Operations and Supply Chain Management (OPMC002)

OPERATIONS AND
SUPPLY CHAIN MANAGEMENT OPMC002
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Published by: Ins
Printed by:
e of Management Technology,
Centre for Distance Learning, Ghaziabad
orms Pvt. Ltd., New Delhi

ISBN is 978-81-951960-1-2
PH OPERATIONS AND
SUPPLY CHAIN MANAGEMENT
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EXPERT COMMITTEE
Prof. (Dr.) S. R. Musanna Prof. (Dr.) S. Venkat
IMT CDL, Ghaziabad IIM Lucknow, Noida Campus
Prof. (Dr.) Ravindra Kumar Prof. (Dr.) Kunal Ganguly

IMT CDL, Ghaziabad IIM, Kashipur
Prof. (Dr.) Subhajit Bha acharya Mr. C. K. Mani

IMT, Ghaziabad Logchain India
Prof. (Dr.) A. H. Kalro (Retd.) Prof. (Dr.) Asif Zameer
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IIM, Kozhikode IMT CDL, Ghaziabad
Prof. (Dr.) P.K. Jain

IIT, Delhi
Prof. (Dr.) B. B. Chakrabor (Retd.)

IIM, Kolkata
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SLM PREPARATION TEAM
Dr. Sourabh Kulkarni Prof. (Dr.) Bhupender Som
FORE School of Management, New Delhi
Dr. Abhay Kumar Srivastava

C Fortune Ins tute of Interna onal
Business, New Delhi
Dr. Sadia Samar Ali

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Ins tute of Public Enterprise, Hyderabad King Abdul-Aziz University,
Jeddah , Saudi Arabia
Dr. Sumeet Singh Jasial

Amity Business School,
Amity University – UP, Noida
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COURSE COORDINATOR EXPERT REVIEW

Dr. Vivek Singh Tomar Prof. (Dr.) Vivek Kumar
IMT CDL, Ghaziabad Director, Relaxo Footwears Ltd.
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PUBLISHER & PRINTER

Cover Concept by: Ms. Ramneek Majithia, Communication Design Product Management Consultant
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ISBN: 978-81-951960-1-2
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ACKNOWLEDGEMENT
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We acknowledge, with gra tude, the assistance taken, in preparing the study
material of the present course, from the texts, websites, and a/v sources cited at
different places within the Units. We, thankfully, also acknowledge the
assistance taken by us from the content generated by individual authors,
publishing houses, educa onal ins tutes, research agencies, consultancies,
government bodies and public sources of commercial organiza ons etc. (cited
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within the Units). Special thanks to our PGDM-Execu ve student Ms. Ramneek
Majithia for helping us in cover concept & design.
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COURSE INTRODUCTION
OPERATIONS AND SUPPLY CHAIN MANAGEMENT
Opera ons and Supply Chain Management (OSCM) is a broad area of Management Studies that covers
manufacturing and service industries, the func ons of sourcing, materials management, opera ons planning,
and distribu on. It also includes logis cs, retail, demand forecas ng, and order fulfilment besides a few more
opera ons.
As the learners complete the program, they get a richer understanding of the complexi es faced by companies
in the networked eco-system of the modern globalized economies. This course is especially useful for those
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aspiring to make a career in Supply Chain Management and associated Opera ons. The course dwells at length
with the issues connected with global economy that is linked together by the flow of products, informa on, and
finances.
The Opera ons and Supply Chain Management Course is made up of thirteen units mainly dealing with the key
areas of logis cs, opera ons, planning, and sourcing. It also covers Forecas ng, Inventory Management, Sales
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and Opera ons Planning, and Resource Planning.
UNIT-1, Introduc on to Opera ons and Supply Chain Management deals with opera ons func on as process of
value addi on, and importance of strategy, and role of opera ons in corporate strategy. It emphasizes the point
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that “Opera ons” is at the core of an efficient organiza on.
UNIT-2, Product and Service Design defines various aspects of design process and discusses the issues involved
in screening a new product idea. It also takes up the use of technology in design and applica on of quality
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func on deployment. The unit defines characteris cs of services and helps you develop an understanding of
different tools of service design.
UNIT-3, is Capaci es and Facili es Design. This unit enables you to understand the requirements of capacity
and facility design and helps you derive the meaning and importance of the parameters for effec ve capacity
design and its u liza on for various matrices measurements. It also discusses the process focused, product
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focused and fixed posi on layouts of Design.

