mixture of old practices and new practices
unless it is ensured that the new method is not altered. Supervisors can play a large role
in ensuring that the new method is followed through constant supervision and motivation
of workers. If the new method is properly documented, it provides a guideline to the
supervisor for control. The implementation of the new method may pose some practical
problems and lead to some modifications so that it can be practically implemented.
Supervisors should document such changes and in consultation with the analyst modify
the method, if required.
Work study is a dynamic process. With changes in technology and skills, methods
will have to be revised from time to time to ensure high productivity. Let us study the
procedure with the help of the following example.
Let us consider the assembly of a bolt, one washer and a nut. The worker had a tray
filled with bolts with a hexagonal head to his left on a work table. On the right side
were two trays, one containing steel washers and the other containing hexagonal nuts.
The worker lifted a bolt with his left hand and picked up a washer from the tray on
his right with his right hand and placed it on the bolt. He then picked up a nut from
the tray with his right hand and placing it on the bolt, gave it a turn to screw it on the
bolt. The left hand then released the bolt into the tray in the centre which contained
assembled bolts. Figure 7.4 gives a schematic representation of the work table.
Asse mble d Nuts

bo lts
Bolts Was hers
Worker
Figure 7.4 Schematic Representation of Work Table.
Since the task has already been selected, it may be assumed that the cost benefit
analysis has been carried out. The next step is to record the existing method. The analyst
decided to use a two-handed process chart for the purpose.
Activity: Assembling a washer and a nut on a bolt

Chart begins: Both hands free before assembly
Chart ends: Assembled bolt dropped in tray
Charted by: I M Smart
Date: 24 May 06
Left hand Right hand
To tray of bolts To washers tray
Pick up one bolt Pick up one washer
To assembly position To assembly position
Grip bolt Drop washer on bolt
To nuts tray
Pick up a nut
To assembly position
Thread on nut
Drop bolt in assembled

bolts tray
Work Study 127
A critical examination was then carried out by asking questions in the format and
order listed in Section 7.6. While examining the process critically, it was found that
the left hand was engaged after it picked up the bolt and could perform no work as it
was holding the bolt. If it could be freed somehow, it could be used to perform other
operations. A suggested alternative was the use of a vice to hold the bolt. However, it
was felt that this would only add to the time as the operation of tightening the bolt into
the vice would take some time. Even after putting the bolt in the vice, the left hand was
still not able to perform any useful operation.
A suggestion was made that the bolt be held in place on the table by cutting a
hexagonal slot on its surface, the same size as the size of the bolt head. This suggestion
was implemented and the layout of the work table was modified. Two slots, the size of
the hexagonal head of the bolt were cut in front of the workers place on the table. A tray
containing bolts was placed on the workers right and left side. Similarly, trays containing
washers and nuts were placed on the right and left side of the table. The new method
suggested was that the worker picks up a bolt with each hand and positions it in the slots.
He would then pick up a washer with each hand and place it on the bolt. Next he would
pick up a nut with each hand and tighten it on the bolt by giving it a turn. Theoretically
productivity should have doubled. However, the worker experienced some difficulty in
carrying out the last step as the two hands are naturally designed in such a way that when
one is rotated clockwise, the natural movement of the other is anticlockwise. In this case,
both hands were expected to move clockwise. The uncoordinated movement caused some
delay, but the increase in productivity was significant. Figure 7.5 gives the new layout of the
worker's table and the two-handed process chart for the new process is also shown over leaf.
Nuts Nuts
Washers Assembled Washers

bolts
Bolts Bolts
0
Worker Slot to hold bolt
in upright position
Figure 7.5 Revised Layout of Work Table.
7.10 ERGONOMICS
Work is affected not only by the methods by which it is performed but also by the
environment in which it is performed. The environment can be both physical and
psychological. Here we shall deal only with the physical environment. The study of man
in his working situation is known as ergonomics. The word has been derived from two
Greek words-Ergon meaning work and Nomos meaning laws. It is known as human
engineering in the US. Other terms applied to it are biomechanics, man-machine systems
analysis, applied and human engineering research and so on.
Activity: Assembling a washer and a nut on a bolt

Chart begins: Both hands free before assembly
Chart ends: Assembled bolt dropped in tray
Charted by: I M Smart
Date: 24 May 06
Left hand Right hand
To tray of bolts To tray of bolts
Pick up one bolt Pick up one bolt
To slot To slot
Place bolt in slot Place bolt in slot
To washer tray To washer tray
Pick up a washer Pick up a washer
Drop washer on bolt Drop washer on bolt
To nuts tray To nuts tray
Pick up a nut Pick up a nut
Thread nut on bolt Thread nut on bolt
0 Drop bolt in assembled

bolts tray
Drop bolt in assembled
bolts tray 0
The International Labour Organisation (ILO) defines ergonomics as 'the application
of biological sciences in conjunction with engineering sciences to the worker and his
working environment so as to obtain maximum satisfaction for the worker which at the
same time enhances productivity.'
Ergonomics can be applied to any activity where human effort is involved. Some
areas where it has been successfully applied are design of equipment, power tools,
displays, furniture, jigs and fixtures; plant and workplace layout, working conditions
and environment.
Work Study 129
Human beings vary in their physical dimensions. It follows that the equipment used
by humans should either be capable of rapid adjusbnents to the changing needs (for
example, the typist's chair) or should be designed for the majority of persons likely to
use it. Furniture designs are based on human dimensions or anthropometrical data. For
example, a chair is normally designed so that the seat is at such a height that the feet
rest flat on the ground (generally 18 inches). If the feet do not rest flat on the ground,
the position becomes extremely uncomfortable after some time. Design of equipment,
furniture, displays and so on must be based on anthropometrical data which will vary
from people to people. The average American is much taller than the average Indian
and this fact should be taken into account.
In any activity human beings receive data from the environment through their
perceptory organs (five senses of touch, sight, hearing, smell and taste). The received
data after being processed by the brain undergoes comparison and analysis on the basis
of previous experiences, knowledge, emotions and feelings. The brain then orders the
body to perform certain tasks through the motor organs (arms, legs, organs of speech,
defecation and sex). However, there is a limit to the amount of loads that can be applied
to the human body. Excess loads cause the characteristics of the human body to change.
The loads may be physical, perceptual or mental. The loads may be static or dynamic.
Examples of such loads are given in Table 7.1. While designing work and work environment,
we should try and reduce the loads imposed on the worker.
Table 7.1 Examples of Loads
Load Static Dynamic

Physical: Accompanied by Steady pressure on a Fixing a job on a lathe
expenditure of physical spring loaded device
energy
Perceptual: Caused by
sensory input
(a) Visual Watching dials indicating Seeing changes in traffic signals
a steady state of progress
(b) Aural Constant hum of generator Hearing an alarm signal
(c) Tactile Holding on to a hand rail Holding a rope which is slipping
through one's hand
Mental Memorising facts to take Evolving new ideas or designs
a quiz test later
Physical load: Workers must be made comfortable at the workplace. Imposing excessive
physical load on them can cause them to tire easily adversely affecting productivity.
Some of the principles that can be followed are:
Sit rather than stand. As far as possible a worker should be able to sit while performing
work. If the work is such that the worker must stand while performing it, then a
comfortable seat should be provided where he can rest in between cycles of work or the
work duration should be reduced. For instance, personnel on the bridge of a ship do not
sit. This is because they are required to be in a high state of alertness at all times. Their
load is reduced by restricting the watch timings to four hours at a stretch.
Natural working position. Any unnatural working position like an extended arm or leg
or a twisted torso or a bent neck can cause undue fatigue. The worker should be able
to perform his work in a natural position as far as possible. For example, if a worker is
to constantly monitor displays located above his head height, his neck will be constantly
craned upwards causing him to tire. It is much better to provide him with a high stool
on which he can climb and sit so that the displays are at eye level and he can observe
the displays in a natural head-up position.
Support arms and feet. Forearms, elbows and hands should be provided upholstered,
adjustable and robust supports whenever possible. The feet should be placed firmly flat
on the ground wherever possible. In case this is not possible, a firm foot rest should be
provided. Providing a bar on stool to rest one's feet is not very satisfactory.
Permit a change in position. A fixed position is invariably tiring and must be avoided.
The worker should be able to change or shift his position at work.
Keep movements symmetrical. The human body has been designed to perform symmetrical
movements. For instance, in the example quoted in Section 7.9, we observed that it is
unnatural to screw on nuts on two bolts held vertically with both hands simultaneously.
If the fingers of one hand work clockwise then the fingers of the other hand naturally
work anticlockwise. As far as possible, the body should perform symmetric motions.
These are less tiring and better controlled.
Workplace. Ensure adequate working space and working area should be at a correct height.
Free hands from holding work. The use of hands to hold work is generally unnecessary and
tiring. We should provide jigs and fixtures to hold work. For example, a data entry operator
should have a document holder besides the visual display screen so that his hands are free.
Perceptual load: This can be reduced by proper design of displays, reduction in noise
and by proper positioning of controls that have to be touched like cranks, levers, knobs,
hand-wheels, push-buttons and joysticks.
Aural load. Noise can be an irritant at work. A steady dull noise is not so damaging as
intermittent loud noise (for example, a pneumatic hammer). Noise affects tasks which
require coordination, precision and intense mental concentration. Noise can be reduced
by the use of carpets and linoleum on the floor and acoustic materials on walls and
ceilings. Ear muffs should be provided to workers who are subjected to excessive noise.
Music is being used in workplaces where the workers work under tension and to mask
irritating background noises.
Visual load. The visual load can be reduced by having proper displays. If possible,
a display should be located near or in relation to its control device. Displays can be
grouped according to their purpose and they should be differentiated by colour and
position. Wherever possible the direction of pointers and scales should be standardised
so that they all move in the same direction.
Tactile load. Tactile load can be reduced by designing proper controls. The controls are
to be so located that they can be easily handled by the operator. The fine controls should
be near to the operator and the coarse controls further away. The control device should
be made according to the scale of work, for instance, a delicate knob for light work and
a bigger, sturdy one for heavier work.
Work Study 131
Working environment: A workplace should be clean and orderly. Tools and materials
have to be within easy reach. Colour, illumination, temperature, humidity and ventilation
are other factors to be taken care of.
Colour. A harmonious combination of colours promotes efficiency, reduces fatigue and
provides visibility for accurate work. It eliminates waste and unproductive motion. Colour
has a certain effect on the performance of the operator. For example, yellow colour
contributes to a gay cheerful abnosphere, green is restful, black sombre, blue cool and
white symbolises purity. Characteristic colours are used in industry to emphasise certain
themes. Yellow is used for drawing attention, orange for alertness, red for danger, green
for safety, blue for caution and white for cleanliness. While making a choice of colour
schemes for a workplace we should keep the following in mind:
1. Dull colours appear to recede and bright colours appear to advance
2. Vertical stripes appear to increase the height of a wall and horizontal stripes
tend to decrease the height
3. Some colours are cool (blue and green) while some colours are warm (red and
orange)
4. Break in shade adds to its value
5. Colour depends on its neighbour
6. Ceilings can be white, yellow or the lightest tint
Illumination. Good lighting speeds up production. It is essential for the health, safety and
efficiency of the worker. Poor light will cause eye damage, poor quality of work and may
even lead to accidents. The quality of light includes factors like glare, diffusion, direction,
uniformity of distribution, colour and brightness. Lighting standards for different types
of work are laid down. For example, assembly, inspection and machining of medium
size parts requires 30 lumens per square feet. The following are some important factors
considered:
1. Light must fall on the surface on which work is carried out
2. Illumination must provide relief and contrast to bring out the specified object
in sharp focus. One way of achieving this is to have soft ambient light in the
background and the workplace lit up brightly. Special care should be taken in
places where fast rotating machines are used like lathes and so on. In such cases,
fluorescent lamps are best avoided, because fluorescent lamps do not provide
continuous light but flicker at a very high frequency. If the frequency of the
flicker matches the frequency of the machines rotation, the moving part will
appear stationary and may result in accidents. (The effect is akin to that of a
stroboscope used to adjust the timing of an auto engine. The fly wheel appears
stationary when its speed matches the frequency of the strobe.)
3. Direct glare on the eye must be avoided
4. Diffused lighting should be preferred to harsh naked lights
5. Overhead lighting should be supplemented by adjacent local lighting
Ventilation, temperature and humidity. The effect of temperature is closely associated with
humidity and air circulation. If the humidity is high then there is a greater feeling of
warmth than when the humidity is low. Similarly air circulation also affects the subjective
feeling of warmth or cold. Attention to these factors must be paid when the building
is being designed. Provision of desert coolers to counter the Indian dry summer heat
and air circulators to counter the humidity during monsoons should be provided.
However, working in a direct blast from a fan or an air circulator is uncomfortable. A
displacement velocity of 3 metres per second, instead of giving relief, causes respiratory
problems.
7.11 METHODS IMPROVEMENT AND MATERIALS HANDLING

Materials and documents have to be moved from place to place in any organisation.
Often material handling is treated as a separate subject. However, efficient handling of
materials increases productivity and reduces costs. It is influenced by the layout of the
work facility, and the equipment and requirements to handle materials. Reduced handling
of materials reduces the cost of handling materials which is quite substantial. Ideally the
best material handling is no material handling. The material to be handled should be
correctly identified and packed well so that movement is facilitated. Incorrect packing
will often lead to damage during handling and result in wastages. The equipment used
to handle materials should be of the right capacity. Moving material as a single load is
far better than moving it as multiple loads. Multiple handling can be avoided by moving
the material in the largest possible load. The weight of the container is to be considered.
The aim is to employ effort to move the load and not the container. The container should
be as light as permissible for the material that is being carried in it. Loads are easier to
move if they are palletised or containerised.
It is always better to use machines than manpower to move the materials. Where
unavoidable, use labourers and not skilled manpower for material handling. Material
should not be moved in small quantities, it is much cheaper to use a wheel barrow or
a truck than moving single items. Try and avoid raising loads above shoulder height.
Gravity can be used to move materials through chutes, slides, roller conveyers or
ball tables from higher levels to lower levels but for moving materials to higher levels
power conveyors are necessary.
Conveyors, escalators, lifts and rails provide for materials to be moved along fixed
paths. When the material is to be moved along variable paths forklifts, hoists cranes and
trucks can be used.
7.12 WORK MEASUREMENT

Work measurement determines the work content in a task in terms of time. It is important
to know how much time a task will take so as to enable us to plan scheduling and
loading and to determine manning levels. It enables us to set reasonable targets for the
worker and forms a basis of comparison between work methods and performance of
workers. Piece-based compensation systems or incentive-based compensation systems can
be designed by laying down achievable standards. It is important to know how much
time each task takes to carry out line balancing.
The time taken to complete any job is the time which a qualified worker-that is one
with the requisite mental attributes and physical skills-would take, if working without
Work Study 133
overexertion throughout a normal period while applying himself/herself to the job.
The definition assumes that the worker has the required knowledge, skill, attitude and
other attributes necessary to carry out the job. The worker is expected to work without
overexertion throughout the normal duration of his work period. This may be an eight
hour day or shift or a longer or shorter period depending on the task being performed.
There are various methods used for work measurement. They can be classified into
direct methods where actual observations are made of workers and indirect methods
where the timings are calculated from available data. The direct methods commonly
used are time study and activity sampling. Some of the indirect methods are synthetic
timings, Predetermined Motion Time Systems (PMTS) and analytical estimating. Time
study is the most commonly used method.
7.13 TIME STUDY

It is a direct observation technique. The work is broken down into identifiable elements
and an observer times the worker as he performs the work. A stop watch can be
used for timing the worker. The worker may work faster or slower while he is
being observed. In order to compensate for this, the observer rates the worker. He
mentally compares the observed worker with a qualified operator working at standard
performance.
Rating a worker is a difficult task. Not only is the speed of work involved but also
the quality of the work performed as well as due regard given to safety while performing
the work. A worker may be working just as fast as a worker with standard performance
but he may not be performing the work with the precision it requires. Alternately the
precision achieved may be much more than desirable. Rating the worker is a specialist's
task and only a properly trained work study analyst can rate workers. The analyst is
required to rate a worker in real time and carry out the comparison mentally on multiple
factors as explained before. The analyst is specially trained for the task. The training is
carried out through video rating films. The analyst is shown a number of tasks being
performed by different workers on film and is asked to rate the worker. He compares his
rating with the rating given by the film. The process is repeated by showing the same
actions but in a different sequence after a time interval. Gradually the analyst develops
consistency in his rating skills.
Different rating scales are used, but the one most commonly used rates a worker with
standard performance as 100. A worker who works slower by one third is rated at 70
and a worker who works faster by one third is rated at 135. Ratings are not assessed in
increments smaller than 5 units. The timing is adjusted to bring it in line with a worker
whose rating is 100. A number of observations are taken and then averaged out as
basing timings on one observation would lead to incorrect results. Since these are sample
observations, the larger the number the more accurate the results. The exact number of
observations to make or the sample size can be statistically determined.
EXAMPLE 7.1 Consider an example of a worker whose task has been broken into three
elements-A, B and C. Four cycles of work were timed and the results of observations
are given in Table 7.2.
Table 7.2 Four Cycles of Work and Observations
Job element Cycle (observed time in minutes) Rating

2 3 4
A 3 4 5 4 105
B 0.5 0.4 0.3 0.5 95
C 2 2 2 95
Solution:
The mean observed time for element A = 3+4+5+4
4 = 4 minutes
Similarly, mean observed time for element B = 0.425 minutes
and for element C = 1.75 minutes
The observed time is next converted to basic time also known as normal time by
multiplying it with the rating.
Basic time for element A = 4 x !~~ = 4.2 minutes

Basic time for element B = 0.425 x :to = 0.40 minutes
Basic time for element C = 1.75 x :to = 1.66 minutes
Total basic time for the task = 6.26 minutes

The basic time is the time that a worker with standard performance would take for
one cycle of the work.
The worker needs some time for relaxation and for attending to his personal needs
during his normal work period. Some delays are also likely to take place because of a
number of reasons. There may be bits of defective material or the worker may have to
wait while a high speed machine stops or comes to rest after it is switched off. These
allowances are normally expressed as a percentage of basic time and are added to the
basic time to obtain standard time. The standard time is the average time that a qualified
worker would take to complete the work, working without overexertion throughout
the normal work period. Let us assume that the firm has a policy to permit 15% time
allowance for all contingencies for the previous example.
Then standard time = Basic time (1 + Allowance)
= 6.26(1 + 0.15) = 7.2 minutes
The standard output during an 8 hours working day will be
8 X 60
- - - = 67 units
7.2
Let us consider another example.
Work Study 135
EXAMPLE 7.2 A worker was observed for 6 cycles of work. He was rated at 110%
and the company allowance is 10%. Observations are in the given Table 7.3. Calculate
the basic time and the standard time. What is the standard output per day? What will be
the output produced by the worker under observation? How many observations should
be made for results with 95% confidence level and an error of 5%?
Table 7.3 Six Cycles of Work and Observations
Cycle time in minutes Number of times observed

25 1
29 2
30 2
31
Solution:
25 X 1 + 29 X 2 + 30 X 2 + 31 X 1
Mean observed time = 6 = 29 minutes
Basic time = 29 x !~~ = 31.9 minutes

Standard time = 31.9(1 + 0.10) = 35.1 minutes
8 X 60 . .
Standard output= 35 _1 = 13.67 umts (13 or 14 umts) per day
The workers' observed time is 29 minutes
Standard time for the worker = 29(1 + 0.10) = 31.9 minutes
8 X 60 .
Output of the worker = 3 1. 9 = 15 umts
If we assume that the time taken by the worker follows a normal distribution then
the number of observations can be calculated from the relationship
where
z is the number of standard deviations from the mean reflecting the statistical level
of confidence
ais the population standard deviation. In the absence of population standard deviation,
sample standard deviations can be used
S=
E is the acceptable error

Applying to the present situation,
(29-25) 2 + (29-29) 2 + (29-29) 2 + (30-29) 2 + (30-29) 2 + (31-29) 2 =2 l

S=
r
6-1 ·
n = ( ~--~~: ~; = 8 (z is 1.96 for 95% confidence level)
8 observations should be taken to get a result within 5% of the actual.
EXAMPLE 7.3 Compute the production cost per piece from the following data:
(a) Direct material per piece = f2.00.
(b) Wage rate f2,000 per month consisting of 25 working days and 8 hours per
day.
(c) Overheads expressed as a percentage of direct labour costs = 200%
(d) The time for manufacture of 4 pieces of the item was observed during time
study. The manufacture of the item consists of 4 elements a, b, c and d. Time
observed in minutes during the various cycles is as follows:
Element Cycle 1 Cycle 2 Cycle 3 Cycle 4 Element rating

a 1.2 1.3 1.3 1.4 85
b 0.7 0.6 0.65 0.75 120
C 1.4 1.3 1.3 1.2 90
d 0.5 0.5 0.6 0.4 70
The personal fatigue and delay allowance may be taken as 25%.

Solution:
Element Cycle 1 Cycle 2 Cycle 3 Cycle 4 Mean observed Element Basic
time rating time
a 1.2 1.3 1.3 1.4 1.3 85 1.105
b 0.7 0.6 0.65 0.75 0.675 120 0.81
C 1.4 1.3 1.3 1.2 1.3 90 1.17
d 0.5 0.5 0.6 0.4 0.5 70 0.35
Total basic time for one unit = 3.435 minutes

Standard time = 3.435 x 1.25 = 4.29375 or 4.30 minutes.
2000
Wage of worker per minute = 25 x 8 x 60 = f0.167
Overhead per minute = 0.334
Total cost per minute = f0.50
Cost of labour and overhead per unit= 4.30 x 0.50 = f2.15
Cost of material = f2.00
Total cost per unit = f4.15
Work Study 137
The steps involved in time study can be summarised as follows:
1. Establish the best method for doing the job and ensure that it is being used
2. Break the task into elements
3. Time and rate the elements
4. Calculate the mean observed time of each element
5. Calculate the basic time for each element by multiplying the mean observed time
with the rating factor
6. Calculate the total basic time by summing up the basic time for each element
7. Calculate the standard time by adding the company allowance to the basic time
7.14 ACTIVITY SAMPLING

Activity sampling also called work sampling, is a statistical technique for work measurement.
As the name suggests it consists of taking a number of sample observations. It is a
technique in which a large number of observations are made over a period of time of one
group of machines, processes or workers. Each observation records what is happening
at that instant and the percentage of observations recorded for a particular activity or
delay is a measure of the percentage of time during which that activity or delay occurs.
The technique helps to collect information about the percentage of time that is spent
on certain activities. Unlike a time study, the analyst does not have to observe and time
the whole task. We shall understand the procedure with the help of the following example.
A baker, who runs a bakery which makes biscuits to orders, has three assistants
working in his shop. The duties performed by them are kneading dough, rolling dough,
cutting cookies from the dough, attending to customers, and miscellaneous activities (not
necessarily productive). The baker himself tends the ovens. The object of the study is to
find out how much time is spent on each activity.
Having identified the activities, the analyst will decide on how the activities will be
recorded. A sample format is shown in Table 7.4.
Table 7.4 Activities at the Bakery

S. No. Time Activities
Knead dough Roll dough Cut cookies Attend customers Miscellaneous
0914 A B C
2 0953 C B A
3 1012 A B C
4 1027 B A,C
The analyst first carries out a pilot study by taking 100 to 200 observations. The
observations are taken at random timings. The random timings can be generated using
random number tables or by using a computer. The analyst observes what each assistant
is doing at that particular time and records it. Let us assume that the analyst carried out
a pilot study by visiting the bakery 40 times-that is, 120 observations as each time he
is observing three workers. If 48 observations were made for cutting cookies, then the
percentage of time spent in cutting cookies is:
Time spent in cutting cookies = 48 1~~00 = 40%

The analyst can now determine how many observations he will have to make if he
wants a confidence level of 95% and an error of 2%, by using the relationship:
n=(;J xp(l-p)
where
n is the number of observations
z is the number of standard deviations from the mean reflecting the statistical level
of confidence
E is the error expressed as a percentage
p is the proportion of time spent on the activity expressed as a percentage
r
Using the relationship mentioned previously,
n =( ~:~~ X 0.4(1- 0.4) = 2305 observations

Since there are three assistants the number of visits required by the analyst will be 768.
It is obvious that the study may span a number of days. If the study was completed
in 48 hours and the percentage time spent cutting cookies was 40%, and a total of 128
cookie trays were cut, then the time for cutting a cookie tray can be computed.
No. of hours spent on cutting cookies = 48 x 0.40 = 19.2 hours
. . . 19.2 X 60
Tune for cutting one cookie tray = 128 = 9 minutes
The observed time for cutting one cookie tray is 9 minutes. The analyst can determine
worker rating by observing the worker through a few cycles. The standard time can be
computed by applying the worker rating and the allowance factor.
The study can also give the percentage of time spent in non-productive activities
and this can be used to determine the company allowance for calculating standard time.
Accuracy for the study can be computed by rearranging the relationship used above.
E = 1z2p(!- p)
The steps involved in activity sampling can be summarised as follows:

l. Define the job activities. Activities must be defined in as much detail as possible
so that the observer has no ambiguity when recording his observations
2. Preliminary study. Carry out a preliminary study or pilot study with 100-200
random observations. This will confirm that the activities have been correctly
identified and will also help refine the proforma for recording
3. Compute the number of observations required. Based on the results of the preliminary
study, compute the number of observations required
4. Carry out the full study. The study is carried out by making the number of
observations required randomly over a period of time. Percentage occurrence
of activities is then calculated
Work Study 139
5. Periodically recalculate the number of observations required. The number of observations
is dependent on the value of p, which is the percentage occurrence of the activity.
Since this may change with the increase in the number of observations from what
was observed during the preliminary study it is necessary to check and revise
the number of observations necessary for the complete study
Activity sampling offers several advantages over time study. A single observer can
conduct several activity sampling studies simultaneously. No timing devices are required.
The observer need not be a trained analyst unless standard time is to be determined, in
which case the analyst must be thoroughly trained as he has to rate workers on their
performance. The study is spread over a long period and this minimises the short period
variation. As the observations are instantaneous, the worker is unlikely to be able to
influence them by changing his work method.
Activity sampling is more appropriate for jobs with long cycle time. It does not
provide as complete a breakdown of elements as time study. Often analysts fall into a
routine routing and the timings of observations become predictable rather than random.
This may cause the observations to be influenced by the worker, invalidating the findings.
7.15 PREDETERMINED MOTION TIME SYSTEMS

Predetermined Motion Time Systems (PMTS) are work measurement systems based on the
analysis of work into basic human movements, classified according to the nature of each
movement and the conditions under which it is made. Tables of data provide a time, at
a defined rate of working, for each classification of each movement. By combining these
movements and timings, the timing for any task can be computed. A number of such
systems are available, but Method Time Measurement (MTM) is the mostly commonly
used. Various versions of MTM have been evolved over time.
MTM-1 is the earliest version. It classifies basic human movements like reach, grasp,
move, apply pressure, position, release, and disengage and so on. The timings for these
movements have been arrived at by a frame by frame analysis of motion film. Very large
and varied data is analysed and the time for each motion averaged out, thus eliminating
the need for worker rating. Time is measured and expressed in Time Measurement Unit
(TMU) which is equal to 0.00001 hour or 0.036 seconds. A degree of difficulty is attached
to the motion (for instance whether an object being reached is in a fixed location such
as a tool in a tool rack or a single object on a bench or a small object jumbled together
with other objects). MTM-1 shows that the time required to reach for an object 20 cm
away-R20A-is 7.8 TMUs, whereas if the object is very small over the same distance
(R20D) the time would be 11.4 TMUs. MTM-1 gives very accurate results but it is tedious
to compile time using this system as the task being studied has to be broken down into
elementary human motions. It is claimed that it takes 10 hours to analyse 4 minutes of
work. MTM-1 was developed in the 1940s.
In the 1960s, MTM-2 was developed. It uses lower level motions (for example, MTM-2
combines the MTM-1 motions of reach and grasp to get). It is useful for longer time
cycles, particularly when the time aggregated is more than one minute.
Later MTM-X was developed. It only has nine categories and three distance codes: N
is for near distance (less than 15 cm), F is for far, and X is for variable distance. These
simplifications enable the standards to be summarised on a small card. The nine categories
of MTM-X and a summarised card are shown in Table 7.5 and Figure 7.6.
Table 7.5 The Nine Categories of MTM-X
S. No. Category Description Code

Get Reach to and grasp an object GE (easy)
GD (difficult)
2 Put Move and position an object PE (easy)
PD (difficult)
3 Regrasp Shift the grasp of an object R
4 Handle weight Apply force to move an object HW
5 Apply pressure Apply force where no movement is involved A
6 Eye action Eye focus and eye travel E
7 Step A pace in walking s
8 Bend down Bend the trunk BD
9 Arise from bend Straighten the trunk AB
MTM-X
GE GD PE PD
N 8 17 5 19
F 16 25 14 28
X 13 20 9 22
R HW A E s BD AB
6 5 14 7 18 29 32
WARNING: Do not attempt to use this data unless you have been
trained and qualified under a scheme approved by the MTM
Association
Figure 7.6 Summary of MTM-X Standards.
None of the MTM systems should be used without proper training and appropriate
instructions. The use of PTMS eliminates the need for rating and the data can be used
across organisations throughout the world.
7.16 SYNTHETIC TIMINGS

In an organisation, the same element of work occurs repeatedly even though the job may
be different. If the organisation keeps proper records of the work elements constituting
a task and the standard time computed for each work element, then it is possible to
synthesise timings for new jobs. The new job is first broken into elements and the
previously assessed times for these elements are summed up to establish the time for
the new job. Every organisation has different work culture and working environment
Work Study 141
which affects the time for performing an element of work. Each organisation's data is
unique and the data of one organisation cannot be used to synthesise work timing for
another organisation.
7.17 ANALYTICAL ESTIMATING

This method is used when the timing for a new job cannot be synthesised because there
may be some work element for which previously assessed data is not available. In such
a case, the time required for the task is built up from synthetic data wherever possible,
and is supplemented by estimates based on knowledge and experience for tasks for which
synthetic data is not available. Time estimates are usually provided by those who have
an intimate knowledge of the products and processes involved.
7.18 SUMMARY
Work study is a systematic analysis of work in order to improve productivity. It consists
of method study and work measurement. Method study aims at determining the best
method of performing a task and work measurement determines the standard time that a
work should take. Whenever a work study is undertaken, its behavioural impact should
be considered. Workers tend to view such studies as a threat to their employment. The
aim of the study along with the methodology that the analyst will employ should be
explained to the workers and this will facilitate in implementing the study as the workers
will feel involved and committed to it.
Method study is carried out in six steps-select, record, examine, develop, implement
and maintain. The task for study must be carefully selected and should yield benefits
that will outweigh the costs of conducting the study.
The next step is to record the present method of performing the task. Different methods
are used for recording data. A flow process chart is a diagrammatic representation of
all operations, inspections, movements, delay and storage which occur when a task is
being carried out. The chart is used to represent either the activities of a person, or
flow of material or document or a product but only one at a time on one chart. Outline
process charts show only the operations and inspections involved. Two-handed process
charts show the activities performed by both hands. Multiple activity charts show the
time relationships between two or more workers, machines or materials. Simultaneous
motion charts are used to record the movements of two or more parts of the body. The
movements are very small and are recorded with the help of therbligs. A frame by frame
analysis of a cine film is used for making such charts. Travel charts, flow diagrams and
string diagrams are used to record movement between various locations at the workplace.
These help to improve layout of the workplace and are used to redesign offices and so
on. When applied to office situations, method study is called an organisation and method
study (0 and M).
Critical examination follows the recording of the present method of doing work.
The examination is carried out through a systematic questioning technique. The order
of tackling the aspects of work is: purpose, place, sequence, person and means and in
each case, questions are asked. For example, the purpose is questioned:
What is being done?

Why is it being done?
What else can be done?
What should be done?
Similar questions are framed for other aspects.
The first two questions are a part of analysing the present method and the latter two
questions help the development of the new method. This requires creativity and ingenuity
on the part of the analyst. Once the new method is developed it is implemented and it
is ensured that it is maintained.
Ergonomics is the study of the worker and his work environment. The principles
of ergonomics applied to work enhance productivity. Material handling is inevitable in
any production or operations process. Incorrect handling of materials results in loss of
efficiency and wastages in terms of costs and time.
Work measurement is a method to establish the standard time for doing a task. This
is essential so that the management knows how much output can be expected from a
worker. It helps to plan and schedule work and design monetary incentive schemes based
on productivity. Direct methods like time study and activity sampling involve direct
observation of the worker and indirect method like predetermined motion time systems,
synthetic timing and analytical estimating involve computation of standard time through
already available data.
While conducting a time study, the task is broken up into elements. The analyst
observes the worker at his task and times him for each element with the help of a stop
watch. The worker is rated in comparison to the speed with which a qualified worker
would normally perform. The observed time is converted to normal or basic time by
multiplying it with the rating factor. An allowance is added to this timing for contingencies
and rest periods and the standard time computed.
Activity sampling involves taking a large number of random observations and
recording the task that the worker was performing when the observation was made.
This helps us to deduce the percentage of time spent on different tasks by the worker
and the standard time can also be computed from this data.
Predetermined motion time systems measure work by dividing it into basic human
movements, classified according to the nature of each movement and the conditions
under which it is made. Tables of data provide a time, at a defined rate of working, for
each classification of each movement. By combining these movements and timings, the
timing for any task can be computed.
Synthetic timing computes the timing for a new task by breaking it into elements.
The elements are generally repetitive in nature and data obtained for these elements
from previous studies is summed up to obtain the time for the new task. In case data for
some elements of the new task is not available, then a time estimate for it is provided by
those who have knowledge and experience of that work. This method is called analytical
estimating.
Work Study 143
ICONCEPT QUIZ I
State True or False
1. Work study is a part of method study.
2. Work study attempts to find out improved ways of performing activities.
3. Work measurement attempts to find out better ways of performing an activity.
4. A flow process chart is used to represent the activities of a person and the flow
of materials.
5. Only operations and inspections are shown in an outline process chart.
6. A SIMO chart is used to show the time relationship between two or more workers,
machines or materials.
7. Ergonomics can be applied to any activity where human effort is involved.
8. Work measurement determines the work content in a task in terms of its monetary
value.
9. Activity sampling is a statistical technique for work measurement.
10. A time measurement unit (TMU) is equal to 0.0001 seconds.
1. The first step in the conduct of a method study is to:
(a) Analyse (b) Record
(c) Select (d) Install
2. Which of these is not a method of recording:
(a) Flow process chart. (b) String chart.
(c) Two handed process chart. (d) Activity sampling.
3. Work measurement determines:
(a) Least cost of an item.
(b) The work content in a task in terms of labour cost.
(c) The work content in a task in terms of time.
(d) Desired output/input.
4. A worker is rated:
(a) Below 100, if he is observed working slower than normal.
(b) Above 100, if he is working slower than normal.
(c) 100, if he is working slower than normal.
5. Ergonomics can be applied to:
(a) Design of equipment.
(b) Design of furniture.
(c) Design of work conditions and lighting.

6. Activity sampling involves:
(a) Observing the worker for a number of task cycles and recording the time
taken.
(b) Preparation of a two handed chart to record what the worker is doing.
(c) Taking samples from the product produced and testing them for quality.
(d) Taking a number of observations and recording what is happening at that
instant.
7. The number of observations n is given by:
(a) n = (; rX p(l - p). (b) n=(!r xp(l-p).
(c) n = (;) x p(l - p). (d) n=(;r xp(l-p)2.
8. PMTS is:
(a) A direct method of method study.
(b) A direct method of work measurement.
(c) An indirect method of method study.
(d) An indirect method of work measurement.
9. Work measurement is required so that:
(a) Better methods of performing work can be designed.
(b) Performance standards can be established.
(c) A worker's rating can be established.
(d) Time for basic human movements can be established.
10. Standard time:
(a) Varies from worker to worker.
(b) It is the mean time observed for doing work over a number of cycles.
(c) It is the time that a worker would take for a task, if working without
overexertion throughout a normal period.
(d) It is the time that a qualified worker would take for a task, if working without
overexertion throughout a normal period.
Fill in the blanks:

1. Work study is aimed at improving _ _ _ _ _ _ _ _ _ _ _ _ __
2. Work study uses techniques like _ _ _ _ _ _ _ _ and _ _ _ _ _ __
3. The main steps in a method study are select, record, _ _ _ _ __, develop,
install and _ _ _ _ _ _ _ _ __
Work Study 145
4. A SIMO chart records the movement of two or more parts of the _ _ _ _ _ __
5. An outline process chart shows only ______________ and
6. Travel charts show the frequency of trips between points and are useful for
modifying _ _ _ _ _ _ _ __
7. A critical examination provides an _ _ _ _ _ _ _ _ _ of the present system.
8. Ergonomics is also known as _ _ _ _ _ _ _ _ _ _ _ __
9. Standard time = Basic time plus _ _ _ _ _ _ _ __
10. Basic time = Mean observed time multiplied by the_ _ _ _ _ _ __
I QUESTIONS I
7.1 What is method study? Explain the different steps involved in method study?
7.2 What behavioural aspects will you bear in mind when carrying out a method study?
7.3 No value is added to the end product through material handling. However, poor
material handling may result in delays leading to idling of equipment. Discuss
what are the principles of material handling?
7.4 Write a short note on activity sampling.
7.5 Following are the elemental times for a broaching operation. The corresponding
ratings and relaxation allowances are given. Calculate standard time for the
operation assuming contingency allowance of 3%.
Element Observed time Rating Relaxation

(in minutes) allowance
(%)
Locate part on pilot end of the 0.15 80 13
broach, engage broach into
pulling head
Start machine 0.05 80 13
Broach 0.50 100 11
Slide part into a trolley 0.04 110 13
Brush off broach clean 0.10 100 13
Return unit (broach and pulling head) 0.05 100 4
to start position
Disengage broach from pulling head 0.10 80 4
back to start position
7.6 Elemental timings (in minutes) for a four element cycle in a shop floor study
are as follows:
Element Cycle observed timings Rating

1 2 3 4 5
A 0.09 0.08 0.09 0.10 0.09 90
B 0.12 0.11 0.12 0.11 0.12 110
C 0.13 0.13 0.14 0.12 0.12 100
D 0.07 0.06 0.06 0.08 0.07 120
Assuming total allowances of 15%, calculate standard time and standard production
per 8 hours shift.
7.7 In a machine shop, the following were the times recorded for each operation in
seconds, for five trials of a particular job.
Operation Cycle observed timings Rating

1 2 3 4 5
Face machine 10 11 10 10 11 110
Bore machine 15 15 14 15 13 120
Face machine 12 12 12 11 12 100
Groove machine 8 7 7 8 9 80
Assuming total allowance of 15%, calculate the standard time and standard
production norm per day based on three shifts per day of 8 hours each.
7.8 A case study of a shop worker revealed the actual times given here. The analyst
rated the worker at 90 and the company allows the following per eight hours day:
Personal time 20 minutes
Delay time 30 minutes
Time in minutes per cycle

Worker Machine Total
2.30 0.80 3.10
1.80 0.80 2.60
2.00 0.80 2.80
2.20 0.80 3.00
1.90 0.80 2.70
10.20* 0.80 11.00
2.20 0.80 3.00
1.80 0.80 2.60
*Unusual, non-recurring situation.
Find the standard time from the given data.

7.9 In an attempt to increase productivity and reduce costs, Ajanta Corporation
is planning to install an incentive pay scheme in its manufacturing plant. In
Work Study 147
developing standards for one operation, time study analysts observed a worker
for 30 minutes. During that period he produced 42 units. The analyst rated the
worker as 130. The base wage rate of the worker is f50 per hour. The firm has
established 15% as fatigue factor.
(a) What is the normal time for the task?
(b) What is the standard time for the task?
(c) If the worker produced 500 units during an eight hours day, what wage
would the worker have earned?
7.10 In an activity sampling study, a total of 15 observations were taken. The breakdown
of the workers activity is as follows:
(a) Set up 2
(b) Operate machine 6
(c) Clean up 3
(d) Idle 4
Based on this information, how many observations should we make to determine
the worker's time spent in operating the machine, assuming that the desired
accuracy is 5% at 95% confidence level?
7.11 A time study was made of an existing job to develop new time standards. The
worker was observed for 30 minutes during which he made 20 units. He was rated
at 90% by the analyst. The firm's allowance for rest and personal time is 12%.
(a) What is the normal time for the task?
(b) What is the standard time for the task?
(c) If the worker produces 360 units in an eight hours day, what would be
the day's pay if the base rate is f60 per standard hour?
7.12 A call centre has 30 operators. Management wants to determine the proportion of
time that the operators are idle. A work sampling study was carried out and 20
observations made. The results are the following:
Observation Number of operators Observation Number of operators

No. idle No. idle
1 4 11 4
2 5 12 3
3 7 13 6
4 6 14 3
5 5 15 7
6 5 16 4
7 6 17 7
8 4 18 6
9 2 19 5
10 3 20 5
If the management wants an accuracy of 2% with a confidence level of 98%,

what should be the number of sample observations taken?
Process Quality-Statistical
Quality Control
Quality means doing it right when no one is looking.
HENRY FORD
LEARNING OBJECTIVES
• Explain statistical quality control
• Understand the relationship between quality and process capability
• Understand the concept of six sigma quality
• Learn how to prepare p, c, X and R control charts
• Understand the usage of control charts
• Explain acceptance sampling
• Understand the operating characteristics curve for a sampling plan
• Explain single, double and continuous sampling plans
8.1 INTRODUCTION
Products can be designed for high quality, but unless processes are compatible, the
quality desired of the product may never be achieved. Processes determine the degree
of conformance to quality. The nuances of product design and the issues involved in
ensuring total quality management have already been dealt with in Chapter 5. Quality
can never be inspected into a product, it must be 'built in'. Correct and 'in control'
processes ensure that the product is made right, the first time.
148
Process Quality-Statistical Quality Control 149
Three main issues are involved.
1. Is the process capable of producing the quality desired in the product? For
instance, if a piece of metal is to be cut to a length of 604 mm with a tolerance
of ±0.01 mm, and the process is being performed with a manually operated saw,
the process may not be capable of keeping within this fine tolerance. Clearly the
process cannot deliver the quality desired of it and is unsuitable.
2. Is the process meeting or not meeting the requirement at any time? No matter
how precise a machine may be, variations will always take place. Some of these
variations occur due to faulty set up or due to the tools not being proper or
insufficiently trained operators and so on and can be controlled. Other variations
take place due to heating up of the machine, vibrations which may be as small
as those caused by a vehicle moving outside the building, draughts, abnospheric
temperature changes, electrical fluctuations, and changes in the physical and
emotional condition of the operator. There is inherent variation in the testing
process too because of similar causes. If only such random variations are present,
the process is said to be in statistical control. No specific causes can be assigned
to such random variations and little can be done other than to revise the process.
When an assignable cause of variation is present, the variability will be excessive
and the process is considered to be out of control.
3. If the process is not meeting the requirements, make adjusbnents to correct the
process.
Statistical Process Control (SPC) or Statistical Quality Control (SQC) aims at addressing
the above issues and providing means to check whether the process is capable of delivering
the quality standards required of it, determining whether the process is in control or
not, and laying down the actions to be taken when the process is out of control. SQC
techniques are applicable to both production processes and service processes. For instance,
Domino's Pizza must ensure that home delivery is always within half an hour. The
process of preparing and delivering the pizza must conform to this design specification.
The techniques involve taking periodic samples, testing the samples for quality and based
on this data determining whether the process is in control or not. If the process is out of
control, corrective action is taken to bring it within control. Since the process involves
the use of samples and draws conclusions based on samples, an understanding of very
basic statistics is necessary.
The Central Limit Theorem forms the basis of sampling theory. The basic precepts
are:
1. The distribution of sample means (called the sampling distribution of mean)
follows a normal distribution irrespective of the distribution of the population.
2. The mean of the sample means is the same as the population mean.
3. The standard error of mean-that is, the standard deviation of the sample mean
distribution-is equal to the standard deviation of the population divided by the
square root of the sample size. Mathematically this may be expressed as:
8.2 PROCESS CAPABILITY

When we design a part, we specify that certain dimensions should be within the upper
and lower tolerance limits. Suppose we are to make a shaft for a bearing and the specified
dimensions of the diameter are 500 mm ± 0.005 mm, then a shaft which has a diameter
between 499.995 mm (Lower Tolerance Limit (LTL)) and 500.005 mm (Upper Tolerance
Limit (UTL)) would be acceptable.
The manufacturing process follows a normal distribution curve as shown in
Figure 8.1. The curve shows that three standard deviations (three sigma) on either side
of the mean cover 99.74% of the values. In order to meet the requirements, the machine
should be capable of producing most of the shafts with a diameter between 499.995
mm and 500.005 mm. A 99.74% probability of producing such shafts would exist if the
machine had the capability to produce shafts with a mean diameter of 500 mm and
three sigma value on the lower side should not have a value lesser than 499.995 and on
the upper side the value should not exceed 500.005 mm. The standard deviation for the
machine should be:
500 - 499.995 500.005 - 500
(j = ------,,.3--- or <J=------,,.3---
a = 0.00167 mm
This implies that if the machine has a standard deviation exceeding 0.00167 mm, the
chances of producing defective shafts would increase considerably.
68.2%
I
9 5 .5%
9 9 .74%
-3a -2a -1a µ=0 1a 2a 3a
Figure 8.1 Normal Distribution Curve.
The machine may be having a standard deviation of 0.00167 mm but the mean value of
the machine may itself be off centre. For instance if the mean value of the shafts produced
by the machine is 500.001 mm, then the three sigma limits for the dimension would be
499.996 and 500.006. Clearly the parts with the upper dimension would be unacceptable
as they would be beyond the Upper Tolerance Limit (UTL). The capability index (C11k) of
the machine is the position of the mean and the extreme values (three sigma) in relation
to the design specifications. Because the mean can shift in either direction, the direction
of shift and its distance from the design specifications set limit on the process capability.
The direction of the shift is towards the smaller number.
The capability index can be expressed mathematically as:
cpk = mm
. [X -30'
LTL
or
UTL-X]
30'
_ . [500.001- 499.995 500.005 - 500.001]

- mm 3 x 0.00167 or 3 x 0.00167
= min[l.2 or 0.8]
cpk = o.8
A Cpk value of less than 1 indicates that the machine is incapable of conforming to
design specifications. In such cases, either a better machine must be procured or the
specifications revised.
8.3 SIX SIGMA QUALITY

If the process capability index is 1, then the process is capable of conforming to the
tolerance limits 99.74% of the times, and there is still a 0.0027 probability of producing
a defective which translates to 2.7 defectives per thousand. Motorola felt that this was
not an acceptable risk for producing defectives. They introduced the six sigma level. This
implies that the upper and lower tolerance limits should be ±60' from the mean. If we
consider the example mentioned in section 8.2, the standard deviation of the machine
should be 0.00083 mm. The probability of values lying beyond ±60' is 0.000000002 or 2
in one billion. Even if we assume that the process has shifted off the mean by 1.50', the
chance of producing a defective is 3.4 per million. For six sigma levels, the acceptable
process capability index, Cpk = 1.5 to 2.
8.4 PROCESS CONTROL

Process control monitors the quality of the product or service while it is being produced.
Process control provides information about whether the product or service is being
produced in conformance with the design specifications or not and provides warning
signals whenever the process is out of control indicating that future production may not
meet the design specifications. It consists of taking small random samples at periodic
intervals and drawing inferences from them about the process.
Quality characteristics may be measurable or countable. Characteristics like weight,
length, diameter, time and so on are measurable. They are continuous variables and can
adopt any value on a continuous scale. For instance, the length of a piece of metal that
is between 5 and 6 cm may have exact dimensions lying anywhere on the continuum
of values between 5 and 6 cm. It may be 5.2 or 5.11 or 5.123 or any other value as long
as it is between 5 and 6 cm. On the other hand characteristics like a polished surface or
a woven cloth may have a number of defects on it. These can only be counted and can
only take on discrete values. Measurable characteristics follow a normal distribution and
are controlled with the help of X and R charts (mean and range charts).
Countable data may be of two types. Parts may be defective or non-defective,
functioning or not functioning, working or not working. Whenever the attribute has
only two options (defective or non-defective, pass or fail, yes or no), we use p charts or
proportion charts. This type of data follows the binomial distribution and we can find
the proportion of defectives and non-defectives and so on. If we consider a polished
surface or a roll of cloth, every point on the surface or every woven thread on the roll of
cloth could be potentially defective, yet there are only a few defects that can be actually
counted. Attribute data of this type follows a Poisson distribution and is controlled
through c control charts, where c is the number of defects.
8.5 PROCESS CONTROL FOR ATTRIBUTES-p CHARTS

Measurement by attributes that follow a binomial distribution involves taking samples
and using a single decision-the item is good or bad. Simple statistics can be used to
prepare a control chart. To prepare the control chart, a number of samples are taken.
The sample size should be such that we can expect to count the attribute twice in each
sample. For example, if a machine produces 1% defectives, then the appropriate sample
size is 200. The proportion of defectives can be found from the samples and upper and
lower control limits are established as following:
_ Total number of defects in all samples (S 1 t b f th · )
p = Total number of items sampled amp es may no e O e same size
er-= ~p(l - p)
P n
where crP is standard error of proportion and n is average sample size.
Upper control limit= p + zcrP
Lower control limit = p - zcrP
The value of z is normally taken as 3. Upper and lower warning limits may be established
by taking the value of z as 2.
Let us consider an example.
EXAMPLE 8.1 Ten samples of the hourly production of a mass produced item are
taken and the number of defectives of each sample are noted. On the basis of this data,
obtain the three-sigma control limits of the control chart for defective proportions.
Sample No. Size No. of defectives

1 148 7
2 160 6
3 155 8
4 156 8
5 161 5
6 167 9
7 164 8
8 160 8
9 156 7
10 173 10
Solution:
Sample No. Size No. of defectives Proportion p
1 148 7 0.047
2 160 6 0.038
3 155 8 0.052
4 156 8 0.051
5 161 5 0.031
6 167 9 0.054
7 164 8 0.049
8 160 8 0.050
9 156 7 0.045
10 173 10 0.058
Total 1600 76
Total items sampled = 1600

Total number of defects = 76
Average sample size = 160
_ Total number of defects in all samples
P= Total number of items sampled
76
= 1600 = 0.047
er-= ~p(l- p)
P n
Upper control limit = P+ zcrP = 0.047 + 3 x 0.017 = 0.098

Lower control limit = p - zcrP = 0.047 - 3 x 0.017 = -0.004
Take the lower control limit as 0 (zero) as defects cannot have minus value.
Upper and lower warning limits are set at ±2cr.
Upper warning limit = 0.047 + 2 x 0.017 = 0.081
Lower warning limit = 0.047 - 2 x 0.017 = 0.013
Plot the limits on a graph as shown in Figure 8.2 and plot the defects for each sample.
The process is in control throughout.
0. 1 T=====+=====::::i::===:::::+:===~~=====i ucL
I
Q)
>
0.09
0.08
0.07
------------------ ------------------ -------- UWL
~ 0.06
Q)
ni 0.05
"O
C: 0.04
0
t 0.03
0
0..
e 0.02
a.. 0.01 ------------------ ------------------ -------- LWL
0 -+--------.1------+------+-----1----------<LCL
0 2 4 6 8 10
Sample number -
Figure 8.2 p Chart.
8.6 PROCESS CONTROL FOR ATTRIBUTES-c CHARTS

Some attributes follow a Poisson distribution, for example defects on a polished surface.
The defects can be counted but the sample size or the potential defectives is not known.
Every point on the surface can be a defect. A number of pieces are taken and the defects
on the polished surface of each are noted. The average number of defects is determined
(c) and the upper and lower limits can be determined in the following manner:
_ Total number of defects
C==-----,,---=--~--,-------,-~
Total number of pieces sampled
Upper control limit = c + z-/f
Lower control limit = c - z-/f
Let us study this with the help of an example.
EXAMPLE 8.2 Machine made carpets are manufactured in big rolls of various lengths
before they are cut into standard size rolls, for sale at retail stores. OCM carpets wants
to monitor the quality of its rolls. Twenty rolls were inspected at random and the results
are the following:
Roll No. 1 2 3 4 5 6 7
No. of defects 12 8 5 7 14 9 10
Roll No. 8 9 10 11 12 13 14
No. of defects 11 8 6 15 10 12 13
Roll No. 15 16 17 18 19 20
No. of defects 9 8 7 12 12 12
Prepare a control chart for this process and indicate if the process was out of control at
any time.
Solution: Total number of defects = 200
c = 200 = 10
20
Jf = 3.16
Upper control limit = 10 + 3 x 3.16 = 19.48
Lower control limit = 10 - 3 x 3.16 = 0.52
Upper and lower warning limits are set at ±2J°f
Upper warning limit= 10 + 2 x 3.16 = 16.32
Lower warning limit= 10 - 2 x 3.16 = 3.68
The process is in control throughout as revealed in the c chart at Figure 8.3.
20
I 18
16
14
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - UWL
,\ I\ ......o
UCL
12
<JI
o \ I \ ..,.it I '·/ \ I c
Q)
ai
0
10
8
\
I\ )
I ....... \ I
r---.. I
·~ ~
I
6 1("
4
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - LWL
2
LCL
0
0 5 10 15 20
Sample number -
Figure 8.3 c Chart.
8.7 PROCESS CONTROL FOR VARIABLES-X AND R CHARTS

Measurable data is continuous and can assume any value. We measure the actual
weight, volume, length and so on and develop control charts which help us to determine
whether the process is in control or not. Continuous data follows a normal distribution
and control charts are based on the mean and standard devaiation of the sample. The
sample size is usually small. If large samples are taken, the time to obtain these samples
may be large enough for the process to go out of control even when the sample is being
taken. The second reason for taking small samples is the cost involved, especially if the
measurement of the variable involves destructive testing. Sample size of four to five units
is generally used. The means of the samples follow a normal distribution irrespective
of the distribution of the population. The standard deviation is related to range as the
sample is too small to compute the standard deviation with any reasonable degree of
accuracy. If sample size is more than 15, it is better to compute standard deviation in
the conventional manner and use it for preparing control charts.
For the preparation of the chart, 20 to 25 samples are taken. Once the control chart is
established, the statistics of each sample are used to determine the state of the process.
The frequency of taking samples depends on the cost of sampling. Initially samples can
be taken frequently and as confidence develops in the system, the frequency of samples
can be reduced.
Control limits are generally set at ±3a. This implies that 99.7% of the sample means
are expected to lie within the limits. If a sample mean lies outside the limits there is
a strong possibility that the process is out of control and needs adjusbnent. X and R
charts are prepared to control the process.
If the standard deviation of the process distribution is known, then the X chart can
be defined as:
Upper control limit = X + ZO'y
Lower control limit= X - zay
where
Cf
O'y = Jn standard error of mean or the standard deviation of sample means
a is the standard deviation of the process distribution

n is the sample size
X is the average of sample means or a target value set for the process
z is the number of standard deviations for a specific confidence level (usually z = 3)
Let us understand the process of developing X and R charts with the help of an example.
EXAMPLE 8.3 In an initial study of a process, five samples were taken after every
30 minutes and the following data was recorded for analysis. Prepare X and R control charts.
Time Readings (weight in gm)

1 2 3 4 5
8:00 a.m. 65 70 65 65 85
8:30 a.m. 75 85 75 85 65
9:00 a.m. 75 85 75 85 65
9:30 a.m. 60 70 70 75 65
10:00 a.m. 60 70 70 75 65
10:30 a.m. 70 75 65 85 80
11:00 a.m. 60 75 75 85 70
11:30 a.m. 75 80 65 75 70
12:00 p.m. 60 70 80 75 75
12:30 p.m. 80 75 90 50 80
1:00 p.m. 85 75 85 65 70
1:30 p.m. 70 70 75 75 70
2:00 p.m. 65 70 85 75 60
2:30 p.m. 90 80 80 75 85
3:00 p.m. 75 80 75 80 65
3:30 p.m. 75 70 85 70 65
(Contd.)
Time Readings (weight in gm)

1 2 3 4 5
4:00 p.m. 75 70 60 70 60
4:30 p.m. 65 65 85 65 70
5:00 p.m. 60 60 65 60 65
5:30 p.m. 50 55 65 80 80
6:00 p.m. 60 80 65 65 75
6:30 p.m. 80 65 75 65 65
7:00 p.m. 65 60 65 60 70
7:30 p.m. 65 70 70 60 65
8:00 p.m. 65 65 65 70 70
Solution:
Time Readings (x) Sample Range
1 2 4
mean X R
3 5
8:00 a.m. 65 70 65 65 85 70 20
8:30 a.m. 75 85 75 85 65 77 20
9:00 a.m. 75 85 75 85 65 77 20
9:30 a.m. 60 70 70 75 65 68 15
10:00 a.m. 60 70 70 75 65 68 15
10:30 a.m. 70 75 65 85 80 75 20
11:00 a.m. 60 75 75 85 70 73 25
11:30 a.m. 75 80 65 75 70 73 15
12:00 p.m. 60 70 80 75 75 72 20
12:30 p.m. 80 75 90 50 80 75 40
1:00 p.m. 85 75 85 65 70 76 20
1:30 p.m. 70 70 75 75 70 72 5
2:00 p.m. 65 70 85 75 60 71 25
2:30 p.m. 90 80 80 75 85 82 15
3:00 p.m. 75 80 75 80 65 75 15
3:30 p.m. 75 70 85 70 65 73 20
4:00 p.m. 75 70 60 70 60 67 15
4:30 p.m. 65 65 85 65 70 70 20
5:00 p.m. 60 60 65 60 65 62 5
5:30 p.m. 50 55 65 80 80 66 30
6:00 p.m. 60 80 65 65 75 69 20
6:30 p.m. 80 65 75 65 65 70 15
7:00 p.m. 65 60 65 60 70 64 10
7:30 p.m. 65 70 70 60 65 66 10
8:00 p.m. 65 65 65 70 70 67 5
The mean of each sample is calculated:

- LX
X=-
n
where xis the value of each item and n is the sample size.
The range of each sample is the difference between the highest value and the lowest
value.
The mean of sample means is computed as shown in the following way:
- = numberrx
X --,,...-~-=--------,,-
of samples
= 1~~ 8 = 71.12
The mean range is computed as follows:
R= L,R
number of samples
= ~~o = 17.6
Since the sample size is very small it is possible to use an alternative measure of
dispersion-the mean range of samples. Hartley's conversion constant d11 can be used
for estimating the process standard deviation:
dn can be obtained from Table 8.1.
Table 8.1 Hartley's Constant
n 2 3 4 5 6 7 8 9 10
1.13 1.69 2.06 2.33 2.53 2.70 2.85 2.97 3.00
Control limits are X ± 3o-x
=X±3 ~
=X±-3-R.
dll,[n
Since 3, d11 and ,[ii are all constants, they can be replaced by one constant A 2, the value
of which can be obtained from Table 8.2.
Table 8.2 Constants Used in Calculating Mean Chart Control Limits
n 2 3 4 5 6 7 8 9 10
A2 1.88 1.02 0.73 0.58 0.48 0.42 0.37 0.34 0.31
2A;/3 1.25 0.68 0.49 0.39 0.32 0.28 0.25 0.23 0.21
Control limits are X ± A 2 R and
Warning limits are X±} A 2 R

Upper control limit = 71.2 + 0.58 x 17.6 = 81.41
Lower control limit= 71.2 - 0.58 x 17.6 = 60.99
Upper warning limit= 71.2 + 0.39 x 17.6 = 78.06
Lower warning limit= 71.2 - 0.39 x 17.6 = 64.34
The X chart is always used in conjunction with the range chart. It may so happen that
while the mean of the sample conforms to the desired mean and lies within the tolerance
limits, the spread (range) of the sample becomes excessive and the process variability
increases beyond desired limits. The process should be both accurate (mean) and precise
(spread). Instead of measuring the dispersion by the sample standard deviation, the
range is plotted and a range control chart prepared. If the process variability increases,
the situation as depicted in Figure 8.4 may occur. The process may change from form A
to form B. The range of samples from form B will be greater than those from form A.
A range chart with control limits can be prepared.
Figure 8.4 Increase in Process Variability.
The distribution of the sample ranges is a positively skewed distribution and the chart
limits are asymmetrical about the mean range. Table 8.3 gives the values of constants D 3
(lower control limit) and D4 (upper control limit).
Table 8.3 Values of 0 3 and 0 4
n 2 3 4 5 6 7 8 9 10
0 0 0 0 0 0.08 0.14 0.18 0.22
3.27 2.57 2.28 2.11 2.00 1.92 1.86 1.82 1.78
Upper control limit = D4 x R = 2.11 x 17.6 = 37.14

Lower control limit= D3 x R = 0 x 17.6 = 0
From Figure 8.5, it can be seen that the process was out of control when sample
number 14 was taken at 2:30 p.m ..
85
l 80
UCL
UWL
E 75
E
..c
0)
70 x
C:
~ 65 LWL
C:
<ll
Q) 60 LCL
:::!?:
55
0 5 10
Sample number
Figure 8.5
15
X Chart.
- 20 25
It can be seen from Figure 8.6 that tenth sample taken at 10:30 a.m. is not within the
control limits. Though the mean on the X chart is within the control limits, the R chart
range shows that the process variability has increased.
50
I
Q)
O>
40
30
C:
<ll 20
a:
10
0
0 5 10 15 20 25
Sample number -
Figure 8.6 Fi Chart.
8.8 USING CONTROL CHARTS

The lower warning limits and lower control limits serve little purpose in case of attribute
control charts (p and c charts), as the chart is showing only proportion defectives or
number of defects. It is desirable if these reduce. However, in the rare instance when the
values fall below the lower warning limit or the lower control limit, we should investigate
for the causes that have improved the process so that these improvements can be made
permanent. Such instances may also occur due to faulty inspection.
When setting up control charts for measurable data, samples should be taken when
the process is believed to be under control. The data from the samples is plotted on
the control chart and the control chart is validated and brought into use only when all
points satisfy the conditions given below. In case some samples lie outside the limits,
fresh samples are taken and the control chart set up again. The process is said to be in
statistical control when:
1. No mean or range values lie outside the control limits.
2. No more than 1 in 40 values lie between the warning and control limits.
3. There are no incidences of two consecutive mean or range values lying in the
same warning zone. The chance of such an occurrence, if the process is in control,
is 1 in 1600.
4. No runs of six or more sample means or ranges lie above or below the average
control chart line.
5. No runs of more than six values of mean or range which are continuously either
rising or falling, that is, showing a rising or falling trend.
Figure 8.7 shows the out-of-control signals on an X chart.
X Chart
40
•
35 3cr
30 - - - - - - - - - ./.
I
t - - - - - - - - - - - - - - - - - - - - 2a
\ ~ ~
~.
j~
25 1cr
I V 11\ I 1r---.,., J.
20 ~-- \ J
~
• "~ )( 1cr
15
\ I ~~
10
- - -~ t - - - - - - - - - - - - - - - - - - - - - - - - - - - 2a
5
3cr
0
0 5 10 15 20
Sample number
• A single point outside the control limits . Point 7 is above the UCL (Upper Control
Limit).
• Two consecutive points are on the same side of the centre line and farther than 2cr
from it. Point 4 sends this signal
• Six successive points are on the same side of the centre line. Points 6 to 11 are all
above the line.
• Rising or falling trends with six successive points. Points 13 to 18 show a falling trend .
Figure 8.7 Out-of-Control Signals.
Samples are taken periodically and the mean and range of each sample is plotted.
If the mean lies within warning limits, a second sample is immediately taken. If the
second sample lies within warning limits or beyond control limits, the process is stopped
and corrective action taken. Whenever a sample mean or range lies outside the control
limits, the process is stopped and corrective action taken. If trends are noticed-that is
six means or ranges above or below the average line or six consecutive means or ranges
that show a rising or falling trend, the process is corrected. Since the samples are taken
while the process run is in progress, the below quality production is restricted only to
the period between last sample which showed that the process was in control and the
next sample which indicated that the process was out of control. The units produced
during this period can be subjected to 100% inspection. Thus the costs of failure and the
costs of appraisal will reduce.
8. 9 ACCEPTANCE SAMPLING
The previous sections have dealt with process control. However, there may be a requirement
to inspect a lot before it is delivered to the customer. Alternatively, if the firm is buying
some components or subassemblies from an outside agency, it will have to inspect them
to ensure that they meet the quality requirement or to check that the process quality is
being maintained. Acceptance sampling is a form of inspection applied to lots or batches
of items, before or after a process, to judge conformance with predetermined standards.
The inspection can be meaningful only if what constitutes non-conformance to quality
requirements is clearly specified. Sometimes it may be necessary to provide samples of
acceptable and unacceptable material to assist the inspection process. The inspection must
result in a decision to accept or reject a lot. No matter how strict the quality control, some
defectives are bound to be produced. In addition to the criteria for non-conformance,
the proportion of defectives that can be allowed for a lot to be accepted must also be
specified. This is called the acceptable quality level.
A hundred percent inspection is not only time consuming but is also costly. In some
cases it may not be feasible, especially if destructive testing is involved. However, there
may be instances, for example aerospace industry, where a hundred percent inspection
is necessary to meet safety standards. The procedures used for carrying out acceptance
sampling will depend on the nature of the item and the quality characteristics which will
be used in the inspection procedure. Attribute data is most commonly used and variable
data is also often converted to attribute type data so that inspection can be facilitated.
Acceptance sampling techniques make use of random samples to decide whether to
accept or reject a batch or a lot. If a decision is taken to accept a batch on the basis of
the sample, then the remainder of the batch is accepted without further testing. It should
be clear that this is no guarantee of the quality of the batch. If a decision is taken to
reject a batch, it may be subjected to 100% screening and all defectives replaced; it may
be down graded in quality; it may be returned to the supplier or it may be accepted at
a discounted price.
Since we are resorting to decision making based on a sample, we run the risk of
making two types of errors. We may reject a batch even though the batch is of acceptable
quality. This type of error is called a Type I error and the probability of rejecting a
batch though it is of high quality is denoted by a and is called the producer's risk. The
producer's objective is to devise a sampling plan which reduces the risk of rejecting a high
quality batch.
A second type of error that may occur is the acceptance of a batch with low quality.
This is called a Type II error. The probability associated with accepting a batch which is
of low quality is denoted by f3 and is called the consumer's risk. The consumer would
aim at reducing this risk as much as possible. Batches are defined as low quality if the
percentage of defectives is greater than a specified amount, termed Lot Tolerance Percent
Defective (LTPD).
8.10 OPERATING CHARACTERISTICS CURVE

The Operating Characteristics (OC) curve shows the efficiency of any sampling plan
as a detector of acceptable and unacceptable batches. The curve for a sampling plan
is obtained by plotting the probability of accepting a batch against the percentage of
defectives in a batch.
A single sampling plan lays down how many units to sample (n) from a batch of size
N, and the decision criteria or the number of defectives (c) found in the sample based
on which a decision will be taken whether to accept the batch or to reject it. Ideally,
the sampling plan should be such that all batches which have an actual percentage of
defectives equal to or less than the Acceptable Quality Limit (AQL) are accepted on the
basis of the single sample and all batches which have an actual percentage of defectives
higher than the AQL are rejected. Figure 8.8 shows the ideal operating characteristics
curve for 3% defectives.
100%
0£ 75%
.z- C>
==
..c C:~ 50%
nl 0..
.0 CD
0 0
... 0
a.. nl 25%
0 .03 0 .06 0 .09

Lot quality (fraction defective)
Figure 8.8 The Perfect OC Curve.
The probability of x defectives occurring for a given percent of defectives

being produced by the process can be calculated using the binomial or the Poisson
distribution. The Poisson distribution can be used as generally n, the sample size, is
large and p, the actual percent defectives is very small. Whenever np is less than
or equal to 5, the Poisson distribution is a convenient distribution to use. The probability
is computed as:
where
p the percentage of defectives
x is the number of defectives
If up to 3 defectives are acceptable, then the probability of acceptance is the sum
of the probability of occurrence of 0, 1, 2 and 3 defectives for a certain percentage of
defectives (p).
The computations for n = 60 and c = 2 are given as follows:

Percent np P(0) P(1) P(2) Total probability
defective of acceptance
0 0.0 1.0000 0.0000 0.0000 1.0000
1 0.6 0.5488 0 .3293 0.0988 0 .9769
2 1.2 0.3012 0.3614 0.2169 0.8795
3 1.8 0.1653 0.2975 0.2678 0.7306
4 2.4 0.0907 0.2177 0.2613 0.5697
5 3.0 0 .0498 0 .1494 0.2240 0.4232
6 3.6 0.0273 0.0984 0.1771 0.3027
7 4.2 0.0150 0.0630 0.1323 0.2102
8 4.8 0 .0082 0 .0395 0.0948 0 .1425
9 5.4 0.0045 0.0244 0.0659 0.0948
10 6.0 0.0025 0.0149 0.0446 0.0620
11 6.6 0.0014 0.0090 0.0296 0.0400
12 7.2 0.0007 0 .0054 0.0194 0 .0255
In practice no sampling plan offers this ideal discrimination. The OC curve for a
sampling plan N = 1000, n = 60, c = 2 is shown in Figure 8.9. The acceptance quality
limit as shown on the curve is 2% defectives. The producers risk or the probability of
rejecting a high quality lot is 12%. The Lot Tolerance Percent Defective is 8% and the
consumer's risk as shown on the OC curve is 14%.
1.0000
0.9500 ~
0.9000 \. a Producer's risk 12%
0.8500 '\
0.8000
~ 0.7500 \
c: 0.7000 \
"*- 0.6500 \
Q)
0 0.6000 \
~ 0.5500 \
N= 1000
0 0.5000 \
\ / n= 60
~
:.c 0.4500 \./ C= 2
Cll
..c
0.4000
e o.3500 \.
a.. 0.3000 \.
0.2500 \.
0.2000
0.1500
0.1000
'' .......
..........
0.0500
0.0000
0 2
AQL
,B Consumer's risk 14°0
4 6 8
LTPD
10 ---
12 14
Percentage Defective
Figure 8.9 OC Curve for N = 1000, n = 60, c = 2.

As the sample size increases the curve becomes more rectangular and more
discriminatory. The probability of acceptance of lower quality batches decreases. Figure 8.10
shows the operating characteristic curves when the sample size increases. Though the
ratio of n to c remains the same, the curve for the higher sample size has a better
discrimination between good and bad batches .
. .__.~
0.95
~
0.9
~
0.85
f
Cl>
(.)
0.8
0.75
0.7
""
°\:'
\: ,"'-
'-\, '
C:
0.65
"'Cl>
ii 0.6 '\- ....
(.)
0.55 '\ ', .....
(.)
'\ ', n = 20
"'
0
0.5
0.45 '\ '. ' -....._ C = 1
~ 0.4 \. ' '

\. '
' '~
:c 0.35
'\. '
"'e
..c 0.3 .' '
0..
0.25
0.2
0.15
C=3
"
n = 60 ........_
.........
-- . nC=2
--
= 40
0.1 ............
0.05
0
----
0 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Percentage defective -
Figure 8.1 O OC Curves Showing Effect of Changing Sample Size.
If the number of defectives acceptable, that is, c is reduced, the OC curve is lowered
and becomes more discriminatory. Figure 8.11 shows the effect of changing the number
of defectives acceptable. The size of the sample is the same in all cases. As can be seen
1
0 .95
0 .9
0.85
f 0.8
0.75
Cl>
(.) 0 .7
C:
0 .65
"'
ii 0 .6
Cl>
(.)
(.) 0 .55
"' 0 .5
0 0.45
~ 0.4
ii 0 .35
"'
..c 0 .3
e 0 .2 5
0..
0.2
0 .15
0 .1
0 .05
0
0 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Percentage defective -
Figure 8.11 OC Curves Showing Effect of Changing Number of Acceptable Defectives.

when zero defectives in a sample are acceptable there is no inflexion of the curve at the
top. The curve is fully concave. While the consumer's risk is reduced, a lot of batches
of good and acceptable quality will be rejected. This may be economically unacceptable.
Moreover if the rejected batches are subjected to 100% inspection, the inspection costs
will also increase.
8.11 AVERAGE OUTGOING QUALITY LIMIT (AOQL)

Acceptance sampling leads to some lots being rejected and some lots being accepted.
The rejected lots are subjected to 100% inspection and all defectives are replaced, hence
a rejected lot does not bring in any defectives. In accepted lots, the defectives found in
the sample are replaced, but there is a possibility of defectives in the remainder of the lot
depending on the percentage defectives produced in the lot. The probability of accepting
a lot varies with the percentage of defectives that the lot may have. Hence the percentage
of defectives that will enter with the accepted lots is given by:
AOQ (N-n)
= PacX p -----y;;:r-
where
Pac is the probability of the accepting lot
p is the fraction defective
N is the lot size
Let us assume that the data given below has been calculated and is available separately.
Lot size N = 1000 and sample size n = 60.
Actual percent defective in the lot Probability of acceptance of the lot AOQ
1.0 0.9769 0.918
1.2 0.9634 1.087
1.4 0.9467 1.246
1.6 0.9269 1.394
1.8 0.9044 1.530
2.0 0.8795 1.653
2.2 0.8525 1.763
2.5 0.8088 1.901
3.0 0.7306 2.060
3.5 0.6496 2.137
4.0 0.5697 2.142
4.5 0.4936 2.088
5.0 0.4232 1.989
5.5 0.3594 1.858
6.0 0.3027 1.707
The average outgoing quality limit is the maximum value of AOQ and is the maximum
risk that we are exposed to when we follow the particular sampling plan. The AOQL in
Figure 8.12 is 2.15% defectives when the actual proportion of defectives in the lot is 3.9%.
2.400
~
~
::::,
2.200
2.000
1.800
/
,/
~
--- -..............
0
0)
1.600
/
"'
.!: 1.400
0
.E> 1.200 /
,/
::::,
0 1.000
Cl)
g> 0.700
~ 0.600
<C 0.400
0.200
0.000
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6
Incoming percent defective
Figure 8.12 Average Outgoing Quality Limit (AOQL)
The maximum point on the curve is referred to as the average outgoing quality limit.
This is the worst level of outgoing quality that the management can expect on average,
and if this level is acceptable then the sampling plan is deemed to be acceptable. As
the percentage of defectives increases and the quality of the lots deteriorates, the AOQ
improves. This happens because as the quality of the lots becomes poorer, it is more
likely that they will be identified and rejected, and any defective items in these lots will
be replaced with good ones.
8.12 SAMPLING PLANS

Three types of sampling plans generally used are: single sampling, double sampling and
continuous sampling.
Single sampling: The plan defines the lot or batch size N, the sample size n, the number
of defectives acceptable c. A random sample of n units is drawn from a batch of size
N. The sample is tested. If the number of defectives is c or less, the batch is accepted,
else it is rejected. Suppose the plan is (500, 50, 2), then a sample of 50 units is drawn at
random from a batch of 500 units. If the defectives found in the sample are more than
2, the batch is rejected, else it is accepted.
Double sampling: The plan defines N, n 1, c1, n2 and c2 . N is the lot or batch size, n 1
and n2 are the sample sizes of the first and second sample respectively and c1 and c2 are
the number of defectives acceptable. A sample of size n1 is drawn from a batch of size
N. Let us assume that the number of defectives found in the sample is d1. If d 1 ~ c1 the
batch is accepted. If d1 > c2, then the batch is rejected. If d1 is more than c1 but less than
or equal to c2, a second sample of size n 2 is taken. Let the defects in the second sample be
d2 • If d 1 + d2 > c2, the sample is rejected else it is accepted. Suppose the sampling plan is
(1000, 100, 1, 200, 3), then a sample of 100 units is first drawn. If the defectives are more
than 3 the batch is rejected and if the defectives are 1 or 0, the batch is accepted. If the
number of defectives is 2 or 3, another sample of 200 is drawn and tested. If the total
number of defectives in both the samples exceeds 3, the batch is rejected, else it is accepted.
Sequential sampling: This is similar to double sampling. When a second sample is
taken, the limits for number of defectives are again specified for the cumulative sample.
The sample will be rejected or accepted based on these limits. If the number of defectives
lies between the limits, then another sample is taken and compared with the next set of
limits. The sample sizes may be as low as one in this case.
Sampling plans are given in tables designed by Dodge and Romig. The tables lay
down the lot size N, the sample size n, the acceptable number of defectives c, the average
percent defective in the lot, LTPD and consumer's risk. A set of tables have AOQL
as constant, while in another set the LTPD and the consumer's risk is maintained as
constant. Mil Std 105 (Military Standard 105) also gives sampling plans in the form of
tables. Sampling plans can also be designed on computer software.
8.13 SOLUTION BY COMPUTER PACKAGE

Several software packages are available for dealing with SQC and acceptance sampling. Win
QSB is a software package which has modules to tackle SQC and acceptance sampling problems.
The quality control chart module can draw p, c, and X and R charts. It can also
draw histograms and perform Pareto analysis. The data is entered in an easy spreadsheet
format. The following are computer printouts for some sample problems.
EXAMPLE 8.4 Setting up a p chart.
Table 8.5 Example 8.4
QCC Ptoblem Spec,ficatlon
Quality Characteristics
Variable Dala
• Attribute D ala
Problem Title: ..._ _____________.....

Example 8.4
Number of Olty. Size of

60
Characteristics: Subgroups:
Number of
20
Subgroups:
OK
Subgroup Date Time Size Characteristic 11 Disabled Cause Action Co111111ent

1 I ~ 4' i I
2 60 3,
3 60 51
60
4
5 60
--- 62
---
~~
6 4
7 60 8 --- - 1-
-- -
8 60\
--- 51
9 60[ 4
10 61!1 - - -
--- 3
11
12
;60
--- 2
2
13 60[ 5
14
15
16
17
18
·~
60
60
60
60
---
---
4
6
5
8
5
19
20
l I
I
+-
60
60
--- -4
Jj -
P (Propo rtion Nonconforming) Ch art for Cha r.tcteristic I of Example 8.4
UCL - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - 0. 1743
+ 2 a - - - - -- • - - - - - - - - - - - - - - -- - - - - --- - - - - - - - - - - - -- - - - - - - --- - - - • -- - - - - - - - - - - - - - - - -- - - - - 0. 1406
+ a - - - - -- --- - - - ---- - - - ---- - - - - -- --- - --- -~- - - - --- - - - ---- - -- --- --- - .... -- - ------- - -- - 0. 1070
CL i---- - - - - - - - - - - - - - - - - - - -----10.0733
- a - - - - -- - -- - - - -- - - - - - - - -- - - - - --- -- - - - - - - - -- -- - - - - - - --- - - - - -- - - - - - - - -- - - - -- - - - - - - - 0.0397
- 2 a - -- -- ---- - - -•---- - --- ------- ------- ---- ------ --------- - --------- ---- -- --------- 6.03E-3
LCL - - - - - - - -- - - - - --- --- -- - - - - -- - - - - -- - -- - -- - - - --- - -- ---- --- ---- - - - - - - - - - - - - --- - - - - - -0 .0276
13 17 20
f. kan = (1.07 _\_\ S.D. cSiF ma ) = 0.0_\_\7

• lnComml • ;\01 l11 Co111ml Disabled Point
Figure 8.13 p (Proportion Non-conforming) Chart for Characteristic 1 of Example 8.4.

EXAMPLE 8.5 Setting up a c chart.

Subgsoup
1
Date l• Size Characte,mic l I Disabled
5
Cause Action COllllllerll
11
2
3
1
-1 10
8
- - .
4 1 4
5 1 -- 9
6 1 12
-
7 1 181
8 1 27
9 1 14
10 1 8
11 1
-- 5
-
12 1 4
13 1 7
14 1
-- 12
15 1
-- 15
16 1
-- 10
17 1 3
- --
18
- 1
,- -- 16
19 1 14
20 1 18 I
C (Number of Defects) Chart fo r Charnc1cris1ic I o fQCC Samp le Prob lem
UCL - - - -- -- - - - - - - - - - - - - - -- - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 20. 8772
+ l o -- ----- ----- -- ----- ----- _.: _____ ----- -- --- -- ----- ---------------- -- --- -- - -- -- - ~ - 17.5682
+ o - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - . - - - - - - - - - - - -- - - - -- - - - - - -- - • - • - - - - - - - - - - i ---- - 14.259 1
CL l - - - - - - - - - - - - - - - - - - - - - - - - - - , 10.95
-0 -- ----- -- • -- -- ----- ----- -- ----- ----- - • --- -- ----- ---------------- -- --- ------- - - - 7,6409
. .
- 2 o ---- --------- .- --- -- ----- -- --- -- ----- -- - -- -- - - .- --- -- - ------------ ----- -- - -- -- - - - 4.33 18
LCL - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - l .0228
13 17 20
~k :m = 10.9 5 S.D . (Sigm:1) = 3.309 1
• l11 Cn111rol • No1 lt1Control Dis:1bkJ Poim
Figure 8.14 Standardised c Chart for Characteristic 1 of Example 8.5.

EXAMPLE 8.6 Setting up X and R charts.
QCC Problem Specification ~
Quality Characteristics Data Entry Format
• Variable Data Subgroup vertically
Attribute Data • Subgroup horizontally
Problem Title: Example 8.6
Number of Olly. Size of

1 5
Characteristics: Subgroups:
Number of ote: The above is the initial setup.

Subgroups: You can odif it later.
OK Cancel Help
5 ........ Clwoctonolico
1
2
'3
4
5
Clwaclori>'liel
llhoroel~1
Chorocten>lic '
C.,_oele,~ir,1
Dare
Clwlroct01idicl W06/12
r-
osoo
OS20
OS40
1000
1020
D
·-·
143. 1
145.8
140.3
143.4
142.5
0.....,,..... 2 ob-volibn-3 Ollnrvlilion4 0--.....,5 Dinblod
U l.51
144.0I
147.41
144,o j
144.51
1411.1
149,D
146. 2
147.0
139.6
149.1
141 .2,
140.4
144. 1
145.4
U6.3
143.5
149.7
140.6
146.3
c-
- 1:-,,,
G aw... Ofldic, 1040 147.4 145.Z 145.0

145._2 _ _
150.3 15L2
7 Choloct....lic1 1100 144.7 141.7' 140.6 1a9.7
8 DWll'actm•licf 1120 1.i1.4 145.2 140.J 1426• U(.4
9 m..oct-1icl 1140 1-51 ,3 US.DI 145.4 148. 2 149.0
10 Charec:lotuticl 1200 137.3 138.sl 145. B 141.!l 1445
11 Choraclemlic 1 1220 142.J 149.7' 141 .6 145.8 140.3
12 O,.,actmalicl 1240 143.G 144,6 1 145.. 0 144.3 149,1
13 Dwoc:10riltic1 1300 149,4 144.7 149.1 140.6 140.9
14 Choroct ..atle1 1320 151.3 , .. s..c 1 147.2 146,5
15 Chorocterillic , 1340 US.2 147.31 141 .2 142,7
16 Clwocto,i,loc 1 1400 146.J 1~41 145_:.1
17 Choroct- 1 - 1420 ------ti"'l.9 - , 44.61 146,3
18 a.....,rmic1 1440 145.6· f45,31 144,3
19 .a..--1 1soo , 142.8 141 ,7 146,3
20 CIMrAlc\omlic 1 1520 145.41 149.4
X-bar (Mean) C h art for C l1arac1eris1 ic I of Exa mpl e 8.6
UC L -- J48.7 I03
+2 0" -- 147.4865
146.2628
Cl r -- - - - - - - - - - - - - - - - - - - - - - - - - ------, 1-15.0390
- o - - - - - --- - - - - - - - - - -- ---~- - - - - - - --- - - - - -- - - -- - -- -~- - - - - - - -- . - - - - - - - - -- - -- - ~--<- - - - - 143.8152
- 2 er -- ------ ---- ---- --- ---- ---- ---- -- -------- - ---- -- -- -- ---- ----------- ---- -- -- -- -- 142.5914
LC L - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 14 1.3676
20
\k:m = 1-1.i .OWO

"
S .D. (Sif!m:11 = l. : O : O. J8
17
• l11 Co111m l · '.\m l11 Co111ro l D isallkd Poim
Figure 8.15 X (Mean) Chart for Characteristic 1 of Example 8.6.

R (Ran ge ) Chari for Characteristic I of Examp le 8.6
UCL - - - - - - - - - - - - - - • - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - • - - - - - - - - - - - 13.45 79
+ 2a --------------------•-------------------------------------•-----•-------------- 11.0936
+ a - - - - - . - - --<- -- - --- - - - - - - - - - - - - -- - - - - - ; - -- - - - - - - - · ; · · - - - - - - --- - - - - - - - - - - - - - - - - - - 8. 7293
- (1 --------------------------- --------------------------------------------------- 4.0007
- 2 a - - - - - --- -- - -- - --- - - - ---- - -- - - --- - -- - - - --- - - - - - - ---- --- - - - --- - - - --- - --- - - - -- - - - l. 63 64
I. CL ------ · ----- - -- • ---------------------•-----------------------------·----------- 0
13 17 20
Figure 8.16 R (Range) Chart for Characteristic 1 of Example 8.6.

The acceptance sampling module can search for sampling plans given AQL, a, LTPD
and /3. It can search for single, double, multiple, sequential, chain and continuous sampling
plans. Given a sampling plan, the computer can analyse it and can also draw OC curves
for the selected plan. It also calculates AOQL and plots the AOQL curve.
EXAMPLE 8.7 Let us find a suitable single sampling plan, given that the AQL is 2%,
a= 12%, LTPD = 8% and /3 = 14%.
The plan is: Single Sampling for Attribute Data
Randomly take 60 items (n) and inspect them. If the number of defective items (d)
is greater than 2(c), reject the lot and insepct all items; otherwise, accept the lot.
Sampling curtailed: No
Defective items rectified: Yes
Table 8.8 Example 8.7: Single Sampling for Attributes
DATA ITEM ENTRY
Sample me [n)
Acceptance number [c)
Acceptable qualitJ level (AQL. in % defective) 2
Rejectable qualit,p level (RQL, LQL. or LTPD. in% defective) 8
Produce,-. risk level (alpha. type I e,ror in %) 12
Consumer's risk level (beta. type II error in ~ 14
Lot size (N) 1000
Probabilil_v dishibution Poiuon
Unit sampling cost
Unit inspection cost
Unit producer's coal if unit is found defective
Unit consumer's cost if unit is found defective
Inspection error: probability (%) of good item is clauified as bad
Inspection enor: probability (%) of bad item is classified as good
Table 8.9 Sampling Plan for Example 8.7: Single Sampling for Attributes
06·24·2012 Plan Value
----
1 GivenAQl 2%
-------f
2 Given RQL 8%
----
3 Desired producer's risk. (alpha) 12%
.. Desired consumer's risk. (beta)
i----5-----t l ot size
f 14%
1000
==
1,, ........ ,..................
---- 6
1
Recommended sample size (n)
Recommended acceptance number (c)
- -8- - Resulted producer's risk. (alpha) ------------+------- -
60
2
----
12.0513%
---- 9
10
Resulted consumet's risk. (beta)
Resulted AOQL
14.2539%
2. 1481%
OC Cur ve for Example 8.7: Single Sampling for Attributes
Acce ptance Probabilit y

P a(%) Pa (%)
120.00 ~ - - - - - - - - - - - - - - - - - - - - - - - -~ 120.oo
(60. 2)
[08.00 l08.00
96,00 96.00
84.00 84.00
72.00 72.00
60.00 60.00
48.00 48.00
36,00 36.00
24.00 24.00
12.00 12.00
10
Lo t Fra('t ion Ddec tive (p in '}. )
Figure 8.17 OC Curve for Example 8.7: Single Sampling for Attributes.
AOQ Curve for Example 8.7: Sin gle Sampling for Attributes
A,·era ge Om goin g Qu~ li!y

AO Q (%) AOQ ('if,)
3,22~- - - - - - - - - - - - - - - - - - - - - - -~3,22
(60, 2) A00L=2 14% at P=3.74%
2.89 2 .89
2.57 2 .57
2.25 2,25
1.93 1,93
1.6 1 1,61
1.29 1.29
0.96 0,96
0,64 0,64
0.32 0,32
10
LN Fractwn D.-f.. ct, ve i p m c,t- I
Figure 8.18 AOQ Curve for Example 8.7: Single Sampling for Attributes.
8.14 SUMMARY
Process control is necessary for conformance to quality. We should first check whether
the process is capable of producing the product to conform to its specifications most of
the time. It is normal to use three sigma levels to check process capability. The upper
or lower tolerance limits should not lie within three process standard deviations from
the process mean. If the tolerance limits are three standard deviations from the mean,
there is 99.7% chance of meeting the specifications within the tolerance limit. The process
capability index is defined as:
cpk
. [X-30'LTL
= mm or
UTL -
30'
X]
The value of Cpk should be at least 1. If the value is less than 1, then the process is
incapable of meeting the specifications most of the times. If Cpk is equal to 1, the chances
of producing a defective are 2.7 in a thousand.
Some firms use six sigma level of quality. This implies that the Cpk is determined
with six sigma:
cpk
. [X-60'LTL
= mm or
UTL -
60'
X]
The value of Cpk is 2 and the chance of a defective is 2 in a billion. If the mean is off
centre by 1.50', the value of Cpk is 1.5. With a value of Cpk = 1.5, the chance of a defective
occurring is 3.4 in a million.
Process control is exercised with the help of control charts. The type of control chart
used depends on the quality characteristics. In case of variable quality characteristics
which can be measured X and R charts are used. When the quality characteristics are
attributes that can be counted we use p charts and c charts. When attributes are of the
yes/no types, p charts are used and follow a binomial distribution. When the attribute
follows a Poisson distribution, c charts are used.
The p charts are set up by determining the mean proportion or P from a set of
samples taken when the process is believed to be in control. This forms the centre line
of the chart. The control limits are set as:
Control limits = p ± zO'P
O'- = ~p(l - p)
P n
where O'fi is standard error of proportion and n is average sample size.

The value of z is normally taken as 3. Warning limits are set at z = 2.
The sample values are then plotted to check that the process was indeed in control
when the samples were taken. Periodic samples are taken and the value of P determined.
This is then plotted on the control chart. If the value lies within the warning limit, that is,
between two and three sigma lines, another sample is immediately taken. If this sample
also lies in the same warning zone, the process is stopped and corrected. Whenever a
value lies outside the control limits, the process is halted and adjusbnents are carried
out. Trends of six consecutive points above or below the centre line or rising or falling
also act as warning signs. On such occurrences, adjusbnents must be made to the
process.
The c charts are set up in a similar manner. c is computed from the samples and
limits set by:
Control limits = c ± z./f
The value of z is normally taken as 3 for the control limits and 2 for the warning limits.
The chart is used in the same manner as the p chart.
For variable attributes X and R charts are used. A number of small sized samples
are taken and the mean value of the attribute and the range computed for each sample.
The mean of the sample means X and the mean range R of the samples are computed.
These form the centre lines for the X and R charts respectively. The control limits for
the X are set as:
Control limits are X ± A 2 R and
Warning limits are X ± }A2 R where A is a constant, whose value is given in tables.
2
R chart are set as:

The control limits for the
Upper control limit= D4 x R
Lower control limit= D3 x R where D3 are D4 constant, whose value are given in tables.
X are R used in conjunction with each other.
Acceptance sampling is a form of inspection applied to lots or batches of items, before
or after a process, to judge conformance with predetermined standards. Sampling carries
the risk of rejecting a good quality lot (producer's risk) or accepting a poor quality lot
(consumer's risk). A good sampling plan should have a high degree of discrimination. The
probability of rejecting a high quality lot or accepting a low quality lot should be low.
Each sampling plan has an operating characteristics curve which shows the probability
of accepting a lot given the percent defectives in the lot. The larger the sample size, the
better the discrimination of the plan. However, large samples increase the cost of sampling
and testing.
Acceptance sampling is carried out by single sampling, double sampling or sequential
sampling. Sampling plans based on the average outgoing quality limit or the lot tolerance
percent defective can be obtained from Dodge and Romig tables or from Mil Std 105
tables. Computer packages can also be used to search for sampling plans.
Design specifications are meaningless unless the process is capable of achieving them
and if it has the capability it should be controlled at all times to produce the desired
results. Process control can be applied to both manufacturing and services.
ICONCEPT QUIZ I
State True or False
1. Process control is necessary for conformance to quality.
2. A high precision machine will not produce any variance.
3. A machine is capable of conforming to design specifications if its capability index
is less than 1.
4. The probability of a value lying beyond ±6a is 3.4 in one million.
5. p charts and c charts are used for variables.
6. p charts and c charts are always used together.
7. While preparing control charts the value of z is taken as 3 for setting upper and
lower control limits.
8. Upper and lower warning limits are set ±2a levels from the mean value.
9. Acceptance sampling is a form of inspection applied to lots or batches of items.
10. A good sampling plan should have a low degree of discrimination.

1. A process is capable of conformance to quality of design if:
(a) The capability index is 1.
(b) The capability index is 1 or more than 1.
(c) The capability index is - 1.
(d) The capability index is lesser than - 1.
2. In a process chart, the upper control limit is:
(a) Mean value of the attribute or variable.
(b) Mean value of attribute or variable plus twice the standard deviation.
(c) Mean value of attribute or variable plus thrice the standard deviation.
(d) Upper warning limit.
3. A p control chart is used when:
(a) The average number of defects occurring are known.
(b) The sample size is not known.
(c) The attribute follows the Poisson distribution.
(d) The attribute follows the binomial distribution.
4. Ac control chart is used when:
(a) The number of defects occurring in the sample are known.
(b) The sample size is known.
(c) The attribute follows the Poisson distribution.
(d) The attribute follows the binomial distribution.
5. Upper control limit for an X chart is:

(a) X +3A2 R (b) X+A2 R
- -
(c) X + 2A2 R (d) X+3R
6. In a single sampling plan N, n and c, if the defectives in the sample are less than
or equal to c:
(a) The lot is accepted.
(b) The lot is accepted and the defectives are replaced with good items.
(c) The lot is rejected.
(d) The lot is discarded by the manufacturer.
7. In a double sampling plan N, ni, Ci, n2, c2 a second sample is taken if :
(a) The number of defectives in the first sample are greater than c2•
(b) The number of defectives in the first sample are less than c1.
(c) The number of defectives is zero.
(d) The number of defectives is between c1 and c2 •
8. When the value lies between the warning limit and the control limit:
(a) No action is taken.
(b) The process is stopped and adjusbnents carried out.
(c) Another sample is taken immediately and if it also lies in the same warning
zone the process is stopped and adjusbnents carried out.
9. Producer's risk is the:
(a) Probability of accepting a batch of low quality.
(b) Probability of rejecting a batch of low quality.
(c) Probability of accepting a batch of high quality.
(d) Probability of rejecting a batch of high quality.
10. Consumer's risk is the:
(a) Probability of accepting a batch of low quality.
(b) Probability of rejecting a batch of low quality.
(c) Probability of accepting a batch of high quality.
(d) Probability of rejecting a batch of high quality.
Fill in the blanks:
1. The proportion of defectives that can be allowed for a lot to be accepted is called
2. Lots are defined as low quality if the percentage of defectives is greater than
3. The process is said to be in control when only _ _ _ _ _ _ _ _ _ are present.

4. The chance of producing a defective when following a six sigma quality level is
_ _ _ in one million assuming that the mean has shifted by _ _ _ a.
5.
p chart is used when the attribute follows distribution.
6. c chart is used when the attribute follows _ _ _ _ _ _ distribution.
7. The larger the sample size, the _ _ _ _ the discrimination of the sampling
plan.
8. If the number of defectives acceptable is reduced, the sampling plan becomes
_____ discriminatory.
9. Quality can never be ______ into a product, it must be _ _ _ _ __
10. The chances of two consecutive values lying between the upper warning limit and
the upper control limit are 1 in _ _ __
IQUESTIONS I
8.1 What are the three main issues involved in process control?
8.2 Explain capability index.
8.3 What is the difference between attributes and variables from the SQC point of
view?
8.4 What is the difference between p chart and c chart?
8.5 Why is an X chart used in conjunction with an R chart?
8.6 Write a short note on OC curve.
8.7 What do you understand by acceptance sampling?
8.8 Explain single and double sampling plans.
8.9 Write a short note on average outgoing quality limit.
8.10 Explain how a control chart is used.
8.11 An inspection team has collected the following data during the quality control
exercise in a computer cabinet manufacturing unit:
Sample Observed dimension in ems

1 2 3 4 5 6
1 3.56 3.49 3.48 3.51 3.50 3.53
2 3.50 3.50 3.52 3.53 3.49 3.47
3 3.49 3.54 3.55 3.54 3.49 3.48
4 3.55 3.52 3.52 3.50 3.51 3.52
5 3.49 3.48 3.49 3.49 3.53 3.54
6 3.48 3.47 3.53 3.54 3.55 3.53
Work out the control chart for the observations so obtained, where d1 = 2.53,
D4 = 2.004, D3 = 0. (d 1 is the same as Hartley's constant).
8.12 Twenty samples of n = 200 were taken by a worker at a workstation in a production

process. The number of defectives found in each sample are given.
Sample 1 2 3 4 5 6 7 8 9 10
Defectives 20 18 20 21 22 18 16 12 14 16
Sample 11 12 13 14 15 16 17 18 19 20
Defectives 12 14 18 11 12 10 17 14 16 19
Set up a p chart. Was the process in control throughout?