UNIT 4, is about Project Management. This unit enables you to create a work breakdown structure for the
project and develop an understanding of the concept of quality in projects.
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UNIT 5, Supply Chain Management- Strategy and Design defines Supply chain management and its strategic
importance. It discusses decision making across supply chain and explores the role and significance of supply
chain players.
UNIT 6, focuses on Global Supply Chain- Procurement. The modern supply chains do have their upstream
supply partners across the globe, and firms are o en dependent on global supplies. Thus, global procurement is
emerging as a strategic and interna onal sourcing concern for mul -na onal giant firms.
UNIT 7, con nues further and takes up the subject of Global Supply Chain Distribu on.
UNIT 8, The course now takes up Forecas ng Techniques. It addresses the important issue of the ever-changing
market and changing customer's psyche. Forecas ng is the scien fic func on to the opera ons management. It
helps you understand the customer demand in terms of quan ty and me through forecas ng.
UNIT 9, is about Inventory Management. It discusses concepts of inventory management and defines inventory
and challenges of inventory management.
UNIT 10, is Sales and Opera ons Planning; it describes the sales and opera ons planning process, the monthly
S&OP process and the importance of reconciling differences by u lizing various tools and techniques to adjust
capacity and manage demand.
UNIT 11, is en tled Material Requirement Planning. It explains enterprise resource planning (ERP) systems that
can foster be er resource planning. It describes the inputs and outputs to an MRP system, and the methods to
execute the MRP process. It also takes up basic CRP, DRP, MRP II, ERP systems and the scope of their
implementa ons.
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UNIT 12, discusses Quality Management and Lean Systems. It defines the term “quality” and explains the
differen a on between quality control and quality assurance. In addi on, the unit also helps you develop an
understanding of the concept of quality in design and conformance.
UNIT 13, the last unit of this course is about Scheduling. It explains the mul ple dimensions of a good schedule,
and enables you determine which type of schedule is appropriate for different types of produc ve systems. It
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also equips you to use several different quan ta ve techniques for loading, sequencing, and monitoring work.
The unit makes you use the theory of constraints to iden fy the bo leneck and pace a system to the bo leneck
opera on.
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Let us together embark on a journey of discovery and a pleasant collec ve experience of learning.
Best Wishes.
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OPMC002
Operations and Supply
Chain Management
INDEX
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UNIT 1
Introduction to Opera ons and Supply Chain Management 1
UNIT 2
Product and Service Design 20
UNIT 3
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Capaci es and Facili es Design 43
UNIT 4
Project Management 81
UNIT 5
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Supply Chain Management: Strategy and Design 104
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UNIT 6
Global Supply Chain-Procurement 129
UNIT 7
Global Supply Chain-Distribu on 152
UNIT 8
Forecas ng Techniques 174
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UNIT 9
Inventory Management 190
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UNIT 10
The Sales and Opera ons Planning 206
UNIT 11
Material Requirement Planning 231
UNIT 12
Quality Management and Lean Systems 258
UNIT 13
Scheduling 282
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OPMC002
Opera ons and Supply
Chain Management
UNIT 1 NOTES
INTRODUCTION TO OPERATIONS
AND SUPPLY CHAIN MANAGEMENT
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STRUCTURE
1.0 Objec ves
1.1 Introduc on
1.2
1.3
The Evolu on of Opera ons and Supply Chain
The Opera ons Func on
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1.4 Types of Transforma on Process
1.5 Differences between Products and Services
1.6 Produc vity of Transforma on Process
1.7 Produc vity and Compe veness
1.8 Basic Func ons of Opera ons Manager
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1.9 Challenges in Opera ons Management