8.13 Baat Cheet Telecom is a mobile phone service provider. The industry is highly
competitive and the company has decided to improve customer service by a
reduction in billing errors. A sample of 200 bills was taken for twenty consecutive
days and the results are given.
Sample 1 2 3 4 5 6 7 8 9 10
Defectives 7 9 10 2 10 12 10 9 14 5
Sample 11 12 13 14 15 16 17 18 19 20
Defectives 12 6 11 3 12 14 8 6 10 8
Set up a control chart with 3a level and check whether the process is in
control.
8.14 Vidyut Nigam an electricity distribution company receives a number of complaints.
The number of complaints received for the last twenty days is given.
Day 1 2 3 4 5 6 7 8 9 10
Defectives 35 27 33 15 41 23 19 38 16 21
Day 11 12 13 14 15 16 17 18 19 20
Defectives 31 18 12 19 17 26 42 25 35 40
Is the process of handling complaints in control?
8.15 Ruchi Silk Mills manufactures sarees. There are often weaving defects in the saree.
If the number of defects is more, the saree has to be downgraded to seconds.
Twenty sarees were taken at random and the number of defects noted in each
is given.
Saree 1 2 3 4 5 6 7 8 9 10
Defects 2 6 0 8 4 7 5 2 3 6
Saree 11 12 13 14 15 16 17 18 19 20
Defects 7 1 5 8 4 4 6 2 3 3
Do any sarees have to be downgraded to seconds? If so, which ones?

8.16 Alfa Couriers specialises in delivering parcels overseas. The company wishes
to monitor its services with regard to delivery time. Delivery time for five
randomly selected packages from 10 samples taken over a period of ten days
are as given.
Sample Observed delivery time in days

1 2 3 4 5
1 3 3 3 4 2
2 4 1 4 2 4
3 4 3 3 2 2
4 1 2 3 3 2
5 5 5 6 6 7
6 1 6 3 3 3
7 3 3 6 3 3
8 2 4 4 4 1
9 3 1 5 3 5
10 2 4 1 4 4
Construct a X and R chart for the delivery time.

8.17 Comfort India is a chain of hotels known for its cleanliness and comfortable rooms.
The hotel wants to ensure that service is up to the mark. They have laid down
an elaborate check list for what would constitute an excellent comfortable guest
room. Twenty rooms were checked at random and the number of shortcomings
noticed in each are given.
Room 1 2 3 4 5 6 7 8 9 10
Defects 0 2 4 3 1 2 5 2 3 3
Room 11 12 13 14 15 16 17 18 19 20
Defects 1 0 0 3 2 2 3 1 1 3
Prepare a control chart with the help of the previous data. Are the rooms being
maintained within standards?
8.18 The Metal Smelting Works specialises in casting cylinder blocks for automobiles.
At the end of the day a sample of 100 cylinders is tested for defectives. The
following are results of the last 20 days.
Sample 1 2 3 4 5 6 7 8 9 10
Defectives 5 5 4 7 3 2 4 8 3 5
Sample 11 12 13 14 15 16 17 18 19 20
Defectives 6 2 3 4 1 4 3 6 7 5
Prepare a control chart for Metal Smelting Works. Is their process in control?
8.19 Cool Water is a mineral water company. Its bottles are filled at a filling plant and
should contain 1 litre of water. In order to test the quantity filled a sample of
5 bottles was taken at random intervals over the last two days. The results are
given.
Sample Observed quantity in millilitres

1 2 3 4 5
1 990 985 1005 992 987
2 990 985 980 990 990
3 985 995 990 995 995
4 990 990 990 995 995
5 995 995 1000 1005 985
6 980 990 995 998 997
7 995 995 995 995 995
8 990 985 995 990 990
9 1000 1005 995 995 985
10 980 990 985 980 985
Construct an X and R chart and check whether the filling process was in control
when the samples were taken.
Part IV
The Where of Production and
PLANT
V)V)
0
d 5 Ps of
~ Production
Operations
Management
Facility Location
A place is everything, everything in its place.
BENJAMIN FRANKLIN
LEARNING OBJECTIVES
• U nde rstand th e impo rtance of locatin g faci liti es
• U nde rstand th e causes lead ing to locatio n decisions
• Ide ntify th e facto rs th at affect locatio n decis io ns
• Exp lai n th e facto r rating analys is meth od and th e fo rced decis io n matri x
• Expl ai n locati o n meth ods based o n eco nomi c analys is-break eve n analys is
and transportati o n model
• U nde rstand load di stance meth ods fo r so lv ing locati o n prob lems
9.1 INTRODUCTION
The location of a plant or a service facility has strategic implications. Revised trade
agreements and the advent of technology have reduced the world to a global facility.
Facilities should be so located that the firm gets competitive advantage. This can be
in terms of cost leadership, flexibility, time advantage or advantage of quality. Ellora
Times Private Limited, the maker of Ajanta watches and Orpat calculators, telephone
instruments and so on, shifted their facilities to China as they were unable to compete
with the influx of cheaper Chinese goods into India. Business process outsourcing, by way
of call centres has developed into a major service in India. Why have foreign concerns
like IBM and foreign banks shifted their call centres to India? The location gives them
a significant cost advantage.
The location of a facility acts as the basis of determining production technology and
cost structure. For example, a manufacturing unit in a less developed country will use
185
labour-intensive technology as labour is cheap. Its cost structure too will be different as
compared to a similar unit located in a highly developed country. In a highly developed
country where the cost of labour is high, the processes used will be capital-intensive.
Location decisions involve large capital outlays that are not easily reversible. Adequate
consideration must be given before a decision on location of a facility is taken. The
location is vital for providing timely and convenient service to the customers.
Location decisions are based on a number of factors. The factors depend on the
nature of the product or service. Services generally require a high degree of customer
contact and the proximity to markets or customers becomes a major deciding factor. In
other cases, some other factors become overriding. For instance, safety would be a major
consideration when locating a nuclear power plant. When considering the location of a
facility globally, a higher weightage will be given to political stability, state of economy
and so on.
Location of facilities has a major impact on costs, as the cost of land, labour, raw
materials and transportation and distribution vary from place to place. The impact on
cost will also have a cascading effect on income.
9.2 THE WHY OF LOCATION DECISION PROBLEMS

Location decisions occur due to many reasons. Whenever a new enterprise is started,
the location of the facility has to be decided upon. In an expanding market, additional
capacity is necessary for an already established enterprise. The additional capacity can
be located at the already existing facility or a new facility created in keeping with the
market requirements. The introduction of new products or services also requires the
establishment of new facilities.
Changes in technology may necessitate the closure of the existing facility and the
establishment of a new one which may not be located at the earlier site. Often facilities
have to shift because of exhaustion of raw materials in a particular location. Companies
involved in extraction are typical examples.
Changes in demand, availability of resources, political factors, economic environment,
trade regimes and so on can also give rise to a shift in existing facilities or the need to
set up new facilities. A decision on the location of new facilities will have to be taken
in all such cases.
9.3 FACTORS AFFECTING FACILITY LOCATION

Market factors: Proximity to customers and suppliers are important location factors.
Manufacturing companies like to be close to their suppliers of raw materials, components
or subassemblies. Services need greater interaction with customers, and their location has
to be close to customers. For example, consider a shopping mall. The mall has to be close
to population centres where customers are located. If it is too distant from its potential
customers, it may fail to attract them. Similarly, if we consider a bank, or a dental clinic
or a nursery school, proximity to the customers plays a large role in deciding about their
locations. Proximity to suppliers will not only reduce costs of transportation but will
also facilitate interaction with them to resolve quality, technical or delivery problems.
Facility Location 187
Availability of labour: Labour is readily available in some areas. Along with the
availability of labour in terms of numbers, they should also possess the required skills,
attributes and attitudes. It is rare to find a location that will meet this criterion. New
skills can be taught through training but the basic educational level required for those
skills must exist. Cultural and social factors also play a role. In the global context, labour
is available cheap in some countries. For instance, the shipping industry mostly employs
crew members from the Philippines, as they have the right attitude and are easily available
at a lower cost. Similarly Taiwan and Korea are centres for ready-made garments.
Availability of infrastructure: Infrastructure is always a major consideration when
locating facilities. If adequate infrastructure does not exist, then it will have to be created
at considerable cost.
Communications and transport. The location should have good means of communication
and transport. The mode of transport should be suitable for the product being produced.
For instance, an oil refinery might need to be connected to its prospective markets or
sources of crude oil by pipelines. All forms of transport should be considered. These are
road, rail, water, air and pipelines. Facilities which produce goods for export will enjoy
a cost advantage if they are located close to ports or large airports. A balance between
transportation costs of distribution and supply has to be struck.
Services. The main services are electricity, water, drainage, waste disposal, gas and
communication services. Different industries have different requirements of these services.
For example, food preparation, chemical industries, metal plating, textile block printing
and so on need large quantities of water. Steel and smelting processes need a great deal
of electricity. Financial services need excellent communications on a global scale. It is
important to make a correct assessment of the requirement of services and while making
location decisions ensure that these requirements can be met, either through existing
capacities or by creating services.
Amenities. Human basic needs have to be satisfied by any organisation. A location which
can provide basic amenities like housing, shops, schools, health services, local transport
system, community services and so on may be preferred over one which lacks these
amenities. Often large industries like steel plants and so on provide their own amenities
and build their own townships-Bhilai and Bokharo in India are good examples. This is
expensive initially but its social benefits outweigh the costs. Often, the government offers
concessions for establishing industrial units in remote and underdeveloped regions so
that infrastructure can be developed in such areas.
Land and climate: Suitability of land and climate must be considered. While it is possible
with modern technology to build a facility anywhere, the costs are high. For example,
Hyderabad has an Ice World, but the cost of running the facility is very high. Ski resorts,
beach resorts and so on impose severe restrictions on choice of locations. There must
be sufficient land to cater for future expansion. We should look ahead and estimate our
future requirements. It may not be possible to acquire land at a later stage.
Site cost is another important factor. Location specifies the general area but the site
is the actual location of the facility. For instance, the cost of land closer to a city is much
more than the cost of land located a few miles outside the city. Site costs should be taken
into account while making location decisions.
Safety and environmental considerations: Some production units may pose potential
dangers and health hazards. For example, a fireworks factory poses a potential fire
hazard. Nuclear plants carry the risk of radiation leakage. Chemical plants are also
hazardous in nature. The Bhopal gas tragedy and the Chernobyl disaster are examples
of what can happen if this factor is ignored. Environmental damage is another factor
that is often ignored. The Mathura refinery is a case in point. The harmful sulphurous
gases released by the refinery cause damage to the Taj Mahal, one of the wonders of the
world. Today, all projects need a clearance from the Ministry of Environment. Disposal
of chemical wastes into water bodies, release of harmful air pollutants in the abnosphere,
noise pollution and so on should be considered while locating a facility. It is a part of
the social responsibility of an entrepreneur to ensure that his or her enterprise does not
damage the environment or pose any kinds of hazard to the community.
Regional considerations: We should ensure that we do not violate any regional regulations
while locating the facility. We must conform to the rules of the region with regards to
building norms, waste disposal norms, safety norms and so on. The government sets up
special economic zones or export zones and software and technology parks. Locating
facilities in such areas may lead to tax breaks, low rentals, lower cost of land, facilitation
of exports and imports and so on. These may become major attractions for locating
facilities in such zones.
Business environment: The prevailing business environment has a major impact on
location decisions. Political stability, economic state, foreign exchange rates, currency
repatriation regulations, import export barriers, government incentives and so on become
major factors when considering location of facilities globally. Sociocultural factors cannot
be ignored. For example, it will not be possible to set up a beef canning export unit in
Northern India where the society does not accept cow slaughter. It may be possible to
set up such a unit in areas where the major part of the population does not object to
this. McDonalds had to come up with non-beef burgers for their Indian outlets. Kentucky
Fried Chicken outlets never became popular in India.
Integration: If a new facility is part of an organisation which has a number of other
facilities, it should be so located that its functioning can be integrated with the existing
set up. A holistic view of the organisation should be taken and the new facility so located
that it fits in with the existing structure.
A large number of factors have been listed above. It is emphasised that the weightage
given to them will differ from industry to industry or service to service. Factors which
have an impact on a particular situation should be applied and those that are irrelevant,
ignored. For instance, let us consider the location of a nursery school and a university
designed for ten thousand students. It is obvious that the considerations in both cases will
be different, even though they basically provide education services. The nursery school
must be located close to its target customers. Small children cannot be expected to travel
far off. The school may not be too big as it will primarily cater to the community in
which it is located. There is not much requirement for further expansion unless the school
has plans to convert to a primary and later to a secondary school. The university should
be located away from the town to provide the quiet and calm abnosphere conducive to
academic pursuit. Adequate space for current requirements and future expansion must be
available. It should be reasonably well connected to the nearest rail or roadhead so that
the students from the entire country can come. Infrastructure must exist or be planned
for by the university. It may create its own township. Pilani, the location of Birla Institute
of Technology and Science presents a perfect example.
9.4 FACTOR RATING ANALYSIS AND FORCED DECISION MATRIX

Location decisions are complex and a large number of factors are involved. A number
of methods are available which can give a start point, and decisions can then be refined
using other factors and our best judgement. Each facility has a few critical factors. These
are first identified and then given a relative rating. The rating scale can be conveniently
selected. We could give a weightage to all factors starting with the least important one
and giving it a weightage of one. Alternatively we could give a weightage so that the
sum of all weights is one. We could also use the forced decision matrix to decide on the
weightage. The method consists of making paired comparisons among the attributes and
awarding 1 to the attribute rated higher and O to the attribute rated lower. The name
forced decision implies that the attributes being compared cannot be rated equal. Let us
illustrate this with an example.
EXAMPLE 9.1 Let us take the example of setting up a ready-made garments store
specialising in casual cotton clothing at a shopping mall. Four existing malls A, B, C
and D have been shortlisted. The factors that were considered important and critical are
proximity of a College (C), Income (I), availability of Parking Space (PS), Quality and
Number of stores already in the mall (QN), Proximity of other shopping complexes in
the area (P). We shall first determine the attribute weightages by paired comparisons.
Table 9.1
C I PS ON p Total
C 1 1 1 1
I 0
PS 0
ON 0
p 0
The paired comparisons are carried out with the help of a matrix. The shaded cells show
that a comparison is not possible. We start by comparing the attribute of proximity of a
college (C) with the others. Comparing it with income, we feel it is more important to us
than income. A score of 1 has been given to the cell (C)(I) indicating that (C) is preferred
to (I). At the same time a score of O has been entered in the cell (I)(C) indicating that
the (I) has a lower preference than (C). Similarly other paired comparisons for (C) are
completed and the scores entered in the (C) row and (C) column. Next (I) is considered.
It has already been compared with (C). It cannot be compared with itself. It is next
compared with (PS). If we feel income is more important to us than parking space, we
enter 1 in the cell (I)(PS) and a O in the cell (PS)(I). We can complete the matrix as shown
in Table 9.2. The scores in each row are totalled up.
Table 9.2
C I PS QN p Total
C 1 1 1 1 4
I 0 1 1 1 3
PS 0 0 0 1 1
QN 0 0 1 1 2
p 0 0 0 0 0
In the given matrix, we find that the factor proximity of other shopping complexes
in the area gets a score of zero. With a score of zero, it will not figure in our further
considerations. At the outset, however, it was felt that it was an important factor. The
situation is remedied by adding a dummy to the rows and columns of the matrix and
assuming that all factors are more important than the dummy. The following is the new
Table 9.3:
Table 9.3
C I PS QN p Dummy Total
C 1 1 1 1 1 5
I 0 1 1 1 1 4
PS 0 0 0 1 1 2
QN 0 0 1 1 1 3
p 0 0 0 0 1 1
Dummy 0 0 0 0 0 0
For getting the weightage divide the score of each attribute by the total score. The
weightage for the various attributes will be:
Table 9.4 The Weightage for Various Attributes

C 5/15
4/15
PS 2/15
QN 3/15
p 1/15
The next step is to carry out paired comparisons for the sites but considering one factor
at a time. The same method of scoring and forcing a decision can be adopted. In this
case a dummy is not necessary even if a particular location gets a score of zero for an
attribute or factor. Let us first consider the factor proximity to a college (C). We shall
now compare the four locations only on the basis of the proximity of a college and take
no other factor into account.
Table 9.5 Factor Considered (C)
A B C D Total
A 1 0 1 2
B 0 0 0 0
C 1 1 0 2
D 0 1 1 2
Similarly consider the other factors.
Table 9.6 Factor Considered (I)

A B C D Total
A 0 0 1 1
B 1 0 1 2
C 1 1 1 3
D 0 0 0 0
Table 9.7 Factor Considered (PS)

A B C D Total
A 1 1 1 3
B 0 0 1 1
C 0 1 1 2
D 0 0 0 0
Table 9.8 Factor Considered (ON)

A B C D Total
A 0 0 0 0
B 1 0 1 2
C 1 1 1 3
D 1 0 0 1
Table 9.9 Factor Considered (P)

A B C D Total
A 0 1 1 1
B 1 1 1 3
C 0 1 1 2
D 0 0 0 0
While carrying out paired comparisons, ensure that mathematical logic is followed, that
is, if A > B and B > C, then A > C.
Next a total weightage matrix is constructed as shown in Table 9.10.
Table 9.1 O
Location Attribute C I PS QN p Total Rank

Weightage 5/15 4/15 2/15 3/15 1/15
A Score 2 1 3 0 1
Wtd score 10/15 4/15 6/15 0/15 1/15 21/15 II
B Score 0 2 1 2 3
Wtd score 0/15 8/15 2/15 6/15 3/15 19/15 Ill
C Score 2 3 2 3 2
Wtd score 10/15 12/15 4/15 9/15 2/15 37/15
D Score 2 0 0 1 0
Wtd score 10/15 0/15 0/15 3/15 0/15 13/15 IV
The weighted score (Wtd score) is obtained as the product of the score for the particular
attribute and its weight. The locations are then ranked according to their overall scores. In
the example shown above location C is ranked first, A is ranked second, Bis third and Dis
fourth. The best location is C. The ratings and comparisons are subjective. The subjectivity
can be reduced by making a panel or a committee to consider the paired comparisons.
The forced decision matrix technique is especially useful in case of closely competing
alternatives as the method forces a choice of one over the other in a paired comparison.
9.5 ECONOMIC ANALYSIS

Often when alternatives are closely competing in terms of most attributes an economic
analysis can be carried out to decide the location of facilities. Break even analysis and
transportation model are two commonly used techniques.
Break even analysis: Break even point is that level of production where costs are equal
to revenues. The costs can be broken into fixed costs and variable costs. While the fixed
costs are independent of the level of production, the variable cost is expressed as cost
per unit and is dependent on the level of production. Let us study this technique with
the help of an example.
EXAMPLE 9.2 A sports goods firm intends to set up a unit to produce tennis rackets.
It is considering sites A, B and C for the purpose. Cost data for the sites are given in
Table 9.11.
Table 9.11 Cost Data for the Producing Sites
Site Fixed cost Variable cost

A t50,000 t135
B t1,00,000 t110
C t1,20,000 t120
If the selling price is ~300 per racket and the annual demand is 3000, which site would
you recommend?
Solution: Revenue at all sites is the same = 300 x 3,000 = ~9,00,000

Costs at location A
Fixed cost = 50,000
Variable cost = 135 x 3,000 = 4,05 ,000
Total = 4,55 ,000
Profit = 9,00,000 - 4,55,000 = ~4,45,000
Costs at location B
Fixed cost = 1,00,000
Variable cost = 110 x 3,000 = 3,30,000
Total = 4,30,000
Profit = 9,00,000 - 4,30,000 = ~4,70,000
Costs at location C
Fixed cost = 1,20,000
Variable cost = 120 x 3,000 = 3,60,000
Total = 4,80,000
Profit = 9,00,000 - 4,80,000 = ~4,20,000
As the profit at location B is the highest, the factory should be located at location B.
At what volume of production would location A become viable?
This would happen when the costs for location A and location B are the same.
Let x be the number of racquets produced and sold.
Costs at location A = 50,000 + 135x
Costs at location B = 1,00,000 + 110x
Equating the two
50,000 + 135x = 1,00,000 + 110x, x = 2000
When the volume is less than 2000 units location A will be more economical as seen in
Figure 9.1.
7 ,00 ,000
6 ,00 ,000
/
//
5 ,00 ,000
NY
C: ~
1/
.... 4 ,00,000
<JI
0
0
3 ,00,000
,.V
"iii
0 2,00,000
I-
/
1,00,000 ,,/1/
,
0
0 1000 2000 3000 4000 5000
Location A Location B
Production volume
Figure 9.1 Break Even Analysis.
Transportation model: Transportation model can be used for economic analysis, when
the cost of transportation to various destinations from the facility differs. The contribution,
that is, the sale price minus the variable cost, and the fixed cost at each location is
the same. The transportation model can be solved with the help of computer software
like WinQSB or by the Microsoft Excel's Solver function. We shall discuss solutions by
both the softwares. The manual solution of such a model can be found in any book on
quantitative techniques and is not included in this text.
EXAMPLE 9.3 Premixed concrete is supplied to three project sites X, Y and Z from
two existing facilities located at A and B. The facility at A has the capacity to produce
300 tons of concrete per week and the facility at B has a capacity of 400 tons per week.
The requirement at the sites has now increased and the firm is considering setting up
another facility with a capacity of 200 tons per week either at location C or at D. The
expansion of present facilities is not possible. The cost of transportation of 1 ton of cement
is shown in Table 9.12. At which site should the new facility be created?
Table 9.12(a)
X y z Capacity
A 2 3 2 300
B 1 1 3 400
C or 3 2 1 200
D 1 3 4 200
Requirement 200 300 400
Solution: The problem will have to be set up as two transportation model problems.
In one the sources will be A, B and C and in the other the sources will be A, Band D.
The one which gives lower costs shall form the decision criteria. The problem solution
with WinQSB is shown in Figure 9.2.
NET Problem Specrflcot1on ________
......,;
Problem Type ======:i Objective Criterion =="'11

Net-kflow @ Minilllization
• T 111mpo1tation Ptobleta M.-,ization
Aas~Ptoblea
Shoftest Path Ptoblem
• Spreadsheet Matria Fon•
Mamal Flow Ptoblem
Grephic Model F1N111
Miniaal Spanning Tiee
r: Sy"1mel11c A,c Coelhc1 nls
fi.e •• bo4h "ll!fl oams coal)
01<
Figure 9.2
Table 9.12(b) Example 9.3: Minimisation (transportation problem)
From\ To X y z Supply
A 2 3 2 300
B 1 1 3 400
C 3 2 1 200
Demand 200 300 400
Table 9.12(c) Solution for Example 9.3: Minimisation (transportation problem)

06-11-2006 From To Shipment Unit Cost Total Cost Reduced Cost
1 A X 100 2 200 0
2 A z 200 2 400 0
3 B X JOO 1 100 0
4 B y 300 I 300 0
5 C z 200 I 200 0
Total Objective Function Value= 1200
Table 9.12(d) Example 9.3: Minimisation (transportation problem)

From\ To X y z Supply
A 2 3 2 300
B 1 1 3 400
D 1 3 4 200
Demand 200 300 400
Table 9.12(e) Solution for Example 9.3: Minimisation (transportation problem)

06-11-2006 From To Shipment Unit Cost Total Cost Reduced Cost
1 A z 300 2 600 0
2 B y 300 1 300 0
3 B z 100 3 300 0
4 D X 200 1 200 0
Total Objective Function Value= 1400
The total cost of transportation if the facility is located at C is ~1,200.

The total cost of transportation if the facility is located at D is ~1,400. The facility
should be located at C.
Solution by Microsoft Excel's solver function: Table 9.12(f) shows how the problem
can be set up in the spreadsheet. Cells B2 through D4 are the costs of shipping 1 ton
of concrete on any source destination combination. For example Cell B2 shows the cost
of moving 1 ton of concrete from facility at A to project site X. Cells E2 to E4 show the
capacity at each location and cells B5 to D5 show the requirements at the project sites
X, Y and Z.
Table 9.12{f)
A B C D E
1 From/To X V z Capacity
2 A 2 3 2 300
3 B 1 1 3 400
4 C 3 2 1 200
5 Req uirement 200 300 400
6
7 Solution
8 X V z Qty Shipped
9 A 0 0 0 =B9+C9+O9
10 B 0 0 0 =Bl0+Cl0+OlO
11 C 0 0 0 =Bll+Cll+Oll
12 Qty Supplied =89+810+Bll =C9+C10+Cll =09+010+011
13
14 Cost
1S
16 A =B9*B2 =C9"'C2 =D9*O2
17 (8 =Bl0*B3 =Cl0*C3 =Dl0*D3
18 le =Bll*B4 =Cll*C4 =Dll*D4
19 I
20 r Total Cost =SUM(B16:D18)
.
Cells for the solution of the problem are B9 to D11. Cells E9 to Ell give the tonnage
shipped from A, B and C respectively. For example, Cell E9 is the sum of cells B9, C9
and D9. Cells B12 to D12 give the quantities supplied to the various project sites. For
example, Cell B12 is the sum of the Cells B9, B10 and B11. The cells can be initially left
blank for the solver to calculate.
Cells B16 to D18, are the costs of shipping any quantity through these routes. For
example the cost of moving concrete from A to project site X is the product of cells B9
and B2. Similarly the cost for the other cells can be entered. The total cost is the sum of
cells B16 through D18 and is given in cell E20.
To solve the problem the Excel Solver application is accessed. The application appears
in the Tools menu. In case it does not appear, then the required Add-in may not have been
installed when Excel was installed on your computer. The Solver Add-in can be installed
from the original disk of Excel. The Solver can then be invoked from the Add-in Menu under
the Tools option. Once the solver is invoked, a screen as shown in Figure 9.3 will appear.
Set the target cell as $E$20, that is the cell containing the total cost. Set the cells $B$9
through $D$11, as the cells whose value is to be guessed by Solver. In the constraints,
add two constraints as shown $B$12 to $D$12 >= $B$5 to $D$5, that is, the quantity
supplied is greater than or equal to the quantity required, and $E$9 to $E$11 <= $E$2
s~,t:Tc1rget Cell: U@P Si ~olv.e 'I

Equal To, r ma:.: !'.: riiru 1 Y,afue-of: lo
6:r Chan~ng Cells~
Close I
1$8$9:$1)$11 iJ §.Liess
Qption:s
the Constraintst
Sy_bject to
$8$1-2:$D$12 >"" $8$5:$1)$5 eternlum
add
$E$9 :$E$11 °'=$E$2:$E$'f
~ange
R.esetAII
~11:,te
..:.I l;ielp
Figure 9.3
to $E$4, that is, the quantity shipped from a location is less than or equal to its capacity.
Next invoke the options menu on the solver screen. A screen as shown in Figure 9.4
will appear.
~Iver Opt-f0_11_s_ _ _ _ _ _ _ _ _ _ _ ffi~I
,MaxJjmet ID seconds 0
Iterations: 1100 Cancel
ei,eas1m1 10.000001 !,.oad Model ...
Tol!;!,fance: lo,os O/o ~ave Model ... _J

Con~e~gence: lo,0001 jj_elp
., Assume Linear f'l1.(ld'l'i r l,J_se P,utamiitlc x all~

W Assume Non-Neg,atlye Show ~ratlor, B,esults
Btlmates De1' vat1Vll5 Ssatcii- -
r. T2_n9ent r. forwa!'d Q Newton
r Q.uadr~t!(; k!lntral CQ111ug;1t,;,
Figure 9.4
The options Assume Linear Model and Assume Non-Negative are then selected. The
OK button is pressed and the Solve button is clicked on the Solver screen. The results
appear in the spreadsheet and are shown in Table 9.12(g).
The total cost is ~1,200.
Now let us solve the problem using A, B and D as sources.
The total cost is ~1,400.
Location C should be preferred as it gives the least cost result.
Table 9.12{g)
A B C D E F
1 From/To X y z Capacity
2 A 2 3 2 300
3 B 1 1 3 400
4 C 3 2 1 200
5 Requirement 200 300 400
6
7 Solution
8 X y z Qty Shipped
9 A 100 0 200 300
10 B 100 300 0 400
11 C 0 0 200 200
12 Qty Supplied 200 300 400
13
14 Cost
15
16 A 200 0 400
17 B 100 300 0
18 C 0 0 200
19
20 Total Cost 1200
21
Table 9 .12{h)
1 From/To
A
-
X
B
y
C
z
D - .~ E
capacity
2 j A 2 3 2 300
3 e 1 1 3 400
4 D 1 3 4 200
5 Requirement 200 300 400
6
Solution
- 87 X y z Qty Shipped
9 A 0 0 300 300
10 ,a 0 300 100 400
11 C 200 0 0 200
12 Qt y Supplied 200 300 400
13
14 Cost
15
16 1A 0 0 600
17 8 0 300 300
18 C 200 0 0
19
20 Total Cost 1400
9.6 LOAD DISTANCE METHODS

The load distance methods are useful when we want to establish a facility that considers
the existing facilities, the distance between them and the loads or volume of goods
shipped between them. These are often used to locate intermediate warehouses or depots
and distribution centres. In its simplest form it is assumed that the cost of moving a
unit load from one location to another is the same per unit distance moved. However,
if the cost is different, the load can be weighted with the cost and the load multiplied
by the cost per unit per distance unit. The methods involve placing the existing facilities
on a coordinate grid system. The choice of the grid system is purely arbitrary. In case
of global decisions, latitude and longitude coordinates may be used. There are various
methods used, the most common ones being the centroid or centre of gravity method
and the median load method.
Centroid method: This is also referred to as the centre of gravity method. Having
plotted the existing facilities on a grid coordinate, the coordinates of the centroid
are then calculated which results in the minimal transportation costs. The centroid
can then be plotted on the map and suitably adjusted so that other factors like proximity
to a rail road hub or a communication centre can be met. The centroid is calculated as
follows:
where
xis the X coordinate of the centroid
y is the Y coordinate of the centroid
dix is the X coordinate of the ith location
diy is the Y coordinate of the ith location
Wi is the weight or load moved from or to the ith location.
Let us illustrate the method with the help of an example.
EXAMPLE 9.4 A company has five existing production facilities. The company is
now centralising its purchase system and establishing a warehouse which will supply
materials to the five facilities. The loads required at each facility and its coordinates are
shown in Table 9.13(a). Where should the warehouse be located?
Table 9.13(a)
X Coordinate Y Coordinate Load
A 25 40 450
B 350 400 350
C 325 75 1500
D 400 150 250
E 450 350 450
Solution:
= 25 X 450 + 350 X 350 + 325 X 1500 + 400 X 250 + 450 X 450 = 307 9
X 450 + 350 + 1500 + 250 + 450 .
= 40 X 450 + 400 X 350 + 75 X 1500 + 150 X 250 + 350 X 450 = 155 l
y 450 + 350 + 1500 + 250 + 450 .
450
B
400 -
350~ 400 E
350 -
450 , 350
300
250
200
D
150 F r.'I
~
308 , 155 400 , 150

100
A C • 325 , 75
50
• 25 , 40
0
0 100 200 300 400 500
Figure 9.5 Grid Map for Example 9.4.
EXAMPLE 9.4(a) Let us now assume that the cost of transportation is not the same,
but is as shown in Table 9.13(b).
Table 9.13(b)
X Coordinate Y Coordinate Load Cost per unit per km Weighted load

A 25 40 450 1.00 450
B 350 400 350 1.50 525
C 325 75 1500 1.30 1950
D 400 150 250 2.00 500
E 450 350 450 1.20 540
= 25 X 450 + 350 X 525 + 325 X 1950 + 400 X 500 + 450 X 540 = 320 7
X 450+525+1950+500+540 .
= 40 X 450 + 400 X 525 + 75 X 1950 + 150 X 500 + 350 X 540 = 160 9
y 450+525+1950+500+540 .
Median load method: The median load method is similar to the centroid method. The
load distances are used to minimise the cost of movement. We follow three steps:
1. Identify the median load
2. Find the X coordinates of the existing facility that sends or receives the median
load
3. Find the Y coordinates of the existing facility that sends or receives the median
load
45 0
B
40 0 -
350
350 , 400
-E
450~ 350
30 0
25 0
200
150
320,161 (a) F --D
400 , 150
100
A C • 325, 75
50 • 25, 40
0
0 100 200 300 400 500
The coordinates X, Y are the best location for the new plant. The model assumes that
all movements are rectilinear, that is, along X and Y axes only.
Let us consider the data of Example 9.4 reproduced in Table 9.13(c).
Table 9.13(c)
X Coordinate Y Coordinate Load

A 25 40 450
B 350 400 350
C 325 75 1500
D 400 150 250
E 450 350 450
450
B
400 -
350,400 E
350 -
450 ,3 50
300
250
200
D
150 -
400, 150
100
A C • 325, 75
50 • 25 , 40
0
0 100 200 300 400 500
Identify the median load.The total number of loads from the new warehouse is 3000.
If we consider that each load is numbered individually then the median load is load
number 1500 and 1501.
Find the X coordinate of the median load. Let us consider the movement of loads in the X
direction. Beginning at the origin and moving along the X axis consider the loads moved
to each location. From location A 450 loads are moved, that is, loads 0-450 are moved
from A (X = 25). The next location along the X axis is C. From C 1500 loads are moved,
that is loads 451-1950 are moved (X = 325). Since the median load falls in the interval
451-1951, the X coordinate of the new warehouse is X = 325.
Table 9.13(d) Facility Location Information for Example 9.4

Facility Facility To Existing I To Existing 2 To Existing 3 To Ex is ting 4 To Existing 5 To New I Location Location
Number Name Flow/Unit Cost Flow/Unit Cost Flow/Unit Cost Flow/Unit Cost Flow/Unit Cost Flow/Unit Cost X Axis Y Axis
Existing I A 450 25 40
Existing 2 8 350 350 400
Existing 3 C 1500 325 75
Existing 4 D 250 400 150
Existing 5 E 450 450 350
New I New I
Tab!e 9.13(e) Summary of Optima! Location for Example 9.4

08-13-2006 New Facility XAxis Y Axis
1 New 1 325 75
Total Flow to&from New Location = 3000
Total Cost to&from New Location = 490750
(by Rectilinear Distance)
IN ENEMY TERRITORY
During military manoeuvres, the planning staff of a formation Headquarters was to site
a forward supply depot. The depot was to feed supplies of ammunition and stores to
the forward locations at the border between the exercise forces. The border was
shaped as shown below:
D D
D
--, o
En e my X )
_,,,,o
_,,,o
D Forward Locations
A computer package which worked on the median load method was used to locate
the forward depot. The package gave the coordinates at the point shown as X on the
enemy side of the border. This was obviously not the desired location. The location
of the base depot was added to the grid as the loads were to come from the base depot
to the forward depot. When the problem was solved , the depot location appeared on
our own side . Some adjustments were made to locate it near a town closest to the
coordinates given by the computer and the manoeuvres proved that the location was
ideal.
Find the Y coordinate of the median load. Let us consider the movement of loads in the Y
direction. Beginning at the origin and moving along the Y axis consider the loads moved
from each location. From location A 450 loads are moved, that is, loads 0-450 are moved
from A (Y = 40). The next location along the Y axis is C. From C 1500 loads are moved,
that is loads 451-1950 are moved (Y = 75). Since the median load falls in the interval
451-1951, the Y coordinate of the new warehouse is Y = 75.
The new facility should be located at (325, 75), at the same location as C. If the costs
are different, then the weighted loads can be used. Solutions to location problems can
also be found using computer software. WinQSB also has a module to deal with location
problems.
9. 7 LOCATING SERVICE FACILITIES

It is more common to locate new service facilities than new manufacturing units, because
of the variety and the relatively low cost of establishing a service facility. Services require
high contact with the customers and typically have multiple sites. The location decisions
are closely tied to market selection decisions. For example, it may be considered essential
to have a student community close to a music store as they are the target market. In such
a case, it is unlikely that the store will come up in a colony of retired people. The markets
affect the number and size of the facilities to be built. Manufacturing location decisions
are based on minimisation of costs. In the case of service facility location decisions,
the emphasis shifts to the maximisation of profits and the potential of various sites is
compared on the basis of the profit that they are likely to generate. The critical factors
for service facility location decisions will vary from those considered for manufacturing
decisions and will be affected by the type of service being considered.
9.8 SUMMARY
Whenever a new manufacturing facility or a service facility is set up, we are faced with
a location problem. We have to decide where to locate the new facility. A faulty decision
can prove expensive in the long run, more so in the case of manufacturing units, as the
costs involved are very high and are not easily reversible. Location decisions have an
impact on the choice of technology and processes used.
The choice of location depends upon a number of factors. The criticality of the factors
depends on the nature of the facility and the same factors with the same emphasis
cannot be applied to every situation. Market factors like the proximity of customers and
suppliers are important factors. Service operations entail close contact with the user and
the proximity of customers becomes important. On the other hand a manufacturing unit
depends on its suppliers for materials, components, subassemblies and so on.
Availability of labour is another important consideration. We should consider the
availability of labour in both numbers and skills required and the costs involved in procuring it.
Adequate infrastructure should be available at the selected site. This includes
transportation facilities, communication facilities, services like water supply, electricity,
sewage disposal, drainage and so on. The site should also have adequate amenities like
housing, shopping complexes, schools, health services and other community facilities.
Another important consideration is the suitability of land and climate. Site costs
can vary greatly and must be given due importance in location decisions. Safety and
environmental conditions cannot be ignored. Regional regulations can affect location
decisions. Concessions and tax breaks may make the setting up of a facility in certain
areas attractive as compared to other locations.
In the global business environment that is prevailing today, political stability, economic
conditions and sociocultural factors have an important part to play in location decisions.
Foreign exchange rates, export import laws and barriers, customs regulations, economic
growth, capital repatriation rules and so on affect location decisions. New locations must
also be compatible with the existing facilities and structure.
There are numerous aids to decision making that can be used while making location
decisions. The factor rating analysis is a commonly used approach. Critical factors affecting
the decision are identified and a weightage assigned to them. The alternative locations
are then scored against each factor and the weighted score computed. The forced decision
matrix can be used to choose amongst closely competing alternatives. The technique
involves paired comparisons where a choice must be made preferring one over the other.
The attributes or factors are assigned weightages on the basis of paired comparisons and
the alternatives are again subjected to paired comparisons on one factor at a time. A total
weightage matrix is then prepared and the choices ranked in order of preference. These
methods are subjective and individual biases can be removed by forming a team or a
committee to work with these techniques.
Economic analysis is another method of comparing locations. A breakeven analysis can
be performed considering the fixed costs and the variable costs for each candidate location
and the revenues that can be expected from each location. If the manufacturing costs are
the same and the product is to be delivered to different locations, the transportation model
can be used to check which combination of locations has the least transportation costs.
Load distance methods are used to locate a new facility when loads will be moved
to it or from it. The technique can be used for locating communication towers for mobile
phones, TV and radio towers. The existing locations are plotted on a coordinate grid
system and the coordinates of the new facility computed. These can then be adjusted as
per the ground conditions and the facility located close to a communication centre with
adequate infrastructure.
Incorrect location can prove costly and often disastrous. The Union Carbide gas leak
at Bhopal and the nuclear power station blast at Chernobyl are examples of incorrect
location decisions.
I CONCEPT QUIZ I
State True or False
1. The location of a facility affects the choice of production technology.
2. Cultural and social factors play no role in facility location.
3. All facilities must be located near their customers.
4. While locating new facilities we need not consider existing facilities.
5. Safety and environmental conditions are a low priority factor when locating facilities.
6. A balance must be struck between cost of production and the cost of transporting
the goods to customers.
7. The load distance method of facility location is based on the maximisation of
load distances.
8. Services typically have multiple sites.
9. Location of manufacturing facilities is based on maximisation of profits.
10. Location of service facilities is based on maximisation of profits.
1. While locating a nursery school, the most important factor is:
(a) Safety. (b) Availability of a market place.
(c) Proximity to residential areas. (d) Cost of labour.
2. While locating a nuclear power plant, the most important factor is:
(a) Cost. (b) Availability of raw materials.
(c) Safety. (d) Availability of cheap transport.
3. Of the following what is not a part of infrastructure:
(a) Amenities (b) Services
(c) Products (d) Communication and transport
4. The load distance method is based on:
(a) The sum of loads and the distances over which they are moved.
(b) The centre of gravity method.
(c) The median load method.
5. A comparison between closely competing alternative locations is carried out through:
(a) Load distance method. (b) The median load method.
(c) Transportation model. (d) Forced decision matrix.
6. While locating a steel plant, the most important factor affecting location is:
(a) Safety. (b) Proximity of raw materials.
(c) Proximity to consumers. (d) Foreign exchange rates.
7. The load distance methods for locating a facility are useful for location of:
(a) New facility.
(b) Availability of raw materials.
(c) Facility that considers existing facilities and the loads being moved between
them.
(d) Availability of cheap transport.
8. The following methods can be used for facility location:
(a) Load distance models. (b) Transportation model.
(c) Factor rating method. (d) All of the above.
9. While locating facilities globally, the most important consideration is:

(a) Availability of amenities. (b) Proximity to customers.
(c) Availability of technology. (d) Business environment.
10. Location decisions occur due to:
(a) Expansion of existing capacity.
(b) Change in technology.
(c) Change in availability of resources.
Fill in the blanks:
1. Location decisions involve ___________ and are not easily reversible.
2. The location of a facility acts as the basis for determining _ _ _ _ _ _ _ __
and cost structure.
3. Location of facilities has a major impact on _ _ _ _ __
4. Location of service facilities must be close to ________
5. The forced decision matrix is based on ____________
6. The Chernobyl disaster is an example of what can happen if ______ factor
is ignored.
7. New locations must be compatible with ________
8. The forced decision matrix involves _ _ _ _ _ _ _ _ _ comparisons.
9. Economic analysis for comparing locations can be performed using ________
and _ _ _ _ _ _ _ _ __
10. Load distance methods are used to locate a new facility when _____ will be
moved to it or from it.
IQUESTIONS I
9.1 What are the factors that influence the choice of location of a production unit?
9.2 What key factors would you consider while locating the following?
(a) Nursery school
(b) Residential university for 5000 students
(c) Thermal power plant
(d) Nuclear power plant
(e) Gas-based fertiliser plant
(f) Fast food restaurant
(g) Five star hotel
9.3 A private school with 1000 students is considering four sites for its location. The
factors considered, their weightage and the score for each factor for each site are
given in the following table.
Factors Weight Scores (0 to 100)

A B C D
Proximity to housing 0.25 70 90 65 85
Student traffic 0.25 75 80 60 85
Parking availability 0.10 90 60 80 75
Plot size 0.10 80 70 90 75
Infrastructure 0.15 50 40 60 60
Accessibility from other towns 0.15 70 75 90 85
Which location would you recommend?
9.4 An American-based automobile company is planning to locate a plant in Asia
so that it can serve the region better. Three locations in three different countries
have been identified-Chennai in India, Singapore and Shanghai in China. The
company has rated the important location factors for each site as given.
Factors Weight Scores (0 to 100)

Chennai Singapore Shanghai
Political stability 0.25 85 90 50
Economic growth 0.18 90 75 85
Labour cost 0.15 90 50 75
Port facilities 0.15 65 90 85
Land and construction cost 0.10 80 60 70
Tariffs/Trade regulations 0.10 85 90 75
Infrastructure 0.07 80 95 90
Which site would you recommend?
9.5 A company has four factories-A, B, C and D manufacturing the same product.
Production and raw material costs differ from factory to factory and are given
in the following table.
A B C D
Production costs per unit 15 18 14 13
Raw material cost per unit 10 9 12 9
The product is sold through three sales depots X, Y and Z. Transportation costs
to these sales depots, selling prices at each depot, requirements and production
capacity are given here.
To from A B C D Sale price per unit Requirement

X 3 9 5 4 34 80
y 1 7 4 5 32 120
z 5 8 3 6 31 150
Production capacity 100 150 50 100
Determine the most profitable production and distribution schedule and the
corresponding profit. The surplus production should be taken to yield zero profit.
9.6 A manufacturer wants to ship 8 loads of his product as shown in the following
table. The matrix gives the distance from origin to destination.
A B C Available
X 50 30 220 1
y 90 45 170 3
z 50 200 50 4
Required 3 3 2
Shipping costs are flO per load per km. What shipping schedule should be
used?
9.7 A company has four factories situated in different locations in the country and
four sales agencies located in four other locations in the country. The following
are the cost of production (f per unit), the sales price per unit, the shipping costs
per unit in the cells of the matrix, monthly capacities and monthly requirements
are provided.
Factory Sales agencies Capacity Production cost

1 2 3 4
A 7 5 6 4 10 10
B 3 5 4 2 15 15
C 4 6 4 5 20 16
D 8 7 6 5 15 15
Requirements 8 12 18 12
Sale price 20 22 25 18
Find the monthly production and distribution schedule which will maximise
profits.
9.8 An auto ancillary unit is to be established that will feed parts to three auto plants.
The following table gives locations of the auto plants with their coordinates and
volume requirements.
Location Coordinates Volume per year

A 180,470 3000
B 470,375 6000
C 320,300 4000
Determine the coordinates of the facility location by the median load method,
and the centroid method.
9.9 A new computer parts unit is to be set up. The unit will supply parts to five
existing computer assembly units located as shown in the table.
Location Coordinates Volume per day

A 200,400 180
B 400,250 150
C 300,100 300
D 150,300 200
E 180,210 250
Determine the new location by the centroid method.

9.10 The company in Question 9.9 is considering three sites-X (300, 250), Y(300, 350)
and Z (250, 150). Determine the best location using the load distance formula.
How does this location compare with the location determined in Question 9.9?
Facility Layout
.. . What's a sun-dial in the shade?
BENJAMIN FRANKLIN
LEARNING OBJECTIVES
• U nderstand th e impo rtance of faci lity layou t and bas ic fo rm ats
• Process layo ut
• Systemati c layo ut p lanning
• Asse m bly lin e balanci ng
• Se rv ice layo ut
10.1 INTRODUCTION
Facility layout refers to the placement of deparhnents, work groups within the departments,
workstations, machines and stock holding points within a production facility. The layout
should be compatible with the technology and the process structure used. A good layout
ensures smooth flow of work, materials, persons and information. Layout decisions depend
on the processing requirements and a commonly used criteria is to reduce the distance
that must be travelled between elements. Layout decisions must be taken before the
facility is built as later adjustments will be very expensive. For instance, if the foundations
required for a machine are built without due thought, one may later discover that the
machine has been so positioned that the grease points required to be greased during
maintenance are against a wall and cannot be accessed. Certain factors must be kept in
mind while planning layouts.
210
Facility Layout 211
10.2 FACTORS AFFECTING LAYOUT

Flexibility: A good layout should be flexible enough to respond to changing conditions.
The changes may be brought about by changes in technology or changes in processes.
Particular attention should be paid to the provision of services like water supply and
power supply. Water pipes, sewage pipes, drainage pipes, electric lines and so on are
easy to place the first time but are difficult to shift at a later stage. For instance, concealed
water piping is difficult to alter at a later stage. Ample provision should be made at the
outset and alternative layouts thought of in the initial phase itself.
Flow of work, materials, and personnel: Work and materials should flow along designated
patterns. The entry into and exit from a functional area should be coordinated so that it
is convenient to the issuing and receiving deparbnents. As far as possible, back tracking
should be kept to a minimum. Aisles through which materials are to move should be well
marked and kept clear of all other movement. Nothing should be ever stored on them,
not even temporarily. The layout should avoid unnecessary re-handling of materials. Inter-
stage storage of materials should be avoided. Load distances moved between deparbnents
should be kept minimal. It is only logical to position deparbnents with a high volume
of traffic between them adjacent to each other. In a service organisation, the service flow
should be so planned that it is easily understood. There should be clear entry and exit
points with adequate check out facilities. The layout should be such that it is easy to
communicate with customers. Adequate waiting area for customers should also be provided.
Use of space: Space in a facility should not be viewed only as floor space, but seen
volumetrically. Overhead space can be utilised to run cables, pipelines and conveyers.
Often tools and equipment can be suspended from the ceiling. Work-in-progress can
also be moved via the overhead space. Racks and ducting can be installed above head
height. Use of volumetric space applies particularly to storage areas especially where
mechanical lifting devices are used. The space utilisation should permit maximum visibility
so that all people and all material can be observed at all times. 'Hiding places' should
be avoided into which goods get mislaid. This is difficult to achieve as people tend to
ask for cupboards and lockers and view them as status symbols. Screens and partitions
should be carefully considered as they lead to undesirable segregation. In case of service
facilities, deparbnents and processes should be so arranged that the customers only see
what we want them to see. Maximum visibility helps in customer surveillance. A balance
should be struck between waiting area and service area. There should be no clutter.
Accessibility: The layout should permit maximum accessibility to all maintenance points.
If maintenance points are not easily accessible, the machine or equipment will not be
maintained. If it is not possible to provide the desired accessibility, it should be possible
to move the machine or equipment at the time of maintenance. Similar accessibility to
service points should be ensured. Do not have a power point located behind a machine
as it may become inaccessible in case it has to be repaired or replaced.
Working environment: The layout should ensure that the working environment is
conducive. Poor lighting, excessive sunlight, draughts, heat, noise, and vibrations should be
kept to the minimum. The worker should be able to perform his duties comfortably. There
should be inherent safety and security in the layout. For example, paints and consumables
like waste cotton which are combustible should not be stored together. Suitable measure
must be implemented to provide protection against fire hazard. The layout should ensure
that accidents are prevented. Keep areas below overhead travelling cranes and so on, clear
of people. Adequate rest areas, drinking water, wash rooms, medical first aid facilities
and so on should be provided in keeping with industrial regulations and laws that may
be applicable. Work groups should be able to identify themselves with their work place.
Psychologically, each group has a need for 'territory'. Unnecessary segregation should be
avoided. Groups should be able to communicate with each other and within the group
it should be possible for operators to help each other. Team spirit should be fostered.
A good layout will result in efficiency and minimise the processing time and costs by
reducing handling and movement. It will lead to better supervision and control through
maximising visibility. Human productivity will improve if the working environment is good.
10.3 BASIC PRODUCTION LAYOUT FORMATS

Layouts are generally defined by the pattern of work flow. The three basic formats
are-process layout, product layout and fixed position layout. Hybrid layout or group
technology or cellular technology layout is a combination of process and product layouts.
Process layout: It is also called functional layout. In this type of layout all machines
and equipment which perform the same function are grouped together. For example, all
lathes may be placed in a machine shop, all welding plant may be grouped together in
a welding shop, and painting equipment may be available in a painting shop and so on.
The job is routed to various shops as required. The set up is ideal for batch production.
In service facilities, hospitals provide a good example of process based or functional
layout. The wards and deparbnents provide specific medical care, like the surgical ward
looks after the surgery cases, and the obstetrics ward provides care to maternity and
neonatal cases and so on.
Product layout: It is also referred to as the flow line layout. In this layout, equipment
and work processes are arranged in the progressive steps in which the product is made.
The work flow in effect follows a straight line. Automobile production on an assembly
line, chemical plant, cement factory, and a steel plant are all examples of such layouts.
The layout is particularly suited for flow and continuous production process structures.
Fixed position layout: In a fixed position layout, the product stays fixed at a particular
location because of its bulk and size, and worker teams and equipment move to the work
site to work on it. Examples of such layouts are ship building yards, bridge construction
sites and so on. The layout is suited for project and high tech job shop production
processes. In this kind of layout the product may be visualised as the hub of a wheel
with materials and equipment arranged concentrically around it in the order of use and
movement. Equipment that is used frequently is positioned closer to the product. Materials
are arranged according to their technological priority.
Hybrid layout: It is also referred to as cellular layout or group technology layout. In
this type of layout dissimilar machines are grouped together into a work centre which
manufactures a family of products having similar processing requirements though not
necessarily in the same order. The layout is similar to a process layout in as much as
Facility Layout 213
the machines perform different processes and is similar to the product layout as the
machines are grouped to perform processes required by a limited set of products or a
family of products. Details have been discussed in Chapter 6.
10.4 PROCESS LAYOUT

Process layouts aim at minimising the costs of interdepartment movement. The cost of
movement is the number of loads multiplied by the distance between departments and
the cost of moving one load. The loads are standardised. They can be in terms of a single
unit, a bin load or a pallet load of material or a crate of materials that is normally moved
from one location to another. For example, in an automobile factory, a single car may
constitute a load. In a manufacturing unit making carburettor subassemblies, a crateful
of carburettors may constitute a load.
The next step is to calculate the movement of loads between departments. The locations
can then be laid out keeping those with maximum flow between them adjacent to each
other. Let us try and understand the procedure with the help of an example.
EXAMPLE 10.1 A metal fabrication unit has eight departments-shipping and receiving
(A), machining (B), drilling (C), welding (D), milling (E), grinding and polishing (F),
painting (G), and assembly (H). Let us assume that each department requires 10 m by
10 m space and we have a hall in which to accommodate them which is 20 m by 40
m. Materials are moved from one department to the other in standard sized crates by a
fork lift. The flows of loads between departments have been based on data from another
similar unit and are given in Table 10.1.
Table 10.1 The Flows of Loads Between Department
A B C D E F G H
A 180 60 20 40 240 30 35
B 10 11 0 90 100 90 100
C 20 95 140 100 200
D 20 30 30 20
E 5 200 220
F 380 100
G 10
H
Let us assume that all movements are rectilinear and moving from one department to
an adjacent department involves the move over 10 m. Let us also assume that the cost
of moving over a distance of 10 m is ~l.
Solution: The space available and that required for the departments suggests that the
layout be in two rows of four departments each. Let us try and arrange the departments
in such a manner that departments with heavy movement between them are kept adjacent
to each other.
Let us assume that the first layout we arrive at is given in Table 10.2(a).
Table 10.2(a) Layout of Departments
B D E H
A F G C
Let us now compute the load distances for this layout in Table 10.2(b).
Table 10.2(b) Calculation of Load Distances between Departments
Department pair Load between Distance between Load X distance

departments departments
A-8 180 1 180
A-C 60 3 180
A-D 20 2 40
A-E 40 3 120
A-F 240 1 240
A-G 30 2 60
A-H 35 4 140
8-C 10 4 40
8-D 110 1 110
8-E 90 2 180
8-F 100 2 200
8-G 90 3 270
8-H 100 3 300
C-D 20 3 60
C-E 95 2 190
C-F 140 2 280
C-G 100 100
C-H 200 200
D-E 20 20
D-F 30 1 30
D-G 30 2 60
D-H 20 2 40
E-F 5 2 10
E-G 200 200
E-H 220 220
F-G 380 380
F-H 100 3 300
G-H 10 2 20
Total 4170
We could now manually try and improve this solution by interchanging deparbnents
and recalculating the load-distance. However, it will be appreciated that a large number
of permutations are possible. The problem can be solved with help of a computer. A
Facility Layout 215
number of software packages are available. WinQSB also has a module that deals with
layout problems. Most computer systems follow the CRAFT algorithm. CRAFT stands for
Computerised Relative Allocation of Facilities Technique. The CRAFT method is similar to
the method shown. It requires a load matrix showing flow of loads between departments
and an initial suggested layout which enables the programme to form a distance matrix.
Costs can also be applied, especially if they differ for loads between certain departments.
The programme then tries to improve the material handling costs by exchanging pairs
of departments iteratively. It then computes the total material handling costs and if
the cost reduces, the exchange is accepted. The process is iteratively performed till no
further reduction in cost is possible. The programme is heuristic and does not guarantee
the best cost solution. WinQSB can handle up to 61 departments. The distances may be
considered rectilinear, Euclidean or squared Euclidean. The layout assumes that the floor
space is rectilinear and divided into rows and columns. Departments which have a fixed
location can be designated and the programme does not include them in the exchange
iterations. The solution arrived at by the WinQSB package using rectilinear distances is
shown below.
Problem Specification
Problem Type ====- Objective Criterion = = : f l

Facilit, Location
• Minimization
• Functional La,out
Maximization
Line Balancing
Problem Title: Example 10.1
Number of Functiono.l Deportments: 8
Number of Rows in Layout Area: 2
Number of Columns in Layout Area: 4
OK Cancel Help
Figure 10.1
216 Production and Operations M anagemen t
Table 10.3 Functional Layout Information for Example 10.1

Department Department Location To Dep. l ToDep. 2 To Dep. 3 To Dep. 4 To Dep. 5 To Dep. 6
Number Name Fixed Flow/Unit Cost Flow/Unit Cost Flow/Unit Cost Flow/Unit Cost Flow/Unit Cost Flow/Unit Cost
l A No 180 60 20 40 240
2 B No 10 110 90 100
3 C No 20 95 140
4 D No 20 30
5 E No 5
6 F No
7 G No
8 H No
Functional L ayout Information for Example 10.1

To Dep. 7 To Dep. 8 Initial Layout in
Flow/Unit Cost Flow/Uni t Cost Ce ll Locations [e.g., (3,5) , (1 , 1)-(2,4)]
30 35 2, 1
90 100 1,1
100 200 2,4
30 20 1,2
200 220 1,3
380 100 2,2
10 2,3
1,4
• Improve bJ Exchanging 2 departments

Improve bJ Exchanging 3 departaenb
Improve by Exchanging 2 then 3 deparunei
Improve by Exchanging 3 then 2 departaet
Evaluate the Initial La,out Only
• Rectilinear Diatance
Squared Euclidian Distance
Euclidian Distance
Figure 10.2
Facility Layout 217
Final Layout After I Iteration for Example IO.I
Total Cost =4060 (by Rectilinear Distance)
Column
Row 2 4
D H
A G C
The total load distance is 4060. It has been assumed that the cost to move a load
over a unit distance is the same and has been taken as one unit. As can be seen there is
an overall reduction from 4170 load distance units to 4060 load distance units.
10.5 SYSTEMATIC LAYOUT PLANNING

The load distance method is based on a numerical analysis of loads being exchanged
between deparbnents. Often it is difficult get such quantitative data of loads. In such cases
systematic layout planning is used. It is also referred to as relationship diagramming.
The system is based on subjective inputs from analysts and managers. They indicate
the desirability or otherwise of having deparbnent close to each other. The preferences
show the importance attached to the interaction between deparbnents. The preferences
are indicated by the five vowels and the letter X as shown in Figure 10.3.
Value Closeness Line code
A Absolutely necessary
--
E Especially important --
I Important --
0 Ordinary closeness okay --
u Unimportant
X Undesirable /VV
Figure 10.3
The preferences, using the same data as for Example 10.1 and assuming that there is no
quantitative data available on actual flows between deparbnents, are given in Table 10.4.
Table 10.4
A B C D E F G H
A E 0 u 0 A 0 0
B u E I E I E
C u u I I I
D u 0 0 0
E X E A
F A E
G u
H
Figure 10.4 shows a relational layout. The flows between deparhnents are marked according
to their importance. Lines of different thickness show the relative importance of proximity.
A good layout will only show short thick lines and no zigzag lines. Undesirable closeness
is marked only if it exists.
Figure 10.4 Relationship Diagram.
The preferences are often indicated on a grid developed by Richard Muther known
as Muther's grid. The diamond shaped grid is read similar to mileage charts. Figure 10.5
shows a Muther's Grid.
A
B
C
D
E
F
Figure 10.5 Muther's Grid.

Facility Layout 219
10.6 PRODUCT LAYOUT

In a product layout workers and machines are arranged in a line according to the sequence
of operations required for assembling or making a product. If a particular process is to be
repeated, the machines required are duplicated along the line to avoid back tracking. The
layout is determined by the sequence of operations that need to be performed. Precedence
lays down what operations must precede others, what can be done concurrently and what
must wait. The precedence requirements form an important input in product layout. The
layout effectively follows a line and an assembly line is a typical product layout. The
assembly line is used for producing high volumes of standardised goods. The job is broken
down into its smallest indivisible portions called work elements. A work element can
be performed by one worker or at one workstation and cannot be split any further. But
more than one work element can be performed by a worker as the job passes through his
workstation. An assembly line in its simplest form consists of a moving conveyer with
workstations located along it. A workstation is any area along the assembly line which
requires at least one worker or one machine. The jobs move on the conveyer. The conveyer
stops for a fixed duration referred to as the cycle time, during which all workstations
perform the work elements on the job piece before them. When the fixed duration is over,
the conveyer moves again transferring each job to the next workstation and so on. The
job is finally completed at the last workstation. Since the process is a continuous one, a
finished product rolls off the line at the end of every cycle. The layout attempts to group
work elements and assign them to workstations in such a manner that the time taken at
each workstation to complete the work elements is the same. This will ensure smooth flow
of work, and neither the job nor the worker will have to wait. While grouping the work
elements, precedence relationships and any other restrictions will have to be kept in mind.
The process of equalising the work content at each workstation is called line balancing.
10.7 LINE BALANCING

Precedence relationship: The first step in line balancing is to define the precedence
relationships. These may be tabulated or shown as a network. The precedence relationships
also include any restrictions. For example, a part that is hot cannot be immediately painted
and so the heating and painting work elements cannot be performed at the same workstation.
Cycle time: The next step is to determine the cycle time. This may depend on the production
requirement or may be restricted by the longest time required for completing a work element.
Let us assume that we require 240 units of a product to be produced per day
(8 hours working). Then the cycle time can be calculated as:
.
Cye1e time _ Time available per day
- U ms
·t reqmre
. d per d ay
8x60 .
= 240 = 2 minutes
If longest work element takes 3 minutes, it is obvious that this production target
cannot be met. The line will have a minimum cycle time of 3 minutes so that the particular
work element can be completed.
The production per day will be:

.
P ro d uchon d Time available per day
per ay = C ye 1e rune
8x60 .
= - 3- = 160 units
Number of workstations: Theoretically the minimum number of workstations is equal
to the total work content divided by the cycle time.
If we assume that the product takes 11 minutes to complete and the cycle time is
3 minutes, then
. Total work content
Number of workstations N = C 1 r
ye e une
=.!!=4
3
The number of workstations must always be rounded off to the next higher value.
Assigning tasks to each workstation: We select a primary rule to assign tasks to
workstations and a secondary rile to break ties. Tasks are assigned to the first workstation
until the sum of the task times is equal to the cycle time, or no other task assignment
is possible because of the available time or the precedence restrictions. The process is
repeated for each workstation in turn till all the tasks are assigned.
Efficiency: The efficiency of the line is calculated as:
Eff . _ Sum of task times (total work content)
iciency - Number of workstations x Cycle time
Various rules are used for assigning tasks to workstations. We shall restrict ourselves
to two rules-longest operational time and rank positional weight. Let us understand
the procedure for line balancing with the help of an example. In this example we shall
use the Longest Operational Time (LOT) rule. As the name suggests the task with the
longest operational time is assigned first, provided it is possible to do so without violating
precedence or time restrictions.
EXAMPLE 10.2 A company is setting up an assembly line for making prefabricated
panelled doors. Table 10.S(a) gives the precedence and the time required for the tasks.
What is the maximum output that can be achieved? Suggest a possible layout for the line.
Table 10.5(a) Precedence and Time Required for Tasks
Task Task time (seconds) Description Task that must precede

A 70 Assemble frame None
B 80 Insert moulding A
C 40 Insert frame screws A
D 20 Insert frame handle A
E 40 Insert frame latch A
F 30 Install panel B, C
G 50 Cover frame screws C
H 50 Pack door unit D, E, F, G
Total 380
Facility Layout 221
Task B takes the longest time. The cycle time cannot be less than 80 seconds. If cycle
time is 80 seconds, the output is:
8 X 60 x60
Output= 80
= 360 door units per day
Number of workstations = 3880 = 5°

Let us draw a network diagram as shown in Figure 10.6 to indicate the precedence: The
activities are on nodes and the lines indicate the relationships.
80
Figure 10.6 Network Showing Precedence of Activities.
We shall now assign tasks to the workstations based on LOT. The longest operational
time is taken for task B, but task B cannot be carried unless A is complete. Task A is
assigned to Workstation 1. Task A takes 70 seconds leaving a balance time of 10 seconds,
as cycle time is 80 seconds. No task can be performed in 10 seconds. Thus 10 seconds is
the idle time at Workstation 1. Now we consider Workstation 2. Task B with the longest
operational time can now be performed. Next consider Workstation 3. The task with the
longest operational time is G but G cannot be carried out till C is completed. C depends
only on the completion of A. Tasks C and E are assigned to Workstation 3. They take 80
seconds. Tasks G and F are assigned to Workstation 4, and tasks D and Hare assigned
to Workstation 5 and 10 seconds is idle time.
Table 10.5{b) Tasks Assigned to Work Stations
Work station Task assigned Time Balance time Idle time

1 A 70 10 10
2 B 80 0 0
3 C 40 40
E 40 0 0
4 G 50 30
F 30 0 0
5 D 20 60
H 50 10 10
Efficiency= /!~o x 100 = 95%

Idle time = 5%
Let us now study the Rank Positional Weight method (RPW) with the help of an example.
EXAMPLE 10.3 A product manufactured on an assembly line involves 10 processes.

The tasks, precedence relationships and time required are shown in Table 10.6. What is
the suggested layout for the line using rank positional weights?
Table 10.6
Task Task time (minutes) Task that must precede

A None
B 2 A
C 4 A
D 2 B
E 1 B
F 5 D
G C, E
H 3 F, G
4 G
J 3 H, I
Solution:
Cycle time: Task F takes the longest time of 5 minutes. The cycle time is 5 minutes.
The output will be:
8 x 60 .
Output = - 5- = 96 units
. 26
Number of workstations= 5 = 6
Let us now draw a network diagram as shown in Figure 10.7 to indicate the precedence
4 1 4
C
12
6
21
Figure 10.7 Network of Tasks.

Facility Layout 223
The network in Figure 10.7 shows the precedence relationship. The activities are
shown on nodes. The figure above the node indicates the work content of the activity.
The figure below the node (in bold) indicates the rank positional weight. The rank
positional weight for any task is calculated by summing up the work content on all
paths from the task to the completion of the product. For example, the rank positional
weight of task I is
RPW(I) = Work content of task I + Work content of task J
=4+3=7
Similarly,
RPW(G) = Work content of task G + Work content of task H
+ Work content of task I + Work content of task J
=1+3+4+3=11
Now assign tasks to workstations based on the rank positional weights. The tasks are
assigned in the descending order of rank positional weights, without violating any
time or precedence constraints. Task A has the highest RPW and is assigned to the first
workstation. Task Bis next in RPW. It is also assigned to the first workstation. The next
task as per RPW should be C. However, Task C requires 4 minutes while only 2 minutes
are available. Task D comes next in RPW. It takes 2 minutes and follows B. Since B is
completed and 2 minutes are available, it is assigned to Workstation 1. Similarly, other
tasks are assigned to the successive workstations as shown in Table 10.7.
Table 10.7 Tasks Assigned to Workstations
Workstation Task assigned Time Balance time Idle time

A 1 4
B 2 2
D 2 0 0
2 C 4
E 0 0
3 F 5 0 0
4 G 1 4
4 0 0
5 H 3 2 2
6 J 3 2 2
Efficiency = 626
x 5 x 100 = 86.67%
Idle time = 13.33%

Let us reconsider the problem if the output required was 80 units per day
8 x 60
Cycle time = 8 0 = 6 minutes
Number of workstations= ~6 = 5
New assignment will be as shown in Table 10.8.
Table 10.8
Workstation Task assigned Time Balance time Idle time
A 1 5
B 2 3
D 2
E 0 0
2 C 4 2
G
3 F 5
4 4 2 2
5 H 3 3
J 3 0 0
26
Efficiency = 5 x 6 x 100 = 86.67%
Idle time = 13.33%
Line balancing problems can also be solved through computer packages. WinQSB facility
location and layout module can solve line balancing problems using different rules that
the user may specify. Computer printouts for solution of Example 10.2 as solved by
WinQSB are shown in Tables 10.9 to 10.10.
Table 10.9 Example 10.2 Data Entry

Tadt I
Task Task Time Task I
l1Rmediate Successor
Number Name in second Isolated (V/N) (task number separated by ~I
1 Task 1 70 No 1 2.3.4.5
2 Task 2
- 80
- No 6
3 Task 3
-
40
-- No 6.7
4 Task 4
- 20 No 8
5 Task 51 40 No 8
6 Task 6 30
-- No 8
7 Task 7 50 No 8
8 Task 8)
- 50 No 1 "·
Facility Layout 225
Solution Method = = = = =
• Heuristic Plocedul11
Opliiaizing Beat Bud s-ch
F - Followefa
Fewest 1.-ediale Folowet1
Fitst lo B - Available
Last lo Bee- Available Last lo Be-Available
• longest T alt r - r LongoatTaa r -
M11111 Followets M1111t Followets
Moll 1 ~ 1 1 Folower1 Mo~l-.lial11Folower1
Randoal • RandoOA
Ranked Positional Weight Method Ranked Pomonal Weight Method
Sho<lod Tak Tine Shortest Tak Tine
Table 10.1O Line Balancing Summary for Example 10.2

07-13-2012
20:32:33
line
Station
Nu.be, of
Dpeiat011
Task I Tade l'aslll
Tillle
Assigned N - Tillle Un.»signed
I :t
lcleness
1 1 1 lTask 1 10 I 10 12.50%
2 2 1 2 Task 2 80 0 0.00%
3 J 1 - 3- -
Task 3 40 - -40- 50.00%
4
5 4 --... ,- -
5
7
Task 5 40
Task 7 50
0
JO
0.00%
37.50%
6
1
8
5 - 1
6
4
8
Task 6 30
Task 4 20
Task 8 50
0
60
10
0.00%
75.00%
12.50%
Solved b.11 Heuristic 1Method ---
1
07-13-2012 Uem Ruult

1 Desired C.vcle Time in second 80
z Number of Line Stations 5
3 Number of Required Operators 5
. Total Available Time in s econd 400
5 Total Task Time in second 380
6 Total Idle Time in sec.a nd 20
1 Balance Dela}' (%) 5.00%
Optimal Solution has been obtained by
Primary Heuristic: longest Task Time
Ti"e Breaker: Random
1 2 3 4 5
' .. 'ru):,
3,5
Total Availab e Iim.e. in second= 400 Total Task Time in second= 380
Total Idle Time in second= 20 Balance Delay= 5.00%
Ootimal Solution bv Primai-v Hewistic: Lone:est Task Time Tie Breakel': Random
Figure 10.8 Final Line Balancing Layout for Example 10.2.
10.8 MACHINE BALANCING IN GROUP TECHNOLOGY

Cellular or group technology uses hybrid layouts and draws the advantages of both
the process and product layout. Machines and workers are grouped together to form a
cell which produces a family of products that have similar processing requirements, not
necessarily in the same order. In such a case, the composition of the machines in a cell
should be so balanced that work flows smoothly from one machine to another without
intermediate queues building up or there being excessive idle time at any workstation
in the cell. Let us illustrate this with the help of examples.
EXAMPLE 10.4 A producer of electronic equipment needs to add a component

subassembly operation that can produce 80 units during a regular 8 hour shift. The
operations have been designed for three activities with times as shown in Table 10.11.
Table 10.11
Operation Activity Std time (minutes)
A Mechanical assembly 12
B Electric wiring 16
C Testing 3
(a) How many workstations in parallel will be required for each activity?
(b) Assuming that workers at each station cannot be used for other activities in the
plant, what is the appropriate percentage of idle time for this subassembly operation?
. . 8 x 60
Solution: Cycle tune =8 0 = 6 minutes
Mechanical assembly:
1 unit is produced in 12 minutes
80 units will be produced in 12 x 80 = 960 minutes
Time available 8 x 60 = 480 minutes
960
Number of workstations required = 480 = 2
Facility Layout 227
Electric wiring:
1 unit is produced in 16 minutes.
1280
Number of workstations required = 480 = 3
Testing:
1 unit is tested in 3 minutes.
240 1
Number of workstations required = 480 = 2 i.e. 1
Have 2 workstations for mechanical assembly
3 workstations for electric wiring
1 workstation for testing
Idle time:
Total number of workstations = 6
Idle time at mechanical assembly workstations is 0
Idle time at electric wiring workstations is 2 minutes
Idle time at testing workstation is 3 minutes
Idle time = 6 ~ 6 x 100 = 13.8%

EXAMPLE 10.5 A manufacturing unit makes three products A, B and C. The times
required for set up and operations on different machines, lot size and the total quantity
required in a month are given in Table 10.12.
Table 10.12
Equipment Activity Time required in minutes

A B C
Centre lathe Set up 30 55 40
Operations 2 2.5 1.5
Milling Set up 45 30
Operations 8 4
Grinding Set up 50 54
Operations 10 7.2
Lot size 350 400 600
Quantity required in month 1750 4500 3000
Assuming that a month has 4 weeks and 45 hours of work is put in every week, how
many workstations for each activity should be provided?
Solution:
Lathe
Product A
.
Number of lots reqmred = 1750
350 = 5
Set up time for 5 lots = 5 x 30 = 150 minutes
Time for operations = 1750 x 2 = 3500 minutes
Total time = 3650 minutes
Product B
. d = 4500 -_ 12
N umb er o f 1o t s reqmre 400
Time for operations = 4500 x 2.5 = 11250 minutes
Product C
.
600 = 5
Total time required = 3650 + 11910 + 4700 = 20260 minutes
Time available = 4 x 45 x 60 = 10800 minutes
20260
Number of lathes required = 10800 = 2
Milling machines
Product A
.
350 = 5
Product B
.
Number of lots reqmred= 4500
400 = 12
Total time required = 14225 + 18360 = 32585 minutes
32585
Number of milling machines required = 10800 = 4
Facility Layout 229
Grinding machines
Product A
Number of lots required = 1750
350
=5
Product C
.
600 = 5
Total time required = 17750 + 21870 = 39620 minutes
N umb er of . d.mg mac h.mes reqmre
gnn . d = 39620 = 4
10800
Provide two centre lathes, four milling machines and four grinding machines
10.9 SERVICE LAYOUT

Most service organisations use process layout because of the need for customisation and
the variability in the customer's request for service. While manufacturing organisations
may layout on the basis of reducing or minimising the flow of materials, the objective
while laying out services may be different. It may be to minimise the flow of customers
or flow of paperwork. In retail stores, the objective may be to maximise profits per unit
of display space. It is in keeping with this aim that milk and bread may be stocked at
different ends of a store, inducing a customer to walk through the display area that might
prompt additional sales. In such cases, instead of minimising flow of customers, it may
be more beneficial to an extent to increase it. The objective in this case may be translated
as maximise product exposure. However, this does not imply that the store should give
the look of a warehouse and customers play the role of order pickers.
It is necessary to understand the effect of physical surroundings on customers and
employees while laying out service facilities. The term servicescape is often used to
describe these. The servicescape comprises three elements-ambience, spatial layout and
functionality, and the signs, symbols and artefacts.
Ambience: This refers to the background characteristics such as noise level, music,
lighting, colours, temperature, and scent that can affect the employee's performance and
the customer's perception of the service. Generally, the longer the customers stay in a
service facility the more they spend, leading to enhanced profits for the establishment.
Dim lighting in theatre corridors, subtle lighting and music in restaurants serving special
cuisine, a well lit store, spotlessly clean hospital corridors and so on add to the ambience
of a facility. The ambience is dictated by the type of service facility. It would be obvious
that comfortable seating for a leisurely meal would be totally out of place at a fast food
establishment.
Spatial layout and functionality: The spatial layout is important to direct the flow
of customers. Even the size of the aisles is important. Some stores ensure that the size
of the aisle is such that a shopping cart cannot be turned around in them, ensuring a
smooth flow through the aisles and ensuring maximum product exposure to the customer.
Customer's attention can be drawn to focal points by the use of lighting, colour, signs
and artefacts. Secondary and tertiary aisles can be laid at an angle to the main aisle. This
provides the customer with a much clearer view of the merchandise on display. The
related items of merchandise are usually grouped together. This associative categorisation
disregards the physical characteristics of the products. Deparbnental stores generally follow
such grouping of merchandise by association. For example, a floor may be dedicated to
women's apparel. All categories of women's apparel are available on the floor. Different
sections may be created for nightwear, formalwear, innerwear, casual clothes and so on.
Consumer's behavioural aspects must be kept in mind. For instance, customers tend to
follow a perimeter pattern in their shopping behaviour. Placing high profit items along the
walls of a store will enhance the store's profitability. Items placed at the ends of aisles always
sell better than if they are placed in the inner positions. Locations nearest to the entrances
and front window displays draw the attention of the customer and have high sales potential.
Signs, symbols and artefacts: These refer to the parts of the service that have social
significance. For example, the size of the work table generally indicates the importance
of a person in the organisation. Some organisations develop their own signs and symbols
which are peculiar to them. The receptionist's desk is always near to the entrance of the
establishment.
A good layout gives an organisation a competitive edge and helps in increasing its
profits through better flow of work, materials, persons and information.
10.10 SUMMARY
Layout refers to the placements of deparbnents, workgroups within deparbnents, work stations
machines and so on. Layout depends on the process structure employed and the technology
used. A good layout ensures better flow of work, materials, persons and information.
Flexibility, flow of work, materials and persons, use of space, accessibility of maintenance
points and the working environment provided by the layout need to be considered while
making layout decisions. Layouts need to be flexible enough to respond to changing
circumstances and ensure that work, persons and materials flow along designated patterns.
The flow of materials between deparbnents should be kept to the minimum. Space should
be viewed as volumetric space rather than floor area. Overhead space must be utilised to
the extent possible. While positioning machinery and material stocks, special care should be
taken that it is easily accessible for maintenance and repairs. The working environment has
to be conducive to higher productivity. Proper lighting, colour schemes, comfort of workers,
safety and security are some of the issues that should be addressed while planning layouts.
There are generally three types of basic layout structures-process based layout,
product based layout and fixed position layout. Hybrid layouts are used in group or cell
technology.
Facility Layout 231
In process based layouts machines and equipment, workgroups or personnel who
perform the same task are grouped together. A metal fabrication workshop which has a
machine shop, a drilling shop, a milling shop, a grinding and polishing shop, shipping
and receiving area, painting shop and so on is a typical example of process layout. Most
service facilities follow a process layout. Hospitals, deparbnental stores, universities and
so on follow a process layout. Process layouts are useful for batch production.
In a product layout machines and equipments are arranged according to the sequence
of operations to be performed for making the product. Back flow of materials is avoided.
Work flow and material flow in effect follow a continuous line. Cement plants, steel
plants, chemical works and so on are examples of product layout. Product layout is also
adopted when the task involves assembling and some fabrication. Automotive factory
assembly lines are examples of product layout. All assembly line operations are product
layouts. The product layout is useful for flow and continuous methods of production.
Fixed layouts are used for project type operations. Due to the bulk and weight of the
product, the product forms the hub of activities and equipment and work teams come
to the product location and work on it to add value. Ship building, generator turbines,
bridge construction and so on are examples of fixed layout.
Hybrid layouts are used in cell or group technology to make a family of products
which require similar operations and processes but not necessarily in the same order.
Process layouts aim at reducing load distance between deparbnents. The load distance
is the product of the load being moved between deparbnents and the distance between
them. If the cost of moving the loads is different, the loads can be weighted with the
cost. In case loads cannot be quantified, the systematic layout planning method can be
employed to tackle layout problems.
An assembly line is a typical example of product layout. In an assembly line an
attempt is made to ensure that time required to perform tasks at each workstation is the
same. This is called line balancing. Cycle time is the time taken to produce one unit of
the product on the assembly line. It is dictated by the required output subject to its being
equal to or greater than the longest time required for completing any work element of
the product. The steps in line balancing are:
1. Define the precedence relationship
2. Calculate the cycle time
3. Calculate the minimum number of workstations required
4. Assign tasks to work stations
5. Calculate the efficiency of the line
Service layouts generally follow a process layout but the objective is to maximise profit
per unit area of display. The layout is designed to maximise the flow of customers and
maximise their exposure to goods on display to induce sales. The servicescape consisting
of the ambience, spatial layout and functionality, and the signs, symbols and artefacts
affect the behaviour of customers. Layout of aisles, colours, noise, music, lighting and
so on are all important considerations when laying out service facilities.
Good layouts increase productivity and profitability and provide a competitive edge
to the organisation.
ICONCEPT QUIZ I
State True or False
1. Facility layout refers to the place where a facility is located.
2. Layout decisions must be taken before a facility is built.
3. Load distances moved between deparbnents must be kept minimal.
4. Product layout is particularly suited for batch production.
5. In a product layout all machines which perform the same function are grouped
together.
6. Line balancing is important in process layout.
7. Line balancing aims at reducing the number of work stations.
8. Cycle time depends on the desired output.
9. Cycle time must not be less than the longest time required for completing a work
element.
10. Fixed position layout is ideally suited for group technology.

1. For batch production the ideal layout is:
(a) Process layout. (b) Product layout.
(c) Fixed layout. (d) Hybrid layout.
2. The ideal layout for automobile production and assembly is:
3. The ideal layout for a cement plant is:
4. The aim of line balancing is to:
(a) Group all machines performing the same operation together.
(b) Reduce the number of work stations.
(c) Ensure that the work content performed at each station is nearly equal.
5. Deparbnental stores follow a:
6. In a process layout:
(a) Equipment and work processes are arranged in progressive steps in which
the product is made.
(b) All machines and equipment which perform the same function are grouped
together.
Facility Layout 233
(c) The product remains fixed and worker teams and equipment move to the
work site.
(d) Dissimilar machines are grouped together into a work centre.
7. A process layout aims to reduce:
(a) The time spent at each work station.
(b) The number of work stations.
(c) The cost of inter deparbnent movement.
(d) The cycle time.
8. In self help retail stores, the layout aims to:
(a) Minimise the flow of work material.
(b) Minimise the flow of customers and paperwork.
(c) Minimise the time taken by a customer in the store.
(d) Maximise product exposure.
9. Hybrid layout is used for:
(a) Job shop production method.
(b) Batch production.
(c) A family of products requiring similar operations and processes but not
necessarily in the same order.
(d) Flow production.
10. The cycle time is:
(a) The time required to produce one unit based on the level of production
required.
(b) The longest time required for completing a work element.
(c) The time required to produce one unit of the project dictated by the required
output subject to its being equal to or greater than the longest time required
to complete any work element of the product.
Fill in the blanks:
1. Layout depends on the _ _ _ _ _ _ _ employed and the technology used.
2. The flow of materials between deparbnents should be kept to the _ _ _ __
3. When positioning machinery, its _ _ _ _ _ _ for maintenance and repairs
should be considered.
4. A metal fabrication workshop is a typical example of _ _ _ _ _ based layout.
5. Universities follow a ______ layout.
6. All assembly line operations are _ _ _ _ _ _ layout.
7. The objective of service layouts is to _ _ _ _ _ _ _ profit per unit area of
display.
8. A good layout ensures better flow of work, - - - - ~ persons and _ __
9. While laying out _ _ _ _ _ _ _ _ _ _ _ consumer behaviour aspects should

be considered.
10. Space should be considered _ _ _ _ _ _ and not just as floor space.
IQUESTIONS I
10.1 What factors would you consider while planning the layout of your facility?
10.2 What is the difference between a product based layout and a process based layout?
10.3 What are the peculiarities of layout of a big retail store?
10.4 An office has six deparbnents laid out as shown in the following table. The loads
between deparbnents are also shown in the table.
Layout of Six Departments
A B C
F E D
The Loads between Six Departments

Dept. B C D E F
A 50 0 200 100 0
B 0 0 0 0
C 50 150 50
D 0 100
E 0
The office administration wishes to interchange Deparbnent F and B. What would

be the impact of this change? Do you have a better suggestion?
10.5 Seven areas in a factory will receive stores from a receiving dock which can be
located either at X or at Y. The number of loads to be moved per day is given in
the table (in parenthesis). The distance to X and Y are also given. Which location
do you recommend?
A B C
(90) (X:2, Y:4) (70)(X:3, Y:3) (40)(X:4, Y:2)
D E F
(30)(X:1, Y:3) (80)(X:2, Y:2) (60)(X:3, Y:1)
X G y
(75)(X:l, Y:1)
10.6 The desired output for an assembly line is 360 units per day. The assembly line
will operate for 450 minutes per day. The following table gives the task times
and the precedence relationship.
Facility Layout 235
Task Immediate predecessor Time (in seconds)

A 30
B A 30
C A 35
D C 35
E B 65
F B 15
G E, F 40
H D,G 25
Balance the line applying the longest operational time rule.
What is the efficiency of the line?
10.7 The tasks given in following table are to be performed on an assembly line in the
sequence specified.

A 40
B ~
C B 20
D C 20
E C 45
F E 25
G D 10
H A,F,G 35
(a) What is the cycle time?
(b) Balance the line using LOT. What is the line efficiency?
(c) If the required output is 400 units per day, what will be the cycle time?
(d) What changes will occur in the balancing of the line using LOT? What will
be the efficiency of the line?
10.8 The tasks given in following table are to be performed on an assembly line.

A 20
B A 7
C B 22
D B 20
E D 10
F C 15
G E, F 16
H G 8
(a) If the line works for 7 hours per day and the demand is 800 units per day,
what is the cycle time?
(c) What changes would you make if the demand fell to 750 units per day?
(d) What changes would you make if the demand increased to 1000 units per
day?
10.9 The tasks given in following table must be carried out to produce a part.

A 50
B A 120
C A 40
D C,F 80
E B 100
F E 20
G H 80
H B 60
J B 30
K D, G, J 50
(a) If the cycle time is 120 seconds, what is the minimum number of stations
required?
10.10 The activities given in following table have to be completed to produce a product.
Task Immediate predecessor Time (in minutes)

A 8
B A 5
C 6
D B,C 10
E D 2
F 4
G 5
H E, F, G 7
J H 2
K H 9
L J, K 3
Facility Layout 237
(a) Set up an assembly line to produce 25 units per day. What is the line
efficiency?
(b) What is the difference in results using LOT and RPW methods?
10.11 The following activities are involved in producing a modular writing desk.

A 0.1
B A 0.6
C B 0.5
D B 0.4
E B 0.8
F C 0.3
G F 0.7
H G 0.5
J E 0.4
K D,H 0.9
L J, K 2.0
Balance the line to produce 200 units per day. What is the line efficiency?
10.12 A product involves the following activities.

A 1
B A 4
C A 2
D B 2
E B 1
F D 5
G C,E 1
H F, G 4
J G 3
K H, J 3
At present the assembly line is set up as shown. Its output is 84 units per day.
Station 1 2 3 4 5 6 7
Tasks A,C D, E B, G F H J K
Worker Anu Bina Chaya Durga Ekta Fatima Gauri
Bina has idle time and enjoys chatting with Anu. Fatima and Gauri complain
that their jobs tend to get boring. Ekta has never worked at another workstation.
Chaya does not like to perform task G. The management wants to increase the
efficiency of the line and reduce manpower. What suggestions would you give
to the management? What reactions do you expect from the employees to your
suggestions?
10.13 An assembly line needs to produce 15 units per hour and only four workstations
can be established. Given the timings and precedence relationships, how would
you set up the line? What is the line efficiency?
A 3
B 2
C 1
D A,B,C 1
E C 3
F E 2
G E 3
Capacity and Equipment Selection
Capacity never lacks opportunity. It cannot remain undiscovered because
it is sought by too many anxious to use it.
JACQUELINE COCHRAN
LEARNING OBJECTIVES
• Understand the importance of capacity
• Examine the use of decision tree analysis for capacity and plant selection
• Study the use of linear programming for solving resource allocation problems
• Understand the economic analysis required for equipment selection decisions
• Study equipment balancing in cases where output of one machine is the
input of the next
11.1 INTRODUCTION
Capacity is an important aspect of the facility that we set up. If the capacity provided for
is less, we will lose the ability to cash in on opportunities. We shall lose the opportunity
that an increase in market demand may present. On the other hand, if capacity is too much,
we will bear the cost of idle resources. The establishment of facilities entails heavy capital
outlays which are generally irreversible. It is imperative that adequate consideration is
given to capacity. It is equally important to choose the right type of equipment. This will
depend on the technology deployed and on the changes anticipated in the future. Another
aspect is the balancing of equipment. Often, the output of one machine forms the input for
the next machine and so on. It is important that machines are balanced so that capacity
is neither under utilised nor falls short of requirements. A correct balance of equipment
will ensure optimum productivity and give the firm a competitive edge over its rivals.
239
11.2 CAPACITY
Capacity can be defined as the rate of productive capability of a facility. Capacity depends
on the demand for the product or service. The demand is often related to location. For
example, the demand for banking services in an urban area is likely to be much higher
than the demand in rural area. Capacity planning involves the following activities:
1. Assessing the demand and capacity requirements
2. Evaluating current capacity
3. Generating alternatives to modify capacity
4. Evaluating alternatives on the basis of financial, economic and technical analysis
5. Selecting and implementing the most suitable alternative
Capacity is simple to measure in some cases. For instance, the capacity of a car factory
may be expressed as number of cars per year. It may be argued that the car factory may
be producing different models which may take different time to produce and thus affect
capacity. A concept of aggregation can be used in such cases. Aggregation implies using
a standard car as a representative average model and expressing capacity in terms of this
standard product. Capacity for Amul Cheese may be stated as tons of cheese per year.
In these cases the capacity is being related to output.
In cases where the output is too complex, capacity may be stated as in terms of
input. For instance, an airline's capacity may be expressed by the total number of seats;
a hospital's capacity is generally stated as the total number of beds available and so on.
Future capacity needs can be viewed from a long-term or short-term perspective. The
short-term view is based on a time horizon varying from twelve to eighteen months. The
forecast of demand for different products is based on the past data and the actual firm
orders received, and the existing capacity is adjusted to meet the demand. Short-term
measures usually include under utilisation or over utilisation of resources. Long-term
requirements are more difficult to forecast. Such forecasts must also take into account
technological forecasts, marketing plans, product life cycles and so on. Long-term
requirements can be met by expansion or by divesting and disposing off of the extra
capacity and resources that are currently available. Various techniques can be used to
evaluate options.
11.3 DECISION TREE ANALYSIS

The decision tree is a means of representing the sequential, multistage logic of a decision
problem. The decision tree is an offshoot of probability trees. It uses two symbols-a
box to represent a decision node and a circle to represent a chance node. The outcomes
emanating from chance nodes are the various events that may occur. These are referred
to as states of nature and the decision maker has no control over them. Probabilities
are associated with their occurrences. Let us see how a decision tree is constructed and
analysed with the help of a simple example. The real managerial value of the decision
tree analysis is obtained when it is used on more complex kind of problems which we
shall illustrate subsequently.
Capacity and Equipment Selection 241
EXAMPLE 11.1 Alfa Industries has to decide whether to set up a large plant or a
small plant for its new range of refrigerators. A large plant will cost the company ~250
lakhs while a small plant will cost ~120 lakhs. An extensive market survey and a cost
profit volume analysis carried out by the company reveal the following estimates for
sales over the next 10 years.
High demand Probability = 0.5
Moderate demand Probability = 0.3
Low demand Probability = 0.2
1. A large plant with high demand will yield an annual profit of ~100 lakhs.
2. A large plant with moderate demand will yield an annual profit of ~60 lakhs.
3. A large plant with low demand will lose ~20 lakhs annually because of production
inefficiencies.
4. A small plant with high demand would yield ~25 lakhs annually, taking into
account the cost of lost sales due to inability to meet demand.
5. A small plant with moderate demand will yield ~35 lakhs, as the loss due to
lost sales will be lower.
6. A small plant with low demand will yield ~45 lakhs annually, as the plant
capacity and demand will match.
Solution: Let us now draw the decision tree. We start with a decision node and draw
two branches representing the decisions to be taken, namely build large plant, and build
small plant as shown in Figure 11.1.
Build large plant
Build small plant
Figure 11 .1 A Decision Tree with Two Branches.
If we build a large plant, it can result in three outcomes-the market demand can
be high, moderate or low. The same outcomes will occur even if we build a small plant.
These outcomes are now added to the tree at the end of chance nodes as shown in
Figure 11.2.
We have added the probabilities for each state of nature and have also added the
payoff for each outcome. This step is called rolling out the tree. In order to calculate the
value of the decisions we now roll back the tree.
The expected value at chance Node 2 can be computed as follows:
EV = 0.5 X 100 + 0.3 X 60 + 0.2 X (-20) = 64
High demand
100
Expected val ue 0. 5
39 0 Moderate dem and
60
Bu ild large 0. 3
plant Low de mand
-20
0.2
Hi gh dema nd
25
Expe cted value 0. 5
20 0 Mode rate demand
35
Build smal l 0.3
pl ant Low demand
45
0.2
Figure 11.2 A Decision Tree with Added Branches.
The expected value in 10 years is ~640 lakhs. The cost of the large plant is ~250 lakhs.
Hence net expected gains at end of ten years is ~390 lakhs (640 - 250). We write the
expected value of the node on the tree.
Similarly we can calculate the expected value of chance node 3.
EV = 0.5 X 25 + 0.3 X 35 + 0.2 X 45 = 32
The expected value in ten years is ~320 lakhs. The cost of building a small plant is
~120 lakhs. Hence the net expected value of the decision is ~200 lakhs. The chance node
with the higher value is carried backward to the decision box and the decision taken
accordingly. The decision in this case is to build a big plant and the expected value is
~390 lakhs. Now let us take a little more complex problem.
EXAMPLE 11.2 A company is introducing a new product. It has the option of setting
up a commercial plant, or a pilot plant at present and a commercial plant later depending
on the performance of the product. It has been estimated that the present cost of setting
up the pilot plant will be ~2 lakhs and for a commercial plant will be ~21 lakhs. However,
if the commercial plant is to be set up three months later after observing the performance
of the product, then it will cost ~25 lakhs.
It has also been estimated that the probability of the product giving a high yield during
the pilot stage is 0.9 and that of giving a low yield is 0.1. If the product is introduced
commercially without going through a pilot plant stage, it is expected that it will give a
high yield of profits with a probability of 0.7. If the pilot plant does show a high yield,
then the probability that the commercial plant will also give a high yield is 0.85; but if
the pilot plant gives a low yield the probability that the commercial plant will give a
high yield is only 0.1. The estimated profits from high yield at the commercial stage are
~122.5 lakhs and if the yield is low the company will suffer a loss of ~15.25 lakhs.
Solution: Let us first set up a decision tree as shown in Figure 11.3 to depict the problem.
The decision required at decision node 1 is to build the commercial plant or to build
the pilot plant. If we build the commercial plant, then at the chance node 2 there are 2
outcomes: high yield with a probability of 0.7 and low yield with a probability of 0.3.
Build High
commercial 81 .17 122.5
0.7
plant
-21
Low
60.17 -15 .25 Build High
0.3
commercial - - - - - 1 22.5
plant 0.9
76 .84 -25
High Low
Build 76.84 - - - - - -15.25
0.9 0.15
pilot Stop
plant 0
Stop
0
0
Low High
Build commercial - - - - - 1 22 .5
0.1 0.1
plant
-25
Low
-26.47 - - - - - -15.25
0.9
Figure 11.3
The pay-off associated with the high yield is ~122.5 lakhs and with low yield a loss of
~15.25 lakhs. If we decide to build the pilot plant, then the outcomes at chance node 3
are a high yield with a probability of 0.9 and a low yield with a probability of 0.1. If
the yield is high, we have to take a decision at decision node 4 whether to build the
commercial plant or stop. If we build the commercial plant, then it leads to chance node
6 whose outcomes are a high yield with a probability of 0.85 and a low yield with a
probability of 0.15. Even if the yield of the pilot plant is low, we have to take the decision
at decision node 5 whether to build the commercial plant or stop. Again if we build the
commercial plant, we have outcomes at chance node 7 of high yield with a probability
of 0.1 and a low yield with a probability of 0.9.
Having rolled out the tree, we have now to roll it back. Let us calculate the expected
value at nodes 2, 6 and 7.
EV at node 2 = 0.7 x 122.5 + 0.3 x (-15.25) = 81.17
EV at node 6 = 0.85 x 122.5 + 0.15 x (-15.25) = 101.84
EV at node 7 = 0.1 x 122.5 + 0.9 x (-15.25) = -1.47
At node 2 we must subtract ~21 lakhs that is the cost of building the commercial plant.
The expected value is ~60.17 lakhs.
At node 6 and node 7 we must subtract ~25 lakhs which is the cost of building the
commercial plant. The expected value at Node 6 is ~76.84 lakhs and ~26.47 lakhs at
node 7.
It is obvious that since the result at node 7 is less than zero which would be the result
if we stop at this stage, we should select the option of stopping, giving us an expected
value of 0 at decision node 5.
At decision node 4 the expected value is f76.84 which is brought down from chance
node 6 as it is greater than zero the expected value if we stop. The decision at this node
is to build the commercial plant.
Now calculate the expected value at node 3.
EV at node 3 = 0.9 x 76.84 + 0.1 x 0 = 69.16
We should now subtract f2 lakhs from this figure as this is the cost of building the pilot
plant. We get expected value at node 3 is f67.16 lakhs.
Let us now work backwards to node 1. The expected value at node 2 is f60.17 lakhs
and that at node 3 is f67.16 lakhs. Clearly the path to node 3 is a better decision. We
should build a pilot plant. If the yield of the pilot plant is high, we should build the
commercial plant after three months.
Decision trees can be used for analysing sequential decisions which are dependent
on the outcome of the previous decisions. As can be seen from the foregoing examples,
capacity problems of a long-term nature can be tackled using decision trees.
11.4 ALLOCATION OF CAPACITIES THROUGH LINEAR PROGRAMMING

Companies making multiproducts are often faced with the problem of allocating capacities
to products competing for them. Generally, the object in such cases is to reduce costs
or to maximise the contribution to profits. Linear programming involves setting up the
problem in the form of a set of linear equations and then solving them graphically, if
only two variables are involved or by using the simplex method when more than two
variables are involved. A detailed solution by the simplex method is beyond the scope of
this text. However, software packages are available which can solve linear programming
problems. WinQSB has a module to solve linear programming problems. They can also
be solved through Microsoft Excel's Solver function. Let us see how to use the Excel's
Solver function to solve such problems with the help of an example.
EXAMPLE 11.3 A plant is engaged in the production of two products which are
processed through three deparbnents. The number of hours required to finish each are
given in Table 11.1.
Table 11.1 (a) Processing Departments and the Required Time
Machines Products Maximum hours

A B available per month
Lathe 7 3 1600
Milling 8 6 1600
Grinding 9 4 1600
If the profit of the products is f60 per unit of A and f40 per unit of B, what quantities
per month should be planned to maximise profit?
Solution: Let A be the number of units of Product A
B be the number of units of Product B.
The objective is to maximise the profits. 1 unit of product A yields ~60, therefore A units
will yield ~60A. Similarly B units of product B will yield a profit of ~40B. The total profit
would be the sum of the two and can be written as:
Max Z = 60A + 40B
Since the number of hours available in each department is restricted, these will pose a
restriction on the number of units of Products A and B that can be made. Let us consider
the lathe operation. A unit of product A takes 7 hours, A units will require 7A hours.
Similarly B units of product B will require 8B hours. The total time available on the lathe
is 1600 hours. It is obvious that the total time required for products A and B cannot
exceed 1600 hours. This can be expressed as:
7A + 3B::; 1600
We can form similar relations for the milling and grinding operations. The complete
model formulation is written as:
Max Z = 60A + 40B
subject to
7A + 3B::; 1600
8A + 6B::; 1600
9A + 4B::; 1600
A, B;::: 0
The problem is now set up on the Excel worksheet as shown in Table 11.l(b). The target
cell is D10 which contains the formula for the total profit (=D9*D3+E9*E3). The cells CS to
C7 contain the formula for the number of hours used. For instance, cell CS contains the
formula (=DS*D3+ES*E3). The cells D3 and E3 are to be changed to achieve the results.
Table 11 .1 (b)
I A B C D E
1
2 A B
3 Nos Manufactured 0 0
Hours
Machine Hours Used Hours Required per unit
Available
4
5 Lathe 1600 =$O$3*O5+$E$3*E5 7 3
6 Milling 1600 =$O$3*O6+$E$3*E6 8 6
7 Grinding 1600 =$O$3*O7+$E$3*E7 9 4
8
9 Profit 60 40
10 Total profit =D3*O9+E3*E9
11
The Excel Solver application appears in the Tools menu. In case it does not appear,
then the required Add in may not have been installed when Excel was installed on your
computer. The Solver Add in can be installed from the original disk of Excel. The Solver
can then be invoked from the Add in Menu under the Tools option. Once the Solver is
invoked, a screen as shown in Figure 11.4 will appear.
S~lver .Par_r1i:111eters &LJ~

S!ll_tTarge Cell: /'$D$10' ' ~o1ve
EqLlal To: f• Max MtQ. r' Y.alue of: Jo Close
~ Chany,ng Cells-:
l$D$3;$E.$3
5!!_bject to ~he Constn;rnts;
C$S:$d7 <- t8$5:$e17 ·----·-- -·-·-·--·-: _J
Be~tAII
Figure 11 .4
The target cell is D10, which is to be maximised by changing cells D3 to E3. The
constraint has been added; cells CS to C7 must be less than or equal to B5 to B7. The
Options menu is then invoked.
The screen as shown in Figure 11.5 will appear. Choose the Assume Linear Model
and Assume Non-Negative options. Click OK. The solver screen reappears. Click on Solve
and the solution is given in the spreadsheet as shown in Table 11.l(c).
~ x iime: [1mll seconds OK I

{ter.itiol"ISI 1100 Cancel
I
e1·ecisio111 jo.000001 !,oad Model•.,.
I
Tol~ance: lo,os: % ~ave Model...
J
Con~ergt9nce: lo,OHJOl !:ieJl!l I
l
P' AssLlrtlc Linear' [1od<!I !,be Automal:it Scaling
P' rmu 1111.ln-N .fi!:iUVI:' r Show Jter atlon B,esult.s
Esb!mates Derlv~lve$ Search
• T9.nge11t • Eorward •• tii'J t"Oll
C ~adr-al!tc C ~~ntral C C£11j,j gate
Figure 11 .5
Table 11.1(c)
A B C D E
1
2 A B
Nos
3 manufacture 145.4545 72.72727
Hours Hours required per
4 Machine available Hours used unit
5 Lathe 1600 1236.363636 7 3
6 Milling 1600 1600 8 6
7 Grinding 1600 1600 9 4
8
9 Profit 60 40
10 Total profit 11636.36
11
The solution is to make 145.45 units of product A and 72.73 units of product B. The
total profit will be ~11,636.36. Linear programming gives fractional answers. In case
integer answers are required, integer programming is used.
11.5 SIMULATION
Monte Carlo simulation can be used to solve capacity problems by simulating different
scenarios. The technique is explained in the supplement on simulation.
11.6 ECONOMIC ANALYSIS FOR EQUIPMENT SELECTION

Various methods can be selected for economic appraisal of alternatives. The payback period
method can be used when the firm is cash strapped and it is important that the capital
invested be quickly recovered. Another method of economic and financial appraisal is
the net present value. The technique involves computing cash flows over the life of the
equipment and then taking their net present value. The cash flow stream is based on the
expected revenues and costs over the life of the equipment. It is important to understand
the various costs involved. The equipment has a standing cost and a running cost. The
standing cost is the cost of procuring and installing the equipment. The running cost
refers to the cost of operating the equipment in order to generate the required product
or service. This includes the cost of power and supplies, the direct cost of operations, the
cost of ancillary labour, and the cost of upkeep and maintenance. In addition to this, there
is depreciation and the cost of obsolescence which must also be taken into consideration.
The operational life of the equipment must also be borne in mind. This is the
economic life of the equipment or the period up to which it is most economical to run
the equipment. The equipment will have to be replaced after it reaches the end of its
economic life. Replacement models explained in annexure to Chapter 4 can be used for
carrying out this appraisal.
A detailed description of economic analysis is beyond the scope of this text and is
available in texts on financial management and capital budgeting.
11. 7 EQUIPMENT BALANCING

Capacity is one of the major factors affecting the choice of equipment. However, other
factors are equally important and cannot be ignored. The new equipment should be
compatible with existing facilities. This will help in the provisioning of spares, maintenance,
operator training and repairs. If the new equipment is totally different than the existing
one in the organisation, costs will increase.
Often new equipment can only be utilised if a wide range of associated equipments
is available. The availability or otherwise of associated equipment may become a decision
criteria.
Reliability, ease of installation, ease of maintenance and safety are some other factors
that influence the choice of equipment. Availability of spares and technology updates
become extremely important in cases of imported equipment or technology. Technology
transfer is to be considered carefully and should be compatible with the prevailing
environment, and be capable of easy adaptation. Payment terms also affect decisions.
It is important that equipment should be balanced in terms of capacity throughout
the process. Let us illustrate this with an example.
EXAMPLE 11.4 Apsara Spinners is proposing to set up a new cotton yarn spinning
unit to produce cotton yarn. The unit has been given a license for 2000 spindles capacity.
The promoters are new to this field and after discussions with some friends have decided
to install the following machinery:
(a) Blow room 2
(b) Carding machines 3
(c) Draw frames 2
(d) Simplex frames 3
(e) Ring spinning frames 5
The technical details of the machinery working at 100% rated capacity are as given in
Table 11.2.
Table 11.2
Machine Capacity per 8 hours shift Wastage Capacity utilisation/Efficiency
Blow room 1200 kg 7% 80%
Carding machine 150 kg 5% 85%
Draw frame 325 kg 2% 75%
Simplex frame 4 kg per spindle 1% 85%
(120 spindles)
Ring spinning frame 200 gm 3% 88%
(450 spindles)
Capacity utilisation of the ring spinning frame is 90%.

Is the proposed machinery balanced in terms of output? What equipment do you
recommend purely from the technical point of view of balancing the output?
Solution: Before attempting any calculations of output, let us familiarise ourselves with
the technical details of the process.
Raw cotton is sent to the blow room where with the help of scutchers the fibrous part
is removed from the woody pods by beating. The fibrous cotton is then sent to a carding
machine. The carding machine is provided with a row of teeth used to disentangle the
fibres of the cotton yarn. After carding the cotton is passed through draw frames. The
draw frame draws the cotton into thick strands. These are then spun into thinner strands
on the simplex frame spindles. The output of the simplex frames is fed to the ring frame
spindles which complete the process of spinning the cotton into the required quality of
yarn or thread. It can thus be seen that the output of one machine is the input of the
next. We can represent the process diagrammatically as shown in Figure 11.6.
Blow room ,__ Carding

machine - Draw frame ,__ Simplex
frame
,__ Ring spinning
frame -
Figure 11.6 Diagrammatic Representation of Spinning Process.
From where should we start? The licensed capacity is 2000 spindles. This means that
the final spindles producing the yarn cannot exceed 2000. These are on the ring spinning
frames.
Ring spinning frames: Each ring spinning frame has 450 spindles.
Number of ring spinning frames permissible= 2000/450 = 4
(5 frames will result in exceeding the licensed capacity)
Each spindle on a ring spinning frame processes 200 gm at 100% capacity, but it
works at 90% capacity.
Total production per shift (including wastage)
= Production x weight x machine efficiency x capacity utilisation
= 4 X 450 X 0.200 X 0.88 X 0.90 = 285.12 kg
This must be the input at the ring spinning frames, and should correspond to the output
of the Simplex frames.
Simplex frames: Since there is 1% wastage at the simplex frame, its input should be
=2 ~~cj! 2 = 288 kg
Let the number of simplex frame machines be x. Then
X X 120 X 4 X 0.85 = 288
x = 0.71 or 1 machine
Draw frames: Similarly we can compute the number of draw frame machines required.
Since there is 2% wastage at the simplex frame, its input should be
288
= 0.98 = 293.88 kg
Let the number of draw frame machines be x. Then
X X 325 X 0.75 = 293.88
Carding machines: Similarly we can compute the number of carding machines required.
Since there is 5% wastage at the simplex frame, its input should be
= 2~~9: 8 = 309.35 kg
Let the number of draw frame machines be x. Then
XX 150 X 0.85 = 309.35
Blow rooms: Similarly we can compute the number of blow rooms required.
Since there is 7% wastage at the blow room, its input should be
Let the number of blow rooms be x. Then

X X 1200 X 0.80 = 332.63
x = 0.35 or 1 blow room
The correct balanced combination should be:
1. Blow room 1
2. Carding machines 3
3. Draw frames 2
4. Simplex frames 1
5. Ring spinning frames 4
Production or operations are transformation processes which transform inputs into
goods or services. The facility plays an important role in this transformation. Not only
is it important to locate the facility at the right place and to lay it out properly but it is
equally important to choose the right equipment which will have capacity compatible
with the forecast demand and will be economically viable.
11.8 SUMMARY
Capacity is the rate of productive capability of a facility. It is important because if the
facility has less capacity, business opportunities caused by an increase in demand may
be lost. At the same time excessive capacity will result in under utilisation of facilities
and consequent rise in costs. Capacity is based on demand forecasts and the actual
orders in hand for a product or a service. There are various methods of dealing with
the mismatch between capacity requirements and existing capacity. Short-term measures
include increasing the utilisation of existing capacity through over time and extra shifts
to make up for shortfalls, or curtailing the operations to cater for the excesses. Production
could also be spread evenly to neutralise the peaks and troughs of demand in case the
product can be stored. Long-term decisions may take the form of installing additional
capacity or divesting surplus capacity.
The decision maker is confronted with capacity decisions whenever a new facility
is set up or additional facilities are required because of an increase in market demand.
Decisions may also have to be taken because of change in technology or when the
equipment needs to be replaced after completing its economic life.
The decision tree is a quantitative technique to analyse problems involving sequential
decisions over a period of time. The tree is similar to a probability tree and uses two
symbols-decision nodes, represented by boxes and chance nodes represented by circles. A
decision may result in different states over which the decision maker has no control. For
instance, a decision is arrived at on the demand for the product being high, medium or
low. These possible outcomes are called states of nature and probabilities are associated
with their occurrence. The tree is first rolled out and then rolled back to obtain pay-off
values at various decision nodes. The technique can be usefully employed in situations
of risk.
Linear programming is a quantitative technique that helps in solving resource allocation
problems. Managers are often faced with problems of allocating existing capacities to
different products with the objective of maximising profits or minimising costs. Linear
programming problems can be solved with the help of computer software. Microsoft
Excel's Solver function can be used to solve such problems. WinQSB is another software
package which has modules to tackle operations research and production operations
problems through quantitative methods.
Simulation is another technique that can be used to tackle decision problems related
to capacity and allocation of resources.
An economic analysis must form part of the selection process for equipment. Purchase
of equipment or setting up of a facility involves heavy capital investment and it is
imperative that the economic viability of the alternatives is assessed. Payback period
and net present value are commonly used methods in economic analysis. Replacement
models help to determine the economic life of equipment.
It is important that different pieces of equipment or machines are correctly balanced
in the facility. This will ensure that there are no intermediate queues or excessive idle
time on any equipment. This becomes extremely important when dealing with processes
where the output of one machine becomes the input of the next. We can work backwards
if we know the final output based on market demand forecast or can work forwards if
the initial input is specified.
Equipment selection decisions involve heavy capital invesbnent which is generally not
reversible. It is therefore, imperative that due consideration from the technical, financial
and economical point of view is given before taking decisions.
ICONCEPT QUIZ I
State True or False
1. Capacity is the actual rate of production of a facility.
2. Capacity is based on demand forecasts and the actual orders in hand.
3. Capacity is expressed in terms of actual output.
4. Capacity shortfall can be dealt with only by installing additional capacity.
5. Additional capacity may be created through overtime as a short-term measure.
6. It is important to correctly balance different machines specially when the output
of one machine becomes the input of the next.
7. Capacity may be stated either in terms of output or in terms of input.
8. A decision tree is a means of representing hierarchical decisions.
9. Aggregation implies adding up the capacity for different products made by the
firm.
10. The capacity of a hospital is expressed in terms of the daily outdoor patients that
it handles.

1. Capacity is defined as:
(a) The actual demand of the product in the preceding year.
(b) The demand forecast of the product for the ensuing year.
(c) The actual production level achieved.
(d) The rate of productive capability of a facility.
2. Capacity may be expressed:
(a) In terms of output. (b) In terms of input.
(c) In terms of an aggregated product. (d) All of the above.
3. Capacity adjusbnent to meet increased demand in the short-term does not include:
(a) Outsourcing. (b) Overtime.
(c) Expansion of the facility. (d) Employing part time workers.
4. Capacity of a hotel is expressed as:
(a) The star rating of the hotel.
(b) The average room occupancy per day.
(c) The number of banquet halls and restaurants that it has.
(d) The number of guest rooms.
5. Capacity planning involves:
(a) Assessing demand and capacity requirements.
(b) Assessing gap between existing capacity and required capacity.
(c) Generating, evaluating and selecting alternatives to fill the gap.
Fill in the blanks:
1. Capacity is the rate of _ _ _ _ _ _ _ of a facility.
2. Capacity depends on the _ _ _ _ _ _ for the product or service.
3. When a facility makes a family of products, a concept of ______ is used
to define capacity.
4. Decision trees are used for analysing ______ which are dependent on the
outcome of previous decisions.
5. It is important to balance _ _ _ _ _ _ throughout the process.
6. Excess capacity can be divested as a _ _ _ _ _ _ _ term measure.
7. Production can be spread evenly to offset the peaks and troughs of demand only
if the product can be _ _ _ _ _ __
8. If facility has _ _ _ _ _ capacity, business opportunities caused by an increase
in demand may be lost.
9. If the facility has ______ capacity, it will result in a rise in costs.
10. The short-term view of capacity is based on a time horizon of _ _ _ _ __
IQUESTIONS I
11.1 What do you understand by capacity?
11.2 Sanchar Ltd., dealing with a newly invented telephone device is faced with the
problem of selecting from the following courses of action:
(a) Manufacture the device themselves;
(b) Allow manufacture by another party on royalty basis;
(c) Sell the rights for the invention for a lump sum.
The profits in lakhs of rupees which can be expected in each case and the
probabilities associated with the level of sales are shown in the following table.
Outcome Probability In-house Royalties Sell all rights

High sales 0.1 75 35 15
Medium sales 0.3 25 20 15
Low sales 0.6 -10 10 15
Represent the company's problem in the form of a decision tree. Redraw the
tree adding the following additional information:
(a) If the Company manufactures the product and sales are medium or high,
then the company has the opportunity of developing a new version of its
telephone.
(b) From past experience, the company estimates that there is a 50% chance of
successful development.
(c) The cost of development is f15 lakhs and the returns after deducting the
development costs are f30 lakhs and flO lakhs for high and medium sales
respectively.
11.3 A businessman has two independent invesbnents A and B available to him, but he
lacks the capital to undertake both simultaneously. He can choose to take A first
and then stop, or if A is successful then take B, or vice-versa. The probability
of success of A is 0.7, while for B it is 0.4. Both invesbnents require an initial
capital outlay of f2,00,000 and both return nothing if unsuccessful. Successful
completion of A will return f30,000 over cost and the successful completion of
B will return f15,000 over cost. Draw the decision tree and determine the best
strategy.
11.4 A car manufacturer uses a special control device in each car that he produces. In
order to avoid a faulty device, each can be tested either before installation at a
cost of f2 per device tested or can be installed without testing and the faulty
devices replaced after assembly at a cost of f20 per device. The faulty devices
cannot be repaired and must be discarded.
The devices are purchased from a manufacturer in batches of 10,000. Based
on past experience the proportion of defectives and the associated probability
are estimated to be:
Proportion of faulty devices Probability

0.08 0.20
0.12 0.70
0.16 0.10
(a) What inspection method should the car manufacturer adopt?

(b) What is the Expected Value of Perfect Information (EVPI)?
11.5 A company makes three products X, Y and Z, which flow through three
deparbnents: Drill, Lathe and Assembly. The hours required by each product
in each deparbnent, the profit contribution of the products and the total time
available in each deparbnent are shown in the table.
Product Time required per unit Profit per unit (f)

Drill Lathe Assembly
X 3 3 8 9
y 6 5 10 15
z 7 4 12 20
Hours available 210 240 260
The marketing deparbnent indicates that the sales potential for Products X and
Y is unlimited but for the Product Z it is only 30 units. Determine the optimal
product mix.
11.6 A timber merchant manufactures three types of plywood. The data below give
the production hours per unit in each of three production operations, maximum
time available and profits per unit.
Plywood Operations (hrs.) Profit per unit (f)

I II III
Grade A 2 2 4 40
Grade B 5 5 2 30
Grade C 10 3 2 20
Max time available 900 400 600
How many units of each grade of plywood should be produced to maximise the
total profit?
11.7 A manufacturing company makes three products, each of which requires three
operations as part of the manufacturing process. The company can sell all of
the products it can manufacture but its production capacity is limited by the
capacity of its operations centres. Additional data concerning the company is as
follows:
Product Manufacturing requirements Hour/Unit Cost (f) Selling

price (f)
Centre 1 Centre 2 Centre 3
A 1 3 2 11 15
B 3 4 1 12 20
C 2 2 2 10 16
Hours available 160 120 80
What should the product mix be?

11.8 A knitting machine can produce 1000 trousers or 3000 shirts (or a combination of
the two) each day. The finishing deparbnent can handle either 1500 trousers or
2000 shirts (or a combination of the two) each day. The marketing deparbnent
requires that at least 400 trousers be produced each day. The company's objective
is profit maximisation. If the profit from the trousers is f40 and that from a shirt
is f15, how many of each type should be produced?
11.9 An electronics firm is undecided as to the most profitable mix for its products. It
produces transistors, resistors and electron tubes, with a profit (per 100 units) of
flO0, f60 and f40 respectively. To produce a shipment of transistors containing
100 units requires 1 hour of engineering service, 10 hours of direct labour and
2 hours of administration. To produce 100 resistors requires 1 hour, 4 hours and
2 hours of engineering, direct labour and administration time respectively. To
produce one shipment of electron tubes (100 units) requires 1 hour of engineering,
5 hours of direct labour and 6 hours of administration. There are 100 hours
of engineering services available, 600 hours of direct labour and 300 hours of
administration. What is the most profitable product mix?
11.10 Four products have to be processed through the plant. There are three production
lines on which the products could be processed. The rates of production in units
per day, the total available capacity and the demand are given in the table.
Production line Product Max line capacity

1 2 3 4 (days)
A 150 100 500 400 20
B 200 100 760 400 20
C 160 80 890 600 18
Demand 2000 3000 3000 6000
Formulate the data as a linear programming problem to minimise the cost of

operations, if Line A requires f3,000 per day, Line B f5,000 per day and Line C
requires f4,000 per day. Solve using suitable software package.
11.11 Apsara Spinners is proposing to set up a new cotton yarn spinning unit to
produce cotton yarn. The unit has been gifted 3 draw frames. A diagrammatic
representation of the spinning process is given in Figure 11.7.
Blow room r---"'

Carding
machine - Draw frame r---"'
Simplex
frame - Ring spinning
frame -
Figure 11.7
The technical details of the machinery working at 100% rated capacity are as
follows:
Machine Capacity per 8-hour Wastage Capacity utilisation/

shift Efficiency
Blow room 1100 kg 6% 82%
Carding machine 160 kg 5% 85%
Draw frame 300 kg 2% 75%
Simplex frame 4 kg per spindle 1% 85%
(120 spindles)
Ring spinning 250 gm 3% 88%
frame (450 spindles)
Capacity utilisation of the ring spinning frame is 90%.

What equipment do you recommend purely from the technical point of view of
balancing the output?
Supplement 3
Simulation
INTRODUCTION
Operations research relies on a modelling approach. We attempt to model the real
life problem by mathematical relationships. We then experiment with the model by
manipulating the values of the variables and obtain the best solution. However, some
real life situations can be so complex that expressing relationships in mathematical terms
and then solving them may not be possible. There can be complex queuing situations
or other real life situations which are difficult to analyse mathematically. Sometimes, in
our attempt to solve such situations mathematically, we simplify the model and make
assumptions to such an extent that realism is lost and the model bears little resemblance
to reality. In such cases simulation provides an alternative approach.
Simulation is the representation of a real life situation by different means. It is an
imitation of reality. It is one of the most widely used management science techniques.
Its use is popular because:
(a) It may be the only method available as it is difficult to observe the actual
environment. (In space flight and charting of satellite trajectories it is often used).
(b) It may not be possible to develop a mathematical model.
(c) Actual observation of a system may be too expensive or too disruptive.
(d) There may not be sufficient time to allow the system to operate extensively.
(For instance, if we are studying the long-term trends of world population, we
simply cannot wait for the required number of years to see the results).
Simulation is also a descriptive technique. It can tell us how a system would respond
under given conditions, but it does not give optimal answers. A good simulation model
is expensive to build and is often time consuming. Situations involving uncertainty
are best suited for simulation. There must be a certain degree of randomness, else all
simulated experiments will produce the same results. It is only a method of evaluating
solutions and does not generate solution techniques. Managers have to generate the
solution approaches that they want to test.
Monte Carlo simulation is the most widely adopted method for simulation. It involves
the use of random numbers. It was first used while studying chain nuclear reactions
and the random numbers were generated actually using a Russian roulette which is a
common feature in the casinos at Monte Carlo and hence the name.
257
Simulation can be used to address many problems related to operations. Some of the
problem areas that it can handle are:
l. Production and manufacturing systems. It can be applied to production scheduling
and sequencing, facility layout and location problems, and assembly line balancing.
As machine breakdowns have probabilities associated with their occurrence,
maintenance problems can also be analysed through simulation.
2. Inventory management. Since demand and lead times are not certain and have a
degree of randomness attached to them, simulation offers a good approach to
handle such problems.
3. Queuing problems. Problems involving complex queuing systems are best analysed
through simulation.
4. Capital investment and budgeting. Capital budgeting problems involve the
determination of cash flows which are dependent on a number of random
variables. Simulation offers a good approach to handle such situations.
5. Service operations. These can also be analysed using simulation.
STEPS INVOLVED IN MONTE CARLO SIMULATION

Let us examine the steps involved in Monte Carlo simulation with the help of an example.
EXAMPLE 1 Two new ship docking facilities are being completed in the Fantasia
harbour this year, and a decision has to be taken on the number of tugs that will be
necessary to service the arriving ships. Data has been collected from several similar ports
and the time between ship arrivals is distributed as shown in Table 1.
Table 1 Distribution of Ship Inter-arrival Time
Time between arrivals (hrs.) Ship arrivals (%)

1 6
2 12
3 40
4 25
5 12
6 5
The time spent at the dock in unloading was estimated in a similar manner and its
distribution is shown in Table 2.
Table 2 Distribution of Unloading Time
Unloading time (hrs.) Ships (%)

1 2
2 40
3 30
4 15
5 10
6 3
Supplement 3: Simulation 259
The tugging time is fairly constant and a tug takes one hour from the time it leaves the dock
to the time till it finishes berthing the ship. Similarly one hour is taken to take a ship out
to sea and then return to the dock. Ships are berthed on a first come first served basis, and
priority is given to ships which have to be tugged out to sea over those that have to be tugged
to port. If a ship is tugged out to sea and another is waiting to be tugged in, the process
of leaving the outgoing ship and bringing the incoming ship is assumed to take two hours.
Solution:
Step 1 Problem identification: The first step is to identify the problem and clearly
state the objectives. In the given problem, we have to determine the behaviour of the
system under conditions where one or two tugs are available. We have already stated
that simulation is descriptive; now we have to consider the two states and simulate the
two conditions separately. The availability of tugs will affect the waiting time of ships
and thus have economic implications which we shall have to evaluate. There will be a
definite trade off involved between the cost of providing and operating an additional
tug and the cost of waiting of the ship.
Step 2 Developing a model: The next step is to develop a suitable model depicting
the real life situation. Let us examine the process from the moment a ship arrives. First,
we have to check the availability of a berth. In case a berth is available, we must check
whether the tug is free. The ship can be brought in only when both berth and tug are
available. There is a randomness in the arrival of ships and the unloading time of ships
which will affect the availability of the berth and the tug. A suggested model for the
harbour simulation problem is depicted in the form of a flow chart as shown in Figure 1.
Ship waits
No
No
Ship tugged in
Ship unl oaded

Ship waits
No
Ship tugged out to

sea
Figure 1 A Model for Harbour Simulation Problem.

The arrivals of ships and the unloading times follow a certain distribution but there is
randomness in the interval between arrivals and the unloading times for each ship. These
events have to be generated. The usual technique to generate these timings is through the
use of random numbers. Random numbers may be generated by the computer or by the
use of random number tables which consists of digits arranged in columns and rows for
ease of reading. One can start with any number and then follow a horizontal or a vertical
sequence to pick up numbers. A certain block of random numbers is assigned to each
event so that the intervals of random numbers correspond to the probability distribution.
Here since the probabilities have been expressed as percentages, we shall use hundred
random numbers that is from 00 to 99, picking up two digits at a time from a random
number table for the purposes of illustrating the technique. In actual practice a manual
simulation would be replaced by a computer simulation to save time and effort.
Let us see how a block of random numbers can be assigned to simulate an event.
Consider the arrival of ships. As the number of ships arriving with an interval of one
hour between arrivals is 6%, we assign a block of 6 random numbers to represent this
interval. When we draw a random number and it happens to be one of these six, then
we schedule this ship to arrive one hour after the previous arrival. The simplest way of
assigning random number blocks is to calculate cumulative probability and then assign
the blocks as shown in Table 3. This will ensure that no numbers fall in two blocks.
Table 3 Assigning Random Numbers to Simulate Time between Arrival of Ships
Time between Ship arrivals Cumulative Random number

arrivals (hrs.) {%) percentage block
6 6 00-05
2 12 18 06-17
3 40 58 18-57
4 25 83 58-82
5 12 95 83-94
6 5 100 95-99
Similarly we can assign random numbers as given in Table 4 for unloading time.
Table 4 Assigning Random Numbers to Simulate Unloading Time
Unloading time Ships {%) Cumulative Random number

(hrs.) percentage block
2 2 00-01
2 40 42 02-41
3 30 72 42-71
4 15 87 72-86
5 10 97 87-96
6 3 100 97-99
Step 3 Running the simulation: The simulation model is now ready for experimentation
and running. Let us run the model manually with one tug available and simulate the
arrival of twenty ships. We shall use the random number table (Table 5) for the purpose.
The table has been generated with the help of an Excel spreadsheet.
Table 5 Random Number Table
327793 602771 027542 697091 342274
575355 684150 249323 814381 246714
777657 192889 572386 618783 277907
576247 532082 787051 837497 270155
530049 408069 857005 853679 192317
820696 960316 472871 276790 562206
270902 631725 377901 576991 841915
742851 660647 424458 811053 563304
752842 417098 531542 486324 403858
875738 501856 937955 865726 505958
831688 228253 879184 672571 532809
219400 923654 420967 524005 467375
934318 305562 137973 239832 598946
149067 461376 384472 111033 668266
197464 249797 465063 597855 745952
500666 207521 270321 033762 791184
256765 430284 029918 034189 983140
903401 632822 153298 748284 104287
515972 411626 787234 641086 317541
571950 786397 420852 401417 532366
Let us now record the events as they take place.

1. We shall start with the 12th row (shaded) of Table 5 and pick up two digits at
a time horizontally. (When one row finishes we will move to the next row). The
first number is 21. This is the random number to generate the interval between
arrival of ships. If we check in the random number block assignment (Table 3 is
reproduced for ease of reference) 21 represents an arrival interval of three hours.
400 923654 420967 524005 467375
Table 6 Computing Time between Arrival of Ships

Tim e between Ship arrivals Cumulative Random number
ar rivals (hrs.) (%) percentage block
6 6 00-05
2 12 18 06-17
3 40 58 18-57
4 25 83 58-82
5 12 95 83-94
6 5 100 95-99
2. Let us keep a track of the running time. The first ship arrives at hour 3. At this
stage both the berths and the tug are available. The ship is brought in by the
tug and berthed at Berth A at hour 4.
3. We now pick the next two random digits (after 21). They are 94. This random
number is used to generate the unloading time. If we check the random number
block assignment table for unloading time (Table 4 reproduced), we find that the
unloading time is 5 hours. This implies that Ship no. 1 will be ready to leave
the berth at hour 9. We record the events in Table 9 Harbour Simulation.
2 9 0 923654 420967 524005 467375
Table 7 Computing Unloadi ng Time
Un loading time Ships (%) Cumulative Ra nd o m nu mber

(hrs .) percentage block
2 2 00-0 1
2 40 42 02-4 1
3 30 72 42-71
4 15 87 72- 86
5 10 97 87-96
6 3 100 97-99
Before deciding on the availability of the tug to take Ship no. 1 out, we generate the
arrival of Ship no. 2 by picking the next random number and checking the inter arrival
time in Table 3. The next random number is 00. This represents an inter arrival interval of
1 hour. Ship no. 2 arrives at hour 4. The Berth Bis free and the tug is also available. The
ship would be berthed at Berth Bat hour 5. The next random number is 92 and represents
the unloading time of 5 hours. Ship no. 2 will be ready to leave the berth at hour 10.
In a similar manner simulate the arrival of Ship no. 3. It arrives at hour 7, but both
the berths are busy. Ship no. 1 is tugged out starting at hour 9 and the tug is free at
hour 10. Since we have laid down that the outgoing ships have priority over incoming
ships. The tug will now be used to move Ship no. 2 out to sea. The tug will be free at
hour 11, and will bring in Ship no. 3 to Berth A by hour 12. Ship no. 3 had to wait 4
hours before the tug was available. We can similarly simulate the other ships. Table 8
diagrammatically shows the arrival and departure of the first four ships. Twenty ships
have been manually simulated and the results tabulated in Table 9.
Table 8 Diagrammatic Representation of First Four Ships
Time 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Sh ip no.
Ship no. 2
Ship no. 3
Ship no. 4
~ Tugging - Waiting D Berth A - Berth B

Table 9 Harbour Simulation
Ship Random Interval Ship Berth Berth Tug Ship Random Unloading Ship Tug Waiting
no. no. between arrives free A free B available arrives no. time ready to available time
arrivals at sea at berth leave berth
21 3 3 y y y 4 94 5 9 y
2 00 1 4 N y y 5 92 5 10 y
3 36 3 7 N N N 12 54 3 15 y 4
4 42 3 10 N y N 13 09 2 15 y 3
5 67 4 14 N N N 18 52 3 21 y 3
6 40 3 17 N y y 19 05 2 21 y 2
7 46 3 20 N N 24 73 4 28 y 3
8 75 4 24 N y y 25 93 5 29 y
9 43 3 27 N N 31 18 2 33 y 3
10 30 3 30 N y N 32 55 3 35 y
11 62 4 34 y N y 35 13 2 37 y
12 79 4 38 y y y 39 73 4 43 y
13 23 3 41 N y y 42 98 6 48 y
14 32 3 44 y N y 45 59 3 48 N
y y en
15 89 5 49 N N 51 46 3 54 1 ;::
"<:I
16 14 2 51 y N y 52 90 5 57 y "<:I
y y y
....
17 67 4 55 N 56 46 3 59 ~
18 13 2 57 y N N 59 76 4 63 y 1 "'....
;:!
19 38 3 60 N y y 61 44 3 64 y ~
y y en
20 72 4 64 N 66 11 2 68 1
l
;::
....5·
;:;"
;:!
N
0'I
CIJ
Step 4 Interpreting the results: We must carry out a large number of simulations
so that a steady state is reached. It would be appreciated that doing a large number of
simulations manually would be tedious and time consuming. A computer can be used to
carry out a large number of simulations and the average waiting time can be determined.
For instance after simulating 20 ships we find that the total waiting time has been 23
hours, that is an average of 1.15 hours per ship. However, 20 simulations are far too less
to be able to draw any conclusions.
We can then simulate the situation using two tugs. We may find that the major
bottle neck is not the non availability of the tug but the fact that there are only two
berths.
Simulation helps us to understand the problem better. As may be seen the
model developed for each situation will be different. At times it is extremely difficult
to develop models and may be expensive and time consuming. Development of models
is dependent on the quality and quantity of data collected. A good model requires
not only an accurate and wide database but also tests the imagination and ingenuity of
the analyst.
EXAMPLE 2 A manufacturer of pumps is investigating the inventory situation of his

company. The past data, given in Table lO(a), reveals the distribution for daily demand
of pumps:
Table 1O{a) Daily Demand Distribution of Pumps

Units demanded 5 6 7 8 9 10
No. of days 15 25 30 18 8 4
The lead time distribution in days is given in Table lO(b)
Table 1O{b) The Lead Time Distribution

Lead time 3 4 5 6
Probability 0.20 0.30 0.35 0.15
The ordering cost is flOO per order, the holding cost is f3 per unit per day and the
shortage cost is f20 per unit, representing the loss in profits.
The manufacturer wishes to know what would be the total inventory costs for specific
reorder levels and reorder quantities.
Let us study the simulation process for one scenario where the opening inventory
is 25 units, the reorder level is 20 units and the reorder quantity is 40 units. It is also
assumed that an order will not be placed until a previously placed order materialises.
Solution: As a first step let us assign random number blocks to the various values of
daily demand and the various values of lead time.
Table 11 (a) Assigning Random Numbers to Simulate Daily Demand
Daily demand Number of Probability Cumulative Random number

days probability block
5 15 0.15 0.15 00-14
6 25 0.25 0.40 15-39
7 30 0.30 0.70 40-69
8 18 0.18 0.88 70-87
9 8 0.08 0.96 88-95
10 4 0.04 1.00 96-99
100 1.00
Table 11 (b) Assigning Random Numbers to Simulate Lead Time
Lead time Probability Cumulative probability Random number block

3 0.20 0.20 00-19
4 0.30 0.50 20-49
5 0.35 0.85 50-84
6 0.15 1.00 85-99
Let us run the simulation using the random number table (Table 5). We shall start
with the first two digits of column 4 and proceed top to bottom. The random numbers
will represent the demand for the day. Whenever an order is placed, the lead time will
be determined by the next random number that we pick.
The opening balance on day 1 is 25. The first random number is 69. This represents
a demand of 7 units. The closing balance is 18. Since the closing balance is less than 20,
the reordering point, an order for 40 units is placed. Ordering cost of flO0 is incurred.
The next random number is 81. This represents a lead time of 5 days. The order placed
on day 1 will materialise on day 6. Holding costs of f54 at f3 per unit on the balance of
18 units are incurred. The closing balance becomes the opening balance for the next day.
Similarly the demand for the next day is determined by picking up the next random
number, which is 61. This represents a demand of 7 units. The closing balance reduces
to 11 units and the holding cost of 11 units works out to f33.
Table 12 gives the result of simulation for a month. As explained earlier, this is not
enough to reach a steady state. A computer programme can be written to carry out this
simple simulation.
We can simulate different scenarios and determine which would be the most economical
combination of order quantity and reorder point.
EXAMPLE 3 A sales counter at a particular deparbnent store is open for two hours
every evening from 4:00 p.m. to 6:00 p.m. The counter is served by one sales person
who provides integrated service of serving customers, preparing bills and collecting
payments. There have been complaints from customers that the service is poor and the
waiting time is too long.
Solution: It was decided to study the system by simulating it. Data was collected over
a period of two hours for one day and is given in Table 13(a) and Table 13(b).
Table 12 Inventory Simulation N
0'I
0'I
Day Opening Random Demand Closing Random Lead Ordering Holding Shortage
balance number balance number time cost cost cost
12 56 97 18 81 5 100 54
..."t1
C
i::,,.
21 86 17 11 33 ..,.....
;:::
31 18 38 3 9 5·
;::
43 85 80 100 ;:,
;::
i::,,.
50 27 60 120
64 05 77 33 99 ~
73 38 18 25 75 "'...;:,
.....
82 54 87 18 86 6 100 54 5·
;::
O>
91 86 77 11 33
10 11 52 74 12
s::
;:,
;::
11 42 36 0 40 ~
12 01 15 0 100 "'~
13 05 97 0 140 "';::.....
14 40 35 35 105
15 35 35 30 90
16 30 74 82 2 66
17 22 64 71 54 04 100 45
18 15 70 87 21
19 74 37 0 0
20 08 78 0 160
21 40 74 83 2 96
22 32 36 62 6 78
23 26 67 71 96 95 100 57
24 19 10 51 4 42
25 14 63 77 21
26 75 77 0 0
27 02 56 0 120
28 40 40 73 3 99
29 33 98 10 23 69
30 23 10 51 8 54
Total Cost 400 1,212 780
Table 13(a) Data of Customer Arrivals
Arrival time Minutes between arrivals Arrival time Minutes between arrivals
1601 1 1708 6
1607 6 1712 4
1609 2 1715 3
1616 7 1717 2
1619 3 1724 7
1623 4 1730 6
1626 3 1732 2
1630 3 1740 8
1635 5 1743 3
1640 5 1747 4
1650 10 1751 4
1659 9 1756 5
1702 3
Table 13(b) Frequency of Time between Customer Arrivals
Time between Frequency Cumulative frequency Cumulative relative

arrivals frequency
0 0 0 0
1 1 1 4
2 3 4 14
3 6 10 36
4 5 15 54
5 4 19 68
6 4 23 82
7 2 25 89
8 1 26 93
9 1 27 96
10 1 28 100
Since time is a continuous variable we can plot a graph of the time between arrivals
and the cumulative frequency percentage and the time represented by the random number
drawn can be read off from the graph (Figure 2).
10 0
90
80
...
Q) 70
.0
E
::J 60
C:
50
E
0
40
"
C:
<1l
30
a:
20
10
Time between arrivals

Figure 2 Random Number Assignment to Time between Arrivals .
For instance, random number 20 would represent an interval of 2.5 minutes between
arrivals. While this would be the correct method of dealing with continuous variables, for
the sake of simplicity, let us consider time only to the nearest minute for this example.
We can then assign a random number block to the time between arrivals as given in
Table 13(c).
Table 13(c) Revised Random Number Assignment
Time between Frequency Cumulative Cumulative relative Random number

arrivals frequency frequency block
0 0 0 0
1 1 1 4 00-03
2 3 4 14 04-13
3 6 10 36 14-35
4 5 15 54 36-53
5 4 19 68 54-67
6 4 23 82 68-81
7 2 25 89 82-88
8 26 93 89-92
9 27 96 93-95
10 28 100 96-99
Similarly data was collected for service time. The random number blocks assigned
to service data are given in Table 13(d).
Table 13(d) Random Number Assignment for Service Time
Service time Frequency Cumulative Cumulative relative Random number

frequency frequency block
0 0 0 0
3 2 2 7 00-06
4 2 4 14 07-13
5 4 8 29 14-28
6 5 13 46 29-45
7 5 18 64 46-63
8 3 21 75 64-74
9 3 24 86 75-85
10 2 26 93 86-92
11 27 96 93-95
12 28 100 96-99
Let us carry out a simulation for a two hours day with one and two sales persons.
We shall use the computer to carry out the simulation and shall programme it on an
Excel spreadsheet. The random numbers are also being generated by the computer. The
results are given in Table 14.
As can be seen from the above simulations, if only one sales person is employed the
average waiting time is 30.75 minutes. In fact, even after stopping entry at 1750 hours,
the last person will have to wait for 59 minutes.
Table 14(a) One Sales Person
Start time 16:00 hours
Random Minutes to Arrival time Random Service time Start Finish Waiting
number next arrival number time
22 3 1603 35 6 1603 1609
55 5 1608 98 12 1609 1621
63 5 1613 46 7 1621 1628 8
70 6 1619 90 10 1628 1638 9
55 5 1624 40 6 1638 1644 14
23 3 1627 49 7 1644 1651 17
34 3 1630 87 10 1651 1661 21
64 5 1635 37 6 1701 1707 26
64 5 1640 5 3 1707 1710 27
52 4 1644 62 7 1710 1717 26
86 7 1651 6 3 1717 1720 26
36 4 1655 25 5 1720 1725 25
72 6 1701 34 6 1725 1731 24
51 4 1705 44 6 1731 1737 26
74 6 1711 97 12 1737 1749 26
8 2 1713 20 5 1749 1754 36
75 6 1719 53 7 1754 1761 35 en
;::
~
52 4 1723 47 7 1801 1808 38 ~
85 7 1730 2 3 1808 1811 38 ....

~
32 3 1733 89 10 1811 1821 38 "';:!.....
11 2 1735 99 12 1821 1833 46 ~
61 5 1740 68 8 1833 1841 53 en
10 2 1742 5 3 1841 1844 59 i
;::
;:;"
6 2 1744 24 5 1844 1849 60 .....
5·
76 6 1750 92 10 1849 1859 59 ;:!
Average waiting time 30.75

N
0'I
1.0
Table 14(b) Two Sales Persons N
-...:i
0
Start time 16:00 hours
Random Minutes to Arrival Random Service Sales person Start Finish Waiting ...
"ti
C
number next arrival time number time time :;::,..
..,.....
;:::
22 3 1603 35 6 A 1603 1609 5·
;::
55 5 1608 98 12 B 1608 1620 ;:,
;::
63 5 1613 46 7 A 1613 1620 :;::,..
70 6 1619 90 10 A 1620 1630 1 0
~
55 5 1624 40 6 B 1624 1630 "'...;:,
23 3 1627 49 7 A 1630 1637 3
.....
5·
;::
34 3 1630 87 10 B 1630 1640 O>
64 5 1635 37 6 A 1637 1643 2 s::

;:,
;::
64 5 1640 5 3 B 1640 1643
~
52 4 1644 62 7 A 1644 1651 "'~
86 7 1651 6 3 B 1651 1654 "';::.....
36 4 1655 25 5 A 1655 1700
72 6 1701 34 6 B 1701 1707
51 4 1705 44 6 A 1705 1711
74 6 1711 97 12 B 1711 1723
8 2 1713 20 5 A 1713 1718
75 6 1719 53 7 A 1719 1726
52 4 1723 47 7 B 1723 1730
85 7 1730 2 3 A 1730 1733
32 3 1733 89 10 B 1733 1743
11 2 1735 99 12 A 1735 1747
61 5 1740 68 8 B 1743 1751 3
10 2 1742 5 3 A 1747 1750 5
6 2 1744 24 5 A 1750 1755 6
76 6 1750 92 10 B 1751 1801
45 4 1754 79 9 A 1755 1804
23 3 1757 61 7 B 1801 1808 4
9 2 1759 1 3 A 1804 1807 5
Average waiting time 1.15
If two sales persons are employed, the average waiting time is reduced to 1.15 minutes.
The maximum waiting time is 6 minutes.
We have carried out the simulations with the same random numbers to bring out the
difference between the employment of one or the employment of two sales persons. It
must be borne in mind that the number of simulations will have to be much larger for
any reasonable conclusions. Continuous variables can be simulated with help of graphs.
EXAMPLE 4 An automobile production line turns out about 100 cars per day, but
deviations occur owing to many causes. The production is more accurately described by
the probability distribution given in Table 15(a).
Table 15{a) Probability Distribution of Car Production
Production/day Probability Production/day Probability

95 0.03 101 0.15
96 0.05 102 0.10
97 0.07 103 0.07
98 0.10 104 0.05
99 0.15 105 0.03
100 0.20
Finished cars are transported across the bay, at the end of each day, by ferry. If the
ferry has space only for 101 cars, what will be the average number of cars waiting to be
shipped, and what will be the average number of empty spaces on the boat? Use Monte
Carlo simulation and simulate for 20 days. Random numbers are given:
0721 1280 0803 3265 4374 2337 1628 3018 2534 1921
Solution: We shall have to simulate the number of cars produced daily. Let us first
assign random number blocks to the production distribution as given in Table 15(b).
Table 15{b) Assigning Random Numbers for Simulating Car Production
Production per day Probability Cumulative probability Random number block

95 0.03 0.03 00-02
96 0.05 0.08 03-07
97 0.07 0.15 08-14
98 0.10 0.25 15-24
99 0.15 0.40 25-39
100 0.20 0.60 40-59
101 0.15 0.75 60-74
102 0.10 0.85 75-84
103 0.07 0.92 85-91
104 0.05 0.97 92-96
105 0.03 1.00 97-99
Now let us run the simulation as shown in Table 15(c).

Table 15(c) Simulation for 20 days for Car Production and Shipping
Day Random no. Production Cars waiting for shipment Empty space on boat
1 07 96 5
2 21 98 3
3 12 97 4
4 80 102
5 08 97 4
6 03 96 5
7 32 99 2
8 65 101
9 43 100
10 74 102
11 23 98 3
12 37 99 2
13 16 98 3
14 28 99 2
15 30 99 2
16 18 98 3
17 25 99 2
18 34 99 2
19 19 98 3
20 21 98 3
Total 2 47
At an average 2/20 or 0.1 car is waiting for shipment and 47 /20 or 2.35 empty spaces
are there on the ferry.
(Note: Number of simulations is too less for any conclusive results)
EXAMPLE 5 The management of ABC Company is considering the question of

marketing a new product. The fixed cost required in the project is f4,000. Three factors
are uncertain, viz. the selling price, variable cost and the annual sales volume. The
product has a life of only one year. The management has the data on these three factors
as shown in Table 16(a).
Table 16(a) Available Data
Selling Probability Variable Probability Sales volume Probability

price (t) cost m (units)
3 0.2 1 0.3 2000 0.3
4 0.5 2 0.6 3000 0.3
5 0.3 3 0.1 4000 0.4
Consider the following sequence of thirty random numbers:

81, 32, 60, 04, 46, 31, 67, 25, 24, 10, 40, 02, 39, 68, 08, 59, 66, 90, 12, 64, 79, 31, 86, 68,
82, 89, 25, 11, 98, 16. Using the sequence, simulate the average profit for the previous
project on the basis of ten trials.
Solution: We shall have to simulate the selling price, the variable cost and the sales
volume. The selling price minus the variable cost will give the contribution per unit. The
total contribution for the sales volume can be worked out. Profit will be equal to the
total contribution less fixed costs of f4,000. Let us first assign random number blocks.
Table 16{b) Random Numbers to Simulate Selling Price
Selling price (f) Probability Cumulative probability Random number block

3 0.2 0.2 00-19
4 0.5 0.7 20-69
5 0.3 1.0 70-99
Table 16{c) Random Numbers to Simulate Variable Cost
Variable cost (f) Probability Cumulative probability Random number block

1 0.3 0.3 00-29
2 0.6 0.9 30-89
3 0.1 1.0 90-99
Table 16{d) Random Numbers to Simulate Sales Volume
Sales volume Probability Cumulative probability Random number block

2000 0.3 0.3 00-29
3000 0.3 0.6 30-59
4000 0.4 1.0 60-99
Now let us run the simulation as shown in Table 16(e).
Table 16{e) Simulation for 1O Days
Serial Random Selling Random Variable Random Sales Profit

number number price m number cost m number volume m
1 81 5 32 2 60 4000 8,000
2 04 3 46 2 31 3000 -1,000
3 67 4 25 1 24 2000 2,000
4 10 3 40 2 02 2000 -2,000
5 39 4 68 2 08 2000 0
6 59 4 66 2 90 4000 4,000
7 12 3 64 2 79 4000 0
8 31 4 86 2 68 4000 4,000
9 82 5 89 2 25 2000 2,000
10 11 3 98 3 16 2000 -4,000
Total profit 13,000
Average profit = fl,300.

(Note: Number of simulations is too less for any conclusive results)
EXAMPLE 6 A company maintains a machine which is exposed to severe service due

to the frequent bearing failures, a common maintenance problem. There are three bearings
in the machine that fail. The prevailing practice is to replace the bearings at the time of
their failure. From past experience the company has obtained the following data [Table
17(a)], on bearing failures:
Table 17(a) Bearing Life Data
Bearing life (hrs.) Frequency

1000 5
1200 15
1400 25
1600 20
1800 15
2000 12
2200 6
2400 2
Using the following data find out the total cost involved in replacing the bearings for a
working period of 4000 hours. Cost of bearing is f300 each. Downtime cost is f15 per
hour and it takes 5 hours to replace a bearing.
Random numbers are: 11, 30, 60, 27, 32, 34, 18, 90, 42, 28, 58, 54.
Solution: Let the three bearings be A, B and C. The problem involves simulating the
failure of each bearing. All three bearings do not fail simultaneously and hence a different
simulation for failure of each should be taken. Allocate random number blocks to the
failure distribution.
Table 17(b) Random Numbers Assigned for Simulating Bearing Life
Bearing life (hrs.) Frequency Cumulative frequency Random number block

1000 5 5 00-04
1200 15 20 05-19
1400 25 45 20-44
1600 20 65 45-64
1800 15 80 65-79
2000 12 92 80-91
2200 6 98 92-97
2400 2 100 98-99
Let us now run the simulation as shown in Table 17(c).

Table 17(c) Simulation Result
Random number Bearing Life of bearing (hrs.) Replace at (hrs.)

11 A 1200 1200
30 B 1400 1400
60 C 1600 1600
27 A 1400 1200 +1400 = 2600
32 B 1400 1400 + 1400 = 2800
34 C 1400 1600 + 1400 = 3000
18 A 1200 2600 + 1200 = 3800
90 B 2000 2800 + 2000 = 4800
42 C 1400 3000 + 1400 = 4400
28 A 1400 3800 +1400 = 5200
58 B 1600 4800 + 1600 = 6400
54 C 1600 4400 + 1600 = 6000
Up to 4000 hours, 7 bearings will have to be replaced.

Cost of replacement = 300 + 75 = f375.
Total cost = 375 x 7 = f2,625
EXAMPLE 7 Meera runs Kayakalp Beauty Parlour. One of her assistants has fallen ill
and her schedule for the next day is as given in Table 18.
Table 18(a) Schedule
Time Activity Expected time (minutes)

10:00 a.m. Manicure 40
10:40 a.m. Clean-up 20
11:00 a.m. Facial 90
12:30 p.m. Clean-up 20
12:50 p.m. Hair styling 60
2:10 p.m. Depilation 100
4:10 p.m. Threading eyebrows 10
4:40 p.m. Bridal makeup 120
Meera closes the parlour by 7:00 p.m. and has to be ready to take on the first customer
at 10:00 a.m. every morning. She feels that the schedule may not work especially as she
is short of one assistant. The bride has to leave the parlour by 6:50 p.m. else she will be
late for her wedding. Meera's past records show that customers do not always arrive on
time. Sometimes they are early and sometimes late. She also knows that the activities may
take a little longer or be finished early. Clean-up takes either 10 minutes or 30 minutes
with equal probability.
Her data on customer arrival are the following:
Table 18(b) Data on Customer Arrival
Arrival Probability
Customer arrives on time 0.50
Arrives 5 minutes early 0.10
Arrives 10 minutes early 0.05
Arrives 5 minutes late 0.20
Arrives 10 minutes late 0.15
Table 18(c) Activity Time Expectation

Activity Probability
Activity completed in expected time 0.50
Completed in 90% of expected time 0.15
Use one run of simulation to determine if Meera will be able to meet her next day's
schedule. The following set of random digits is given:
71 64 23 89 34 76 66 12 72 59 52 13 09 77 12 51 33 64 89 80
Solution: We shall have to simulate arrival of customers, time taken on activity and
time taken to clean up. Let us assign random number blocks.
Table 18(d) Random Numbers to Simulate Customer Arrival

Arrival Probability Cumulative probability Random number block
Customer arrives on time 0.50 0.50 00-49
Arrives 5 minutes early 0.10 0.60 50-59
Arrives 10 minutes early 0.05 0.65 60-64
Arrives 5 minutes late 0.20 0.85 65-84
Arrives 10 minutes late 0.15 1.00 85-99
Table 1S{e) Random Numbers to Simulate Activity Time
Activity Probability Cumulative Random number
probability block
Activity completed in expected time 0.50 0.50 00-49
Completed in 90% of expected time 0.15 0.65 50-64
Table 18{f) Random Numbers to Simulate Clean-up Time

Clean-up time Probability Cumulative probability Random number block
1O minutes 0.50 0.50 00-49
30 minutes 0.50 1.00 50-99
Now let us run the simulation as shown in Table 18(g).
Table 1S{g) Simulation Result

Random Meaning Outcome
number
71 Customer arrives 5 minutes late Manicure starts at 10:05 a.m.
64 Manicure completed in 90% of Manicure finished at 10:41 a.m.
expected time (36 minutes)
23 Clean-up time is 1O minutes Ready for next customer at 10:51 a.m.
89 Customer arrives 1O minutes late Facial starts at 11: 1O a.m.
34 Facial completed in expected time Facial ends at 12:40 p.m.
76 Clean-up time 30 minutes Ready for next customer at 1: 1O p.m.
66 Customer arrives 5 minutes late Hair styling commenced at 1: 1O p.m.
at 12:55 p.m.
12 Hair styling completed in time Hair styling ends at 2:10 p.m.
72 Clean-up takes 30 minutes Ready for next customer at 2:40 p.m.
59 Customer arrives 5 minutes early, Depilation starts at 2:40 p.m.
i.e. at 2:05 p.m.
52 Activity completed in 90% time Depilation ends at 4: 1O p.m.
13 Clean-up takes 1O minutes Ready for next customer at 4:20 p.m.
09 Customer arrives on time Threading of eyebrows commences at
4:20 p.m.
77 Takes 110% of expected time Threading completed at 4:31 p.m.
12 Clean-up time 1O minutes Ready for next customer at 4:41 p.m.
51 Customer arrives 5 minutes late Bridal make up commences at 4:45 p.m.
33 Bridal make up completed in Bridal make up ended at 6:45 p.m.
expected time
64 Clean-up takes 30 minutes Can close shop only at 7:15 p.m.
Meera can get the bride ready on time but has to work 15 minutes longer. This may
involve penalties or overtime. (Note: One simulation is too less to draw any conclusions)
SUMMARY
Simulation can be used successfully to model complex real life situations which do not
lend themselves to other forms of mathematical modelling. Its success lies in the ingenuity
of the analyst and the quality of the model that is built. There is no standard format for
building a model as each situation will have to be modelled differently. The models deal
with stochastic processes and the randomness involved in real life situations.
Deductions should be drawn only after a large number of simulations have been
carried out. Computers can be used to carry out simulations effectively as the repetitive
processes can be run a large number of times quickly. Simulations are however expensive
as model building requires considerable effort and cost.
IQUESTIONS I
1. What is Monte Carlo Simulation? Explain the use of random numbers to generate
probabilistic events.
2. What are the advantages and disadvantages of Monte Carlo Simulation as a problem
solving technique?
3. "When all else fails, use simulation." Comment.
4. The materials manager of a firm wishes to determine the expected demand for a
particular item in stock during the reorder lead time. The information is needed
to determine how far in advance to reorder before the stock level is reduced to
zero. However, both the lead time in days and the demand per day of the item are
random variables, described by the probability distribution given in following table.
Lead time (days) Probability Demand/day (units) Probability

1 0.5 1 0.1
2 0.3 2 0.3
3 0.2 3 0.4
4 0.2
Manually simulate the problem for ten reorders to estimate the demand during
lead time. Use the random numbers 84, 20, 57, 42, 85, 70, 86, 69, 83, 41, 90, 12,
23, 06, 79, 14, 36, 31, 27, 35, 01, 41, 60, 91, 82, 14, 02, 06, 64.
5. The manager of a warehouse is interested in designing an inventory control
system for one of the products in stock. The demand for the product comes
from numerous retail outlets and orders arrive on a daily basis. The warehouse
receives its stock from a factory but the lead time is not constant. The manager
wants to determine the best time to release orders to the factory so that stock-outs
are minimised yet inventory holding costs are at acceptable levels. Any order
from a retailer not supplied on a given day constitutes lost demand. Based on
a sampling study the following data is available:
Daily demand Probability Lead time (days) Probability

2 0.20 1 0.20
3 0.50 2 0.50
4 0.20 3 0.30
5 0.10
Two alternative ordering policies have been proposed:

Policy 1: Whenever the inventory level drops below 6 units, order 10 units.
Policy 2: Whenever the inventory level drops below 10 units, order 10 units.
1. Simulate each of these two policies for 20 days. Assume that the opening
inventory is 12 units.
2. Compare and contrast the outcomes for these two policies.
Use the following random numbers: 01, 14, 66, 37, 85, 79, 74, 26, 40, 49, 97, 93,
78, 52, 00, 25, 62, 49, 61, 08, 56, 10, 73, 87, 93, 63.
6. A machining deparbnent receives a different number of orders each day and
the time required to process each order varies. The deparbnent is interested
in determining how many machines it should have to minimise the combined
cost of machine idle and order waiting time. The deparbnent knows from past
experience that the number of orders per day and the processing time per order
follow distributions as following:
Number of orders/day Probability Hours required per order Probability

0 0.10 5 0.05
1 0.15 10 0.05
2 0.25 15 0.10
3 0.30 20 0.10
4 0.15 25 0.20
5 0.05 30 0.25
35 0.15
40 0.10
Cost/hour of idle machine = f40.00

Cost per hour for order waiting = f60.00
Assuming an 8 hours working day, solve the problem using simulation.
Use random numbers 18, 58, 26, 44, 10, 39, 77, 56, 75, 77, 64, 24, 29, 25, 71, 93.
Simulate using one machine and two machines for 5 days each.
7. A call centre provides customer services by telephone. The interval between calls
and the duration of calls is distributed as shown in the following table. The
management does not want more than 0.05 probability that a caller has to wait
for more than 10 seconds for his call to be answered. Use simulation to determine
how many operators should be employed to answer incoming calls.
Interval between incoming Probability Length of call Probability

calls (seconds) (seconds)
10 0.08 60 0.07
12 0.11 65 0.12
14 0.14 70 0.18
16 0.16 75 0.16
18 0.14 80 0.15
20 0.12 85 0.12
22 0.08 90 0.08
24 0.07 95 0.06
26 0.04 100 0.06
28 0.04
30 0.02
Simulate 10 calls. Use the random numbers: 91, 18, 52, 60, 60, 50, 74, 19, 51, 19,
50, 96, 50, 28, 64, 55, 70, 38, 55, 33.
8. A firm has a single channel service station with the following arrival and service
time probability distributions:
Inter arrival interval Probability Service time (minutes) Probability