1.10 Globaliza on
1.11 Strategy and Opera ons
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1.12 Opera ons Role in Corporate Strategy

1.13 Let Us Sum Up
1.14 Key Words
1.15 References and Suggested Addi onal Readings
1.16 Self-Assessment Ques ons
1.17 Check Your Progress-Possible Answers
1.18 Answers to Self-Assessment Ques ons
1.0 OBJECTIVES
A er going through this unit, you will be able to:
• Define opera ons func on as process of value addi on
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Introduc on to Opera ons
and Supply Chain Management
NOTES • Understand differences between products and services

• Understand impact of globaliza on on opera ons management
• Understand challenges in opera ons management
• Demonstrate the understanding of produc vity and compe veness
• Understand importance of strategy
• Understand role of opera ons in corporate strategy
1.1 INTRODUCTION
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Opera ons is the core of any organiza on. You can say it is the reason behind existence of any
organiza on because opera onal ac vi es help in crea ng/providing the products or
services. In general, it could be said that opera ons are the set of ac vi es which
converts/transforms inputs into outputs by adding some value in it, and proper planning,
execu on and control of these ac vi es is known as opera ons management.
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During 20th century this subject was popular by the name of “Produc on and Opera ons
Management”, but this name was crea ng an impression of manufacturing relevance only.
Mostly people thought that this subject is for those who are working in manufacturing firms
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and is not applica on for service industry. Looking on to the contribu on of manufacturing
and service sector towards GDP of any country it was necessary to include both under the
scope of “Produc on and Opera ons Management”. Finally, the subject was renamed as
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“Opera ons Management” to take manufacturing and service industry under its purview.
Therefore, you can say that opera ons management is the heart of any organiza on.
1.2 THE EVOLUTION OF OPERATIONS AND SUPPLY CHAIN MANAGEMENT

As you are aware that prior to 1700 century it was co age system exis ng and whatever was
made in through this system was consumed/used by local communi es. With the inven on
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of steam engine in 1764 by James Wa , industrial revolu on broke out and produc on
started shi ing to factory system. Being in the ini al phase lot of improvements were
required in the factories. An ar cle by Adam Smith (1776) “Economic benefits of division of
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labor” and recommenda on of using scien fic methods for analyzing factory problems by
Charles Babbage (1832) improved the efficiency to some extent.
Though Charles Babbage introduced scien fic methods, but the era of scien fic
management begins with the work of F.W. Taylor in 1878. Frederick W. Taylor is also known as
father of scien fic management and his major contribu ons remained as personnel
selec on, planning and scheduling, mo on study, ergonomics etc. The main principles of
scien fic management as explained by Taylor are as follows:
• Replace the old rules by systema c approach.
• Best or right worker on each job and then provide training to these workers on
individual basis.
• Management and workers should work collec vely for maximizing produc on
which will lead to increase in worker wages.
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• Providing and guiding workers with proper tools and work methods. NOTES
• Proper division of work between management and workers so that everyone can
work with full efficiency.
Followed by FW Taylor, Henry L Gan , Frank and Lillian Gilbreth. Frank and his wife Lillian
Gilbreth developed the principles of Industrial engineering, concept of mo on study and
established opera ons management concept. Eli Whitney (1800) is known for his
contribu on of interchangeable parts. This was achieved by standardizing the parts. In 1913.
Henry Ford developed and brought the concept of assembly line in car manufacturing. By
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this concept the me taken to make one car was dras cally reduces from 728hrs to 92
minutes. Walter Shewhart (1924) introduced sta s cal concepts for quality control. W.
Edward Deming (1950) provided his philosophy of quality management and advocated on
the involvement of top management in it. The concepts like just-in- me, total quality
management, empowerment etc. led to Lean produc on era from 1980-95. Mass
customiza on era (1995 onwards) started therea er based on the globaliza on, internet/e-
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commerce, supply chain management etc.
The system of material requirement planning (MRP) and manufacturing resource planning
(MRP-II) were well developed by 1960 to 1970s. With the passage of me manufacturers
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started understanding the cost associated with the high levels’ inventories and their storage.
Advancements in informa on technology led to inventory tracking so ware which made
possible to reduce the inventory costs. Just-in- me and total quality management strategies
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helped manufacturers to enhance efficiency and reduce delivery mes. This led to an
environment where li le inventory was sufficient if strong supplier-manufacturer-customer
rela onships can be developed. This concept finally emerged as field of supply chain
management.
1.3 OPERATIONS FUNCTION