(minutes)
1 0.35 1 0.20
2 0.25 1.5 0.35
3 0.20 2 0.25
4 0.12 2.5 0.15
5 0.08 3 0.05
The service station works from 1000 hours to 1200 hours and the customers are
served on a first come first served basis. If the attendant's wages are f15 per hour
and the customer's waiting time costs f20 per hour, then would it be economical
to engage a second attendant? Answer on the basis of Monte Carlo simulation.
Use random numbers: 46, 89, 19, 47, 92, 62, 91, 18, 52, 60, 60, 50, 74, 19, 51,
~~~~~~~~~~~~~~~~~~~~~~
56, 57, 97, 47, 58, 96, 19, 81, 17, 07, 80, 31, 83, 93, 92, 71, 79, 18, 16, 29, 90, 68,
11, 37, 81, 72, 52, 69, 64, 91, 09, 05, 88, 17, 77, 03, 04, 63, 74, 77, 60, 10, 13, 49,
92, 29, 80, 33, 63, 84, 16, 20, 02, 87, 27, 37, 09, 34, 20, 20, 08, 59, 00, 13, 35, 66,
74, 10, 28.
9. A certain maintenance facility is responsible for the upkeep of five machines. The
machines, which fail frequently, must be repaired as soon as possible to maintain
as high a productive capacity of the production system as possible. Management
is concerned about the average down time per machine and is considering an
increase in the capacity of the maintenance facility. The following distributions
have been developed from historical data:
Time between Probability Repair time (days) Probability

breakdown (days)
2 0.05 1 0.40
3 0.10 2 0.45
4 0.15 3 0.15
5 0.40
6 0.20
7 0.10
Simulate the failure and repair of 10 machines. Begin by determining the time
of the first breakdown by each of the five machines. Sequence the machines
through the repair facility on a first come first served basis. After a machine has
been repaired determine its next time of breakdown and continue till you have
repaired ten machines.
Use random numbers: 82, 56, 52, 38, 98, 28, 24, 23, 63, 68, 01, 64, 67, 99, 69, 66,
69, 12, 84, 20, 57, 42, 85, 70, 86, 69, 83
10. The management of a company is considering the marketing of a new product.
The invesbnent or the fixed cost required for the project is fl,50,000. The selling
price, variable costs and the annual sales volume have an element of uncertainty
in them. The product has a life of only one year. Past data reveals that these
factors follow probability distributions as shown in following table:
Unit selling Probability Unit variable Probability Sales volume Probability

price (f) cost (f) (units)
250 0.30 125 0.10 3000 0.20
300 0.50 175 0.60 4000 0.50
350 0.20 250 0.30 5000 0.30
What is the expected profit? Carry out ten simulations. Use random numbers:
27, 35, 01, 27, 32, 24, 55, 33, 95, 11, 23, 68, 78, 33, 84, 83, 47, 46, 25, 75, 16, 28,
03, 38, 41, 60, 91, 64, 23, 35.
11. A bakery keeps stock of a popular brand of cakes. Previous experience shows
the daily demand pattern for the item with associated probabilities, as following:
D~~d O 10 20 ~ ~ ~
Probability 0.01 0.20 0.15 0.50 0.12 0.02
Use the following sequence of random numbers to simulate the demand for the
next 10 days. Also find out the average demand per day.
Random numbers: 25, 39, 65, 76, 12, 05, 73, 89, 19, 49.
12. The quality control deparbnent of a manufacturing unit tests the lots of a
subcomponent received from an ancillary unit by a double sampling plan. It first
tests 10 units, the lot is accepted if no defective is found. If 1 defective is found,

another sample of 10 units is taken and tested. The lot is accepted if the second
sample is defect free, else the lot is rejected. If more than two defectives are found
in the first sample, the lot is rejected. Past data reveals that the probability that
a lot has 3% defectives is 0.20, 5% defectives is 0.50, 7% defectives is 0.20, 10%
defectives is 0.10. Simulate the testing procedure twenty times and determine
the proportion of lots that would be rejected. How often would you accept a lot
with more than 5% defectives?
Use random numbers:
666912 962862 479262 052207 937805 402214 362085 256249
842057 058415 911852 515479 738233 399186 619224 610856
428570 199307 606050 234066 977523 473801 413389 107387
866983 851392 741951 914963 072762 810824 320713 936382
419012 331430 195096 251249 731543 697276 161787 124734
13. A book store wishes to carry Ramayana in stock. Demand is probabilistic and
replenishment of stock takes two days (i.e. if an order is placed on March 1 it
is delivered on March 3). The probabilities of demand are the following:
Demand O 1 2 3 4
Probability 0.05 0.10 0.30 0.45 0.10
Each time an order is placed, the store incurs a cost of flO per order. The store
also incurs a carrying cost of f0.50 per book per day. The inventory carrying
cost is calculated on the basis of stock at the end of each day.
The manager of the book store wishes to compare two options for his inventory
decisions.
(a) Order 5 books when the inventory at the beginning of the day plus orders
outstanding is less than 8 books.
(b) Order 8 books when the inventory at the beginning of the day plus orders
outstanding is less than 8.
Currently (beginning 1st day) the store has a stock of 8 books plus 6 books
ordered two days ago and expected to arrive the next day.
Using Monte Carlo simulation for 10 cycles recommend which option the manager
should choose.
The following are two digit random numbers:
89, 34, 70, 63, 61, 81, 39, 16, 13, 73
14. A company manufactures 30 units per day. The sale of these items depends upon
demand which has the following distribution:
Sales (units) Probability

27 0.10
28 0.15
29 0.20
30 0.35
31 0.15
32 0.05
The production cost and sale price of each unit are f40 and f50, respectively.
Any unsold product is to be disposed off at a loss of f15 per unit. There is a
penalty of f5 per unit if the demand is not met.
Using the following random numbers, 07, 27, 62, 81, 08, 24, 32, 07, 13 and 93,
estimate the total profit/loss for the company for the next ten days.
If the company decides to produce 29 units per day, what is the advantage or
disadvantage to the company?
15. Dr. Strong is a dentist who schedules all her patients for 30 minutes appoinbnents.
Some of the patients take more or less than 30 minutes depending on the type
of dental work to be done. The following summary shows the various categories
of work, their probabilities and the time actually needed to complete the work.
Category Time required Probability of category

Filling 45 Minutes 0.40
Crown 60 Minutes 0.15
Cleaning 15 Minutes 0.15
Extraction 45 Minutes 0.10
Check-up 15 Minutes 0.20
Simulate the doctor's clinic for four hours and determine average waiting time
for the patients as well as idle time for the doctor. Assume that all patients
show up at the clinic at their scheduled arrival time starting at 8:00 a.m. Use
the following random numbers for handling the above problem: 40, 82, 11, 34,
25, 66, 17 and 79.
16. The materials manager of a firm wishes to determine the expected mean demand
for a particular item in stock during the reorder lead time. The information is
needed to determine how far in advance to reorder before the stock is reduced
to zero. However, both the lead time in days and the demand per day for the
item are random variables, described by the probability distribution that follows:
Lead time (days) Probability Demand per day (units) Probability

1 0.45 1 0.15
2 0.30 2 0.25
3 0.25 3 0.40
4 0.20
Manually simulate the problem for 30 reorders, to estimate the demand during
lead time.
Use random numbers: 42, 85, 70, 19, 93, 07, 60, 60, 50, 23, 40, 66, 97, 75, 23, 47,
38, 01, 41, 33, 89, 10, 73, 87, 86, 69, 83, 85.
Part V
The When of Production and
3~ 5 Ps of
Q Production
Operations
Management
Forecasting
Any astronomer can predict just where every star will be at half past
eleven tonight; he can make no such prediction about his daughter.
JAMES TRUSLOW ADAM
LEARNING OBJECTIVES
• Understand the importance of forecasting

• Study qualitative methods of forecasting-market research, panel consensus,
historical analogy and Delphi method
• Study time series analysis-simple moving average, weighted moving average,
exponential smoothing, and trend adjusted exponential smoothing
• Study causal methods-linear regression and multiple regression
• Understand the decompos ition of a time series and method to incorporate
trend and seasonal variation in the forecast
• Study the measures of forecasting accuracy-MAD, MSE, MAPE and TS
• Ana lyse the factors affecting choice of forecasting methods
12.1 INTRODUCTION
Production and operations management are transformation processes designed to convert
inputs into goods or services to satisfy the customer's needs. The process can work
efficiently only if we know what the customer's need is and how much is the demand.
All activities start with a demand forecast. It influences long-term planning of facilities,
their capacity, their location and their layout. Short-term forecasts are necessary to plan
and perform day-to-day activities, like inventory management, materials management,
287
production scheduling, planning work force requirements and so on. Forecasts can never
be perfect. However, this does not imply that we do not make any forecasts. On the
contrary we can make use of more than one method to make a forecast and continually
review and revise the forecast based on the information available.
12.2 TYPES OF FORECASTS

Forecasts can be classified according to the period being forecast. Forecasts may be
long term or short term. A long-term forecast is usually for a period longer than two
years into the future. Long-term forecasts are required for strategic planning. Long-term
forecasts have a greater degree of uncertainty. Short-term forecasts may be daily, weekly,
monthly, quarterly or annually. The forecast generally does not look beyond two years
in the future. Short-term forecasts rely heavily on historic data.
Four basic methods used for forecasts are:
Qualitative techniques: These are subjective and judgemental and are based on estimates
and expert opinions. Some of the commonly used methods are the Delphi method, panel
consensus, historical analogy and market research.
Time series analysis: This is based on the assumption that past data can be used
to predict the future. The data may include various components like trend, seasonal
fluctuations, cyclic variations and random variations.
Causal forecasting: This is based on determining the cause and effect relationships and
expressing them as mathematical relations. Regression models and econometric models
are examples of this type of forecasting.
Simulation: Demand may be forecast using Monte Carlo simulation.
12.3 QUALITATIVE METHODS OF FORECASTING

Qualitative methods are based on judgement and expert opinion. They are subjective and
are influenced by the biases and experiences of the persons involved.
Market research: It is primarily used for product research, looking for new product
ideas, seeking customer preferences and so on. Data is collected from the customers and
the retailers and distributors in the market through various means like questionnaires,
interviews, telephone calls, door-to-door surveys and so on. The data is then analysed
to arrive at forecasts.
Panel consensus: The method is also referred to as the nominal group technique. It is
based on the belief that two heads are better than one. A panel of people from a variety
of positions is formed. The panel meets and discusses the issues to arrive at a consensus.
However, a major drawback of this technique is that often people at junior levels are
afraid to express views which may be contrary to the views expressed by their senior
colleagues. They are intimidated by the presence of their seniors and feel inhibited to
express themselves. This behavioural aspect often defeats the very purpose of having a
panel.
Forecasting 289
When the forecasting decisions are made at a higher level, especially in case of
strategic decisions, the term executive judgement or executive committee consensus is used.
Historical analogy: The method relies on using data of a similar existing product to
forecast the demand for another product. For instance the demand of electric tea kettles
may be related to the demand for electric toasters.
Delphi method: This is a popular technique particularly for technological forecasting.
The moderator selects a panel of experts. The composition of the panel is known only to
the moderator. The panel members are not brought face to face nor do they know who
else is on the panel. The moderator poses the question to all the members through mail
or email and obtains their answers. He then summarises the results and redistributes
them to the panel members along with new appropriate questions. This may be repeated
till the panel arrives at some kind of consensus. The Delphi technique overcomes the
shortcomings of the panel consensus where some members get overawed or inhibited by
those more dominant or influential. As the panel members do not know the identity of
the others, there are no inhibitions in expressing opinions frankly and freely. However,
the method involves several rounds and is time consuming depending on the speed with
which the panel members respond to the questions.
Subjective methods are more appropriate for long-term forecasts.
12.4 TIME SERIES ANALYSIS

Demand for products can be broken down into six components: average demand, trend,
seasonal variation, cyclic variation, random variations and autocorrelation. Trend is the
overall tendency of the data to increase in value with time or to decrease in value with
time. The trend may be linear, asymptotic or exponential. Rising per capita income may
form a trend. Seasonal variation occurs because of seasonal demand. For example the
sale of ice-cream rises during summers and falls during winters. Cyclic fluctuations
are more difficult to predict and determine. They may be related to weather cycles or
political activity cycles. For example, elections are held every five years in India. These
could have an overall impact on the business. Random variations occur because of causes
which cannot be assigned. They occur purely due to chance events. Random variations
cannot be built into forecasts. Autocorrelation means that the value expected at any point
is highly correlated with its own past values.
Time series forecasting models attempt to predict future values based on past data.
For example last four weeks data on sales can be used to predict the fifth week's sales
or the last six quarters' data can be used to predict the next quarter's figures. Different
time series forecasting models are used depending on the situation. Short-term models
cater for random variations. Short term generally refers to periods under three months.
Medium-term models covering periods up to two years are useful for seasonal effect.
Long-term models help to identify major trends. The model chosen depends on the time
horizon of forecast, the availability of past data, and the accuracy required. Sometimes
available budget and the availability of qualified persons may also affect the choice of the
forecasting model as collection of data involves costs and the skills available determine
the complexity of the model that may be used. We shall study the simple moving average,
the weighted moving average and exponential smoothing models.
12.5 SIMPLE MOVING AVERAGE

The simple moving average is a short-term time series model. It is applied when the
demand is neither increasing rapidly nor declining rapidly and has no seasonal variations.
As the name suggests, the method depends on the average value of past data. The period
of past data to be considered is specified. To illustrate, the forecast for June based on a
four-month moving average will be the average of the actual demand of the preceding
four months, that is, February, March, April and May. For the forecast of July, the average
of actual demand of March, April, May and June will be computed. Table 12.1 depicts
the three-week and six-week moving averages.
Forecast for the fourth week using three-month moving average is
Demand of first week + Demand of second week + Demand of third week
= 3
To generalise,
r _ Dt-1
rt -
+ Dt-2 + ··· + Dt-11
n
where Ft is the forecast for the tth period
Dt-l is the actual demand in the t- lth period and so on
n is the number of periods to be averaged.
Table 12.1 Three-week and Six-week Moving Averages
Week Actual demand Forecast

3 weeks 6 weeks
1 700
2 1300
3 900
4 1400 966.7
5 1400 1200.0
6 1200 1233.3
7 1700 1333.3 1150.0
8 1600 1433.3 1316.7
9 1200 1500.0 1366.7
10 1600 1500.0 1416.7
11 1600 1466.7 1450.0
12 1400 1466.7 1483.3
13 2200 1533.3 1516.7
14 2100 1733.3 1600.0
15 2000 1900.0 1683.3
Figure 12.1 shows the moving average forecasts for the three and six-week periods
graphically. Here the shorter moving average period has more fluctuations and is closely
following the rising trend. The longer moving average period smoothens out the random
elements but lags behind the trend. It is important to select the best period for the moving
average. If the fluctuations in the actual demand are high and there is a requirement
to take these into account in the forecasts as well, a shorter moving average period is
preferred. If the fluctuations are small, a longer moving average period is preferred.
Forecasting 291
2500
2000
"C
C:
1500
<IS
E
Q)
Cl 1000
500
0
0 5 10 15 20
Week
- - - - Actual demand
- - - - - - Three-week moving average
- - - Six-week moving average
Figure 12.1 Moving Average Forecast for Three and Six-week Periods.
12.6 WEIGHTED MOVING AVERAGE

The simple moving average gives equal weightage to the data used for calculating the
moving average. Sometimes we may like to give different weights to the data that is being
used. For instance, for a three-month moving average, we may feel that the previous
month's data should have a weightage of 50%, data which is two months old should
have a weightage of 30% and the oldest data, that is, three months old should have a
weightage of 20%. Any weightage can be assigned provided that the sum of all weights
is 1. If the actual figures for the last three months are:
Month 1 Month 2 Month 3 Month 4
100 90 106 ?
Weight 0.20 0.30 0.50
Then the forecast for the fourth month is:
f4 = 106 X 0.50 + 90 X 0.30 + 100 X 0.20 = 100
Generalising
where w 1, w 2 , .. . , w,, are the weights given to the actual data for periods t - l, t - 2, ... ,
t - n respectively,
Dt-l, Dt_2, ... , Dt-n is the actual data for periods t - 1, t - 2, ... , t - n respectively, and
Ft is the forecast for the tth time period.
If in the previous example the actual data for the fourth month was 104 the forecast
for the fifth month will be:
F5 = 104 X 0.50 + 106 X 0.30 + 90 X 0.20 = 101.8
The simplest way to choose weights is through trial and error. Generally, the most recent
past is a good indicator of the future and should be given a higher weightage than older
data. However, this would not be true in case the data has seasonal variations. For
example, the figures for the sale of ice-cream in June should be weighted more heavily
than the figures of sale in December. The weighted moving average has advantage
over the simple moving average in that the effects of past data can be varied by using
appropriate weights.
12. 7 EXPONENTIAL SMOOTHING

Single smoothing: The simple moving average and the weighted moving average require
a lot of data. Exponential smoothing is based on the premise that the latest occurrence
of data is more indicative of the future than the past occurrences. This method gives
exponentially decreasing importance to older data and requires very little data. It is based
on the forecast and the actual data of the previous period and a smoothing constant
Alpha a which lies between 0 and 1.
Exponential smoothing is the most commonly used forecasting technique and is an
integral part of all computer forecasting software packages. It is surprisingly accurate
and easy to use. The computational effort is very little both for computing forecasts and
computing accuracy. The value of the smoothing constant is kept low if the demand is
fairly stable and will be higher if the demand were experiencing growth. The higher the
rate of growth, the larger should be the value of the smoothing constant as it will give
greater importance to the recent growth.
The forecast is given by the relation
Ft = Ft-1 + a(Dt-1 - Ft-1)
= a x Dt-l + (1 - a) x Ft-l
where
Ft is the forecast for the tth period
Ft-l was the forecast for the prior (t-l)th period, and
Dt-l was the actual demand for the prior (t-l)th period
The forecast for a period is the forecast for the previous period plus a proportion of
the error. The error is the difference between the actual demand and the forecast demand.
Let us see the effects of exponential smoothing with the help of an example given in
Table 12.2.
Forecasting 293
Table 12.2
Week Actual demand Forecast

a= 0.1 a= 0.3 a= 0.5
5 1400 1200.0 1200.0 1200.0
6 1200 1220.0 1260.0 1300.0
7 1700 1218.0 1242.0 1250.0
8 1600 1266.2 1379.4 1475.0
9 1200 1299.6 1445.6 1537.5
10 1600 1289.6 1371.9 1368.8
11 1600 1320.7 1440.3 1484.4
12 1400 1348.6 1488.2 1542.2
13 2200 1353.7 1461.8 1471.1
14 2100 1438.4 1683.2 1835.5
15 2000 1504.5 1808.3 1967.8
250 0
200 0
"C 1500
C:
<O
E
Q)
Cl
1000
50 0
0
4 6 8 10 12 14 16
Week
-+- Actual demand --- Forecast a = 0.1
.....- Forecast a = 0.3 -*- Forecast a = 0.5
Figure 12.2 Exponential Smoothing.
It may be observed that when the value of a is higher, the values are closer to the actual
demand. However, the forecast tends to lag, that is the forecast values are lower than the
actual values when demand is rising and higher than the actual values when demand is
falling. A trend factor may be added to track the actual demand more closely.
Trend adjusted exponential smoothing: It is a method to correct the trend. It uses two
smoothing constants. In addition to the smoothing constant a, a smoothing constant a
is used for smoothing the trend. The value of the trend for the first set of data must be
known. It can either be calculated based on past data or can be estimated through an
educated guess.
The equation to compute the Forecast Including Trend (FIT) is:

FITt =Ft+ Tt
Ft = aDt-l + (1 - a) FITt-l
Tt = Tt-l + /3(Ft - FITt_ 1)
where
Ft is the exponentially smoothed forecast for time period t
Tt is the exponentially smoothed trend forecast for time period t
FITt is the forecast including trend for time period t
FITt-l is the forecast including trend for time period t - 1
Dt-l is the actual demand for time period t - 1
a smoothing constant for demand
f3 is the smoothing constant for trend
Let us understand the procedure with the help of an example.
EXAMPLE 12.1 The average sale of cars for Raj Motors for the last five months was
30. The average increase in car sales was 4 units per month. In the fifth month 31 units
were sold. If a = 0.2 and /3 = 0.3, what is the forecast for the sixth month?
Solution: Fs = 30
Ts= 4
Ds = 31
FITs = Fs + Ts
=30+4=34
F6 = aDs + (1 - a) FITs
= 0.2 X 31 + 0.8 X 34 = 33.4
T6 =Ts+ /3(F6 - FITs)
= 4 + 0.3(33.4 - 34) = 3.82
FIT6 = F6 + T6
= 33.4 + 3.82 = 37.22
If the actual demand for sixth month was 38, what is the forecast for the seventh month?
F7 = aD 6 + (1- a) FIT6
= 0.2 X 38 + 0.8 X 37.22 = 37.376
T 7 = T 6 + /3(F7 - FIT6)
= 3.82 + 0.3(37.376 - 37.22) = 3.87
FIT7 = F7 + T7
= 37.38 + 3.87 = 41.25
Forecasting 295
Choice of smoothing constant a: The smoothing constant a has a value between O and
1. If the demand is stable a small smoothing constant should be chosen so that the effect
of random variations can be decreased. However, if the demand has large variations from
period to period, it is better to choose a smoothing constant with a higher value so that
the forecast value can keep up with the variations.
12.8 CAUSAL METHODS

Demand is dependent on a number of factors like price, availability of substitutes, price
of substitutes, competitor's price policy, income level of customers and so on. Causal
methods establish the relationship between the different variables and their effect on
each other. Causal methods include econometric models, linear regression and multiple
regression.
12. 9 LINEAR REGRESSION

Linear regression establishes the relationship between a dependent variable and an
independent variable. For example, if the sale of television sets varies with the amount
spent on advertising, then the demand for TV sets is the dependent variable and the
advertising budget is the independent variable. Linear regression establishes a straight
line relationship between the dependent and the independent variable. It is applicable to
time series analysis also where the dependent variable changes with time. The relationship
takes the form:
Y =a+ bX
where
Y is the dependent variable
a is the intercept on the y axis
b is the slope, and
X is the independent variable
The value of a and b can be calculated from the following relationship:
a= Y-bX
b= r,xY - n(X)(Y)
r,x -n(X)
2 2
L(Yi-Y;)2
n-2
where
Yi is the actual value and Yi is the forecast value for ith period
Syx is the standard error.
Let us examine this with the help of an example.
EXAMPLE 12.2
Table 12.3(a)
Sales (00s units) Ad. budget (000s)

20 7
10 5
35 15
20 8
25 9
15 6
What is the expectation of sales forecast if the advertising budget is t12,000?

Solution:
Table 12.3(b)
Sale (Y) Ad. budget (X) XY x2

20 7 140 49
10 5 50 25
35 15 525 225
20 8 160 64
25 9 225 81
15 6 90 36
Sum= 125 50 1190 480
Here n = 6
- rxn
X=-
= 560 = 8.33
- Ly
Y=-
n
= 1~5 = 20.833
b= r,xY -n(X)(Y)
r,x -n(X)
2 2
= 1190 - 6 X 8.33 X 20.833 = 2 34

480-6 X 8.33 X 8.33 .
a= Y-bX
= 20.833 - 2.34 X 8.33 = 1.34
Hence
Y = 1.34 + 2.34X
Forecasting 297
When advertising budget is f12,000, the forecast for sales is:
Y = 1.34 + 2.34X = 1.34 + 2.34 X 12 = 29.42
Let us consider a time series example.
EXAMPLE 12.3 The data for quarterly sales of an item is given in Table 12.4(a):
Table 12.4(a) Quarterly Sales Data
Quarter Sales
1 600
2 1550
3 1500
4 1500
5 2400
6 3100
7 2600
8 2900
What is the forecast for the ninth and tenth quarters?

Solution:
Table 12.4(b)
Quarter X Sale (Y) XY x2
1 -7 600 -4200 49
2 -5 1550 -7750 25
3 -3 1500 -4500 9
4 -1 1500 -1500
5 1 2400 2400 1
6 3 3100 9300 9
7 5 2600 13000 25
8 7 2900 20300 49
0 16150 27050 168
The computational effort in a time series can be reduced by coding for X. The median
value of the quarters is given the code value zero. In this case, the median value is 4.5
and is coded as zero. The value 4 is coded as -1 and the value 5 is coded as +1. Code
difference for each quarter is 2 and hence, the other values. In case the number of
observations had been odd, let us say seven, then the median value 4 would be given a
code value of 0, and the coded value of the third quarter would be -1 and of the fifth
quarter +1 and so on. The advantage gained is that the value of X becomes zero, and
the equations can be reduced to:
From the given data:

b = r,xY
r,x2
= 27050 = 161
168
a=Y
= !
16 50 = 2018.75
Y = 2018.75 + 161X
For the ninth quarter, the coded value of Xis 9. The forecast is
Y = 2018.75 + 161X = 2018.75 + 161 X 9 = 3467.75
For the tenth quarter the coded value of Xis 11. The forecast is
Y = 2018.75 + 161X = 2018.75 + 161 X 11 = 3789.75
If coded values of X have been used to derive the linear regression equation, we must
use the coded value of X for the period of forecast also.
12.10 MULTIPLE REGRESSION

When the dependent variable is affected by more than one factor, or by more than one
independent variable, multiple regression can be used for establishing the relationship.
The equation takes the form:
Y = a + b1X1 + b2X2 · ·· b11 X 11
The manual solution of such problems is tedious. Multiple regression can be performed
through the Data Analysis function of Microsoft Excel. The data analysis function can
be invoked from the Tools menu. In case the data analysis option does not appear in
the menu, the analysis tool pack option must be selected from the Add-in menu. The
data analysis function has a regression option available. Let us understand the use of
this function with the help of an example.
EXAMPLE 12.4 The sales of ice-cream are dependent on the advertising budget and
the daily temperature. Past data for six days is given in Table 12.5.
Table 12.5 Advertising Budget and Sale
Sale Ad budget Temperature

500 5 25
550 6 28
620 6.5 32
800 8 38
750 7 35
845 8 40
Forecasting 299
Let us first find the multiple regression equation using MS Excel. Clicking on the Add-in
option of the Tools menu produces the screen given in Figure 12.3.
A-d-d--lns- - - - - - - - -ft]~
1
Arialys,s ToolP~- \IBA

OK
I
r
r
Conditronal 5urn Wiu.m:I
Euro CuirencyTemls
Cancel
I
r Frcflldine':. Mathematir;al f l.117[tion5
r
r
Internet ,Assi$ ant VBA
Lookup W~ard
llf()I/I/Se. ,.
J
w Solver Add·irt
A!,.lt:omdt:lon. ,.
I
AnalysJ_ TooiPak
Provide> fundions and 1rterfoces for nn,anda, ,md scient ic
data analysis
Figure 12.3
Select the Analysis Toolpak option and click OK. When the Tools menu is invoked,
the Data Analysis option will appear in the menu.
Set up the data in the spreadsheet in cells A2 through C8. Invoke the Data Analysis
option under the Tools menu. A screen as shown in Figure 12.4 opens up.
--- - - - ----------
Data Analysis [!ii~
Covarf.ani:e
DescrlptiVe Statistics Cal"ll:el
Exp()flenticil Simoothrng
J
f -Test Two-5ample for 1/anam;es
Fourier Al'I ysls l:ielp
Histogram
Movririg A\/erage
Riarndom Number Generation
Rank i::rld Percentile
Figure 12.4
Select the Regression option and click OK. Screen as shown in Figure 12.5 appears
Regression --- - - - - - - - - (I]~
Inpl.lt
OK
ln~t l'. RanQBO 11~1.
Input ~ Range:
~j
r kdbels r Constant I< jtero
t[elp
Cort,dence Le~el: ~ "lo
Olltll(.t oplKJn<
Ii" Qutput Rar,go: 1$A$12 'I,
(' New Wolk.<hBet fJ\I,
r New \1£0f~0ok
Residuals
r e.es,duols r Resii;l.u.!IPlots
r 5tatldardl2ed Re<ldual< r L[ne FHlot<
~ rmal Probability
(" ~mal Probab~ty Plots
Figure 12.5
The Input Y Range is A3:A8. The Input X Range is B3:C8 and the output range is Al2.
Click OK. The results on the spreadsheet are shown in Table 12.6.
Table 12.6(a)
Sale Ad budget Temperature

500.000 5.000 25.000
550.000 6.000 28.000
620.000 6.500 32.000
800.000 8.000 38.000
750.000 7.000 35.000
845.000 8.000 40.000
Table 12.6(b) Summary Output
Regression statistics
Multiple R 0.991
R square 0.981
Adjusted R square 0.969
Standard error 24.820
Observations 6.000
Table 12.6(c) ANOVA

df ss MS F Significance F
Regression 2.000 97539.408 48769.704 79.168 0.003
Residual 3.000 1848.092 616.031
Total 5.000 99387.500
Forecasting 301
Table 12.6(d)
Coefficients Standard t Stat P-value Lower Upper Lower Upper
error 95% 95% 95.0% 95.0%
Intercept -112.405 64.706 -1.737 0.181 -318.327 93.518 -318.327 93.518
X Variable 1 -27.405 56.215 -0.487 0.659 -206.305 151.496 -206.305 151.496
X Variable 2 29.542 11.372 2.598 0.081 -6.648 65.732 -6.648 65.732
The regression equation is:

Y = -112.405 - 27.405X 1 + 29.542X2
What is the sales forecast if the advertising budget is 6 and the temperature for the next
day is likely to be 32?
Y = -112.405 - 27.405 X 6 + 29.542 X 32 = 668.51
12.11 DECOMPOSITION OF TIME SERIES

A time series may contain all the components of demand-trend, seasonal variations,
cyclic variations, random variations and autocorrelation. While the trend and seasonal
component can be dealt with easily, the cyclic component is more difficult to build into
forecasts as the cycles may occur after a long period. The seasonal variations may be
additive or multiplicative. In case of additive seasonal variation, the trend and seasonal
variations are added, whereas in the case of multiplicative seasonal variation, the trend
is multiplied by the seasonal variation factor or seasonal index.
Seasonal index: The seasonal index can be determined by using simple proportions as
illustrated in the example.
EXAMPLE 12.5 The sale of a product in various quarters of the year is given in
Table 12.7(a).
Table 12.7(a) Sale of a Product in Various Quarters
Quarter Past sales Average sale per quarter Seasonal factor
1 200 250 0.8

2 300 250 1.2
3 350 250 1.4
4 150 250 0.6
Total 1000
The seasonal factor is computed by

Actual sale
Seasonal factor = ~ - - - ~ -
Average sale
If the expected annual sale next year is 1200, what is the forecast of sale for each quarter?
Table 12.7(b)
Quarter Seasonal factor Average sale per quarter Forecast

1 0.8 300 240
2 1.2 300 360
3 1.4 300 420
4 0.6 300 180
Total 1200
The average sale per quarter is 300. This is multiplied by the seasonal factor to obtain
the forecast.
The procedure for dealing with a time series that has trend and seasonal variations
is:
Step 1. Determine the seasonal index.
Step 2. Deseasonalise the data.
Step 3. Develop the linear regression equation from this data.
Step 4. Using the regression equation forecast the future deseasonalised values for various
quarters.
Step 5. Seasonalise the forecast by applying the seasonal index.
Let us understand the procedure with the help of an example.
EXAMPLE 12.6 The actual quarterly demand figures for a product for 3 years are
given in Table 12.8. Make a forecast for the next year?
Table 12.S(a) Quarterly Demand for a Product for Three Years
Year Quarter Actual demand

2003 600
II 1500
Ill 1300
IV 800
2004 1300
II 2700
Ill 2500
IV 1000
2005 2000
II 4800
Ill 3700
IV 2100
Total 24300
24300
Average quarterly demand =1 2 = 2025
Solution:
Step 1. Compute seasonal index
Forecasting 303
Table 12.S(b)
Year Quarter I Quarter II Quarter Ill Quarter IV

2003 600 1500 1300 800
2004 1300 2700 2500 1000
2005 2000 4800 3700 2100
Average 1300 3000 2500 1300
Average quarterly demand 2025 2025 2025 2025
Seasonal index 0.642 1.481 1.235 0.642
Step 2. Deseasonalise the data by dividing the actual demand with the seasonal index.
Table 12.S(c)
Year Quarter Actual demand Seasonal index Deseasonalised demand

2003 600 0.642 934.579
II 1500 1.481 1012.829
Ill 1300 1.235 1052.632
IV 800 0.642 1246.106
2004 1300 0.642 2024.922
II 2700 1.481 1823.093
Ill 2500 1.235 2024.291
IV 1000 0.642 1557.632
2005 2000 0.642 3115.265
II 4800 1.481 3241.053
Ill 3700 1.235 2995.951
IV 2100 0.642 3271.028
Total 24300
Step 3. Develop the regression equation.
Table 12.S(d)
S. No. Quarter X y XY x2
1 1 -11 934.579 -10280.4 121
2 2 -9 1012.83 -9115.46 81
3 3 -7 1052.63 -7368.42 49
4 4 -5 1246.11 -6230.53 25
5 1 -3 2024.92 -6074.77 9
6 2 -1 1823.09 -1823.09 1
7 3 1 2024.29 2024.291 1
8 4 3 1557.63 4672.896 9
9 1 5 3115.27 15576.33 25
10 2 7 3241.05 22687.37 49
11 3 9 2995.95 26963.56 81
12 4 11 3271.03 35981.31 121
Sum 24299.38 67013.11 572
Mean 2024.948
b = r,xY
r,x2
= 67 ~~~- 11 = 117.156
Y = 2024.948 + 117.156 XX
Step 4. Deseasonalised forecast values
Table 12.S(e)
Year Quarter Forecast deseasonalised Seasonal index Seasonalised

demand demand
2006 3547.98 0.642 2277.803
II 3782.29 1.481 5601.571
Ill 4016.60 1.235 4960.501
IV 4250.91 0.642 2729.084
The deseasonalised demand is computed with the regression equation.

Step 5. Seasonalise the demand by multiplying the deseasonalised demand with the
seasonal index.
12.12 MEASURES OF FORECASTING ACCURACY

Forecasts are predictions of future values and are bound to have some error in them. Error
is the difference between the actual value and the forecast value. Demand is dependent
on a large number of factors, all of which cannot be taken into account while making
a forecast. Some errors may be random due to unidentifiable causes and some may be
due to bias. Errors due to bias are consistent mistakes because of wrong interpretation
of data or some other assignable cause. It is important to measure the accuracy of the
forecast. This will enable the managers to choose the best method of forecasting as well
as enable them to take suitable action to correct the forecast so that the effect of errors
can be reduced to the minimum. Various methods are used to measure forecasting errors.
Mean Absolute Deviation (MAD): It is the mean of the forecasting errors without
considering whether the error is positive or negative, that is, it does not consider whether
the forecast value was an overestimate or an underestimate. It is computing by summing
up the absolute value of the error and dividing it by the number of data points.
n
IIDi-Ftl
MAD= _i=_l_ __
n
where
n is the number of data points
Di is the actual demand for the ith period, and
Fi is the forecast for the ith period
Forecasting 305
Mean Square Error (MSE): The mean square error is the mean of the square of the
deviations of actual demand from the forecast. As can be seen, by squaring the error, the
direction of error will be negated as even negative values of error will become positive
when squared. Large errors will be penalised more than small errors because of squaring.
It is given by
MsE = n
1 II
i=l
r
(Di - "q)
2
The notations have the same meanings as explained in the formula for MAD.
Mean Absolute Percentage Error (MAPE): MAD and MSE provide information on the
extent of error, they do not provide information on the extent of relative error. Mean
absolute percentage error indicates the relative extent of the error. It is computed by
MAPE = 100 ±
n i=l
IDi - Fil
Di
Tracking signal: Tracking signal is the ratio between the Running Sum of Forecast
Errors (RSFE) and the MAD. RSFE refers to the cumulative errors.
.
T rac kmg . l RSFE
szgna = MAD
The tracking signal is calculated each time the forecasting model is updated with new data.
A positive tracking signal indicates that the forecasts are lower than the actual demand
and a negative tracking signal indicates that the forecast is higher than the demand. A
tracking signal whose value is close to zero indicates that the forecast values and actual
values are close to each other and there is very little error between them. If the forecast
value and the actual values have large variation between them, the value of the tracking
signal will deviate significantly from zero.
Let us study these methods with the help of an example.
EXAMPLE 12. 7 Table 12.9 shows the demand forecast and the actual demand. The
values for MAD, MSE, MAPE and TS have been calculated and incorporated in the table.
Table 12.9 Demand Forecast and The Actual Demand
Forecast Actual Deviation Absolute Squared Percentage Absolute percentage

demand deviation deviation error error
100 110 10 10 100 9.09 9.09
90 85 -5 5 25 -5.88 5.88
80 88 8 8 64 9.09 9.09
85 95 10 10 100 10.53 10.53
75 65 -10 10 100 -15.38 15.38
85 80 -5 5 25 -6.25 6.25
65 52 -13 13 169 -25.00 25.00
Total -5 61 583 81.23
61
MAD= 7 = 8.71
MSE = 7583 = 83.29

MAPE = -81.23
7- = 11.60%
TS = 8-5
_71 = -0.57
12.13 SELECTING A FORECASTING METHOD

The choice of a forecasting model depends on the amount and type of data available,
the time horizon for which forecasts are required, the degree of accuracy required and
the costs involved.
One of the key issues affecting the choice of method is the time span for which
forecasts are required. Short-term forecasts are needed for decisions on purchasing, job
scheduling, machine scheduling and time series methods like the simple moving average,
weighted moving average and exponential smoothing are used. Regression analysis is used
for mid-term forecasts, such as those required for sales planning, production planning,
inventory budgeting and so on. Long range forecasts rely more on qualitative techniques
like Delphi and market research.
If no data is available or it is too expensive to collect, techniques like Delphi and
nominal group method are used. When historic data is available, time series methods
can be employed. If the data has a causal relationship, regression analysis is a suitable
choice.
A trade-off must be made between accuracy and cost. As the accuracy of the forecast
is improved the cost of collecting data and analysis increases. On the other hand, if the
forecast is not accurate, it may lead to high inventory carrying costs. For example, if
the forecast for items on the inventory which have a high usage value (Usage value =
Numbers used x Cost per unit) is inaccurate, it may lead to overstocking and result in
high carrying costs. The choice of method may also be dictated by the purpose of the
forecast. A step by step approach could be:
Step 1. Decide what to forecast. This should include the level of accuracy required and
the time horizon for which the forecast is required.
Step 2. Evaluate and analyse appropriate data. Identify the data that is needed for the
forecast and check whether it is available. If not, can it be collected and what will be
the cost involved?
Step 3. Select and test the forecasting model. Check for the ease of use, accuracy and costs.
Step 4. Generate the forecast.
Step 5. Monitor forecast accuracy over time and review the method used. If the method
is found inappropriate, switch to another method.
Forecasting 307
Forecasting the future demand for a product or a service is the first step in planning
of production or operations. The demand forecast leads to an estimate of materials,
labour, machine hours, capital budgets and so on. Inaccuracies in the forecast will affect
productivity, increase costs and result in waste. An accurate forecast will ensure efficient
and effective implementation of production or operations.
Computer packages are available for forecasting. WinQSB has a forecasting module
that can forecast using various methods. Historical data can be entered and various
forecasting methods selected. Printouts from the package are shown in Table 12.10 and
Figure 12.6.
Table 12.10(a) Example 12.8

Quarter Historical Data
l 600
2 1500
3 1300
4 800
5 1300
6 2700
7 2500
8 1000
9 2000
10 4800
11 3700
12 2100
Melhod P111.a .. ete,s Search Cntet1on
(i Assign vakJes
('
Wcii#,lcd ,noving ••crogc [l,t/MAJ

Moving ~vauga .. th ~naa, trend (MA fl
Single ~11:ponertlial HU>Olhirig (S E'S J
Slnale e•Potiertlial ,11001hlfit1 wlh ueoo ISES Tl
Linttdl 1eu11:s¥iun w:lh li111tt. (LR)
Holt W,ntcu A•dilivc AIQo,ilhm IIIWAI

Holt-llf,nt,., N t.p,calovo Algonlhm (H'IJNJ
lh I
OK
Figure 12.6
Table 12.10(b) Forecast Result for Example 12.8

07-02-2006 Actual Forecast by Forecast by Forecast Tracking
CFE MAD MSE MAPE(%) R-square
Month Data 3-MA 6-MA Enor Si~nal
I 600
2 1500
3 1300
4 800 11 33.333
5 1300 1200
6 2700 I l33.333
7 2500 1600 1366.667 11 33.333 11 33.333 11 33.333 1284445 45.33334 1
8 1000 2 166.667 1683.333 -683.3334 450 908.3334 875694. 5 56.83334 0.4954 128 0. 1345679
9 2000 2066.667 1600 400 850 738.8889 637 129.7 44.55556 1.150376 0.2526 19 1
10 4800 1833.333 17 16.667 3083.333 3933.333 1325 2854584 49 .4757 2.968554 0.5075636
II 3700 2600 2383.333 13 16.667 5250 1323.333 2630389 46.69767 3.967254 0.6934637
12 2 100 3500 2783.333 -683.3333 4566.667 12 16.667 22698 15 44.3380 1 3.753425 0.5378 196
13 3533.333 2683.333
CFE 3666.666 4566.667
MAD 1066.667 12 16.667
MSE 1858025 22698 15
MAPE 46.84285 44.3380 1
Trk.S ignal 3.4375 3.753425
R-square 0.4749889 0.5378 196
m=3 m=6
Mean of actual data = 2025 S.D. (sigma) 1246.905

n = 12 #Forecast = 1
7012.621 ~ - - - - - - - - - - - - - ~ ~ 7012.621
• Actual • 3-MA X 6-MA
'
'
6311.359 ------------------------------------------~---- 6311.359
'
5610.097
__________________________________________ L ___ _
' 5610.097
'
'''
'
4908.835 ------------------------------------------ 'r ---- 4908.835
4207.573 4207.573
3506.311 3506.311
2805.049 2805.049
2103.786 2103.786
1402.524 1402 .524
701 .2621
0
13
Month
Figure 12.7
Forecasting 309
12.14 SUMMARY
Forecasting of demand for a product or service initiates the production and operations
function. It is an important input to help plan materials procurement, inventories, production
scheduling, machine loading and scheduling, labour planning, capital budgeting and so on.
Forecasting can be carried out by the use of qualitative methods or quantitative
methods. Qualitative methods rely on the informed judgement of experts and people in
the field. Some of the qualitative techniques commonly used are market survey, panel
consensus, historical analogy and the Delphi method. Market survey is carried out by
interviewing or collecting data through questionnaires from customers, dealers and
retailers. A panel consensus involves the creation of a panel that meets and discusses
the problem. They reach a consensus about the forecast. Its main disadvantage is that
people especially subordinates tend to be overawed and inhibited in the presence of their
seniors and may not express their views frankly. There is a tendency to toe the line of the
senior person or the expert present. The Delphi technique overcomes this shortcoming.
In this method a panel of experts is drawn up and the moderator sends them questions
to be answered by them. The questions are sent through mail or on email. The panellists
do not know who the other members of the panel are and never come face to face. The
answers are then compiled by the moderator and a fresh set of questions along with
the moderator's comments are sent to the panel. A number of rounds may be necessary
before a consensus is reached. The method is time consuming and several rounds may
be needed to reach some consensus about the forecast. Historical analogy uses the data
of an existing similar product to forecast the demand of another product.
The time series analyses is a quantitative technique. Time series consists of data
which changes with respect to time. For example, the monthly sales figure for the
sale of a product is a time series. Forecasts based on time series data follow the
premise that the data is likely to follow the pattern that it has followed in the past.
A simple moving average is the mean of the actual data for a number of past
periods called the averaging period. If we use a three-month averaging period, then the
forecast for the fourth month is the average of the actual demand during the first three
months. The forecast for the fifth month is the average of actual demand for the second,
third and fourth month. The weighted moving average assigns weights to the data of the
averaging period. Generally a higher weightage is assigned to the most recent data and
lower weights are assigned to data which is not so current. Simple exponential smoothing
involves a smoothing factor whose value lies between Oand 1. The forecast for a particular
period is the sum of the actual demand of the preceding period multiplied by the smoothing
factor and the forecast of the previous period multiplied by (1- smoothing factor). Trend
adjusted exponential smoothing can be used to cater for the trend in the actual data.
Causal methods establish a relationship between a dependent variable and independent
variables. For example, the sale of electric water heaters may depend on the availability of
electricity, the electricity tariff, the severity of winters at the location and so on. Regression
establishes a functional relationship between two or more correlated variables. Linear
regression is a special form of regression where the relationship between a dependent
variable and an independent variable is expressed as a straight line.
A time series can be decomposed to separate the trend and seasonal variations. The
decomposition procedure consists of calculating the seasonal index, deseasonalising the
data, computing the trend through regression, forecasting the values for the required
period and then seasonalising them with the help of the seasonal index.
Forecasts are prone to some amount of error. Forecasting error is the difference
between the actual data and the forecast value of the data. The forecasting error can be
expressed as mean absolute deviation, mean squared error, mean absolute percentage
error and tracking signal.
The choice of forecasting method depends on the accuracy required, the time horizon,
the availability and type of data and the cost involved. The method also depends on the
purpose of the forecast. Different items may require a different degree of accuracy and
hence different methods of forecasting. Time series analysis can be used for short-term
forecasts. Regression and causal models are suitable for mid-term forecasts. For long-term
forecasts, qualitative methods are generally more suitable.
Accurate forecasts can contribute to efficient and effective production and operations
planning and implementation.
ICONCEPT QUIZ I
State True or False
1. A simple moving average forecast is used for technical forecasting.
2. Exponential smoothing is based on the premise that past occurrences are more
indicative of the future than latest occurrence.
3. Delphi technique is useful for technological forecasting.
4. Monte Carlo simulation can also be used for demand forecasting.
5. Time series forecasting models attempt to predict future values based on past data.
6. Time series forecasting models are useful for long-term forecasts.
7. A shorter moving average period is preferred when fluctuations in demand are
small.
8. Panel consensus is a quantitative method of forecasting.
9. The greater the accuracy of the forecast required, the greater is the cost involved.
10. Historical analogy uses historical demand data of the product for forecasting future
demand.
1. The choice of a forecasting method does not depend on:
(a) The cost involved.
(b) The price of the product.
(c) The accuracy required.
(d) The time horizon for which the forecast is required.
2. Seasonal index is obtained by:
(a) Average quarterly demand.
(b) Average actual demand for different quarters, i.e. first quarter, second quarter
and so on.
Forecasting 311
(c) Dividing average quarterly demand by average actual demand for different
quarters, i.e. first quarter, second quarter and so on.
(d) Dividing average actual demand for different quarters, i.e. first quarter,
second quarter and so on by average quarterly demand.
3. Which of the following is not a time series forecasting model:
(a) Simple moving average. (b) Exponential smoothing.
(c) Delphi technique. (d) Weighted moving average.
4. Which of the following is not a component of a time series:
(a) Trend. (b) Cyclic variations.
(c) Market volatility. (d) Seasonal variations.
5. A three-month simple moving average implies that:
(a) The demand forecast is relevant for the next three months.
(b) The demand forecast is the average of the three months when the demand
was maximum.
(c) The demand forecast is the average of the previous three months actual
demand.
(d) The demand forecast is the average of the forecast demand of the last three
months.
6. In the Delphi method:
(a) The panel of experts is brought face to face for discussions.
(b) The panel meets periodically to discuss their individual forecasts and come
to a consensus.
(c) The panellists know who the other members of the panel are.
(d) The panellists are unaware of the composition of the panel and are not
brought face to face for discussions.
7. While carrying out exponential smoothing and assuming that a is the smoothing
constant:
(a) Ft = aFt-l + Dt-l· (b) Ft= Ft-1 + aDt-1·
(c) Ft = aFt-1 + (1 - a)Dt-1· (d) Ft = (1 - a)Ft-1 + aDt-1·
8. Which of the following is not a method of measuring forecasting accuracy:
(a) Mean absolute deviation. (b) Mean square error.
(c) Root mean square error. (d) Mean absolute percentage error.
9. Members tend to toe the line of the senior person present or the expert present
when using:
(a) Delphi technique. (b) Time series analysis.
(c) Panel consensus. (d) Historical analogies.
10. Regression and causal models are suitable for:
(a) Short-range forecasts. (b) Mid-range forecasts.
(c) Long-term forecasts. (d) All of the above.
Fill in the blanks:

1. Delphi is a popular technique for _______ forecasting.
2. The overall tendency of the data to increase or decrease in value with time is
called _ _ _ _ __
3. Seasonal variation occurs because of _ _ _ _ _ demand.
4. When value expected at any point is highly correlated with its own past values,
_ _ _ _ _ exists.
5. _ _ _ _ _ _ _ _ _ establishes the relationship between a dependent variable
and an independent variable.
6. The mean of forecasting errors without considering whether the forecast is an
overestimate or an underestimate is called ________
7. Long-range forecasts rely on _ _ _ _ _ _ _ _ _ _ techniques.
8. A trade off must be made between and _____ when selecting a
forecasting method.
9. Time series consists of data which changes with respect to _ _ __
10. The value of the smoothing factor in exponential smoothing lies between _ __
I QUESTIONS I
12.1 Why is forecasting important for an operations manager?
12.2 Explain the Delphi technique of forecasting. When would you use this method?
12.3 What do you understand by a time series analysis?
12.4 Explain the simple moving average method of forecasting with the help of an
example?
12.5 How does the weighted moving average differ from the simple moving average?
12.6 What is exponential smoothing? How do we decide on the smoothing constant?
12.7 What is linear regression? Explain the difference between an independent variable
and a dependent variable with the help of an example.
12.8 What are the different measures of forecasting accuracy?
12.9 What factors would you consider while selecting a forecasting method?
12.10 How do we build in seasonal variation in our forecast?
12.11 The following is the historical demand for a product.
Demand 15 11 12 12 16 17
(a) What is the forecast for July using a simple moving average for 3 months?
(b) What is the forecast for July using a four-month simple moving average?
(c) What is the forecast for July using single exponential smoothing, smoothing
constant of 0.2? The forecast for January was 14.
(d) What is the forecast using three-month weighted moving average, if the
weights are 0.5, 0.3 and 0.2 starting with the most current month?
(e) Calculate MAD, MAPE, MSE and TS for each of the methods.
Forecasting 313
12.12 The monthly demand for a product (00s of units) for the last year is as follows:
Demand 42 43 40 44 50 47
Month July Aug. Sep. Oct. Nov. Dec.
Demand 53 49 54 57 63 60
(a) What would be the forecast for January next year using a three-month
moving average?
(b) What would be the forecast for January next year using a five-month moving
average?
(c) What would be the forecast for January next year using single exponential
smoothing? The smoothing constant is 0.3 and the forecast for March was
50 units. Calculate MAD, MASE, MAPE and TS.
(d) Using regression analysis, what would be the forecast for January, February
and March next year? What is the standard error?
12.13 The quarterly demand for the past three years for a particular product is given in
following table:
2003 2004 2005

Quarter Demand Quarter Demand Quarter Demand
1 2100 1 2700 1 3500
2 1700 2 2400 2 3000
3 2700 3 3500 3 4300
4 3200 4 3500 4 4800
There are both trend and seasonal factors. The cycle is of one year. Use time
series decomposition to forecast demand for the quarterly sales of the next year.
12.14 The demand for sweets is correlated to the price of sugar. Past data is given in
following table:
S. No. Price of sugar (~ per kg) Demand in kg per month

1 10.00 440
2 10.80 420
3 12.20 380
4 12.60 320
5 13.20 300
6 14.00 260
7 14.50 250
8 15.00 200
9 15.40 180
10 16.10 120
What is the forecast demand if the price of sugar is ~16.50 per kg?
12.15 The forecast demand and the actual demand for a product for the past six months
is given:
Month Mar. Apr. May Jun. July Aug.
Forecast 90 90 100 80 120 150
Actual 60 70 60 120 80 60
Calculate MAD, MAPE, MSE and TS.
Aggregate Production Planning
Planning is thinking beforehand how something is to be made or done, and mixing imagination
with the product-which in a broad sense makes all of us planners. The only difference is that
some people get a license to get paid for thinking and the rest of us just contribute our good
thoughts to our fellow man.
PAUL WILLIAMS
LEARNING OBJECTIVES
• Understand the production planning system
• Appreciate different production planning strategies
• Study aggregate planning techniques-trial and error methods, linear programming
approach, transportation model approach, dynamic programming approach
• Aggregate planning for services-yield management
13.1 INTRODUCTION
An organisation can compete effectively only if it can deliver the required volume of output
to the customers as per their time schedule. This involves matching production capacity
with the demand and striking a balance between the two. Figure 13.1 gives an overview of
the production planning and scheduling system. The output requirements and the capacity
have to be matched at each level. The details of planning also vary with each stage.
13.2 PRODUCTION PLANNING SYSTEM

Business plan: The production plan is evolved from the business plan. The business plan
is a statement of what the firm proposes to do in the future. The plan generally spans
a time horizon of 6 to 18 months. It is based on the business' strategic goals and spells
315
out the level of activity. The plan is generally expressed in terms of annual, quarterly or
monthly output (in rupee volume of sales) for the broad product groups of the firm. It is
not specific to a particular item or each product in the group. For example, Tata Motors'
plan may specify a certain amount of rupee sales for the cars without specifying the rupee
sale for the different models of cars that it makes. It is only a broad statement of intent.
Aggregate production planning: Aggregate production planning deals with the output
side of the plan. The rupee volume of sales target is translated into the number of units
of the aggregate product that must be produced and sold. The aggregate product is a
representative product of the product family. For example, Tata Motors make different
models of cars like the Indica, Indigo, Safari and so on, but at the aggregate production
planning stage the target may be to produce ten thousand cars in the year, where car is
a representative product of the car family and is assumed to consume a standard amount
of resources to help plan the capacity requirement. The aggregate plan does not deal with
specific individual products. The plan is governed by the availability of capacity and the
company's overall policies for maintaining inventories, backorders, employee stability or
hiring and lay off policies, and subcontracting.
Aggregate capacity planning: The aggregate capacity plan checks whether there is
sufficient capacity to meet the demand expressed in the aggregate output plan. The
feasibility of the planned output is checked against the available capacity. The plan lays
down how the capacity will be utilised and how over or under capacity will be corrected
by using different strategies. While the basic capacity is fixed, in the short run it could
be augmented by overtime or running an extra shift or by subcontracting. The labour
inputs could be varied. The aggregate planning process balances output levels, capacity
limitations and temporary adjustments of capacity during the coming months. The plan
sets limits on the master production schedule.
Master Production Schedule (MPS): The master production schedule disaggregates the
product groups into individual products and lays down when these should be produced
to meet the customer's requirements. The plan is a link between the marketing plan and
the production plan. It lays down when an incoming sales order can be scheduled for
production and when delivery of the same can be expected. It also takes into account
any backlogs that may exist and plans overproduction in lean periods keeping in view
the overall policy regarding maintaining inventories.
Business plan (6 to 18 months)
Operations plan
Output planning Capacity planning
Aggregate productio n - Aggregate capaci ty
MPS - Rough cut capacity
MRP - Detailed capacity
Loading scheduling - Short-term capacity

sequencing expediting control
Figure 13.1 Production Planning and Scheduling System.

Aggregate Production Planning 317
Rough-cut capacity planning: Rough-cut capacity planning checks the feasibility of
executing the tentative master production schedule in terms of capacity. This is to ensure
that the master production schedule does not overload any critical department or work
centre. The check is generally applied to critical areas before the master production
schedule is finalised.
Material Requirements Planning (MRP): The MPS is the driving force for material
requirements planning. The plan lays down the schedule for releasing orders and receiving
materials so that the MPS can be implemented. The other important inputs for the MRP
are the bill of materials and the inventory status.
Detailed capacity planning: This goes hand in hand with the MRP. It is a detailed
check carried out to ensure that the capacity needed for scheduled tasks is available.
Shop floor controls: Loading, sequencing, scheduling and expediting are shop floor
controls. Daily tasks or weekly tasks are coordinated through these controls. Loading
implies the assignment of individual jobs to machines or work centres. Sequencing
determines the order in which tasks should be carried out so that machine idle time
and delay in completing tasks is reduced. Scheduling lays down the start and finish
time for each activity. Expediting monitors the material and work flow from station to
station. Any last minute adjustment of capacity because of delays, hold ups and change
in priorities is carried out through short-term capacity control.
13.3 AGGREGATE PRODUCTION PLANNING

Aggregate production plan sets the production rate by product groups over a time
horizon of 6 to 18 months. It aims at an optimal combination of production rate, work
force level and inventories. The production rate is the number of units produced per
unit of time. The work force level is the number of workers needed for the production
and the inventory is the unused number of units carried over from the previous period.
Aggregate production plan attempts to minimise costs to fulfil the forecast demand by
an optimal mix of production rate, work force level and inventory level.
Inputs to the production planning process are shown in Figure 13.2.
External factors Internal facto rs
Econ omic cond itions Current capaci ty

Market demand
Current workforce
Competitor's behaviour
Inventory levels
Raw materials
availability Policy on back orders and
External capacity subcontracts
Figure 13.2 Inputs to the Production Planning System.

The inputs consist of internal and external factors. Generally the external factors are
beyond the control of the planner. However, some attempts are made to influence the
demand. For instance, during lean periods discounts are offered. Hotels invariably offer
discounted packages during the lean season in order to increase demand. Similarly, there
can be a slowdown on the promotional effort to reduce the demand. Some organisations
even resort to making complimentary products to overcome seasonal or cyclical demand
variations. For instance, a sports apparel store which offers swimsuits in the summer
may offer skiing gear in the winters.
All internal factors cannot be totally controlled either. Current physical capacity in
terms of plant and equipment is usually fixed in the short run. It may not always be
feasible to adjust it temporarily for optimum utilisation by hiring and firing workers as
trade union rules may prohibit such a policy. Similarly, there may be restrictions on the
overtime that can be used. Various strategies have to be adopted involving trade-offs
among work force levels, working hours, inventories and backlogs.
13.4 PRODUCTION PLANNING STRATEGIES

Chase strategy: The production rate in this strategy is adjusted so that the forecast
demand can be met. This is done by increasing or decreasing the level of the work
force through hiring and firing. This strategy can be adopted when a trained pool of
manpower is available for hiring as and when required. The strategy has its obvious
motivational limits. During periods of low demand workers will tend to slow down as
they are apprehensive that they will be laid off as soon as the work is completed. Trade
union activity may also restrict the use of this strategy.
Level production strategy: A stable work force is maintained in this strategy and
production rate is kept constant. The work force is based on the total demand for the
planning period and shortfalls are carried forward as backorders while surpluses are carried
forward as inventories. The employees prefer this strategy as they enjoy the benefits of
stable employment, though customer satisfaction is lower than what is achieved when
using the chase strategy.
Stable workforce-variable work hours: The strategy involves having a stable work force
but adjusting the production rate by varying the work hours. Shortfalls can be made up
through working overtime and during slack periods the work force can be under utilised.
Besides these strategies, we may even subcontract work when required. This can
be resorted to when the quality of work produced by the subcontractors is acceptable
and they are reliable. Part time workers can also be employed. For example, restaurants
employ part time workers during meal hours.
When a single strategy is used, it is called a pure strategy and when more than one
strategy is used it is termed as mixed strategy. While selecting a strategy, the aim is to
minimise the costs. The costs relevant to production planning are:
Basic production costs. These include the direct and indirect costs of production. The cost
of materials, direct and indirect costs of labour and fixed costs are included. The cost of
labour includes regular and overtime wages
Hiring and firing costs. Whenever the production rate is changed by changing the
workforce level, hiring and firing costs are involved. These are the cost of hiring and
training personnel and the costs of laying off personnel.
Inventory carrying costs. Whenever production is in excess of demand, the surplus units
will have to be carried as inventory to the next production period. Inventory holding cost
is the cost of storage, insurance, security, safety, pilferage, obsolescence, deterioration,
and record keeping beside the cost of capital tied up in the inventory.
Backorder costs. When demand exceeds production, the shortfall is carried over to the next
period as backorders. This involves costs of expediting and keeping track of backorders
and loss of customer goodwill. These are difficult to determine.
13.5 AGGREGATE PLANNING TECHNIQUES

Most firms use trial and error methods to solve aggregate planning problems. Different
strategies are applied and the one with the least cost selected. Mathematical techniques
namely linear programming, transportation model and dynamic programming can also
be applied to solve aggregate planning problems.
Trial and error method: Let us study the method with the help of an example.
EXAMPLE 13.1 A company is setting up a production plan for its product for the
next six months. The information given in Table 13.1 is available.
Table 13.1 Demand and Working Days Available
Demand and number of working days available
Jan. Feb. Mar. Apr. May Jun.
Demand 1600 1700 900 1000 1200 1800
Number of working days 25 23 24 20 25 24
Inventory carrying cost f2.00 per unit/month

Stock out cost f5.00 per unit/month
Cost of subcontracting f60.00 per unit
Cost of hiring and training f400.00 per worker
Laying off cost f500.00 per worker
Time required for 1 unit 5 labour hours.
Regular time wage fl0.00 per hour
Overtime wage f15.00 per hour
Starting inventory 400 units
Safety stock 25% of monthly demand
Present workforce 40
Overtime per worker not to exceed 4 hours per day.
The cost of material can be ignored as it is common to every unit that is produced.
Solution: Let us try various plans.
Plan 1. Chase strategy.
Plan 2. Level production. Keep a constant workforce and vary inventory and backorders.
Plan 3. Use a stable workforce sufficient to meet minimum demand and subcontract to
make up shortfalls
Plan 4. Use a stable workforce of 30 and make up shortfalls through overtime and
subcontracting.
The different plans have been set up with the help of MS Excel worksheets. They can
also be solved through the Aggregate Planning module of WinQSB package.
Plan 1. The company wishes to maintain a safety stock to cater for any variations in
the forecast and actual demand. The safety stock required to be maintained is 25% of
the monthly forecast demand. Based on this requirement the first step is to calculate
the actual number of units required to be produced. Detailed working is at Table 13.2.
Table 13.2 Number of Units to be Manufactured

Opening inventory 400 400 425 225 250 300
Forecast demand 1600 1700 900 1000 1200 1800
Safety stock 400 425 225 250 300 450
Units to be manufactured 1600 1725 700 1025 1250 1950
The opening inventory in January is 400 units. The safety stock is 25% of the forecast
demand. For January the safety stock is 400. This also becomes the opening inventory
for the next month, that is, February. The units to be manufactured is calculated as:
Units to be manufactured = (Forecast demand + Safety stock - Opening inventory)
Total units to be manufactured = 8250.
Table 13.3 shows all the computations. The number of days available in a month is
given. They are converted to hours by multiplying the number of days by 8 (8 hours
working per day).
Table 13.3 Costs for Plan 1
Jan. Feb. Mar. Apr. May Jun. Total

Forecast demand 1600 1700 900 1000 1200 1800
Safety stock 400 425 225 250 300 450
Units to be manufactured 1600 1725 700 1025 1250 1950 8250
Number of days 25 23 24 20 25 24
Number of hours 200 184 192 160 200 192 1128
Hours required 8000 8625 3500 5125 6250 9750 41250
Labour required 40 47 19 33 32 51
Numbers Available 40
Numbers hired 0 7 0 14 0 19 40
Numbers fired 0 0 28 0 1 0 29
Cost of hiring 0 2800 0 5600 0 7600 16000
Cost of firing 0 0 14000 0 500 0 14500
Regular wages 80000 86250 35000 51250 62500 97500 412500
Inventory cost 800 850 450 500 600 900 4100
Total 447100
Production of one unit takes 5 hours. The total hours required for production for each
month are calculated by multiplying the numbers required to be produced in a month by
5. For example, in January we require 1600 units for which we shall need 8000 hours. The
labour required is calculated by dividing the total number of hours required in a month
by the number of hours available per worker in the month. For the month of January,
8000 hours are required for production and each worker can contribute 200 hours in the
month. Hence the number of workers required is 40. As the present workforce is 40, there
is no requirement to hire or fire any worker. The requirement of workers for February is
47. Seven additional workers will have to be hired. The requirements for other months
have been similarly worked out.
The cost of hiring or firing workers has been calculated. It costs ~400 to hire and
train a worker. In February, 7 workers have been hired and the cost is ~2,800. Regular
wages have been calculated by multiplying the number of total hours required in the
month by the hourly wage rate which is ~10 per hour.
The inventory cost is based on the inventory held at the end of the month.
The total cost for Plan 1 is ~4,47,100.
Plan 2. The total production over six-month period is 8250.
The time required to manufacture 8250 units is 8250 x 5 = 41250 hours.
Total hours available per worker for manufacture = 1128
Number of workers required = 41250/1128 = 36
Table 13.4 shows the computations for Plan 2. The workforce has been kept constant
at 36.
Jan. Feb. Mar. Apr. May Jun. Cost
Starting inventory 400 240 -135 347 499 739

Forecast demand 1600 1700 900 1000 1200 1800
Number of days 25 23 24 20 25 24
Number of hours per worker 200 184 192 160 200 192
Total hours 7200 6624 6912 5760 7200 6912
Labour employed 36 36 36 36 36 36
Actual production 1440 1325 1382 1152 1440 1382
Inventory 240 -135 347 499 739 321
Shortfall 135 0 675
Shortfall cost 0 675 0 0 0 69100 406050
Regular wages 72000 66250 69100 57600 72000 642 4292
Inventory cost 480 694 998 1478 Total 411017
Total hours per month = Number of days x 8 x 36

Actual production per month= Total hours in a month/5
Inventory= Opening inventory+ Production - Forecast demand
Negative figure shows shortfall.

Inventory at the end of sixth month should have been 450 whereas it is only 321.
Total cost for Plan 2 is ~4,11,017.
Plan 3. Use a stable workforce sufficient to meet minimum demand and subcontract to
make up shortfalls.
The minimum number of units to be manufactured is in March= 700 units
Time required for manufacturing 700 units = 700 x 5 = 3500 hours
Time available per worker = 192 hours
Workforce required = 3500/192 = 19
Detailed working is in Table 13.5.
Starting inventory 400 400 425 225 250 300

Forecast demand 1600 1700 900 1000 1200 1800
Safety stock 400 425 225 250 300 450
Number of days 25 23 24 20 25 24
Number of hours 200 184 192 160 200 192
Workforce 19 19 19 19 19 19
Total hours available 3800 3496 3648 3040 3800 3648
Units produced 760 699 730 608 760 730
Surplus 0 0 30 0 0 0
Shortfall 840 1026 0 387 490 1220
Subcontracted units 840 1026 0 387 490 1220
Subcontract cost 50400 61560 0 23220 29400 73200 237780
Regular wages 38000 34960 36480 30400 38000 36480 214320
Inventory cost 800 800 910 450 500 600 4060
Total 456160
Total hours available per month = Number of days x 8 (hours per day) x 19 (workforce)
Units produced = Total hours/5 (5 hours per unit are allowed)
Surplus/shortfall = Units produced + Carryover inventory - Units to be produced
The shortfalls are subcontracted and costs worked out.
Plan 4. Use a stable workforce of 30 and make up shortfalls through overtime and
subcontracting. The detailed calculations are given in Table 13.6.

Number of days 25 23 24 20 25 24
Number of hours 200 184 192 160 200 192
Workforce 30 30 30 30 30 30
Total hours available 6000 5520 5760 4800 6000 5760
Units produced 1200 1104 1152 960 1200 1152
Forecast demand 1600 1700 900 1000 1200 1800
Surplus 0 0 252 212 212 0
Shortfall 0 596 0 0 0 436
Extra hours required 0 2980 0 0 0 2180
Overtime available 3000 2760 2880 2400 3000 2880
Units produced in overtime 0 552 0 0 0 436
Subcontracted units 0 44 0 0 0 0
Subcontract cost 0 2640 0 0 0 0 2640
Regular wages 60000 55200 57600 48000 60000 57600 338400
Overtime wages 0 41400 0 0 0 32700 74100
Inventory cost 800 0 504 424 424 0 2152
Total 417292
Total hours available per month = Number of days x 8 (hours per day) x 30 (workforce)
Units produced = Total hours/5 (5 hours per unit are allowed)
Surplus/shortfall = Units produced + Carryover inventory - Forecast demand
For making up shortfalls priority has been given to overtime. Balance requirement is
subcontracted.
A comparison of costs is shown in Table 13.7.
Table 13.7 Comparison of Costs for Different Plans
Cost Plan 1 Plan 2 Plan 3 Plan 4

Hiring 16000 0 0 0
Lay-off 14500 0 0 0
Excess inventory 4100 4292 4060 2152
Shortage 0 675 0 0
Subcontract 0 0 237780 2640
Overtime 0 0 0 74100
Regular time 412500 406050 214320 338400
Total 447100 411017 456160 417292
Plan 2 is the most economical option.

13.6 LINEAR PROGRAMMING APPROACH

The trial and error method is easy to evaluate, but it does not give an optimal solution.
Linear programming can be used to obtain an optimal solution to the problem. The
problem will involve a large number of variables. The objective is to minimise the cost
of hiring, the cost of lay-offs, the cost of overtime, the cost of subcontracting, the cost
of holding inventories and the cost of backorders. Constraints can be modelled on the
production capacity per period, the workforce employed per period and the demand
per period. Let us study the method with the help of an example. For simplification and
ease of understanding let us consider a situation where we shall follow a chase strategy.
EXAMPLE 13.2 Let us consider the same data of Example 13.1. The relevant data is
reproduced in Table 13.8.
A company is setting up a production plan for its product for the next six months.
The following information is available:
Table 13.8 Demand and Working Days Available

Demand and number of working days available
Demand 1600 1700 900 1000 1200 1800
Number of working days 25 23 24 20 25 24
Inventory carrying cost f2.00 per unit/month

Stockout cost f5.00 per unit/month
Cost of hiring and training f400.00 per worker
Laying off cost f500.00 per worker
Time required for 1 unit 5 labour hours
Regular time wage fl0.00 per hour
Starting inventory 400 units
Safety stock 25% of monthly demand
Present workforce 40
The cost of material can be ignored as it is common to every unit that is produced.
Solution: As computed previously, the requirement of units per period is given in
Table 13.9.
Table 13.9
Let H 1, H 2, H 3, H 4, H 5, and H 61 be the number of workers hired in each period

F1, F2, F3, F4, F5, and F61 be the number of workers laid off in each period
Ii, 12, 13, 14, 15, and 16, be the number of units of inventory in each period
The objective function can be written as
Minimise Z = 400(H1 + H 2 + H 3 + H 4 + H5 + H6)
+ 500(F1 + F2 + F3 + F4 + F5 + F6)
+ 2(11 + l2 + l3 + l4 + l5 + 16)
Let us examine the workforce constraints.
Workforce for January is
W 1 = 40 (initial workforce) + H 1 - F1
W2 = W1 + H2 - F2
= 40 + H1 - F1 + H2 - F2
W3 = 40 + H1 + H2 + H3 - (F1 + F2 + F3)
W4 = 40 + H1 + H2 + H3 + H4 - (F1 + F2 + F3 + F4)
W5 = 40 + H 1 + H 2 + H 3 + H 4 + H 5 - (F1 + F2 + F3 + F4 + F5)
W 6 = 40 + H 1 + H 2 + H 3 + H 4 + H 5 + H 6 - (F1 + F2 + F3 + F4 + F5 + F6)
Let us examine the production constraints.
Production in a period= hours available x number of workers/5 (hours required per unit)
The hours available per worker per period have already been worked out in Plan 1 and
are reproduced in Table 13.10.
Table 13.10
Number of days 25 23 24 20 25 24
Number of hours 200 184 192 160 200 192
P1 = 200 Wi/5 = 40 W1
P2 = 184 W2/5
P3 = 192 W3/5
P4 = 160 W4/5
P5 = 200 W5/5
P6 = 192 W6/5
Let us now examine the demand constraints.
Demand for a period = Initial inventory + Production for the period - Final inventory
400 + P1 - 11 = 1600
11 + P2 - 12 = 1725
I2 + P3 - I3 = 700
!3 + p 4 - !4 = 1025
!4 + Ps - ls= 1250
ls + p6 - !6 = 1950
The problem can now be solved either by using the Solver function of Microsoft Excel as
explained in Chapter 11, Section 11.4, or by using any other software package. WinQSB
has a module to solve aggregate planning problems. The following are printouts from
the WinQSB package for solving this problem.
Ptablem ype r= PanTimO! AIIU--l!Ll

C !;iinr,je Iii P<W
r 0v.. nimF- All,:r ,arJ
Jiil Hire/Qµimimsnl i4.llowE:J
C- Trant1J<Wta6on N<>del _ ~~bi;:on11a.cri11g Allowod
Iii General l,P r,IOOP,I Q El11cl<nrd'!f AOn111"~
r4 t._11sl Sol~~ Allnw,,;d
Prob1em TiUe IE11a11111le 13.2
!~umber .lilf Planning Periods
Planmn~ Aosourco. Neimo !E11p!Qvoa
Capacity Unit of Pla:1111ing RJ:!COUICI! jt-1our
CH1JaeitY Requ irE1men1 p_er R1'1aclu1:it/SeNice
Initial Number of Plonning Resource jw
l"itiaJ lnvootory(..)/Backordor(-) of Produc:1/Soivrco
~====:
l~o___~
C<inc.cl Help
Ill! IRll'I 111£1"1° 1~1 IRll'l 12111111~
Figure 13.3
Table 13.11 (a) Planning Information for Example 13.2 (LP Model)
DATA ITEM Period l Period 2 Period 3 Period 4 Period 5 Period 6
Forecast Demand 1600 1725 700 1025 1250 I 950
Initial Number of Emol ovee 40
Regu lar Time Caoac itv in Hour oer Emo lovee 200 184 192 160 200 192
Regular Time Cost oer Hour IO IO IO IO IO IO
Undertime Cost oer Hour IO IO IO IO IO IO
Hirin g Cost oer Emol ovee 400 400 400 400 400 400
Dismissal Cost per Emp loyee 500 500 500 500 500 500
Max imum Number of Employee All owed M M M M M M
Minimum Number of Em ployee All owed
Initial Inventory(+) or Backorder(-)
Max imum Endin g Inventory Allowed M M M M M M
Minimum Ending Inventorv (Safetv Stock)
Unit Inventorv Holding Cost 2 2 2 2 2 2
Other Unit Production Cost
Capac it y Requirement in Hour per Unit 5 5 5 5 5 5
Table 13.11(b) Planning Result for Example 13.2 (LP Model)
07-09-2006 Regular Ending Number of

10:31 :32 Demand Production Inventory Employees
Initial 0.00 40.00
Period 1 1,600.00 1,731.77 131.77 3.29 0.00 43.29
Period 2 1,725.00 1,593.23 0.00 0.00 0.00 43.29
Period 3 700.00 1,270.97 570.97 0.00 10.20 33.10
Period 4 1,025.00 1,059.14 605.11 0.00 0.00 33.10
Period 5 1,250.00 1,323.92 679.03 0.00 0.00 33.10
Period 6 1,950.00 1,270.97 0.00 0.00 0.00 33.10
Total 8,250.00 8,250.00 1,986.88 3.29 10.20
Table 13.11(c) Cost Analysis for Example 13.2 (LP Model)
07-09-2006 Inventory TOTAL

10 :39 :11 Holding Cost COST
Period 1 $86,588.58 $263 .54 $1,317 .71 0 $88,169 .83
Period 2 $79 ,661.45 0 0 0 $79,661.45
Period 3 $63 ,548.38 $1 ,141.94 0 $5 ,098 .07 $69,788 .39
Period 4 $52,956.99 $1,210 .22 0 0 $54,167 .20
Period 5 $66,196.23 $1,358 .06 0 0 $67,554.30
Period 6 $63 ,548.38 0 0 0 $63,548 .38
Total $412,500 $3,973.76 $1 ,317.71 $5,098 .07 $422,889.56
As can be seen, linear programming permits fractional answers. If we are to permit

only hiring and firing of employees, we need 43.29 employees for the first two periods
and 33.10 employees for the remaining four periods. The total cost for this solution is
~4,22,889.56. The package being of US origin prefixes the dollar sign before the cost.
13.7 TRANSPORTATION MODEL APPROACH

Aggregate planning problems can be set up as transportation model problems and solved
either by using the Solver function of Microsoft Excel or through other software packages.
The use of Solver function for solving transportation models has been explained in
Chapter 9, Section 9.5.
EXAMPLE 13.3: A company wants to plan production for the ensuing year so as
to minimise the combined cost of production and storage. In each quarter of the year
demand is anticipated to be 65, 80, 135 and 75 units respectively. The product can be
manufactured during regular time at a cost of ~16 per unit or during overtime at a cost of
~20 per unit. The cost of carrying inventory for one unit per quarter is ~2. The inventory
at the beginning of the first quarter is zero and the production capacity quarter-wise is
given in Table 13.12(a).
Table 13.12{a) Quarter-wise Production
Quarter Regular time Overtime

80 10
2 90 10
3 95 20
4 70 10
What should be the production schedule?

The problem does not appear to have anything to do with transportation on
the face of it. However, we can view the production as sources and the monthly demand
as destinations. It is obvious that what is produced in the first quarter can be sold in
the second quarter also but the production of the second quarter can only be sold
in that and subsequent quarters. Production costs for normal and overtime working
is different, and so we can consider these as different sources. The inventory storage
costs will also have to be added for any units that are produced in the first quarter
but sold in subsequent quarters. Let us set up the transportation table as shown in
Table 13.12(b).
Table 13.12{b)
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Supply
Quarter 1
Regular ~ I 18 I 20 LE_ 80
Overtime ~ I 22 I 24 ~ 10
Regular L_ I 16 I 18 ~ 90
Quarter 2
Overtime L_ I 20 I 22
~ 10
Quarter 3
Regular L_ I I 16
~ 95
Overtime L_ I I 20 LE_ 20
Regular L_ I I ~ 70
Quarter 4
Overtime L_ I I ~ 10
Demand 65 80 135 75
In Table 13.12(b) the shaded cells are not available. Let us solve this problem with
the help of WinQSB aggregate planning module. The set up screen is shown in
Figure 13.4.
Problem 5pccific-<1fion _
oblemTyp11 r PortTime Alluwed

("I Simple Model
Ix Ove~ime Allowed
[ r
@ ln.1n:tP(lftalion Modef
r Subcontrncllng Allowed
("\ 60,...ol lP Model r B"c:korder Allowed
Losl Snles Alluwed
Problem Title JE,ampl• l 3.3

Number of PIMning Pe110ds 14
Plonning Resource Nome
:===:
Ji ,
C..p!lcily U1111 ol P1enn,ng Resource
!====!
pI
CnpBcily Requirement per Product/Service ;
J = ===;
lnill"I Number of Pl.,nning Resource )1
!====!
lnlti"I lnvenlory(~J(Backorder(-) of Producl/ServiceJ~o_ _~
I OK Cancel Help
Figure 13.4
Table 13.12(c) Planning Information for Example 13.3 (Transportation Model)

DATA ITEM Period I Period 2 Period 3 Period 4
Forecast Demand 65 80 135 75
Regular Time Capacity in Unit 80 90 95 70
Regul ar Time Cost per Unit 16 16 16 16
Overtime Capacity in Unit 10 10 20 10
Overtime Cost per Unit 20 20 20 20
Initial In ventory(+) or Backorder(-) 0
Minimum Ending Inventory (Safety Stock) 0
Unit Inv entory Holding Cost 2 2 2 2
Table 13.12(d) Planning Result for Example 13.3 (Transportation Model)

07-09-2006 Regular Overtime Total Ending
12:35:22 Demand Production Production Production Inventory
Initial 0.00
Period I 65 .00 80.00 0.00 80 .00 15.00
Period 2 80.00 90.00 0.00 90.00 25.00
Period 3 135.00 95.00 15.00 110.00 0.00
Period 4 75.00 70.00 5.00 75.00 0.00
Total 355.00 335 .00 20.00 355.00 40 .00
Table 13.12(e) Cost Analysis for Example 13.3 (Transportation Model)

07-09-2006 Regular Time Overtime Inventory TOTAL
12:37:50 Cost Cost Holding Cost COST
Period I $1,280 0 $30 $1,310
Period 2 $1,440 0 $50 $1 ,490
Period 3 $1 ,520 $300 0 $1 ,820
Period 4 $1 , 120 $100 0 $1 ,220
Total $5 ,360 $400 $80 $5,840
The production schedule is

Quarter 1 Regular time 80 units
Quarter 2 Regular time 90 units
Quarter 3 Regular time 95 units and overtime 15 units
Quarter 4 Regular time 70 units and overtime 5 units
Total cost f5,840.
13.8 OTHER METHODS

Dynamic programming can also be used to solve aggregate planning problems as
illustrated in Annexure on Dynamic Programming. The capacity requirements can also be
determined through simulation. Linear Decision Rules can also be used. These are a set
of equations for calculating the optimal workforce, aggregate output rate and inventory
level for each period. The method guarantees an optimal solution and incorporates
non-linear cost relationships. The model determines actual costs incurred due to changes
in the workforce size, the inventory levels and the production rate and fits them in the
form of non-linear equations. The equations are simplified through calculus to minimise
the cost, and two linear equations for production rate and work force size are obtained.
LDRs must be uniquely developed by each organisation based on its data and cannot
be applied across organisations.
13. 9 AGGREGATE PLANNING FOR SERVICES

Aggregate planning for services is different because of the characteristics of services.
Services cannot be stored. For example, an airline cannot store a seat for later use. If the
seat is vacant when the flight takes off, it remains unutilised and causes a loss to the
airline. Similarly an appoinbnent with a dentist cannot be stored. The goods provided
by services may be stored but they generally have a short life. For instance, a newspaper
is good only for a day.
It is difficult to predict demand for services as it varies considerably. Capacity too is
difficult to predict and often depends on the type of services asked for by the customer.
How should capacity at a beauty parlour be measured? Should we measure it in terms
of the number of customers expected to visit it daily, or should we measure it in terms
of the worker hours available? The demand for different services can considerably affect
the capacity. Overall aggregation may not be possible.
Service capacity has to be provided at the appropriate place and time. This poses
its own problems. Services generally have a number of branches or outlets located at
different places. Determining the staffing requirements at each place is a part of the
aggregate planning process.
Services are generally labour intensive. This is an advantage from the planning point of
view as labour is the most flexible resource. Increased demand can be met through temporary
and part-time workers or through overtime. Most services rely on part-time workers.
Workers can be cross-trained to perform multiple tasks. Fire fighters can be trained
as paramedics and so on. Some services have peculiar requirements. Doctors have to
accommodate emergency calls along with their routine work. Hotels and airlines often
overbook capacity to cater for customers who do not show up after booking. The problem
is further compounded by different rates for different segments. The airline or hotel has
to determine how much capacity to provision in each segment in order to maximise its
profits. This process is called yield management.
13.10 YIELD MANAGEMENT

Hotels, airlines and restaurant services are time sensitive. Their capacity lapses with time.
It is important that the capacity is fully utilised. Marginal analysis is used to determine
how much of overbooking should be resorted to. The marginal analysis is based on cost
information and past data of no-shows (customers not turning up after booking). Let us
understand the yield process with the help of an example.
EXAMPLE 13.4 Managers of the Atithi Hotel are concerned about the increasing
number of guests who book room and do not show up. They have decided to adopt
a policy of overbooking like the larger hotel chains. The profit from a guest averages
fl,000 per night. The cost of putting up a guest at another hotel is fl,500 per room per
night. Records show the following number of no shows for the past six months given
in Table 13.13(a).
Table 13.13(a)
No shows Frequency
0 8
1 12
2 20
3 40
4 20
How many rooms should they overbook? What will be saved by overbooking?
Solution: The loss incurred if there is no show is fl,000 per night.
The cost incurred if the customers show up and the overbooked customer has to be sent
to another hotel is fl,500.
If N be the number of customers not showing up and B the number of over bookings,
then a customer will have to walk, that is will have to be sent to another hotel if N < B.
If the probability of N < B is P(N<BJ,
Then the expected cost of walking the customer = P(N<B) x 1,500.
The probability that the customer will not have to walk = 1 - P(N<B)
The earning from such a customer will be (1 - P (N <BJ) x 1,000
The limiting case will be when the earning and the loss are equal.
p(N<B) X 1500 = (1 - p(N<B)) X 1,000
1000
p(N<B) = 1500 + 1000 = 0.40
Table 13.13(b)
Overbooking limit B Probability all guests Probability that a

with reservation get a room guest has to walk
1 - p(N<B) p(N<B)
0 1.00 0.00
1 0.92 0.08
2 0.80 0.20
3 0.60 0.40
4 0.20 0.80
5 0.00 1.00
As computed, as long as the probability that a guest has to walk is not greater than
0.40, it will be profitable to overbook rooms. From Table 13.13(b) we can see that if the
3 rooms are overbooked, the probability that a guest may have to walk is 0.40, hence
3 rooms should be overbooked.
Let us now calculate the savings, if any.
If no over bookings are done, the expected number of no shows is
0 X 0.08 + 1 X 0.12 + 2 X 0.20 + 3 X 0.40 + 4 X 0.20 = 2.52
Loss due to no shows = 2.52 x 1,000 = 2,520 per night
Table 13.13(c)
Number of no shows Probability Number of guests who Expected value

will have to walk
0 0.08 3 0.24
1 0.12 2 0.24
2 0.20 0.20
3 0.40 0 0
Expected loss due to guests made to walk = 0.68 x 1,500 = 1,020

Table 13.13(d)
Number of no shows Probability Rooms that will be vacant Expected value

even after over booking
4 0.20 0.20
Expected loss due to vacant rooms = 0.20 x 1,000 = 200

Total expected loss = 1,020 + 200 = 1,220
Net expected saving = 2,520 - 1,220 = 1,300
The hotel should overbook three rooms. The expected saving is ~1,300.
The same principle can be applied when deciding how many rooms are to be given at
what tariff. Airlines offer discounts on tickets. The airline has to take a decision whether
to accept a discounted bid on an airfare or to keep the seat for full fare.
13.11 SUMMARY
The aggregate planning process aims to match demand and capacity. The capacity of a
facility is fixed in the short run. However, temporary adjusbnents can be made by adjusting
the workforce level, the utilisation of the workforce, and the level of inventories and
backorders. We can also subcontract work to outside agencies to make up for shortfalls.
The aggregate plan is evolved from the business plan. The plan is expressed in
terms of product groups or families and not in terms of individual products or items. A
representative product of the groups is used for aggregation. Capacity is expressed in
terms of this aggregate product. For example the capacity of an airline is expressed in the
number of seats and not in the number of seats from a particular destination to another.
Various strategies can be used to match capacity and demand. The chase strategy produces
only as much as is required in a production period. No inventories are maintained and
temporary adjusbnents are made to capacity by hiring and firing workers. Level strategy
uses a stable workforce and production is kept constant over all production periods. The
surplus produced is carried forward as inventories and the shortfalls are carried forward
as backorders. At the end of the planning period the demand and the capacity balance
out. We could also adopt a strategy of using a stable workforce and adjusting the capacity
through varying the hours of the workforce by working overtime or under time. Shortfalls
in capacity can also be made up through subcontracting. When a single strategy is used
it is termed as a pure strategy. A mix of strategies could also be used.
The trial and error method is commonly adopted to evaluate strategies. The costs for
various strategies are computed and the one with the least cost is adopted. Mathematical
techniques like linear programming, transportation models and dynamic programming
can also be used.
Aggregate planning for services uses different methods as the characteristics of
services are different from those of products. Services are perishable and cannot be stored.
Capacity cannot be carried forward as inventories. Services are generally labour intensive
and part-time workers can be employed to enhance capacity. For instance, restaurants
use part-time workers during peak hours. Services attempt to utilise capacity fully by
overbooking or offering services at a discount. Decisions have to be made as to how
much to overbook or whether to accept a discounted bid or keep the capacity for offer
at full price. The process to deal with such situations is called yield management. Yield
management problems can be solved through marginal analysis.
An organisation can be successful only if it can meet the customers' requirements
according to the time schedule desired by them. It is important for an organisation to be
able to balance demand and capacity if it has to gain a competitive edge over its rivals.
I CONCEPT QUIZ I
State True or False
1. Aggregate planning aims to match demand and capacity.
2. In chase strategy the surplus produced is carried forward as inventories.
3. Level strategy does not advocate the hiring and firing of the workforce.
4. MRP is the driving force for the MPS.
5. The MPS disaggregates the product groups into individual products.
6. Rough cut capacity planning checks the feasibility of executing the MRP in terms
of capacity.
7. Capacity cannot be carried forward as inventories in the case of services.
8. Services attempt to utilise capacity fully by overbooking or offering services at
a discount.
9. The business plan is expressed in terms of each product in the group.
10. Capacity can be augmented in the short run through overtime or subcontracting.

1. The aggregate product is:
(a) The sum total of all the products made by the firm.
(b) The rupee volume of the annual sales target.
(c) A representative product of the product family.
2. Shop floor controls do not include:
(a) Loading (b) MRP
(c) Sequencing (d) Expediting
3. Which of the following is not an input to the MRP:
(a) MPS. (b) Cost of materials.
(c) Bill of materials. (d) Inventory status.
4. Chase strategy aims to meet the forecast demand through:
(a) Maintaining backorders and carrying forward inventories.
(b) Using a stable workforce.
(c) Increasing or decreasing the level of the workforce.
5. Costs relevant to level production strategy are:
(a) Hiring and firing costs.
(b) Cost of carrying inventories and backorders.
(c) Overtime wages.
(d) Subcontracting costs.
6. In a level production strategy:
(a) Surplus production is carried as inventories.
(b) Shortfalls are maintained as backorders.
(c) The strength of the work force is kept constant.
7. While using a stable force-variable work hours strategy:
(a) Shortfalls are maintained as back orders.
(b) Surplus production is carried forward as inventories.
(c) The production rate is adjusted by varying the work hours.
(d) The work force is adjusted through hiring and firing.
8. Shortfalls in production while using a stable force can be made up by:
(a) Working overtime.
(b) Employing part time workers.
(c) Subcontracting or outsourcing work.
9. A linear programming approach to production planning attempts to:
(a) Increase workers productivity.
(b) Maximise the actual production.
(c) Minimise costs of hiring, firing, subcontracting, carrying inventories and
backorders.
(d) Minimise the reserve stocks held.
10. Yield management in services attempts to ensure that:
(a) Capacity is fully utilised.
(b) There are no inventories.
(c) There are minimum back-orders.
Fill in the blanks:
1. The ______ strategy produces only as much as is required in a production
period.
2. Level strategy uses a ______ work force.
3. While adopting a strategy, production is kept constant over all
production periods.
4. No inventories are maintained when following a_ _ _ _ _ _ strategy.
5. The aggregate planning process aims to match demand and _ _ _ _ __
6. The ______ of a facility is fixed in the short run.
7. The _ _ _ _ _ _ _ _ _ _ method is commonly used to evaluate production
strategies.
8. In case of services, _ _ _ _ _ _ _ cannot be carried forward as inventories.
9. Yield management problems can be solved through _ _ _ _ _ _ _ __
10. A _ _ _ _ _ _ _ product of the group is used for aggregation.
I QUESTIONS I
13.1 What do you understand by aggregation?
13.2 Explain the production planning system and the various stages involved.
13.3 What are the costs relevant to production planning?
13.4 What are the different production planning strategies that can be employed?
13.5 What is the difference between chase strategy and level production strategy?
13.6 Describe the inputs to the production planning system?
13.7 What is the difference between master planning schedule and materials requirement
planning?
13.8 A company is setting up a production plan for its product for the next one year.
Demand forecast 3000 500 500 1000 300 5000
Month Jul. Aug. Sep. Oct. Nov. Dec.
Demand forecast 4000 3000 2000 500 500 1000
Beginning workforce 10
Subcontracting capacity unlimited
Overtime capacity 2000 units/month
Production rate per worker 250 units/month
Regular wage rate f20 per unit
Overtime wage rate f30 per unit
Subcontracting cost f60 per unit
Hiring cost fl,000 per worker
Firing cost f2,000 per worker
Holding cost f0.30 per unit per month
Backorder cost f15 per unit per month
Develop an aggregate plan using:
(a) Chase strategy
(b) Level production strategy with backorders as needed
(c) Stable labour force to meet a demand of 1500 units per month with
overtime and subcontracting as required
(d) Linear programming solution through Excel
(e) Which plan do you recommend?
13.9 A manufacturer must produce a product in sufficient quantity to meet contracted
sales in the next four months. The production facilities available for this product
are limited, but by different amounts in respective months. The unit cost of
production also varies in each month.
The product may be produced in one month and then held for sale in a later
month, but at an estimated storage cost of fl per unit per month. No storage
cost is incurred for goods sold in the same month in which they are produced.
There is no initial inventory and none is desired at the end of four months. The
following table shows how much to produce in each month in order to minimise
total costs. Solve as a transportation problem.
Month Contracted Maximum production Unit cost of

sales (units) (units) production
1 20 40 14
2 30 50 16
3 50 30 15
4 40 50 17
13.10 A company is setting up a production plan for its product for the next one year.
Demand forecast 3000 4000 2000 1000 1200 1000
Month Jul. Aug. Sep. Oct. Nov. Dec.
Demand forecast 1000 1800 2500 3000 8000 9000
Beginning work force 12
Subcontracting capacity unlimited
Overtime capacity 50% of regular capacity
Production rate per worker 200 units/month
Regular wage rate f40 per unit
Overtime wage rate f55 per unit
Subcontracting cost f65 per unit
Hiring cost f5,000 per worker
Firing cost f8,000 per worker
Holding cost f2 per unit per month
Backorder cost f15 per unit per month
Develop an aggregate plan using:
(a) Chase strategy
(b) Level production strategy with backorders and inventories as needed
(c) Stable workforce at current level with overtime and subcontracting as
required
(d) Which plan do you recommend?
13.11 Uran Airways is facing a problem of empty seats on its Delhi-Mumbai flight. It has
decided to offer a reduced fare of f2,500 instead of the regular fare of f4,500 for
a limited number of seats booked 60 days in advance. The aircraft operating on
the Delhi-Mumbai flight has a seating capacity of 100. Last month's distribution
of full fare passengers is given:
No. of seats Frequency

50 10
55 20
60 35
65 20
70 15
How many seats should be reserved for full fare passengers?
Material Management and
Inventory Control
I write quickly, which can cause some inventory problems in (publishing) house.
NORA ROBERTS
LEARNING OBJECTIVES
• Understand the functions of materials management
• Examine the pros and cons of centralised procurement versus decentralised
procurement
• Explain the importance of inventory control
• Understand the costs associated with i nventory
• Study inventory control methods-EOQ, discounts and price breaks, and
selective inventory control (ABC analysis)
• Study different ordering systems-fixed quantity order system, fixed period
order system and other variants
14.1 INTRODUCTION
Materials form a major part of the costs of any industry. About 60% of the cost of any
product is attributable to materials. It is also said that a rupee saved in materials is
equivalent to no worth of additional sales. Consider a firm which has annual sale of
~10 lakhs and a profit of ~1 lakh. If we assume that 60% of the costs are attributable
to materials then ~6 lakhs is the cost of materials. If the company were to increase
its profits by ~0.1 lakh, it would have to make an additional sale of n lakh as the
338
Material Management and Inventory Control 339
margin on sale is 10%. However, it would have to reduce the cost of materials by only
f0.1 lakh to achieve the same result. Effective material management ensures that the cost
of materials is minimised resulting in increased profitability for the organisation.
Every organisation maintains inventories. We often think of inventory as finished
goods. For example a retail store hold inventory of items that are bought by its customers.
However, inventory includes not just finished goods but also raw materials, goods in
process, and parts, components and subassemblies that may have been purchased from
an outside source. Holding and procuring inventory involves costs and the manager must
decide how much to order and when to order so that the cost is reduced.
14.2 MATERIAL MANAGEMENT

Material management may be defined as the planning, acquiring, storing, moving and
controlling of materials to optimise the usage of facilities, personnel and capital funds
and to provide service to the user in line with the organisational aims.
Three distinct functions are involved-materials planning and controlling, purchasing
of materials and store and inventory control functions.
Materials planning and controlling: A forecast requirement of materials is prepared
based on the forecast demand and the production plan. Budget is prepared for materials.
A forecast of inventories to be held is also prepared. Based on the forecasts orders are
scheduled and progress is monitored in relation to production and sales.
Purchasing: This includes selection of sources of supply, finalising the terms of purchase,
placing orders, follow up of placed orders and approval of payments to suppliers. The
source must be able to supply materials in the desired quantity and of the desired quality.
The source should be reliable and should continue to supply the materials as required.
Smooth relations must be maintained with suppliers. Another important function related to
purchase is vendor rating. Vendors are rated according to their ability to deliver materials.
Stores and inventory control: Storage of materials requires special care. Stores must
be preserved. Obsolescence and damage should be minimised through timely disposal
and efficient handling. Proper records should be maintained. These include records of
receipts and issues, prices, sources and so on. Stores must be properly located and laid
out to reduce material handling to the minimum. Periodic verification of stores must be
carried out.
Inventory control includes setting inventory levels, fixing levels of safety stock to
be maintained, carrying out lead time analysis and employing techniques to reduce the
inventory. Safety stock is the stock maintained as a reserve to deal with fluctuations in
demand and lead time. The time between placing an order and actually receiving the
material is called lead time.
Materials management aims at providing materials of the right quantity, of the right
quality, at the right price, at the right place, at the right time and from the right source.
14.3 OBJECTIVES OF MATERIALS MANAGEMENT DEPARTMENT

The primary objectives of the material management deparbnent are:
Low procurement price: The materials management deparbnent should procure materials
at the lowest possible price in keeping with other requirements like quality, delivery
and so on. Quantity discounts should be carefully weighed against the costs involved
in holding higher levels of inventory.
High inventory turnover: High inventory turnover should be ensured. This will reduce
carrying costs and prevent obsolescence.
Low cost of acquisition and possession: The materials manager should ensure that
materials have a low cost of acquisition and storage. Policies should be laid down so
that items of high usage value are not stocked in excess else the cost of materials and
their storage will be high.
Continuity of supply: Vendors should be so selected that continuity of supply is
maintained. This is particularly true in case of materials procured from abroad. For
instance, when procuring defence weapon systems from foreign vendors, vendors from a
friendly nation who will continue to supply spares, parts and ancillaries like ammunition
would be preferred over a vendor who may refuse to supply especially during emergency
situations like the outbreak of war, even though the latter vendor may supply materials
at a cheaper cost.
Consistent quality: Materials procured should be of consistent quality.
Low payroll costs: Optimum utilisation of manpower employed in the materials
management function will ensure low pay roll costs.
Favourable supplier relations: Favourable relations should be maintained with suppliers
so that the organisation and the supplier both stand to gain from the mutual relationship.
The organisation should understand the supplier's problems and help them to improve
the quality of supplies.
Maintenance of good records: Accurate and updated records should be maintained.
These will facilitate forecasts for the future and help in analysing requirements and
evolving stocking policies.
The secondary objectives of material management are:
New materials, processes and products: Material managers keep a watch for new
materials and new products that may become available and may be substituted for
existing materials and products with advantage. They also keep a track of new processes
that may facilitate the existing manufacturing process.
Economic make or buy decisions: Materials managers must evaluate options and take
make or buy decisions. These are dependent on the quality and quantity requirements.
Cost aspects must be borne in mind. Making involves fixed and variable costs. Buying
may involve payment terms extending over a period of time. If suppliers who can supply
required quantity of the desired quality are not available a firm may have to decide in
favour of make. Sometimes political considerations, desire to develop own capabilities
and the need to safeguard processing secrets may favour a make decision even though
it may be more economical to buy.
Standardisation: Materials should be standardised. This will result in a decrease in
inventory levels and will facilitate the purchase process.
Product improvement: This is an important secondary objective of materials management.
As the materials manager is in touch with the user through the suppliers, valuable
feedback can be obtained to improve the product.
14.4 CENTRALISATION VERSUS DECENTRALISATION

Centralisation of any function reduces overall costs but reduces responsiveness. Materials
management is no exception. Centralisation of the materials management function will
minimise duplication of effort resulting in savings. Orders for the same material when
consolidated will result in larger quantities being ordered and quantity discounts may be
offered on the higher quantities. More effective inventory control is possible in a centralised
system. As the material management function is centralised, it leads to development of
purchase specialists. Record keeping is reduced and line managers are not burdened with
the additional responsibility of procuring materials.
Despite these advantages, decentralisation will be more effective when a single
raw material is to be procured like tobacco or cotton and where prices of the natural
product fluctuate widely. Companies which operate many plants in different locations
may prefer decentralised procurement systems as advantage can be taken of local
variations in price and transportation costs can be avoided. Organisations involved in
research and development work may also prefer decentralised procurement as the items
to be procured may vary widely and the requirements may best be appreciated by the
concerned section.
14.5 INVENTORY MANAGEMENT

The inventory figure constitutes the bulk of the current assets for most firms. A stock out
can result in loss of profit from the missed sale, the loss of a customer and good will, and
in case of a production unit, lack of inventory of raw materials will result in production
coming to a halt. At the same time excessive inventory increases the costs of carrying the
inventory. These carrying costs include the interest on the money locked up in inventory,
the cost of storage, deterioration, obsolescence, pilferage, security, accounting and so on.
It is thus important for the manager to understand the implications of inventory and to
correctly manage it in the most economical way.
Any idle resource with economic value is inventory. It may be in the form of raw
materials, work-in-progress or finished goods. Even cash can sometimes form inventory, for
instance the cash available at an hotel's front office cash counter for encashing traveller's
cheques.
Inventory helps to smoothen out irregularities in supply. For instance, tobacco is
harvested only once a year but the production of tobacco products is throughout the year.
This is possible only if sufficient stocks of tobacco are procured during the harvesting
season and stored for use throughout the year. If this is not done, we will have to stop
production due to lack of raw materials.
Whenever the demand for an item does not support its continued production throughout
the year or its seasonal nature prevents production throughout the year, it is produced
in batches or lots. A sufficient quantity is produced and stored to cover the demand of
the period when the item is not being produced. The sugar industry is a typical example
of such production. Sugar mills produce sugar only between November and April when
the sugar cane is harvested. Adequate stocks of sugar have to be maintained to meet the
demand throughout the year. Stocks are often purchased in lots. A retailer of ready made
garments does not purchase a shirt from the producer every time he sells one. He prefers
to buy them in lots and carry an inventory of ready made shirts so that purchasing can
be done in larger quantities and at lower costs with less paper work.
Inventory offers us a means to store labour. This may sound odd but is regularly
practised. The demand for coolers and air conditioners suddenly increases with the onset
of summers. This surge in demand is generally met by the inventory stocked and produced
during the lean season. This helps in smoothing the use of resources in terms of labour
and machine capacities. Fairly steady production rates are maintained throughout the
year and the goods produced during the off season help to meet the rise in demand in
summer.
Managers must take two basic decisions for every item in the inventory to ensure efficiency
and effectiveness. These are:
1. How much of an item to order when its inventory is to be replenished?
2. When should the inventory of an item be replenished?
14.6 COSTS ASSOCIATED WITH INVENTORY

Costs associated with inventory are-cost of purchasing inventory, ordering costs, carrying
(or holding) costs and cost of stockouts. Cost of purchasing inventory needs no explanation.
Ordering costs are basically the costs of getting an item into the inventory of the firm.
They are incurred each time an order is placed. Placing an order involves not just cost of
stationery and clerical effort, but may also require tendering action, cost of advertising
tenders, shipment costs, costs of transit insurance and so on. The costs are calculated in
terms of rupees per order, that is, incremental costs are computed.
Carrying costs, also referred to as holding costs are basically the costs incurred because
the firm owns or maintains inventory. They include interest on the money invested in
inventory, storage costs, costs of deterioration and obsolescence, security, losses and
pilferage, insurance, accounting and so on. These costs are normally expressed as a
percentage of average inventory value, or as a cost per unit per time period. Expressing
them as a percentage is convenient as the same percentage can be applied irrespective
of the unit cost of the item.
Stockout costs are difficult to measure. Besides the opportunity loss, there is loss of
goodwill and loss of repeat orders.
If we assume that the usage of inventory follows a constant steady rate and if we
start with a certain inventory Q at the beginning of a period, then at some stage the
inventory will become zero and need to be replenished. The ideal inventory system
assumes that inventory is used at a constant steady rate and is replenished to the original
level whenever it reaches zero.
Figure 14.1 shows a graphical representation.
Figure 14.1 Ideal Inventory Model.
Average inventory held during the period

Inventory at the start of the period + Closing inventory
= 2
The costs associated with inventory can be graphically represented as shown in Figure 14.2.
500 0
450 0
400 0
350 0
300 0
NY
250 0
200 0
Total co sts
150 0
100 0
50 0
0
0 5 10 15 20 25
No . of orders
Figure 14.2 Cost Associated with Inventory.
As can be seen from the diagram, the ordering cost has a linear relationship with the
number of orders and increases as the number of orders increase. The carrying cost is a
curve which is asymptotic to the axes. It is obvious that if we were to place no orders
at all we would need an infinite inventory and if we were to place an infinite number
of orders we would need zero inventory. If the annual usage of a product is 1200 and
we were to place orders of the size of 100, then we would have to place 12 orders. On
the other hand if we placed orders of the size of 600 units, then we would place only
2 orders in the year. While the cost of ordering would go down in the latter case, the
inventory carrying cost would go up as the average inventory would be 600 /2 = 300 as
against 100/2 = 50 in the first case. The manager has to try and strike a balance which
minimises the total cost. The most economical order quantity occurs when the ordering
costs become equal to the carrying costs.
14. 7 EOQ MODEL

Let us derive a relationship for the most Economic Order Quantity, generally referred
to as EOQ.
Let A be the annual usage of the item, that is, numbers used per year.
S be the cost per order
C be the cost per unit of the item
i be the carrying cost expressed as a percentage of the cost of average inventory
held.
Q be the size of each order in number of units.
Then
A
Number of orders N = Q
AxS
Ordering cost = ~
Q+O
Average inventory = - 2-
Cost of average inventory held = ~C
.
Inventory carrying QCi
cost = - 2 -
Total cost is minimised when the carrying cost= ordering cost.

This can be mathematically proved by taking the first derivative of the total cost with
respect to Q and equating it to zero. Equating the two, we get:
QCi A xS
-2-=~
Q2 _ 2AS
- Ci
Q= 12~is
This is the basic EOQ model.
Q= 12~is
where Q is number of units per order.
Value of each order can be found by multiplying Q with C the cost per unit of the
item.
We get:
QC= ~2AiSC
Number of orders N = QA =~ACi

25
365 2(365)2S
Interval between orders =N = ACi
Assumptions: The model derived is based on certain assumptions. These are:
1. Annual usage can be estimated
2. Demand or usage rate is constant or nearly constant
3. An order is received all at once
4. Lead time is constant
5. Ordering costs and carrying costs can be computed with reasonable accuracy
These assumptions do not always hold good, but there are methods to overcome
these limitations. Let us study the application of this model with the help of an example.
EXAMPLE 14.1 Mohan is a confectioner. He buys plastic boxes in bulk and uses them
to pack his chocolates. His annual requirement of boxes is 1200, and each box costs him
f30. He has estimated that his ordering costs are flO per order and his carrying costs
are 20%. How many boxes should he order at a time so as to minimise his expenses?
Solution:
A= 1200
C = f30
s = flO
i = 0.20
EOQ = ~2~iS
2 X 1200 X 10
=
30 X 0.2
= 63 boxes
EXAMPLE 14.l(a) If the supplier sells the boxes only in lots of 25, should we buy
50 or 75?
Solution: We should now calculate the ordering and holding costs in both cases. The
cost of the inventory can be ignored as it remains the same.
If Q = 50 If Q = 75
. 1200 X 10 1200 X 10
Ordering costs = 50 Ordering costs = 75
= f240 = f160
50 X 30 X 0.2 . 75 X 30 X 0.2
Carrying cost = 2 Carrying cost = 2
= f150 = f225
Total cost = 390 Total cost = 385
As the total cost of buying lots of 75 is lesser, we should buy in lots of 75.
14.8 EOQ MODEL-DISCOUNTS AND PRICE BREAKS

EXAMPLE 14.l(b) The supplier offers 2% discount if the purchases are in quantities
of 300 at a time. Should we accept the discount?
Solution: We should now compute the total costs including the cost of inventory as
the offer of a 2% discount will result in a reduction of acquisition cost.
If Q = 75 If Q = 300 (2% discount on
cost per unit)
1200 X 10 . 1200 X 10
Ordering costs = 75 Ordering costs = 300
= f160 = f40
. 75 X 30 X 0.2 .
C arrying t 300x30x0.98x0.2
Carrying cost = 2 cos = 2
= f225 = f882
Inventory cost = 1200 x 30 Inventory cost= 1200 x 30 x 0.98
= f36,000 = f35,280
Total cost = 36,385 Total cost = f36,202
We should accept the discount as the total cost is less.
EXAMPLE 14.l(c) The supplier of boxes offers the following price breaks:
Order quantity less than 100 f30 per box
Order quantity between 100 and 199 f29.75 per box
Order quantity 200 or more f29.60 per box
What should be the order quantity?
Solution: We should calculate the cost for each price break. The EOQ at f30 is
63 boxes, but because they are sold in lots of 25 we should buy 75 boxes as shown
earlier.
When the cost of the box is f29.75 per box, the EOQ is 63.51. We shall have to
purchase 75 boxes if we want to buy the EOQ. However, the price of f29.75 per box
is available only when we place an order between 100 and 199. We should select the
quantity closest to the EOQ at which the price break is available. We should, therefore,
order quantity 100 at this price.
Similarly, the EOQ with a price of f29.60 per box works out to be 63.77 boxes.
Again since this price is available only on purchases of 200 or more, let us consider
placing orders of quantity 200 each time. Let us now calculate the costs for each
case.
Case 1: Cost per box is f30.00 and the quantity ordered is 75. We have already worked
out the total cost for this case in Example 14.l(b).
Total cost = f36,385
Case 2: Cost per box is f29.75 and the order quantity is 100.
1200 X 10
Ordering costs = 100
= f120
100 X 29.75 X 0.2
Carrying costs = 2
= f297.50
Inventory costs= 1200 x 29.75
= f35,700
Total cost= f36,117.50
Case 3: Cost per box is f29.60 and the order quantity is 200.
1200 X 10
Ordering costs = 200
= f60
200 X 29.60 X 0.2
Carrying costs = 2
= f592
Inventory costs= 1200 x 29.60
= f35,520
Total cost= f36,172
As the cost for order quantity 100 is the least, we should order 100 boxes per
order.
14.9 EOQ MODEL-ELIMINATING THE INSTANT RECEIPT ASSUMPTION

In the EOQ Model presented so far, we have assumed that all the inventory which is
ordered is received simultaneously-that is, the inventory rises to its maximum level
instantaneously. In many cases this is not a valid assumption as the vendor may deliver
an order in partial shipments or portions over a period of time. In such cases inventory
is being used while new inventory is still being received.
Let Q be the optimum order quantity in units of the item
x be the receipt rate in units per day
then Q is the number of days required to receive entire order.

X
If y is the usage rate in units used per day
Then Q x y is the number of units used during receipt period

X
And Q - Q x y is the largest inventory that can accumulate

X
If A is the annual usage of the item in units

S the cost per order
C the cost per unit of the item
and i the carrying cost expressed as a percentage
Ordering cost = ~
Carrying cost = ½(Q - °;) Ci

Equating ordering cost= carrying cost, we get:
AS = _!_
Q 2
(Q - Qy) Ci
X
2 2ASx
Q = (x -y)Ci
2AS
Q= (1- y!x)Ci
Optimum order quantity with the assumption of instantaneous receipt eliminated.
EXAMPLE 14.2 The annual demand for a product is 1,00,000 units. The rate of production
is 2,00,000 units per year. The set up cost per production run is ~500. The variable cost
of the item is ~10 per unit and the carrying cost is 20% of the average inventory held.
What is the optimum production lot size?
Solution: The item is produced, supplied and consumed simultaneously. The set up
cost is similar to the ordering cost as it is incurred each time we have a production run.
The data can be rewritten as following:
A= 100000
S= f500
C= flO
i= 20%
X = 200000
y= 100000
2AS
Q= (1- y!x)Ci
2 X 100000 X 500
=
10 X 0.2 X (1 - 100000 / 200000)
= 10000
The production run should be of 10000 units.
Interval between runs = 365 = 365 Q = 365 x lOOOO = 36.5 days

No. of orders A 100000
14.10 A PRACTICAL APPROACH-WHEN COSTS ARE NOT KNOWN

The ordering costs and carrying costs are difficult to determine and are seldom exactly
known, unless exact cost data has been maintained. Often, an organisation may not be
applying formal inventory methods and may wish to do so, but may not be willing to
wait for a long period in which costing data can be collected. The EOQ concept can
still be used with considerable savings. Let us consider the EOQ model when the order
quantity is expressed in rupees.
QC= ~2AiSC
In the formula AC represents the annual usage value, that is the number of units of an
item used annually multiplied by the cost per unit. This data is normally available or
can be computed from store accounting ledgers. Even though the ordering cost S and
the carrying cost i is not known, we can write the relationship as:
QC= k../Ac
where k represents J¥
AC
Number of orders N = QC
Substituting for QC, we get:

N- ~
- kJ;fc
N -
-
JAc
k
Average stock for any one item

. = 2QC = --
kJ;fc
2-
Because k is a constant for any single item, we may consider k as a constant for the entire
inventory of items. We can say:
where
IN = Total number of orders
I JAc = Sum of square root of annual usage values
k = constant
kIJAf
Total average stock = 2
Let us see the application of this model with the help of an example.
EXAMPLE 14.3 A store stocks five items-A, B, C, D and E. The current policy is
to carry three months stock as inventory and place orders for each item 4 times a year.
Data pertaining to the items is given in Table 14.l(a).
Table 14.1(a)
Item Annual usage value Number of orders Average inventory
QC AC
(AC) (N) 2= 2N
A 10000.00 4 1250.00
B 8000.00 4 1000.00
C 5000.00 4 625.00
D 1000.00 4 125.00
E 600.00 4 75.00
24600.00 20 3075.00
We know that total number of orders IN 1s. 20 and total average inventory
. . kIJAf .
1s 2
For different values of k we can compute the value of IN and the value of total average
. kIJAf .
inventory 2 . The results are shown in Table 14.l(b).
Table 14.1(b)
k IN=L~ kI../Ac
2
8 39.53 1265.08
9 35.14 1423.22
10 31.63 1581.36
11 28.75 1739.49
12 26.36 1897.63
13 24.33 2055.76
14 22.59 2213.90
15 21.08 2372.03
16 19.77 2530.17
17 18.60 2688.30
18 17.57 2846.44
19 16.65 3004.58
20 15.81 3162.71
21 15.06 3320.85
22 14.38 3478.98
23 13.75 3637.12
24 13.18 3795.25
25 12.65 3953.39
From this table we can plot an indifference curve for k as shown in Figure 14.3.
4500 .00
4000 .00
€ 3500 .00 \
i::'
.£ 3000 .00
\.
' ' " -- --.

C:
Q)
> 2500 .00
C:
Q)
2000 .00
Cl
~ 1500.00
Q)
>
<( 1 000 .00
500 .00
0.00
0.00 10.00 20 .00 30 .00 40 .00 50 .00
Number of orders
Figure 14.3
We can see from this curve that for a total number of 20 orders, the average inventory
held should be ~2,500, whereas the inventory being presently held is ~3,075. If we do
not wish to change the administrative load of ordering and keep the total number of
orders as 20, we find that the value of k is 16. With k = 16 let us compute the number
of orders for each item and the average inventory held.
We get Table 14.l(c).

Table 14.1(c)
Annual usage value No. of orders No. of orders Average inventory
N = ../Ac (rounded off) held

k
A 10000.00 6.25 6 833.33

B 8000.00 5.59 6 666.67
C 5000.00 4.42 4 625.00
D 1000.00 1.98 2 250.00
E 600.00 1.53 2 150.00
24600.00 19.77 20.00 2525.00
The number of orders placed for items with higher annual usage value is more while
the number of orders placed for items with lower usage value is less.
If the inventory level is to be kept the same and the number of orders changed, we
can chose the appropriate value of k. In this case if k = 19 then the value of average
inventory will be f3,005 (rounded off) and if k = 20, the value of average inventory will
be f3,163. The overall total cost will remain the same but the number of orders to be
placed for different items will be different. This is similar to the concept of selective
inventory control or ABC analysis.
14.11 SELECTIVE INVENTORY CONTROL-ABC ANALYSIS

Vilfredo Pareto, an Italian economist, mathematician and physicist carried out a study
on the distribution of the wealth in Milan. He observed that 20% of the people control
80% of the wealth while 20% of the wealth was divided between the remainder 80%
of the population. This was later observed to be true for the entire nation and was
extended to other fields. It came to be known as the 80:20 rule or Pareto's Law. In any
activity involving human endeavour, 20% of the effort achieves 80% of the result and
80% is required to achieve the balance. For example, if we consider an athlete trying to
run a mile under four minutes, a certain amount of effort brings the athlete close to the
four minute target, but after that level, improvement of every hundredth of a second
in the timing requires effort many times more than the initial effort. The 80:20 rule also
applies to inventory.
It has been observed that inventory can be classified according to its annual usage
value (numbers used in a year multiplied by the cost per unit) into A, B and C categories.
Their distribution is shown in Table 14.2.
Table 14.2
Category Inventory items (%) Annual usage value (%)
A Items 5 to 10 70 to 75
B Items 20 20
C Items 70 to 75 5 to10
It, therefore, follows that A items are much more important and should receive much
more attention than C items. The stocking policy and ordering policy should be different.
Steps in conducting ABC analysis:
1. Prepare a list of items and estimate annual consumption
2. Determine unit price
3. Obtain annual usage value in f
4. Arrange in descending order of annual usage value
5. Calculate cumulative cost percentage of total value
6. Calculate cumulative item percentage
7. Plot (5) vs (6) and segregate into A, Band C categories. There is a sharp rise in
the curve for A items and a distinct levelling off for C items
Let us consider an example. Table 14.3(a) gives the details of 20 items held by a
store. The column (e) gives the annual usage value which is the product of the annual
usage and the cost of the item per unit. The rest of the columns in the table are self
explanatory.
Table 14.3(a)
S. No. Item Annual Cost per Annual Rank Revised Item Annual Cumulative Cumulative Cumulative
usage unit usage rank usage usage usage Item
value value (%) (%)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (I)
1 A 50 5 250 14 1 L 35000 35000 34.9 5
2 B 100 12 1200 10 2 G 22000 57000 56.9 10
3 C 160 55 8800 4 3 p 10500 67500 67.4 15
4 D 30 6 180 16 4 C 8800 76300 76.2 20
5 E 10 1 10 20 5 I 5400 81700 81.6 25
6 F 18 90 1620 9 6 N 5400 87100 87.0 30
7 G 200 110 22000 2 7 K 3880 90980 90.8 35
8 H 20 8 160 18 8 a 3640 94620 94.5 40
9 I 180 30 5400 5 9 F 1620 96240 96.1 45
10 J 50 12 600 12 10 B 1200 97440 97.3 50
11 K 40 97 3880 7 11 M 720 98160 98.0 55
12 L 140 250 35000 1 12 J 600 98760 98.6 60
13 M 60 12 720 11 13 R 300 99060 98.9 65
14 N 600 9 5400 6 14 A 250 99310 99.2 70
15 0 36 5 180 17 15 s 200 99510 99.4 75
16 p 420 25 10500 3 16 D 180 99690 99.5 80
17 a 260 14 3640 8 17 0 180 99870 99.7 85
18 R 100 3 300 13 18 H 160 100030 99.9 90
19 s 200 1 200 15 19 T 110 100140 100.0 95
20 T 22 5 110 19 20 E 10 100150 100.0 100
The items are rearranged in a descending order according to the annual usage value in
column (h). A graph is plotted between the cumulative usage value expressed as a percentage
and the items or SKUs(Stock Keeping Units) expressed as a percentage. As the total number
of items is 20, the column (1) shows a 5% increase per item in the cumulative value. It
must be noted that we are referring to the number of items (column (a)) and not to the
total number of units of various items used (column (c)). The graph is given in Figure 14.4.
From the graph it can be observed that the graph rises sharply for the first four
items. It then smoothens out to a more uniform gradient for the next four items and
then flattens out for the remaining 12 items. The items covered by the steep gradient
100
90 ~
~ - ~ ~
~
)'
80
. I
70 J
~
~
.!!?
0
<JI
60
'
I
0
j
Q) 50
>
~:::,
I
40
E
:::,
()
30
20
10
0
0 50 100
Cumulative item (%)
Figure 14.4 ABC Analysis.
of the graph, i.e. the first four items-L, G, P and C are classified as A items. The next
four items-I, N, K and Q are classified as B items and the remainder are classified as
C items. The distribution for this example is shown in Table 14.3(b).
Table 14.3(b)
Category Inventory items (%) Cost (%)
A Items 20 76
B Items 20 18
C Items 60 6
The A items must be ordered frequently so that the average inventory held reduces.
B items can be ordered less frequently than A items and bulk orders can be placed for
C items. Let us see the effect of such a policy with the help of an example.
EXAMPLE 14.4 Consider a stock holding organisation with 10,000 items on its inventory
with a total value of ~1,00,000. If the current policy is to hold four months stock of all
items, then the average inventory held is ~1,00,000/(3 x 2) = 16,667, as three orders for
each item are placed per year; and the number of orders placed, assuming that a separate
order is required for each item, are 30,000. If the organisation wishes to reduce costs by
25%, one option is to hold stocks for three months instead of four. This will reduce the
average inventory to fl,00,000/(4 x 2) = 12,500, but will result in the increase in orders
to 40,000 (4 orders per item). Let us now assume that an ABC analysis was carried out.
If the ordering policy was monthly for A items, quarterly for B items and annually for C
items, both the number of orders and the average inventory held would decrease thereby
reducing the costs. The details are shown in Table 14.4(a).
Table 14.4(a)
Category No. of items Value Orders per year Total Average inventory
(LAC) per item (N) no. of orders (IAcJ

Nx2
A 1000 70000 12 (Monthly) 12 X 1000 = 12000 70000 = 2917

12 X 2
B 2000 20000 4 (Quarterly) 4 X 2000 = 8000 20000 = 2500

4x2
C 7000 10000 1 (Yearly) 1 X 10000 = 10000 10000 = 5000

1x2
Total 27000 10417
This may not be the optimal solution but is sufficiently close to the optimal to merit
consideration. If we observe the total cost curve in the EOQ model, we notice that the
curve is flat at its lowest point and a deviation of upto 20% from the EOQ makes only
marginal difference to the total costs. The EOQ is computed from the relationship:
Q = ~2~is
It should be noted that the size of the order and the average inventory held should
rise only by the square root of the increase in annual usage of the item. Thus inventory
systems which hold a fixed percentage of anticipated annual usage in inventory cannot
be considered optimal.
If we compare the results of the ABC Analysis with the results obtained in the model
that we developed for dealing with situations where ordering and carrying costs are not
known, we find a fair amount of similarity. The number of orders for items with high
annual usage is more (6 orders each for items A and B whose annual usage value is
fl0,000 and fS,000 respectively) and very few orders for items whose annual usage value
is small (2 orders each for items D and E whose annual usage value is fl,000 and f600
respectively). A and B comprise A items while D and E fall in the category of C items.
Management should exercise different type of control for different categories of items.
It is obvious that A items are most important as they contribute to about 70% of the
inventory costs. Any errors in their management can cause heavy loss to the organisation.
On the other hand while the annual usage value of C items is low they may be important
from the functional angle. For instance a vehicle repair workshop may be using gaskets
of very low value but a stock-out in this item can cause problems in repair of vehicles.
These should be stocked in plenty.
The managerial controls desired for each category are given in Table 14.4(b):
Table 14.4(b) The Managerial Controls for Each Category
A Items B Items C Items
Top management Middle management Junior management
Low inventory level Satisfactory inventory level High inventory level
Frequent supply orders Less frequent supply orders Bulk procurement
Minimum safety stock Reasonable safety stock Large safety stocks
Detailed and rigid control Fair amount of control Negligible/routine/procedural
checks.
Besides ABC analysis, inventory can also be classified into other categories as follows:
1. VED analysis classifies inventory as vital, essential and desirable.
2. FSN analysis-fast moving, slow moving and non-moving.
3. SOS-seasonal, off-seasonal.
4. GOLF-according to source of supply, government, local and foreign.
ABC is the basic classification. All other classifications are superimposed on it. For
example, VED classification can be superimposed on the ABC classification to produce
AV, AE, AD, BV, BE, BD, CV, CE, and CD. Obviously AV is the most important class
and CD the least important class of items in the inventory.
Calculating EOQ or classifying every individual item for selective inventory control is
tedious if an organisation has a large number of items on its inventory. A practical approach
would be to take a sample inventory of 20 to 50 items and then carry out an ABC analysis.
On the basis of this analysis we can say that an item whose annual usage value exceeds
a certain amount will be classified as A, those whose annual usage value lies below a
particular amount would be classified as C items and the rest would constitute B items.
Similarly instead of calculating the EOQ for each item, we can calculate the rupee
value of the economic order quantity by multiplying the EOQ relationship with the cost
per unit. We get:
QC= ~2AiCS
AC is the annual usage value. We could tabulate the value of the order for various values
or ranges of annual usage value and use that data for placing orders, assuming that the
ordering cost and the carrying cost remain constant.
14.12 ORDERING SYSTEMS

The materials manager can determine how much to order through the various methods
discussed in previous sections. The economic order quantity will reduce the cost of holding
and ordering inventory to the minimum. However, the assumptions of the economic
order quantity model must be borne in mind. The materials manager must also determine
when to order. A number of options are available to the manager. The ordered quantity
can be kept fixed and the interval at which orders are placed varies. This is known as
the fixed quantity order system or the continuous system. Another option is to keep the
interval at which orders are placed constant and vary the quantity ordered. This system
is known as the fixed period or fixed interval system. A combination of these two systems
could also be adopted where the interval between orders and the quantity ordered can
both vary. Yet another option could be to keep the quantity ordered and the interval at
which it is ordered fixed.
14.13 FIXED ORDER QUANTITY SYSTEM

The fixed order quantity system is also referred to as the continuous inventory system
or Q system. As the name suggests, the quantity that is ordered every time remains
fixed and is generally the EOQ. The period between orders varies according to usage.
An order is placed when the stock level reaches a point where there is enough stock to
last through the lead time. Since the lead time and the consumption rate vary, a certain
amount of reserve stock known as safety stock is maintained at all times. The reorder
point is thus equal to the lead time consumption (usage rate multiplied by the lead time)
plus the safety stock.
Safety stock: The safety stock is usually expressed in terms of service level. The service
level is the probability that a stock-out will not occur. It can be assumed that the daily
demand is normally distributed and can be described by a mean and a standard deviation.
If the desired service level is 95%, then the safety stock will be 1.64 standard deviations
of the mean lead time consumption. The value 1.64 can be obtained from the standard
normal probability distribution table. Let us illustrate this with the help of an example.
EXAMPLE 14.5 Let the mean demand per day be 100 with a standard deviation of
20 and a lead time of 9 days. The desired service level is 95%. How much safety stock
should be maintained?
Solution: The lead time consumption is 9 x 100 = 900. The standard deviation of daily
demand is 20. The standard deviation of the demand for the lead time period of 9 days
must be calculated. Standard deviation cannot be added but variance (square of the
standard deviation) can be added.
Standard deviation for the lead time is ~9 x (20) 2 = 3 x 20 = 60
For 95% service level, z = 1.64
Safety stock = 1.64 x 60 = 98.4 (say 99)
Reorder point = 900 + 99 = 999
Whenever the inventory level reaches 999 or less an order for the EOQ will be placed.
EXAMPLE 14.6 A regional warehouse purchases hand tools from various suppliers and
then distributes them on demand to retailers in the region. The warehouse operates 5 days
per week, 52 weeks a year. Only when it opens, orders can be received. The following
data is estimated for 3/8 inch hand drills with double insulation and variable speeds:
Average daily demand = 100 drills
Standard deviation for daily demand a= 30 drills
Lead time = 3 days

Holding cost= f9.40/unit/year
Ordering cost = f35 / order
Cycle service level = 92% (z = 1.41)
The warehouse uses a continuous review system.
(a) What order quantity Q, and reorder point R should be used?
(b) If on hand inventory is 40 units, there is an open order for 440 drills, and there
are no back orders, should a new order be placed?
Solution: (a) Let us first calculate Q.
Annual usage = 52 x 5 x 100
Q = ~2~is
= /2 x 52 x 5 x 100 x 35 = 440 drills

V 9.40
Lead time consumption= 3 x 100 = 300
Safety stock= z x a x .Ji
= 1.41 x 30 x ..Jj = 73.26 (say 74)
Reorder point (R) = 300 + 74 = 374 drills.
Whenever the stock in hand reaches 374 an order for 440 drills should be placed.
(b) The stock in hand is 40, and the stock on order is 440. There is no back order
either. The inventory in hand is virtually 440 + 40 = 480 which is well above the reorder
level. No order needs to be placed.
The fixed quantity order system is highly automatic. It is simple, reliable and cheap to
operate. It lends itself to visual controls and records can be dispensed with. For example,
the housewife stores flour in a tin, and decides when it should be replenished by visually
determining the available stock. It is suitable for items of low value (C items) and its
functioning can be delegated to lower levels.
Despite its advantages, the fixed quantity order system has some inherent disadvantages.
Usually no records are maintained of stock levels and usage rates. The system does not
lend itself to ordering different items simultaneously from the same source as they may
reach their reorder points at different times. For example, a workshop may reach the
reorder point for 6 inch nails on Monday and for 4 inch nails on Wednesday. Even though
the items are purchased from the same hardware store, the system will generate an order
for 6 inch nails on Monday and 4 inch nails on Wednesday. This leads to additional
work. The system does not permit balancing of the work load as on a particular day a
large number of items may reach their reorder points generating orders and on another
day no item may reach its reorder level. The system is not suitable for items having very
long and highly variable lead times.
Two bin system: This is only a practical application of the fixed order quantity system.
The system uses two bins. One bin holds the amount that will normally be consumed
during the lead time and the safety stock (reorder inventory level). The other bin holds
the balance of the inventory, which is equal to the EOQ initially. When stock in the second
bin is used up, an order is placed and the other bin brought into use. As and when the
order is materialised, the bin in use (the bin with reorder quantity) is filled up and the
balance put in the bin, which was not in use. The reorder quantity bin is then replaced
with the other bin, which is brought in use. The system facilitates visual control and is
very simple to operate. A modification is the three bin system.
Three bin system: The first bin is divided into two bins lA and lB. When lA is used
up, the order is expedited.
14.14 FIXED INTERVAL SYSTEM

The fixed interval system is also known as P system. In this system the interval between
orders is kept fixed but the quantity ordered varies. The stock position is reviewed at
fixed intervals, for example, monthly. The review period is generally set to correspond
to EOQ consumption period. If we assume that the usage rate is uniform, then fixing the
review period as EOQ consumption period will imply that the quantity ordered every
time would be EOQ and thus be the most economical option. In the fixed period system
a maximum stock level is fixed. The maximum stock level is:
MSL = Consumption during review period+ Lead time consumption+ Safety stock
In this case the safety stock has to cater for the review period as well as the lead time.
The safety stock is calculated in the same manner as shown previously. The quantity
ordered at each review period is:
Order quantity = Maximum stock level - Stock in hand - Stock on order
Let us examine the working of this system with the help of an example.
EXAMPLE 14.7 The daily demand for a product is 15 units with a standard deviation
of 5 units. The review period is 30 days and the lead time is 6 days. Management has
a policy of providing 95% service level. At the beginning of the review period there are
150 units in the inventory. How many units should be ordered?
Solution:
Safety stock= zcrd~(T + L)
= 1.64 x 5 x ~(30 + 6) = 49.2 (say 50 units)
MSL = 15 x 30 + 15 x 6 + 50 = 530 units
Order quantity = 530 - 150 = 380 units
The fixed period system provides strict control on inventory as at each review
period the order quantity is re-fixed, keeping the requirements in view. It permits even
distribution of load as the review date of each item can be laid down. It also permits the
grouping of orders from a single source as the items purchased from that source can all
be reviewed on the same date.
The system requires skilled manpower and this adds to the cost. Order quantities
may vary considerably from period to period causing problems for the supplier. The
quantity held is higher than that held in the fixed quantity order system.
14.15 OTHER SYSTEMS

Variable order variable interval system: This is a hybrid of the fixed quantity and the
fixed period system. In this system the inventory is reviewed at a fixed interval, but an
order is placed only if the stock level has dropped below a certain amount. Ordering
takes time and costs money, and hence a minimum order size is fixed. The quantity to
be ordered at each review period is computed as in the case of fixed period system.
However, if the quantity to be ordered at the review period is less than this minimum,
the order is skipped till the next review period. Thus the quantity ordered and the interval
at which it is ordered are both variable.
Fixed quantity fixed interval system: In this system, no review is carried out. After a
fixed interval, an order for a fixed quantity is placed. This system is used effectively for
ordering small value items of an expendable nature, like cleaning materials, small items
of stationery and so on.
S - 1, S system: This is a one for one replacement system. It is used for items of high
value. As soon as one unit is used, an order for one unit is placed. For instance, crank
shafts at an automobile repair facility would be ordered on a one to one replacement basis.
Often it is preferable to hold no inventory of very high value. It may prove cheaper
to fly in the item when required than to tie up capital in maintaining even a single unit
of the item. For example, it would not be prudent to stock even a single aero engine at
an aircraft repair facility. It would prove economical to fly in one from the manufacturer
as and when required rather than tying up capital in stocking one at the facility.
14.16 SIMULATION
Monte Carlo simulation can also be used to solve inventory problems. The procedure is
explained in the annexure on Simulation.
Computer packages can also solve inventory control problems. WinQSB has a module
to solve EOQ and related problems.
14.17 SUMMARY
The cost of materials constitutes about 60% of the cost of any product. A saving of fl in
the cost of materials is equivalent to flO of additional sales. Effective material management
reduces costs and increases profitability. Materials management is concerned with the
planning, acquisition, storage, movement and control of materials. It aims at providing
materials in the right quantity, of the right quality, at the right price, from the right
source, at the right place and at the right time.
Organisations maintain inventories of raw materials, work in progress and finished
goods. Raw material inventories ensure that production does not stop due to non-
availability of raw materials. Finished goods inventories are kept so that there are no
stockouts. Inventory entails cost of buying inventory, cost of placing orders, cost of
carrying inventory and cost of stockouts. As the number of orders increases, the ordering
costs increase but the carrying costs decrease. The EOQ model determines the economical
order quantity which minimises the total costs of inventory.
The materials manager determine how much to order, that is, the order quantity and
when to order. The EOQ model helps to determine the order quantity. It can also deal with
situations involving discounts and price breaks. The model is based on certain assumptions.
It is based on knowledge of ordering costs and carrying costs. In practice, these are difficult
to determine. Selective inventory control or ABC analysis provides a practical alternative.
Different ordering systems like the fixed order quantity system, the fixed period system,
variable quantity and variable period and fixed quantity and fixed period systems are
used. In the fixed quantity order system, the order quantity (generally the EOQ) is kept
fixed and an order is placed whenever inventory reaches a reorder point. The reorder
level is set as the sum of the lead time consumption and the safety stock. The method
is simple and easy to operate and lends itself to visual control. However, the work load
cannot be balanced and an order for different items even though from the same vendor
cannot be placed simultaneously.
In the fixed period system, the stock position is reviewed at fixed intervals. The
review period generally conforms to the EOQ consumption period. A maximum stock
level is set. This is equal to the review period and lead time consumption and safety
stock. The quantity ordered is the difference between the maximum stock level and the
stock in hand less any stock on order.
A variable quantity variable period system is a combination of the fixed quantity
and fixed period system. The stock position is reviewed at fixed interval but an order is
placed only if the stock level is below a certain specified quantity. If the stock level is
higher than this quantity, no order is initiated and the position re-examined whenever
the next review is due.
Fixed quantity fixed period system is used for expendable stores of low value. The
inventory is automatically replenished with the fixed quantity at fixed intervals without
reviewing the current stock level.
Effective material management and inventory control can reduce costs and increase
the profitability of the organisation.
I CONCEPT QUIZ I
State True or False
1. EOQ model can most profitably be applied to C items.
2. EOQ is that size order which makes the total annual carrying costs equal to the
total annual ordering costs.
3. If the annual usage of an item doubles, its EOQ will also double.
4. The average inventory is half the order quantity under the EOQ model.
5. Inventory offers us a means to 'store labour'.
6. Costs of deterioration and obsolescence are a part of ordering cost.
7. EOQ model is based on the assumption that the lead time has large fluctuations.
8. 'A' items must be stocked in large quantities as they are few in number.
9. 'C' items account for approximately 5 to 10% of the total value of inventory.
10. Control for C items must be exercised at the highest level of the organisation.

1. 'A' items should be:
(a) Ordered in bulk. (b) Ordered frequently.
(c) Stocked in large quantity. (d) Ordered annually.
2. 'C' items have:
(a) Low price per unit. (b) Very high demand.
(c) Low annual usage value. (d) High price per unit.
3. The EOQ model is based on the following assumptions except:
(a) Annual demand is known and constant.
(b) Estimates of carrying and ordering costs are accurate.
(c) The ratio of the ordering cost and the carrying cost expressed as a percentage
of average inventory is constant.
(d) Orders are received instantaneously exactly when previous inventory is just
used up.
4. ABC analysis is based on:
(a) The unit price of the item.
(b) The quantity of the item used in a year.
(c) The annual usage value of the item.
(d) The life of the item.
5. For every item in the inventory managers must decide:
(a) The source from which it can be bought at the cheapest rate.
(b) How much to buy and when to place orders.
(c) The cost of placing an order.
(d) The cost of maintaining inventory.
6. Ordering costs do not include:
(a) Cost of stationery and clerical effort.
(b) Shipment costs.
(c) Cost associated with tendering action.
(d) Cost of storage.
7. When discounts and price breaks are offered:
(a) Accept the highest discount or price break that is available.
(b) Order the maximum quantity possible at a price break or discount.
(c) Order the quantity closest to the EOQ and available at the discount or price
break offered.
(d) Relevant costs are ordering cost and carrying cost.
8. 'A' items should be controlled by:
(a) Junior management. (b) Middle level management.
(c) Top level management. (d) Store keeper.
9. When carrying and ordering costs are not known, the EOQ model can be used
with the added assumption that:
(a) Orders will be received over a period of time instead of instantaneously.
(b) Stock-outs will be permitted.
(c) The ratio between ordering cost and carrying cost expressed as a percentage
of an average inventory held is constant for all items in the inventory.
10. Inventory is necessary to:
(a) Smoothen out irregularities in supply.
(b) Ensure production without undue breaks.
(c) Store labour by producing during lean periods to cater for peak periods.
Fill in the blanks:
1. An _ _ _ _resource with ______ value is called inventory.
2. are basically the costs of getting an item into the
inventory of a firm.
3. Carrying costs are also called _ _ _ _ _ _ _ _ __
4. If annual usage is not known, EOQ model _____ be applied.
5. If economic order quantity is used for replenishing inventory, the carrying cost
is _ _ _ _ _ _ to the ordering cost.
6. The EOQ model assumes that usage rate or demand is _ _ _ _ __
7. As ordering costs _ _ _ _ ___, the carrying costs._ _ _ _ __
8. 'A' items should have ______safety stocks.
9. ABC analysis is based on _ _ _ _ _ _ _ _ _ _ of an item.
10. The number of orders placed for items with higher annual usage value is
______than that for items with lower annual usage value.
I QUESTIONS I
14.1 What is the purpose of inventory?
14.2 What are the assumptions on which the EOQ model is based? What are the
limitations of the model?
14.3 What are the costs associated with inventory?
14.4 What is ABC analysis? How does it assist inventory control?
14.5 What are the managerial applications of ABC analysis?
14.6 What is safety stock? How is it determined?
14.7 Describe the fixed order quantity system. How does it differ from the fixed interval
ordering system?
14.8 What are the advantages and disadvantages of the fixed interval ordering
system?
14.9 A company buys its annual requirement of 36,000 units in six instalments. Each
unit costs fl and the ordering cost is n5. The inventory carrying cost
is estimated at 20% of unit value. Find the total annual cost of the existing
inventory policy. How much money can be saved by using economic order
quantity?
14.10 A company purchases 2000 units of a particular item per year at a unit cost of
f20. The ordering cost is f50 per order and the inventory carrying cost is 25%.
Find the optimal order quantity. If a 3% discount is offered by the supplier on
lots of 1000 or more, should the company accept the offer?
14.11 A company for a particular item places 6 orders each of size 200 in a year. Given
ordering cost is f60 per order, holding cost is 40%, cost per unit is f40, find out
the loss to the company in not operating scientific inventory policy. What are
your recommendations for the future?
14.12 Find the optimal order quantity for the following price break inventory
problem:
Annual demand = 3600 units
Inventory carrying cost = 20%
Ordering cost = f20 per order
Quantity Price
0-499
500-999
Over 999
14.13 Find the optimal order quantity for the following price break inventory
problem:
Annual demand = 200 units
Inventory carrying cost= 25%
Ordering cost = f20 per order
Quantity Price
0<Q<50
50 ~ Q < 100
Over 100
14.14 India Electronics, a manufacturer of radio sets, uses printed circuit boards worth
f75,000 per year in its production process. Cost per order is f45 and the inventory
holding costs are assessed as 25% of the average balance per year. The company
has been following an EOQ policy for purchases. The supplier has now offered
a 1.5% discount on its list price, if the company buys its requirements four
times a year. Would you advise India Electronics to accept this offer? If not,
why?
14.15 NBC Limited has to supply Orient Fans with 24,000 bearings per year on a steady
daily basis. It is estimated that it costs fl.20 as inventory holding cost per bearing
per year and that the set up cost per run of bearings manufacture is f324. What
should be the optimal run size for bearing manufacture? Find out the minimum
inventory cost. What would be the interval between two consecutive optimal
runs?
14.16 You have to supply your customers 100 units of a certain product every Monday.
You obtain the product from your local supplier at f60 per unit. The costs of
ordering and transporting from the supplier are f150 per order. The carrying cost
of inventory is estimated to be 15% per year of the cost of the product carried.
Determine the lot size which will minimise the cost of the system. Determine
the optimal cost.
14.17 The annual requirement of an item is 12,000 units, each costing f6. Ordering costs
are f200 per order and inventory carrying costs are 20% of the average inventory
held. Determine the economic order quantity and the total inventory cost. Should
the item be purchased in lots of 6,000 at a time if the price per unit is reduced
by 5% for this quantity?
14.18 A company purchases three items-A, Band C. Their annual demand and unit
prices are given in the following table:
Item Annual demand Unit price

A 1,20,000 f3.00
B 80,000 f2.00
C 600 f96.00
If the company wants to place 40 orders per year for all the three items, what
is the optimal number of orders for each item?
14.19 The purchasing manager of a chemical plant is considering three sources of supply
for specially coated metal containers. Supplier A offers any quantity of containers
for f150 each. Supplier B offers containers in lots of 150 or more at a price of
f125 each. Supplier C is willing to supply containers in lots of 250 or more at
a price of flOO each. The annual requirement of the plant is 1500 containers.
Ordering costs have been estimated at f400 per order, while the carrying costs
are 40% of the unit price. Which supplier should be given the contract for the
supply of the containers?
14.20 A company maintains an inventory of 10 items used in its manufacturing process.
The company cannot reliably establish carrying costs or ordering costs and is
unable to follow an EOQ approach for managing its inventory. The data regarding
use and purchase of the inventory for last year is given.
Item Annual usage value (f) No. of orders

A 1,30,000 5
B 85,000 6
C 45,000 6
D 20,000 4
E 11,00 8
F 5,000 6
G 2,500 7
H 1,200 8
I 900 6
J 300 6
(a) Without increasing the administrative load of orders, what percentage reduction
can you make in the cost of average inventory carried?
(b) If the company is willing to increase the purchase workload by 25%, what is the
minimum average inventory it will achieve?
(c) If the company is willing to increase its average inventory by 10%, what percentage
reduction in purchasing workload can it achieve?
14.21 Daily demand for a product is 80 units with a standard deviation of 10 units. The
lead time is 5 days. If a 95% service level is desired and the company follows
a fixed order quantity system, what should be the reorder level?
14.22 Daily demand for a product is 80 units with a standard deviation of 10 units. The
lead time is 5 days. The company follows a fixed interval system and the review
period is 20 days. It desires to maintain a service level of 95%. At the review the
company had an inventory of 800, what should be the order quantity assuming
that there are no pending orders?
Material Requirements Planning
Productivity is never an accident. It is always the result of a commitment to excellence, intelligent
planning and focused effort
PAUL MEYER
LEARNING OBJECTIVES
• Understand the MRP structure
• Appreciate the relationship between aggregate production plan and a master
production schedule
• Understand a bill of materials
• Examine the logic of MRP computations
• Study capacity requirements planning
• Examine different methods of lot sizing
15.1 INTRODUCTION
Traditionally manufacturing followed a make-to-stock philosophy. The demand or sales
forecast was the basis of planning manufacture. The manufactured goods were then
pushed into the market. The age of information technology has brought in new paradigms.
Emphasis is shifting to make-to-order. Manufacturing processes are shifting from mass
production to mass customisation. Just-in-time systems and enterprise resource planning
have revolutionised manufacturing. From a push system, the philosophy has changed to
a pull system. Instead of the forecast, actual orders are driving the manufacturing system.
It is imperative that materials, assemblies, components and subcomponents are received
in the right quantity at the right time. However, it would be incorrect to say that there
is total novelty in systems. Material Requirements Planning (MRP) always existed in
367
some form or the other. It was important to ensure that materials were available when
required. MRP is a logical approach to determine the number of parts, components and
materials required to produce each end item. It also provides the schedule when each
of these materials, parts and components should be ordered or produced. Initially MRP
planned only for materials. As the use of computers and their applications increased, the
system then evolved to include all resources and was known as Manufacturing Resource
Planning II (MRP II). The system included modules to handle order entry, scheduling,
inventory control, finance accounting, accounts payable and so on. Today most big
organisations are using Enterprise Resource Planning (ERP) systems. ERP systems work
on the basis of an integrated database and have modules covering all activities of the
enterprise. Most ERP systems have four main modules-financial accounting, human
resources, manufacturing and logistics, and sales and distribution. The systems are fully
integrated and data is shared across the organisation. For example, if an order filling
transaction is posted in the sales and distribution module, it is immediately reflected
in the accounts payable in the financial accounting module as well as in the inventory
management module.
MRP is an important component of the production planning process. The master
planning schedule is finalised only after its conversion to see that there is no overloading
of critical elements.
15.2 MATERIAL REQUIREMENTS PLANNING (MRP)

MRP is driven by the master planning schedule. It is a process of working backwards
the materials, parts and components required and determining when they should be
ordered or produced so that delivery schedules mentioned in the Master Production
Schedule (MPS) can be met. A bill of materials is maintained for each end product.
It is simply a hierarchal sequence of every thing that goes into the final product. It is
also called product structure tree, or schedule or flow diagram. For example, a bicycle
consists of a frame, two wheel assemblies, a handle bar assembly and a gear wheel and
chain assembly. The wheel assembly itself is made of a hub, wheel spokes, a wheel rim,
a tube and a tyre. The product structure tree for the wheel assembly may be as shown
in Figure 15.1.
Wheel assembly
Wheel Tube Tyre
Wheel rim Wheel hub Wheel spokes
Figure 15.1 Bill of Materials for Wheel Assembly.
Every organisation also maintains inventory data. This gives information about the
stock in hand of various items and the stock-on-order. The MPS, bill of materials and
the inventory status provide inputs for the MRP.
Material Requirements Planning 369
MRP is based on dependent demand. The demand for an end product is independent
demand, but the demand for the parts and components depends on the total units of the
end product required. Computing the requirement of the parts and components is only a
multiplicative process. For example, the demand for bicycles may vary, but once the figure
is known, the number of wheel assemblies required is the number of bicycles multiplied
by two. Similarly the components for the wheel assembly can be worked out once the
number of wheel assemblies required is known. The requirement of dependent demand
items tends to be more lumpy as we go further down the hierarchy. Lumpiness means
that the requirement tends to bunch together rather than being evenly distributed over
a period of time. This is also caused by the manufacturing process. If we manufacture in
lots, then the items required for the lot are drawn from the inventory at the same time
rather than being spread out over a period of time.
MRP is most useful where production is in batches or lots using the same processes.
MRP is most useful to companies which assemble products rather than those that fabricate
them. It is not very useful if the annual production is very low or where very complex
products are involved which require research and design and have long and uncertain
lead times.
15.3 MRP SYSTEM STRUCTURE

The MRP structure is shown diagrammatically in Figure 15.2.
Forecast Agg reg ate

Firm orders
demand production plan
Master
Inventory
Design changes Production
transaction s
Schedule (M PS)
Bill of materials MRP Inventory status
Figure 15.2 MRP System Structure.
The MRP is driven by the Master Production Schedule (MPS), the bill of materials
and the inventory status. The MPS is derived from the aggregate production plan and is
based on demand forecast and firm orders received from customers. The bill of materials
is a product tree structure diagram which lists out all the parts and components that go
into making the product in a hierarchal manner. The bill of materials may undergo a
change whenever, engineering design changes take place in the product. The inventory
status is dependent on inventory transactions which may be in terms of receipts or issues
of items or pending orders. The status will change whenever an inventory transaction
takes place. As may be appreciated, the system is a dynamic one. The firm order status
will change from time to time as more orders are received and existing orders fulfilled.
The bill of materials may change. The inventory status must be updated whenever an
inventory transaction takes place. With these changes the MRP will have to be revised
from time to time. Computer packages can handle these complex situations and revise
the material requirements plan speedily and accurately. They are an integral part of ERP
systems. WinQSB also has a module to solve MRP problems. Let us study the elements
that drive the MRP in some more detail.
15.4 MASTER PRODUCTION SCHEDULE (MPS)

The MPS is derived from the aggregate production plan. As explained in Chapter 13,
the aggregate plan deals with product families and not individual products. At the MPS
formulation stage the planned production is disaggregated to individual products. An
MRP is then derived from the MPS. The requirements of components and parts and their
schedule are then examined for feasibility. The MPS is finalised only after it is found
that there are adequate resources and the completion times are reasonable. Figure 15.3
shows how an aggregate plan is broken into a master production schedule.
Aggregate plan
Month 1 2
--------
Cars 900 1200
Week
Maruti 800
-------
1
1 00
2 3
1 00
4
200
\
5
300
6 7 8
100
Alto 1 00 1 00 200 1 00 100
Wagon R 1 00 1 00 1 00 100 200 100
Master production schedule
Figure 15.3 Aggregate Plan and Master Production Schedule for Cars.
Let us see how a master production schedule is developed for a make-to-order item
with the help of an example.
EXAMPLE 15.1 The forecast demand for inkjet printers for the next six weeks is 35,
30, 32, 38, 30 and 32. The number of orders booked at the start of the MPS planning
period is 30, 40, 25, 45, 22 and 20. The inventory on hand is 40. Lead time is one week.
The production lot size is 75. Prepare an MPS for the inkjet printer.
Solution: The production schedule for the six weeks is shown in Table 15.1.
Table 15.1 Master Production Schedule for Six Weeks
Week 1 2 3 4 5 6
Forecast 35 30 32 38 30 32
Orders 30 40 25 45 22 20
Inventory 5 40 8 38 8 51
MPS quantity 75 75 75
MPS start 75 75 75
Week 1:
Opening inventory = 40
Forecast demand = 35
Closing inventory = 5
No production is required to meet the forecast demand which is greater than the orders.
Week 2:
Orders= 40
We shall need to produce a lot.
Since we manufacture in lots of 75, the inventory will be 75 + 5 = 80
Closing inventory = 80 - 40 = 40
As the lead time is 1 week, we shall have to start production of the lot in the first week
itself.
Week 3:
Forecast = 32
Closing inventory = 8
No production quantities needed.
Similarly, the production schedule for other weeks can be worked out.
The number of orders received will lead to changes in the MPS. How flexible should
the MPS be? The flexibility depends on product lead times, commibnent of parts and
components to specific end use item, relationship between the manufacturer and the
vendor, excess capacity available and the willingness or otherwise to make changes. It
is obvious that total flexibility is neither possible nor desirable.
Organisations lay down time fences. These are periods defining the flexibility available
for making changes. For instance, an organisation may freeze the MPS for the next
6 weeks. This may mean no changes to be made to the plan for the next six weeks or
only the most minor change. It may define the period from week 6 to week 12 as
moderately firm. This may mean that the organisation may allow changes in specific
products within a particular group as long as parts are available. The organisation
may define the period from week 12 to week 24 as flexible. This may imply that any
variations may be made keeping in view the overall capacity constraint and the lead
time constraint.
15.5 BILL OF MATERIALS

We have already seen that a bill of materials is a list of all that goes into a final end
product. The data is maintained on computers through different files. An Item Master
File is created. This file contains the data of all parts in terms of the classification of the
part, whether it is manufactured or procured, its lead time, the manufacturing lot size
and so on.
A bill of materials file from the WinQSB package is shown in Table 15.2.
Table 15.2
Item ID Component Component Component Component
ID/Usage ID/Usage ID/Usage ID/Usage
A10O C2OO D2OO F3OO/3
8100 C2OO/2 D2OO E2OO F3OO
C2OO G3OO/2
D2OO F3OO
E2OO G3OO/2 F3OO/2
F3OO
G3OO
The file lists only the parent item and the items one level below. For instance the
Product AlOO consists of one unit of C200, one unit of D200 and three units of F300.
C200 consists of two units of G300, and D200 consists of one unit of F300. The product
structure tree for Product AlOO is given in Figure 15.4.
A100
C200 (1) D200 (1) F300 (3)
G300 (2) F300 (1)
Figure 15.4 Product Structure Tree for Product A.
Similarly, the product structure tree for Product B100 is shown in Figure 15.5.
F300 (1)
Figure 15.5 Product Structure Tree for Product B.
15.6 INVENTORY STATUS

The inventory status file shows the current stock in hand and any orders in hand. The
status of the file has to be updated whenever inventory is received or inventory is issued.
The file helps to calculate net requirements of parts and components.
15. 7 MRP PROCEDURE

MRP computations are carried out in the following steps.
Step 1 Explosion: The end products are exploded into their components and
the gross requirement of components worked out. It starts with the time when the
product is required and proceeds backwards. It uses the information from the MPS
and the bill of materials to generate the sequence followed to produce the end
product.
Step 2 Netting: The gross requirements are now converted to net requirements based
on the quantities on hand or quantities on order expected to be delivered during the
period being considered.
Step 3 Offsetting: The system next determines when orders must be released either
to procure the materials or to manufacture it in house. This is based on the lead times
required for each item.
Step 4 Consolidation: The next step is to consolidate the requirement of a particular
item for all the end products in which it is used.
Let us understand this procedure with the help of a simple example.
EXAMPLE 15.2 Suppose a company makes a Product A, which is made of three parts
of Product B and two parts of Product C. Product B is made of two parts of Product D
and one part of Product E. Product C is made up of two parts of Product E and one part
of Product F. The bill of materials is shown in Figure 15.6. The figures in parenthesis
indicate the number of parts and the lead time in weeks is mentioned as LT = 3 and so
on. 200 Units of Product A are to be delivered in week 20. The inventory on hand for
the products is indicated in Table 15.3. Prepare an MRP schedule.
Product A
LT= 1
Product B (3) Product C (2)

LT= 3 LT= 2
Product D (2) Product E (1) Product E (2) Product F (1)

LT= 2 LT= 3 LT= 3 LT= 2
Figure 15.6 Bill of Materials for Product A.
Table 15.3 Inventory Status

Product Stock in hand
B 100
C 60
E 900
Solution: In Table 15.4, we have calculated the net requirement of sub products through
explosion and netting. The demand for Product A is 200 and there is no stock in hand.
Product A is made up of three units of Product B and two units of Product C.
Table 15.4 Net Requirement of Products

Demand Stock in hand Net quantity
Product A 200 0 200
Product B (3) 600 100 500
Product D (2) 1000 0 1000
Product E (1) 500 500 0
Product C (2) 400 60 340
Product E (2) 680 400 280
Product F (1) 340 0 340
Product B required = 200 x 3 = 600

Stock in hand = 100
Net required = 500
Product Bis made up of two units of Product D and one unit of Product E.
Product D required (for Product B) = 500 x 2 = 1000
Stock in hand = 0
Net requirement = 1000
Product E required (for Product B) = 500 x 1 = 500
Stock in hand = 900
Net requirement = 0
Product C required (for 200 units of Product A) = 200 x 2 = 400
Stock in hand = 60
Product E required (for Product C) = 340 x 2 = 680
Stock in hand = 400 (500 used in Product B)
Product F required (for Product C) = 340 x 1 = 340
Stock in hand = 0
Let us now do offsetting
Table 15.5 Schedule of Order Releases

Week 12 13 14 15 16 17 18 19 20
A 200
B 500
C 340
D 1000
E 280
F 340
Since A has a lead time of 1 week, work on A must start in week 19 so that it can be
delivered in week 20.
Product B has a lead time of three weeks. Order for 500 units of product B must be
released in week 16. Product Chas a lead time of 2 weeks and its order must be released
in week 17. Similarly we have worked backwards for products D, E and F.
The problem can be set up on an MS Excel spreadsheet and solved. We can also use
other software packages like WinQSB.
15.8 CAPACITY REQUIREMENTS PLANNING

MRP ensures that material requirements are met. However, materials alone are not
enough to produce end products. Production processes also require inputs of machine
and labour hours. A check must be carried out to verify that the MRP can be
implemented and that machine and labour inputs are not a constraint. This process
is called capacity requirements planning and is similar to material requirements
planning.
The loads from a material requirements plan are projected on to the capacity of the
system and any overloads or underloads identified. The loads must then be levelled out
or smoothened out. This is achieved by shifting requirements, temporarily increasing
capacity or by reducing the requirements. The major inputs to the system are-planned
order releases for the MRP, routing instructions that specify which machines, or workers
or work centres are required to complete an order from the MRP, and an open orders
file that contains information on orders which have been released but not yet completed.
The routing instructions also lay down the sequence of the processes, machines, workers
or work centres involved.
The CRP prepares a load profile for each machine or work centre. The load profile
compares released orders or planned orders with the capacity of the work centre. Capacity
is usually expressed in standard hours:
Capacity = Number of machines or workers x Number of shifts x Utilisation
x Efficiency
Utilisation is the percentage of available working time for which the machine or
worker actually performs work. For instance, if a worker works for 7 hours in an
8-hour working shift, utilisation is 7 /8 or 87.5%. Efficiency refers to the rate of work as
compared to a standard rate. It is almost like worker rating. The standard is taken as
100%. A machine or worker could perform at more than 100% efficiency.
Load is the standard hours of work assigned to a facility. The ratio of load to capacity
is termed the load factor. Let us illustrate the CRP system with the help of a simple
example.
EXAMPLE 15.3 Suppose a work centre consisting of two machines working with 95%
efficiency for two 8-hour shifts per day, six days a week, at a utilisation of 85% has load
as shown in Table 15.6. (Time in hours).
Table 15.6 Work Centre Load

Week Job No. Units Set up time Run time per unit Total time Total for week
10 101 100 3.5 0.25 28.5
102 150 2.5 0.20 32.5
103 60 1.3 0.15 10.3
104 250 5.0 0.18 50.0 121.3
11 201 200 4.0 0.40 84.0
202 250 3.0 0.30 78.0
203 80 2.5 0.40 34.5 196.5
12 301 100 3.0 0.15 18.0
302 120 5.0 0.18 26.6
303 200 2.0 0.20 42.0
304 200 4.0 0.25 54.0 140.6
Capacity per week = 2 x 2 x 8 x 6 x 0.85 x 0.95 = 155.04 hours per week

200
180
160
140
120
100 B Over loading
80
60
D Under loading
40
20
0
10 11 12
Figure 15.7 Chart Showing Load and Capacity.
In the 10th week, the capacity exceeds the load. In the 11th week, load is greater than
the capacity and in the 12th week load is less than the capacity. The grey shaded areas
indicate under loading of capacity while the grey hatched area indicates overloading of
capacity.
The load must now be levelled or the capacity adjusted temporarily by overtime,
running an extra shift or through subcontracting. For example, Job 203 could be shifted
to the 10th week. The capacity available can be used. However, it should be appreciated
that this option will entail the carrying costs involved in carrying the inventory of Job
203 to the next week. The overload in week 11 can also be met through overtime or by
postponing delivery of some job and scheduling it to the next week.
EXAMPLE 15.4 The data given in Table 15.7 refers to three different machines A, B
and C. The output is expected to be 9000 units per month. Factory works for 48 hours
per week. Find out the machine which will satisfy the required capacity.
Table 15.7
Particulars A B C
Set up time in minutes 9 4 6
Machine operation time in minutes per unit 1.2 2.0 1.5
Lot size 450 300 360
Solution:
Total time available = 48 x 4 x 60 = 11520 minutes
Machine A
Number of lots required = 9000 / 450 = 20
Set up time required = 9 x 20 = 180 minutes
Processing time = 9000 x 1.2 = 10800
Machine B
Number of lots required = 9000/300 = 30
Processing time = 9000 x 2 = 18000
Machine C
Number of lots required = 9000/360 = 25
Processing time = 9000 x 1.5 = 13500
Machine A meets the required capacity.
MRP and capacity requirements planning are linked to each other. A holistic view
of the entire production planning system must be taken. Set up costs and run costs and
inventory carrying costs affect the total costs involved. MRP determines the quantities
required and the schedule of releasing orders. However, cost considerations affect the
lot size.
15. 9 LOT SIZE

Lot size is the quantity that is ordered or manufactured as a batch. Manufacturing involves
set up costs while ordering involves ordering costs. The lot size may result in inventories
which involve carrying costs. Elaborate MRP systems exist which can determine the
optimal lot size. Some of the commonly used methods are Lot For Lot (LFL), Economic
Order Quantity (EOQ), Least Total Cost (LTC) and Least Unit Cost (LUC). Let us examine
these systems for determining lot size with the help of a simple example.
EXAMPLE 15.5 The data for an item extracted from the MRP is given in Table 15.8(a).
Cost per unit is fl0.00
Set up cost is f50.00
Carrying cost is 0.05 per unit per month
Table 15.8(a)
Month 2 3 4 5 6 7 8
Demand 50 60 70 60 80 90 60 80
Determine the most economical lot size.

Solution:
Lot for lot: In this method only the quantity required is ordered or produced. No
inventories are formed. The method does not take up set up costs into account.
Table 15.8(b)
Month Demand Quantity ordered Set up cost Inventory carrying cost Total cost
1 50 50 50 0 50
2 60 60 50 0 50
3 70 70 50 0 50
4 60 60 50 0 50
5 80 80 50 0 50
6 90 90 50 0 50
7 60 60 50 0 50
8 80 80 50 0 50
Total 400
The total cost will be f400.00

EOQ: In this method, the EOQ is the lot size and is ordered whenever needed.
The annual demand for the item based on the eight month data= 550 x 12/8 = 825 units
EOQ = 2 X 825 X 50 = 370 units

0.60
Table 15.8(c)
Month Demand Cumulative Quantity Set up cost Inventory carrying Total cost
demand ordered cost
1 50 50 370 50 16.00 66.00
2 60 110 13.00 13.00
3 70 180 9.50 9.50
4 60 240 6.50 6.50
5 80 320 2.50 2.50
6 90 410 370 50 16.50 66.50
7 60 470 13.50 13.50
8 80 550 9.50 9.50
Total 187.00
The total cost of ordering EOQ quantity is f187.00. The closing inventory at the end of
eight months is 190 units.
Least Total Cost (LTC): This method is almost akin to the EOQ method. We attempt to
find the least total cost for a lot which will occur when the set up cost and the inventory
carrying costs are nearly the same.
Table 15.S(d) shows the cost of set up and ordering if an order is placed for 1 month
or 1 to 2 months or 1 to 3 months and so on. If an order is placed covering the demand
for the first three months, then 130 units will be carried as inventory at the end of first
month, and 70 units at the end of second month, or a total of 200 units for one month.
The carrying cost is f0.05 per unit. Total carrying cost is fl0.00. Similarly carrying costs
have been worked out for each option. Since the set up cost and the carrying cost are
closest for first to sixth month clubbed order, the lot size in the first month should be
410. This will meet our requirements till the sixth month at a cost of f107.50.
Table 15.8(d)
Month Cumulative Quantity Set up cost Inventory carrying Total cost
demand ordered cost
50 50 50 0.00 50.00
1-2 110 110 50 3.00 53.00
1-3 180 180 50 10.00 60.00
1-4 240 240 50 19.00 69.00
1-5 320 320 50 35.00 85.00
1-6 410 410 50 57.50 107.50 +-- Least cost
1-7 470 470 50 75.50 125.50
1-8 550 550 50 103.50 153.50
7 60 60 50 0.00 50.00
7-8 140 140 50 4.00 54.00
Similarly, for the seventh and eighth month, the lot size for seventh month is 140
and the cost will be f54.00. The total cost will be f161.50.
Table 15.8(e)
Month Demand Cumulative Quantity Set up cost Inventory carrying Total cost
demand ordered cost
1 50 50 410 50 18.00 68.00
2 60 110 15.00 15.00
3 70 180 11.50 11.50
4 60 240 8.50 8.50
5 80 320 4.50 4.50
6 90 410 0.00 0.00
7 60 470 140 50 4.00 54.00
8 80 550 0.00 0.00
Total 161.50
Least Unit Cost (LUC): In this method the total cost of set up and inventory are added
and divided by the number of units to obtain the cost per unit.
As can be seen from Table 15.8(f), the least cost per unit is achieved when an order
for 410 covering the requirement from week 1 to week 6 is placed. An order for 140
placed in week 7 to cover requirement of week 7 through week 8, at a total cost of
f161.50. The cost in this example is the same as that worked out for the least total cost
method. However, this may not always be the case. The lot size for the first month is
410 and for the seventh month is 140.
Table 15.8{f)
Month Cumulative Quantity Set up Inventory carrying Total Unit
demand ordered cost cost cost cost
50 50 50 0.00 50.00 1.00
1-2 110 110 50 3.00 53.00 0.48
1-3 180 180 50 10.00 60.00 0.33
1-4 240 240 50 19.00 69.00 0.29 1st order
1-5 320 320 50 35.00 85.00 0.27 least unit
1-6 410 410 50 57.50 107.50 0.26 f-- cost
1-7 470 470 50 75.50 125.50 0.27
1-8 550 550 50 103.50 153.50 0.28 2nd order
7 60 60 50 0.00 50.00 0.83 least unit
7-8 140 140 50 4.00 54.00 0.39 f-- cost
The best lot size can now be selected. As may be seen the least unit cost method
and least total cost method have yielded the same result of f161.50 which is lower than
the EOQ method cost of f187.00 and the lot for lot method cost of f400. The least unit
cost method is a more complete analysis than the others and can also take into account
situations where the set up cost may vary with the size of the order.
MRP is a part of all ERP systems. Computerised software working on an integrated
database combines the functions of MRP and capacity requirements planning. MRP can
also be integrated with just-in-time systems.
15.10 SUMMARY
Material requirements plan determines the quantity of materials, parts and components
required for each end product and the schedule when they should be ordered or produced.
MRP is based on dependent demand. While the demand for the end product is
independent, the demand for parts, components and materials is dependent on the total
units of an end product to be produced.
MRP is driven by the master production schedule. The MPS lays down the schedule
for delivery of end products. The MPS is derived from the aggregate production plan.
At the aggregate planning stage, we only plan the production for product families, but
the MPS disaggregates this demand to individual products within the product family.
The MPS is based on firm orders received and the forecast demand.
MRP uses a bill of materials along with the MPS to compute the total number of
parts, components and materials required for executing the MPS. The bill of materials
lists out all that goes into the end product and the sequence in which the end product
is produced. It is also referred to as a product structure tree. The bill of materials is
supported by a master item file. The file gives details of each item, its classification in
terms of ABC classification, whether its manufactured in house or procured from outside
sources, the source of supply, the lead time, the ordering or set up cost, the carrying
cost and other such details. The process of computing total quantities required is called
explosion.
Another important input to the MRP is the inventory status file. The inventory status
file gives the details of stock in hand and orders on hand. It is updated every time an
inventory transaction like receipt, issue or order takes place. The gross requirements of
parts and components are then converted to net requirements by using the inventory
status data.
The schedule is then worked out by offsetting the time at which a part or component
is required by its lead time. Essentially, MRP works backwards from the scheduled
delivery date.
The MPS changes with the receipt of firm orders, the bill of materials may change
with changes in engineering design of the product and the inventory status changes with
every inventory transaction. The MRP is, therefore, a dynamic system. Organisations set
up time fences to impose some restrictions on the changes that can be made and accepted
so that the production can be scheduled in a practical manner. The MPS may be frozen
for the immediate short-term planning horizon, which implies that none or very minor
changes may be accepted. It may be moderately firm in the intermediate planning range
and flexible for the long-term planning range.
The MRP is then compared with the available capacity. This is called capacity
requirements planning. The shortfalls or excesses in capacity are remedied through
overtime, running extra shifts, outsourcing or shifting loads by either preponing production
or delaying it and consequently delaying delivery. If capacity constraints do not permit
the execution of an MRP, the MPS is revised and the MRP reworked out. This iterative
process ensures that the production plan can be executed.
The lot size for production or ordering as per the MRP schedule has to be decided
based on cost considerations. Various methods are available like lot for lot, EOQ, least
total cost and least unit cost. In the lot for lot, the lot size is equal to the requirement.
No inventories are maintained. This reduces the carrying cost to zero but increases the set
up or ordering cost. EOQ lots follow a fixed quantity system of ordering where the lot
size is the economical order quantity. Orders are placed as and when required according
to the MRP schedule. The system involves set up and carrying costs. The least total
cost method of lot sizing determines that lot size where the set up cost and the
carrying cost are closest to each other. The lot size may differ from order to order. The
least unit cost method calculates the costs of ordering and carrying for different lot sizes
and then computes the cost per unit. The lot size which gives the least cost per unit is
adopted.
Enterprise resource planning systems are now being increasingly adopted by
organisations. ERP is a software programme working on an integrated database and
generally has four main modules-financial accounting, human resources, manufacturing
and logistics, and sales and distribution. MRP is a part of the manufacturing and logistics
module.
ICONCEPT QUIZ I
State True or False
1. MRP is driven by the master planning schedule.
2. The bill of materials shows the cost of various materials required for production.
3. The inventory status indicates the quantity of finished products held in stock.
4. The MPS, bill of materials and the inventory status provide inputs for the MRP.
5. Time fences are periods defining the flexibility available for making changes.
6. At the MPS formulation stage the planned production is stated in terms of the
aggregate product.
7. The MRP computations involve explosion, netting, offsetting and consolidation.
8. Lot size is the quantity that is ordered or manufactured as a batch.
9. The loads from a materials requirement plan must be matched with the available
capacity.
10. The lot size should be based on cost considerations.

1. The MPS is derived from:
(a) Business plan. (b) Bill of materials.
(c) Aggregate production plan. (d) Inventory status.
2. Which of the following does not affect the MRP:
(a) Cost of materials. (b) Inventory status.
(c) MPS. (d) Bill of materials.
3. A bill of materials is:
(a) An invoice for the cost of materials.
(b) An estimate of the materials required for production.
(c) A hierarchical product structure tree.
(d) An invoice given to the customer for his purchases.
4. At the MPS formulation stage:
(a) The planned production is stated in terms of an aggregate product.
(b) The planned production is disaggregated to individual products.
(c) The planned production is stated in terms of material requirements.
(d) The planned production is stated in terms of inventory status.
5. MRP works:
(a) Forward from the schedule date.
(b) Backwards from the scheduled date.
(c) Adds lead times to the scheduled date.
(d) Based on the total number of parts required for executing the MPS and
maintains the existing inventories as they are.
6. Capacity depends on:
(a) Number of machines or workers.
(b) Number of hours worked.
(c) Utilisation and efficiency factors.
7. Capacity shortfalls can be made up in the short run by:
(a) Levelling loads. (b) Overtime.
(c) Subcontracting. (d) All of the above.
8. The lot for lot method:
(a) Produces lots of the same size throughout the year.
(b) Maintains backorders and inventories.
(c) Produces only the quantity that is required and no inventories are
maintained.
(d) Maintains a safety stock to cater for fluctuations in demand.
9. The EOQ method attempts to:
(a) Balance setup costs and inventory carrying costs.
(b) Produce only the quantity required for a production period.
(c) Produces a safety stock in addition to the requirement.
(d) Minimise the cost per unit.
10. MRP is:
(a) A one shot planning process.
(b) A dynamic process responding to changes in the MPS and the inventory
status.
(c) A bill of materials.
(d) Used for planning manpower.
Fill in the blanks:
1. The MPS, ______ and inventory status provide inputs for the MRP.
2. MRP is most useful to companies which _ _ _ _ _ products rather than those
that fabricate them.
3. The MPS is derived from the _ _ _ _ _ _ _ _ _ _ __
4. The inventory status file shows the current _ _ _ _ _ _ _ and any orders
in hand.
5. The _ _ _ _ _ _ _ _ _ _ _ _ _ are worked out by exploding the end
products.
6. The gross requirements are converted to net requirements based on the quantities
_________ and the quantities _ _ _ _ _ _ __
7. Offsetting is based on the ________ required for each item.
8. Utilisation is the percentage of ______ working time for which the machine
or worker actually performs work.
9. The standard hours of work assigned to a facility is called _ _ _ __
10. Lot size is based on _ _ _ _ _ considerations.
I QUESTIONS I
15.1 What is the purpose of material requirements planning?
15.2 What do you understand by dependent demand and independent demand?
15.3 What is a bill of materials?
15.4 What is the role of MPS in MRP?
15.5 Describe the inputs to an MRP?
15.6 Describe the steps followed to make a material requirements plan?
15.7 What do you understand by capacity requirements planning?
15.8 What is the importance of selecting lot size in MRP?
15.9 Describe different methods of determining lot size?
15.10 Product A is made of three units of Band two units of C. Bis made of two units
of D and three units of E. C is made of two units of D and two units of F. Lead
time for A is one week, B two weeks, C three weeks, D two weeks, E one week
and F two weeks.
(a) Draw the bill of materials.
(b) If 100 units of A are needed in week 9, develop a planning schedule when
each item should be ordered and in what quantity?
15.11 Resolve Question 15.10, if the on hand inventory is 20 units of A, 30 units of B,
50 units of C, 100 units of D, 60 units of E and 100 units of F.
15.12 One unit of A is made of two units of B, one unit of C and three units of D. Bis
composed of one unit of D and two units of E. C is made of one unit of E and
two units of B. E is made of two units of F.
A and D have a lead time of two weeks. All other items have a lead time of
one week.
Assume that lot sizing lot for lot is used for Items A, B and C; lot sizes of
50, 50 and 200 are used for Items D, E and F respectively. B, E and F have on
hand inventories of 20, 50 and 150 respectively. All other items have an opening
inventory of zero. We are scheduled to receive 10 units of B in Week 2 and 50
units each of E and F in Week 1. If 30 units of A are required in Week 8, find
the necessary planned order releases for all items.
15.13 Apsara Home Appliances manufactures two models of electric kettles.
Although some parts are different quite a few parts are common to the two
models. The bill of materials showing the number of each item required, lead
times and current inventory on hand for the parts and components is as follows:
A B
C(l) D(2) C(2) E(2)
F(2) G(l) F(2) F(2) G(l) G(2)
1(2) H(2) 1(2) 1(2) H(2) H(l)
Item Stock in hand Lead time (weeks)

Model A 35 1
Model B 45 2
Subassembly C 80 1
Subassembly D 75 2
Subassembly E 120 1
Part F 130 1
Part G 45 2
Material H 180 2
Material I 275 1
Part of the MPS shows a demand of 700 units of model A in Week 11 and
1200 units of Model Bin Week 10. Develop an MRP schedule to meet the demand.
15.14 ABC Computers manufactures hardware for computers. One of the items made by
it is CD drives. The drives are produced in two models-CD RO (Read Only)
drive and CD RW (Read Write) drive. Aggregate demand for CD drives for the
next two quarters is 2100 and 3000 units respectively. Assume that the demand
is uniformly distributed over each month in the quarter and that the demand
for CD read only drives is 75% of the aggregate demand. The bill of materials
and the lead times are shown below. Each drive consists of a drive assembly
and an electronics and housing assembly.
I CD drive I
LT= 1 month
I
I I
Electronics and
Drive assembly
housing
LT= 2 month
LT= 3 month
The MRP is run monthly. Currently there are 150 CD RO and 50 CD RW drives
in stock. There are also 200 drive assemblies and 100 electronic and housing
assemblies for CD RO and 50 electronic and housing assemblies for CD RW
drives. Prepare the aggregate plan, the MPS and the full MRP.
15.15 The MRP gross requirements for the next 10 weeks for Item A are shown in
following table. The lead time for A is 3 weeks and the set up cost is flO. The
carrying cost is f0.05 per week per unit. Beginning inventory is 100.
Week 1 2 3 4 5 6 7 8 9 10
Demand 30 30 40 30 60 70 40 50 100 80
Use the lot for lot, EOQ, least total cost method and the least unit cost method
to determine the lot size and when the orders should be released. Compare the
cost of each method and give your recommendations.
Operations Scheduling
A lot affects the outcome. It boils down to scheduling and the commitment of the network.
DAVID OGDEN STIERS
LEARNING OBJECTIVES
• Understand the importance of scheduling
• Study the different approaches adapted to scheduling
• Examine the objectives of scheduling
• Examine the use of assignment model for solution to loading problems
• Study different methods of scheduling-priority rules; n jobs two stations,
same and different sequence; n jobs m stations; Johnson's rule; 2 jobs
n stations in random order
• Examine the methods of employee scheduling for services
16.1 INTRODUCTION
The business plan gives rise to production plan. The aggregate plan is derived from the
production plan. The master production schedule is evolved from the aggregate production
plan. The next step is to draw up a material requirements plan, check it for its feasibility
by matching it with the available capacity and then finalise it. Scheduling is the last
stage of planning before production begins. It specifies when labour, equipment and
other resources are required for producing a product or providing a service. Scheduling
varies considerably with the processes used.
In continuous production, scheduling may imply when the ingredient mix is to be
varied to produce other variants of the product. For instance, in a steel factory, we may
387
have to determine when the mix of additives should be changed to produce different
grades of steel. Linear programming can be used to solve resource allocation and product
mix problems. EOQ model dealing with non-instantaneous receipts of inventory can help
determine the length of production runs. These techniques have already been dealt with
in earlier chapters.
Flow production processes generally use an assembly line. Scheduling is a part of
the design of the line. Day to day scheduling consists merely of deciding how fast to
feed a line and how many hours per day to run it.
Projects involve a large number of activities, some of which are sequential and some
can be carried out simultaneously. Projects present complex scheduling problems and
these are generally solved by network techniques like Critical Path Method (CPM) and
Programme Evaluation and Review Technique (PERT).
Job shop and batch production processes involve complex scheduling decisions.
The complexity arises because of the small volume and large variety of tasks. The tasks
may go through different processes and in a different sequence. The tasks have delivery
deadlines to be met, made all the more difficult by limited resources.
We shall deal with scheduling problems arising out of job shop or batch production
processes.
16.2 APPROACHES TO SCHEDULING

Scheduling systems can be distinguished from one another on the basis of certain
characteristics. One of the distinguishing characteristics is how capacity is considered
while scheduling. The system may use infinite or finite loading.
Infinite loading: Infinite loading implies that work is assigned to a work centre based
on what is needed over time. A work centre is a group of machines or workers or both
capable of executing the processes assigned to it. In infinite loading, capacity of the work
centre is not considered directly, nor do we consider the sequence in which the task is
carried out. Only a broad check in the aggregate sense is carried out. The work required
over a production period (say a week) is calculated by summing up set up times and
run times and adding time for queuing delays that are anticipated. This approach is
generally adopted for job shop and batch methods of production.
Finite loading: In this approach a detailed schedule for each resource using set up and
run times for each job and process is prepared. The system determines exactly what will
be done by each resource throughout the day. This approach is adopted for continuous
and flow methods of production.
The schedule may be generated forward or backward in time.
Forward scheduling: In the forward scheduling, the system takes an order and then
schedules each operation that must be performed to complete the task forward in time.
Forward schedule gives the earliest date by which a task can be completed.
Backward scheduling: In this approach, we start with the required completion date and
work backwards scheduling the operations required to complete the task. This schedule
gives the latest date by which work must commence so that the task can be completed
on time. MRP is a typical example of backward scheduling.
Operations Scheduling 389
We should also be clear as to what we are scheduling. In some processes machines
are critical and in others labour is critical. Processes are referred to as machine limited
when machines are critical and labour limited when labour is critical. In machine limited
process, equipment-the critical resource is scheduled; and in labour limited processes
labour, which is the critical resource, is scheduled.
16.3 OBJECTIVES
The objectives of scheduling are:
1. Meeting due dates
2. Minimising late completion of jobs or tardiness
3. Minimising completion time
4. Minimising response time
5. Minimising time in system
6. Minimising overtime
7. Minimising idle time
8. Minimising work-in-progress inventory
9. Maximising machine or labour utilisation
As can be seen some of the objectives are conflicting and a choice of the objective
to be met must be made. Maximising machine or labour utilisation may not be the most
effective way to manage flow through the process.
Scheduling and controlling operations involves allocating orders, equipment, and
personnel to work centres; establishing job priorities and determining the sequence in
which the jobs will be performed; initiating the work on the jobs and reviewing, controlling
and expediting orders as required.
The process of assigning jobs to work centres is called loading. Routing explains the
sequence of operations to be carried out in order to complete a job. For instance, a job of
making a geared wheel may first require some work on a lathe machine, next it may be
sent to a milling machine. After the gears have been cut the job may be sent to a drilling
machine so that a hole can be drilled in the centre. It may then go to a grinding machine
for polishing and finishing. Its routing would be lathe, milling machine, drilling machine,
grinding machine. Once the job has been loaded to a work centre and its routing sheet
prepared, dispatching takes place. The final act of releasing job orders to the workers to
go ahead with the production process is called dispatching.
16.4 LOADING
A job can often be performed by various persons, machines or work centres. However,
the efficiency with which it is performed varies, or the costs incurred on it vary from
person to person, or machine to machine or work centre to work centre. It is obvious that
jobs must be loaded to the agency which can perform them with the highest efficiency.
Assignment model can be used to handle such problems. The assignment model is a
special form of linear programming model and has a simple solution method called the
Hungarian method. The method involves the calculation of opportunity costs and an
opportunity cost matrix.
The steps involved are the following:

Step 1 Determine the opportunity cost table:
(i) Subtract the lowest entry in each row of the given cost table from all entries in
that row (row reduction).
(ii) Subtract the lowest entry in each column of the table obtained in (i) from all
numbers in that column (column reduction).
Step 2 Determine whether an optimal assignment can be made: Cross out all zeros
with the minimum number of horizontal or vertical straight lines. If the number of lines
is equal to or greater than the number of rows or columns then an optimal assignment
can be made. If not, go to Step 3.
Step 3 Revise the total opportunity cost table:
(i) Select the smallest number in the table not covered by a straight line and subtract
this number from all numbers not covered by a straight line.
(ii) Add this same number to the numbers lying at the intersection of any two lines,
that is, numbers covered with two lines. Go back to step 2.
In case optimal assignment can be made, select the row or column with only one
zero in it and make an assignment to that zero. Delete the row and column to which an
assignment is made. Repeat this procedure till all assignments are made. In case there
are more than one zeros in a row and column and there is no row or column with a
single zero, make an assignment arbitrarily to a zero cell and proceed. This indicates
that multiple solutions exist.
Let us understand the assignment model solution procedure with the help of an
example.
EXAMPLE 16.1 Mettalica Works Limited is a metal working machine shop. It generally
does jobs on contract basis. At present it has four jobs-A, B, C, D in hand. Mettalica
has four machines-I, 2, 3, 4. The jobs can be performed on all machines. However,
the cost for performing a job on different machines varies because of the capacity of
the machine and the characteristics of the job. The jobs are to be exclusively performed
on one machine as the set up costs are too prohibitive to permit setting up of another
machine for the same job. An estimate has been made of the cost of performing the jobs
on each machine and the estimated cost data (in~) is given in Table 16.1.
Table 16.1(a)
~
s s 1 2 3 4
A 20 36 31 17
B 24 32 40 12
C 22 40 38 18
D 36 39 35 16
How should the machines be loaded?
Solution:
Step 1.
(i) Subtract the lowest entry in each row of the given cost table from all entries in
that row.
Table 16.1(b) Row Opportunity Cost Table
J~ s 1 2 3 4
A 3(20 - 17) 19(36 - 17) 14(31 - 17) 0(17 - 17)

B 12(24 - 12) 20 (32 - 12) 28(40 - 12) 0(12 - 12)
C 4(22 - 18) 22(4 0 - 18) 20(38 - 18) 0(18 - 18)
D 20 (36 - 16) 23(39 - 16) 19(3 5-1 6) 0(16 - 16)
The figures in parenthesis show the computations.

(ii) Subtract the lowest entry in each column of the table obtained in (i) from all
numbers in that column.
Table 16.1(c) Total Opportunity Cost Table
~s s 1 2 3 4
A 0(3 - 3) 0(19 - 19) 0(14 - 14) 0

B 9( 12 - 3) 1 (2 0 - 19) 14(28 - 14) 0
C 1 (4 - 3) 3(22 - 19) 6(20 - 14) 0
D 17(20 - 3) 4(23 - 19) 5 (19 - 14) 0
The figures in parenthesis show the computations.

Step 2. Cross out all zeros with the minimum number of horizontal or vertical straight
lines.
Table 16.1 (d)
~
s s 1 2 3 4
A -----{}------ ------8------ ------{}------ ------~------

B 9 1 14 9
C 1 3 6 (!)
I
D 17 4 5 (!)
We find that there are only 2 lines whereas the number of rows is 4. Hence we cannot
make an optimal assignment.
Step 3.
(i) Select the smallest number in the table not covered by a straight line, that is 1,
and subtract this number from all numbers not covered by a straight line.
(ii) Add this same number to the numbers lying at the intersection of any two lines,
that is, numbers covered with two lines. Go back to step 2.
Table 16.1(e)
~s s 1 2 3 4
A -----{}------ ------9------ ------{}------ - ~- -1-(-0-+- ~ i-
B 8(9 - 1) 0(1 - 1) 13(14 - 1) 9

C 0(1 - 1) 2(3 - 1) 5 (6 - 1) 0I
D 16(17 - 1) 3(4 - 1) 4(5 - 1) 0
Table 16.1(f)
~achines
2 3 4
JOb S ---------
A ------0------- ------9------ -------0------- ------t------
B ------8------- ------9------ -----~3------ ------~------
C ------0------- ------2------ -------5------- ------Q------
1
D 16 3 4 0
The number of lines is 4 which is equal to the number of rows. Hence optimal
assignment can now be made.
For making optimal assignments first select a row or a column with only one zero
in it. Column 3 and Row D have only one zero in them. Taking Column 3 make an
assignment in the zero cell, i.e. assign Job A to Machine 3. Delete Job A row and Machine
3 Column as no other assignment can be made in them, or cross out ( X ) all zeros in
Row A and Column 3. The situation is shown in Table 16.l(g).
Table 16.1 (g)
~
s s 1 2 3 4
A 0 0 (o) 1
B 8 0 13 0
C 0 2 5 0
D 16 3 4 0
Similarly assign Job D to Machine 4. Eliminate Row D and Column 4. We now have
one zero in Column 1 and one zero in Column 2. Make these assignments as shown in
Table 16.l(h).
Table 16.1(h)
~ s s 1 2 3 4
A X X (o) 1
B 8 (o) 13 X
C (o) 2 5 X
D 16 3 4 (o)
The cost of the assignments is as follows:
Job A to Machine 3 31
Job B to Machine 2 32
Job C to Machine 1 22
Job D to Machine 4 16
Total 101
The assignment model can be used to assign n jobs to n machines. If the jobs and
machines are unequal, they are made equal by the addition of a dummy job or a dummy
machine as required. The cost of assigning dummy job to any machine, or the cost
of assigning any job to a dummy machine is zero. There is no change in the solution
procedure thereafter.
16.5 PRIORITY RULES

After the work centre has been loaded, dispatching of jobs is carried out according to
different rules. These are particularly applicable to scheduling of a number (n) of jobs
on one machine. These rules are:
1. First Come First Served (FCFS): Jobs are run in the order in which they are
received.
2. Shortest Operation Time (SOT): Run the job with the shortest completion time
first, next shortest second and so on. This is also referred to as Shortest Processing
Time (SPT).
3. Due Date (DDATE): Run the jobs in the order of their due dates starting with
the job with the earliest due date first.
4. Slack Time Remaining (STR): It is the difference between the time remaining
to due date and the remaining processing time.
STR = (Due date - Today's date) - Remaining processing time
Jobs are scheduled in the order of the slack time remaining with the one having
the least slack time remaining scheduled first.
5. Critical Ratio (CR): It is the ratio between the time remaining and the work
remaining. The job with the least critical ratio is scheduled first.
CR = Due date - Today's date
Remaining processing time
6. Last Come First Served (LCFS): This generally occurs by default. As jobs arrive,
they are put on top of the stack. The operator usually picks up the job on top
to run first.
7. Longest Processing Time (LPT): Jobs are run as per their processing time, the
one with the longest processing time being run first.
Let us apply these rules with the help of an example.
EXAMPLE 16.2 Five orders have been received at the beginning of the week. Scheduling
data is given in Table 16.2.
Table 16.2(a)
Jobs Processing time (days) Due date (days hence)
A 2 7
B 4 6
C 3 5
D 1 2
E 6 6
All orders are to be processed only on one machine. Schedule the jobs according to
different rules and compare them.
Solution:
FCFS: Scheduling the jobs on FCFS basis will result in a schedule as shown in
Table 16.2(b).
Table 16.2(b)
Job sequence Processing time (days) Due date (days hence) Start date Finish date
A 2 7 0 2
B 4 6 2 6
C 3 5 6 9
D 2 9 10
E 6 6 10 16
Jobs A and B are completed on time. C, D and E are delayed.

Average delay = (0 + 0 + 4 + 8 + 10) /5 = 4.4 days.
Shortest Operation Time (SOT): Schedule jobs according to their operations time running
the one with the shortest operations time first. The result is shown in Table 16.2(c).
Table 16.2(c)
D 1 2 0
A 2 7 3
C 3 5 3 6
B 4 6 6 10
E 6 6 10 16
Jobs D and A are completed on time. Jobs C, B and E are delayed.
Average delay = (0 + 0 + 1 + 4 + 10)/5 = 3 days.
Due Date (DDATE): Run the job with the earliest due date first. The result is shown
in Table 16.2(d):
Table 16.2(d)
D 1 2 0
C 3 5 4
B 4 6 4 8
E 6 6 8 14
A 2 7 14 16
Jobs D and C are completed on time. Jobs B, E and A are delayed.

Average delay = (0 + 0 + 2 + 8 + 9)/5 = 3.8 days.
Slack Time Remaining (STR): Job with the least slack time is scheduled first.
STR = (Due date - Today's date) - Remaining processing time
Let us assume that today is day 0.
STR for A= (7 - 0) - 2=5
STR for B = (6 - 0) - 4=2
STR for C = (5 - 0) - 3=2
STR for D = (2 - 0) - 1=1
STR for E = (6 - 0) - 6=0
The schedule is given in Table 16.2(e).
Table 16.2(e)
E 6 6 0 6
D 2 6 7
B 4 5 7 11
C 3 5 11 14
A 2 7 14 16
Job E is completed on time. All other jobs are delayed.

Average delay = (0 + 5 + 6 + 9 + 9)/5 = 5.8 days.
Critical Ratio (CR): Schedule job with the least critical ratio first.
CR = Due date -Today's date
Remaining processing time
If today's date is 0, the critical ratio for each job is as follows:

CR for A = (7 - 0)/2 = 3.5
CR for B = (5 - 0)/4 = 1.25
CR for C = (5 - 0)/3 = 1.67
CR for D = (2 - 0)/1 = 2.0
CR for E = (6 - 0)/6 = 1.0
The schedule is shown in Table 16.2(£).
Table 16.2(f)
E 6 6 0 6
B 4 5 6 10
C 3 5 10 13
D 2 13 14
A 2 7 14 16

Average delay = (0 + 5 + 8 + 12 + 9) /5 = 6.8 days.
Last Come First Served (LCFS): The schedule is given in Table 16.2(g).
Table 16.2(g)
E 6 6 0 6
D 2 6 7
C 3 5 7 10
B 4 5 10 14
A 2 7 14 16

Average delay = (0 + 5 + 5 + 9 + 9)/5 = 5.6 days
Longest Process Time (LPT): Schedule the job with the longest process time first as
given in Table 16.2(h).
Table 16.2(h)
E 6 6 0 6
B 4 5 6 10
C 3 5 10 13
A 2 7 13 15
D 2 15 16
Average delay = (0 + 5 + 8 + 8 + 14)/5 = 7.0 days
The following Table 16.2(i) is a comparison of different methods.
Table 16.2(i)
Scheduling method Average delay (days)
FCFS 4.4
SOT 3.0
DDATE 3.8
STR 5.8
CR 6.8
LCFS 5.6
LPT 7.0
In this case, the least average delay is achieved if we schedule as per the shortest
operations time.
Let us now examine how to sequence and schedule multiple jobs which are to be
processed through more than one machine or work centre.
16.6 n JOBS 2 STATIONS

Let us consider a simple case where a number of jobs have to be put through two
processes in the same order.
EXAMPLE 16.3 Five jobs A, B, C, D and E have to be processed on two machines-

Machine 1 and Machine 2. Each job must first be processed on Machine 1 and then on
Machine 2. The time taken on each machine in hours for the jobs is given in Table 16.3(a).
Table 16.3(a)
Job Machine 1 Machine 2
A 5 2
B 6
C 9 7
D 3 8
E 10 4
To find the sequence which gives the minimum elapsed time, stick to the following steps.
This is also referred to as Johnson's Rule.
Step 1. Examine the columns for Machine 1 and 2 and find the smallest value. In this
case it is 1 in column for Machine 1 and Job B.
Step 2. If this minimum value falls under Machine 1, schedule this job first and if it
falls under Machine 2, schedule this job last. In this case, since the lowest value is under
Machine 1, schedule Job B first.
Step 3. Cross out the job already scheduled and go to step 1. In case of a tie choose
any job amongst the tied jobs. It only means that there are alternative solutions available.
In this case, the next minimum figure is 2 occurring under Machine 2 for Job A. Job A
is scheduled last.
Proceeding as explained before, the sequence is given in Table 16.3(b ).
Table 16.3(b)
Order 1 2 3 4 5
Job no. B D C E A
Having placed B in the first place and A in the fifth place, the next smallest value
is 3 occurring under Machine 1 for Job D. Job D is now scheduled at the earliest place
possible, that is second place. The next smallest number is 4 occurring under Machine 2
for Job E. Job E is now scheduled in the latest place possible, that is, fourth place. Job
C, the only remaining job, occupies the only vacant slot, that is, third place. The total
elapsed time as per this sequence is as computed in Table 16.3(c).
Table 16.3(c)
Job Machine 1 Machine 2

Time in Time out Idle Time in Time out Idle
B 0 1 0 7
D 1 4 0 7 15 0
C 4 13 0 15 22 0
E 13 23 0 23 27
A 23 28 2 28 30
2 3
All jobs will be completed in 30 hours. Machine A will be idle for 2 hours after all jobs
are completed on it while Machine B will be idle for 3 hours as it has to wait for 1 hour
for the first job, and an hour each for the fourth and fifth jobs.
16.7 n JOBS 2 STATIONS-DIFFERENT SEQUENCE

Often situations are encountered when a number of jobs have to be processed on two
machines but in different sequence. The procedure to minimise delays is as follows:
Step 1. Schedule jobs which are to move from Machine 1 to Machine 2 first on Machine
1. Simultaneously jobs which are to be moved from Machine 2 to Machine 1 are sequenced
first on Machine 2.
Step 2. Jobs to be done only on either of the machines are scheduled next.
Step 3. Jobs requiring processing on both machines are then scheduled for processing
on the latter machine as required.
EXAMPLE 16.4 Consider the jobs given in Table 16.4(a). The table shows their processing
time in hours and the sequence in which they are to be processed on the two machines.
Table 16.4(a)
Job Time on machine 1 Time on machine 2 Processing sequence
A 5 3 1 - 2
B 2
C 3 2.5 1 - 2
D 3.5 2
E 4 1.5 1 - 2
F 2 2 - 1
G 2 2.5 2 - 1
H 2
J 3
Sequencing as per steps given in previous table, we get.
Table 16.4(b)
Job Machine 1 Job Machine 2

Time in Time out Idle Time in Time out Idle
A 0 5 0 F 0 2 0
C 5 8 0 G 2 4.5 0
E 8 12 0 D 4.5 8 0
B 12 14 0 H 8 9 0
J 14 17 0 A 9 12 0
F 17 18 0 C 12 14.5 0
G 18 20 0 E 14.5 16 4
All jobs will be completed in 20 hours. Machine 2 will be idle for 4 hours after all
jobs have been finished on it.
16.8 n JOBS m STATIONS

Let us now consider a case where n jobs are to be processed through m stations in the
same order. The jobs require different duration on every station. Following is a heuristic
model (Gupta's algorithm) to solve this kind of problem.
Step 1. Determine the Job Value (JV) of each job as follows:
k
JV= Min {(Duration on Station 1 + Duration on Station 2),
(Duration on Station 2 + Duration on Station 3), · · ·
(Duration on Station m -1 + Duration on Station m)}
where k = l if duration on first station is larger than the duration on last station
and k = -l if duration on first station is less than duration on last station.
In case of a tie, compare duration on second station with duration on second last
station and so on.
Step 2. Sequence the jobs in increasing order of Job Value.
EXAMPLE 16.5 Four jobs have to be worked through 5 stations in the order 1, 2,
3, 4 and 5. The time taken for each job on different stations is shown in Table 16.S(a).
Table 16.S(a)
Job nos. Time required at each machine in hours

Cutting Planing Lathe Milling Grinding
101 4 3 7 2 8
102 3 7 2 8 5
103 1 2 4 3 7
104 3 4 3 7 2
Let us evaluate Job Value for each job. Let us consider Job 101. Duration at Cutting
Machine (first station) is less than duration at Grinding Machine (last station), hence the
value of k = -1.
~ 1
JV of Job 101 = Min {(4 + 3 = 7), (3 + 7 = 10), (7 + 2 = 9), (2 + 8 = 10)} = -7
~ 1
JV of Job 102 = Min {(3 + 7 = 10), (7 + 2 = 9), (2 + 8 = 10), (8 + 5 = 13)} = -9
-1 1
JV of Job 103 = Min {(l + 2 = 3), (2 + 4 = 6), (4 + 3 = 7), (3 + 7 = 10)} = -3
1 1
JV of Job 104 = Min {(3 + 4 = 7), (4 + 3 = 7), (3 + 7 = 10), (7 + 2 = 9)} = 7
Sequencing the jobs in increasing order of job value we get Table 16.S(b ).
Table 16.S(b)
Sequence 1 2 3 4
Job 103 101 102 104
The problem of n jobs and m stations can also be solved by Johnson's Rule, provided
one of the following conditions is met.
Condition 1. The minimum time taken on the first machine is greater than the maximum
time taken on each of the machines that follow except for the last machine. We can say
that if n jobs are to be processed on m machines named A to M, then the minimum time
taken on machine A should be greater than or equal to the maximum time taken on
machines B, C, D and so on till machine L. The last machine M is ignored.
Condition 2. The minimum time taken on the last machine, that is M, is greater than
or equal to the maximum time on the machines preceding it, that is L, K, J and so on
till B. The first machine A is ignored.
If either of the above conditions is fulfilled we can apply a modified form of Johnson's
Rule.
Step 1. Obtain timings on two fictitious machines X and Y. The timings on machine X
are obtained by adding all the times for a job starting with time on Machine A till time
on Machine L, that is the last but one machine. The timings for machine Y are obtained
by adding the times for a job starting with machine B, that is the second machine, till
the last machine. The sequence of processing is taken as X and Y.
Step 2. The problem is now reduced to n jobs 2 machines, and is solved by applying
Johnson's Rule as discussed in Section 16.6.
EXAMPLE 16.6 Solve the following sequencing problem with the data given in
Table 16.6(a).
Table 16.6(a)
Jobs Machines
A B C D
13 8 7 14
2 12 6 8 19
3 9 7 5 15
4 8 5 6 15
Solution: Minimum time on Machine A is 8, maximum time on Machine Bis 8, maximum

time on Machine C is 8, and minimum time on Machine Dis 14. As the minimum time on
Machine Dis greater than the maximum time on Machine C and Machine B, the second
condition is fulfilled. Prepare a new table reducing the problem to n jobs 2 machines as
shown in Table 16.6(b ).
Table 16.6(b)
Jobs Machine
X (Ti me = A + B + C) Y (Ti me = B + C + D)
13 + 8 + 7 = 28 8 + 7 + 14 = 29
2 12 + 6 + 8 = 26 6 + 8 + 19 = 33
3 9 + 7 + 5 = 21 7 + 5 + 15 = 27
4 8 + 5 + 6 = 19 5 + 6 + 15 = 26
Applying Johnson's Rule the sequence is:

4 3 2 1
16.9 2 JOBS THROUGH n STATIONS IN RANDOM ORDER

Let us consider the special case of two jobs to be processed by two or more stations,
where the jobs are not processed in the same order but the ordering of stations is fixed
for each job. The following algorithm minimises the elapsed time to process the two jobs.
1. On a graph set the same time scale along X and Y axis
2. Mark duration of one of the jobs along one axis and the other job along the
other axis. Longest total duration job should be assigned to Y axis
3. Divide the job durations into processing times in specified station order
4. Block the rectangular area on the graph where common station is indicated on
both axes
5. Using only horizontal, vertical or 45 degree movements, draw a continuous line
from the origin to the upper right hand corner of the graph; avoiding the blocked
areas
6. Determine idle times for the jobs by adding the horizontal and vertical segments
7. Select the sequence with the least total elapsed time
EXAMPLE 16.7 A machine shop has five machines-A, B, C, D and E. Two jobs must
be processed through each of these machines. The time (in hours) taken on each of these
machines and the necessary sequence of jobs through the shop are given in Table 16.7.
Table 16.7
Job 1 Sequence A B C D E
Time 2 4 3 6 6
Job 2 Sequence C A D E B
Time 4 6 3 3 6
Solution: In Figure 16.1 Job 1 is being represented on the X Axis and Job 2 on the
Y Axis. Whenever we move horizontally, it means that Job 1 is being processed and
Job 2 is idle and whenever we move vertically, Job 2 is being processed and Job 1 is
idle. A diagonal means that both jobs are progressing. Since both jobs cannot be done at
the same time on a machine, diagonals through shaded areas are not permitted. In the
sequence shown above Job 1 has to wait for Machine D as there is a conflict. The time
taken is 21 hours for Job 1 plus an idle time of 4 hours, that is a total of 25 hours. Job 2
is finished in 22 hours and waits at the end for 3 hours for Job 1 to finish. If we decide
to allocate the Machine D to Job 1 first, Job 2 shall have to wait for 8 hours. Obviously
this will increase the overall time.
16.10 MONITORING AND CONTROL

Scheduling jobs and assigning priorities is just one aspect of production. The implementation
of the schedule requires constant monitoring and control. Shop floor control must be
exercised. The control system informs management on the status of work-in-progress
- >--
I/
B
-
-
-
>--
I/
/
- >--
/
- - /
I/
/
E I/
/
/'
D /'
/'
Job 2
/'
I/
A I/
/
I/
/
I/
C /
I/
/
A B C D E
Job 1
Figure 16.1
and actual output data. It helps to measure efficiency, utilisation and productivity of
manpower and machines. Some of the tools employed for exercising control are Gantt
charts, daily dispatch lists, status and exception reports and input/ output control.
Gantt chart: This helps to plan and track the progress of activities. The Gantt chart
is a special type of bar chart where activities are plotted against time. It is shown in
Figure 16.2.
'
Week 1 2 3 4
'' 5 6 7
I I
Job 101 ''
I I ''
I
Job 102 '
' I
Job 103 '''

'
I
c:::::J Planned c:::::J Completed

Figure 16.2 A Gantt Chart.
The Gantt chart, indicates that progress is being reviewed at the end of fourth week.
Job 101 is behind schedule, Job 102 is ahead of schedule and Job 103 has been completed.
Dispatch lists: As explained earlier, dispatching is the releasing of the order for work
to commence. It is the go ahead to the worker to commence a task. Dispatch lists are
given to work centres. The dispatch list lists out the jobs with their start dates and the
run times required for each.
Input/Output control: Knowledge of outputs alone from different work centres is not
sufficient for control. For instance, a work centre reports that it produces 70 units on
a day against its targeted production of 90 units. Does that imply that the centre is
inefficient or that delays are taking place at this centre? In actual fact it may be that
the centre is downstream in the routing of the job and is receiving an input of only 70
units from the previous process. The delay may be occurring at some other work centre
upstream of it. Both input and output must be considered for measuring the efficiency
of a work centre. The input can only be controlled at the starting work centre for the
initial operation. Input/output control helps to control the work flow and identify
problem areas so that corrective action can be taken. It is pointless increasing resources
at a work centre which is not meeting its schedules because of shortfalls in inputs. The
report compares planned inputs with the actual inputs and the planned outputs with
the actual outputs. A comparison of the deviations reveal the true picture. The example
in Table 16.8, illustrates the point.
Table 16.8
Period 1 2 3 Total
Planned input 70 75 75 220
Actual input 60 65 60 185
Deviation -10 -10 -15 -35
Planned output 80 80 80 240
Actual output 70 70 60 200
Deviation -10 -5 -15 -40
Backlog 20 10 5 5
The report shows that the output was 40 units less than planned. Of this, 35 units is
attributable to shortfalls in input and 5 units less production is attributable to the work
centre. If we calculate the work centre efficiency in terms of planned output and actual
output, the efficiency would be:
Output
Efficiency= Planned output
200
= 240
= 83.33%
However, the efficiency should be calculated as output in relation to input. (185 + 20
backlog)
.
Effic1ency = 200 97 5ox
205 = . o
16.11 EMPLOYEE SCHEDULING FOR SERVICES

Services are generally labour-intensive. Scheduling problems mainly pertain to the
scheduling of personnel on a weekly, daily or hourly basis, based on the peak load and
slack periods. The problems arise because workers are required to put in only five or
six days a week and eight hours a day. Even though the load and requirements vary,
normally a worker does an eight hours continuous shift or prefers a five or six days
continuous week. Another factor that can add to the complexity of the problem is that
the shifts cannot start and finish at any time. Generally three shifts a day are planned.
The problems may be solved through heuristic techniques. Let us study these techniques
with the help of examples.
EXAMPLE 16.8 At a hospital the requirement of nurses is as shown in Table 16.9.

Table 16.9
Time from 0200 0600 1000 1400 1800 2200
To 0600 1000 1400 1800 2200 0200
Nurses required 4 8 10 7 5 3
A nurse who comes on duty spends eight hours continuously at the hospital.
Solution: If we assume that the shifts are from 2200 to 0600, 0600 to 1400 and 1400 to
2200, then the peak requirement during these periods will be the number of nurses in
each shift. This implies that there shall be
4 nurses from 2200 to 0600 hours
This implies that 20 extra nursing hours are being assigned.
However if nurses can begin their shift at every four hours, then a logical heuristic
would be to start with the minimum number required and keep adding them as and
when necessary to meet the requirement. This heuristic is called the first hour principle.
Numbers Required During Different Times

2200- 0200 0200- 0600 0600- 1000 1000- 1400 1400- 1800 1800- 2200
J, Number
joining 3 4 8 10 7 5
3
1
7
3
4
1
By this schedule, only 4 extra nursing hours are assigned.

EXAMPLE 16.9 The number of workers required per day is given in Table 16.lO(a).
Each worker is to work for 5 days. As far as possible, the two off days should be together.
Table 16.1O(a) Number of Workers Required Per Day
Mon. Tue. Wed. Thu. Fri . Sat. Sun.
3 3 4 3 4 5 3
Solution:
Step 1. Assign the first worker to all the days that require staffing. This is done by
simply rewriting the total requirements for each day. Worker A has now been assigned
on all days. Now select the two lowest consecutive numbers. Sunday and Monday can
be combined, as done in this case. This implies that the worker will be given an off on
Sunday and Monday. In case of a tie, choose the days off pair with the lowest requirement
on an adjacent day.
Step 2. For the second worker, subtract 1 from each of the days not shaded, that is, days
on which Worker 1 has been assigned. Repeat the procedure as in Step 1 of selecting the
two lowest consecutive numbers and giving a day off on those days.
As shown in Table 16.lO(b), in the row for worker B, 3 has been entered under
Monday as Worker A has not been assigned to work on that day. Under Tuesday, the
entry is 2, that is, one less than the entry in row for Worker A. Similarly, the rest of the
table has been completed.
Tab!e 16.1O(b) Number of Workers Required Per Day
Mon. Tue . Wed. Thu . Fri. Sat. Sun.

3 3 4 3 4 5 3
A 3 3 4 3 4 5 3
B 3 2 3 2 3 4 3
C 2 2 3 1 2 3 2
D 1 1 2 1 2 2 1
E 1 0 1 0 1 1 0
Worker A and Dare off on Sunday and Monday, Worker Bis off on Tuesday and
Wednesday, Worker C is off on Thursday and Friday, and Worker E has no work on
Tuesday, Thursday and Sunday. In case Worker Eis a regular worker and must be given
two days off continuously, we shall have to employ a casual worker for a day.
16.12 SUMMARY
Sequencing problems are frequently encountered on the shop floor. The problems become
too large to solve by enumeration and even a computer cannot enumerate every possible
solution in a very large problem. A heuristic approach is generally followed.
n Job 2 Station problems where the sequence of operations is the same can be solved
by a simple algorithm which involves finding the least operation time. If the time is
being spent at the first station, the job is scheduled first and if it is at the second station
the job is scheduled last. The job is then deleted from the list and the same procedure
followed till all jobs are scheduled.
When the n jobs Two Station problem involves different sequence, then all jobs which
have to move from one machine to another are scheduled first on their respective first
machine. This is followed by any jobs which are to be performed on one machine only.
The jobs are moved to the second machine only after that.
A generalized heuristic approach for n jobs m stations, where the sequence of the m
stations for all jobs is the same involves the calculation of job value. The jobs are then
scheduled according to increasing job value starting with the job with the least job value.
A problem involving 2 jobs and n stations in random order can be solved graphically.
Employee scheduling problems for services can be solved by heuristic methods.
ICONCEPT QUIZ I
State True or False
1. In an assignment model only one assignment per row or column is permitted.
2. A row opportunity cost table is obtained by subtracting all elements of the row
from the highest element of the row.
3. If the minimum number of horizontal and vertical lines covering all zeros is equal
to the number of rows in an assignment problem, optimal assignments can be
made.
4. Sequencing techniques assume that a job started on a machine can be suspended
or stopped if required and another job started in its place.
5. An optimal solution to a sequencing problem can be obtained through enumeration.
6. n job 2 station problems are solved on the basis of least operation time.
7. Jobs which are to move from one machine to another should be sequenced before
jobs which are to be performed only on that machine.
8. All sequencing problems can be solved graphically.
9. While determining job value, if the time on the first machine is longer than the
time on the last machine, the value of k is taken as -1.
10. The time used in sequencing models is the time for which a job is processed on a
machine.
1. Balancing of an unbalanced assignment problem may involve:
(a) The introduction of a dummy column.
(b) The introduction of a dummy row.
(c) The introduction of a dummy row or a dummy column.
2. If the number of lines covering all the zeroes is less than the number of rows,
the least uncovered number is:
(a) Subtracted from all other numbers.
(b) Is added to all covered numbers.
(c) Is subtracted from all covered numbers.
(d) Is subtracted from all uncovered numbers and added to twice covered
numbers.
3. In case multiple zeroes are obtained in all rows and columns:
(a) No solution is possible for the problem.
(b) A unique solution exists for the problem.
(c) The problem has multiple solutions.
(d) The problem has infeasible solutions.
4. A maximising assignment problem can be converted to an equivalent minimisation
problem by:
(a) Subtracting the lowest element from all other elements of the given matrix.
(b) Subtracting the lowest element of each row from other elements in that row.
(c) Subtracting all elements of each column from the highest element in the
column.
(d) Subtracting all elements in the matrix from the highest element in the matrix.
5. When making optimal assignments:
(a) Assignments are made to the least cost element in the row or column.
(b) Assignments are made to cells with zero values only.
(c) In case this is not possible, assignments can arbitrarily be made to any cell.
(d) If a column or a row has only one zero in it, an assignment must be made
in the zero cell of that row or column before considering other rows or
columns.
6. The Johnson's Rule can be applied to a n job 2 station situation:
(a) If the jobs are to be processed in random order on the machines.
(b) If all jobs follow the same order for processing on the machines.
(c) If some jobs are to be processed on one machine and some on the other.
(d) If the minimum time of processing a job on machine one is greater than the
maximum time on machine two.
7. In applying Johnson's Rule:
(a) The job with the least processing time on any machine is considered first.
(b) If this least time is being spent on the first machine, it is scheduled first.
(c) If this least time is being spent on the second machine, it is scheduled
last.
8. If n jobs are to be processed on two stations in different sequence, then:
(a) The jobs to be performed on one machine only are scheduled first.
(b) Jobs which have to move from one machine to the other are scheduled first
on their respective first machine.
(c) After processing on the first machine the jobs are scheduled on the second
machine and jobs which are to be performed only on one machine are to be
scheduled last.
9. If n jobs have to be processed on m stations in the same order, the problem can
be converted to a n job 2 stations and Johnson's Rule applied if:
(a) The maximum processing time on the first machine is lesser than or equal
to the minimum processing time on all machines except the last.
(b) The maximum processing time on the first machine is greater than or equal
to the minimum processing time on all machines except the last.
(c) The minimum processing time on the first machine is lesser than or equal
to the maximum processing time on all machines except the last.
(d) The minimum processing time on the first machine is greater than or equal
to the maximum processing time on all machines except the last.
10. While solving 2 job n stations in random order problem graphically, a horizontal