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Like I said opera ons management is the core of any organiza on then let’s understand what
exactly happens in it. Opera ons management is planning, execu on and control of many
ac vi es which in turn are responsible for making of products and rendering of services.
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Many ac vi es or opera ons func on include procurement of raw material from suppliers,
inputs like man material equipment’s etc., value adding processes to inputs, transformed
outputs, ensuring that output reach end customers etc. One of the major objec ves of
opera ons management is to ensure that opera ons func on (transforma on process is
executed efficiently and enhancing value of the output in a way that it becomes greater than
the inputs. Therefore, value crea on or addi on is the main role of opera ons people.
In general, we can say that opera ons func on transforms inputs into outputs by adding
some value in it. The value added could be giving shape, assembling, ornamen ng, breaking,
cleaning etc. Another name of opera ons func on is transforma on process and it can be
• Physical (this will include manufacturing opera ons)
• Loca onal (this will include transporta on and warehouse opera ons)
• Exchange (this will include retail opera ons)
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NOTES • Physiological (this will include health care)

• Serviceability (this will include a er sales service etc.)
Following diagram will help you in understanding it.
Fig. 1.1: Transforma on Process
Quality of Quality of
Inputs Random disturbances outputs
monitored monitored
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Transformation Outputs
Inputs Process
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Feedback
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Now let’s understand transforma on process in accordance with figure 1.1. Inputs will be in
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the form of raw material, workers, machines and equipment, furniture, computers etc.
Before finalizing the inputs, their quality is always monitored so that errors/defects do not
occur due to poor quality of inputs. A er the quality check inputs are moved to
transforma on process for value addi on. One point that you all should remember is that
most of the mes transforma on process will have many ac vi es and output of 1st ac vity
will be input for 2nd ac vity and so on. A er the value addi on by transforma on process
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what you get is known as output and quality of output is always monitored to check whether
desired quality standards are achieved or not.
For example, when you all joined this PGDM program your raw minds were input and various
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semesters you will pass through are different ac vi es of the transforma on process. Also,
when you will complete the 1st semester then you will be eligible for 2nd semester, this
means output of 1st semester is input for 2nd semester. A er comple ng your PGDM if you
are a transformed individual who possesses traits like leadership quali es, pleasant
personality, effec ve communica on skills, decision making skills, ability to carry research
etc. then companies would prefer recrui ng you.
During the transforma on process random disturbances like strikes of labor, change in
government policies etc. might also occur and as a manager it will be your responsibility to
handle/manage such disturbances. And ensure proper feedback mechanism from the
customers to understand the areas of improvement and strive for con nuous improvement
philosophy.
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1.4 TYPES OF TRANSFORMATION PROCESS NOTES