line on the graph indicates:
(a) Job represented on X-axis is progressing while job represented on Y-axis is
waiting.
(b) Job represented on X-axis is waiting while job represented on Y-axis is
progressing.
(c) Both jobs are progressing.
(d) Both jobs are waiting.
Fill in the blanks:
1. The best possible assignment is an assignment with an opportunity cost equal to
2. In an assignment model the number of rows must be equal to the number of
3. The assignment model is solved with the _________ method.

4. The first step in an assignment model is to compute the total ______ cost
matrix.
5. Sequencing models assume that a machine can process _ _ _ _ _ job(s) at a
time.
6. Sequencing models assume that timings include time to move from one machine
to the other, processing time and _______ time.
7. While solving problems of n jobs 2 stations in different sequence, jobs which are
to move from one machine to another are scheduled _ _ _ __
8. While solving problems of n jobs 2 stations in different sequence, jobs which are
to be processed only on one machine are scheduled _ _ _ _ _ the jobs which
are to move from one machine to the other.
9. While determining job value, the denominator is the _ _ _ _ of the sums of
two consecutive processes on all the stations.
10. Sequencing problems are solved by _ _ _ _ _ methods and rules.
IQUESTIONS I
16.1 What do you understand by scheduling? Discuss the different approaches to
scheduling.
16.2 What are the objectives of scheduling?
16.3 Briefly discuss the different priority rules.
16.4 A chemical company has six plants located in different parts of a city. Every two
years it is necessary for each plant to be completely overhauled. The overhauling
is carried out in two stages A and B, and each stage requires a crew of workmen
with completely different skills. The work on stage B can start only when stage
A has been completed. A plant has to be closed for the entire period of its
overhauling. The present schedule of the overhaul of the six plants is as follows:
Time required by crews in days
Plant Pl P2 P3 P4 PS P6
Crew A 4 5 10 6 4 7
Crew B 6 3 4 5 6 6
(a) Determine the optimal sequence?

(b) What would be the total time taken to overhaul all the plants?
16.5 A road construction company is working on five village roads in the district. It has
one bulldozer and one motor grader for carrying out earthwork on the road. The
bulldozer work must be completed before the motor grader can do final grading
of the road. The time required in weeks by each of the earthmoving plants on
each project is given as follows:
Road 1 2 3 4 5
Dozer 6 7 4 3 5
Grader 4 2 3 1 3
Determine the optimal sequence so that the projects are completed at the earliest.
16.6 Sanchar Limited is a telecommunications firm and is laying overhead telecable
in five parts of the old city. The task is carried out in two phases-erection of
poles and laying of line. The poles have to be erected before line can be laid on
them. The timings in weeks required at different sites for the two activities are
as follows:
Sites A B C D E
Erection of poles 3 6 4 8 5
Line laying 2 8 3 6 5
16.7 A book binder has one printing press, one binding machine and the manuscripts
of different books. The time required to perform the operation of printing and
binding for each book are shown below.
Book 1 2 3 4 5 6
Printing time (hrs.) 30 120 50 20 90 100
Binding time (hrs.) 80 100 90 60 30 10
Determine the order in which books should be processed in order to minimize

the total time required to turn out all the books.
An additional operation is added to the above process, finishing. The time
of the finishing operation is 20, 40, 60, 120, 30 and 40 hours respectively. What
should be the order of the books now?
16.8 There are six jobs which must go through two machines A and B in the order AB.
Processing time in hours is given here.
Job 1 2 3 4 5 6
Machine A 8 10 11 12 16 20
Machine B 7 5 0 14 3 9
Determine the optimal sequence and the elapsed time.

16.9 Find the sequence that minimizes the total elapsed time (in hours) required to
complete the following jobs on three machines, Mi, M2 and M3 in the order
M1M2M3
Jobs A B C D E
5 7 6 9 5
2 1 4 5 3
3 7 5 6 7
16.10 A company has six jobs which go through three machines X, Y and Zin the order
XYZ. The processing time in minutes for each job on each machine is as follows:
Jobs 1 2 3 4 5 6
Machine X 18 12 29 36 43 37
Machine Y 7 12 11 2 6 12
Machine Z 19 12 23 47 28 36
What should be the sequence of the jobs?

16.11 Provide the optimal job sequence involving three machines M1, M2 and M3 in the
order M 1M2M3 for the following.
Jobs 1 2 3 4 5
7 12 11 9 8
8 9 5 6 7
11 13 9 10 14
16.12 Ten jobs are to be processed on two machines as per timings given below.
Jobs Machine A Machine B Order

A 4 6 B-A
B 3 5 A-B
C 6 B
D 4 B
E 5 3 A-B
F 4 3 B-A
G 6 A
H 8 4 A-B
I 5 A
J 2 3 B-A
What sequence will minimize the total time required?
16.13 Find the sequence that minimizes the total elapsed time in hours required to
complete the following jobs on five machines A, B, C, D and E in the order
ABCDE.
Machines A B C D E
Job 1 5 7 6 9 5
Job 2 2 1 4 5 3
Job 3 3 7 5 6 7
16.14 Find the optimal sequence for the following problem to minimize time and also
obtain the elapsed time.
Jobs Machine A Machine B Machine C

1 13 8 13
2 8 9 12
3 12 10 11
4 7 7 14
5 10 6 15
6 6 11 14
Find the total elapsed time and the idle time on each machine.
16.15 Five jobs are to be processed on three machines A, B and C in the order ABC.
Processing time in hours is as given below.
Jobs Machine A Machine B Machine C

1 4 5 8
2 9 6 10
3 8 2 6
4 6 3 7
5 5 4 11
Determine a sequence for the five jobs that will minimize the total elapsed time.
Find also the idle time of the machines.
16.16 Two jobs are to be processed on four machines A, B, C and D. The technological
order for these jobs on machines is as follows:
Job 1 A B C D
Job 2 D B A C
Processing times are given in the following table:

Machines A B C D
Job 1 4 6 7 3
Job 2 4 7 5 8
Find the optimal sequence of jobs on each machine.

16.17 Use graphical method to minimize the time needed to process the following jobs
on the given machines and calculate the total time needed to complete both jobs.
The relevant data is given in the following table.
Job 1 Order A B C D E
Time 3 4 2 6 2
Job 2 Order B C A D E
Time 5 4 3 2 6
16.18 A machine shop has six machines A, B, C, D, E and F. Two jobs must be processed
through each of these machines. The time spent on each machine and the necessary
sequence of the jobs through the shops are given below.
Job 1 Order A C D B E F
Time 5 15 5 35 30 30
Job 2 Order B C A D F E
Time 20 35 15 15 20 25
In what sequence should the jobs be done on each of the machines to minimize
total time necessary to finish the jobs? Also determine the total elapsed time.
16.19 A hotel has to schedule its receptionists according to hourly loads. The number
of receptionists required to meet the hourly load has been identified. Assuming
that receptionists work a four-hour shift; prepare a schedule for the receptionists
using the first hour principle.
Period 0800 0900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900
Requirement 3 2 5 8 8 6 5 5 7 7 8 8
16.20 The following table contains information regarding jobs that are to be scheduled
through one machine.
Job Processing time Due date

A 11 16
B 10 15
C 2 12
D 4 20
E 12 30
F 6 10
G 3 5
Draw up the schedule using different priority rules and compare the results.
16.21 Five employees of a company are to be assigned to five jobs which can be done
by any of them. Because of different number of years with the firm, the workers
get different wages per hour. These are: t50 per hour for A, B and C each and
t30 per hour for D and E. The amount of time taken by each employee to do
the job is given in the following table. Determine the assignment that minimises
the total cost of getting the five jobs done.
Employees
Jobs A B C D E
1 7 9 3 3 2
2 6 1 6 6 5
3 3 4 9 10 7
4 1 5 2 2 4
5 6 6 9 4 2
16.22 Four trucks are to ply on four routes. The cost of each truck on each route in
thousands of rupees is given in the following table. How would you assign the
trucks to the routes so that the cost is minimised?
Trucks/Routes A B C D
1 50 52 55 56
2 50 51 52 57
3 48 52 49 53
4 50 50 52 54
16.23 The owner of a small machine shop has four machinists available to assign to
jobs for the day. Five jobs are offered with the expected profit (in ~) for each
machinist on each job being as follows:
Job\Machinists 1 2 3 4 5
A 620 780 500 1010 820
B 710 840 610 730 590
C 870 920 1110 710 810
D 480 640 870 770 800
Find the assignment of machinists to jobs that will maximise the profits. Which
job should be declined?
16.24 Six wagons are available at six stations A, B, C, D, E and F. These are required
at stations 1, 2, 3, 4, 5 and 6. The distance in kms between various stations is
given in the following table.
1 2 3 4 5 6
A 20 23 18 10 16 20
B 50 20 17 16 15 11
C 60 30 40 55 18 17
D 16 17 10 20 10 19
E 18 19 28 17 60 70
F 19 10 20 30 40 55
How should the wagons be transported in order to minimise the total dead
mileage?
16.25 The cost structure (in lakhs of rupees) of contractors against tenders is given.
Tenders\ Contractors 1 2 3 4 5
A 16 22 13 21 25
B 14 12 17 11 20
C 18 21 20 17 21
D 26 29 22 33 31
E 19 15 17 16 20
How should you assign the contracts for minimum cost?
16.26 A firm wants to purchase three different types of machines and five manufacturers
have bid to supply one or all the three machines. However, the firm's policy is
not to accept more than one machine from any one supplier. The data relating
to the price (in lakhs of rupees) is given.
Machines \Manufacturers 1 2 3
A 2.99 3.11 2.68
B 2.78 2.87 2.57
C 2.92 3.05 2.80
D 2.82 3.10 2.74
E 3.11 2.90 2.64
Determine how best the firm can purchase the three machines.
16.27 Gammon India is a construction company engaged in constructing bridges on

national highways. It has to move its earthmoving plant in accordance with its
requirements. The details of on going projects, availability and requirements of
plants at different sites, and the distance between sites is given. How should
the company move its plant?
Available Required
1 Dozers 1 Dozers
Available Required
1 Dozers 1 Dozers
Available Required
1 Dozers 1 Dozers
Available Required
1 Dozers 1 Dozers
16.28 A caterer has four chefs. He has received orders for four parties. He has evaluated
and rated his chefs (100 is best rating) on the basis of their abilities and the kind
of cuisine preferred at each party, and these are shown in following table.
Party 1 Party 2 Party 3 Party 4
Chef A 70 60 40 60
Chef B 70 20 60 50
Chef C 60 20 30 40
Chef D 40 30 10 30
How should he assign the chefs?
Supply Chain Management
Teach a parrot the terms "supply and demand" and you've got an economist.
THOMAS CARLYLE
LEARNING OBJECTIVES
• Understand the supply chain
• Study the key factors contributing to successful supply chain management
• Examine the role of information in supply chain management
• Study the issues related to supplier
• Understand the distribution and transportation system and its significance
in the supply chain
• Examine the characteristics of managing the global supply chain
17.1 INTRODUCTION
Supply chain consists of all activities associated with the flow of information and goods
and services from the raw material stage to the end user (customer). The chain begins
with the suppliers of raw materials, parts and components; the producers of products
and services; the distributors and retailers, and the customers. Four main processes
involved are: getting customer orders, procuring materials, transforming materials to
produce goods and services, and delivering the goods and services to the customers to
satisfy their need. It is imperative that all the processes be well integrated and work in
concert if we are to satisfy the end user's need in an efficient and effective manner at
the lowest cost. Information flow through the system is vital. The supply chain is shown
diagrammatically in Figure 17.1.
417
Suppliers Producers Distributors

Customers
Inventory Inventory Inventory
Information
Figure 17. 1 The Supply Chain.
Customers place orders for their needs. The information travels down the chain to
the suppliers. The suppliers supply raw materials, parts, components, subassemblies,
assemblies or services to the producer. The producer in turn transforms these into finished
goods and services. The goods are then sent to the customer either through a distribution
channel or directly.
Traditionally the system was a push system. The producer planned production based
on forecasts and placed orders for supplies with the supplier. The producer then pushed
the products produced to the distributor and retailers, who in turn pushed the product to
the customer. With the focus now shifting to customer needs, the system is transforming
to one of pull. The customers pull what they need from the retailers, who in turn pull
their requirements from the distributor and so on down the chain. It is important that
information flows correctly so that activities at each point of the supply chain can be
properly coordinated.
17.2 SUPPLY CHAIN MANAGEMENT (SCM)

According to the Council of Supply Chain Management Professionals (CSCMP), a
professional association that developed a definition in 2004, Supply Chain Management
"encompasses the planning and management of all activities involved in sourcing and
procurement, conversion, and all logistics management activities. Importantly, it also
includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third-party service providers, and customers. In essence, Supply Chain
Management integrates supply and demand management within and across companies."
SCM focuses on the flow of goods and services and information through the supply
chain in order to make it more responsive to customer needs at lower total costs. This
involves synchronisation of all activities in the chain. With the advent of information
technology, it is now possible to share information instantaneously with all components
of the supply chain. The better integrated the components are, the better competitive
advantage the organisation will enjoy.
Some organisations feel that complete vertical integration where the organisation
owns and operates its own source of supply as well as the distribution channel will help
them to achieve efficiency in supply chain management. This is not necessarily true if
the components of the supply chain do not work in step with each other. The keys to
effective supply chain management are information, communication, co-operation and trust.
In practice, supply chain management involves decisions on inventory, transportation,
facilities like warehouses and other storage facilities, and information.
Supply Chain Management 419
Inventory: Inventory consists of raw materials, work-in-progress and finished goods. It is
often seen that suppliers, producers and distributors maintain inventories as an insurance
against the uncertainties associated with the system. These may stem from changes in
demand, inaccuracies in the demand forecast, varying lead times, batch ordering, price
fluctuations and inflated orders. Unfortunately, there is always a tendency to over ensure.
The retailer inflates the amount of inventory that he actually needs. The distributor in
turn adds up the requirement of all the retailers whom he supplies and then inflates the
figure further. Likewise the figure gets inflated by the producer and also by the supplier.
This inflation is known as the bull whip effect. Extra inventory entails extra carrying
costs. This adds to the cost of the product. Inventory must be properly managed. Lean
systems like the just-in-time system must be introduced. Inventory can be reduced if
information flows can be properly managed. Organisations must decide how much of
inventory to stock so that total costs are reduced.
Transportation: Transport is an important part of the supply chain. Materials, parts
and components have to be moved from the source of supply to the production
facility. Products and goods have to be moved to the distributor or retailer's
warehouses. Finally, the goods have to be moved to the customer. If transportation
is mismanaged the costs will increase. Various forms of transport may be used like
road transport, rail transport, air transport, water transport and pipelines. Trade-offs
have to be made between costs and responsiveness. It is obvious that use of air
transport will increase the responsiveness but the costs will increase. Key decisions
are selecting the mode of transport, routes and network. Another important decision
that an organisation must take is whether to own the transportation infrastructure or
outsource it.
Facilities: These are the components of the supply chain where materials and finished
goods are stored and where the work-in-progress materials are assembled or fabricated.
Important decisions with regard to facilities are their number, capacity and location.
The facilities affect the supply chain efficiency. A large number of facilities closer to the
intended customers will increase responsiveness but will also increase the cost. A balance
has to be struck between these conflicting requirements.
Information: This is one of the key drivers affecting the supply chain. It is vital for
good coordination among the various components of the supply chain. If information
can be shared across the supply chain its responsiveness will increase. For instance, if
the information of an order received from a client can be instantaneously shared with
the supplier and the production facility, its execution will become that much quicker as
the supplier can react without waiting for requisitions from the producer.
17.3 INFORMATION IN THE SUPPLY CHAIN

Information is the vital link in all supply chain activities. Computers and information
technology allow real time on line communications throughout the supply chain. Information
is the most important enabler in the supply chain. Let us see how information helps
through a typical business scenario.
Pehnava Apparels is a garment manufacturer specialising in women's apparel of

Rajsthani design and prints. It has facilities at Jodhpur for stitching garments. Cloth
is procured mostly from Bagru and block printing and tie and dye printing is done at
Sanganer. The outfits are sold through a chain of big retailers like Shopper's Stop and
Lifestyle.
Pehnava plans its next season's production by making a demand forecast based on
past data. The data is collected from various retailers and sales outlets and is consolidated
by regions. The collection of data was a laborious process and more often then not the
figures were inaccurate. Pehnava has recently installed new IT systems including intranets
and extranets. Bar coding has been introduced. The new system makes it possible for
Pehnava's office to gather data directly from point of sales. Every time a sale is made
and the codes are read by the bar code reader for billing, information is also transmitted
over extranets to the company office, facilitating the forecasts with accurate point of sales
data.
Pehnava then informs its Bagru office to purchase cloth. Previously, the requirements
were transmitted through mail causing delays and often resulting in missed opportunities
to avail of quantity discounts, off season discounts and so on. Real time data is now
available on line to the Bagru office also and it can anticipate requirements and deal with
the cloth manufacturers to its advantage.
The cloth is then sent to Sanganer for printing. The transportation is done through
trucks. The company has outsourced this task as this is not one of its core competencies.
The packages are bar coded and the transporting agencies information system has been
integrated with Pehnava's system. It is possible to track every consignment. The printing
works also receive advance information on the requirements through Pehnava's intranet. In
turn, they have procured the right type of dyes and colours required from the suppliers.
The suppliers receive prior information through email.
After printing, the transport agency again takes over the consignments and moves them
to the facility at Jodhpur for stitching. The kind of dresses needed, designs, quantities,
and so on are intimated to the facility through information on the intranet.
Once the garments are stitched Pehnava sends them to seven warehouses located
across the country. The task of distribution has also been outsourced. The distribution
agency owns the warehouses. The facility at Jodhpur dispatches garments to regions as
required by road transport. It needs information on what to send, how much to send
and where to send. The information is linked to the demand forecasts.
Pehnava sends garments to the warehouse packed separately for each retail outlet
and marked accordingly. At the distributor's warehouse, the packages for each retail
outlet are segregated and full truckloads made by combining the packages from other
garment dealers also and then dispatched to the retailers.
As can be seen from the above business scenario, information is vital at each stage.
The information must be timely and accurate. Information technology improves supply
chain management by providing the following functions:
1. Integration of ordering, production, transportation and distribution
2. Locating and tracking every item in the supply chain
3. Access to domestic and global transportation and distribution systems
4. Consolidation of purchases from suppliers
5. Access to information within the organisation and sharing of information between
companies
6. Acquisition of data at the point of sales
7. Instantaneous updating of inventory status
Information technology and the World Wide Web or internet has promoted e-commerce.
This involves replacing physical processes by electronic processes. Transactions are
conducted electronically, through email, electronic data interchange, electronic fund
transfers, shared databases, bar coding, voice mail, fax, intranets and extranets. The
internet provides access to world wide data. Suppliers can be located world wide and
the best deals can be struck. Bar coding is being extensively used to track the flow of
items through the supply chain. While the internet provides unlimited access, intranets
are accessible only within the organisation. Extranets permit access to some data of the
organisation to external agencies in order to share relevant data with them. For instance,
suppliers can be integrated with the organisation through extranets.
Information technology also has some shortcomings. It involves installation of
expensive hardware and software and requires trained personnel. If improperly designed,
web sites tend to crash with overload. Security issues are also involved. Data on the nets
has to be encrypted properly so that its security is maintained. Data has to be protected
against loss due to natural calamities or due to hacking. Often data has to be duplicated
and maintained at alternative sites, which adds to the cost. Information technology is
advancing at a very rapid pace. What is contemporary becomes outdated in a very short
time. Ensuring stability and functionality of systems in this rapidly changing environment
poses its own problems. These aspects should be borne in mind when designing supply
chain information systems.
17.4 SUPPLIERS
Suppliers are at the upstream end of the supply chain. About fifty to sixty percent of the
cost of a product can be attributed to raw materials. Many companies require supplies
not only of raw materials but also of parts, components, subassemblies and assemblies.
Companies want that suppliers meet their material requirements by supplying materials
of high quality, at a low cost and at the right time. Poor quality material will affect the
quality of the product affecting sales and increasing costs because of wastage and rework.
If the materials are not delivered on time, the company shall have to maintain inventories
to hedge against delivery failures and consequently the cost of the product will increase.
Today there is greater integration between the supplier and the company. The supplier
is part of the company's supply chain and follows the standards set by the company.
The supplier must also be committed to quality, reducing costs and timely deliveries.
The company selects its suppliers on this basis. A partnership with the supplier is
established wherein the company expects quality, lower costs and timely deliveries and
the supplier expects customer loyalty. Companies even help the supplier to improve the
quality by providing training, technical assistance and suggesting quality systems. For
example, Tata Motors while outsourcing most of the parts required for the Indica car,
spend considerable effort to develop suppliers' systems and facilities so that quality, cost
and delivery standards are met.
Information to suppliers is of great importance. Companies provide access to certain

information through the establishment of extranets. Information is vital to the success
of the supply chain. Ford Motors is using extranets to share information with the major
suppliers. The level of detail it provides is so precise that a supplier of car seats can see
in what sequence of colours its next shipment should be packed, so that the blue seats
are unpacked at the plant just as the blue cars reach the seat installation station on the
assembly line. Companies may employ cross teams to coordinate processes between the
suppliers and themselves. Suppliers are also now associated at the design stage as part
of concurrent design process. This ensures that design engineers do not specify materials
which may not be available or alternatively this gives enough lead time to suppliers to
find sources for the materials required.
Companies want the suppliers to supply on demand, in order to implement lean
manufacturing systems like just-in-time. Continuous replenishment systems require that
the supplier provide materials and services as required. The company shares real time
demand and inventory data with the supplier. Traditionally suppliers have been used to
provide large batch orders. In continuous replenishment and on demand supply systems
the supplier has to make frequent partial deliveries. This increases the cost to the supplier
but improves the overall efficiency of the system. Often the supplier may have to make
deliveries several times a day. This often requires the supplier to locate his facilities near
the company's facilities.
Traditionally the relationship between a customer and a supplier has been limited to
the purchase transaction. However, this is undergoing a transformation. The relationship
now is much more collaborative and focuses on coordination. In the past companies relied
on a number of suppliers for the same item. 'Do not put all your eggs in the same basket'
appears to be the guiding philosophy. Companies wanted to cultivate alternative sources
of supply. However, having a single source or very few suppliers has its advantages.
Companies can enter into long-term contracts with the supplier. The supplier assures that
he would meet the company's standards of quality, cost and delivery schedules and in
turn would enjoy a long and stable relationship with the customer that would provide
him security.
Outsourcing: Outsourcing is the purchase of goods and services which were previously
being produced in-house from an outside supplier. Companies are resorting to outsourcing
as these activities are not their core competencies. The expertise of others can reduce
costs and can free the company's resources for focusing on its core competencies-things
which it does best. The goods and services that companies outsource can be categorised
as-Original Equipment Manufacturer (OEM) goods and services, Maintenance, Repair
and Operations (MRO) goods and services and corporate services. OEMs include goods
and services that go directly into the product. For example, most auto industries do
not make a lot of parts. Maruti Automobiles does not manufacture any dashboard
instruments like temperature gauge, speedometer, fuel level indicator and so on. These are
supplied as OEMs by Pricol or Yenkay-companies which specialise in the manufacture
of instruments. MROs are indirect products like office supplies, cleaning agents and so
on. Corporate services include items like transport system, warehousing, distribution
channels and information systems.
17 .5 DISTRIBUTION
The actual movement of products and materials between locations is called distribution.
Its management involves managing the handling of materials and products at receiving
points or receiving docks, storing products and materials, packing, and their dispatch to
customers or the shipment of orders. Distribution focuses on order fulfilment. It ensures
timely delivery of the customer's order.
Distribution and transportation are often referred to as logistics. Logistic management
in its broadest sense is supply chain management. Distribution is not just moving material
or goods from one place to another. In today's competitive world, a large number of
organisations compete on the basis of speed. Materials and goods must not only be
delivered but delivered when required. It may be noted that delivery too much earlier
than required is as undesirable as late delivery. Early delivery causes problems of storage
and increases costs. Timely delivery is dependent on information. As discussed earlier,
information has a vital role to play in all activities of the supply chain and distribution
is no exception. The internet gives the customer instant access to worldwide information.
Orders can be received quickly through email and other electronic means. Transactions
can be speeded up through electronic means. However, it must be understood that goods
have to be physically transported and received by the customer for order fulfilment. The
speed of movement is dependent on the existing infrastructure and not always within
the control of the organisation. Virtual companies must bear this aspect in mind else
promised deliveries may not take place resulting in loss of customers and goodwill.
Let us study the distribution system followed by Amazon.com, a virtual book store
to understand how modern technology has revolutionised the system. When an order is
received over the internet or over the phone, it is transmitted to the closest distribution
centre where the product is available. In the warehouse, items are stored in bins on
shelves. Each bin has a red lamp on it. Whenever an order for a particular item is received,
the computer locates the bin in which it is stored and sends a signal which causes the
red lamp to light up. When the light is on, it implies that the item has been ordered.
Workers move from light to light and retrieve the items. They also reset the light. The
workers place the items in a crate. When the crate is full it is sent by a conveyor to a
central point. Here the items are sorted out order-wise by matching their bar codes with
the order numbers. The items which make up orders are sorted into one of hundreds
of 3 foot wide chutes. As the items come down the chutes, they are packed in boxes,
labelled, bar coded weighed and shipped out through a carrier. The order is received
by a customer within 1 to 7 days depending on the destination. The main factor behind
Amazon.coin's success story is not receiving orders through email but its ability to fulfil
orders reliably and quickly.
17.6 DISTRIBUTION CENTRES AND WAREHOUSING

Distribution centres which also incorporate warehousing and storage functions are used
to receive, handle, store, package and then ship products. Information technology has
transformed the way that warehouses are managed. The internet has changed the way the
companies distribute goods. The customer wants faster delivery and greater customisation.
Companies have to distribute goods more frequently in smaller quantities. The warehouse
instead of being a place for storage is converted to a flow through facility, using automated
material handling equipment. The warehouse is merely a transit point where loads can be
sorted out and dispatched to the right customer as a consolidated package even though
they are from different sources and are different in nature. Mixed pallets are used. The
customer expects goods to be sent in configurations ready for the store. For instance, a
customer may want trousers to be delivered folded and ready to be placed on the shelf,
while another may want them to be delivered hung on hangers for display.
Another trend that is now prevalent is postponement. The final assembly and
configuration is postponed for as long as possible so that it can conform to the
customers' requirements. This means that the final assembly and configuration has
shifted from the manufacturer to the distributor. The distributor must ensure that all
the components required are available and that he has the wherewithal to execute the
final assembly.
Warehouse Management Systems (WMS): A warehouse management system is an
automated system that runs day to day operations of a distribution centre. The activities
involved in a warehouse are placing an item at a specific place for storage so that it can
be easily retrieved. This is known as a putaway. In a warehouse which handles a large
number of items it is important to know exactly where an item can be found. The WMS
keeps track of inventories and the location at which item is stored. Items have to be
retrieved from storage when required. This is called a pick. Effective picks are possible
only if the items can be correctly tracked through the system. The items then have to be
packed, labelled and shipped out to the customer through a carrier.
The WMS has various components and features. Some of the important features are
transportation management, order management, yard management, labour management
and warehouse optimisation. Transportation management keeps track of inbound and
outbound consignments. It helps to consolidate and build complete economical loads,
and to select the best mode and carrier based on cost and service. The order management
component enables the addition, modification and cancellation of orders in real time. If an
item is out of stock, the distribution centre can access the suppliers' production schedule
and determine when the item will be available for delivery. Yard management controls
the activities at the loading and unloading points or docks. It facilitates cross-docking.
Cross-docking implies that the goods meant for a particular customer are unloaded at a
particular dock when received from a supplier and then sent to another dock where the
load for the particular customer is being consolidated. Other items which are to be sent
to the customer may be received through other suppliers at other unloading docks. The
packages are identified through bar coding and are directed to the dock where the load
for the particular customer is being consolidated. When an economical load is ready, it
is shipped out to the customer through a carrier. This does away with costly putaway
and pick operations. Incoming loads are directed to shipping docks to fill outgoing
orders. Yard management ensures that there is no congestion at the docks and may
even implement a system of dock appoinbnents if necessary. Labour management plans,
manages, and reports the performance level of the warehouse personnel. Warehouse
optimisation optimises the placement of items within the warehouse based on demand,
product groupings and the characteristics of items. This is referred to as slotting. WMS
also creates custom labelling and packaging.
Collaborative distribution: Collaborative Planning, Forecasting and Replenishment (CPFR)
is software that facilitates joint planning and forecasting by the suppliers, manufacturers
and customers. Past sales data, supporting data, comments, point of sale data, on hand
inventory data, data on scheduled promotions and forecasts can be shared by all concerned
and plans formulated in a truly collaborative manner.
Companies are also collaborating through the net to optimise the use of resources.
For instance, instead of sending half empty trucks with goods for a customer, suppliers
may collaborate to share the truck even if they are competitors. Similarly, warehouse
space may also be shared. This results in savings for everyone in the chain. Another
trend is to outsource distribution activities. This frees the company to focus on its core
competencies and results in lower inventory levels and reduced costs.
17.7 TRANSPORTATION
Transportation is an important part of the supply chain. Transportation costs can
significantly increase the cost of the product. The main issues involved are, the mode of
transport to be used and what quantities should be moved from which source to which
destination so that the transport costs are minimised. The transportation model can be
used to solve such problems. The solution procedure with the help of MS Excel Solver
application is detailed in Chapter 9, Section 9.5.
17.8 MANAGING THE GLOBAL SUPPLY CHAIN

Information technology has virtually transformed the world to a global village. Gone
are the days when a ship would take a couple of months to reach England from India.
Globalisation has improved trade all over the world. It is possible to communicate in
real time from one end of the world to the other. Multinational companies have sprung
up. Materials can be sourced from all over the world. The internet makes it possible
to get real time prices and compare them. Manufacturing facilities can be established
wherever it is cheapest to produce. Markets may be located at totally different places.
The emergence of economic regions with virtually no trade barriers between them has
increased the opportunity for global trade. The European community with its common
currency, ASEAN, SAARC and trade treaties like NAFTA, SAFTA and the WTO regime
have made trading throughout the world viable.
However, global supply chain poses its own peculiar problems. Most nations follow
quota systems for goods from other countries. It is important to understand these so that
sources can be switched when quotas are exhausted. Greater collaboration is required in
the field of transportation and distribution. Tariffs and duties have to be borne in mind
as these affect the overall cost of the product.
17. 9 SUMMARY
The supply chain consists of all activities associated with the flow of information and goods
and services form the raw material stage to the end user. It encompasses the suppliers,
producers, distributors and the customers. Supply chain management has assumed greater
importance with the shift from push systems to pull systems. Increasing customer focus
and the imperative need to fulfil the customers' requirements have changed the traditional
approach to supply chain management.
The key drivers of the supply chain are inventory, transportation, facilities and
information. The efficiency of the supply chain can be measured in terms of inventory
turnover. Additional inventory at any level in the chain involves carrying cost and as
a result the cost of the item increases. Over estimation at each link in the chain causes
a bull whip effect on the inventory holdings. Transportation costs significantly add to
the cost of the product. Facilities such as warehouses need to be properly managed.
Information is vital to the system.
Information technology has made it possible to share information between customers,
distributors, producers and suppliers in real time. When customers place orders, the
information can be transmitted to everyone in the chain. This facilitates and speeds up
the filling of orders. However, information alone is not enough. The actual delivery of
goods depends on the available transport infrastructure. Installing information systems
need expensive hardware and software and this aspect must be kept in mind when
designing the supply chain.
The traditional relationship between suppliers and customers restricted to purchase
transactions has undergone a change. The customer expects the supplier to supply small
quantities frequently, ensuring that the quality, cost and delivery schedules requirements
are met. The customer helps the supplier to improve quality systems. Suppliers also have
a role to play in the design stage. The supplier's representatives on the concurrent design
team can actively participate and express their views on the feasibility or of designs from
the materials point of view. Companies also outsource parts and components. Original
Equipment Manufacturer (OEM) goods and services, Maintenance, Repair and Operations
(MRO) goods and services and corporate services are often outsourced.
Distribution centres which also incorporate warehousing and storage functions
are used to receive, handle, store, package and then ship products. The warehousing
function involves storing items and then retrieving them for filling orders. It is important
to know the exact location where each item is stored so that it can be easily retrieved.
Warehouse management software is used to manage this function. The system comprises
transportation management, order management, yard management, labour management
and warehouse optimisation modules. Warehouses should act as flow through facility
rather than as a storage facility. Companies resort to cross-docking wherein incoming
consignments are unloaded and then redirected to form outgoing consignments to specific
customers. This hastens up delivery of items. It is important that items are delivered at
the time required.
CPFR systems result in better efficiency as all agencies can collaborate with each other
in planning, forecasting and replenishment. Companies are also collaborating with each
other in the field of transport management so that full loads are transported resulting
in savings. Often these functions are outsourced so that the company is free to focus on
its core competencies.
In the context of globalisation, managing the global supply chain has its attendant
problems due to language disparities and disparities in duties, tariffs, quotas, export and
import policies and so on.
ICONCEPT QUIZ I
State True or False
1. Supply chain consists of all activities associated with the flow of information and
goods and services from the raw material stage to the end user.
2. Supply chain management is logistics management.
3. The 'bull whip' effect is the result of expediting orders with suppliers.
4. Inventory consists of a stock of finished goods only.
5. Information is unimportant to the management of the supply chain.
6. Bar coding helps us to track consignments and their addressees.
7. Having a large number of suppliers is good as it introduces competition leading
to better bargaining and prices.
8. OEM (original equipment manufacturers) goods include office supplies, cleaning
agents and so on.
9. Yard management keeps track of inbound and outbound consignments.
10. Continuous replenishment systems require a large inventory to be maintained so
that there are no stockouts.
1. Which of these is not a part of the supply chain:
(a) Distributor (b) Supplier
(c) HR manager (d) Customer
2. Which of these is not a supply chain management decision:
(a) Inventory levels. (b) Advertising budget.
(c) Transportation decisions. (d) Warehousing decisions.
3. Which of the following is not a main process of supply chain management:
(a) Getting customer orders.
(b) Recruiting sales force.
(c) Procuring materials, components, subassemblies and assemblies.
(d) Transforming materials to produce goods and services.
4. Suppliers must be committed to:
(a) Supplying items as early as possible.
(b) Supplying items of the right quality irrespective of their cost.
(c) Supplying items of the right quality in the right quantity at the right time
and the right cost.
5. Firms which have time as their competitive priority:
(a) Deliver products at the earliest.
(b) Deliver products well before the due date.

(c) Deliver products as soon as they can after the due date.
(d) Deliver products when they are due.
6. Continuous replenishment systems require that:
(a) Suppliers supply materials at the earliest possible.
(b) Supply in bulk.
(c) Make frequent partial deliveries, often even several times a day.
7. Goods and services that directly go into a product and are outsourced are
categorised as:
(a) Corporate services. (b) OEM goods and services.
(c) MRO goods and services. (d) All of the above.
8. Collaborative planning, forecasting and replenishment system ensures that:
(a) Data is kept confidential and accessible only to the originator.
(b) Data is available to the whole world through the internet.
(c) Personal data is shared.
(d) Data is shared by all concerned through intranets and extranets.
9. The warehouse is:
(a) Place for storage of goods.
(b) Place from where wholesalers and retailers collect goods.
(c) A flow through facility where loads can be sorted out and dispatched to the
right customer as a consolidated package even though they are from different
sources and different in nature.
10. The keys to effective supply chain management are:
(a) Information. (b) Good advertisements.
(c) Skilled personnel. (d) Good research and development.
Fill in the blanks:
1. _ _ _ _ _ _ _ flow through the supply chain system is vital.
2. The keys to effective supply chain management are information, _ _ _ __,
cooperation and trust.
3. Over estimation at each link in the chain causes a _ _ _ _ _ _ _ effect.
4. The actual delivery of goods depends on existing _ _ _ _ _ __
5. Distribution centres incorporating warehousing and storage functions are used
to receive, handle, store, _ _ _ _ _ and _ _ _ _ _ _ _ _ products.
6. Global supply chain is affected by language disparities, and disparities in
_ _ _ _ _ __, and export and import policies.
7. The efficiency of the supply chain can be measured in terms of _ _ _ _ __
8. Supply chain encompasses suppliers, _ _ _ _ _ _ _ _ _ _ _ _ _ _ and
9. Delivery too much earlier than required results in increased ______ costs.
10. _ _ _ _ _ _ is the most important enabler in the supply chain.
IQUESTIONS I
17.1 What do you understand by supply chain management?
17.2 What is the role of inventory in supply chain management? Explain the bull whip
effect.
17.3 What is the importance of information in supply chain management?
17.4 The traditional role of suppliers has altered in the present day. Comment. Discuss
this in the light of the role of suppliers in the supply chain management.
17.5 What do you understand by cross-docking?
17.6 Explain the functions of warehouse management system.
17.7 Explain CPFR and how it improves the functioning of the supply chain?
17.8 What is the effect of postponement of final assembly and configuration on the
functioning of the supply chain?
17.9 What influence does the internet have on the management of the global supply
chain?
17.10 Production and operation systems are becoming more and more customer oriented.
How is this affecting the functioning of the supply chain?
Enterprise Resource Management
Failing to plan is planning to fail
ALAN LAKEIN
LEARNING O B J E C T I V E S - - - - - - - - - - - - - - - - - - .
• Understand enterprise resource planning systems
• Study the characteristics of a typical ERP system
• Examine the key considerations in ERP implementation
• Study the ERP implementation methodology
• Study other business-related software-CRM, SCM and CPC
18.1 INTRODUCTION
The growth and the advances in information technology have changed traditional
methods of functioning of organisations and the production operation function is no
exception. Material requirements planning evolved as a logical approach to compute the
number of parts, components and materials required to produce an end product. It also
provided a schedule when the parts, components or materials were to be ordered or
produced. Computerisation made the task of performing tedious repetitive calculations
easy. Software was designed for material requirements planning. As it was realised that
the same data could be used for other functions also, MRP evolved into Manufacturing
Resource Planning (MRP II). The scope was enlarged to include modules to handle order
entry, scheduling, inventory control, financial accounting, accounts payable and so on.
It was only a matter of time before integrated systems developed covering all aspects of
the organisation. Today most big organisations are using Enterprise Resource Planning
(ERP) systems.
430
Enterprise Resource Management 431
18.2 ENTERPRISE RESOURCE PLANNING (ERP)

Enterprise resource planning is a computer-based information system extending across
all functions of the organisation. The system functions on the basis of an enterprise
wide integrated database. Prior to the evolution of ERP, programmers wrote individual
modules covering various functions. ERP cuts across functional boundaries and addresses
business processes instead of functions. For example, a sales transaction is immediately
reflected in accounts payable; the inventory status is also updated; the transaction is also
reflected to the manufacturing and procurement deparbnents for their action. ERP also
cuts across organisational barriers and may incorporate suppliers and customers in the
system through Supply Chain Management (SCM) and Customer Relations Management
(CRM) information systems. Some of the characteristics of an ERP are:
1. ERP applications address a business process
2. ERP applications are modular
3. ERP applications are integrated
4. ERP applications include a company's reach beyond its walls-to its suppliers,
customers, and partners
5. The entire ERP suite addresses all areas (or the great majority) of a company's
business functions
Business process: A business process crosses multiple functions in an enterprise. For
example, we may have a deparbnent called accounting, or we may have a function called
payroll. Although each function involves business processes, these functions themselves
are not process based. A business process is broader-for example, order to cash means
everything in the path from the customer order till you have the money in the bank. It
is a more efficient way to think about linkages and how they work in the organisation.
It may include the procurement, manufacture, distribution, invoicing, transportation,
and accounting.
Modularity: ERP is modular in nature. The ERP system designed by SAP AG Software
Solutions of Germany has four major modules-financial accounting, human resources,
manufacturing and logistics, and sales and distribution. The system operates in a three-
tier client/ server configuration. The core of the system is made up of a network of
high-speed database servers. The database servers are specially designed to efficiently
handle a large database. The applications comprising of the four modules are run on
separate computers networked around the database cluster. Users communicate with
the applications through front end servers. The ERP structure is shown in Figure 18.1.
The finance and accounting module covers financial accounting, controlling and asset
management. Financial accounting includes accounts payable, accounts receivable, general
ledger, and capital invesbnents. It facilitates entries and can prepare accounting reports
like balance sheets, profit and loss statements and so on. The controlling function includes
costing; cost centre, profit centre, and enterprise accounting and planning; posting and
allocation; profitability analysis and a variety of other reporting functions. The asset
management category includes the ability to manage all types corporate assets, including
fixed assets, leased assets and real estate. It also has modules to handle treasury functions
and capital invesbnent functions.
The human resources module performs all functions of managing, scheduling, paying
and hiring the people in the company. It includes payroll, benefits administration, applicant
data administration, personnel development planning, workforce planning, schedule and
shift planning, time management, and travel expense accounting.
The manufacturing and logistics module covers all the topics that have been covered
in this book. The SAP R/3 systems module has five major components-materials
management, plant maintenance, quality management, production planning and
control, and project management system. Each component is divided into various
segments to perform different functions. For example, the materials management
components covers all tasks within the supply chain, including consumption-based
planning, purchasing, vendor evaluation, inventory and warehouse management, and
invoice verification.
The sales and distribution module provides customer management; sales order
management; configuration management; distribution, export control, shipping, transportation
management; and billing, invoicing and rebate processing.
The system can be implemented globally and can handle different laws and rules of
different countries, currencies, exchange rates, tariffs and duties and so on.
Financial
accounting
Sales and Human

distribution resources
Manufacturing
and logistics
Figure 18.1 ERP Structure.
Integration: ERP integrates accounting, sales and distribution, manufacturing, planning,

procurement, human resources and other transactions into a single application software.
By integrating the database, the data is entered only once. Inconsistencies that may arise
because of entering the same data differently in individual applications are avoided.
For example, the customer's identity may be reflected as IBM in one application and as
International Business Machines in another. When data is integrated, such inconsistencies
do not occur because there is only one transaction entry. For example, a customer order
entry will affect the data of the entire company. The inventory will be adjusted, the part
supplies will also be updated, accounting entries will be made, and production schedules,
shipping schedules and balance sheets will all reflect the change.
Suppliers, customers and partners: Business involves more than internal operations.
The reason for existence of any organisation lies outside it as its basic purpose is to
satisfy customers' needs. Customers are therefore, an important part of the business.
Similarly suppliers from whom parts, components and materials are procured are vital
to the efficient functioning of the organisation. As we have seen in the chapter on supply
chain management, customers and suppliers must collaborate with the organisation. ERP
handles supply chain management and customer relations management. It also has the
capability of data mining and drilling down for details.
ERP offers the advantage of integration. It can result in cost savings in the long
run. However, ERP implementation is a difficult and expensive project. ERP packages
are mostly standardised and if the business processes followed by the organisation are
not in conformity with those programmed in the package, either the package will have
to be customised or the organisation will have to reengineer its business processes. ERP
vendors claim that the business processes incorporated in their packages conform to
the industry's best practices. However, these may not suit an individual organisation.
Figure 18.2 shows the information flows in an organisation. Let us examine and discuss
the issues involved in implementing ERP.
Orders Sales and
Customers
distribution
Order status
Invoicing
payments
Financial
HRM
accounting
Manpower costs
Production
estimates
data
Invoicing Forecast
payments and
RM and component orders

i - - - - - - - - - - - - - - - - - i Manufacturing
Suppliers
and logistics
Availability and delivery
Figure 18.2 Information Flows in An Organisation.
18.3 ERP IMPLEMENTATION

ERP implementation involves considerable investment in the form of time and money.
It requires the involvement of the entire organisation-different functions, people,
organisation culture, procedures and ideologies-resulting in a comprehensive change
in the organisation. Managing this change is not an easy task. ERP involves high initial
investment and is costly to implement. Organisations may opt to implement ERP in a
phased manner. The main issues that must be considered are discussed here.
Functionality: The business processes incorporated in the package should be compatible
with the business processes being followed by the organisation. A study of the package's
capabilities and the manner in which the organisation conducts its business should
be conducted. The customisation of the ERP package is time consuming and costly.
Any business process reengineering required should be carried out and tested before
implementing ERP.
Technology: The package selected should be scalable and should support open and
non-proprietary technology standards. It should be compatible with other systems and
IT solutions being used by the organisation. The package should be flexible enough for
use with future changes to business processes.
Implementability: The package should be easy to configure, implement and use.
18.4 ERP IMPLEMENTATION METHODOLOGY

The various stages in implementation are described.
Identify need: The first step is to identify the need for ERP. The organisation must
carry out an analysis of its needs and then examine how ERP will fulfil these needs.
Evaluate current state: The next step is to evaluate the existing situation. The existing
business processes should be identified and recorded to establish information flows and
the time taken to complete processes. This will also help to identify decision points and
the type of reports currently being used. Bottlenecks in the system can be identified
through an analysis of the existing system.
Design desired system: An analysis of the current state leads to an identification of
problems and problem areas. This should logically lead to the generation of alternatives
that would remedy the current weaknesses. The business processes may now have to be
redesigned so that they can become more efficient. The performance can be benchmarked
against the best business practices in the industry. The generated alternatives can be
evaluated and the best alternatives selected for implementation. Business processes can
now be reengineered, implemented and tested for their efficacy.
Evaluation of ERP packages: The next step involves an evaluation of available ERP
packages to check which one would be most suitable for the organisation. This will involve
a technical as well as economic evaluation. Is the package globally acceptable? Despite
its global acceptance, what will be its suitability for local operations where the business
practices may be influenced strongly by local, political, legal and cultural factors? What
is the target market for the package? It may be possible to find a package especially
suited to the industry to which we belong. What will be the terms and conditions for
subsequent technological upgrades? The economic analysis is concerned not just with the
cost of the package. A proper cost benefit analysis should be carried out. A company
may not be in a position to implement the entire package in one go because of the costs
involved. It may wants to examine the modularity of the package and the feasibility of
implementing specific modules in a phased manner. The ease of implementation should
be another important factor. Can existing databases be made use of? How much would
it cost to implement? How much disruption will the implementation cause? What will
be the operating and maintenance costs of the system? What will be the costs of training
personnel?
Installation of requisite hardware and networks: Once the package has been selected
the necessary hardware must be considered. This includes servers, work stations, network
equipment and so on.
Implementation: After selecting the ERP packaging and installing the necessary hardware
and networks, the task of actual implementation of the ERP system begins. It is best to
entrust this to a selected team. The team should be given adequate authority so that it
can discharge its responsibilities. The team may report to a steering committee which
may oversee the implementation project. The team should be trained adequately and
should be familiarised with the working of the ERP system.
The business processes of the company should be mapped on to the ERP package.
A gap analysis should be carried out to identify the areas that cannot be handled by the
standard ERP package. Some gaps may require only minor modifications and minimal
programming, others may require major rework and additional resources and there may
be others which cannot be handled by the ERP package. Decisions must be taken on
how to deal with gaps other than those requiring minor modifications. Should additional
costs and delays be incurred to customise the package totally or would it be easier to
reengineer the company's business process? Customisation, if required is then carried
out.
The next stage is the creation of the database. This is a laborious task. Some existing
data may be uploaded to the system. It must be borne in mind that creating enterprise
wide database will take considerable effort and time. The task is further compounded
by the fact that the company's functioning during this period is ongoing and data keeps
changing with each transaction. The integrity of the data has to be maintained.
The next step is to carry out test runs. Training of operators and users must also be
conducted at this stage. The migration to the new system may involve parallel runs for
some period or may be done in a phased manner. The parallel run is generally preferred.
After switching over to the new system, the system will have to be initially monitored
and fine tuned so that optimal performance is achieved.
Implementing an ERP is a project and suffers from all the problems peculiar to
project implementation like rushed deadlines, mismatching authority, responsibility and
accountability, disinterested top management, wrong choice of team members, wrong choice
of project leaders and project manager, unmotivated teams, communication breakdown,
interpersonal conflicts and so on.
18.5 ERP AND RELATED BUSINESS SOFTWARE

The earlier versions of ERP lacked the ability to interact with external agencies. However,
with improved web technology, ERP systems now integrate the company with its suppliers,
customers and other companies by sharing data with them. The vast data created by ERP
systems can be used for other applications. Examples of such applications are Customer
Relationship Management (CRM), Supply Chain Management (SCM) and Collaborative
Product Commerce (CPC).
Customer Relationship Management (CRM): CRM deals with business processes that
involve customers such as marketing, sales, order fulfilment and services. CRM shifts the
focus from managing products to managing customers. E-commerce makes it possible
for a company to sell directly to customers. A lot of customer data is generated through
point of sales data, online purchases and mail order purchases. The customer's buying
behaviour can be analysed from his previous purchases and the market can be personalised
to individual preferences and behaviour. For example, if past purchases reveal that a
customer is fond of reading detective novels, new offerings of such novels can be made
to him. The data of customers is stored in a data warehouse and is analysed for patterns
(called data mining) from which predictions of future buying behaviour can be made.
For example, it was observed that on weekends the sale of beer and the sale of diapers
went up. Though there is no direct correlation between the two, it was found that young
couples purchased diapers to keep themselves free from the chores of baby changing on
weekends, when they wanted to relax. This prompted stores to position diapers close
to beer in their stores.
CRM helps to manage, prospect information, customer profiles, sales force automation,
and campaign modules for direct mail and special sales promotions. CRM also assists in
demand forecasting and demand management. It provides support for pricing products
and services, quoting order delivery dates, and planning for customer needs. It also
facilitates tracking and tracing of orders, returns, repairs, warranty services and so on.
CRM interacts with SCM and ERP to improve the efficiency of the company.
Supply Chain Management (SCM): The functions of supply chain management have
been dealt with in Chapter 17. SCM software assists supply chain planning, supply chain
execution and supply chain relationship management.
Collaborative Product Commerce (CPC): CPC is concerned with new product design and
development and has been discussed in Chapter 3. It facilitates sharing of CAD generated
product design files between various concerned agencies which may be geographically
separated. The agencies can then work on the design concurrently and can interact with
each other. It coordinates product and process design and collaborates with suppliers
and customers in the design process.
ERP, CRM, SCM and CPC make a very powerful combination. It integrates all
systems and results in cost reduction, improved quality and faster delivery giving the
company a distinct competitive advantage. To quote the benefits obtained from ERP by
some companies which have implemented it, Owens Corning was able to save over $65
million. IBM Storage System reduced the time to re-price its products from 5 days to 5
minutes, the time to carry out a credit check from 20 minutes to 3 seconds and the time
to ship a replacement part from 22 days to 3 days. Toyota reduced its order to delivery
time from 30 days to 7 days. Microsoft saved $12 million annually in early payment
discounts from vendors after its ERP system became functional. ERP makes it possible
to adapt an integrated and collaborative approach to business.
18.6 SUMMARY
Enterprise Resource Planning Systems is a computer system that integrates application
programs in accounting, sales, manufacturing, and other functions in the firm. This
integration is accomplished through a database shared by all the application programs.
ERP addresses business processes that may cut across functions. It is modular in
nature. A typical ERP package consists of four main modules: financial accounting, sales
and distribution, manufacturing and logistics, and human resource. The modules are fully
integrated and share common data. A transaction in any module generates and updates
data which is instantly reflected in the other modules. A sale transaction immediately
updates inventory status and is reflected in the accounts module as well. ERP systems not
only restrict themselves to internal integration but also integrate suppliers and customers
into the system. Suppliers can have access to information required by them. Similarly,
customers can also access information needed by them. For example, order tracking and
tracing information is available to customers.
The costs of implementing ERP are very high and it is imperative that the system
is properly evaluated before implementation. The business processes as incorporated in
the package may not conform to the business processes being followed by the company
which intends using the package. In such a case, the package is either customised or
the company may opt to reengineer its business processes to bring them in line with the
selected ERP package. Customisation is an expensive proposition. Creating a database is
also a tedious process.
CRM systems deal with processes that involve customers. The vast data on customers
is used to determine buying behaviour of customers and helps to personalise the market
which conform to customer preferences and behaviour. The focus shifts from managing
products to managing customers. Data of customers is stored in data warehouses and is
mined for patterns.
SCM systems help manage all elements of the supply chain and CPC systems help
in sharing design data with agencies that may not be geographically co-located.
ERP helps a company to reduce costs, improve quality and make timely deliveries,
giving a competitive edge over its business rivals.
ICONCEPT QUIZ I
State True or False
1. ERP addresses business processes that may cut across functions.
2. ERP is a computerised production system.
3. CRM deals with processes that involve cash resources.
4. ERP is modular in nature.
5. ERP runs on an integrated database where data is entered only once.
6. In ERP, a customer order entry will affect the data of the entire company.
7. ERP implementation is difficult and expensive.
8. ERP is a conglomerate of different packages put together.
9. ERP system must be evaluated properly before implementation.
10. SCM is a sales and cash management system.

1. The first stage in implementing ERP is:
(a) To evaluate current state. (b) To design the desired system.
(c) To identify the need. (d) None of the above.
2. Which of the following is not a characteristic of an ERP package:

(a) It is modular.
(b) It addresses a business process.
(c) It has a large number of databases.
(d) It addresses all areas of a company's business functions.
3. The sales and distribution module does not provide:
(a) Customer management.
(b) Inventory and warehouse management.
(c) Sales order management.
(d) Transportation and shipping management.
4. Implementing an ERP is:
(a) An ongoing operation. (b) A project.
(c) A capital budgeting problem. (d) All of the above.
5. ERP systems do not integrate the following:
(a) Internal business functions of the organisation.
(b) Suppliers.
(c) Government agencies.
(d) Customers.
Fill in the blanks:
1. CRM systems deal with processes that involve _ _ _ _ _ __
2. A typical ERP package consists of four main modules; _ _ _ _ _ _ _ _ __,
_ _ _ _ _ _ __, _________ and _ _ _ _ _ _ _ _ _ _ __
3. ERP offers the advantage of _ _ _ _ _ _ _ _ __
4. ERP is _ _ _ _ _ _ _ in nature.
5. A business process crosses multiple _ _ _ _ _ _ _ _ in an organisation.
6. ERP applications address a _ _ _ _ _ _ _ _ _ _ __
7. By integrating the database, the data is entered only _ _ _ _ _ __
8. The business processes incorporated in the ERP package should be _ _ _ _ __
with the business processes followed by the organisation.
9. The migration to the new system may involve _ _ _ _ _ _ _ _ or may be
done in a phased manner.
10. ERP _ _ _ _ _ the ability to interact with external agencies.
I QUESTIONS I
18.1 What do you understand by enterprise resource planning systems?
18.2 Describe the main modules of an ERP system.
18.3 What is a business process? Explain with the help of an example.
18.4 The entire ERP suite addresses all areas of a company's business functions. Explain
with an example.
18.5 What are the steps involved in implementing ERP?
18.6 What are the difficulties that may be encountered in implementing ERP? How
would you overcome them?
18.7 Write a short note on CRM.
Just-in-Time Production System
Kanban is a tool for realizing just-in-time. For this tool to work fairly well, the process must be
managed to flow as much as possible. This is really the basic condition. Other important conditions
are levelling the product as much as possible, and always working in accordance with standard
work methods.
OHNO
LEARNING OBJECTIVES
• Understand the basics of JIT system
• Study the underlying philosophy of JIT
• Examine the measures to eliminate waste
• Study the Kanban production control system
• Examine how the Japanese show respect for people
• Understand the implications of Kaizen and the SS approach to JIT improvement
• Examine the JIT implementation requirements
19.1 INTRODUCTION
Just-in-time (JIT) is an integrated set of activities designed to achieve high-volume
production using minimal inventories of raw materials, work in progress, and finished
goods. Parts arrive at a workstation just when they are required and move through the
operation quickly. It is based on the logic that nothing will be produced until it is needed.
JIT works on a pull system. When an item is sold, the market pulls a replacement from
the last workstation, that is, finished goods. The last workstation in turn pulls parts or
subassemblies from the station upstream of it and assembles another unit. The upstream
440
Just-in-Time Production System 441
station in turn pulls from the station immediately upstream of it and so on back to the
release of raw materials. Figure 19.1 shows the pull system schematically. For the pull
system to work smoothly, high quality, strong vendor relationship and a fairly steady
demand is required.
Vendor
Vendor
Final
assembly Custome rs
Vendor
Sub - Subassembly
Vendor Fab - Fabrication
Figure 19.1 Schematic Diagram Showing the Pull System.
JIT can be viewed either as Big JIT or Little JIT. Big JIT is also referred to as lean
production and aims at eliminating waste from all aspects of the company's production
activities-human relations, vendor relations, technology and the management of materials
and inventories. Little JIT takes a narrow view of providing goods and service resources
where and whenever needed.
JIT became popular in the 1970s, when Tai-ichi Ohno of Toyota Motors used JIT
successfully to take Toyota to the forefront of car quality and delivery time. The Toyota
production system has become a bench mark for others. We shall refer to the Toyota
production system frequently in this chapter as it is the basis of all JIT systems.
19.2 JIT PHILOSOPHY

The Toyota production system or JIT was developed to improve quality and productivity
and is based on two philosophies that are central to the Japanese culture-elimination of
waste and respect for human beings. The JIT system eliminates waste, exposes problems and
bottlenecks and achieves streamlined production. It requires employee participation, industrial
engineering basics, total quality control and a system of continuing improvement. JIT works
best in a stable environment and where the demand is fairly steady. It advocates small factories
as opposed to large integrated units and works in small lot sizes, ideally of one unit each.
Though it can be applied to any form of production, it is best suited for repetitive production.
19.3 ELIMINATION OF WASTE

Waste as defined by Fujio Cho, Toyota's president, is 'anything other than the minimum
amount of equipment, materials, parts and workers (working time) which are absolutely
essential for production.'
Waste has been categorised into seven types by Ohno;

1. Waste from overproduction
2. Waste of time (waiting)
3. Transportation waste
4. Inventory waste
5. Processing waste
6. Waste of motion
7. Waste from product defects
According to this view point, there is no place for surplus or safety stock, because if
you do not need it you should not produce it. It would constitute waste. An extra unit
is as bad as having a unit short. Inventories must be reduced to the bare minimum. The
seven elements to eliminate waste are:
1. Focused factories
2. Group technology
3. Quality at the source
4. JIT production
5. Uniform plant loading
6. Kanban production control system
7. Minimised set up times
Focused factories: The Japanese build small, specialised plants, often producing just
one item. They do not build large, vertically integrated plants. They find it difficult to
manage large operations and the bureaucratic systems associated with large plants. It is
not in conformity with their management style. Toyota has 12 small plants located in and
around Toyota City. These small plants designed for a single purpose can be constructed
and operated more economically. In Japan most plants have between 30 and 1000 workers.
Group technology: Jobs or products which pass through similar operations are identified
and grouped into families. Machines and equipment required to carry out these operations
are grouped together to form a group or a cell and are laid out together in an area reserved
for the group. The group consists of a team of workers who work solely in the group.
The workers share a common product output target and are responsible for achieving it.
The group develops multi-skills and workers work in close cooperation with each other to
achieve their target. The groups are independent of each other and have the autonomy to
pace their work according to their perceived requirements. Details are given in Chapter 6.
The jobs are completed in the cell and do not have to move from deparbnent to
department. This eliminates movement between deparbnents, reduces waiting time
between operations as queues do not build up, reduces inventory and reduces the number
of workers required. The workers are multi-skilled and can handle the machines and
equipment in the cell. They enjoy greater job security due to their multi-skills. Group
Technology facilitates making batches and lots of single unit size.
Quality at the source: Quality at the source implies getting it right, the first time. JIT
does away with inspection. The worker is responsible for quality. If something goes
wrong, the worker stops the line immediately and a light indicates the station, where
trouble has occurred. The problem is attended to and the line resumed only after the fault
is rectified. When Toyota started the system, there were frequent interruptions, but with
the passage of time as more and more problems got ironed out, the line rarely stopped.
The worker is his own inspector and is responsible for quality. Since production is being
done in very small lots, the worker can concentrate on the quality of what he produces.
Toyota also introduced Jidoka. This involved designing machines which had an inbuilt
capacity to detect any faults in the product and to respond suitably when such faults were
detected. The attempt was to make machines mistake proof so that workers do not have
to baby sit the machines. When the line is stopped due to some problem, the workers
are empowered to do their own maintenance and housekeeping till the line restarts.
Employees are involved in quality management. Quality circles and continuous
process improvement are practised. JIT advocates total quality management. Since the
work-in-progress is low, it is easy to get feedback on errors. A proper analysis of all
defects must be carried out and causes determined.
Just-in-time production: JIT produces what is needed and when it is needed. Any extra
production is viewed as waste. JIT can be applied effectively to repetitive manufacturing.
It does not require high volumes and can be applied to any segment of business which
is repetitive in nature. The ideal lot size is one. Even when workstations are dispersed
geographically, the movement is minimised and the quantities moved are kept small-
generally not more than one tenths of a day's production. Vendors ship several times a
day to keep lot sizes small and inventories low. The aim is to drive all inventory queues
to zero. This reduces the invesbnent in inventory and decreases lead time. Having minimal
inventory also helps to identify problems which otherwise remain hidden in excess
inventory and staff. JIT's minimal inventory levels are in sharp contrast to traditional
thinking of keeping inventory and safety stocks just in case things go wrong.
Uniform plant loading: Fluctuations in demand cause fluctuations in production plans.
The changes in the end product demand have a ripple effect on the upstream processes.
JIT works efficiently when the production rate is uniform. Toyota achieves this by freezing
monthly demand and producing a mix of products to ensure that any fluctuations can
be met. When the production rate is uniform, it is easier to implement JIT.
Toyota runs a mixed model line. The line is balanced for optimum production. Let
us illustrate the principle of mixed line balancing through an example. The production
requirements are given in Table 19.1.
Table 19.1
Model Monthly requirement Daily production Cycle time (minutes)
A 10000 400 2.4
B 5000 200 4.8
C 5000 200 4.8
Assuming 25 working days in a month, the daily requirement has been worked out. The
plant works two shifts a day, that is, 960 minutes. The cycle time is worked out on the
basis of the production required. The flow of work and the speed of the line are adjusted
accordingly. If less number of units are required the cycle time is higher. We have an
444 Production and Operations Managem ent
option to produce only Model A on some days and Model Band Con others. However,
if a mix of models is produced every day, it shall be able to cater for minor variations.
A suggested method of production could be-A, B, A, C and so on. In a major cycle of
4.8 minutes, two cars of Model A and one each of Models B and C will be produced.
Uniform plant loading (hiejunka in Japanese) ensures a more or less steady off take of
parts from all workstations. Since there is no buffer inventory, excess capacity is required
to respond to changes. The plant is utilised below capacity. Toyota works two shifts a
day: 4 - 8 - 4 - 8. The spare capacity can be used to cater for unavoidable variations in
demand even though the demand is frozen and production is levelled.
Kanban production control system: Toyota introduced the Kanban system of production
control. Kanban in Japanese means instruction card. Kanbans are only used to signal or
authorise movement of parts from an upstream workstation to a downstream workstation
or to act as release for production order to an upstream workstation. In paperless
organisations, Kanbans may be replaced by crates or bins in which parts are transported
from one workstation to another. In some cases, squares are marked on the ground where
stores are to be placed. An empty square signals that parts are required at that particular
workstation and are moved from the preceding upstream station. Lights, placards hung on
posts or on storage bins, coloured golf balls or any other convenient method of signalling
can be adopted. Let us see how the Kanban system works. We shall illustrate a typical
two-card Kanban system. The system uses two types of Kanban cards, a transportation
Kanban and a production Kanban.
Figure 19.2 shows three work centres A, B and C. Work centre C is a downstream
centre and work centres A and B are upstream of it. At work centre C, a part is assembled
using subparts produced at work centres A and B. As soon as a unit is pulled from work
Suppl ier
Wo rk ce ntre B
I
I
I
I
I
I
I
I
I
I
I
I
D Transportation kanban
ii Production kanban
Work centre C
Figure 19.2 Two Card Kanban System.
centre C, work commences to assemble another unit. When parts are removed from bins
Al and Bl available at the work centre C, the transportation Kanbans are removed from
these bins and sent to work centres A and B. On receipt of the transportation Kanban at
work centre B, the production Kanban is removed from the bin B2 and placed on a rack
near the production facility. The transportation Kanban is placed in bin B2 and the bin
is ready to be transported to work centre C. Production commences at the work centre
B and the units are placed in the empty bin received from work centre C. When the bin
is full, the production Kanban is placed in it and it is moved to storage area from where
bin B2 was moved. Similar action also takes place at work centre A. Once production
begins, the bin containing raw materials comes into use. The transportation Kanban in the
bin is sent to the supplying agency for raw material and the chain functions in the same
manner throughout. Kanbans are used to regulate the flow of inventory. The quantity of
inventory can be regulated by removing or adding Kanbans as required. It is therefore,
relevant to know how many Kanbans should be introduced in the system.
Suppose the assembly of Part C at work centre C involves the use of two units of
Part A and one unit of Part B. The lead time for Part A is 2 hours and for Part B is 3
hours. The production rate of C is 9 units per hour, and the company wishes to hold
10% of the inventory as safety stock. Bins are used to transport the parts and each bin
can carry 10 units.
Then the quantity of Part A consumed per hour is 18.
The quantity required to be held is
Q = DL(l + S)
= 18 x 2(1 + 0.1) = 39.6 Units
where
D is usage per hour
L is lead time
S is the safety stock expressed as a percentage of the inventory
Number of bins required (Kanbans) f

= 3 06 = 4
The usage rate for B is 9 per hour. The quantity required is
Q = DL(l + S)
= 9 x 3(1 = 29.7 Units
+ 0.1)
Number of bins required (Kanbans) = 2 f/ =3
In case there is some problem and no parts are drawn from work centre C, then no
parts will be used and no Kanbans sent back to work centres A and B. Work centres A
and B will also not undertake any production as no production Kanbans are released. JIT
system accepts no work being done. The workers use this time for internal maintenance
and other housekeeping jobs.
As can be seen, JIT is not an inventory less or zero inventory system. It is obvious
from the above example that four bins of Part A and three bins of Part A constitute the
inventory of work-in-progress. This is the minimal inventory required because of the
production lead times.
Minimised set up times: JIT advocates small lot sizes and mixed production on the
line. It is important to reduce the set up times so that delays do not take place because
of set up. In the late 1970s, a team of operators at Toyota were able to change an 800 ton
press in 10 minutes compared with six hours for American companies. Set up activities
were divided into external activities and internal activities. External activities are those
set up activities that can be performed while the machine is running while internal set
up activities are those that can be carried out only when the machine is stopped. The
use of duplicate tool holders also helps to save set up times.
19.4 RESPECT FOR PEOPLE

Respect for people is a key to the Toyota production system. Lifetime employment is
assured to permanent employees who constitute about one third of the total workforce.
In fact, this is not only true of Toyota but applicable to Japanese industry as a whole.
Permanent employees are more flexible, remain with the company through thick and
thin, and do all they can to help the company achieve its goal.
Company unions cooperate with the management. Employees receive bonus twice a
year and are aware that their productivity will be rewarded. Management treats them as
human beings and not just as another managerial resource. Automation and robotics are
extensively used to perform all tedious and boring jobs so that the worker can concentrate
on continuous improvement.
Toyota relies heavily on subcontractors. With the emphasis on small focused factories,
a network of suppliers specialising in narrow fields exist. Companies have long-term
relationships with their suppliers and the suppliers consider themselves part of customer's
family.
EMPLOYEE ACTION-THE JAPANESE WAY
In a shoe factory, the employees had a dispute with the management. They decided
to go on strike. However, it was not in their ethos to let production suffer. The workers
produced only left shoes for three weeks in a novel form of protest. After the dispute
was resolved, the workers only made right shoes and the overall production did not
suffer. That's Japanese work culture for you.
Contrast this with our own country. Workers would have probably set a couple
of buses on fire and caused damage to public property.
Toyota uses a bottom round management style. This concept, sometimes called
consensus management or committee management, is an innate part of Japanese culture.
It involves a slow decision making process that attempts to reach a true consensus
rather than a compromise. The process is slow but ensures involvement of all parties.
This makes it easier to implement decisions especially those involving change as there is
commitment from the participants. Top management rarely takes operational decisions.
It concentrates on strategic planning.
Employee involvement in total quality management is ensured. Quality circles are
active and meet weekly to discuss problems. Quality circles and other employee roles
in quality management have been discussed in detail in Chapter 5.
Kaizen is an important part of Toyota work culture. Kaizen means continuous
improvement in the personal life, home life, social life and work life. When Kaizen is
applied to the work place it means continuous improvement for workers and managers.
Kaizen involves everyone in the organisation to make improvements without large
capital invesbnents. The basics for JIT improvements are the five Ss. These are given in
Table 19.2.
Table 19.2
Name Interpretation Description
Seiri Organisation Separate out all the things that are not necessary and
eliminate them or tidy them away.
Seiton Neatness Arrange the essential things in order so that they can be
quickly and easily accessed and put away.
Seiso Cleaning Keep machines and working environment clean.
Seiketsu Standardisation Make cleaning and checking a routine practice; maintain a
pleasant environment.
Shitsuke Discipline Standardise the previous four steps and constantly improve
them.
The five Ss are about doing the basics. They provide a foundation on which to
build other quality activities. With a tidy, disciplined environment, you can see many
of the things which need further attention. Companies that live in chaos, no matter how
fashionable it is these days, spend a lot of time in unproductive activities. Implementing
the five Ss requires full cooperation of all involved.
The Toyota production system controls variability and creates learning opportunities
from its processes. Its approach is based on four unwritten rules identified by Spear and
Bowen. These are:
Rule 1. All work shall be highly specified as to content, sequence, timing and outcome.
Rule 2. Every customer-supplier connection must be direct, and there must be an
unambiguous yes or no way to send requests and receive responses.
Rule 3. The pathway for every product and service must be simple and direct.
Rule 4. Improvements must be made in accordance with the scientific method, under
the guidance of a teacher at the lowest possible level in the organisation.
19.5 JIT IMPLEMENTATION REQUIREMENTS

JIT is typically suitable for repetitive work. Some requirements essential to the implementation
of JIT are discussed:
Design flow process: The plant layout should facilitate work flow. The layout should
be balanced just as we balance an assembly line, even if a line does not physically exist.
Workers must be trained to carry out preventive maintenance so that the line does not
stop. However, in keeping with the JIT philosophy every worker should be authorised
to stop the line if any thing goes wrong. The line will have to produce small lots and
therefore, the set up time should be reduced by identifying internal and external set up
activities and having duplicate tool holders.
Total quality control: The company must practise TQM. Every worker is responsible
for quality. SQC techniques should be used. The worker must inspect his work and
should stop the line if he has a quality problem. Fail safe procedures should be
instituted.
Stabilise schedule: The production schedule should be stabilised and levelled. This can
be achieved by freezing production figures for particular time slots and accepting no
changes in them. Capacity of the plant should be under utilised so that some capacity
is available for unavoidable variations in demand.
Kanban pull: The system must be designed to work on the pull philosophy. The
downstream demand should pull parts from upstream stations and trigger further assembly
or production. Backflush should be used to find out what parts have been used in the
end product by exploding the end product instead of accounting for each part.
Work with vendors: The vendors become a part of the JIT system. Lead times must be
reduced and deliveries made more frequently. It is not JIT if the vendor still produces
in large lots and then supplies to the company. That amounts to merely transferring the
burden of carrying inventory to the vendor. The vendor must also switch to JIT practices.
The company should help vendors to improve their quality. There should be a long-term
steady relationship with the vendor.
JIT also attempts to reduce inventory movement by locating stores and transit areas
close to work areas and through the use of mechanical means of moving inventory like
carousels and conveyors. The simplification of product design and standardisation will
also reduce inventories and assist JIT functioning. JIT can be applied to services too,
where the processes involved are repetitive.
Toyota's success story with JIT can be attributable to the work culture of the Japanese.
Toyota has not been as successful in other locations with JIT as in Japan. Its plant in
Australia follows JIT production system but is not as efficient as its plants in Japan. The
success of all systems depends on the humans who operate them, and social and cultural
differences cannot be overcome easily.
19.6 SUMMARY
Just-in-time (JIT) is an integrated set of activities designed to achieve high-volume
production using minimal inventories of raw materials, work-in-progress, and finished
goods. Parts arrive at a workstation just when they are required and move through the
operation quickly. It is based on the logic that nothing will be produced until it is needed.
JIT works on a pull system. For the pull system to work smoothly, high quality, strong
vendor relationship and a fairly steady demand is required.
JIT became popular in the 1970s when Tai-ichi Ohno of Toyota Motors used it
successfully. It is based on two philosophies that are central to the Japanese culture-
elimination of waste and respect for human beings.
The following measures can be taken to eliminate waste:
1. Focused factories
2. Group technology
3. Quality at the source
4. JIT production
5. Uniform plant loading
6. Kanban production control system
7. Minimized set up times
The Japanese build small focused factories which may at times concentrate only
on the production of one part. The smaller units are easier to manage. The plants
follow cellular technology and the machine and equipment required to produce
a family of products requiring similar processes are grouped together in a cell.
Every worker is responsible for quality. As the lots are small, ideally of size one, the
worker can concentrate on quality. The line can be stopped by any worker if things
go wrong. Nothing is produced until it is required. Pulls from the downstream
stations initiate work at the upstream stations. The production schedule is levelled
and instead of inventories acting as a safeguard against variations, plant capacity is
used. The plant produces a mix of products. As machines have to be set up differently
for different products it is imperative that set up time is reduced. This is done by
separating the external set up activities from the internal set up activities and having
duplicate tool holders.
Kanban in Japanese means an instruction card. Kanbans are only used to signal or
authorise movement of parts from an upstream workstation to a downstream workstation
or to act as release for production order to an upstream workstation.
ICONCEPT QUIZ I
1. JIT is a method of inventory control.
2. JIT is based on the logic that nothing will be produced till it is needed.
3. JIT is based on a 'push' system.
4. JIT is based on a philosophy of elimination of waste.
5. Focused factories are large factories focused on producing sub assemblies for
automobiles.
6. In JIT if anything goes wrong it is detected by inspection and then set right.
7. JIT views any extra production over and above immediate requirements as waste.
8. JIT uses a bottom round management style where all components are rounded
at the bottom.
9. There is very high turnover in JIT, especially in Japanese firms.
10. JIT works efficiently when the production rate is uniform.

1. JIT is best suited for:
(a) Job shop production.
(b) Batch production.
(c) Repetitive production.
(d) Production in very low volumes.
2. JIT believes in:
(a) Selective inventory control. (b) Zero inventories.
(c) Bare minimum inventory. (d) High safety stock.
3. JIT reduces set up times by:
(a) Having long production runs.
(b) Having dedicated machines for processes so that set up is avoided all together.
(c) Dividing set up activities into external and internal activities.
4. Toyota follows uniform plant loading:
(a) It produces only one model of a car per day.
(b) It runs a mixed model line.
(c) The cycle time of the line remains fixed throughout the year.
5. The Japanese adopt the following method for continuous improvement:
(a) Seven Mudas. (b) Kaizen.
(c) Jidoka. (d) Hiejunka.
6. Toyota has:
(a) Major trade union problems.
(b) Lifetime employment for its permanent employees.
(c) A hire and fire system to follow a chase strategy.
7. In JIT:
(a) The Quality Control deparbnent is responsible for quality.
(b) The procurement deparbnent is responsible for quality.
(c) The worker is responsible for quality.
(d) The top management is responsible for quality.
8. When JIT is used:
(a) Materials have long lead times.
(b) Bulk orders are placed for parts and components.
(c) Deliveries are made more frequently, sometimes even twice or thrice a day.
(d) There is a frequent change in vendors to ensure competition between them.
Fill in the blanks:
1. The quantity of inventory can be regulated in JIT production by adding or
removing _ _ _ _ __
2. In the 'pull' system the _ _ _ _ _ _ work station pulls parts or assemblies
from the work station.
3. _ _ _ _ _ _ means continuous improvement.
4. Focused factories follow a _ _ _ _ _ _ layout.
5. JIT system ensures a steady off take of parts from all work stations by adopting
6. JIT is based on the philosophy of __________________________ and
7. The set up time is minimised by dividing the set up activities into _ _ _ __

and _ _ _ _ _ _ _ _ activities.
8. In JIT system of production the plant is utilised _ _ _ _ _ _ _ capacity.
9. _ _ _ _ _ or continuous improvement is an important part of the Toyota work
culture.
10. For the success of JIT, the vendor must also switch to _____ practices.
IQUESTIONS I
19.1 What is JIT? How does it differ from traditional manufacturing?
19.2 What are the different types of waste and what steps would you take to eliminate
it?
19.3 What are the prerequisites for implementing JIT?
19.4 How would you reduce set up time?
19.5 Describe the Kanban method of control.
19.6 The JIT production system holds only bare minimum inventories. How does it
cope up with demand fluctuations?
19.7 What is Kaizen? What is its relevance to JIT?
19.8 Describe the five S's system for improvements in JIT.
19.9 Toyota's plants in Japan have been very successful in implementing JIT. However,
its plants located in Australia have not been able to implement JIT with the same
effectiveness. What could be the causes for this?
19.10 Explain the concept of bottom-round management.
Queuing Theory
The hardest thing about queueing theory is spelling 'queueing' ...
PROF GRIMMETT
LEARNING OBJECTIVES
• Understand economic effect of queues
• Appreciate the characteristics of a queue that affect costs and waiting times
• Solve problems involving single channel single server queues
• Understand the concept of utilisation factor
• Design queuing systems that are economically effective and viable
20.1 INTRODUCTION
In our daily lives, queues are a very familiar phenomenon. We wait for service in almost
every situation, be it getting our hair cut at the barber's saloon, or getting our cars serviced.
Waiting lines occur whenever an employee, part, machine or unit must wait for service
because the facility providing the service is busy, that is operating to full capacity, and
is unable to provide the desired service.
Why should we be interested in queues? Every time anyone or anything waits for
a service, the time spent in waiting results in costs-they may be direct or indirect.
Imagine a ship carrying a fifty thousand ton cargo waiting to discharge at a port.
Every day that the ship is kept idle results in the loss of the cost of carrying several
tons of cargo. It would be of interest to reduce these costs. One of the simplest methods
of reducing waiting times and the resultant waiting costs is to increase the rate at
which service is provided by increasing the number of service facilities. But provision
of service facilities entails costs. Is the benefit of reducing waiting costs going to
outweigh the cost of providing additional facilities or not? Queues are important to
452
Queuing Theory 453
production and operations management as we always strive for service improvement.
If we can reduce queuing wherever it occurs we can make systems more efficient and
save on costs.
The pioneering work in queuing theory was done by A.K. Erlang, a Danish engineer
associated with the telephone industry. Early in the twentieth century Erlang was doing
experiments involving the fluctuating demand for telephone facilities and its effects on
automatic dialling equipment. It was only at the end of World War II that his work was
extended to other more general problems.
A queuing system consists of a calling population, that is customers (people or
equipment) waiting for a service and a service facility that provides the service.
20.2 QUEUING AND COST BEHAVIOUR

The relationship between waiting costs, the cost of providing additional facilities and the
total costs is shown graphically in Figure 20.1.
(/)
Cost of facilities
iii
0
(.)
~--- Waiting costs
Increased service
Figure 20.1
The cost of waiting decreases as the number of service facilities increases but the
cost of providing the increased service facilities rises. The objective of studying queuing
systems is to minimise the costs as far as possible.
It may be noticed that the curve is similar to the inventory control model.
However, while the inventory control model is prescriptive, that is it provides us
with an optimal solution, queuing models are descriptive. The queuing models only
describe what would happen under certain conditions and do not give ready optimal
solutions.
20.3 DEFINITIONS FOR QUEUING SYSTEMS

We are mainly concerned with three parts of the queuing system: the calling population,
the queue and the service facility. The characteristics of each of these parts effect the
waiting time and hence the cost of queuing.
Characteristics of the calling population

Size of the calling population. The size of the calling population may be finite or infinite.
One may say that nothing is infinite, but practical examples of nearly infinite populations
could be vehicles arriving at a toll bridge on a national highway, or patients arriving at
the emergency ward of a hospital or people waiting to buy tickets at a cinema hall on
the opening day of a popular film. On the other hand, finite populations may be four
computers in a small office which need to be serviced by a mechanic periodically, or
three lathes in a machine shop or four trucks with a transport company. What then is
infinite or finite? We can say that if the probability of an arrival is greatly altered when
one member of the calling population is receiving service, the calling population is finite.
For instance, if a transport company has four trucks and one of them is already being
serviced, it is unlikely that another one will arrive for service at the same time.
Arrival characteristics of the calling population. Members of a calling population generally
arrive for service in a random fashion. They may also arrive in some organised pattern.
It is observed that random arrivals can best be described by a Poisson distribution. If the
distribution describing the time between arrivals is not Poisson, then we must determine
the probability distribution of arrivals.
Behaviour of the calling population. Members of a calling population may sometimes baulk
the queue, or avoid joining a queue if it is too long, or may renege it, that is leave a
queue after waiting for sometime in it. Queuing theory does not take such members into
consideration. The queuing models deal with patient callers who join the queue and wait
till service is provided.
Characteristics of the queue
Queues may be of restricted length or of unlimited length. The length of the queue may
be restricted because of availability of space or service capability. For example, a car
service station may not be able to serve more than forty cars a day and so when it is
accepting cars for service it may not accept more than forty cars a day. When the length
of the queue is unlimited, it is easier to deal with than a finite queue.
Characteristics of the service facility
Physical layout. The physical layout of a queuing system is described by the terms
channel and server. A single channel system has a single facility to provide a service
whereas a multi-channel system has more than one service facility providing the same
service. For instance, if a petrol pump has only one petrol bunk where you can get your
car filled, it is a single channel system. But if there are a number of petrol bunks, it is
a multi-channel system. The implications are obvious. If a system is multi-channel, it
affords the caller the flexibility to go to whichever petrol bunk is free. When we refer to
server, we are referring to the number of points or persons that provide service. Suppose
the petrol pump that we have been referring to provided oil and petrol for scooters
at the same bunk, it would be referred to as a single server system. However, if there
was a different point for getting oil and a different point for petrol, the system would
be referred to as multi-server. A different person would provide the service at each of
these points. A multi-server system implies different types of service being provided at
the same facility.
Queuing Theory 455
A schematic representation of different types of systems is given in Figure 20.2.
Service facility
type 1
Single channel, single server
Service Service
facility type facility type 2
Single channel, multi server
Service
facility type 1
Service
faci Iity type 1
Multi channel, single server
Service Service
facility type 1 facility type 2
Service Service
faci Iity type 1 facility type 2
Multi channel, multi server
Figure 20.2
The queue discipline. Here we are referring to the order in which service is provided to
the callers. The most common system used is First Come, First Served (FCFS). Typical
examples are customers waiting at a bank counter, cars waiting for petrol at a petrol
pump and so on. The queue discipline does not assign any priorities and serves the caller
who arrived first. As opposed to this, we could have a Priority (PRI) queue discipline. In
this case, some callers would receive priority over others and service would be provided
to them before others irrespective of their arrival times. Priority may be pre-emptive or
non pre-emptive. Pre-emptive priority discipline permits interruption of service to those
being served. For instance, in the emergency room of a hospital, if an accident injury
case with minor injuries is being dressed and suddenly a cardiac arrest patient arrives,
the doctor is likely to leave the dressing midway and turn to offer his services to the
patient with cardiac arrest. This would constitute pre-emptive priority. In the case of non
pre-emptive priority, the service will be completed for the caller already being served
without interruption and the priority caller will be served as soon as the service facility
is free. This has its own implications. If the number of priority callers are too many,
then the waiting time for both priority and non priority callers will increase. Some
queues follow the discipline of Last In First Out (LIFO). Examples of such queues can
be files in the in tray on your office desk, luggage loaded in an aircrafts luggage
comparbnent, or even people travelling in an elevator. Service may sometimes be provided
in random order (SIRO). Examples of such service could be the street corner ice candy
vendor. Children generally crowd around the vendor and extend their money to him.
He takes money from any child without following any specific order and hands over
an ice candy.
The service time. Service time or the time to provide service may be constant as in
computer executed instructions or may be randomly variable. Except for automated
systems the service time is most often randomly distributed and it is observed that the
service time generally follows an exponential probability distribution. It implies that the
probability of very long service times is rather small.
20.4 SINGLE CHANNEL, SINGLE SERVER QUEUING MODEL (M/M/ 1)

The simplest queuing system and the one that is encountered most often is a single
channel single server system. The arrival rate, that is number of arrivals per unit
time, follows a Poisson distribution and the service times follow an exponential
distribution. The calling population is large enough to be considered infinite and
the length of the queue is also unlimited or infinite. The queue discipline is First
Come, First Served (FCFS). Such queues are referred to as M/M/1 queues. The
description is an abbreviated form of Kendall-Lee's notation for queuing systems and
the first M implies that the arrivals follow a Poisson distribution; the second M implies
that the service times are exponentially distributed. The 1 in the notation implies single
channel single server queue system. The complete notation describing the model is
M/M/1: FCFS/00/00. The last three symbols indicate that the queue discipline is first
come first served, the length in service, that is callers waiting and those being provided
service is infinite and the calling population is infinite. The second part of the notation
is generally omitted.
An analogy to a queuing system can help us to understand it better. Imagine a car
on a road and a train moving on a track parallel to the road. If the car is at the end of
the train and both move at the same speed, the car can never overtake the train. The car
must move faster than the train to be able to overtake it.
Let us assume that the train is travelling at A kms per hour and the car is moving at
S kms per hour.
Then the relative speed with which the car will be able to overtake the train is
S - A kms per hour.
If the train is 1 km long, the time taken to overtake the train completely is
1
S-A
A queuing system may be viewed as analogous to the above situation. Callers are akin
to the train and the car is akin to the service being provided. From the previous analogy,
Queuing Theory 457
we can conclude that if the service rate is slower than the arrival rate the queue will
keep on building. For instance, if we consider a beauty parlour and customers arrive for
service at an average rate of 12 per hour, and the parlour takes 10 minutes per customer,
that is it can provide service to only 6 customers in an hour, the waiting line will never
finish.
Let us now consider the case when the arrival rate and service rate are the same. If
the arrival rate and the service rate were constant then no queue would form. But the
arrival rate and the service rate is seldom constant. As the customer arrivals follow a
Poisson distribution, it is not necessary that customers will arrive at exactly five-minute
intervals. Similarly it is not necessary that a customer will take no less or no more than
five minutes to receive the service. A late arrival will result in idle time for the service
which can never be recouped. Likewise a longer service time will result in the caller
having to wait and the delay in providing him service can never be recouped. This will
result in a perpetual queue.
If we now consider that the service is faster than the arrival rate of customers, will
we have no queue? Because of the variability of service time and arrival rate some callers
will still have to wait and a queue will form.
If A (also represented by A) is the average arrival rate and
S (also represented by µ) is the average service rate, then
Waiting time in system= W5 = 5 ~A or (µ=A) (time units)

The time in system includes waiting time and the time during which service is provided.
It is the total time spent in the system. The time spent waiting in the queue would be
the total time spent in the system less the time spent being serviced. Since S units per
time period is the service rate, the time to service one unit is 1/S.
1 1
Waiting time in queue= Wq = 5 _ A - 5
= S(S ~ A) or (µ(µ~A)) (time units)
Since the arrival rate is A units per time period, the numbers of units in the service
referred to as length in service, would be equal to the number of units that would arrive
during the time one unit spends in service.
Length in service =Ls= 5 ~A or µ~A (numbers)
Similarly numbers in queue, referred to as the length in queue would be equal to

the numbers that would arrive while a unit was waiting in the queue.
. A2 ( ).,2 )
Length m queue= Lq = S(S -A) or µ(µ_A) (numbers)
Expected length of non-empty queues, Lq = 5 :_ A or ( µ ~ A)

The previous mentioned relationships apply to a steady state. Initially, there

will be no queue but as the system operates, queues will start to form up. The
average waiting time will keep fluctuating till after some time of operation a steady
state is reached.
EXAMPLE 20.1 Mr. Banke Behari the Chief Secretary of Fantasia was a worried
man. The monsoons were just round the corner. The state was always affected by heavy
floods every year during the monsoon. While the floods were a curse, they were also a
blessing for the flood waters deposited rich alluvial soil in the fields resulting in a high
yield per acre. However, providing succour and relief to the thousands of affected was
a nighbnare. He recalled his experience of the previous year.
Mr. Banke Behari had requisitioned transport aircraft form the Fantasia Air Force to
lift essential foodgrains from the state capital and transport them to the flood affected
areas. The aircraft were then unloaded and the food supplies transported by road, boat
or helicopter as found suitable. Enthusiasm at the beginning of the operation was high
and a large number of sorties were planned taking into account the turn round time for
the aircraft. However, the actual tonnages delivered fell far short of the planned figures.
He was determined to do a better job this time.
Mr. Banke Behari called for the report on last year's operations. As he studied it,
the picture began to emerge. At the planning stage the Air Force had said that though
only five aircraft would be employed, they would be recycled resulting in a continuous
stream of aircraft landing at the forward base at an average interval of twenty minutes.
A team of fifteen men was employed to unload the aircraft. Past experience showed
that the team could unload the aircraft in fifteen minutes. This would give the crew a
five-minute break before the next aircraft arrived.
The report indicated that the initial sorties had gone off well as per plans but soon
aircrafts were waiting to be unloaded. By the end of the day the tonnage fell far short of
the target. Assuming that the unloading crew was getting tired and becoming inefficient,
the duty of the crew was reduced to four hours and a new crew replaced them. However,
there was no improvement in the rate of delivery.
Mr. Banke Behari wondered what had gone wrong. Why were aircraft waiting to be
unloaded when the rate at which they were landing was slower than the rate at which
they could be unloaded? He had to find a way out.
Solution: Aircraft arrive at an average interval of 20 minutes, that is 3 per hour. They
are unloaded in an average time of 15 minutes per aircraft, that is they can be serviced
at a rate of 4 per hour.
A= 3
5=4
= 4 _1 3 = 1 hour
Queuing Theory 459
A
Wq= S(S -A)
3
= 4(4 -3) = 45 minutes
A
Ls= S-A
= 4 ~ 3 = 3 aircrafts
A2
Lq = S(S -A)
3x3
= 4(4 -3) = 2.25 aircrafts
It can now be seen that each aircraft would spend 1 hour on the ground-45 minutes
while it waits to be unloaded and 15 minutes for unloading. No wonder the tonnages
fell short of the planned figures. During planning it was assumed that an aircraft would
spend no more than 15 minutes on the ground while it was being unloaded but as we
can now see aircraft are spending as much as four times that amount.
Utilisation factor: The ratio A/S often represented by pis called the utilisation factor.
It is also the probability that the system is busy. Let us examine the effect on the length
of the queue if we alter this ratio (Table 20.1).
Probability that the system is busy = 1= i = p
Probability that the system is idle = 1 - 5A =1 - ;_,

µ =l - p
Table 20.1 Effect on Queue Length if p is altered

A s A/S Lq=A 2l[S(S - A)]
5 10 0.5 0.50
6 10 0.6 0.90
7 10 0.7 1.63
8 10 0.8 3.20
9 10 0.9 8.10
9.5 10 0.95 18.05
9.8 10 0.98 48.02
As may be observed from Figure 20.3 there is a very sudden increase in the
length of the queue when the utilisation factor increases beyond 0.7. A practical approach
to solving queuing problems is to ensure that the utilisation factor is kept between 0.7
and 0.8.
60
50
Q)
::I
Q) 40
::I
O"
0 30
..r::
Cl
C:
Q) 20
...J
-
10
V
0
0 0.2 0.4 0.6 0.8
Utilisation factor
Figure 20 .3
Mr. Banke Behari is wondering what would happen if he employed two crews instead
of one for unloading. The service rate would now be doubled.
A= 3
5=8
1
Ws = 5-A
= 8 _1 3 = 12 minutes
.
A
Wq = S(S -A)
= 8(83_ 3) = 4.5 minutes

A
Ls = S - A
= 8 ~ 3 = 0.6 aircraft
A2
Lq = S(S - A)
= 8(3x3 .
8 _ 3) = 0.225 aircrafts
Actually the queuing system would now become multi-channel. There are elaborate
models dealing with multi-server and multi-channel systems. It is observed that if the
problem were to be solved as a multi-channel problem the waiting times would be even
less (Waiting time in queue for the aircraft would be 1.8 minutes). Since we are erring on
the positive side, the approximation of using double the service rates is not out of place.
Queuing Theory 461
As arrivals follow a Poisson distribution, the probability of n arrivals in time T is:
e-AT · (AT)11 e-ilT.().,T)11
p (11 customers during period n= n! or n!
where e = 2.7183
Since the service times are exponentially distributed, probability that no more than
T time period is needed to service a customer is:
P (no more than T time period needed to service a customer) -
_ 1 - e-ST or (1 - e-µT)
Probability that a customer spends more than t units of time in the system
Ws(t) = e-(t/Ws)
Probability that a customer spends more than t units of time in the queue
Wq(t) = 1 e-(t/Ws)
20.5 ECONOMIC ASPECTS OF QUEUING

Let us now study the economic aspects of queuing with the help of an example.
EXAMPLE 20.2 A computer maintenance contract is to be signed by your company

office. At an average three computers per month go off road due to various defects. The
cost of a computer being unavailable is fS,000 per month. Two companies have bid for
the contract. Alfa Computers have quoted at f3,000 per month, whereas Beta Bytes has
quoted at f5,000 per month for the contract. Enquiries reveal that Alfa Computers has
an average repair capability of 5 computers per month and Beta Computers can repair
six computers per month at an average. Who should be given the contract?
Solution: The company loses money on a computer when it is not available to the
company, that is it is either awaiting repairs or being repaired. Let us now compare the
two options as shown in Table 20.2.
Table 20.2
Alfa computers Beta bytes
Arrival rate of computers for repairs (A) 3 per month 3 per month
Service rate (S) 5 per month 6 per month
Numbers in system L5 = A(S - A) 3/(5 - 3) = 1.5 3/(6 - 3) = 1
Cost of off road computers 1.5 X 8,000 = 12,000 1 X 8,000 = 8,000
Cost of contract 3,000 5,000
Total cost 15,000 13,000
The contract should be given to Beta Bytes. Its faster repair capability will ensure
greater availability of computers in the office and hence the lesser cost.
20.6 SOLUTION THROUGH COMPUTER PACKAGE (WinQSB)

The WinQSB package has a module which can solve queuing problems. It can tackle not
only M/M/1 queues but can also deal with multi-channel queues. The package can also
deal with different distributions for arrival and service rates. If costing data is supplied
the package can also work out the economic modalities. Printouts for Mr. Banke Behari's
problem and the office problem of giving a maintenance contract for computers are given
in Table 20.3(a), (b), (c) and (d).
Table 20.3(a) Banke Behari's Case

Data Description ENTRY
Number of servers l
Service rate (per server per hour) 4
Customer arrival rate (per hour) 3
Queue capacity (maxim um waiting space) M
Customer population M
Busy server cost per hour
Idle server cost per hour
Customer waiting cost per hour
Customer being served cost per hour
Cost of customer being balked
Unit queue capacity cost
Table 20 .3(b) System Performance Summary for Banke Behari's Case

01-08-2006
Performance Measure Result
13:23:47
l System: M/M/1 From Formula
2 Customer arrival rate (lambda) per hour= 3.0000
3 Service rate per server (mu) per hour= 4.0000
4 Overall system effective anival rate per hour= 3.0000
5 Overall system effective service rate per hour= 3.0000
6 Overall system utilization = 75.0000 %
7 Average number of customers in the system (L) = 3.0000
8 Average number of customers in the queue (Lq) = 2.2500
9 Average number of customers in the queue for a busy system (Lb)= 3.0000
10 Average time customer spends in the system (Yv) = 1.0000 hours
11 Average time customer spends in the queue (yvq) = 0.7500 hours
12 Average time customer spends in the queue for a busy system (Wb) = 1.0000 hours
13 The probability that all servers are idle (Po) = 25.0000 %
14 The probability an arriving customer waits (Pw or Pb)= 75.0000 %
15 Average number of customers being bat ked pe r hour= 0
16 Total cost of busy server per hour= $0
17 Total cost of idl e server per hour= $0
18 Total cost of customer waiting per hour= $0
19 Total cost of customer being served per hour= $0
20 Total cost of customer being balked per hour= $0
21 Total queue space cost per hour = $0
22 Total system cost per hour= $0
Queuing Theory 463
Table 20 .3(c) System Performance Summary for Office Problem
01-08-2006
13:26:44
I System: M/M/1 From Formula
2 Customer arrival rate (lambda) per month = 3.0000
3 Service rate per server (mu) per month = 5.0000
4 Overall system effective arrival rate per month= 3.0000
5 Overall system effective service rate per month= 3.0000
9 Average number of customers in the queue for a busy system (Lb)= 1.5000
10 Average time customer spends in the system (W) = 0.5000 months
11 Average time customer spends in the queue (Wq) = 0.3000 months
12 Average time customer spends in the queue for a busy system (Wb) = 0.5000 months
13 The probability that all servers are idle (Po)= 40.0000 %
14 The probability an arriving customer waits (Pw or Pb)= 60.0000 %
15 Average number of customers being balked per month= 0
16 Total cost of busy server per month = $1800.0000
17 Total cost of i die server per month = $1200.0000
18 Total cost of customer waiting per month= $7200.0010
19 Total cost of customer being served per month = $4800.00 10
20 Total cost of customer being balked per month = $0
21 Total queue space cost per month= $0
22 Total system cost per month = $15000.0000
Table 20 .3(d) System Performance Summary for Office Problem

01-08-2006
13:28:23
1 System: M/M/1 From Formula
2 Customer arrival rate (lambda) per month = 3.0000
3 Service rate per server (mu) per month = 6.0000
4 Overall system effective arrival rate per month = 3.0000
5 Overall system effective service rate per month= 3.0000
9 Average number of customers in the queue for a busy system (Lb) = 1.0000
10 Average time customer spends in the system (W) = 0.3333 months
11 Average time customer spends in the queue (Wq) = 0.1667 months
12 Average time customer spends in the queue for a busy system (Wb) = 0.3333 months
13 The probability that all servers are idle (Po)= 50.0000 %
14 The probability an arrivin g customer waits (Pw or Pb)= 50.0000 %
15 Average number of customers being balked per month= 0
16 Total cost of busy server per month= $2500.0000
17 Total cost of idl e server per month= $2500.0000
18 Total cost of customer waiting per month = $4000.0000
19 Total cost of customer being served per month= $4000.0000
20 Total cost of customer being balked pe r month = $0
21 Total queue space cost per month= $0
22 Total system cost per month = $13000 .0000
EXAMPLE 20.3 People arrive at a cinema ticket booth in a Poisson distributed

arrival rate of 25 per hour. Service time is exponentially distributed with an average
time of 2 minutes. Calculate the mean number in the waiting line; the mean waiting
time, the mean numbers in the system, the mean time in the system and the utilisation
factor.
Solution:
Arrival rate A = 25 per hour
Service rate S = 30 per hour
A2
Length of queue Lq = S(S -A)
25 X 25
= 30(30 - 25) = 4.17 persons
A
Waiting time Wq= S(S -A)
25
= 30(30 - 25) = 10 minutes
A
Length in system Ls= (S-A)
25
= (30 - 25)
= 5 persons
1
Time in system Ws = (S-A)
1
= (30 - 25) = 12 minutes
A
Utilisation factor =s
= ~~ = 83.34%
EXAMPLE 20.4 A TV repairman finds that the time spent on his jobs has an exponential
distribution with mean 30 minutes. If he repairs sets on FCFS basis and if the arrival
of sets is with an average of 10 per 8 hours day, what is the repairman's expected idle
time each day? Also obtain the average number of sets in the system.
Solution:
Arrival rate A = 1 i per hour
Service rate S = ~~ = 2 per hour

Queuing Theory 465
Probability that the service is free= 1 - 1

10 6
= l - 16 = 16
Expected idle time per day is = 6 1: 8 = 3 hours
A
Length in system Ls = (S _ A)
10/8
= 2 _ (l0/8) = 1.67 sets
EXAMPLE 20.5 A company distributes its products by trucks loaded at its only loading
station. Both company's trucks and contractor's trucks are used for this purpose. It was
found that on average a truck arrived every 5 minutes and the average unloading time
was 3 minutes. 50% trucks belonged to the contractor. Find out:
(a) The probability that a truck has to wait.
(b) The waiting time of a truck that waits.
(c) The expected waiting time of a contractors trucks per day, assuming a 24-hour
shift.
Solution:
Arrival rate A = 12 trucks per hour
Service rate S = 20 trucks per hour
The probability that a truck has to wait is given by the probability that the service is busy.
Probability that service is busy = 1 -1

12
= 1- 20 = 0.4
A
Expected waiting time for a truck= S(S _ A)
= 20( 2~2_ 12) = } 0 hours or 4.5 minutes
The number of trucks arriving in a day (24 hours) is 24 x 12 = 288

Of this 50% belong to the contractor i.e. 144 trucks
Each truck waits for an average of 4.5 minutes.
144 X 4.5
Total waiting time for contractor's trucks = 60 = 10.8 hours
EXAMPLE 20.6 In a factory the average breakdown rate is 3 per hour. The idle time
cost is estimated at ~16 per hour. The factory works 8 hours a day.
The factory manager is considering two mechanics for repairing the machines. Mechanic
A takes on an average, 15 minutes in repairing a machine and demands wages of ts per
hour. Mechanic B takes 10 minutes only but demands tlO as wages per hour.
Assuming that the machine breakdown rate is Poisson distributed and the
repair times follow exponential distribution, which of the two mechanics should be
engaged?
Solution: The factory loses money on a machine when it is not available, that is it is
either awaiting repairs or being repaired. Let us now compare the two options as shown
in Table 20.4.
Table 20.4
Mechanic A Mechanic B
Arrival rate of machines for repairs (A) 3 per hour 3 per hour
Service rate (S) 4 per hour 6 per hour
Numbers in system Ls= Al(S - A) 3/(4 - 3) = 3 3/(6 - 3) = 1
Cost of off road machines ~ 3 X 16 = 48 1 X 16 = 16
Wages 8 10
Total cost 56 26
Mechanic B should be employed as at an average, it will cost only t26 per hour as
against t56 per hour for mechanic A.
EXAMPLE 20.7 In an engineering workshop, motors breakdown at an average of 5

per day, the number of breakdowns being Poisson distributed. The present unqualified
mechanic can repair motors at an average rate of 6 per day and is paid tlOO per day. A
qualified mechanic offers his services at t200 per day and is capable of repairing at an
average 8 motors per day. Whenever a motor is idle, there is downtime cost incurrence
at the rate of tlOO per day. Would it be worthwhile to employ the qualified mechanic
in lieu of the present mechanic? Justify on cost/benefit analysis.
Solution: The workshop loses money on a motor when it is not available, that is it is
either awaiting repairs or being repaired. Let us now compare the two options as given
in Table 20.5.
Table 20.5
Unqualified mechanic Qualified mechanic
Arrival rate of motors for repairs (A) 5 per day 5 per day
Service rate (S) 6 per day 8 per day
Numbers in system Ls = Al(S - A) 5/(6 - 5) = 5 5/(8 - 5) = 5/3
Downtime cost of motors ~ 5 X 100 = 500 (5/3) X 100 = 166.67
Wages 100 200
Total cost 600 366.67
Queuing Theory 467
The qualified mechanic should be employed as it would cost at an average t233.33
less per day.
EXAMPLE 20.8 In a bank with a single server, there are two chairs for waiting
customers. On an average one customer arrives every 10 minutes and each customer
takes 5 minutes for getting served. Making suitable assumptions, find
(a) The probability that an arrival will get a chair to sit down.
(b) The probability that an arrival will have to stand.
(c) Expected waiting time of a customer.
Solution: It is assumed that arrivals follow a Poisson distribution and service time is
exponentially distributed. The probability that an arrival will get a chair to sit on is the
sum of the probability that there is no customer, there is one customer being served
and none waiting or there is one customer being served and one waiting. Alternatively
the probability that he will get a chair to sit on is 1 - (probability that he will not get a
chair). He will not get a chair if he is the third customer.
Arrival rate = 6 customers per hour
Service rate = 12 customers per hour
Probability service is free = 0.5
Probability service is busy = 0.5
Probability of zero customers in service = 0.5
Probability of one customer in service = 0.5 x 0.5 = 0.25
Probability of two customers in service = 0.5 x 0.5 x 0.5 = 0.125
Probability of getting a chair = 0.5 + 0.25 + 0.125 = 0.875
Probability of not getting a chair = 1 - 0.875 = 0.125
A
Waiting time for customer Wq = S(S -A)
= 12(126 _ 6) = 121 .
hours or 5 minutes
EXAMPLE 20.9 The average rate of arrivals at a service store is 30 per hour. At
present there is one cashier who on an average attends to 45 customers per hour. The
store proprietor estimates that each extra minute of system process time per customer
means a loss of t0.50. An assistant can be provided to the cashier and in that case the
service unit can deal with 75 customers per hour. The wage rate of the assistant is t15
per hour. Is it worth employing the assistant?
Solution:
Arrival rate A = 30 per hour
Service rate S = 45 per hour without an assistant
.
Tune . service
spent in . b y a customer Ws = _l A
5
= 151 = 4 minutes
.
Service rate S = 75 per hour with an assistant

1
Time spent in service by a customer Ws = 5 _ A
= 415 = 1.33 minutes
Time saved per customer = 4 - ½= ¾minutes

Savings per customer = ¾x 0.50
Savings per hour= ¾x 0.50 x 30 = ~40
Cost of hiring an assistant = ~15 per hour
Net savings per hour = ~25
We should employ the assistant as it results in a net saving of ~25 per hour.
EXAMPLE 20.10 A small car repair shop can repair cars at the rate of 10 per day, the
repair time being exponentially distributed. Cars arrive at the shop following a Poisson
distribution at an average rate of 8 per day. The shop can accommodate only a maximum
of 3 cars in the system due to space shortage. Cars which arrive when the system is full
are not taken up for service and the potential loss is estimated at ~50 per car. The shop
owner has two alternatives to reduce the customer loss.
Alternative A. He can rent out an additional adjoining area at a monthly rental of ~300
which would enable increasing the capacity of the system to 4 cars.
Alternative B. He can appoint a trained mechanic who has to be paid an extra monthly
salary of ~350 and the service rate will increase to 12 cars per day.
Based on a cost benefit evaluation give your recommendations as to the best alternative.
Solution: In the present situation:
Arrival rate A = 8 per day
Service rate S = 10 per day
Probability that the service is busy is 0.8
Probability that the service is free is 0.2.
The probability that a car will be turned away is when there will be at least three
cars in the system.
Probability of at least 3 cars in the system
= 1 - (Po + P1 + P2 + P3)
= 1 - (0.2 + 0.8 X 0.2 + 0.8 X 0.8 X 0.2 + 0.8 X 0.8 X 0.8 X 0.2)
= 0.4096
Expected loss per day = 0.4096 x 8 x 50 = ~163.84
If space is hired, cars will be turned away when there are at least four cars in the
system.
Queuing Theory 469
Probability of at least 4 cars in the system
= 1 - (P 0 + P 1 + P 2 + P 3 + P 4)
= 1 - (0.2 + 0.8 X 0.2 + 0.8 X 0.8 X 0.2 + 0.8 X 0.8 X 0.8 X 0.2 + 0.8 X 0.8 X 0.8 X 0.8 X 0.2)
= 0.3276
Increase in profit is ~32.80 per day.
Cost of hiring space is ~10 per day.
Net gain ~22.80 per day.
If a trained mechanic is employed, service rate = 12 cars per day.
Probability that the system is busy is 0.67
Probability that the system is free is 0.33.
A car will be turned away when there are at least 3 cars in the system.
Probability that there are at least three cars in the system is
= 1 - (Po + P1 + P2 + P3)
= 1 - (0.33 + 0.67 X 0.33 + 0.67 X 0.67 X 0.33 + 0.67 X 0.67 X 0.67 X 0.33)
= 0.2015
Increase in profits is = 163.84 - 80.60 = ~83.24 per day
Cost of hiring trained mechanic is ~11.67 per day
Net gain ~71.57 per day.
We should hire a trained mechanic as it gives us the maximum gains.
20. 7 SUMMARY
Queues refer to persons, equipment machinery or anything that has to wait for a service.
Managers are concerned with queues as waiting involves costs. Waiting costs can be
reduced by increasing the service capability. However, increase in service capability also
involves costs. With an enhancement in service facility, the cost of waiting decreases but
the cost of providing the enhanced service increases. A balance between the two must
be struck.
Queuing models are descriptive in nature. They can merely describe what would
happen under given conditions and cannot prescribe an optimal solution. The waiting
time in queues depends on the size of the calling population, distribution of the inter
arrival times (usually distributed according to Poisson's distribution) and the attitude
of the caller; the physical layout of the service facility, the service time distribution
(normally exponential), the service discipline and the length of the permissible queue.
M/M/1 queues are encountered most frequently. Such queues have an infinite calling
population, an arrival rate which follows a Poisson distribution, a service rate which
follows an exponential distribution, single channel single server service facility following
a first come first served service discipline with an unlimited queue capacity.
The parameters of interest in such a queue are:
Waiting time in system= W 5 = 5 ~A or (µ ~;.,) (time units).
Waiting time in queue = Wq = S(S ~ A) or (µ(µ~A)) (time units).
Length in system = L 5 = 5 ~A or ( µ ~ ;., ) (numbers).
. A2 ;_,2
Length m queue = Lq = S(S _ A) or µ(µ _ A) (numbers).
where A or ;., is the arrival rate and S or µ is the service rate.

The ratio A/S often represented by p is called the utilisation factor. When the
utilisation factor exceeds 0.8, there is a very steep rise in the length of the queue.
A practical approach to solving queuing problems is to keep the utilisation factor equal
to 0.7.
Elaborate models exist for the solution of other types of queues but are beyond the
scope of this book.
ICONCEPT QUIZ I
State True or False
1. The cost of waiting decreases with increased service facilities and the cost of
providing service increases as the number of service facilities increase.
2. If the mean service rate is equal to the mean arrival rate there will be no queue.
3. The distribution describing the time between arrivals is an important arrival
characteristic of the calling population.
4. A queuing system aims to provide service at a faster rate.
5. The only way that callers are serviced in a queuing system is first come first served.
6. Queuing models are prescriptive in nature.
7. Queuing models consider the complete calling population including those members
who balk or renege the queue.
8. M/M/1 queues are single channel multi-server queues.
9. Utilisation factor is the ratio between the arrival time and the service time.
10. There is only one type of queuing model, that is M/M/1 queues.

1. Which of the following is not an assumption of the M/M/1 queuing model:
(a) The arrival rate follows a Poisson distribution.
(b) The calling population is finite.
Queuing Theory 471
(c) The service discipline is first come first served.
(d) The queue is a single server single channel system.
2. For an M/M/1 queuing model, which of the following are true:
(a) Ls is always greater than Lq.
(b) Wq is always greater than W8 •
(c) The arrival rate is greater than the service rate.
(d) The service time is uniformly distributed.
3. The costs involved in a queuing system include the following, except:
(a) The cost of waiting for service.
(b) The cost of providing the service.
(c) The loss of goodwill because customers balk the queue.
(d) The ordering costs.
4. Waiting time in system is:
(a) The time spent in waiting for the service.
(b) The time spent while service is being provided.
(c) The time between arrivals.
(d) The total time spent in the system, that is waiting time and service time.
5. The following are examples of 'Last in First out' service discipline, except:
(a) Baggage in the luggage comparbnent of an aircraft.
(b) Files in the office incoming mail tray.
(c) Patients in the emergency ward of a hospital.
(d) Persons in an elevator running between two floors.
6. Utilisation factor is:
(a) Arrival Rate divided by Service Rate.
(b) Service Rate divided by Arrival Rate.
(c) Length in system divided by length in queue.
(d) Waiting time in system divided by waiting time in queue.
7. In a single channel multi server queuing system:
(a) There is a single queue and a single operator providing one type of service.
(b) There are different points where the same type of service is provided.
(c) There are different points where different types of service are provided and
customer has to go through all these points.
(d) There are different queues for different services.
8. In a pre-emptive priority queue:
(a) The customer receiving service may have the service interrupted if the priority
caller has a higher priority than him.
(b) The service being provided to a customer will be completed and the priority
customer taken on next.
(c) The service for the priority customer will take lesser time.
(d) The service time for the priority customer will increase.
9. The waiting time in a queue is dependent on:
(a) The arrival rate. (b) The service rate.
(c) The physical layout of the queue. (d) All of the above.
10. All of the following simplify analysis of a queuing system except:
(a) Limited length of the queue.
(b) Infinite calling population.
(c) Assuming a first come first served queuing discipline.
(d) Poisson arrivals and exponential service times.
Fill in the blanks:
1. If service rate is equal to arrival rate, there will be a queue of _____ length.
2. M/M/1 queuing model assumes that arrivals follow ______ distribution.
3. M/M/1 queuing model assumes that service times are distributed.
4. M/M/1 queuing model assumes that the calling population is _ _ _ _ __
5. M/M/1 queuing model assumes that length of the queue is _ _ _ _ __
6. M/M/1 queuing model assumes that service discipline is _ _ _ _ __
7. M/M/1 queuing model assumes that the physical layout of the service is _ _ __
8. In a _ _ _ _ _ _ _ _ _ _ priority queue, service is interrupted to those being
served.
9. There is a sharp increase in the length of queue when the utilisation factor
increases beyond _ _ __
10. Queuing models are applicable only when the system reaches a _ _ _ _ __
IQUESTIONS I
20.1 Give the essential characteristics of the queuing process.
20.2 What do you understand by a queue? Give some important applications of queuing
theory.
20.3 What is service discipline? Describe some forms of common service disciplines
and illustrate with examples.
20.4 Explain the different types of physical layouts of a service system and their impact
on waiting times.
20.5 Describe and explain the economic implications of queues.
20.6 Customers arrive at a booking window, being manned by a single individual at a
rate of 25 per hour. Time required to serve a customer has exponential distribution
with a mean of 120 seconds. Find the waiting time of a customer in the queue.
Queuing Theory 473
20.7 A repair shop attended by a single mechanic has an average of four customers an
hour who bring small appliances for repairs. The mechanic inspects them for
defects and quite often can fix them right away or otherwise renders a diagnosis.
This takes him six minutes on the average. Arrivals are Poisson and service time
has the exponential distribution. You are required to:
(a) Find the proportion of time during which the shop is empty.
(b) Find the probability of finding at least one customer in the shop.
(c) What is the average number of customers in the system?
(d) Find the average time spent, including service.
20.8 Arrivals of machinists at a tool crib are considered to be Poisson distributed at an
average rate of six per hour. The service time at the tool crib is exponentially
distributed with an average of three minutes.
(a) What is the probability that a machinist arriving at the tool crib will have
to wait?
(b) What is the average number of machinists at the tool crib?
(c) The company will install a second tool crib when convinced that a machinist
would have to wait at least six minutes before being served. By how much
should the flow of machinists to the tool crib increase to justify the addition
of a second tool crib?
20.9 Customers arrive at a one window drive in bank according to a Poisson distribution
with mean 10 per hour. Service time per customer is exponential with mean 5
minutes. The space in front of the window, including that for the serviced car
can accommodate a maximum of three cars. Other cars can wait outside this
space.
(a) What is the probability that an arriving customer can drive directly to the
space in front of the window?
(b) What is the probability that an arriving customer will have to wait outside
the indicated space?
(c) How long is an arriving customer expected to wait before starting service?
20.10 A repairman is to be hired to repair machines which breakdown at an average rate
of 6 per hour. The breakdowns follow a Poisson distribution. The non productive
time of a machine is considered to cost ~20 per hour. Two repairmen X and Y
have been interviewed for the purpose. X charges ~10 per hour and he services
broken down machines at the rate of 8 per hour. Y demands ~14 per hour and
he services at an average rate of 12 machines per hour. Which repairman should
be hired?
20.11 An airline has one reservation clerk on duty at a time. He handles information about
flight schedules and makes reservations. All calls to the airline are answered by
an operator. If a caller is related to flight information or reservations, the call is
transferred to the reservation clerk. If the clerk is busy the caller is put on hold.
When the clerk becomes free, the operator transfers the call of the person who
has been waiting the longest to the clerk. Assume that arrivals follow a Poisson
distribution and service follows an exponential distribution. Calls arrive at a

rate of 10 per hour and the reservation clerk can service a call in four minutes
on the average.
(a) What is the average number of calls waiting to be connected to the reservation
clerk?
(b) What is the average time a caller must wait before reaching the reservation
clerk?
(c) What is the average time for a caller to complete the call (waiting time plus
service time)?
20.12 Weavers in a textile mill arrive at a deparbnental store room to obtain spare parts
needed for keeping the looms running. The store is manned by one attendant.
The average arrival rate of weavers per hour is 10 and the service rate is
12 per hour. Arrival rates follow Poisson distribution and service time follows
exponential distribution. Determine:
(a) Average length of waiting line.
(b) Average time a machine spends in the system.
(c) Percentage idle time of the deparbnental store room.
20.13 A warehouse has only one loading dock manned by a three person crew. Trucks
arrive at the loading dock at an average rate of four per hour and the arrival rate
is Poisson distributed. The loading of a truck takes ten minutes on an average and
can be assumed to be exponentially distributed. The operating cost of a truck is
~40 per hour and the members of the loading crew are paid ~12 each per hour.
Would you advise the truck owner to add another crew of three persons?
20.14 On an average, 96 patients per 24 hours day require the service of an emergency
clinic. Also, on an average, a patient requires 10 minutes of active attention.
Assume that the facility can handle only one emergency at a time. Suppose that
it costs the clinic ~100 per patient to treat to obtain treating time of 10 minutes
and that each minute of decrease in the average time would cost ~10 per patient
treated. How much would have to be budgeted by the clinic to decrease the
average size of the queue from 4/3 patients to 1/2 patients?
20.15 An office has one photocopying machine. Clerks are expected to make photocopies
of the documents they require on their own. Past records show that on an average
4 clerks arrive per hour at the machine. Arrivals follow a Poisson distribution.
The average time taken by a clerk to finish his photocopying requirements is
6 minutes. Service time follows an exponential distribution. The clerks time costs
~24 per hour. The company is considering the employment of a separate operator
for the photocopying machine. The operator will have to be paid ~18 per hour.
Should the company hire the operator?
20.16 At a doctor's clinic patients arrive at an average of 5 patients per hour. It has been
observed that while the time for each patient varies depending on whether he
is a first time patient or a routine regular visitor, the doctor takes an average of
8 minutes per patient. Arrivals follow a Poisson distribution while service time
follows an exponential distribution. Determine:
Queuing Theory 475
(a) The percent of times when a patient can walk right into the doctor's chamber
without having to wait.
(b) The average number of patients in the doctor's clinic.
(c) The average number of patients waiting for their turn; and
(d) The average time that a patient spends in the clinic.
20.17 The mean rate of arrivals of planes at an airport during the peak period is 20 per
hour but the actual number of arrivals in any hour follow a Poisson distribution.
The airport can land 60 planes per hour, on an average, in good weather and
30 planes an hour in bad weather, but the actual number landed in any hour
follows an exponential distribution with these respective averages. When there
is a congestion, planes are forced to fly over the field in a stack awaiting the
landing of other planes that have arrived earlier.
(a) How many planes should be flying over the field in the stack on an average
in good weather and in bad weather?
(b) How long would a plane be in the stack and the process of landing in good
and in bad weather?
20.18 A medical store has one cashier who handles all the payments. The cashier can
serve on average 20 persons per hour, who arrive at his counter randomly at the
average rate of 18 per hour. The management noticed that at times the cashier was
idle while at others long queues built up. Customers have been complaining of
the delays involved in billing. The management proposes to provide an assistant
to the cashier provided the average waiting time for a customer is more than
10 minutes. Assume that the arrivals follow a Poisson distribution and service
times are exponentially distributed. Determine the time for which the cashier is
idle. Also determine whether the management will employ the cashier's assistant
or not.
Project Planning and Control I-
Network Models
If your project doesn 't work, look for the part that you didn't think was important
ARTHUR BLOCH
LEARNING OBJECTIVES
• Draw a network
• Calculate floats
• Identify critical activities and critical path
• Perform cost analysis and cost crashing
• Understand resource levelling
• Use CPM and PERT for controlling projects
• Calculate probability of completing project in certain time
21.1 INTRODUCTION
A project can be defined as a unique activity which has a definite beginning and a definite
end and consumes time and resources. It generally involves large capital investments
and has long-term implications. For example, setting up a new manufacturing facility
is a project; adding capacity to an existing facility could also be a project. What makes
projects different than other activities? While other activities may be ongoing, a project
has a definite end after which the organisation set up for it may be dissolved as it is
no longer required. In this chapter we shall not discuss the nuances of a project team
and project organisation but shall concentrate on the use of networks like Critical Path
476
Project Planning and Control I-Network Models 477
Method (CPM) and Programme Evaluation and Review Technique (PERT) as means of
project planning and control.
21.2 NETWORK ANALYSIS

Network analysis has been successfully used to plan, monitor and control projects
involving thousands of activities. Control involves assessing the present state of things,
measuring deviations from the desired state and then taking corrective measures to reduce
these deviations. Conventional control measures like budgeting and analysis of budget
variations are backward looking controls. They inform us after things have gone wrong.
Networks, on the other hand, provide forward looking controls which help us to plan
and modify our plans to prevent things from going wrong. Critical Path Method (CPM)
and Programme Evaluation and Review Technique (PERT) are two popular methods
based on network analysis for controlling projects.
CPM and PERT originated at about the same time. PERT was developed to control
the Polaris missile project in 1957 by the U.S. Navy Special Projects Office, Lockheed
Aircraft Corporation and the management consulting firm of Booz, Allen and Hamilton.
The Polaris missile programme was a massive project. It involved 250 major contractors
and over 9000 subcontractors. Hundreds of thousands of individual tasks had to be
coordinated and monitored for its success, and the use of PERT ensured that the project
was completed two years ahead of its original scheduled date. Since the activities involved
in development of the Polaris missile had not been performed earlier, there was an
element of uncertainty in the time that each activity would take. PERT addresses this
uncertainty and gives estimates of the probability of meeting specified schedule dates at
various stages of the project.
CPM grew out of a joint effort initiated in 1957 by Dupont and Remington Rand
Univac. Their objective was to determine how best to reduce the time required to perform
plant overhaul, maintenance and construction work. They were interested in determining
optimum trade-off time (project duration) and total project cost. The activities involved
in these types of projects were subject to very small amounts of variations. CPM treats
the activity performance time in a deterministic manner and its main feature is to arrive
at a project schedule which minimises the total project costs.
The pioneering PERT and CPM groups were unaware of each other's existence until
early 1959 when papers were published on the two techniques. Essentially the basis of
PERT and CPM was network diagrams and network analysis.
A network is a schematic representation of work to be done (activities) drawn in
such a way that relationships between work items are logically defined. The network
shows a complete picture of the relationship which exists between different activities,
as all the operations necessary to complete the project are represented on the
network.
21.3 CRITICAL PATH METHOD (CPM)

Let us study CPM with the help of an example.
EXAMPLE 21.1 Rasoi Appliances is a white goods manufacturer. It manufactures

kitchen appliances like food processors, food warmers, ovens, toasters, grills, refrigerators
and other house hold goods. It has recently designed and tested a new microwave oven
designed specially for Indian conditions in which Indian dishes can be prepared. The
company feels that the product has distinct advantages over the conventional microwave
ovens as it preserves the essence of spices so typical of the Indian cooking. Mr. Kapoor
the president of the company is very keen that the product is launched after a proper
promotion scheme, as it will give him a competitive edge and will help him to capture
the major market share in the microwave oven field. He has held various meetings with
the marketing manager and the advertising agency head. The company plans an extensive
promotion campaign involving specially prepared promotion literature, TV and radio
advertisements, training of field force, special demonstrations at selected stores, various
ladies clubs and social organisation, and proper point of purchase displays throughout
the country. Mr. Kapoor realises that all activities must be properly coordinated to
ensure a simultaneous nation wide launch of the product. He wants to finalise the date
of launch and must decide when each activity must start and finish. He would like to
monitor critical activities himself. Should he have contingency plans to cater for delays
in the execution of the activities affecting the launch of the product? Will he be able to
shift resources from one activity to another to speed up those that may have got delayed?
How should he plan his finances? Mr. Kapoor is besieged by a host of such questions. Are
there methods available to help him plan, monitor and control the launch of this product?
Solution:
Let us consider Mr. Kapoor's problem. The first step is to list out all the activities involved
in the promotional campaign for the new microwave. Mr. Kapoor's marketing manager
came up with a list as follows:
1. Develop the training plan (the design of the training programme that the store
representatives will be put through before the final in-store introduction of the
product).
2. Develop promotion and training materials plan (a detailed study of the material
that will be required for training store representatives).
3. Selection of store representatives who will undergo training.
4. Conduct the training programme.
5. Develop the advertising plan (a detailed plan of projected radio, TV and print
media advertising).
6. Develop the advertising copy that will be required.
7. Schedule the radio, TV and print advertisements that will appear prior to the
launch of the product.
8. Prepare promotion material which will be used during the in-store introduction.
9. Prepare material which will be used in the training of store representatives.
10. Conduct the pre advertising campaign.
11. Final in-store introduction of the product.
The next step is to rearrange the activities in their logical sequence and identify
immediate predecessors (activities immediately preceding a particular activity) for each
activity. This will reflect the interdependency of each activity. For example, in a construction
project, the construction of walls can only commence once the foundations are ready;
the roof can only be cast once the walls are constructed, but there is no restriction on
the preparation of door and window frames. These can start independently but must be
completed prior to their being fixed. The duration required for each activity has also to
be determined. The result of this exercise for Mr. Kapoor's product launch are given in
Table 21.1.
Table21.1
Activity Activity description Predecessor Time
symbol (days)
A Develop advertising plan 6
B Develop promotion and training materials plan 7
C Develop training plan 8
D Schedule radio,TV and print media advertising A 20
E Develop advertising copy A 18
F Prepare promotional material for in-store introduction B 9
G Prepare material for training of store representatives B 8
H Conduct pre-introduction advertising campaign D, E 7
Select store representatives for training C 2
J Conduct training G, I 14
K Final in-store launch of product F, H and J 10
The next step is to draw a network diagram representing the relationship of the
activities shown in Table 21.1. It would be useful at this juncture to introduce some
definitions of terms that are used in network analysis.
21.4 DEFINITIONS
Activity: The work content required to be achieved to accomplish an event. It is a clearly
defined project element, a job or a task which requires the consumption of resources
including time. The word activity has been adopted in preference to work content as it
also includes non-work actions like waiting (for instance, curing of a roof slab before
shuttering can be removed), whereas work signifies action or motion in time. It is denoted
by an arrow.
Event: The nodes or events represent points in time when certain activities have been
started or completed. In other words, an event describes the start or completion of an
activity. It is denoted by a numbered circle.
Path: A path is an unbroken chain of activities from the initiating node to some other
node, generally to the last node indicating the end or completion of the project.
Dummy activity: A dummy activity is that activity which has a logical function only
and consumes no time or resources. It is denoted by a dotted arrow. There are two types
of dummies.
Identity dummy. It helps to keep the designation of each activity unique or different
from another.
Dependency dummy. It helps to keep the logic correct.
21.5 RULES AND CONVENTIONS

While drawing networks certain rules and conventions are followed. These are:
1. Activity arrows should be drawn from left to right indicating progressive approach
towards the ultimate objective or the final event.
2. Crossing of activity arrows should be avoided. Arrows should be drawn as
straight or bent lines but not curved lines.
3. Avoid use of unnecessary dummies.
4. Activities are set in the order of their execution. Events are set in the order of
their occurrence.
5. Head event number should be greater than tail event number. No event is
numbered until the tail event of each activity arrow ending into that event has
been numbered.
6. There should be no danglers or loops. Danglers are activities which lead no
where. All activities must be connected to events and the finishing activities
must be connected to the finish event of the project.
Let us now see the application of these rules by drawing the network for Mr. Kapoor.
21.6 DRAWING A NETWORK

Start with the event start of project and draw the activities as shown in Figure 21.1, that
can be started simultaneously, and have no predecessors. These are activities A, Band C.
The network diagram is not a scaled diagram. It is merely showing logical relationship
of activities.
f - - - - - - -B 0
- - +I
Figure 21.1
Next consider the activities which can follow only A or B or C since these have
been completed. From Table 21.1, we know that D and E follow A, F and G
follow B and I follows C. Let us add these activities to the network as drawn in
Figure 21.2.
~A ~ F
B G
Figure 21.2
Activity H is dependent on the completion of Activities D and E. Activity J is dependent

on completion of Activities G and I. Let us add these activities to the network as shown
in Figure 21.3.
D
A L
F
B G 0
C
Figure 21.3
We notice that a dummy activity L has been drawn connecting the finish of activity E
to the finish of activity D. This is an identity dummy. The logic would still be maintained
if the finish point of D and E was the same, but reference to these activities through the
node numbers would not be possible as both would have the same node/event numbers.
In order to avoid this confusion of identity, a dummy activity has been added. There is
no need of a dummy between G and I as the activities can be uniquely identified by the
node numbers. This will become evident when we number the nodes/ events. J can start
only when G and I are completed and H can start only when D and E are completed.
The logic is shown on the network. Now let us add activity K which can start only when
activities H, F and J are completed as shown in Figure 21.4.
D H
-o··
,-f
A
1---E L
F
B G
C j
Figure 21.4
Now that all activities have been represented on the network, we must number the
nodes. A simple way of ensuring that all rules are followed is to start from the left and
number the nodes as we move to the right of the network in the order of their appearance.
If two or more nodes are on the same line, number from top to bottom. This simple
procedure will ensure that, the number of the head event is always greater than the
number of the tail event and that tails of all events joining at a common head event are
numbered before the head event is numbered. Let us number the nodes in accordance
with the procedure just described as shown in Figure 21.5.
D H
7
~ 7
A
6
F K
B G
8
9 10 0
7
C J
4 6
8 2 14
Figure 21.5
It may now be appreciated that had the dummy L not been put, then node 5 would
have been eliminated and activity E also would have ended at node 7. In that case, a
reference to activity between nodes 2-7 would refer to both D and E causing problems of
unique reference. We have also added the time required for completion of each activity
below the activity symbol.
21.7 CALCULATING EARLIEST START TIME

How much time will this project take? The next step is to calculate the time that the
project will take. For this, we will have to determine the critical path of the network. Since
the activities described by all the paths must be done before the project is completed, we
must find that path that requires the most work, the longest path through the network;
this is called the critical path. It is tedious to list all paths through a network and then
pick out the longest path, especially when the network is large and complex. A more
organised method exists. This is done by first calculating Earliest Start Time (EST). We
start at Node 1 and assume that it starts at time zero. We then add the time taken to
complete activities and calculate the earliest time at which subsequent activity can start.
Time at Event 1 which marks the start of the project is zero. Node 2 is the starting event
of activities D and E, and the earliest time at which these activities can start is O + 6 = 6
(Start time + Activity duration of A). The EST is written next to the event it pertains to
and is enclosed in a box as shown in Figure 21.6. The earliest finish time of an activity,
can be calculated from the relationship:
Earliest finish time = Earliest start time + Activity duration (time taken for activity)
~
D H
7
7
A
6 §]
F
B G 9
7 8
~
C J
4 6
8 2 14
Figure 21 .6 Earliest Start Times.
At Node 3, EST = EST at Node 1 + Activity duration of B = 0 + 7 = 7

At Node 4, EST = EST at Node 1 + Activity duration of C = 0 + 8 = 8
At Node 5, EST = EST at Node 2 + Activity duration of E = 6 + 18 = 24
Node 6 is the starting event for Activity J. Activity J can start only when
Activities I and G are completed. Activity I can be completed earliest by 8 + 2 = 10,
as it can start earliest at the end of 8th day. Similarly Activity G can end earliest
on the 15th day as it can start earliest at the end of day 7 and takes 8 days. Hence
the earliest that J can start is the end of 15th day. Since no activity can begin until
all its predecessor activities are complete, the earliest start time for an activity leaving
any node is equal to the largest earliest finish time of all activities entering the same
node.
At Node 6 we have (from 4 to 6) 8 + 2 = 10, and (from 3 to 6) 7 + 8 = 15. Take the
larger of the values on the forward pass as the subsequent activity can start only when
both G and I are completed.
Activity L is a dummy activity and takes zero time.
At Node 7, EST is= EST at node 2 + Activity duration of D = 6 + 20 = 26, and (from
Node 5 to Node 7) 24 + 0 = 24. Earliest H can start is 26.
At Node 8, we get
From 7 to 8, 26 + 7 = 33
From 3 to 8, 7 + 9 = 16
From 6 to 8, 15 + 14 = 29. Earliest K can start is 33.
At Node 9, we get 33 + 10 = 43.
The earliest that Node (event) 9 can occur is at the end of 43 days. Since Node (event)
9 marks the end of the project, the least time required to complete the project is 43 days.
21.8 CALCULATING LATEST FINISH TIME (LFT)

The second step in finding the critical path is to compute latest finish time for each
activity. This is done by using a backward pass. We start at the finish node, i.e. Node
9 and put the latest finish time for this event as 43. The latest finish times are denoted
by figures in a triangle as shown in Fig. 21.7. The latest finish time is the latest time at
which an activity can be completed without extending the completion time of the project.
The latest start time is the latest time by which an activity must start without extending
the duration of the project. The latest start time can be calculated by:
Latest start time = Latest finish time - Activity duration.
Latest finish time for an activity entering any node is equal to the smallest latest start
time for all activities leaving the same node.
D
~A 7
H
A
&~ E
20 L__/ 7
6
2
18 0eJA 26
K
@]
B G
F
9 10 0
7 8
~ ~
~ C
0
4 6
J
8 2 14
A M
Figure 21 .7 Earliest Start Times and Latest Finish Times.
At Node 8, LFT = LFT at Node 9 - Activity duration of K

= 43-10=33
At Node 7, LFT = LFT at Node 8 - Activity duration of H
= 33 - 7 = 26
At Node 6, LFT = LFT at Node 8 - Activity duration of J
= 33 - 14 = 29
At Node 5, LFT = LFT at Node 7 (duration of Activity L = 0 as it is a dummy)
= 26
At Node 4, LFT = LFT at Node 6 - Activity duration of I
= 19 - 2 = 17
At Node 3, LFT = LFT at Node 6 - Activity duration of G or
LFT at Node 8 - Activity duration of F
= 19 - 8 = 11 or 33 - 9 = 24
Take the smallest value, because if Event 3 occurs at 24 then the project will get
delayed.
At Node 3, LFT = 11
Similarly at Node 2 we have LFT at Node 5 - Activity duration of E or LFT at
Node 7 - Activity duration of D. Take the smallest value.
At Node 2, LFT = 6
At Node 1, LFT = 0
Examine the activities or nodes where the earliest start time and the latest finish time
is the same. These nodes are: 1, 2, 7, 8 and 9. The critical activities are on this path-A,
D, H and K. The critical path is written as A-D-H-K or 1-2-7-8-9.
21.9 FLOATS (SLACKS), CRITICAL ACTIVITIES AND CRITICAL PATH

The spare time in an activity is called float. It is used to economise on resources without
affecting the overall duration of the project. Floats are of different types.
Total float: It is the spare time available on any given activity if the tail event occurred
at its earliest time and the head event at its latest time.
Total float = Time latest at head - Time earliest at tail - Activity duration.
Total float = 30 - 4- 3 = 23
----....
-- ~
~
3 ---/~
Figure 21 .8 Schematic Representation of Total Float.
Free float: It is the spare time available on an activity if both the tail and the head
events occurred at their earliest time. If this spare time is used up during the execution
of this activity, it will have no effect on subsequent activities. It can be calculated thus:
Free float = Time earliest head - Time earliest tail - Activity duration
Free float = 26 - 4- 3 = 19
Figure 21.9 Schematic Representation of Free Float.

Interference float: Interference float is equal to total float less free float. As the name
suggests, if this float is used up in an activity, it will interfere with the availability of
floats available for subsequent activities.
Interference float = Total float - Free float
= 23 - 19 =4
Independent float: This is the spare time available in an activity which is neither
affected by the use of float by preceding activities nor does it affect the float available
in subsequent activities. It can be calculated as:
Independent float = Time earliest head - Time latest tail - Duration.
Independent float = 26 - 8 - 3 = 15
_.... .... --- 3
Figure 21.1 O Schematic Representation of Independent Float.
Let us calculate floats for Mr. Kapoor's problem and see their implications. The
network is reproduced in Figure 21.11 for the ease of reference.
D
~M 7
H
20 7
L /
A
6
E
18 0'§JMF 26
B G 9
g 7 8
£ ~
C 0 4
J
8 2 14
£ £
Figure 21.11
Let us examine the entries in Table 21.2. Activities A, D, H and K have no float
available. These are called critical activities and the critical path is the path joining these
activities. As these activities have no slack time available, management must monitor them
carefully and ensure that these are completed in time. Any delay in their completion will
affect the over all duration of the project.
Table 21.2
Activity Total float Free float Interference float Independent float

(TL head - TE tail (TE head - TE tail (Total float (TE head - TL tail
- Duration) - Duration) - Free float) - Duration)
A 6-0-6=0
B 11-0-7=4 7-0-7=0 4-0=4 7-0-7=0
C 17 - 0 - 8 = 9 8-0-8=0 9-0=9 8-0-8=0
D 26 - 6 - 20 = 0
E 26 - 6 - 18 = 2 24 - 6 - 18 = 0 2-0=2 24 - 6 - 18 = 0
F 33 - 7 - 9 = 17 33 - 7 - 9 = 17 17 - 17 = 0 33-11-9=13
G 19-7-8=4 15 - 7 - 8 = 0 4-0=4 15 - 11 - 8 (0)
H 33 - 26 - 7 = 0
19-8-2=9 15 - 8 - 2 = 5 9-5=4 15 - 17 - 2 (0)
J 33 - 15 - 14 = 4 33 - 15 - 14 = 4 4-4=0 33-19-14=0
K 43 - 33 - 10 = 0
Activity B has a total float of 4 days. It can finish earliest on day 7, but must
not finish later than day 11. In case resources are at a premium, management can
delay this activity by a total of 4 days. However it must be noted that Activity B has
no free float. The float of 4 days is interference float. This implies that if any part of
this float is used in Activity B it will affect the float available for remaining activities.
For instance, if the complete float of 4 days is used up in Activity B then its earliest
finish time will become 11 instead of 7. Consequently the total float in Activity G will
become = 19 - 11 - 8 = 0. The float available for Activity G presently is 4 days (from
the previous table) and this is an interference float. Use of interference float affects the
float available for subsequent activities. The floats in Activity C are similar to the floats
in Activity B and G.
Consider Activity F. It has a total float of 17 days. This is also the free float, which
implies that if Activity F starts at its earliest time of 8 days and the entire 17 days of
float are used up, the subsequent activity K will not be affected. However, it has an
independent float of only 13 days. If we trace the path B-F and use up the 4 days of
float available in Activity B, the earliest start time of Activity F will become 11. It will
then have a total float of 33 - 11 - 9 = 13 days. As we can see, interference float affects
the float available in subsequent activities on the path, but the independent float is
neither affected by the use of float in earlier activities nor does it affect the float of the
subsequent activities.
Negative floats are meaningless as we cannot have negative time, and hence are
ignored. (See independent float values for activities G and I in Table 21.2).
To summarise, total float is the total slack available in an activity; free float is the
spare time which will get affected by use of floats in earlier activities on the path but
its use will not affect subsequent activities; interference float interferes with the float of
subsequent activities on the path if it is used; and independent float is neither affected
by the use of floats in preceding activities and nor does it affect the float available for
subsequent activities if used.
Floats help in the shifting and planning of use of resources. For instance,
consider a network in which two activities A and B can start simultaneously and
each requires the services of a bulldozer for the first four days. If Activity B has a
float of four days available and there is only one bulldozer available, we can avoid
hiring another one by starting the work on Activity A first with the bulldozer and
start work on Activity B after four days with the same bulldozer. This may or may
not affect floats in other activities depending on the type of float available in B that
we use up.
Activities with no floats in them are critical activities and the path joining such
activities is the critical path. Top management can now concentrate on the critical activities
which have no leeway for delays.
21.10 ACTIVITY ON NODE (AON) NETWORK

As most computer packages draw activity on node networks, it is important for us to
understand how to draw an AON network and the method of doing the calculations of
EST and LFT for the same. The methodology for calculations remains the same. Different
packages represent the network differently. However, for ease of understanding we shall
use a standard format while drawing the network. We shall use the same data as for the
network drawn in Section 21.6 (Table 21.1)
Some of the rules used in the activity on arrow network get modified. In
an activity on node network, the nodes represent the activities and the arrows
merely show their logical relationship. Nodes representing activities which start
the project may be connected to a milestone 'start' if desired. Dummy activities are
not used. Arrows may cross each other. For our purpose the node shall be drawn as
follows:
Earliest Identity Earliest

start time finish time
Total Description
float
Latest Duration Latest
start time finish time
Let us draw the network. Activities A, B and C start the project.

Activities D and E follow A; F and G follow B; and I follows C. Let us add these to the
network.
Al DI
-~
6 I 20 1
E I
~
1s I
Bl F I
-~
7 I 9 I
GI
~
s I
I I:: H I:: I
Activity H is dependent on completion of D and E; and J is dependent on completion
of G and I. Let us add these to the network.
Al
_,. D I
6 I 20 I
E I H I
~ ~__.
18 I 7 I
B I F I
----+
7 I 9 I
G I J I
---+ ~__.
8 I 14 I
c l I I
_____. -
8 I 2 I
Activity K is dependent on completion of H, F and J.
Al D I
>-
----+
6 I 20 I
E I HI Kl
---+ -__. ~~
18 I 7 I 10 I
B I F I
----+
7 I 9 I
G I J I
~ >- __. >--
8 I 14 I
c l I I
_____. -
8 I 2 I
The complete network is as shown above. Now let us compute the earliest start
times by a forward pass. The earliest finish time is obtained by adding the activity
duration to the earliest start time (EFT = EST + Duration). The earliest finish time
of the preceding activity is the earliest start time of the succeeding activity except
when an activity is dependent on the completion of two or more activities (also
called merge activity as two or more activities merge into it). In such a case, its
earliest start time is the largest of the earliest finish times of all the immediate preceding
activities.
0 A 6 6 D 26
I I
~
~
-
6 I 20
I
6 E 24 26 H 33 33 K 43
I I I
~ -4 ---.
18 I 7
I 10 I
0 B
I 7 7 F
I 16
~
7 I 9
I
7 G
I 15 15 J I 29
~
_,. -
8 I 14 I
0 C 8 8 I 10
I I
~
-
s I 2 I
Now let us compute the latest finish times by a backward pass. The latest start time
is obtained by subtracting the activity duration from the latest finish time (LST = LFT
- Duration). The latest start time of the following activity is the latest finish time of the
preceding activity, except when an activity is followed by two or more activities (burst
activity). In such a case its latest finish time is the smallest of the latest start times of its
immediate following activities.
0 A I 6 6 D
I 26
~
0 6 I 6 6 20
I 26
6 E
I 24 26 H
I 33 33 K
I 43
_. c-4 ,_,..
8 18 I 26 26 7 I 33 33 10 I 43
0 B 7 7 F 16
I I
4 7 I u 24 9 I 33
7 G
I 15 15 J
I 29
_. ,_,. c-
11 8 I 19 19 14 I 33
0 8 8 I 10
C
I I
~
9 s I n 17 2 I 19
Now let us compute the total float.

The total float is the difference between the latest start time and the earliest start
time or the latest finish time and the earliest finish time.
Total float= LFT - EFT= LST - EST
Free float of an activity = EST of following activity - EFT of the activity
Interference float = Total float - free float
Independent float= EST of next activity - LFT of previous activity - duration
Calculate floats for activity F
Total float = 33 - 16 = 24 - 7 = 17 days
Free float = 33 - 16 = 17 days
Interference float = 17 - 17 = 0 days
Independent float= 33 - 11 - 9 = 13 days
0 A
I 6 6 D
I 26 -
0 .
~
0
0 6 1 6 6 20 I 26
6 E 24 26 33 33 K 43
I H
I I
_____. 2 ~-+ 0 -r+ 0
8 18
I 26 26 7 I 33 33 10 I 43
0 B
I 7 7 F
I 16
4 17
4 7 I 11 24 9
I 33
7 15 15 29
G
I J
I
_____. 4
,_,. 4 -
11 8 I 19 19 14 I 33
0 C 8 8 I 10
I I
9 . 9 ~
9 s I 17 17 2 I 19
As can be seen activities A, D, H and K have zero float and are critical. The critical
path is A - D - H - K, and the project will take 43 days. The critical activities must be
carefully monitored if the project is to be completed in 43 days.
The critical activities, the critical path and floats or slacks have the same implications
as discussed earlier in Section 6.8. Floats play a major role in allocation of scarce resources.
21.11 CRASHING A PROJECT

Some activities in a project can be completed in shorter time by employing extra resources.
However, the duration of all activities cannot be reduced by increasing resources because
of their nature or because of the restrictions on employment due to space constraints
and so on. If an activity can be completed earlier, extra cost on extra resources will have
to be incurred, but if this reduces the overall duration of the project this will result in
reduction of the overhead costs. Completing an activity in a shorter time than normal is
referred to as activity crashing and the additional cost is called crash cost. Let us study
the aspects of cost crashing with the help of an example.
EXAMPLE 21.2 Consider a project with the following activities. The normal duration
and cost, crash duration and cost and the precedence of activities are given in Table 21.3(a):
Table 21.3(a)
Activity Dependency Normal time Crash time Normal cost Crash cost
(increase per day)
A Start 4 4 4,000
B Start 8 6 8,000 1,500
C F, D, Finish 3 3 600
D B 6 5 900 150
E Start 7 5 350 100
F A 15 12 9,000 900
G B 12 10 1,200 200
H G, Finish 10 8 1,000 150
J L, Finish 5 4 1,000 300
K E 9 7 900 150
L G&K 11 8 2,200 350
Fixed overhead costs per day ~500.00.

Let us first draw the network. Activities A, Band E can start simultaneously
[Figure 21.12(a)].
A A
_F 0
Do
~B1
E
0 B
E
cCo K
(a) (b)
~
A C
3
~M ~
~
H
6
10
E
0 K ,·c:00 I L • §] J
8 0 9
• 7
11
8
5
£ M
(c)
8
Figure 21 .12 (a) , (b) and (c).
F follows A. D and G follow Band K follows E [Figure 21.12(b)].
C follows F and D and finishes the project. H follows G and finishes the project. L
is dependent on K and G and is followed by J which finishes the project. I is a dummy
activity and reflects the logical relationship of L being dependent on K and G.
The complete network is shown in Figure 21.12(c). The earliest start times and the
latest finish times are also shown. Activities B, G, I, L and J are critical activities and the
critical path is B-G-1-L-J.
The total cost of the project is the cost of all activities and overhead costs for a
period of 36 days, that is ~47,150 (~29,150 as direct cost of activities and ~18,000 as cost
of overheads).
In order to reduce the overall time of the project, we should first of all attempt to
crash critical activities. The choice of the activity to crash first is determined by the cost
per day of crashing, the activity that is cheapest to crash is considered first. Table 21.3(b)
gives the duration and the cost of crashing per day for the critical activities.
Table 21.3(b)
Activity Crash by days Cost of crashing per day
B 2 1,500
G 2 200
L 3 350
J 300
As can be seen from Table 21.3(b), Activity G can be crashed by two days at an
additional cost of ~400. The new duration of G is 10 days. Recalculate the earliest start
times and latest finish times and determine the critical activities and critical path.
A C
4 3
B 0 6
8 3~
M 0
G
10
E K J
4
7 9 5
~
Figure 21 .12(d)
As can be seen the critical path is still the same. The direct costs have increased
by ~400 but the indirect costs have reduced by n,ooo (two days have been reduced),
resulting in a net saving of ~600. Total cost of the project is ~46,550.
We can now consider crashing the next cheapest activity, i.e. J. Activity J can be
crashed by 1 day at a cost of ~350. Recompute the critical activities and the critical path.
~ C
A
3
6
§]
~~ H
6
10 10
0 ,-~~ J
E K
4
7 9 7 11 8 4
& ~ g
Figure 21.12{e)
The critical path is still unchanged. The project can now be completed in 33 days.
While crashing J has resulted in an additional cost of ~350, there is a saving of ~500 in
overhead costs. The total cost of the project is now ~46,400.
We can now consider crashing the next activity in order of its costs, that is L. This
activity can be crashed by 3 days at a cost of ~350 per day. Recompute the critical path.
0~ ~
A
4 ~ 5
D
27
3
C
0
B
3ffi 6 ~~ §]
8
G
10
0 18 H
10
0 ,"..,Gi] ~
J
E K
7 0 9
-~8 4
& ~ g
Figure 21.12(f)
The critical path has still not changed. The project can now be completed in 30 days.
The additional cost of crashing L by 3 days is n,050 while the saving in overheads is
~1,500, that is a net saving of ~450. The total cost of the project is ~45,950.
Now let us consider the Activity B which is the only uncrashed activity on the
current critical path. B can be crashed by 2 days at a cost of ~3,000. Recompute the
critical path.
D
6
~ I\
____f;'\~ H
r-:;-i 10 v 10
L2.J I ',"'- Gil ~
--~----0 ~ -~ 8
J
4
& ~ ~
Figure 21.12{g)
It can now be seen that there are two critical paths, B-G-L-J and E-K-L-J. Since
all activities have been crashed on the path B-G-L-J, crashing activities E or K will not
reduce the overall time of the project. While some other activities like C, D and H can
be crashed, the overall time of the project will not be reduced and hence crashing these
activities will only add to the costs with no benefit.
Crashing B has cost ~3,000 whereas the saving is only ~1,000. The cost of the project
has gone up by ~2,000 and the total cost is now ~47,950.
The most economical solution is to crash the project by 6 days, that is Activity G
by 2 days, J by 1 day and L by 3 days resulting in a total cost of ~45,900 as against the
original cost of ~47,150. The costs are summarised in Table 21.4.
Table 21.4
Activity crashed Duration of project Direct costs lndi rect costs Total cost
Normal 36 29,150 18,000 47,150
G 34 29,550 17,000 46,550
J 33 29,850 16,500 46,350
L 30 30,900 15,000 45 ,900
B 28 33,900 14,000 47,900
Crashing should only be resorted to when it affords some advantage. This may be
either in the form of a trade off between direct costs and indirect costs (like overheads)
or between direct costs and utility costs, such as penalties for being late or bonuses for
early finish. For instance, in the previous problem, if the contractor knows that he is likely
to exceed the time given for the project and will incur a penalty for delays, he should
consider crashing activities only if the costs of crashing are less than the penalty that he
will have to pay. Similarly, if there is a bonus for finishing before schedule, activities
should only be crashed if it results in an overall gain for him. The least time required
for the project is 28 days, but the cost will increase by ~750. The optimal duration for
the project is 30 days at the least cost of ~45,900.
21.12 RESOURCE LEVELLING

Thus far, we have assumed that all activities can start at the earliest time. This assumption
is valid only if there are enough resources to perform all the work defined by the activities.
Often this may not be the case. It may also not be possible to follow a policy of hire and
fire always; and it must be kept in mind that employing casual labour is always costlier
than employing labour on a regular basis. It may be possible to have a reasonably steady
level of resources throughout the project duration by adjusting the start time of activities
which have float available in them. Let us see, how resource levelling can be done with
the help of an example.
EXAMPLE 21.3 Table 21.5(a) gives a list of activities involved in a project, their
duration, their precedence and the requirement of resources. For the sake of simplicity,
we are considering only one resource, that is labour.
Table 21.S(a)
Activity Preceded by Duration Manpower required
A Start 3 3
B Start 2 2
C B 2 3
D A 4 2
E B 3 3
F D, C 3 3
G F, E, finish 4 3
H Start, finish 8
D, C 6 2
Let us first draw the network, calculate earliest start times and latest finish times and
find the critical activities and the critical path. The network is given in Figure 21.13.
A D
2
3 4
C
2
B G
2 4
H
8
Figure 21 .13
As can be seen the activities A, D, F and G are critical and the project takes 14 days.
Now let us tabulate the activities in the descending order of their latest finish times. See
Table 21.5(b).
Table 21.S(b)
S. no . Activity EST LFT Days Men 1 2 3 4 5 6 7 8 9 1 0 11 12 13 14
1 A 0 3 3 3
----------~
- - - - - - - - -2~········
- ••• ······ •• ......................-t--t--t
2
3
4
B
C
D
0
2
3
5
7
2
---+----+---+---... ···-···· .......,......,..,··-···"
7 2
4
3
2
3
....... ··-·- ...... ·-····· ............. ···-· ................ .,
.•...•...
,,_,....
...................................................................................
______
5 E 2 10 3
+----+----+---+----+--· -·· ······-· .,-.... --·- ·--··· ····-··· ................,··········- __,__,.. - + --+
~
6 F 7 10 3 3
3 ............................................. _................................. ........... j.;;;;;;;;;;;::;;;;;
---------~
+----+----+---t---
7 G 10 14 4
8 H 0 14 8 1 , ••••• -~ ••• ····· · ~··· :.~~ ..... ...... ............. ........... .
2 ............-... .............,... ......... ,_,..............................
, - . - -......................... ,, ... ,....... ..
, ..... -... :............ , .. ..
9 7 14 6
10
r--·- - .--- - ,._ ·-·
Labour
..,-.. ·--1........ ..... -~--- - -
~ - 1--- --1--· ··-
•-1-1 = ·-LI ~! ~:;:::;::~:::::;::~=~::;i· ....·-
1 --+~-----.. ._
1=:.=;;;i ""·· . .. ... . . . .._______ -- . . . . . .
5 I I
.............,........... ......... .. _ •• , ... - ........ , , ........ ....... ,.......... .,.............1. -~-·.. '"~·-··6=
I
_ _ __., ......., ....... .. _ _ _ _ _ _ _ _ _ _ _ _-!
I I
"'""'' H ,.,11• "'""' u,.,,., .,,..,,;, "'lt'"'"" t'l"'''"""' ,. ,,c,,t,,1, !' ''••to•t,, ""'""'''
.,..,,.. ""·"" ..... ,.,. ............ .............. ,,,.,, ,.,.,, .. , ..... ., .. 1,.... ....... , ........... :r "..,. , ...................... .
The left part of the table above shows the details of the activities. The right part of
the table is a chart showing the number of days. The thick continuous line in the top
part of the right side of the table shows the latest finish time of each activity. The critical
activities are first filled in. As they have no floats, they start at the earliest start time
and finish at the latest finish time. For example Activity A starts on day 1 and finishes
on day 3. Similarly Activity D starts on day 4 and finishes on day 7.
The critical activities are shown by a double line, ====
The other activities are shown starting at the earliest start time by a thick dashed
line. For example, Activity H can start on day 1 earliest and finish on day 8. Similarly
Activity E can start earliest on day 2 and finish on day 5.
The lower table shows the daily requirement of labour. The first step is to plot the
labour requirements for the critical activities, as there is no scope of adjusting these. As
Activity A takes 3 days and requires 3 men, the lower portion of the table shaded in dark
grey shows 3 men being employed for 3 days. The Activity D starts on day 4 and requires
4 days to complete. It requires 2 men. This is also shown in the lower part of the table.
The daily labour requirement, if all activities start at the earliest start time, is plotted
in the double dashed line. For instance on Day 1, activities A, Band H can be started. A
requires 3 men, B requires 2 men and H requires 1 man-a total of 6 men on Day 1. Similarly
on Day 3 the requirement is 10 men; 3 for Activity A, 3 for Activity C, 3 for Activity E
and 1 for Activity H. It may be noted that there are peaks and troughs in the requirement
of labour. For instance, 6 men are required for the first two days, 10 on Day 3, 9 on Day
4, 6 on Day 5, 4 on days 6 and 7, 6 on Day 8, 5 from Day 9 to Day 13 and 3 on Day 14.
An attempt must be made to level out the requirement of labour by shifting activities
which have some available float in them. If we shift Activity E to start on Day 5 and finish
on Day 7, and shift Activity H to start on Day 7 and finish on Day 14, the requirements
of labour are depicted by the continuous double line on the table. It may be noted that
the peak requirement of 10 has been reduced to 6. If 6 men are employed continuously,
the project can be completed on time with 7 man days going idle.
It may be possible to make such trial and error adjusbnents in a very small project.
When projects are large and involve a number of resources such manual adjusbnents
may not be possible. The optimal combination can be found on the basis of least sum
of squares. This implies that the sum of squares of the number of men required per day
should be the least. Even with computers, it is generally impossible to enumerate all
answers and arrive at the sum of least squares. A heuristic approach is followed. Software
packages which can handle resource levelling are available today.
At times it may not be possible to employ or hire extra resources. The project will
then have to be completed with the limited resources available. This may result in extra
time being needed for completion of the project. For example, if Activity C and Activity
D both require an excavator and there is only one available with no scope for hiring an
additional one, it may be observed that the project duration will increase by one day. The
excavator can be allotted to Activity C first and then to Activity D and the critical path
itself will change to B-C-D-F-G. Computer packages can handle this type of situation also.
21.13 CONTROL OF PROJECT COSTS

Just as we considered delaying activities to achieve resource levelling, the project manager
has the option of starting all activities at their earliest start times at one extreme and
starting them at their latest start times at the other extreme. This will afford the manager
flexibility in planning cash flows. Let us consider the previous example and add costs
for each activity to our original list.
Table 21.6(a)
Activity Preceded by Duration Manpower required Cost per day
A Start 3 3 3000
B Start 2 2 2000
C B 2 3 3000
D A 4 2 2000
E B 3 3 3000
F D, C 3 3 3000
G F, E, finish 4 3 3000
H Sta rt, finish 8 1000
D, C 6 2 2000
We have already calculated earliest start times and latest start times. Table 21.6(b)
shows the earliest schedule. The daily costs and cumulative costs (000s) are shown in
table.
Table 21.6(b)
S. no Activity EST LFT Co S t/ 1 2 3 4 5 6 7 8 9 10 11 12 13 14

day
A 0 3
-~:..._~~~3~0~00~ -·= _ ..:::.. ~
··..,f. ··=-···=····f ....=: --I--+--·. · ·-· . . . . . .... . . . . .. . . . . . . .. . .. . . . . . . . .. . . . . . ._. . . . . . . . . ..
2 B 0 5 2000 • • •
3 C 2 7 3000
--+----+-----<>----+--+-- -+·--•,•·-~- •·····-·····- ·····-····· .-.- ...........- ·······- --· ......... _. ---·--·-··· -- ------ ···--·--- ···----'· ··········-· ·····----···
4 D 3 7 2000
- - + - - - - + - - - - - < ~ --+---+···-.. ···- ····-···- ............. ,.,.·-····· ............. ......- ... ......... --i-_,.. . . ...... ···---.. ···--·-· ............
5 E 2 10 3000
6 F 7 10 3000
7 G 10 14 3000
8 H 0 14 1000 "'••i •••••••••••• ····~···· ..... : ... .. .
--+----+-----<1------1••..• • • 0• , ..... , , ,,,, , ,, • • , ... . ,, . .. ,.,,~.,, .. ,.,, . .... , ............. ,, , _ ......... ,., •••• •· •-••• · ••••••••••• ....... ,-,, rnOO• ••• •.- •• ••• .. ••~ ... •• • .. • •••<-• 0,0.,, ,, MO •
9 7 14 2000 •.•II • • ••• • •• a.•• •••• • • •••
Daily costs
Cumulative costs 6 12 22 . 31 37 40 43 49 54 59 64 69 ' 74-·-77
If we were now to start all activities at the latest time possible, we would get the
following profile:
Table 21.6(c)
S.no Activity EST LFT Co S t/ 1 2 3 4 5 6 7 8 9 10 11 12 13 14

day
A 0 3 3000 F=-1=--1--
l----+----1-----+----+-----<········· ......... ......... ................................................................................................................
2 B 0 5 2000 • •• ••••••
-+----1--+----1········· .............................. ············"-....._ ....................................................................................... .
3 C 2 7 3000
-+----1--+----1········· ....................................................................................................................................................... .
4 D 3 7 2000
-+----+---+----<········· ...................................................... ................---1---+----t············ .................................... .
5 E 2 10 3000
-+----1--+----1········· ......................................................................................................................................................... .
6 F 7 10 3000
-+----+---+----<········· ............................................................................................. .............. _:.:.1-:.:.1-:.:.-:i_""'_:.:1
7 G 10 14 3000 -
-+----+---+----<········· .........................................................................................................................................................
8 H 0 14 1000 I • • • •. • •••••••I • • • •. • • • • • • • • • • • • • • • •
9 7 14 2000
Daily-costs 33
- - - - - - - - - - - - - , ········ 3
·················· ..
4 4 5 6 7 9 9 6 6
. ..........................................................................................................................
6 6
Cumulative costs 3 6 9 13 17 22 28 35 44 53 59 65 71 77
Let us now prepare the cost profiles. The cumulative cost at the end of day 6 is
~40,000 if the earliest schedule is followed and only ~22,000 if the latest schedule is
followed. Figure 21.14 gives the accumulated costs for early start of activities and late
start of activities.
The graph permits us to plan our activities according to our cash flows or manage
our cash flows according to our schedules.
90
80
iiv 70
(/)
0
0 60
2-
(/)
iii 50
0
0
"C 40
Q)
iii
::::s 30
E
::::s
0
0
20
<(
10
0
0 5 10 15
Days
Figure 21.14 Cost Profile.
The use of networks in project management permits one to go beyond the traditional
approach of comparing actual costs with budgeted costs. Since the networks deal with
time and cost, one can compare scheduled work with completed work. Generally costs
are accumulated for each activity and estimates are made on the proportion of that
activity that has been completed. Costs may be directly proportional or profiled according
to estimates. For example, if in an activity time and cost are directly proportional then
comparison between cost incurred and work completed give information vital to project
control. If for instance an activity is only 55% complete and has consumed 75% of budgeted
costs, we can say that the activity is having a cost overrun. Reports can be generated to
answer the following questions:
1. What is expected completion time?
2. Is the activity now on schedule?
3. What are the budget overruns on each activity?
4. Is the situation getting better or worse with each reporting period?
21.14 PROGRAMME EVALUATION AND REVIEW TECHNIQUE (PERT)

The PERT network is similar to CPM but since it deals with activities whose duration
is not exactly known, it relies on three time estimates of activity duration-pessimistic
time, optimistic time and most likely time. A mean time for the activity is then
worked out and the network drawn as in the case of CPM. The critical path is determined
and the variance on the path is calculated. The probability of completing the project by
a certain date can then be determined. Let us study the technique with the help of an
example.
EXAMPLE 21.4 Table 21.7(a) gives the activities, their precedence and the three time
estimates for each in weeks.
Table 21.7(a)
Activity Predecessor Optimistic time (t0 ) Most likely time (tm) Pessimistic time (tp)
A 2 3
B 2 3
C 2 3
D A 2 9
E A 2 3 10
F B 3 6 15
G B 2 5 14
H D, E 4 7
J C 4 9 20
K J, G 2 9
L H, F, K, finish 4 4 4
Solution:
The first step is to calculate mean duration for each activity. This is calculated by the
following relationship:
. t0 + 4t111 + tp
Mean time= 6
The previous equation is valid as it is assumed that the three time estimates follow
a Beta distribution. The distribution has the following characteristics:
1. A small probability (1 in 100) of reaching the most optimistic time (shortest
time)
2. A small probability (1 in 100) of reaching the most pessimistic time (the longest
time).
3. One and only one most likely time, which would be free to move between the
two extremes mentioned in 1 and 2.
4. The ability to measure uncertainty in the estimating.
It has been found that the error in calculating mean time from the expression given
above is negligible and the method can be applied to most cases. Since we have three time
estimates, we can calculate the standard deviation of the activity times. The difference
between the most optimistic time and the most pessimistic time represent the range of
possible activity times. The range is ±3 standard deviations. Thus:
tp - t 0
Standard deviation = - 6-
Mean time and standard deviation for each activity are shown in Table 21.7(b).
Table 21 .7(b)
Activity Optimistic Most likely Pessimistic Mean time Standard deviation
time (t0 ) time Um) time (tp)
A 2 3 2 0.33
B 2 3 2 0.33
C 2 3 2 0.33
D 2 9 3 1.33
E 2 3 10 4 1.33
F 3 6 15 7 2.00
G 2 5 14 6 2.00
H 4 7 4 1.00
J 4 9 20 10 2.67
K 1 2 9 3 1.33
L 4 4 4 4 0
Now draw the network following the same rules as for the CPM network. Also
compute earliest start times and latest finish times as done in the case of CPM.
D
3 ~0P1
',, 0 '<..
A
2
0~ E
4
• 6
H
4
& M ~ ~
0
/M M
F
B
·0 L
·0
2
3 G
6
~ @]
7 4
C
2
00 10
J
·0
K
3
& £
Figure 21.15(a)
The mean duration of the project is 19 weeks, that is there is a 50% chance that the
project will finish in 19 weeks. The critical activities are C, J, K and L.
With 84% level of confidence how much time would the project take?
We know that the mean duration of the project is 19 weeks. We should now calculate
the standard deviation of the critical path of the project. It must be remembered that
standard deviation cannot be added, only variation (square of standard deviation) can
be added, and the standard deviation found by taking the square root.
Standard deviation of the finish time on the network with activities C, J, Kand Lon
the critical path
= ~(SD of C) 2 + (SD of J) 2 + (SD of K) 2 + (SD of L) 2
= ~(0.33) 2 + (2.67) 2 + (1.33) 2 + 0

= 3.00
PERT assumes that the distribution of the total project completion time is normal.
We know that 84% represents mean+ 1 standard deviation. Hence we can say with 84%
level of confidence that the project will finish in 22 weeks.
What are the chances that the project will finish in 20 weeks?
x-µ
z = (J
20-19
= 3
= 0.33
From normal distribution tables the probability when z = 0.33 is 0.6290.
Hence there is a 63% chance that the project will finish in 20 weeks.
19 20
weeks weeks
Figure 21.15{b)
21.15 UPDATING A NETWORK

The network is a planning and control tool. After the network is initially drawn, the
network must be updated from time to time and revised. This will help managers take
decisions. It is not manually possible to keep revising a large network, but with the
help of computer software the task is no longer tedious. Let us study the implications
of control through networks with the help of an example.
EXAMPLE 21.5 A prestigious project has the activities, precedence, duration of

activities, and cost data as shown in Table 21.8. The project is to commence on 1 January
and is to be inaugrated by the Governor on the occasion of the Republic Day, that is
26 January.
Table 21.8
Activity Duration Preceded by Cost Crash duration Crash cost/day
A 9 4500 6 300
B 6 5400 6
C 11 4000 9 150
D 5 Finish 2500 4 400
E 3 B 3000 3
F 5 B 1500 4 100
G 3 A, E 3000 2 600
H 6 A, E 5000 4 750
J 16 A, E, finish 8000 12 500
K 4 A, E, F, C, finish 4000 4
L 10 G 5000 8 250
M 3 L, H, finish 3000 2 700
Solution: Let us draw the network and calculate the earliest start times, the latest finish
times and find the critical path and the critical activities.
As can be seen activities A, B, E, G, L, J and M are all critical. There are 4 critical
paths: A-G-L-M; A-J; B-E-J; and B-E-G-L-M.
On 9 January 2004 the progress was as follows: Activities A and B were completed
but no other activity had started. Let us now revise the network.
H
6
Figure 21 .16{a)
We have removed the activities A and B since they are completed, and we are
assuming that we would now start all activities on 10 January that are required to be
started. We now find that the project cannot be completed before 29 January. Since it is
H
6
Figure 21.16{b)
an important project and must be inaugurated by the Governor on 26 January, we must

now crash it by 3 days. The critical activities are E, G, L, M and J. The critical paths are
E-G-L-M, and E-J. Activity E cannot be crashed. The cheapest activity to crash is L
which can be crashed by 2 days at a cost of ~250 per day. Let us crash L by 2 days and
revise the network.
H
6
\
\
\
\
\
\
16
\
\
\
\
\
~
'-------___,~, 5
' K
11 /\'- 4
D
~
5
Figure 21 .16{c)
It can now be seen that the duration of the project has not changed and the critical activities
are E and J. Since E cannot be crashed, let us crash J by 3 days and revise the network.
H
6
\
\
\
J
\
\
\
16
\
\
\
\
\
~ ' K
~------ 5
11 4
D
M
5
Figure 21.16{d)
We now find that the project duration has decreased by 2 days and we still need to
crash it by one more day. The critical activities are E, G, L and M. Of these, E cannot
be crashed and L has been crashed to its maximum limit. We can consider crashing G
or M. The cheaper option is to crash G by one day. Let us revise the network.
H
6
\
\
\
J
\
\
\
13
\
\
\
\
\
~'
~------• 5
K
11
D
g 4
Figure 21 .16{e)
We now find that the project can be completed on 26 January. The critical activities
are E, G, L, M and J. and the critical paths are E-G-L-M and E-J. As can be seen the
network must be revised periodically so that it can serve as a tool for control.
21.16 DIFFERENCE BETWEEN PERT AND CPM

PERT is a probabilistic model and is based on three time estimates. It is used mainly
for projects where the activity durations are uncertain, like research and development
projects. We can associate levels of confidence and probabilities with the completion
date of a project.
On the other hand, CPM is based on certainty of the activity durations. It is used for
projects where we are certain about the time that each activity would take. The project
completion duration is not probabilistic in this case, but is certain.
21.17 SOLUTION BY COMPUTER PACKAGES

A large number of computer packages are available for network analysis. Primavera, MS
Project, and Prism are some of the common ones. WinQSB also has a module for network
analysis. It can solve a CPM network for normal times and perform crash analysis. It
can also solve a problem involving PERT network and can perform probability analysis.
Solutions to Example 21.4 (PERT) and Example 21.5 as obtained from WinQSB are
given as follows:
Table 21.9(a) Example 11 .3
Activity Activity Immediate Predecessor (list
Optimistic time (a) Most likely time (m) Pessimistic time (b)
Number Name number/name, separated by ',')
I A I 2 3
2 B I 2 3
3 C I 2 3
4 D A I 2 9
5 E A 2 3 IO
6 F B 3 6 15
7 G B 2 5 14
8 H D,E 1 4 7
9 J C 4 9 20
10 K G ,J 1 2 9
11 L F,H,K 4 4 4
Table 21.9(b) Activity Analysis for Example 11.3

01-08-2006 Activ ity On Critical Acti vity Earliest Earliest Latest Latest Slack Activity Time Standard
12:13:27 Name Path Mean T ime Start Finish Start Finish (LS-ES ) Distribution Deviation
1 A no 2 0 2 5 7 5 3-Time estimate 0.3333
2 B no 2 0 2 4 6 4 3-Time estimate 0.3333
3 C Yes 2 0 2 0 2 0 3-Time estimate 0.3333
4 D no 3 2 5 8 11 6 3-Time estimate 1.3333
5 E no 4 2 6 7 11 5 3-Time estimate 1.3333
6 F no 7 2 9 8 15 6 3-Time estim ate 2
7 G no 6 2 8 6 12 4 3-Time estim ate 2
8 1-1 no 4 6 10 II 15 5 3-Time estim ate I
9 J Yes 10 2 12 2 12 0 3-Time estim ate 2 .6667
10 K Yes 3 12 15 12 15 0 3-Time estim ate 1.3333
II L Yes 4 15 19 15 19 0 3-Time estim ate 0
Project Completion Time = 19 weeks
Number o f Critica l Path (s) = I
Expected project completion time = 19 weeks
Figure 21.17
Table 21 .9(c) Probability Analysis for Example 11 .3

01-08-2006 Completion Time Probability to Finish
Critical Path
12:16:07 Std. Dev. in 20 weeks
I C --> J --> K --> L 3.0000 63.0554%
Table 21.9(d) Example 11.4
Activity Activity Immediate Predecessor (list Normal Crash Normal Crash

Number Name number/name, separated by ',' ) Time Time Cost Cost
l A 9 6 4500 5400
2 B 6 6 5400 5400
3 C 11 9 4000 4300
4 D 5 4 2500 2900
5 E B 3 3 3000 3000
6 F B 5 4 1500 1600
7 G A,E 3 2 3000 3600
8 H A,E 6 4 5000 6500
9 J A,E 16 12 8000 10000
10 K A,E,F,C 4 4 4000 4000
11 L G 10 8 5000 5500
12 M L,H 3 2 3000 3700
Table 21.9(e) Activity Analysis for Example 11.4 (Using Normal Time)
01-07-2006 Activity On Critical Activity Earliest Earliest Latest Latest Slack

14:32:09 Name Path Time Start Finish Start Finish (LS-ES)
1 A Yes 9 0 9 0 9 0
2 B Yes 6 0 6 0 6 0
3 C no 11 0 11 10 21 10
4 D no 5 0 5 20 25 20
5 E Yes 3 6 9 6 9 0
6 F no 5 6 11 16 21 10
7 G Yes 3 9 12 9 12 0
8 H no 6 9 15 16 22 7
9 J Yes 16 9 25 9 25 0
10 K no 4 11 15 21 25 10
11 L Yes 10 12 22 12 22 0
12 M Yes 3 22 25 22 25 0
Project Completion Time = 25 days
Total Cost of Project = $48,900 (Cost on CP= $31,900)
Number of Critical Path(s) = 4
Project completion time = 25 days (using normal time)
~
~
Figure 21 .18
Table 21.9(1) Crashing Analysis for Example 11.4

02-22-2007 Activity Critical Normal Crash Suggested Additional Normal Suggested
06:52:41 Name Path Time Time Time Cost Cost Cost
1 A Yes 9 6 9 0 $4,500 $4,500
2 B Yes 6 6 6 0 $5,400 $5,400
3 C no 11 9 11 0 $4,000 $4,000
4 D no 5 4 5 0 $2,500 $2,500
5 E Yes 3 3 3 0 $3,000 $3,000
6 F no 5 4 5 0 $1 ,500 $1 ,500
7 G Yes 3 2 2 $600 $3,000 $3,600
8 H no 6 4 6 0 $5 ,000 $5 ,000
9 J Yes 16 12 13 $1 ,500 $8,000 $9,500
10 K no 4 4 4 0 $4,000 $4,000
11 L Yes 10 8 8 $500 $5 ,000 $5 ,500
12 M Yes 3 2 3 0 $3,000 $3,000
Overall Project: 22 $2,600 $48,900 $51 ,500
Table 21 .9(g) Completion Analysis at day 9 for Example 11.4 (Using Normal Time)
02-22-2007 Activity On Critical Activity Latest Latest Planned % Actual % Early
07:47:00 Name Path Time Start Finish Completion Completion or Late
1 A Yes 9 0 9 100 100 On time
2 B Yes 6 0 6 100 100 Done
3 C no 11 10 21 0 0 OK
4 D no 5 20 25 0 0 OK
5 E Yes 3 6 9 100 0 *Late *
6 F no 5 16 21 0 0 OK
7 G Yes 3 9 12 0 0 OK
8 H no 6 16 22 0 0 OK
9 J Yes 16 9 25 0 0 OK
10 K no 4 21 25 0 0 OK
11 L Yes 10 12 22 0 0 OK
12 M Yes 3 22 25 0 0 OK
Overall Project: 0 25 36 16.6667 *Late *
Prism is a package that has 3 modules. It has a time module, a cost module and a
resources module. It can handle only CPM networks. It has elaborate graphics and can
draw the network. The progress of activities can be entered and the network revised
automatically. The cost module helps to estimate cost of the project. Once the cost
data is fed in, cost crashing and crash analysis can be performed. The package also
gives the flexibility of entering cost profiles for activities, implying that the cost time
relationship of an activity may not be proportional. The resource module helps in resource
planning. It can also handle reusable or non-reusable resources. It can also perform
resource levelling.
21.18 SOLVED EXAMPLES
EXAMPLE 21.6 The following information is known for a project. Draw the network
and find the critical path. Capital letters denote activities and numbers in brackets denote
activity times.
Table 21.1 0
This must be completed Before this can start
A(30) C
8(7) D
B G
B K
C(10) D
C G
0(14) E
E{10) F
F(7) H
F
F L
G(21)
G L
H(7) J(15)
1(12) J
K(30) L{15)
Solution: The network is given in Figure 21.19.
§] ~ ~ ~ ~ §]
A
~_£__7
30 7
£ £ ~•.
I ''
I
I
I
''
I
I
G
I
I
I
I
I
B K
3
0 ~
7 30
Figure 21.19
The critical path is A-C-D-E-F-1-J. The duration of the project is 98 days.

EXAMPLE 21.7 A project has the following time schedule.
Table 21.11
Activity Time in months Activity Time in months
1-2 2 3-7 5
1-3 2 4-6 3
1-4 1 5-8
2-5 4 6-9 5
3-6 8 7-8 4
8-9 3
Draw a network and compute

1. Critical path and its duration.
2. Total float for each activity
Also find the minimum number of cranes the project must have for its activities 2-5,
3-7, and 8-9 without delaying the project. Is any change required in the network? If so,
indicate the same.
Solution: The activities for the network have been referred to as per their node numbers.
Some texts also use a convention of indicating Earliest Start Time (EST) and Latest Finish
Time (LFT) in the node circles as shown in Figure 21.20(a).
(a) (b)
Figure 21.20
We shall use this convention for this problem to understand this system of conveying
information.
1. Critical path is 1-3-6-9. Duration of project is 15 months
2. Total floats for non-critical activities.
Table 21.12(a)
Activity Total float = Time latest head - Time earliest tail - Duration
1-2 7-0-2=5
1-4 7-0-1=6
2-5 11-2-4=5
3-7 8-2-5=1
4-6 10-1-3=6
5-8 12 - 6 - 1 = 5
7-8 12-7-4=1
8-9 15-11-3=1
3. Crane is required for activity 2-5, 3-7 and 8 - 9.

Table 21.12(b)
Activity Duration EST LFT Float
2-5 4 2 11 5
3-7 5 2 8
8-9 3 11 15
Activity 2-5 and 3-7 can both start earliest at end of month 2. As 3-7 has a float of
only 1 month, allocate the crane to 3-7. The crane will be free at the end of month 7.
Allocate it now to activity 2-5. The work will commence at end of month 7 and finish
at end of month 11 which is the latest time by which it must finish. The crane can now
be allotted to activity 8-9 which can start earliest at end of month 11.
Only one crane is required and should be employed as follows:
Activity 3-7, months 3-7 (5 months)
Activity 2-5, months 8-11 (4 months)
Activity 8-9, months 12-14 (3 months).
EXAMPLE 21.8 For the data given in Table 21.13(a), draw the network. Crash the
activities and determine the optimal cost of the project and the optimal duration.
Table 21.13(a)
Activity Normal Crash

Duration Cost Duration Cost
1-2 8 1000 6 2000
1-3 4 1500 2 3500
2-4 2 500 1 900
2-5 10 1000 5 4000
3-4 5 1000 2000
4-5 3 800 1000
Indirect cost is ~700 per day.

Solution: The network with normal times is shown in Figure 21.21(a).
4 5
Figure 21.21 (a)
The critical path is 1-2-5.

Crash data is given in Table 21.13(b).
Table 21.13{b)
Activity No. of days by which it can Additional crash cost Crash cost per day
be crashed
1-2 2 1000 500
1-3 2 2000 1000
2-4 400 400
2-5 5 3000 600
3-4 4 1000 250
4-5 2 200 100
Cost of project without crashing: Direct costs ~5,800, indirect costs ~12,600 and total cost
is ~18,400.
Critical activities are 1-2 and 2-5. Crash cost of 1-2 being less crash 1-2 by 2 days.
The new network is given in Figure 21.21(b).
4 5
Figure 21 .21{b)
Change in cost: Direct cost ~6,800, indirect cost ~11,200 and total cost is ~18,000.
As critical activities are still 1-2 and 2-5, and since 1-2 has already been crashed
now crash 2-5 by 5 days. The new network is shown in Figure 21.21(c).
4 5
Figure 21.21 (c)
Change in cost: Direct cost ~9,800, indirect cost ~8,400, and total cost is ~18,200.
Critical activities are 1-3, 3-4 and 4-5. The duration of the project is 12 days. Since
the path 1-2-5 has already been crashed and takes 11 days, we should now crash the
network by only one day. The cheapest activity that we can crash is activity 4-5. Crash
this activity by one day. The new network is shown in Figure 21.21(d).
4 5
Figure 21.21 (d)
Critical activities are 1-2, 2-5, and 1-3, 3-4 and 4-5. Duration of the project is
11 days.
Cost is: Direct cost ~9,900, indirect cost ~7,700, and total cost is ~17,600.
Crashing any other activity will not reduce the time any further and will only result in
increase in cost.
Optimal duration of the project is 11 days. Crash 1-2 by 2 days, 2-5 by 5 days and
activity 4-5 by 1 day. Optimal cost of project is ~17,600.
EXAMPLE 21.9 A project consists of seven activities as given in Table 21.14(a):
Table 21.14{a)
Activity Optimistic time Most likely time Pessimistic time
1-2 1 1 7
1-3 1 4 7
1-4 2 4 8
2-5 1 1 1
3-5 2 5 14
4-6 2 5 8
5-6 3 6 15
Draw the project network. What is the expected duration of the project? What is the
probability that the project will be completed at least 3 weeks earlier than expected?
Solution: Calculate the mean time of each activity.
. t0 + 4t,,, + t11
Mean tune= 6
Table 21.14(b)
Activity Optimistic time Most likely time Pessimistic time Mean time S.D.
1-2 1 7 2
1-3 4 7 4
1-4 2 4 8 4.5
2-5 1 1 1
3-5 2 5 14 6 2
4-6 2 5 8 5
5-6 3 6 15 7 2
Find the critical path and the critical activities with mean time. The network is shown
in Figure 21.22(a).
14 17
weeks weeks
(a) (b)
Figure 21.22
The critical path is 1-3-5-6. Mean duration of the project is 17 weeks.

Variance on the path= 1 + 4 + 4 = 9. Standard deviation is 3 weeks.
Probability that the project will be completed at least three weeks earlier than expected:
(x - µ)
z=---
<J
3
=3 =1
For z = 1, the probability of the project being completed at least 3 weeks earlier is 0.16.
Expected duration of the project is 17 weeks. There is a 0.16 probability of the project
being completed at least three weeks earlier than expected.
EXAMPLE 21.10 A maintenance project has following estimates of time in hours and
cost in rupees for jobs. Assume that the jobs can be done either at normal or at fast
pace but not at any other pace in between. Assuming a relationship between the job
duration and job cost and with overhead cost of ~25 per hour, what is the optimal cost
and duration of the project?
Table 21.15(a)
Jobs Predecessor Normal Crash

Time in hours Cost (~) Time in hours Cost (~)
A 8 80 6 100
B A 7 40 4 94
C A 12 100 5 184
D A 9 70 5 102
E B, C, D 6 50 6 50
Total 340 530
The network is drawn with normal time and is shown in Figure 21.33(a).
~
B
3
7
C
A ' ',, ' ~ ~
5
12
& M D
OlJ / ho\
4
A
9
A
Figure 21.23(a)
Critical path is A-C-E. Duration is 26 hours.

Direct cost ~340, indirect cost ~650 and total cost is ~990.
Crash data is given in Table 21.15(b).
Table 21.15(b)
Activity Duration by which it can be crashed Crash cost per hour
A 2 10
B 3 18
C 7 12
D 4 8
As E cannot be crashed, consider crashing A or C. Since A costs less than C to crash, A

should be crashed by 2 days. The revised network is given in Figure 21.23(b):
B
7
C
12
D
----.i4
9
Figure 21.23{b)
Critical path A-C-E. Duration 24 hours.

Revised costs: Direct cost ~360, indirect costs ~600 and total cost is ~960.
As there is no change in the critical path, now crash C by 7 days. Revised network
is given in Figure 21.23(c).
Figure 21.23{c)
Critical path A-D-E. Duration 21 hours.

Revised costs: Direct cost ~444, indirect cost ~525, and total cost is ~969.
Crash D by 4 days. Revised network is given in Figure 21.23(d):
B
---~3
7
C
5
D
'----.i 4
5
Figure 21 .23{d)
Critical path A-B-E. Duration 19 hours.
Revised costs: Direct cost ~476, indirect cost ~475 and total cost is ~951.
Crash B by 2 days. Revised network is given in Figure 21.23(e).
[TI]
B
3
5
C
M....... .
5
D
£
4
5
M
Figure 21 .23{e)
All activities are critical. Duration is 17 hours

Revised costs: Direct costs ~530, indirect cost ~425 and total cost is ~955.
Optimal duration of project is 17 hours and the optimal cost is ~955.
21.19 SUMMARY
PERT and CPM are network analysis techniques that help in planning, monitoring and
controlling projects. PERT is a probabilistic model and deals with the uncertainty of
activity durations. It is based on three time estimates-optimistic time, most likely time
and pessimistic time. It is ideally suited for projects where activity durations are not
deterministic, like research and development projects. The expected or mean duration
of an activity is given by:
.
Expecte d tune Optimistic time + Pessimistic time + 4 (most likely time)
= 6
The standard deviation of the activity duration is given by:
. .
Stand ar d d ev1ahon Pessimistic time - Optimistic time
= 6
CPM is a deterministic technique and activity duration is known with certainty.
Both techniques involve the drawing of a network, which is a graphical representation
of activities in their logical order and relationship. Earliest start times and latest
finish times are calculated for each activity and activities which have no slack are
identified. These are called critical activities and the path on which they lie is called
the critical path. The critical activities have no time slacks and it is vital that they are
completed as per schedule, else the project will be delayed causing time and cost over
runs.
Management should monitor the critical activities closely in order to ensure timely
completion of projects. The slacks of time available in other activities are called floats.
The total float available for an activity is the difference between its earliest start time
and the latest finish time less the activity duration. It may be made up of free float,
interference float, and independent float. Free float does not affect the float available in
the subsequent activities but may get affected if some float is used up in earlier activities
on the path. The interference float, if used, affects the availability of float for remaining
activities on the path. It can also be affected by usage of float in preceding activities on
the path. Independent float is not affected by usage of float in preceding activities and
nor does its usage affect availability of float for subsequent activities. Critical activities
have no float available in them.
A time cost trade-off can be calculated for a network. Some activities can be completed
earlier than their normal times by the employment of extra resources. These result in
increases in cost. However, the fixed costs or overheads reduce because of the overall
reduction in the duration of the project. An optimal duration can be worked out.
The requirement of resources can also be levelled out by rescheduling activities
which have some float in them. These can be delayed to level the resources. Cash flows
can also be better managed by starting activities at their earliest start times or delaying
them up to their latest start times.
Networks are a useful tool only if they are regularly updated. The progress of the
activities must be reflected on the network and new schedules worked out as and when
required. This is a very tedious process if it has to be performed manually. However,
computer software packages exist that update and redraw the network once the progress
on the activities is fed in. The schedules are recomputed and the manager can decide
how to avoid time and cost over runs.
I CONCEPT QUIZ I
State True or False
1. A dummy activity is used to preserve unique identity of the activities in a
network, in order to avoid having two activities with the same beginning and
ending nodes.
2. If the time of any activity is reduced, the overall time to complete the project
will also reduce.
3. CPM lays more emphasis on controlling costs than PERT.
4. An activity with no float is called a critical activity.
5. If an activity is not started at its earliest start time, the project will get delayed.
6. The duration of any activity can be reduced by employing more resources.
7. PERT is used in situations of certainty.
8. The time taken to complete a dummy activity is zero.
9. It is not possible for a network to have more than one critical path.
10. If an activity is delayed by more than the total float available with it, the entire
project will get delayed.
1. Which of the following statements is true for PERT networks:
(a) A dummy activity cannot be used.
(b) The network does not show precedence relationship.
(c) Each activity requires a three time estimate.
2. In crashing a CPM network:
(a) The first activity to be crashed is the least expensive activity.
(b) Only activities on the critical path should be considered for crashing.
(c) The critical path never changes.
(d) The maximum cost reduction will take place if all activities that can be
crashed are crashed.
3. The use of interference float in an activity:
(a) Does not affect the availability of float for subsequent activities on the path.
(b) Affects the availability of float for subsequent activities.
(c) Delays the completion of the project.
(d) Speeds up the completion of the project.
4. Which of the following statements are not true for a network:
(a) All activities arrows must be drawn from left to right.
(b) Activity arrows must never cross each other.
(c) There should be no loops in a network.
(d) There should be no danglers in a network.
5. A dependency dummy activity:
(a) Ensures that two activities do not start and end at the same nodes.
(b) Takes least time to complete.
(c) Keeps the logic of precedence relationships correct.
6. Resource levelling attempts to:
(a) Smoothen out peaks and troughs in demand of resources.
(b) Speed up the project.
(c) Use up all floats.
(d) Ensure all activities are started at their earliest.
7. PERT uses three time estimates because:
(a) Three time estimates are more accurate than one time estimates.
(b) The activity duration is known with certainty.
(c) The project has been done so many times that there is variability in duration
of activities.
(d) The duration of activities is probabilistic.
8. The expected time of completion of a project in PERT means that:

(a) The project will be completed always within the expected time.
(b) The project will always take longer than the expected time.
(c) The project has a 50% chance of being completed within the expected time.
(d) The project has a 95% chance of being completed within the expected time.
9. The activity duration follows:
(a) Normal distribution. (b) Binomial distribution.
(c) Beta distribution. (d) Poisson distribution.
10. A network:
(a) Must be drawn at the commencement of the project.
(b) Must be used for all briefings on the project.
(c) Must be periodically updated and revised.
Fill in the blanks:
1. PERT is a _ _ _ _ _ _ model while CPM is a deterministic model.
2. The use of ____ float affects the float available for succeeding activities.
3. In a PERT network, a manager must estimate three times for the completion
of an activity. These are _ _ _ _ _ _ time, _ _ _ _ _ _ _ time and
_ _ _ _ _ _ _ _ time.
4. Activities which must be completed just before a given activity can begin are
called immediate _____ of that activity.
5. The path with the longest duration in a network is called _ _ _ _ _ _ __
6. In a CPM network, the shortest time required to finish an activity with extra
resources is called ______ time.
7. The cost of _____ an activity is always more than its normal cost.
8. During crashing of a network, the _ _ _ _ costs increase while the _ _ _ __
costs decrease.
9. The critical path represents the _ _ _ _ _ _ time required to complete the
project.
10. In crashing, we only consider activities on _ _ _ _ _ _ _ _ _ __
I QUESTIONS I
21.1 How does network analysis help in project management?
21.2 What do you understand by floats? Describe the different types of floats and their
implications. What are the managerial implications of floats? Explain with the
help of an example.
21.3 What are the three time estimates needed for drawing a PERT network? Show
how you would use these estimates to compute the expected activity duration
and variance.
21.4 Explain the use of float in levelling of resources.
21.5 What is the purpose of dummy activities?
21.6 A project consists of following activities and the time estimate (in days). Draw the
network, compute earliest start times and latest finish times. Find the critical
path and critical activities.
Activity Duration Activity Duration Activity Duration

1-2 6 1-3 8 2-3 2
2-4 4 2-5 1 3-4 5
3-5 3 4-5 2 4-6 8
5-6 11 6-7 9 6-8 4
7-8 6
21.7 The following table lists the activities of a maintenance project. The duration is
given in months.
Activity Duration Activity Duration Activity Duration

1-2 2 1-3 2 1-4 1
2-5 4 3-6 5 3-7 8
4-7 3 5-8 1 6-8 4
7-9 5 8-9 3
(a) Draw the project network.

(b) Find the critical path and duration of the project.
(c) If we are to employ a crane on activities 1 - 3, 3 - 6, 5 - 8 and 8 - 9 and
have only one crane available, will it affect the duration of the project?
Explain.
21.8 A firm is planning to manufacture a wall decorative fixture, consisting of
three plates, X, Y and Z made individually and then put together. The design
of X and Y takes 3 and 5 days respectively. The design of Z takes only
2 days but cannot be completed till design of Y is finished. The procurement of
material for X, Y and Z takes 7, 5 and 3 days respectively. The pressing and
grooving of Z has to be done first, then that of Y and last of all of X. Each
takes 3 days. The polishing of plates takes 2 days each, and the assembly takes
1 day. Draw a CPM network, determine the critical path and the duration of
the project.
21.9 The following table gives the list of various activities involved in the production
of a wireless equipment, their immediate predecessor and their normal time in
months. Find the critical path and the least duration of the project.
Activity Predecessor Time

A-Systems calculations 3
B-Release of drawings 3
C-Selection of PSU A,B 10
D-Purchase of raw material A,B 7
E-Production documentation A,B 5
F-Time study /Shop order E 3
G-PCB manufacture D, F 5
H-Mechanical parts manufacture D, F 8
I-Electronic assembly C,G,H 2
J-Testing I 4
21.10 The following table gives the list of the activities involved in the publication of a
book, their immediate predecessor, and their normal times in weeks. Find the
critical path and the earliest time when the book will be ready for distribution.
A-Appraisal of book 9
B-Initial pricing 2
C-Marketability assessment A,B 2
D-Revision by the author A 7
E-Editing of final draft C,D 5
F-Type setting of text E 4
G-Plates for art work E 2
H-Designing, printing of jacket C,D 5
I-Printing and binding F, G 6
J-Inspection and final assembly I, H 1
21.11 The following table gives the list of various activities involved in a project, their
immediate predecessor, and their normal time in days. Find the critical path and
the least duration of the project.
A 9
B 4
C 7
D B,C 8
E A 7
F C 5
G E 10
H E 8
I D, F, H 6
J E 9
K I, J 10
L G 2
21.12 The following table gives the list of various activities involved in the running of a
Management Development Programme along with their immediate predecessors,
and their normal time in weeks. Find the critical path and the earliest time when
the programme can be run.
A-Design programme theme 8
B-Design brochure A 4
C-Compile list of speakers A 2
D-Finalise & print brochure B,C 8
E-Make travel arrangements D 4
F-Dispatch brochures D 3
G-Receive nominations F 4
H-Conduct programme E, G 6
I-Print proceedings I 8
21.13 A project consists of eight activities denoted by A, B, C, D, E, F, G and H.
Relationship between the activities is as follows:
(a) The project starts with activity A.
(b) When A is completed, activities E and B may be started.
(c) Activity F may be started when E is completed.
(d) Activity C depends for its start on the completion of F and B.
(e) When Fis completed activity G may begin.
(f) When C is completed D may begin.
(g) H may begin when G and D are completed and is the final activity.
Expected time for the activities in days are the following:
Activity A B C D E F G H
Time 10 9 3 15 5 17 8 7
Draw the network and find the critical path.
21.14 A team of chemists is planning to undertake an applied research project to test
a formula for a new synthetic material. The project can be separated into
12 distinct activities. The relationship amongst the activities and the time estimates
in weeks are given in table.
Activity Predecessor Optimistic time Most likely time Pessimistic time
A 2 2 2
B 1 3 7
C A 4 7 8
D A 3 5 7
E B 2 6 9
F B 5 9 11
G C,D 3 6 8
H E 2 6 9
I C, D 3 5 8
J G, H 1 3 4
K F 4 8 11
L J, K 2 5 7
Draw a network. What is the expected time to complete the project? What is
the probability of completing the project in 26 weeks? In 23 weeks or less? In
25 weeks or more? What is the time estimate for project completion at 95%
confidence level?
21.15 A project consists of eight independent activities as shown in the following table.
What is the expected time to complete the project? What is the probability of
completing the project in 20 weeks or less? Time estimates are also given:
Activity Predecessor Optimistic time Most likely time Pessimistic time
A 1 3 5
B 2 3 4
C 3 4 5
D A 2 9 10
E C 4 5 6
F B, D, E 5 6 13
G A 2 4 6
H C 1 3 6
21.16 A construction company has to undertake the construction of a flyover bridge.

The work involves a number of activities. Their time estimates and precedence
relationship are as follows:
Activity Preceding activity Time estimate (in months)

Optimistic Most likely Pessimistic
A 1.5 2 2.5
B A 1.5 2 2.5
C 1 2 3
D C 1.5 2 2.5
E B,D 0.5 1 1.5
F E 1 2 3
G B,D 3 3.5 7
H G 3 4 5
I F, H 1.5 2 2.5
(a) Draw the PERT network for the project.

(b) What activities need special attention for completion of the project in time?
(c) What is the expected time for completion of the fly-over?
(d) If the fly-over is completed after 18 months, the contractor will have to pay
a penalty of ~2 lakhs. What is the probability that the company has to pay
the penalty?
21.17 A project has seven activities. The timings are in days and the costs in rupees.
The relevant data about these activities is given as:
Activity Preceding Normal Crash Normal Crash

activity duration duration cost cost
A 7 5 500 900
B A 4 2 400 600
C A 5 5 500 500
D A 6 4 800 1000
E B,C 7 4 700 1000
F C,D 5 2 800 1400
G E, F 6 4 800 1600
(a) Find out the normal duration and minimum duration of the project?
(b) What is the percentage increase in cost to complete the project in 21 days?
21.18 The estimate of a project to be completed at the shortest possible time is urgently
required. Make use of the following information and answer the questions given:
Activity Predecessor Normal time Crash time Normal cost Crash cost
A 20 16 9000 12600
B 25 25 1900 1900
C A 10 7 4500 7200
D A 12 8 4000 8400
E B,C 5 2 4400 6200
F D, E 10 6 4500 6500
(a) Draw the network and determine the critical path with normal time.
(b) What is the shortest duration by which the project can be completed?
(c) If the indirect costs are ~50 per day, what is the optimal duration of the project?
21.19 An electronic firm has signed a contract to install an instrument landing device at the
local airport. The complete installation can be broken down into activities as shown
in following table. The contract specifies that the installation will be completed
within 18 days. There is a penalty of ~1,000 per day beyond the specified time.
Activity Predecessor Normal time Crash time Normal cost Crash cost
A 3 2 3200 3600
B 5 4 5500 6000
C 6 4 5750 7000
D A 7 5 7500 8500
E A 4 3 4200 4700
F B, D 2 2 1800 1800
G C 4 3 4250 4850
H A 8 5 8500 9600
I C 5 4 4750 5350
J C 7 5 6750 7350
K E, F, G 4 3 4000 4400
L H, I 6 4 6500 7500
M L 3 2 2800 3350
N J, K 5 4 5250 5750
(a) What is the normal time to complete the installation?

(b) What is the shortest possible time for completing the installation?
(c) What is the most economical period of time in which to schedule the
installation?
(d) What is the minimum total cost (installation plus penalty)?
21.20 A project has nine activities. Their precedence, normal and crash duration (in days)
and costs (in 000's of ~) are given in following table.
Activity Precedence Normal Crash

Duration Cost Duration Cost
A 2 3 1 5
B 4 5 3 7
C 4 4 2 10
D A,B 4 3.5 4 3.5
E B,C 8 7.5 6 15
F C 2 6 1 9
G D 6 4 4 9
H G, E, F 12 16 7 26
I H 6 10 4 20
Fixed cost is ~4,000 per day.

Determine the optimal duration and cost of the project.
21.21 Following table gives the list of activities involved in the launch of a new credit
card service by a company, their immediate predecessors and their expected
durations (in days).
Activity Description Predecessors To Tm TP
A Conduct market research to 10 12 14
determine size, potential and
competition in the market
B Define market strategy in terms of A 14 15 17
positioning and product features
C Estimate expected volumes B 2 3 4
D Estimate additional manpower C 4 6 8
required
E Identify modifications required to the C 10 12 14
present computer system based on
expected volumes
F Implement computer system E 20 25 27
modification
G Update physical facilities C 10 17 20
(Contd.)
Activity Description Predecessors To Tm TP

H Prepare instructional manuals F 5 6 7
I Hire additional sales force and D 7 12 14
operational staff
J Train sales force and operational staff H, I 14 17 20
K Advertise for suppliers C 1 2 3
L Check supplier samples K 10 15 20
M Identify key suppliers and define L 3 5 7
quality standards
N Roll out basic product to a few M, J 13 15 17
employees as a method of pre-testing
0 Generate and assess feedback N 20 21 22
p Modify and make changes where 0 7 9 14
necessary
Q Update procedures manual p 2 3 4
R Retrain concerned staff Q 2 2 2
s Design communications to prospective p 7 10 13
card holders
T Design advertising schedule s 5 7 9
u Roll out final product-Launch T, Rand G 4 8 12
(a) Draw a network for the project.
(b) Find the expected project completion time.
(c) Determine the probability of completing the project in 165 days.
21.22 A sociologist plans a questionnaire survey consisting of the following tasks.
Activity Predecessors T"' To TP

A Design of questionnaire 5 4 6
B Sampling design 12 8 16
C Testing of questionnaire and A 5 4 12
refinements
D Recruiting for interviewers B 3 1 5
E Training of interviewers D,A 2 2 2
F Allocation of areas to interviewers B 5 4 6
G Conducting interviews C, E, F 14 10 18
H Evaluation of results G 20 18 34
(a) What are the expected task durations and the variances of task durations?
(b) Draw a network for the project and find the critical path. What is the
expected duration of the project?
(c) What is the probability that the project will not exceed 60 days?
21.23 A promoter is organising a sports meeting. The relationship among the activities
and time estimates in days are shown in following table.
Activity Predecessors To Tm TP
A Prepare draft programme 3 7 11
B Send to sports organisation and get A 14 21 28
comments
C Obtain promoters A 11 14 17
D Prepare and sign documents for A,C 2 2 2
stadium hire
E Redraft programme and request entries B 2 7/2 8
F Enlist officials D, E 10 14 21
G Arrange accommodation for touring E 3 4 5
teams
H Prepare detailed programme E, F 4 9/2 8
I Make last minute arrangements G,H 1 2 4
(a) Find the expected activity durations and their variances.
(b) Draw a network and find the critical path. What is the expected duration
of the project and what is its variance?
(c) What is the probability that the project will be completed in 56 days?
Project Planning and Control II-
Line of Balance
A project is complete when it starts working for you, rather than you working for it.
SCOTT ALLEN
LEARNING OBJECTIVES
• Understand the basics of line of balance method of planning and control
• Study the steps for drawing a line of balance chart
• Examine the use of the line of balance chart
22.1 INTRODUCTION
CPM and PERT are good methods of project planning and control. However, when it
comes to repetitive activities and batch production of a single product, CPM and PERT
do not provide an easy method of planning and control. CPM and PERT are useful for
controlling a single project, but the Line Of Balance (LOB) method is more useful for
scheduling and monitoring the progress in case of batch production where the activities
are repetitive. The batches could be of any single product. For example, a unit producing
yachts or a unit producing generators or even a construction company involved in a
housing project where each housing unit involves the same design and repetitive work.
Some conditions must be met before we can use the LOB method. These are:
1. The project must have identifiable stages at which managerial control can be
exercised
2. Manufacturing times between stages must be known
3. Delivery schedule must be available
4. It should be possible to vary resources as required
533
The LOB method helps to plan and monitor the production of batches. The method
compares the actual performance with the plan forecast. It examines the deviations from the
plan and their effect on the rest of the project. The method gives timely warning of areas
likely to be affected because of delays in a particular activity. The project manager can ensure
that activities are in balance through the LOB method of control. It helps to identify project
objectives and establish milestones. Let us understand the method with the help of an example.
EXAMPLE 22.1 A manufacturing unit is producing generating sets. The delivery

schedule is as given in Table 22.1.
Table 22.1(a)
Week 2 3 4 5 6 7 8 9 10 11 12
Demand (units) 3 4 3 5 2 4 3 5 6 4 3 3
Cumulative demand 3 7 10 15 17 21 24 29 35 39 42 45
The activities involved, their duration and the precedence logic is given in
Table 22.l(b).
Table 22.1(b)
Name Activity Duration (weeks) Precedence
A Fabricate mounting 3
B Procure diesel engine 4
C Fit and balance engine to mounting 2 A, B
D Procure rotor 3
E Procure stator 3
F Assemble rotor and stator 2 D, E
G Procure switching system 2
H Connect switching system to generator F, G
Assemble generator and engine C, H
J Preliminary testing I
K Final assembly and delivery J
Prepare a line of balance for week 3.
Solution:
Step 1: Draw an activity on arrow network to show the activity relationship and timings.
Unlike the networks drawn for CPM and PERT, multiple starts are permitted. The network
is shown in Figure 22.1. The activity durations are shown below the activity names.
Step 2: Calculate the latest finish times by working backwards. Activity K finishes at
time 0. Activity K takes 1 week to complete, so all activities up to activity J must finish
1 week before the completion of activity K. The timing should be put down as -1.
However, since all the timings would be negative we ignore the minus sign. The latest
finish times are shown below the concerned node. The nodes are then numbered. We
omit the starting nodes and number the rest according to the descending order of latest
Project Planning and Control II-Line of Balance 535
Activity duration
9
D
3
o>------;--·
6
Figure 22.1
finish times. The node which marks the completion of activities D and E and the start
of activity F has been numbered as 1 because the latest time at the node is 6 weeks. The
node marking the beginning of activity C has been numbered 2 as the latest finish time
at that node is 5.
Step 3: Draw a squared network on a time scale. The squared network is shown in
Figure 22.2.
r----------- I
i l A , ---r---- 1
f---_,_---+--B------r----------1•f---~jc-----+---+----+---------1
'
D
E F
G! H J K
' I
+ -_ __ , __ _~ - - - - - -L- - - - - - ~ - - ~ - - - + - - - _ , _ - - ~ - - - - - - - J
''
9 8 7 6 5 4 3 2 0
Figure 22.2
Rank activities in descending order of latest finish times. The order is D, E, B, A, F, G,

C, H, I, J and K.
Step 4: Prepare a calendar and accumulated quantity table. Let us examine how the
calendar has been prepared. The first column is the time in weeks. It may be noted that
the time starts with week -9, which was the earliest time on the squared network and
goes on to week 12. There is no week 0. The rest of the columns represent the activities
and are arranged in the order in which they were ranked in the last step. The table is
filled up starting with the right most column for activity K, which is the last activity. At
the beginning of week 1, 3 units are to be delivered. The figure has been entered against
week 1. By the beginning of week 2, the cumulative total of deliveries is 7 and has been
entered accordingly. Similarly the other figures have been filled. The activity K takes 1
week, and therefore, work on the 3 units which are to be delivered at the beginning of
week 1 must commence at week -1. The letter S denotes the start of work.
Table 22.2(a)
-9 s s s
-8 C C C s
-7 C C C C
-6 3 3 C C s s
-5 7 7 3 3 C C s
-4 10 10 7 7 3 3 C s
-3 15 15 10 10 7 7 3 3 s
-2 17 17 15 15 10 10 7 7 3 s
-1 21 21 17 17 15 15 10 10 7 3 s
1 24 24 21 21 17 17 15 15 10 7 3
2 29 29 24 24 21 21 17 17 15 10 7
3 35 35 29 29 24 24 21 21 17 15 10
4 39 39 35 35 29 29 24 24 21 17 15
5 42 42 39 39 35 35 29 29 24 21 17
6 45 45 42 42 39 39 35 35 29 24 21
7 45 45 42 42 39 39 35 29 24
8 45 45 42 42 39 35 29
9 45 45 42 39 35
10 45 42 39
11 45 42
12 45
Week D E B A F G C H J K
Similarly, the next column for activity J is filled. If activity K is to commence on

3 units in week -1, then these must be delivered to the workstation where K is being
carried out in week-1 from J. As J takes one week the work on these units must commence
in week -2. The rest of the table is completed in a similar manner.
What do these figures imply? Let us consider the figures for week 3. 35 is entered in
the column for activity D. This implies that cumulatively 35 units should have completed
activity D. Activity D is procurement of rotor. By week 3, 35 rotors should have been
procured. Similarly, if we take activity E, the figure is 35. Activity E is procurement of
stator. By week 3, 35 stators should have been procured. Activity B is procurement of
diesel engine. By week 3, 29 diesel engines should have been procured. The figures for
any week give the planned completion of a particular activity by that time. This is the
Line Of Balance (LOB). The actual achievement can now be plotted on the same graph
and compared. The line of balance for week 3 has been plotted in Table 22.2(b). The
figures on the base line indicate the planned targets. These have been plotted graphically
and shown by the shaded area. The thick line shows the actual figures achieved. As can
be seen, we are ahead in activities D, E, B, and A, all procurement activities, we are
behind schedule in activity F and in the subsequent activities as well. We should speed
up activity F by shifting more resources to it. We should have delivered 10 units in week
3 but we have been able to deliver only 8 units.
Table 22.2(b)
45
40 40
40
35 -------- --------------------+---+--+---+---<
30 30
30
.l!l 25
·c 20 20 20
:::> 20
15 ·--------
15 - 12 ~--r2------1
10
5
-
---8----:
35 35 29 29 24 24 21 21 17 15 10
0
D E B A F G C H J K
The line of balance has provided us with the means of knowing what was planned
and what has been achieved. It has also helped us to identify the bottleneck and problem
area.
The progress required at any stage can be read out from the previous calendar.
Another method of representing the line of balance is as shown in Figure 22.3. The
X axis represents the week and the Y axis represents the number of units. The lines
on the graph are the progress required for each activity. The week 3 targets have been
shown with a thick line. We can read the figures off the graph. We can also plot the
actual progress of each activity on the graph.
50
E B G H I J K
45
,) ~ ~ ~ ~ ~ () /
40
/ /. ~ [/ ClV. /
I I -; / I I I
35
30
.l!l
·c 25
) ') / 'J ') ') ')'
~ ~ y /, ~ v'J
:::> _....J
20 11"""" .l
.,J(',,,. r--: _, ~ ~ ~ 6 V
15
./ VV /
/
10 V / / ..,,..
5
)V)VJ ~ ~ ~
/ ~V
L; ~ ~ ~ ~ ~ ~ _....Jr
0
D A F C
---
-10 -5 0 3 5 10 15
Weeks
Figure 22.3 Line of Balance.
Both the forms of graphs have been made from the calendar and accumulated quantity
table. Once the table is made, any convenient form of representation can be adopted.
22.2 SUMMARY
Following are the steps for constructing a line of balance chart.
Step 1: Construct an activity on arrow network to show logic and timing. Work
backwards. Multiple starts are permitted.
Step 2: Calculate latest finish times by a reverse pass.
Step 3: Make a squared network on a time scale. Rank activities in descending order
of latest finish times.
Step 4: Prepare a calendar and accumulated delivery quantity table.
The line of balance can be used for planning and controlling batch production where
the activities or processes are repetitive. It plots the cumulative production against time
for each process or activity and compares the actual progress with the planned figures.
Remedial actions can be taken provided we are able to shift resources from one activity
to the other.
I CONCEPT QUIZ I
State True or False
1. The line of balance is useful for project planning and control.
2. Line of balance is a useful method for scheduling and monitoring batch production
where the activities are repetitive.
3. The line of balance method does not help us to identify delays.
4. The line of balance method helps us to identify bottlenecks and problem areas.
5. The line of balance plots the daily production against time.

1. The first step in developing the line of balance is:
(a) Draw a squared network on a time scale.
(b) Prepare a calendar and accumulated quantities.
(c) Draw an activity on arrow network to show activity relationships and timings.
2. While making a line of balance calendar:
(a) Activities are ranked according to their earliest start time.
(b) Activities are ranked according to their earliest finish time.
(c) Activities are ranked according to their latest start time.
(d) Activities are ranked according to their latest finish time.
3. Which of the following is not a condition to be met before we can use the LOB
method:
(a) The task must have identifiable stages at which managerial control can be
exercised.
(b) The dates on which orders are received should be known.
(c) It should be possible to vary resources as required.
(d) Manufacturing time between stages must be known.
4. The LOB method is best applied to:
(a) Job shop or Project method of production.
(b) Continuous flow method of production.
(c) Flow production.
(d) Batch production.
5. The LOB method helps us to:
(a) Know what was planned. (b) Know what has been achieved.
(c) To identify problem areas. (d) All of the above.
Fill in the blanks:

1. The line of balance method can be used for planning and controlling _ _ __
production where activities and processes are repetitive.
2. The LOB relies on working ______ from delivery schedules.
3. In the LOB method a calendar and _ _ _ _ _ _ _ _ _ _ table is prepared.
4. The calendar shows the _ _ _ _ _ _ _ _ _ _ _ _ that must be completed
by a certain time.
5. Remedial action comprises shifting _ _ _ _ _ _ _ from one activity to another.
IQUESTIONS I
22.1 Explain the steps required to construct a line of balance chart.
22.2 Conoco Phillips has entered into an agreement for the supply of an electronic
product as per the given schedule.
Time Quantity Time Quantity Time Quantity

period (cumulative period (cumulative period (cumulative
(weeks) in hundred) (weeks) in hundred) (weeks) in hundred)
1 5 7 52 13 166
2 10 8 66 14 200
3 16 9 80 15 240
4 24 10 96 16 290
5 32 11 116 17 350
6 42 12 136 18 420
Delivery is to start from July 2006, that is by the end of 7th July 2006, 500 units
are to be dispatched.
1-----
10 9 8 7 6 5 4 3 2 1 0
The previous exhibit shows interrelationship between different activities (control

points) to be undertaken to produce the product.
Derive the line of balance for the following dates using graphical method:
(a) September 10, 2006
(b) October 15, 2006
(c) October 17, 2006
22.3 A product is to be delivered as per the following schedule.

period period period
(weeks) (weeks) (weeks)
1 2 5 10 9 18
2 4 6 18 10 10
3 8 7 20 11 8
4 12 8 22 12 2
13 2
The following diagram shows the interrelationship between different activities

that must be undertaken to make the product:
12 11 10 9 8 7 6 5 4 3 2 1 0
Draw the line of balance for:

(a) Week 3
(b) Week 4
(c) Week 7
22.4 A company has entered into an agreement with a large government organisation
for the supply of product X as per the given schedule.

period (cumulative) period (cumulative) period (cumulative)
(weeks) (weeks) (weeks)
1 3 6 27 11 85
2 6 7 33 12 100
3 11 8 45 13 115
4 15 9 55 14 125
5 22 10 70 15 135
Delivery is to start from January 2006, i.e. by the end of first week of
January 2006, 3 units, by the end of second week of January 2006, 6 units.
1-----1 -----110
10 9 8 7 6 5 4 3 2 1 0
- Days
The exhibit shows interrelationship between different activities (control points)

to be undertaken to produce the product X. They have been plotted against lead
time in days.
Derive the line of balance for the following dates:
(a) January 13, 2006
(b) February 15, 2006
(c) April 11, 2006
Part VI
The Who of Production and
5 Ps of
Production
Operations
Management
Human Resources in Operations
Management
The motto of successful CEOs: People first, strategy second.
RAM CHARAN
LEARNING OBJECTIVES
• Understand the importance of human resources in production and operations
management
• Study the evolution of human resource management thought
• Examine the role of the production operations manager in the acquisition of
manpower-job analysis, job design, job description and job specifications
• Study the role of the production and operations manager in the training and
development of employees
• Understand the concept and use of learning curve
• Understand the role of the production and operations manager with regard
to industrial re lations, health, safety and we lfare, and remuneration
• Study the latest trends in human resource management
23.1 INTRODUCTION
The resources available to a manager include men, material, money, machines, minutes
and information. Employees are perhaps the most important resource, and also the most
difficult to manage. A machine can be turned off or on at the press of a button, but a
545
human being has no such controls. The behaviour of the human being cannot be predicted
even under exactly the same circumstances, because human beings have feelings, emotions
and can think. Their importance has been recognised to the extent that management gurus
define management as getting things done through and by people.
The production operations function employs the bulk of the manpower in any
organisation no matter how lean its production systems may be. The best of technology
and the best of machines can come to nought if the persons who operate them are
incapable or not motivated enough to perform. It is not the gun but the man behind the
gun who really matters. It is, therefore, imperative that we understand the nuances of
handling this important resource especially in the context of production and operations
management.
23.2 HUMAN RESOURCES AND OPERATIONS MANAGEMENT

The invention of the steam engine in 1764 ushered in the Industrial Revolution. Before
the Industrial Revolution, goods were hand made by skilled craftsmen. The craftsmen
worked in their own homes or shops and at their own pace and at a time convenient to
them. The Industrial Revolution changed all that. Machines appeared which were able
to work much faster. Steam power revolutionised the pace of work. Workers began to
assemble at a central place called the factory to perform their work and the factory siren
began to regulate and control lives. The energies of individuals had to be channelised
to achieve organisational goals. Their effort had to be coordinated towards improving
productivity.
A feature of the Industrial Revolution in its infancy was the great divide between the
entrepreneur and the worker. The worker was viewed as economic man. It was believed
that the workers worked only for money and the entrepreneur had the money to give
them. It was widely believed that the workers were not interested in their work. These
beliefs continued well into the beginning of the twentieth century.
In the early 1900s, Fredrick Taylor appeared on the scene with his Scientific Management
theory. He propounded that there was only one best way to perform a task and it was
the management's duty to find it and disseminate it to the worker. He professed that
standards of output must be established scientifically. He advocated a system of multiple
foremen, and maintained that a specialist foreman should brief the worker on how to
perform a particular task. If the production involved five processes, then according
to Taylor, five specialist foremen would brief the worker on each process. Taylor also
introduced the concept of differential wages. If a worker achieved his targets or exceeded
them he would receive a certain piece rate for his entire production, but if he fell short
of the target he would receive a lower rate for his entire output.
Essentially, Taylor still held the image of the worker as economic man and believed
in the rabble hypothesis according to which workers on the whole were a contemptible
lot. So obsessed was he with productivity, that he advised that workers should be placed
so far apart at the workplace that they should not even be able to talk to each other.
He believed that workers should be prevented from forming cohesive work groups and
thought that individualising each workman would bring workers high wages which is
what they really want.
Human Resources in Operations Management 547
In 1913, Henry Ford set up the first moving assembly line. This further dehumanised
the human being. The worker was forced to perform a simple task requiring very low
skills repetitively during the entire day, day after day. The boredom and mental fatigue
led to the worker becoming disinterested in his work and absenteeism increased.
Between 1927 and 1932, Elton Mayo conducted the now famous Hawthorne Studies.
He discovered that productivity is not affected by environment alone. He realised that the
workplace is a social environment within which people are motivated by much more than
economic self-interest. Workers performed better as teams and performed in accordance
with peer norms. This gave rise to the Human Relations school of management thought.
Maslow, Herzberg, McGregor, McClelland, Vroom and others extended their theories of
motivation, which dwelt on the importance of self esteem, ego and self actualisation.
Workers were no longer to be treated as a replaceable resource employed from nine to
five. They were to be treated as human beings first.
The 1980s saw the increasing Japanese influence on management thought and management
practices. The Japanese have a great respect for people. Worker involvement, loyalty and
permanent lifelong relationship between workers and the employer are common place.
The need for quality, TQM and JIT production system involved the employee further.
Some of the contemporary changes and their effect on human resource management are
discussed later in this chapter.
Human resource management deals with the acquisition, training, performance,
retention and separation of manpower. Let us examine these issues as they pertain to
operations management.
23.3 ACQUISITION OF HUMAN RESOURCES

The aspect of acquisition begins with manpower planning, recruibnent, selection and
induction. These activities are relevant to the production operations function.
Job analysis: The need for personnel must be established. It is not just the numbers
that matter but also the skills required. To get the right kind of personnel suited for the
job under consideration, it is important to first define the job. This involves an analysis
of the job. Jobs involve responsibilities, duties and tasks. For example, the responsibility
of a college professor may be to impart training to students. The responsibility may
involve duties such as teaching, testing, guiding students, administrative work, research
work and so on. Each of these duties involves a set of tasks. For instance, testing may
involve preparation of a test paper, evaluation of the test and providing feedback to
the student. The tasks can be further broken up into elements. For example, framing a
particular question for a test paper is an element of the task of preparing a test paper.
The job analysis leads to job description. This lays down the responsibilities, duties and
tasks involved in a job.
The next step is to identify the knowledge, skills, other attributes and the attitude
required for the job. These lead to job specification which is a statement of the qualification
and skill levels along with other attributes required for the job. The success of finding
the right man for the right job depends to a great extent on the job description and the
job specifications. The production operations deparbnent will have to provide the human
resource managers with job descriptions and job specifications along with the numbers
required for each job to facilitate them in the process of recruibnent and selection.
Once the employee joins the organisation, his smooth induction into the system is
again largely the responsibility of the concerned department. Production and operations
managers will have to draw up induction plans for their new employees.
23.4 TRAINING AND DEVELOPMENT

Training and development are important aspects of managing human resources. While on
the job training through the mentor system produces fairly good results, the worker learns
the good habits and the bad habits of his or her mentor. Formal training programmes
have their own benefit and value. Training involves changing the behaviour of a person.
It must be related to the input behaviour and the desired output behaviour in view of
the requirements of the job. The training programme must bridge this gap.
Training aims at imparting knowledge, teaching skills and developing the right attitude
to the work in hand. While most training programmes are designed to impart knowledge
and teach skills, generally little attention is paid to attitudinal training. This aspect is
acquiring greater importance especially in view of TQM and JIT practices. Workers with
the potential to take on higher responsibilities should be developed for assuming the role
of a supervisor or higher managerial positions than what they are currently holding.
The production operations department must identify the training needs of workers
employed in the department and should help the HRM personnel to plan and conduct
meaningful training which will help to better the worker's performance.
Learning curve: The rate at which a task can be performed depends on the workers
skill and experience. It is an established fact that as the worker continues to perform
the same task, the time taken by him reduces till a plateau is reached when no further
improvement takes place. The performance time drops off rather dramatically at first
and then at some slower rate till a plateau is reached. This general pattern is called the
learning curve. Figure 23.1 shows a learning curve. The improvement is not solely due
to the learning effect on the worker but may also be due to method improvement, job
redesign and worker motivation. The learning effect was described by T.P. Wright. He
described how the direct labour cost of producing airplanes decreased as the number of
planes produced increased .
...
Q)
a.
Q)
E
0)
C
<fl
<fl
Q)
0
e
a..
Units produced
Figure 23.1 The Learning Curve.

The learning curve is an exponential curve and can be represented by the relationship:
Yi= kib
where Yi is the time taken for the ith unit
k is the time taken for the first unit
i is the cumulative number of units produced
b = (In r /In 2) where r is the learning curve percentage (decimal coefficient)
The rate of learning is not the same for all tasks. By convention the learning rate is
specified as a percentage. An 80% curve for example, means that each time the cumulative
output doubles, the most recent unit of output requires 80% of the labour input of the
reference unit. If the learning curve is 80% and the unit 1 takes 100 hours, then the
unit 2 will take 80% of 100 hours that is 80 hours. Unit 4 (double of 2 units) will take
80% of the time taken for the unit 2, i.e. 80% of 80 hours or 64 hours. The learning curve
depends on the correct knowledge of the reference time and the learning curve percentage.
The learning curve helps production managers to plan for resources. Let us understand
this with the help of an example.
EXAMPLE 23.1 A manufacturing unit has been receiving orders for a new product
just being introduced. Based on past experience it is estimated that an 80% improvement
curve is applicable. It is also estimated that the first unit of the product will require
500 labour hours.
The orders received for the next four months are given in Table 23.1.
Table 23.1(a)
Month Number of units ordered
1 4
2 6
3 8
4 10
How much manpower will be required per month? Assume 24 days working in a
month and 8 hours per day.
Solution: The learning curve can be described as:
Yi= kib
In 0.8
b = 7n2 =--0.3219
The values for the time required for various units is given in Table 23.l(b):
Table 23.1(b)
Unit Hours Total hours Manpower
500
2 400
3 351
4 320 Month 1 1571 8.18
5 298
6 281
7 267
8 256
9 246
10 238 Month 2 1586 8.26
11 231
12 225
13 219
14 214
15 209
16 205
17 201
18 197 Month 3 1701 8.86
19 194
20 191
21 188
22 185
23 182
24 180
25 177
26 175
27 173
28 103 Month 4 1748 9.10
In the first month 4 units are to be delivered. The cumulative time for the first four units
is 1571 hours which translates to 8.18 workers or 9 workers. The requirement for other
months is shown in the table. The learning curve can be used for manpower planning
as well as for calculating cash flows.
23.5 PERFORMANCE AND RETENTION

The performance of employees and the organisation's ability to retain them is dependent
on a large number of factors. While training is an important input to better performance,
the motivation level of the employee and his desire to perform also form a major factor.
The organisation climate must be conducive to better performance. Employees will stay in
an organisation when they feel satisfied. Satisfaction is derived not only from the working
conditions but also to a greater extent from the work content. Work must be designed
to give satisfaction to the worker. We have seen the behavioural problems attached with
assembly line working. Organisations can resort to job rotation, job enlargement and
job enrichment. Job rotation involves multi-skills. Workers can be rotated between jobs
which are essentially similar in nature. Job enlargement involves adding further duties to
a job while job enrichment involves adding more responsibilities to a job. The important
aspects which concern operations managers directly or indirectly are: Industrial relations,
health and safety, and remuneration.
Industrial relations: Conflict between management and the worker has its origin in
the early stages of the industrial revolution. The entrepreneur believed in the rabble
hypothesis. Workers were viewed with contempt and paid minimal wages just enough
to sustain the worker and his family. The worker was exploited by the entrepreneur. It
was only a matter of time before the conflict between the worker and the management
came to the forefront. Karl Marx organised workers into unions. Industrial relations
are concerned with the relationship between management and workers and the role of
regulatory mechanism in resolving any industrial dispute.
Industrial relations cover the following areas:
1. Collective bargaining
2. Role of management, unions and Government
3. Machinery for resolution of industrial disputes
4. Individual grievance and disciplinary policy and practice
5. Labour legislation
6. Industrial relations training
Industrial relations are viewed differently by different groups. The typical trade union
socialist view is that it is a class conflict between the workers and the management. Others
treat it as the competing interests of various groups, while a more benevolent view is that
industrial relations seek mutual cooperation between the workers and the management.
The success of industrial relations depends on a number of factors, the most important
of which is the attitude of the management, the workers and the unions towards each
other. Organisations should treat the workers in a just and fair manner especially when it
comes to wage settlements and working conditions. They should also have unambiguous
procedures in place for grievance and dispute handling. When a company prospers, it
should be prepared to share some of its wealth with the employees. Modern management
holds a much more liberal view of the worker. The employees are considered an essential
part of the team and are expected to cooperate with the management. Practices like TQM
and JIT have led to their empowerment. They are involved in decision making and the
term industrial relations is being replaced by employee relations. This term encompasses
participative management, employee welfare, employee development, employee remuneration
and safety and health.
Since the bulk of the workforce is employed in production or operations, it is
imperative that production and operations managers familiarise themselves with the
industrial relations policy of the company. They should be able to resolve problems on
the shop floor before they escalate into full scale conflict between the management and
the workers. Sensibilities of the worker and the trade union should be kept in mind.
Health and safety: Health, safety and welfare are important factors to keep workers
satisfied. While one may argue that these are not motivating factors but merely hygiene
factors according to Herzberg, these factors create a congenial climate for motivation.
Employees' health includes physical health, mental health, noise control, stress management,
AIDS, alcoholism, drug abuse and violence in the workplace. Ill health leads to reduced
productivity, higher unsafe acts and increased absenteeism. Diseases like white lung
disease (caused by asbestos dust) and black lung disease (caused by coal dust) are
avoidable if proper measures are taken to avoid or control pollution. Excessive noise
at the workplace results in hearing loss. Workers employed in noisy places should be
provided with ear muffs. Similarly those employed on welding tasks must be provided
with proper eye shields.
The Factories Act 1948 as amended from time to time, is the principal legislation,
which governs the health, safety, and welfare of workers in factories in India. The Act
extends to the whole of India. Mine and Railway workers are not included as they are
covered by separate Acts. The Act does not permit the employment of women and young
persons in a dangerous process or operation. Children, defined as those, "who have not
attained an age of 15 years", are not permitted to be hired (Sec. 2, 67) and need to have
medical fitness certificates if he/she has to work and age is not confirmed (Sec. 69).
Sections 11 to 20 of the Act deal with the provision of environmental and sanitary
safeguards that protect the worker from a hazardous environment. Cleanliness of the
working place, privy, benches, stairs, wall, etc. are explained (Sec. 11). Disposal of wastes
and effluents should be without any risk (Sec. 12). Ventilation, temperature inside factory,
dust and fumes emission, lighting, artificial humidification, overcrowding (minimum of
50 cubic metres per person) are specified (Secs. 13-17). There should be a provision for
safe and cool drinking water and provision of water in the latrine and urinal. Safety
measures like fencing of machines, protection of eyes by use of goggles, precautions against
fire, dangerous fumes, etc. are defined (Secs. 21-40). Facilities for washing, and sitting,
canteens, creche (one for more than 30 women) and first aid appliances are provided
(Secs. 42-48). One welfare officer for 500 or more workers is suggested (Sec. 49).
The Act provides for one weekly holiday, and not more than 48 hours of work in a
week for an adult worker. There should be at least half an hour rest after a stretch of
5 hours of continuous work. One full wage leave should be given to an adult worker
for every 20 days of work. 12 weeks of maternity leave should be given to a woman.
Safety is the protection of workers from industrial accidents. An accident is defined
as an unplanned and uncontrolled event in which an action or reaction of an object, a
substance, a person or radiation results in personal injury. The gas leak at the Union
Carbide Plant in Bhopal in 1984 is a grim reminder of the effects of accidents. An accident
free plant results in cost saving and increased productivity. It raises the morale of the
employees and avoids litigation. Accidents involve direct costs of medical expenses and
compensation and indirect costs of loss of productivity, damage to equipment, inferior
quality of production and loss of customers.
Most organisations have safety programmes in place. These deal with the prevention
of accidents and with minimising the loss and damage to persons and property. It is
imperative that the shop floor be made as safe as possible. Potential hazards should be
identified and effective safety measures should be implemented. Managers and supervisors
are fully responsible for the safety of personnel and equipment under their control. They
should ensure that workers are properly trained in safe methods of work and enforce
safety measures strictly. The tendency to move without helmets in areas where overhead
hazards may exist or move without industrial boots in areas where they are necessary
must be strictly curbed. Production and operations managers must ensure that health
and safety measures are properly enforced. It is also their responsibility to ensure that
necessary welfare measures are implemented to ensure the well being of the workers.
A humane approach to their personal problems can go a long way in creating a happy
workplace with increased productivity.
Remuneration: The payment of wages and salaries is an HRM function. Production
and operations managers do not have a direct role to play in the payment of salaries
and wages. However, they have an indirect role both in the fixation of salaries and in
the computation of wages and salaries as they are to maintain proper record of work
hours, overtime and so on. Their role in salary fixation is to provide assistance in job
evaluation. Job evaluation aims at assigning values to jobs and comparing them across
the organisation. Most of the occupations are evaluated on the basis of characteristics
like skill, effort, responsibility and working conditions.
If any Payment By Result (PBR) schemes are being practised by the organisation, the
production operations managers will have to keep records and provide inputs as to the
performance output of each worker.
23.6 LATEST TRENDS

The world today has come a long way from the days of the Industrial Revolution. There
have been changes in the social, political, economic and technological environment. These
changes have affected the way the workforce is treated and looked upon. Let us examine
some of these factors.
The Industrial Revolution marked a shift for the society from being predominantly
engaged in agriculture to working in factories. People began migrating from their
rural homesteads to urban areas seeking employment in factories. The joint families
began disintegrating and the nuclear family took its place. A transient society emerged
moving from place to place and job to job. In the late 1990s, industrial nations became
superindustrialised and their economies transited from industrial economies to service-
based economies.
On the political front, the post World War II bipolar world has disappeared and
economic regional blocs have emerged. The European community has even adopted a
common currency-the Euro. Japan, China, India, and the ASEAN group of nations are
the new emerging economic powers. Trade barriers have broken down. The pre World
War II colonialism has been replaced by neocolonialism, a form of economic exploitation
of emerging markets.
Information technology, computers and a fast developing infrastructure have made
world-wide movement possible. The world has indeed shrunk to a global village. Emphasis
is shifting from mass production to mass customisation.
Employee empowerment: The emphasis on TQM, has made each employee responsible
for quality. The JIT systems even empower an employee to stop the entire assembly line
if some quality problem is detected. The employee has been given the authority take
certain decisions without reference to his superiors. IT has made it possible to access data
at all levels. Organisations are tending to become flatter. The flat organisations depend
on the empowerment of employees for their efficient working.
Employee involvement: The employees are no longer treated as just another resource.
They are fully involved and participate in problem solving. Quality circles are good
examples of such involvement. The styles of management are shifting from the autocratic
to a more participative style. The Japanese effectively use bottom-round management.
Flexitime working: The ever growing trend of the husband and the wife working away
from home has given rise to the problem of balancing family life and work life. The
need for one of the partners to stay at home when the children are small has given rise
to flexitime working. This implies that the worker can choose his own hours of work. A
number of work patterns have emerged. Workers may be able to choose their own start
times, but have to complete an eight-hour shift from then on; or they may be provided a
choice of work time slots to choose from. There may be total flexibility where a worker
may choose to work longer hours for some days so that the designated number of hours
required per week can be completed.
The nature of work has also encouraged flexitime working. For instance, software
engineers involved in creative activity of producing new software often work flexitime
to suit their peculiar requirements as creativity is not a nine to five activity.
Part time workers: The use of part time workers is on the increase. Part time workers
are generally employed on a temporary basis and help organisations to cope up with peak
requirements. For instance, a lot of restaurants employ part time workers at dinner time
to cope with the rush hour. The part time workers are benefitted as they can take up the
part time work in addition to their regular work and the organisation employing them
is benefitted as they being temporary employees are not entitled to any fringe benefits.
Relocation of employees: Transfers and relocation of employees has acquired new
dimensions especially since both the husband and the wife work. The organisation may
have to spend time and effort for the relocation of the entire family by seeking suitable
employment for both the partners at the new location. Globalisation and the rise of
multinational firms may require the relocation of employees to different countries. This
poses its problems as it involves linguistic problems and social and cultural adaptation
on the part of the employee.
Alternative workplaces: IT and computers have made it possible to work away from the
workplace. One could even work from home. Work can be downloaded from computers
at the work site to home computers, processed and sent back through electronic means
over the internet. This saves on cost of commuting between home and the workplace and
on providing work space within the organisation. Besides home offices, other alternatives
such as satellite offices, shared offices and even shared desks can be utilised.
23. 7 SUMMARY
The bulk of the manpower of any organisation is utilised in production or operations. While
the human resource management is performed by the HRM deparbnent, the production
and operations manager has certain responsibility and role towards human resources.
The HRM function involves the acquisition, training and development, performance and
retention, and separation of human resources.
In the acquisition process, the production operations manager has to assist in carrying
out a job analysis and help in framing job descriptions and job specifications. He is
also responsible for identifying training needs of the workers and fulfilling the same in
conjunction with the HRM deparbnent.
The performance of workers and their retention in the organisation depends to a large
extent on the working environment, the work content and the organisational climate.
The production and operations manager must ensure that cordial employee relations
are maintained. He should see that all statutory provisions of the Factories Act 1948
with regard to health, safety and welfare of the workers are complied with. His role in
remuneration of workers is to assist the HRM deparbnent in job evaluation and to keep
proper records of workers' attendance and output performance so that the due wages
can be correctly computed.
The production operations manager must be aware of the changing trends and
conditions at the work place as he will have to manage an empowered and involved
workforce. He will have to schedule work based on flexitime, part time work and work
carried out from alternate workplaces.
The human being is the most important factor of production and is also the most
difficult to manage. An HR deparbnent may exist in the organisation but it performs
more of a staff and advisory role. The line functions and control are exercised by the
production operations manager and the task of managing the human resource bulk of
which is utilised under him becomes his responsibility. The best of plans, schedules
and control mechanisms can fail if the human beings who are to implement them do
not perform as required. An understanding of human resource management is therefore
imperative for the production and operations manager.
I CONCEPT QUIZ I
State True or False
1. The HRM function involves the acquisition, training and development, performance
and retention and separation of human resources.
2. The production manager is responsible for recruibnent and selection of man
power.
3. The production manager has no role to play in the remuneration paid to workers.
4. The production manager must ensure that all provisions of the Factories Act 1948
as amended from time to time are complied with.
5. The rate of learning is the same for all tasks for an individual.
6. A high wage given to the workers is the best method of motivating them.
7. As the bulk of the manpower is utilised in the production or operation, the
production manager is responsible for the HRM functions in an organisation.
8. Fredrick Taylor believed in the rabble hypothesis.
9. Modern management views the worker as 'economic man'.
10. The learning curve is a negative exponential curve.

1. Job description lays down:
(a) The knowledge, skills, other attributes and attitudes required for the job.
(b) The qualifications and skill levels along with other attributes required for a
job.
(c) The responsibilities, duties and tasks involved in a job.
2. An 80% learning curve means that the fourth unit will take:
(a) 80% of the time taken by the first unit.
(b) 80% of the time taken by the second unit.
(c) 80% of the time taken by the third unit.
(d) 80% of the time taken by the fifth unit.
3. The production manager is responsible for:
(a) Selection and recruibnent of manpower.
(b) Identifying training needs of individuals.
(c) Separation of individuals from the organisation.
4. Industrial relations covers the following areas:
(a) Selection and recruibnent.
(b) Collective bargaining.
(c) Performance appraisals.
(d) Training and development.
5. The Factories Act 1948 defines children as persons below the age of:
(a) 10 years (b) 12 years
(c) 15 years (d) 18 years
6. The production managers role in salary fixation is to provide assistance in:
(a) Job analysis. (b) Job design.
(c) Job evaluation. (d) Job specification.
7. Flexitime implies:
(a) Working whenever an individual feels like.
(b) Working at chosen hours but with the proviso that the designated number
of hours required per week is completed.
(c) Working only on Sundays and holidays.
(d) Working two shifts a day.
8. The retention of employees does not depend on:
(a) Working environment. (b) Organisational climate.
(c) Work content. (d) Geographical climate of the facility.
9. Production and operations manager is responsible for:

(a) Recruibnent (b) Selection
(c) Induction (d) Separation
10. The modern nuclear family where both husband and the wife work has given rise
to:
(a) Use of alternative work places. (b) Use of part time workers.
(c) Flexitime working. (d) Employee involvement.
Fill in the blanks:
1. The industrial revolution in its infancy view the worker as ________
2. Taylor introduced the concept of _ _ _ _ _ _ _ wages.
3. The first moving assembly line was set up by __________
4. Job description lays down the _ _ _ _ _ _ __, duties and tasks involved in
a job.
5. The learning curve helps production managers to plan for ________
6. An 80% learning curve implies that each time the cumulative output doubles,
the _________ unit requires 80% of the labour input of the reference
unit.
7. When a worker continues to perform the same task, the time taken by him reduces
till a _ _ _ _ _ _ is reached.
8. The term industrial relations is now being replaced with _________
9. The role of a production manager in salary fixation is to provide assistance in
10. TQM and JIT have emphasised employee ____ and employee involvement.
IQUESTIONS I
23.1 Describe the salient features of Taylor's Scientific Management Theory.
23.2 Write a short note on learning curve. How would you use it for workforce planning?
23.3 What do you understand by industrial relations? What is the difference between
industrial relations and employee relations?
23.4 What are the different types of health hazards faced by employees on the shop
floor? What measures would you take to avoid these hazards?
23.5 What are the contemporary issues in human resource management and how do
they affect the working of the production operations deparbnent?
Case Studies
PLANT
CASE I-THE APSGENSET
Mr. Kapoor, the CEO of Apsara Industries, took his place at the table a little pensively.
He had called a meeting of the heads of various deparbnents to review the causes of
failure of their last product launch. The Apsgenset, a generating set to act as a power
backup for domestic use had been launched with much fanfare. A six month promotional
campaign preceded the launch and the product was expected to capture a large market
share because of its fine features, ease of handling and its competitive pricing. However,
even three months later, sales were still to pick up. Most of the few sets which had
been sold had ended up as 'returns' with a number of complaints from the users. He
wondered what had gone wrong?
The meeting got underway and soon the blame game started.
Mr. Suresh, the marketing head opined, "I think the product itself was poorly designed.
The requirement was to have a light weight portable set, capable of being handled by
the lady of the house with an easy push button start up and simple controls. But what
we got instead was a heavy bulky genset which cannot be moved about easily. The push
button start up does not work and the set has to be manually cranked to start it. The
price too has gone up well beyond the initial estimates as production was unable to keep
the costs down."
"Whenever things go wrong production is blamed, Sir," interjected Mr. Vinod the
production head. "We do the best we can with the designs that are given to us. However,
certain changes are inevitable as the design engineers come up with fancy specs that
cannot be met. They seem to have little regard of our plant capabilities. In this particular
case the design of the starter motor and the supporting battery and circuitry were not
compatible. We could not procure the required parts and so had to make some changes."
"It would be incorrect to blame the design, Sir," butted in Mr. Rakesh from the design
deparbnent. "We studied the design of the best gensets available in the world market
and incorporated their best features into our product design."
"While we do not deny this, you must appreciate that there are trade-offs. If you
want a robust product, the weight is bound to increase," Mr. Vinod shot back.
"Gentlemen, let us not squabble about who is to blame. Let us see if we can rectify
matters. Would you please tell us what are the main complaints?" Mr. Kapoor turned
to Mr. Suresh.
"Sir, the main complaint is the starting problem of the set. There have also been
instances of failure of the fuel pump."
"Sir, we have gone through these complaints. There are three basic electronic relays
in the starter circuit. These must work for the starter motor to function. However, we
find that they have a failure rate of about 30%. This brings down the reliability of the
starter motor."
"We had surveyed the entire market, Sir, and these relays are the best that are
available."
"I am sure our engineers can find some way round this problem. How much do
these relays cost?" Mr. Kapoor asked.
"They are not expensive, Sir. The relays cost a mere flOO each. But the current design
requires us to open the entire motor before we can access them for replacement," added
Mr. Vijay from the engineering deparbnent.
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562 Case Studies
"Can we not improve the reliability of the relays? If we do that, maybe we will not
have to replace them at all," suggested Mr. Suresh.
"But we have produced the motor exactly as per the design approved by the design
deparbnent," Mr. Vinod said defensively.
"No one is blaming you, Vinod. I know, you and your team always produce as close
to the original design as possible. I am sure there is a way out," the CEO reassured the
production manager. "Let us have a relook at the design and see if we can rectify this.
I am sure Rakesh and his team will do the needful."
"Yes Sir."
"Another major problem is with the fuel pump. There have been many complaints
that the pump fails to deliver the fuel to the engine."
"Why do we have a fuel pump?"
"Sir, the fuel tank has been placed at the bottom of the genset and the fuel pump is
required to pump the fuel to the motor which is above the fuel tank."
"But that is the standard design, Sir", shot back Mr. Rakesh.
"Surely, we can do with some originality," retorted Mr. Vinod.
"Gentlemen, if we keep squabbling we will never get anywhere. I think it is time
we changed our whole approach to how things are done. Let me think this over. Shall
we meet tomorrow at the same time?" with this the CEO ended the meeting.
DISCUSSION QUESTIONS
If you were to advise the CEO of Apsara Industries, what changes would you suggest to improve
the design process?
What is the main reason that is hampering the repair of the starter motors? Suggest some
remedial measures?
How would you improve the reliability of the starter motor relays? What would be the reliability
if three relays can be arranged to work in parallel?
Can you suggest methods of reducing the overall cost of production of the Apsgenset and increasing
the reliability at the same time?
CASE II
The Apsgenset was reviewed by a team consisting of members from each department.
A concurrent design approach was adopted. The reliability of the starter motor was
improved by having relays in parallel. The accessibility to the relays was improved by
redesigning the casing of the starter motor. A value engineering expert suggested that
the petrol tank be repositioned above the generator and fuel supplied to it through a
gravity feed, eliminating the fuel pump altogether. Everyone was happy with the modified
design. The elimination of the fuel pump had also resulted in considerable reduction in
the cost of the set.
Mr. Vinod was chairing a meeting of his team of production engineers.
"Gentlemen, now that the design of the Apsgenset has been tweaked, I feel it is time
we also thought of how to make the entire production process more efficient."
"Sir, the present set up has a different shop for making stators and making rotors. You
would agree that there are a lot of common processes. For instance, the core for both the
stator and the rotor has to be machined. Similarly, winding is another common process.
May be we could set things up a little differently and avoid duplication of effort."
"I think, there is something in this suggestion, Sir. However, currently the two
departments compete with each other and the output as a result of the competition
increases."
"I do not quite agree with this," interjected Rajesh from the quality assurance
department. "The competition often lays greater emphasis on numbers rather than quality.
A large number of defectives are being produced, leading to an increase in reworking
and scrap."
"Rajesh does have a point," said Mr. Vinod. "Divide and rule is not always a good
policy. Let us just review the entire process."
"Sir, the generator is made by us while the engine is procured from an outside firm.
The two are then mounted on a frame and coupled. The generator consists basically of
a rotor and a stator. The basic parts are as shown in the diagram:
\ STATOR ASSEMBLY ROTOR ASSEMBLY

1. Rear plug 2. Rear cover 5. Rotor 6. Fan
3. Rear shield 4. Frame with stator 7. Front shield
The stator consists of a core which is machined. Copper winding is then done on the core.
The core is housed in a casing. The rotor also consists of metallic machined cores which
have copper windings on them. The rotor is mounted on a spindle and then inserted in
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564 Case Studies
the stator. A fan is attached to the top of the rotor for cooling. Bushes on the stator are
connected to some switchgear."
"As you would notice, Sir, a lot of machined parts are required. The process of copper
winding is similar in both the stator and the rotor. I would recommend that we resort
to the batch method of production for the stator and the rotor main parts, and then we
could assemble them in a different assembly shop."
" I am not so sure, it will work, Sir," Ranjan, a production engineer, interjected. "The
scheduling of batches will prove difficult, especially when we consider the other products
also that require the same machines for the processing. We might land up with a batch
of rotors and no stators or vice-versa."
"The project approach might be a better idea, Sir."
"No, no, Sir. The activities involved are repetitive in nature. This is not the typical
'one of' situation where a job shop approach would work."
"Can we set up an assembly line? After all, once the individual parts are ready we
are only assembling them to produce the generator."
"Perhaps, we could use an assembly line approach when we finally put the parts
together, but first, we must address what approach would be best suited for making the
main components, i.e. the stator and the rotor."
DISCUSSION QUESTION
Discuss the pros and cons of using batch production methods for making the rotor and the stator.
Can you recommend some method of ensuring smooth production of the generators? Discuss the
feasibility of applying JIT in this case.
CASE III
The Apsgenset team was having an animated discussion when Mr. Vinod walked into the
room. He greeted every one as he sat down. The group was having an informal meeting.
"So, how are things?" he addressed the team.
"Sir, we were just discussing some issues on procurement. We are wondering whether
we should outsource the cores required for the rotor and stator and ask one of our
suppliers to get it made for us or should we manufacture the cores in-house? We could
procure steel flats in bulk and then machine them to our requirements," replied Ajay, a
freshly inducted production engineer. He has graduated from IIT Kharagpur.
"Sir, while we do have the capability of machining them in house, we shall be tying
up our machines unnecessarily. Moreover, our machinists will have to be trained for this
job," Rohit responded. He is in-charge of the machine shop at Apsara.
"But doing it in-house will give us the advantage of ensuring quality. We shall also
be able to build up our own technical capability which will help us in the long run,"
Ajay added.
"True. But what about the cost aspects?" Mr. Vinod interjected.
"I have made some enquiries, Sir. Our suppliers are willing to supply a set of cores
required for one generator at a cost of fl,000. Making it in-house with our existing
machinery will cost us f800 per set," replied Sarthak, an MBA fresher who had recently
joined Apsara. Finance was always his forte.
"I don't quite agree with that. We are presuming that we shall take on the task of
manufacturing cores on our existing machines. This will only be at the expense of delaying
some of our other products. The machine shop is fully loaded at present. If we are to
manufacture the cores in-house, we shall need to procure at least two more machines.
The cost of procurement will be f2,00,000," Rohit informed the others.
"What about the latest machine that we saw at the trade fair last month?", asked
Mr. Vinod. "If I recall correctly, it has a much higher capacity and is more efficient than
what we have at present."
"You are right, Sir. If we use such a machine our cost per set will reduce to f300.
However, the procurement cost of the machine is f6,00,000," Rohit replied.
"Gentlemen, let us work out some scenarios. Marketing has still not been able to give
us an estimate of the likely demand for the next year. We should be getting some figures
from them once the data from the market survey and their field operatives is received.
I am sure you shall be able to come up with the best solution based on our demand."
DISCUSSION QUESTION
Discuss the factors you would consider while making the 'make or buy' decision for Apsara.
What process would you recommend to Apsara for the cores required for the rotor and the stator?
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CASE IV
The Apsgenset team had been summoned for a meeting by Mr. Vinod. Ajay, Sarthak
and Rohit were present.
"Gentlemen, Marketing has finally come up with some estimates of demand. Since
the product is just being launched, I propose that we plan for the next six months. The
forecast demand is as being projected on the slide."

Forecast Demand 160 170 90 100 120 180
SLIDE 1
"I want you to carry out a check on whether we have the capacity to meet this
demand or shall we need extra resources in terms of manpower for this task."
"I feel, we should be able to cope up," replied Rohit, the machine shop in-charge.
"Rohit, we shall have to be sure of ourselves so that we can project our requirement
of funds with some accuracy," Mr. Vinod cautioned.
"I agree with you Sir," butted in Sarthak. "We will have to work out in detail the
effort available and how we shall manage in case we require additional effort."
"We can always resort to overtime," Rohit shot back.
"Yes, but that would result in additional costs. We shall have to pay the workers
more for overtime work."
"Gentlemen, I do not wish to consider overtime, after our last time's experience. You
know what a row the Union made of it. I think we can also rule out sub-contracting any
part of the work as we do not wish to part with the details of our design," Mr. Vinod
said.
"In that case, Sir, we may have to adopt a hire and fire policy and adjust our labour
requirements to meet the forecast demand," opined Ajay, the production engineer.
"But this will involve cost of hiring and firing. It may prove costlier in the long run,"
Sarthak, always the skeptic, added.
"If we do not meet the demand, we may have to carry backorders, or possibly some
inventories if our production exceeds the demand. In both cases we will incur additional
costs," replied Ajay.
"You both are right in your own way. Can we have some idea of the costs?",
Mr. Vinod queried.
"Sir, I was on the HR recruiting committee last week. The cost of hiring and training
a worker is f4,000 per head," Sarthak replied.
"Every time we lay off workers we have to pay them f5,000 as per their terms of
engagement. We have currently a work force of 40 that is being trained especially for
this task. The regular wage is flOO per hour," Rohit added.
"Sir, I feel we should keep a safety stock of 25% of the monthly demand as the
system is still to stabilise," Ajay said.
"That seems to be a fair one. Rohit, take the safety stock into account while planning
the production," Mr. Vinod instructed.
566
Case Studies 567
"Each unit requires 50 labour hours. The number of working days available also vary
from month to month based on the holidays. During these six months, we are likely to
get 25 working days in Jan, 23 in Feb, 24 in Mar, 20 in Apr, 25 in May and 24 in Jun,"
Rohit added.
"Do we have any Apsgensets in stock at present?" Mr. Vinod asked.
"Yes, Sir. We have 40 sets which have been rectified after the design was revised."
"I guess, then that wraps it up. You boys work out the details and come up with a
cost effective production plan." Mr. Vinod signalled the end of the meeting.
"Just one question, Sir. Are we allowed to have inventories and backorders?", Ajay
asked.
"You can consider this also as one of the possible options."
"Sir, we shall not have to provision safety stock if we maintain inventories and
backorders," Rohit replied.
"You are right, Rohit. But let us examine whether we should follow a policy of
maintaining inventories and backorders or not."
"Sir, the inventory carrying cost amounts to f200 per set per month while a stock
out will cost us f500 per month, taking into account the loss of goodwill as well," Rohit
interjected.
"Those figures seem reasonable. You can use them while working out various options.
I'll leave you to work out the details," Mr. Vinod said as he got up to leave the room.
DISCUSSION QUESTION
Discuss the production strategies available to Apsara industries for the manufacture of the
Apsgenset. Work out the best production plan for the Apsgenset.
CASEV
The Apsgenset project was finally approved. The redesigned set had been test marketed
and had received a good response from the customers. Rahul Singh in the procurement
deparbnent was seriously tackling the problems of procuring parts and materials for the
Apsgenset team.
The copper wire required for winding was proving a bit bothersome. The production
deparbnent had projected a requirement of 10000 kg for the coming year. The item was
available with only a few suppliers. The Purchase deparbnent issued an open tender for
the item.
Acme Coppers was willing to supply the copper wire of the required specifications
at f500 per kg but required a minimum order of 150 kg at any time.
India Mettalics quoted a price of f480 per kg but also imposed a minimum order
condition of 500 kg.
The quoted price for Astra Metals was f475 per kg with a minimum order of
800 kg.
The cheapest option from the view of the cost of purchase was Astra Metals.
However, he had also to consider the ordering costs and the carrying costs. The finance
deparbnent would not be too happy to tie down a large amount of money in the raw
material inventory.
He estimated that the cost of placing an order was roughly f200 per order. This was
based on his past experience. But Rahul was not sure of the inventory carrying costs.
Despite his best efforts he had not been able to discern the carrying cost for the inventory
with any accuracy. He estimated that it could vary between 20 to 30%.
DISCUSSION QUESTION
What is the best option for Rahul if the carrying costs are assumed to be 20%? Would your
recommendations change if the inventory carrying costs are assumed to be 30%?
568
CASE VI
The Apsgenset became popular with the market. Based on customer feedback, another
model of the Apsgenset was also introduced. Model A and Model B were essentially
similar to each other and had a number of common parts. The Apsgenset team's efforts
to meet delivery schedules often met with failure. Parts arrived late at the assembly
section or the quantities were inadequate.
"We have to find a way to meet our delivery schedules," Mr. Vinod opened the
meeting. "The marketing department is complaining that they are losing customers and
goodwill on this account."
"Sir, while we indicate the quantities of parts required, we are not receiving them on
time. We do need some time to assemble the sets," said Ramesh, the engineer in charge
of the assembly section.
"But we always start production of the parts and subassemblies as soon as the orders are
released to us and we deliver them to you as soon as they are ready," Rohit replied defensively.
"Let us stop blaming each other. I know, I have a fine team which puts in their best. Let
us try and analyse where the problem occurs," Mr. Vinod tried to pacify his team members.
"Sir, I think the problem lies in our planning process. As soon as marketing passes
on the delivery schedules, we start working on the sets required. Sometimes, we receive
delivery schedules for an earlier date after we have already commenced work on orders
due to be delivered later. We then keep making adjustments in a sort of 'fire fighting'
effort to meet delivery schedules. We should work out how much time we require and
insist that marketing give us that much notice before the delivery of the sets," Ajay opined.
"You do have a point. We shall insist with marketing to freeze orders at some stage
and give us adequate time to produce the sets. However, we shall need some more data
before we can decide how much delivery period we should fix. You would appreciate
that too long a delivery period may not be acceptable by customers?" Mr. Vinod added.
"We should plan our material requirements by working backwards from the delivery
schedules. The plan will have to be dynamic as the inputs will keep changing," Ajay added.
"Good. Let us work out a hypothetical plan to understand the system. For our plan let
us assume that we have to deliver 70 sets of Model A in week Wand 120 sets of Model B in
week W+ 1. I will leave you boys to work out the details." Mr. Vinod walked out of the room.
The Apsgenset team deliberated over the matter and came up with a bill of materials
given below. (The part numbers have been omitted for ease of reference)
A B
C(2) 0(2) C(1) E(2)
~ ~ ~ ~
F(2) G(2)
) ) 1(2) ) ) H(2)
Note: The figures in brackets indicate the numbers required of each part/sub assembly.
569
570 Case Studies
The present state of inventory of the parts/sub-assemblies and the manufacturing

time required for each was compiled and is given in the table below:
Item Stock in hand Lead Time (Weeks)

Model A 15
Model B 25 2
Sub Assembly C 40
Sub Assembly D 55 2
Sub Assembly E 60
Part F 70
Part G 35 2
Material H 80 2
Material I 125
DISCUSSION QUESTION
Develop an MRP to meet the delivery schedules. Marketing department insists that some fluctuations
to their orders will always take place. What measures would you suggest to overcome this problem?
CASE VII
The success of the Apsgenset established Apsara Industries as a name in the manufacture
of generating sets. The management decided to venture out in this field and bagged a
contract to manufacture a stand by 1000 KVA generating set for a hotel. Mr. Vinod was of
the opinion that while Apsara could exploit its expertise in the manufacture of generators,
it would be prudent to get the engine from an external source and then couple it with
the generator. His recommendation was accepted by the management and he was given
the 'go ahead' for the project.
Mr. Vinod called in his team and briefed them about the task.
"Sir, since this is a one-time requirement we could adopt a project management
approach," Ajay remarked.
"I agree with you Ajay. But what we have to do is to estimate how much time the
project will take and how much it will cost. I suggest you all sit down and work out
the details. Let us meet tomorrow at 10.00 a.m.," Mr. Vinod told his team and left the
room.
The production team assembled at the scheduled time next morning.
"Sir, the basic activities do not change. We shall have to assemble a rotor, a stator
and then assemble them in the stator housing. We shall have to connect the bushes and
the switchgear and finally test the generator before we couple it to the engine on the
mounting chassis," Rohit briefed Mr. Vinod.
"I checked with Purchase deparbnent. We should be able to procure materials and
complete machining of rotor parts in two days. The procurement and machining of the
parts for the stator however, will take four days," Ajay added.
"There is some problem in procuring the copper wire for windings. Rahul Singh was
mentioning that it is likely to take four days," Rohit informed the team.
"Sir, the rotor winding is likely to take four days, whereas the stator windings will
take eight days. It shall take six days to assemble the rotor after the rotor winding is
complete," Ajay interjected.
"The final machining of the stator housing will take two days and the assembly
of the rotor and the stator in the stator housing as well as coupling of the bushes and
switchgear will take another 12 days. I estimate the testing will be carried out over six
days," Rohit said.
"I have just been keeping a track of the time frame, Sir. This adds up to 48 days,"
Sarthak addressed the audience.
"It won't take that long, Sir. Some activities can be done simultaneously as they are not
dependent on each other. For instance the procurement for rotor parts, stator and stator
housing components and the copper wire for winding can be undertaken simultaneously
as these activities are independent of each other. Some activities will have to be carried
out sequentially as they are dependent on the completion of one before the other can
start. For instance, rotor assembly can be undertaken only once the winding is complete.
We should be able to reduce the total time," Ajay said.
"I entirely agree with you," Rohit responded. "We shall have to use some technique
to depict this and then work out the final time. Maybe we could use a Gantt Chart."
"Or even a network," said Ajay, comfortable in his own elements.
"OK. You can work this out," Mr. Vinod said. "What about the costs."
571
572 Case Studies
"Sir, I have prepared a rough estimate. The cost for the various activities is on the
slide that I am projecting now," Rohit informed Mr. Vinod as he switched on the slide.
SLIDE
ACTIVITY COST (t)
Procure rotor parts 3,000

Procure copper wire 5,000
Procure stator, stator housing 4,000
Rotor winding 3,500
Stator winding 7,500
Prepare stator housing 6,000
Assemble rotor 4,000
Assemble rotor and stator in housing 16,000
Testing 10,000
TOTAL 59,000
"Sir, we shall also have to add the overhead cost. Last time when we had done the
costing for the Apsgenset, the overhead cost was worked out as f3,000 per day," Sarthak
added.
DISCUSSION QUESTION
Prepare a network for the above project. What is the duration of the project and what is its total
cost?
CASE VIII
The Apsgenset team was discussing the details of the 1000 KVA generator project.
"Sir, we have made a CPM network. The project will take 32 working days and shall
cost fl,55,000," Rohit informed Mr. Vinod.
"That is too long and too expensive. Can we not reduce the time and the cost?"
"Sir, the overhead cost is too much. We should try and reduce this," Sarthak said.
"This is the minimum overhead cost. We can reduce this only if we reduce the
duration of the project," Rohit said defensively.
"Maybe we can reduce the duration of some of the activities by working overtime,
and thus reduce the overall timing of the project," Ajay responded.
"We could do that Ajay, but that will add to the direct cost of the activity. And in
any case, I am not sure whether we can do this for all activities. For instance, I know
that the timing on the rotor winding cannot be reduced as we have only one special
purpose machine for the process," Rohit said.
"I think, Ajay has a point. We may have to carry out some kind of trade off between
costs and time. The reduction of time will lead to a reduction of direct costs, but may
add to the direct costs by way of overtime payments. However, it may be worthwhile
to see what impact it will have. You will have to gather costing data and work out the
details."
The team trooped out of Mr. Vinod's office.
"Come on, Sarthak. I am sure with your financial background you can help us with
the data," Rohit said, as the team moved to their office.
The team carried out a detailed review and came up with the data as shown in the
table below.
ACTIVITY DURATION COST (t)

Procure and machine rotor parts 5,000
Procure copper wire 3 7,000
Procure and machine stator, stator housing 2 10,000
Rotor winding 4 3,500
Stator winding 6 15,000
Prepare stator housing 9,000
Assemble rotor 4 9,000
Assemble rotor and stator in housing 7 26,000
Testing 4 20,000
DISCUSSION QUESTION
What is the optimal duration of the project and what is its cost? What is the least duration of
the project and its cost?
573
CASE IX
The Apsgenset team was having an animated discussion.
"Gentlemen, as you are aware the Apsgenset is doing well in the market, but I
feel we can reduce our costs further. I have been going through the figures. I find that
the manufacturing time for the rotors is showing large fluctuations. Maybe we need
to examine why this is so. I asked Rohit to check on it. Maybe he has some answers,"
Mr. Vinod turned to Ro hit.
"Sir, I have looked at the data for the past month and what you said is right. In fact,
last week we had to redo all the spindles produced in one whole day as they did not
correspond to the specification. Often complete rotor assemblies are returned to us by
the assembly section because the rotor spindles do not fit into the stator housing. Maybe
our machines are getting older and the wear and tear is affecting them," Rohit informed
them.
But the machine was purchased only last year," Mr. Vinod remarked. "Isn't it being
maintained properly?"
"Sir, we are regularly carrying out the maintenance tasks as prescribed," Ajay replied
defensively.
"Maybe the operators are not careful when they set up the machine," suggested
Sarthak.
"The foreman checks the machine set up every morning before production starts. I
don't think we have a problem there," Rohit countered.
"What is the procedure we are following for inspection?" Mr. Vinod asked.
"Sir, at the end of the day the entire lot of spindles is subjected to acceptance sampling
by the Quality Assurance deparbnent. If a lot is found to have more defectives than
acceptable, it is subjected to a hundred per cent inspection and the defectives returned
to us for rectification. Those that are over size have to be re-machined while the ones
that are undersized have to be scrapped," Rohit said. "Unfortunately we have had to
scrap a large quantity lately and this is adding to the costs."
"Why can't we introduce some quality control measures at the operator level?" asked
Mr. Vinod. "Let us look into this."
The spindle diameter was specified as 200 ±0.20 mm. The rods procured for making
the spindles were of 201 mm diameter.
Ajay suggested the use of some statistical quality control measures.
DISCUSSION QUESTION
Discuss the methods that could be adopted to control quality of the spindles. What data needs to
be collected and how should it be collected?
574
CASE IX(A)
Ajay decided to set up a control chart for the operators. Five spindles were taken at
random every hour from the production of that hour and their diameters were measured
and recorded. The data as collected over two days is as follows:
Observed diameter in mm
Sample
2 3 4 5
1 200.00 200.10 200.00 199.90 200.00
2 199.80 199.90 199.90 200.00 200.10
3 200.00 200.10 199.80 200.10 200.10
4 200.20 199.90 200.00 200.00 199.90
5 200.00 200.10 200.10 200.10 200.20
6 199.70 199.90 200.00 200.00 200.00
7 200.10 199.80 199.70 200.30 199.70
8 199.90 199.60 199.50 199.80 200.00
9 200.10 200.00 200.20 200.00 200.10
10 200.20 200.30 200.40 199.50 199.60
11 199.90 199.90 200.10 200.00 200.10
12 200.00 200.00 200.00 200.00 200.00
13 199.90 200.00 200.10 199.90 199.90
14 200.10 200.10 200.10 200.20 200.10
15 200.00 199.80 200.20 200.10 199.90
16 199.70 199.80 200.00 200.20 200.30
What kind of control chart should Ajay prepare?
Are all the observations recorded in control?
How would this control chart(s) be used?
What instructions would you give to the operator?
575
576 Case Studies
CASEX
The introduction of the control charts improved the quality of spindles. The operators
also became motivated as the quality of the spindles was now their responsibility. The
Apsgenset team decided to extend the use of control charts. The bushes though a very
small item were also suffering from quality problems. Ajay collected the data on bushes
which is shown in the table below.
Day Sample Size Nos Defective Day Sample Size Nos Defective
1 160 2 11 160 6
2 170 3 12 150 3
3 150 2 13 140 2
4 120 2 14 130 0
5 140 4 15 150 5
6 150 3 16 150
7 160 1 17 160 1
8 150 3 18 130 2
9 140 1 19 170 2
10 180 4 20 150 2
Prepare a control chart for the operators. How would you use this control chart?
What other quality measures would you suggest to Apsara Industries?
Appendix A-The Standard
Normal Probability Distribution
X-X
z=---
<Y
z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224
0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
577 (Contd.)
578 Appendix A
z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817
2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857
2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890
2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936
2.5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952
2.6 0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4961 0.4962 0.4963 0.4964
2.7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0.4974
2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981
2.9 0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986
3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990
Appendix B-Values of e-i for
Computing Poisson Probabilities
A e-A A e-A A e-A A e-A

0.1 0.90484 2.6 0.07427 5.1 0.00610 7.6 0.00050
0.2 0.81873 2.7 0.06721 5.2 0.00552 7.7 0.00045
0.3 0.74082 2.8 0.06081 5.3 0.00499 7.8 0.00041
0.4 0.67032 2.9 0.05502 5.4 0.00452 7.9 0.00037
0.5 0.60653 3 0.04979 5.5 0.00409 8 0.00034
0.6 0.54881 3.1 0.04505 5.6 0.00370 8.1 0.00030
0.7 0.49659 3.2 0.04076 5.7 0.00335 8.2 0.00027
0.8 0.44933 3.3 0.03688 5.8 0.00303 8.3 0.00025
0.9 0.40657 3.4 0.03337 5.9 0.00274 8.4 0.00022
1 0.36788 3.5 0.03020 6 0.00248 8.5 0.00020
1.1 0.33287 3.6 0.02732 6.1 0.00224 8.6 0.00018
1.2 0.30119 3.7 0.02472 6.2 0.00203 8.7 0.00017
1.3 0.27253 3.8 0.02237 6.3 0.00184 8.8 0.00015
1.4 0.24660 3.9 0.02024 6.4 0.00166 8.9 0.00014
1.5 0.22313 4 0.01832 6.5 0.00150 9 0.00012
1.6 0.20190 4.1 0.01657 6.6 0.00136 9.1 0.00011
1.7 0.18268 4.2 0.01500 6.7 0.00123 9.2 0.00010
1.8 0.16530 4.3 0.01357 6.8 0.00111 9.3 0.00009
1.9 0.14957 4.4 0.01228 6.9 0.00101 9.4 0.00008
2 0.13534 4.5 0.01111 7 0.00091 9.5 0.00007
2.1 0.12246 4.6 0.01005 7.1 0.00083 9.6 0.00007
2.2 0.11080 4.7 0.00910 7.2 0.00075 9.7 0.00006
2.3 0.10026 4.8 0.00823 7.3 0.00068 9.8 0.00006
2.4 0.09072 4.9 0.00745 7.4 0.00061 9.9 0.00005
2.5 0.08208 5 0.00674 7.5 0.00055 10.0 0.00005
579
Appendix C-Table of Random
Numbers
825652 421585 598729 331226 185826 215078 498095 011466

389828 720670 918523 034235 441039 663197 470437 378579
242363 459599 940836 171323 775675 120664 260414 742640
680164 106710 212581 972769 776424 475110 275154 499793
679969 194711 468919 473381 292571 557996 294834 785200
666912 962862 479262 052207 937805 402214 362085 256249
842057 058415 911852 515479 738233 399186 619224 610856
428570 199307 606050 234066 977523 473801 413389 107387
866983 851392 741951 914963 072762 810824 320713 936382
419012 331430 195096 251249 731543 697276 161787 124734
230679 713297 502864 848421 557762 995196 039864 718759
143631 814921 557038 888134 584223 870751 865026 638128
273501 273224 553395 112368 783384 834746 257516 280338
416091 642335 590394 472196 653464 888948 578035 098320
821402 205279 262526 483919 788656 610275 730891 299828
824167 356965 972402 179704 087683 355376 363635 478449
066409 418628 565657 534179 384877 089344 663523 671219
257269 855184 974758 316501 569082 172705 351692 185090
982680 117681 961981 833299 045400 089439 598900 015251
992769 205168 170780 449290 694237 320699 802843 934372
(Contd.)
580
Appendix C 581
687259 784961 318393 158673 541405 353313 099613 511808

678566 415305 927179 042069 371553 240793 047914 779788
511081 544748 181629 999071 094380 126668 222543 813582
408717 230393 906811 011263 832606 240179 012208 111282
119697 757170 378172 238902 476436 291609 107862 527024
121470 170279 526964 526222 245028 637623 314507 989568
759583 081631 910905 217550 771138 561640 081562 236793
756264 488918 881777 145674 882765 855475 834944 202049
543555 469892 030463 390756 835263 329272 000278 945637
319743 407650 747760 964917 661579 587261 707306 670964
749992 890020 101349 564224 455996 555679 537378 807960
192506 821984 922980 807553 189618 450224 868587 605081
712827 885971 336384 844963 593382 816617 214619 993869
001264 632109 162002 242515 960857 791080 410416 914963
072289 164714 872737 364338 384157 026713 560279 716959
472688 487107 093420 696143 035033 278032 765249 723715
820090 321147 200859 855127 413731 465482 717159 439007
706188 690437 001335 325184 852863 187206 762215 928350
543655 454378 667410 851290 733075 748885 013903 761542
324163 824058 287237 166260 058407 833076 851067 543957
Answers to Concept Quiz and
Selected Questions
CHAPTER 1
State True or False
1. True 2. False 3. False 4. False 5. True
6. True 7. False 8. False 9. False 10. True
Tick the correct answer/ answers

1. (b) 2. (c) 3. (d) 4. (d) 5. (d)
6. (a) 7. (d) 8. (b) 9. (a) 10. (b)
Fill in the blanks

1. marketing 2. products, services
3. production 4. physical, sensuous, psychological
5. greater 6. cannot
7. throughput 8. skilled craftsmen
9. standardisation 10. preferences
CHAPTER 2
State True or False
1. False 2. True 3. False 4. False 5. False
6. True 7. True 8. False 9. False 10. False
1. (c) 2. (b) 3. (c) 4. (c) 5. (d)
6. (a) 7. (c) 8. (d) 9. (d) 10. (c)
583
584 Answers to Concept Quiz and Selected Questions
Fill in the blanks

1. reducing 2. made-to-stock
3. support 4. priorities
5. flexibility 6. opportunities, threats
7. core competencies 8. competitiveness
9. order winner 10. made-to-assemble
Answers to Selected Questions

2.9 Labour productivity 4.30; Raw material productivity 2.75; Total productivity 1.63.
2.10 Labour productivity 1.87, 2.22; Raw material productivity 2.33, 2.67; Total productivity
0.897, 1.05; Growth rate 17%
Supplement 1
4 Buy all parts from Vendor 3; Buy all parts from Vendor 1.
5 Make 3 units of A. Profit is f30.
6 Invest fl0,000 in A, f30,000 in B and fl0,000 in C Maximum return
f45,000.
7 Production schedule: Jan. 265, Feb. 0, Mar. 335, Apr. 500, May 500, and Jun. 0.
Total cost f6,260.
8 Production schedule: Sep.-5, Oct.-0, Nov.-7, Dec.--0. Total cost f4,90,000.
9 Advertising invesbnent: print - 0, radio - f40,000, TV - f40,000. Audience reach
2,40,000.
10 Purchase schedule: Oct.--60; Nov.--0; Dec.-30; Jan.-40. Total cost f15,350.
Supplement 2
3 Replace after 6 years. Total cost f30,333.
4 Replace at end of 5 years. Average cost f4,360.
5 Replace at end of fourth year. Average cost f27,000.
6 Replace after fifth year. Average cost f2,70,000.
7 Since the cost of running the new trucks is less than the cost of running the old
trucks, replace now.
8 The average cost for machine Bis f20,000. Replace machine A as its running cost
in all years is more than f20,000.
9 Replace number of poles as follows:
Year 1 2 3 4 5 6 7 8 9 10
50.0 100.5 152.0 255.0 361.1 621.8 1041.7 1579.1 944.5 427.8
Replace all after 6 years.
10 Expected monthly breakdown cost is f85,000. Maintain every 2 months. Average
cost is f38,000.
Answers to Concept Quiz and Selected Questions 585
11 The company should replace all bulbs every three months. The average cost per
month will be f26,230. The company is presently incurring an average cost of
f28,157.25.
12 Replace at the end of every third month. Average cost f2,958.79.
13 Replace at the end of 7 years. Average cost f2,742.86 per year.
14 (a) Replace after 5 years. (b) Replace immediately.
CHAPTER 3
State True or False
1. False 2. False 3. True 4. False 5. True
6. False 7. True 8. False 9. True 10. True

1. (a) 2. (d) 3. (c) 4. (c) 5. (c)
6. (d) 7. (d) 8. (d) 9. (c) 10. (d)
Fill in the blanks

1. form design, functional design 2. design, manufacturing
3. Research 4. production design
5. Form design 6. physical, sensuous, psychological
7. electronics 8. simplification
9. standardisation 10. specifications
CHAPTER 4
State True or False
1. False 2. False 3. False 4. True 5. False
6. False 7. True 8. True 9. True 10. True

1. (c) 2. (b) 3. (c) 4. (d) 5. (b)
6. (a) 7. (c) 8. (d) 9. (d) 10. (d)
Fill in the blanks

1. introduction stage, nearing the end of product life
2. reliability 3. between failures
4. repaired and maintained 5. reliability
6. to repair 7. functionality
8. reliability, maintainability 9. EKC
10. reduced
CHAPTER 5
State True or False
1. True 2. True 3. True 4. False 5. False
6. False 7. False 8. False 9. False 10. False

1. (c) 2. (d) 3. (c) 4. (d) 5. (c)
6. (c) 7. (d) 8. (c) 9. (d) 10. (c)
Fill in the blanks

1. customer's 2. inspected, built
3. failure costs 4. prevention costs
5. appraisal costs 6. control limits
7. quality system 8. itself
9. customer or vendor 10. registrar
CHAPTER 6
State True or False
1. True 2. True 3. False 4. False 5. True
6. True 7. True 8. False 9. True 10. True

1. (c) 2. (d) 3. (a) 4. (b) 5. (b)
6. (a) 7. (a) 8. (a) 9. (d) 10. (c)
Fill in the blanks

1. unique 2. Batch production 3. complete batch
4. one unit 5. integrated database 6. manufacturing process
7. self service 8. personal attention approach 9. materials, information
10. batch, flow

6.10 (a) Sell 500 units.
(b) Sell 750 units.
6.11 (a) Sell 625 irons.
(b) Sell 572 units. The second process is recommended as it will start yielding
profit after 572 units have been sold whereas the first process will yield profits
only when the units sold exceed 625.
6.12 Up to 800 units purchase. Between 800 and 2000 units, use Process A. Over 2000
units, use Process B.
6.13 Up to 1000 units purchase. Between 1000 and 2000 units use, Process A. Beyond
2000 use, Process B.
6.14 If usage is more than 100 minutes switch to Plan C. Switching to Plan B will be costly.
6.15 Up to 140 units use old supplier. Between 140 and 360 units, use new supplier.
Over 360 units use in-house production.
6.16 Up to 4 claims Plan B, between 5 and 10 claims Plan C, and over 10 claims Plan A.
CHAPTER 7
State True or False
1. False 2. True 3. False 4. False 5. True
6. False 7. True 8. False 9. True 10. True

1. (c) 2. (d) 3. (c) 4. (a) 5. (d)
6. (d) 7. (a) 8. (d) 9. (b) 10. (d)
Fill in the blanks

1. productivity 2. method study, work measurement
3. examine, maintain 4. human body
5. operations, inspections 6. layouts
7. understanding 8. human engineering
9. allowances 10. rating

7.5 1.065 minutes.
7.6 Standard time is 0.48 minutes. Standard production is 1000 units.
7.7 Standard time is 5.33 seconds. Standard production is 1606 units.
7.8 Standard time = 2.84 minutes.
7.9 Normal time = 0.93 minutes. Standard time = 1.07 minutes. Wages = f446.
7.10 370 observations.
7.11 Normal time = 1.35 minutes. Standard time = 1.51 minutes. Wages= f543.60.
7.12 1824 observations, 61 visits.
CHAPTER 8
State True or False
1. True 2. False 3. False 4. False 5. False
6. False 7. True 8. True 9. True 10. False

1. (b) 2. (c) 3. (d) 4. (c) 5. (b)
6. (b) 7. (d) 8. (c) 9. (d) 10. (a)
Fill in the blanks

1. acceptable quality level 2. lot tolerance percent defective
3. random variations 4. 3.4, 1.5
5. binomial 6. Poisson
7. better 8. more
9. inspected, built in 10. 1600

8.11 X = 3.51, R = 0.07. Limits for X chart = 3.59, 3.44. Limits for R chart = 0.14, 0.
8.12 Upper limit = 0.1375, lower limit = 0.0225, p = 0.08.
8.13 p = 0.0445, upper limit = 0.0882, lower limit = 0.0075.
8.14 c = 26.65, upper limit = 42.137, lower limit = 11.163.
8.15 c = 4.3, upper limit = 10.52, lower limit = 0. All sarees are within quality.
8.16 X = 3.3, upper limit= 4.97, lower limit= 1.63. R = 2.9, upper limit= 6.13, lower
limit= 0.
8.17 c = 2.05, upper limit = 6.345, lower limit = 0. All rooms are within quality.
8.18 p = 0.0435, upper limit = 0.1047, lower limit = 0. Process is in control.
8.19 X = 991.48, upper limit= 998.57, lower limit= 984.38. R = 12.3, upper limit= 26.0,
lower limit = 0.
CHAPTER 9
State True or False
1. True 2. False 3. False 4. False 5. False
6. True 7. False 8. True 9. False 10. True

1. (c) 2. (c) 3. (c) 4. (d) 5. (d)
6. (b) 7. (c) 8. (d) 9. (d) 10. (d)
Fill in the blanks

1. large capital outlays 2. production technology
3. costs 4. customers
5. paired comparisons 6. safety
7. existing facilities 8. paired
9. break even analysis, transportation models
10. loads
9.3 Select location D. Weighted score 79.25.
9.4 Select Chennai. Total weighted score 82.80.
9.5 From A to Y 100 units. From B to Y 20 units. From B to Z 80 units. From C to
Z 20 units. From D to X 80 units. Total profit fl,040.
9.6 From X to A:1 unit; from Y to B: 3 units; from Z to A: 2 units; from Z to C: 2
units. Total cost f385.
9.7 From A to 2: 10 units; from B to 1: 6 units; from B to 4: 9 units; from C to 1:
2 units; from C to 3: 18 units; from D to 2: 2 units; from D to 4: 5 units. Total
profit f175.
9.8 By median method new location is (320,375); by centroid method (356.92, 373.85).
9.9 New location should be at (241.67, 233.33).
9.10 The best location is X. Load distance is 185000.
CHAPTER 10
State True or False
1. False 2. True 3. True 4. False 5. False
6. False 7. False 8. True 9. True 10. False

1. (a) 2. (b) 3. (c) 4. (c) 5. (a)
6. (b) 7. (c) 8. (b) 9. (c) 10. (c)
Fill in the blanks

1. process structure 2. minimum
3. accessibility 4. process based
5. process based 6. product based
7. maximise 8. materials, information
9. services 10. volumetrically

10.4 The cost reduces by flOO. Interchange Deparbnents B and F.
10.5 Locate loading dock at X.
10.6 Workstation 1: A, C; workstation 2: D, B; workstation 3: E; workstation 4: F, G;
workstation 5: H. Idle time 26.67%. Line efficiency 73.33%
10.7 (a) 50 seconds. (b) Workstation 1: B; workstation 2: A; workstation 3: C, D G;
workstation 4: E; workstation 5: F; workstation 6: H. Line efficiency 81.67%.
(c) 72 seconds. (d) Four workstations required. Workstation 1: B, C; workstation
2: E, F; workstation 3: A, D, G; workstation 4: H. Line efficiency 85.07%.
10.8 (a) 31.5 seconds. (b) Workstation 1: A, B; workstation 2: C; workstation 3: D, E;
workstation 4: F, G; workstation 5: H. Line efficiency 74.92%. (c) 33.6 seconds.
Workstation 1: A, B; workstation 2: C; workstation 3: D, E; workstation 4: F,

G; workstation 5: H. Line efficiency 70.24%. (d) 25.2 seconds. Workstation 1:
A; workstation 2: B; workstation 3: C; workstation 4: D; workstation 5: F, E;
workstation 6: G, H .. Line efficiency 78.04%.
10.9 Workstation 1: A, C; workstation 2: B; workstation 3: E, F; workstation 4: D, J;
workstation 5: H.; workstation 6: G; workstation 7: K. Line efficiency 75%.
10.10 By LOT-workstation 1: A, C, G; workstation 2: B, D, F; workstation 3: E, H, K;
workstation 4: J, L. Line efficiency 79.43%. By RPW-workstation 1: A, C, B;
workstation 2: D, G, F; workstation 3: E, H, K; workstation 4: J, L. Line efficiency
79.43%.
10.11 Workstation 1: A, B, E, C, D; workstation 2: J, F, G, H; workstation 3: K; workstation
4: L. Line efficiency 75%.
10.12 Station 1 2 3 4 5 6
Tasks A,B C, D, E F G,H J K
Worker Anu Bina Fatima Gauri Durga Chaya
Ekta will have to be removed from the line as she has never worked at anything
else except H. Change Fatima and Gauri's jobs as they are bored working only
on job J and K. By reducing one person and one workstation the efficiency of
the line has improved.
10.13 Workstation 1: C, E; workstation 2: F, B; workstation 3: A, D; workstation 4: G.
Line efficiency 93.75%.
CHAPTER 11
State True or False

1. (d) 2. (d) 3. (c) 4. (d) 5. (d)
Fill in the blanks

1. productive capability 2. demand
3. aggregation 4. sequential decisions
5. capacity 6. long
7. stored 8. less
9. excessive 10. twelve to eighteen months

11.2 Allow manufacture by other parties on royalties.
11.3 Invest in A first and if successful then invest in B.
11.4 Test the lot before installation.
11.5 Manufacture 21.67 units of Product Z at a profit of f433.33.
11.6 Produce 137.5 units of A Grade plywood and 25 units of B Grade plywood. Profit
is f6,250.
11.7 Manufacture 13.33 units of B and 33.33 units of C. Profit f306.67.
11.8 Produce 600 trousers and 1200 shirts per day. Profit f42,000.
11.9 Make 33.33 units of transistors, 66.67 units of resistors and no electronic tubes.
Profit f7,333.33.
11.10 Run Line A for 20 days and Line B for 10 days. Alternate solutions exist.
11.11 Machines required: blow room 1; carding machines 6; draw frames 3; simplex
frames 2 and ring spinning frames 8.
SUPPLEMENT 3
4 Average demand during lead time is 4.8 units.
5 Policy 1: Average inventory 3.2 units, orders 5, average stockouts 0.55. Policy 2:
Average inventory 5.3 units, orders 6, average stockouts 0.25.
6 Using 1 machine: Cost of jobs waiting f62,460. Using two machines: Cost of jobs
waiting f16,860. Cost of machines idle fl,520. Total cost f18,380.
7 Use 4 operators.
8 Employ only one attendant.
9 Average waiting time 24 days.
10 Average profit per year f2,90,000.
11 24 cakes per day.
12 All lots are accepted in ten simulations. 10 percent chance of accepting a lot with
more than 5% defectives.
13 Cost of Policy 1 is f64.50. Cost of Policy 2 is f61. Adopt Policy 2.
14 Produce 29 units for an average profit of f267.50 per day. Profit for 30 units produced
per day is f261.50.
15 Average patient waiting time is 35.6 minutes. If the clinic is to close at 12:00, the
last two patients cannot be treated.
16 Average demand is 5.1 units during lead time.
CHAPTER 12
State True or False
1. False 2. False 3. True 4. True 5. True

1. (b) 2. (d) 3. (c) 4. (c) 5. (c)
6. (d) 7. (d) 8. (c) 9. (c) 10. (b)
Fill in the blanks

1. technological 2. trend
3. seasonal 4. autocorrelation
5. Regression 6. mean absolute deviation
7. qualitative 8. accuracy, costs
9. time 10. 0 and 1

12.11 (a) Forecast for Jul. 15. MAD 2.89; MSE 10.89; MAPE 18.07; TS 2.54
(b) Forecast for Jul. 14.25. MAD 3.88; MSE 15.16; MAPE 23.44; TS 2.00
(c) Forecast for Jul. 14.28. MAD 2.48; MSE 6.96; MAPE 18.25; TS 0.16
(d) Forecast for Jul. 15.70. MAD 2.50; MSE 8.91; MAPE 15.47; TS 1.32
12.12 (a) Forecast for Jan., 3 month moving average is 60 units.
(b) Forecast for Jan., 5 month moving average is 56.60 units
(c) Forecast for Jan., exponential smoothing is 56.92. MAD 4.40. MASE 28.60,
MAPE 7.91, TS 7.51.
(d) y = 50.17 + 0.96x; forecast for Jan. 62.65; Feb. 64.57; Mar. 66.49. SE 2.7.
12.13 Quarter 1: 3748.40; quarter 2: 3328.99; quarter 3: 5094.67; quarter 4: 5802.37.
12.14 Forecast demand of sugar is 110.90 kg.
12.15 MAD 43.33; MAPE 63.10%; MASE 2366.67; TS - 4.15
CHAPTER 13
State True or False
6. False 7. True 8. True 9. False 10. True

1. (c) 2. (b) 3. (b) 4. (c) 5. (b)
6. (d) 7. (c) 8. (d) 9. (c) 10. (a)
Fill in the blanks

1. chase 2. stable 3. level
4. chase 5. capacity 6. capacity
7. trial and error 8. capacity
9. marginal analysis 10. representative

13.8 Recommend a constant labour of 6 workers with overtime and subcontracting to
make up each month's demand. Total cost t476600.
13.9 Production schedule: Month 1 = 40, Month 2 = 20, Month 3 = 30 and
Month 4 = 50. Total cost t2210.
13.10 Production schedule: Qr 1 Regular 75; Qr 2 Regular 90; Qr 3 Regular 95;
Qr 3 Overtime 20; Qr 4 Regular 70; Qr 4 Overtime 5. Total cost t5,840.
13.11 Adopt level production strategy. Cost t16,96,200.
13.12 Offer 60 seats at full fare
CHAPTER 14
State True or False

1. (b) 2. (c) 3. (c) 4. (c) 5. (b)
6. (d) 7. (c) 8. (c) 9. (c) 10. (d)
Fill in the blanks

1. idle, economic 2. Ordering costs
3. holding cost 4. cannot
5. equal 6. constant
7. increase, decrease 8. minimum
9. annual usage value 10. higher

14.9 Total cost of existing policy t36,750; total cost using EOQ t36,600; savings
t150.
14.10 Optimal order quantity is 200. Do not accept discount.
14.11 Loss to the company is t442.10. Order quantity 95.
14.12 Order quantity 1000 at a price of ts per unit.
14.13 Order quantity 100 at a price of ts per unit.
14.14 Do not accept the discount. The cost is more by t64.55.
14.15 Optimal run size 3,600. Minimum inventory cost t4,320. Interval between orders
is 1.8 months.
14.16 Optimal lot size 416. Minimum inventory cost= t3,757.
14.17 EOQ 2000. Total cost t74,400. Accept the discount. Total cost t72,220.
14.18 Number of orders A-19.35; B-12.9; and C-7.75.
14.19 Supplier C. Order quantity 250. Total cost fl,57,400.

14.20 (a) Percentage reduction in average inventory 54.3%. (b) Average Inventory ~931.92.
(c) Percentage reduction in purchase workload 58%.
14.21 437 units.
14.22 1282 units.
CHAPTER 15
State True or False
1. True 2. False 3. False 4. True 5. True
6. False 7. True 8. True 9. True 10. True

1. (c) 2. (a) 3. (c) 4. (b) 5. (b)
6. (d) 7. (d) 8. (c) 9. (a) 10. (b)
Fill in the blanks

1. bill of materials 2. assemble
3. aggregate production plan 4. stock in hand
5. gross requirements 6. in hand, on order
7. lead time 8. available
9. load 10. cost

15.10 Week 3: D-400, F-400; Week 4: D--600; Week 5: C-200, E-900; Week 6: B-300;
Week 8: A-100.
15.11 Week 3: D-120, F-120; Week 4: D-420; Week 5: C-110, E-570; Week 6: B-210; Week
8: A-80.
15.12 Week 2: D-50; Week 3: D-50, F-200; Week 4: B-30, D-100, E-150; Week 5: B--60,
C-30; Week 6: A-30.
15.13 Week 3: H-12950; Week 5: G--6565, H-1360, 1-8385; Week 6: F-4330, 1-5020; Week 7:
C-2230, E-2190, F-2510, G--665, 1-2660; Week 8: B-1155, D-1255, F-1330; Week 9:
C-665; Week 10: A--665.
15.14 Overdue: Housing RO-275, Housing RW-75; Month 1: Drives-300, Housing
RO-525, Housing RW-175; Month 2: Drives-700, Housing RO-525, Housing
RW-175; Month 3: CD RO-375, CD RW-125, Drives-700, Housing RO-750,
Housing RW-250; Month 4: CD RO-525, CD RW-175, Drives-1000, Housing
RO-750, Housing RW-250; Month 5: CD RO-525, CD RW-175, Drives-1000,
Housing R0-750, Housing RW-250; Month 6: CD R0-750, CD RW-250, Drives-1000;
Month 7: CD RO-750, CD RW-250; Month 8: CD RO-750, CD RW-250.
15.15 Least total cost method is recommended. Least total cost is f58.00.
CHAPTER 16
State True or False

1. (c) 2. (d) 3. (c) 4. (d) 5. (d)
6. (b) 7. (d) 8. (b) 9. (c) 10. (a)
Fill in the blanks

1. zero 2. columns 3. Hungarian 4. opportunity 5. one
6. set up 7. first 8. after 9. minimum 10. heuristic

16.4 Optimal sequence Pl, PS, P6, P4, P3, P2 or PS, Pl, P6, P4, P3, P2. 39 days.
16.5 Optimal sequence 1, 3, 5, 2 and 4. Time 26 weeks.
16.6 Optimal sequence E, B, D, C and A. Time 30 weeks.
16.7 Optimal sequence 4, 1, 3, 2, 5 and 6. Time 460 hours (complete enumeration by
computer). Optimal sequence 4, 3, 2, 1, 5 and 6. Time 470 hours.
16.8 Optimal sequence 4, 6, 1, 2, 5 and 3. Time elapsed 77 hours.
16.9 Optimal sequence B, E, D, C and A. Time elapsed 40 hours.
16.10 Optimal sequence 2, 1, 4, 6, 5 and 3. Time elapsed 209 hours.
16.11 Optimal sequence 4, 1, 5, 2 and 3. Time elapsed 72 hours.
16.12 Machine 1: B, E, H, I, G, F, J, A. Machine 2: F, J, A, D, C, B, E, H. Time elapsed
37 hours.
16.13 Job 2, Job 3, Job 1. Time elapsed 39 hours.
16.14 Sequence Job 4, Job 5, Job 2, Job 6, Job 1 and Job 3. Total time 93 hours. Idle time:
Machine A 37 hours, Machine B 42 hours, Machine C 14 hours.
16.15 Job 1, Job 5, Job 4, Job 2, Job 3. 51 hours. Machine A idle for 19 hours, Machine B
idle for 31 hours, Machine C idle for 9 hours.
16.16 26 hours.
16.17 22 hours.
16.18 Machine A: 1, 2; Machine B: 2,1; Machine C: 1, 2; Machine D: 1, 2; Machine E: 1,
2; Machine F 2, 1. Time 145 hours.
16.19 One split shift for 3 from 0800 to 1000 hours and from 1800 hours to 2000 hours.
5 persons from 1000 to 1400 hours; 3 persons from 1100 to 1500 hours; 2 from
1400 to 1800 hours; 3 from 1500 to 1900 hours; 2 from 1600 to 2000 hours; 3 daily
as casual employees from 1900 to 2000 hours. Total 75 hours scheduled against
requirement of 72 hours.
16.20 FCFS. Job A completed on time. B, C, D, E, F and Gare delayed. Average delay
15.86 days. SOT: Jobs C, D and G are completed on time. Jobs F, B, A and E are
delayed. Average delay 7.57 days. DDATE: Jobs G, F and C are completed on
time. Jobs B, A, D and E are delayed. Average delay 8 days. STR: Jobs G and
F are completed on time. All other jobs are delayed. Average delay 10.29 days.
CR: Job A is completed on time. All other jobs are delayed. Average delay 17
days. LCFS: Jobs G, F and E are completed on time. All other jobs are delayed.
Average delay 10.57 days. LPT: Job E is completed on time. All other jobs are
delayed. Average delay 20.57 days.
16.21 JlD, J2B, J3A, J4C, J5E. Total cost f450.
16.22 TlA; T2B; T3C; T4D. Cost f204.
16.23 A4, B2, C3, D5. Total profit f3,760. Do not accept Job 1.
16.24 A4, B6, CS, D3, El, F2. Total mileage 77 km.
16.25 Al, B4, CS, D3, E2. Cost f85 lakhs.
16.26 B3, Dl, E2. Cost f8.29 lakhs.
16.27 AG, BF, CE, DH. Dead mileage 156 km.
16.28 A4, B3, Cl, D2. Rating 210.
CHAPTER 17
State True or False
6. True 7. False 8. False 9. True 10. False

1. (c) 2. (b) 3. (b) 4. (c) 5. (d)
6. (c) 7. (b) 8. (d) 9. (c) 10. (a)
Fill in the blanks

1. Information 2. communication
3. bull whip 4. transport structure
5. package, ship 6. duties
7. inventory turnover 8. producers, distributors, customers
9. inventory carrying 10. Information
CHAPTER 18
State True or False
1. True 2. False 3. False 4. True 5. True

1. (c) 2. (c) 3. (b) 4. (b) 5. (c)
Fill in the blanks

1. customers
2. financial accounting, human resources, sales and distribution, manufacturing and
logistics
3. integration 4. modular
5. functions 6. business function
7. once 8. compatible
9. parallel runs 10. incorporates
CHAPTER 19
State True or False
1. False 2. True 3. False 4. True 5. False

1. (c) 2. (c) 3. (c) 4. (b) 5. (b)
6. (b) 7. (c) 8. (c)
Fill in the blanks

1. kanbans 2. upstream, downstream
3. Kaizen 4. cellular
5. uniform plant loading 6. elimination of waste, respect for human beings
7. external, internal 8. below
9. Kaizen 10. JIT
CHAPTER 20
State True or False
1. True 2. False 3. True 4. True 5. False

1. (b) 2. (a) 3. (d) 4. (d) 5. (c)
6. (a) 7. (c) 8. (a) 9. (d) 10. (a)
Fill in the blanks

1. infinite 2. Poisson 3. exponentially
4. infinite 5. infinite 6. first come first served
7. single channel single server 8. pre-emptive

9. 0.7 10. steady state

20.6 10 minutes.
20.7 (a) 0.6, (b) 0.4, (c) 2/3, (d) 10 minutes.
20.8 (a) 0.3, (b) 3/7, (c) Arrival rate 40/3 machinists per hour.
20.9 (a) 0.42, (b) 0.48, (c) 25 minutes.
20.10 Hire Y. Cost f34 per hour.
20.11 (a) 1.33 calls, (b) 8 minutes, (c) 12 minutes.
20.12 (a) 4.166, (b) 30 minutes, (c) 16.66%.
20.13 Employ another crew. Cost reduced from f116 to f92 per hour.
20.14 f12,000.
20.15 Do not hire operator for photocopying. Cost of clerks on photocopying is f16 per
hour.
20.16 (a) 33.33%. (b) 2. (c) 1.33. (d) 24 minutes.
20.17 (a) Good weather 1/6 plane; bad weather 4/3 planes. (b) Good weather 1.5 minutes;
bad weather 6 minutes.
20.18 Idle time 10%. Management will provide an assistant as average waiting time is
27 minutes.
CHAPTER 21
State True or False
1. True 2. False 3. True 4. True 5. False

1. (c) 2. (b) 3. (b) 4. (b) 5. (c)
6. (a) 7. (d) 8. (c) 9. (c) 10. (c)
Fill in the blanks

1. probabilistic 2. interference
3. pessimistic, most likely, optimistic 4. predecessors
5. critical path 6. crash
7. crashing 8. direct, indirect
9. least 10. critical path

21.6 Critical path 1-2-3-4-5-6-7-8 and 1-3-4-5-6-7-8.
21.7 Critical path 1-3-7-9. Duration 15 months. We do not need another crane. It can
be scheduled as: 1-3 from Day Oto Day 2; 3--6 from Day 2 to Day 7; 5-8 from
Day 7 to Day 8; and 8-9 from Day 11 to Day 14.
21.8 Design Y-Design Z-Procure materials for Z-Groove Z-Groove Y-Groove X-Polish
X-Assemble. 22 days.
21.9 B-E-F-H-1-J. A-E-F-H-1-J. Time 25 months.
21.10 A-D-E-F-1-J. 32 weeks.
21.11 A-E-H-1-K. 40 days.
21.12 A-B-D-F-G-H-1. 41 weeks.
21.13 A-E-F-C-D-H. 57 days.
21.14 B-F-K-L. 24.67 weeks. Variance on critical path is 4.0555. Probability to finish in 26
weeks or less 0.746. Probability of finishing in 23 weeks or less 0.2039. Probability
of finishing in 25 weeks or more 0.4343. At 95% confidence level completion time
is 27.97 weeks.
21.15 A-D-F. 18 weeks. Probability of completing in 20 weeks or less 84.14%.
21.16 Critical activities are A, B, C, D, G, H and I. Expected mean duration 14 months.
Probability that contractor will have to pay a fine is less than 0.001.
21.17 Normal duration 25 days. Minimum duration 18 days. Percentage increase in cost
to complete in 21 days is 15.55%.
21.18 Normal duration 45 days. Critical path A-C-E-F. Shortest duration 33 days.
Optimal duration 38 days at a cost of f64,400. Crash E by 3 days and F by
4 days.
21.19 Normal time 21 days. Shortest time 16 days. Most economical time 19 days. Cost
f73,550.
21.20 Optimal duration-24 days at a cost of fl,75,000.
21.21 Expected completion time 160.17 days. Probability of completion in 165 days is
0.9478.
21.22 Expected completion time 53 days. Critical path B-D-E-G-H, and B-F-G-H.
Probability of completing within 60 days is 0.9659.
21.23 Expected time of completion 53.67 days. Critical paths A-B-E-F-H-1, and A-B-E-H-1.
Probability of completing within 56 days is 0.5849.
CHAPTER 22
State True or False

1. (c) 2. (d) 3. (b) 4. (d) 5. (d)
Fill in the blanks

1. batch 2. backwards
3. accumulated quantity 4. accumulated quantity
5. critical resources

22.2 Activity 1-2 2-3 3-4 5-6 4-8 6-7 8-9 9-10
Sep. 19 420 373 310 213 177 177 123 103
Oct. 15 420 420 420 420 177 420 310 257
22.3 Week B-1 A-2 1-3 C-4 D-5 3-6 4-7 5-8 7-9 8-10
-3 96 36 36 26 14 6 6
4 136 132 132 124 114 96 96 54 54 26
7 136 136 136 136 134 132 132 114 114 74
22.4 1-2 2-3 4-5 5-6 3-7 7-8 8-9 9-10

13 Jan. 70 55 33 27 27 22 15 6
15 Feb. 133 123 97 82 82 67 53 32
11 Apr. Delivery completed
CHAPTER 23
State True or False
1. True 2. False 3. False 4. True 5. False

1. (c) 2. (b) 3. (b) 4. (b) 5. (c)
6. (c) 7. (c) 8. (d) 9. (c) 10. (c)
Fill in the blanks

1. 'economic man' 2. differential
3. Ford Motors 4. responsibilities
5. resources 6. most recent unit
7. plateau 8. employee relations
9. job evaluation 10. empowerment
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Index
ABC analysis, 352 Bull whip effect, 419

Acceptance sampling, 162 Business process, 431
Accessibility, 47, 79
Accuracy, 79
Activity, 479 Canon, 16
sampling, 137 Capacity, 239
Aesthetics, 79 Capacity requirements planning, 375
Aggregate capacity planning, 317 Capital intensity, 100
Aggregate planning techniques Carrying costs, 342
linear programming approach, 324 Causal methods, 295
transportation model approach, 327 Cause and effect diagram, 89
trial and error method, 319 Cellular manufacturing, 107
Aggregate planning for services, 330 Chance node, 240
Aggregate production planning, 315, 316 Check sheet, 87
Analytical estimating, 141 Collaborative Product Commerce (CPC), 40, 434
Annual usage value, 352 Competitive priorities, 16
Arrival rate, 457 cost leadership, 17
Assembled-to-order, 20 flexibility, 18
Assignment model, 389 quality, 18
Availability, 47 time, 18
Average outgoing quality limit (AOQL), 166 Completeness, 79
Computer Aided Design (CAD), 37, 40
Computer Aided Engineering (CAE), 40
Backward scheduling, 388 Computer Aided Manufacture (CAM), 40, 109
Bajaj Auto, 17 Computer Integrated Manufacturing (CIM), 109
Basic time, 134 Concurrent design, 33
Batch production, 102 Consistency, 79
Bath tub curve, 45 Consolidation, 373
Baxter, 10 Continuous flow production, 104
Bell's principle of optimality, 58 Control chart, 87
Beta distribution, 503 using, 160
Bill of materials, 371 Core competencies, 16
Blackett, Professor P.M.S., 8 Cost crashing, 493
Bottom-round management, 446 Courtesy, 79
Break even analysis, 190 CPFR, 425
605
606 Index
Crash cost, 493 Facility location, 185

Critical activities, 485 factors affecting, 186
Critical path, 485 services, 203
Critical path method, 477 Factor rating analysis, 189
Cross-docking, 424 Factories Act 1948, 552
Customer Relations Management (CRM), 431,435 Failure, 45
Feasibility study, 34
economic analysis, 34
Decision tree, 240 market analysis, 34
Decision node, 240 technical analysis, 34
Delphi technique, 253 Features, 78
Dispatch list, 404 First come, first served, 455
Dispatching, 389 First hour principle, 405
Distribution, 423 Fixed interval system, 359
Dummy activity, 479 Fixed order quantity system, 357
Durability, 78 Fixed quantity fixed interval system, 360
Dynamic programming, 47, 58 Flexible manufacturing system, 109
optimal policy, 59 Flexitime working, 554
policy, 58 Float, 485
stage, 58 free, 485
state, 58 independent float, 486
interference float, 486
total, 485
Earliest Start Time (EST), 482 Flow production, 103
Economic man theory, 546 Flow chart, 88
Economic Order Quantity (EOQ), 344, 378 Flow process chart, 121
EKC concept, 53 Focused factories, 442
Employee Forced decision matrix, 189
empowerment, 553 Ford, Henry, 7
relations, 549 Forecasting, 287
EOQ model Forecasting accuracy measures
assumptions, 345 mean absolute deviation, 304
discounts and price breaks, 346 mean absolute percentage error, 305
eliminating instant receipt assumption, 348 mean square error, 305
Equipment balancing, 248 tracking signal, 305
Ergonomics, 127 Forecasting method selection, 306
Erlang, AK., 453 Form design, 34
ERP (Enterprise Resource Planning), 368, 431, Forward scheduling, 388
implementation, 433 FSN analysis, 356
modularity, 431 Functional design, 34
Event, 479
numbers, 482
Explosion, 373 Gantt chart, 403
Exponential smoothing, 292 Gilbreth, Lillian, 7
trend adjusted, 293 Group technology, 107, 442
Facility layout, 210 Hawthorne studies, 8, 547

factors affecting, 211 Herzberg, 8
fixed position layout, 212 Hiejunka, 444
hybrid layout, 212 Histogram, 87
process layout, 212 Historical analogy, 289
product layout, 212 Holding costs, 342
Index 607
Idea generation, 33 M/M/1 queues, 456
Identity dummy, 480 Machine balancing in group technology, 226
Industrial relations, 551 Made-to-order, 20
Industrial revolution, 547 Made-to-stock, 20
Input/ output control, 404 Maintainability, 47
Interchangeable parts, 7 Maintenance, 49
Inventory, 341, 419 Market research, 288
Inventory models, when costs are not known, Maslow, 8
349 Mass production, 7
Inventory status file, 372 Master Production Schedule (MPS), 316,370,387
ISO 9000: 2000, 89 Material handling, 132
certification, 90 Material management, 339
principles, 90 Material Requirements Planning (MRP), 317, 367,
Item master file, 371 Mayo, Elton, 8, 547
McGregor, 8
Mean Time between Failures (MTBF), 47
Jidoka, 443 Mean Time to Repair (MTTR), 48
Jishu Hozen, 50 Median load method, 200
JIT, Method study, 120
elimination of waste, 441 critical examination, 124
five S's, 447 develop, 125
implementation requirements, 447 install, 125
respect for people, 446 maintain, 125
Job record, 121
analysis, 548 select, 121
description, 548 Miles, Lawrence, 51
evaluation, 553 Modular design, 36
shop, 101 Monte Carlo simulation, 257
specification, 548 Multi-channel
value, 399 multi server, 454
Johnson's rule, 397, 400 single server, 455
Just-in-time (JIT), 440 system, 455
Multiple activity chart, 122
Multiple regression, 298
Muther's grid, 218
Kaizen, 50, 447
Kanban, 444
Netting, 373
Network analysis, 477
Last in first out, 456 Nonpre-emptive priority, 455
Latest Finish Time (LFT), 483
Lead time, 345
Leaming curve, 548 Offsetting, 373
Least Total Cost (L TC), 379 Oil and Natural Gas Corporation (ONGC), 16
Least Unit Cost (LUC), 380 Operating characteristics curve, 163
Line of Balance (LOB), 533 Operations management, definitions, 6
Line balancing, 219 Operations strategy, 15
Linear programming, 244 Order
Linear regression, 295 qualifiers, 20
Load distance method, 199 winners, 20
Loading, 389 Ordering costs, 342
Logistic management, 423 Outline process chart, 122
Lot size, 377 Outsourcing, 422
608 Index
Panel consensus, 288 Quality

Pareto analysis, 87 appraisal costs, 80
Pareto, Villefredo, 352 circles, 85
Performance, 78 conformance to design, 79
specifications, 33 control tools, 86
Personal-attention approach, 112 costs of, 80
PERT (Programme Evaluation and Review of design, 78
Technique), 477, 502 employee suggestions, 85
Polaris missile, 477 failure costs, 80
Predetermined motion time systems (PMTS), 139 prevention costs, 81
Pre-emptive priority, 455 Queue discipline, 455
Preliminary design, 34 Queues, 452
Priority rules, 393 Queuing
CR, 393 calling population, 454
DDATE, 393 cost behaviour, 453
FCFS, 393 economic aspects, 461
LCFS, 394
LPT, 394
SOT, 393 Rabble hypothesis, 546
STR, 393 Random number, 260
Process capability, 150 Reliability, 46, 78
Process control-p chart, 152 Remuneration, 553
Process control-c chart, 154 Replacement models, 47, 68
Process control-X and R chart, 155 Reputation, 79
Process design, 99 Resource levelling, 498
factors, 100 Response, 79
services, 109 Rough-cut capacity planning, 317
Process improvement teams, 86 Routing, 399
Process quality control, 148
Process selection
economic analysis, 106 Safety, 551
investment, 105 Safety stock, 357
variety and volume, 105 Sampling plans, 167
Product double, 167
concept, 33 sequential, 168
design, 31 single, 167
DFMA, 37 Scatter diagram, 88
simplification, 35 Scheduling, 387
quality, 77 employee scheduling, 405
quality dimensions, 78 finite loading, 388
structure tree, 372 infinite loading, 388
Production design, 32 Scientific management, 7
Production-line approach, 112 theory, 546
Production planning strategies Seasonal index, 301
chase strategy, 318 Selective inventory control, 352
level strategy, 318 Self-service approach, 112
stable work force-variable work hours, 318 Sequencing, n Jobs 2 Stations, 397
Production planning system, 315 Service
Productivity, 21 characteristics
Project, 101 heterogeneity, 37
Putaway, 424 intangibility, 37
Index 609
perishability, 37 Tai-ichi Ohno, 440
simultaneity, 38 Taylor, F.W., 7, 109, 546
classifications Three bin system, 359
factories, 39 Three time estimates, 502
shops, 39 Time fences, 371
concept, 38 Time series decomposition, 301
design, 38 Time series forecasting, 289
delivery specifications, 39 Time study, 133
design specifications, 39 Timeliness, 79
performance specifications, 39 Total quality management, 82
layout, 229 principles, 82
package, 38 Toyota, 18
quality dimensions, 79 Transportation model, 194
rate, 407 Travel charts, 123
Serviceability, 79 Two bin system, 359
Services Two handed process chart, 122
classifications
mass, 39
personal, 39 Updating networks, 505
professional, 39 Usability, 36
physical benefits, 5 Utilisation factor, 409
psychological benefits, 5
sensual benefits, 5
Shop floor controls, 317 Value, 51
Simple moving average, 290 analysis, 51
Simulation, 247, 257, 360 engineering, 17
continuous variables, 267 Variable order variable interval system, 360
Simultaneous motion chart (SIMO), 123 VED analysis, 356
Single channel Vertical integration, 100
multi server, 455
single server, 455
system, 454 Waiting lines, 452
Six sigma quality, 151 Wal-Mart, 10
Smith, Adam, 7 Warehouse Management Systems (WMS), 424
Specifications, 78 Warehouse optimisation, 424
Standard time, 134 Watt, James, 7
Standardisation, 35, 47 Weighted moving average, 291
Statistical quality control, 148 Whitney, Eli, 7
Steady state, 458 Work study, 119
Stockout cost, 341 behavioural impact, 120
String diagram, 123 Work measurement, 7, 120, 132
Suppliers, 421 Working environment, 131
Supply Chain Management (SCM), 417, 431, 436
information, 419
Synthetic timings, 140 Yard management, 424
Systematic layout planning, 217 Yield management, 331

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PHI Learning [;Ju1IT\Y7GJO@ ~D[illDG@dJ

Fifth Printing (Second Edition) May, 2015

Part I: The Why of Production and Operations Management

2. Operations Strategy and Competitiveness 15-27

Part II: The What of Production and Operations Management

3.2 Traditional Approach 32

4. Reliability, Maintainability, Availability and Value Analysis 44-57

Supplement 1: Dynamic Programming 58-67

Supplement 2: Replacement Models 68-76

5. Product Quality 77-95

Part III: The How of Production and Operations Management

6. Process Design and Selection 99-118

7. Work Study 119-147

8. Process Quality-Statistical Quality Control 148-182

8.11 Average Outgoing Quality Limit (AOQL) 166

Part IV: The Where of Production and Operations Management

10. Facility Layout 210-238

11. Capacity and Equipment Selection 239-256

Part V: The When of Production and Operations Management

13. Aggregate Production Planning 315-337

14. Material Management and Inventory Control 338-366

14.7 EOQ Model 344

15. Material Requirements Planning 367-386

16. Operations Scheduling 387-416

17. Supply Chain Management 417-429

18. Enterprise Resource Management 430-439

19. Just-in-Time Production System 440-451

20. Queuing Theory 452-475

21. Project Planning and Control I-Network Models 476-532

21.7 Calculating Earliest Start Time 482

22. Project Planning and Control II-Line of Balance 533-541

Part VI: The Who of Production and Operations Management

23. Human Resources in Operations Management 545-557

Case Studies 559-576

Needs ~ Satisfiers (Products or

Figure 1.1 Customer Satisfaction-Closed Loop.

Prod uct service Needs

Finance Marketing Personnel

Sales and de mands Organisation s abil ity

Figure 1.3 Information Flows and Relationship between Production and

1.2 DIFFERENCE BETWEEN PRODUCTS AND SERVICES

1.3 WHAT IS OPERATIONS MANAGEMENT?

Most of the definitions emphasise the transformational aspects of operations

1.4 BRIEF HISTORY OF OPERATIONS MANAGEMENT

THE FIRST ASSEMBLY LINE

Industrial revolution Late 1700s

Table 1.2 Historical Perspective

Industrial Replaced traditional craft methods

Table 1.2 Historical Perspective (Contd.)

Developments Just-In-Time (JIT): Techniques designed to achieve high volume production

Japanese Total Quality Management (TOM): Techniques designed to achieve high

1.5 IMPACT OF INFORMATION TECHNOLOGY AND GLOBALISATION

Globalisation: Today, operations can be spread globally. Business Process Outsourcing

1.6 ORGANISATION OF THIS BOOK

7. The production/operations function of a firm are independent of other functions

9. The introduction of interchangeable parts gave rise to the need for _ _ _ _ _ __

• Define the role of business strategy

2.2 BUSINESS STRATEGY

2.3 COMPETITIVE PRIORITIES

Figure 2.1 Developing Business Strategy.

Table 2.1 Competitive Priorities

Cost • Eliminate wasted labour, materials and facilities

2.4 ORDER QUALIFIERS AND ORDER WINNERS