Be it service or manufacturing industry transforma on process will always be in the core of it.
Depending on the nature of the work the transforma on process can be of following types:
1. Con nuous process (mass produc on)
2. Semi-con nuous process (assembly lines)
3. Intermi ent processes
4. Projects
Now, let’s understand these processes one by one.
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1.4.1 CONTINUOUS PROCESS
These are the processes which leads to mass produc on and hence are technology/machine
driven. I am sure you must have seen the newspaper prin ng scene in a movie, serial,
YouTube etc. Have you no ced how fast the prin ng takes place? This is example of
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con nuous process. Further, you will agree that all the newspapers published in an interval
of me are having same content. So, you can say that con nuous process will provide similar
type of products and hence variety will be least. In con nuous process huge produc on takes
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place in less small span of me, therefore you can say me taken to make one product will be
less. To ensure all this the ini al me required for se ng the machines will always be higher.
Following are some of the characteris cs of con nuous processes:
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• The efficiency is high.
• Standard products are made through such processes.
• Time taken to make one product is low.
• Cost per product is usually low.
• These processes are very low on crea on of variety in products.
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• Ini al me taken for se ng the machines is high.

Cement industry, Sugar industry, tex le industry, paper industry, plas c industry, chemical
industry etc. are some examples which follows con nuous process.
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1.4.2 SEMI-CONTINUOUS PROCESS

In these types of processes, the efficiency is li le less in comparison to con nuous process,
but flexibility (variety) is li le more than con nuous process. All the assembly lines viz.
assembling of cars, bikes, refrigerators, washing machines etc. are examples of semi-
con nuous processes. For be er understanding imagine a car assembling plant let’s say
Maru Suzuki India. Although MSI makes a large range of products but consider set-up for
assembling Swi car. On the same set-up along with Swi cars, Dzire cars can also be
assembled if the requirements in term of conveyer belt etc. are same. If the Ciaz cars also
requires same set-up then these cars can also be assembled on this pla orm. Therefore, you
can visualize that the variety is more than the con nuous process but, efficiency is somehow
less.
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UNIT 1
NOTES 1.4.3 INTERMITTENT PROCESSES

These processes are used when output variety is more and each output requires different
opera ons, inputs etc. Intermi ent processes can be of following two types:
• Job Shop
• Batch Shop
Job shop is pure customiza on. For example, if you want to have one cupboard made for you
then you will go to a carpenter who is expert in this work. Let’s assume that carpenter
showed you some already made cupboards and they are not sui ng your expecta ons then
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you will tell him that show me something different. Now, carpenter will show you some
albums having photographs of different types of cupboards. A er having looked on all the
photographs if you say tell the carpenter that you liked the exterior of one cupboard in the
photograph and interior of other cupboard in some other photograph. And, now if you ask
the carpenter that can you make one cupboard having exterior and interior as per your
expecta on then his obvious answer would be “yes”. This is what we call job shop, where
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maximum customiza on takes place. Other examples could be boys going to saloon for
haircut, girls going to beauty parlor etc. Service industry usually work as per the job shop.
In case of batch shop, a batch of products/individuals will get similar treatment and variety of
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batches can be created. For example, in a bakery shop the variety of biscuits, breads, cakes
etc are made in batches. One type of salted biscuits can be entered in the oven and when
baked then batch of sweetened biscuits can be entered in the oven and so on. So, you can say
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that when a small group of similar outputs (known as batch) is passed through some
opera onal ac vi es then it is batch shop. In batch shop variety is more than semi-
con nuous processes, but efficiency is less.
1.4.4 PROJECTS
“These are the one- me unique ac vi es with a start and finish me”. Projects usually takes
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more me for its comple on. The me could be in days, months, years etc. In the case of
projects, the product remains fixed and man, material, machines etc. move around the
product as per requirements/planning for comple ng it. For example, making of a building,
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flyover, highway, ship etc.

The cri cal elements of Projects are following:
• Project team
• Project planning
• Project Control
In project team you need to ensure that members as per the requirements of the project are
included. Project is led by one person designated as project manager and under him are
some team leaders who have some members with them foe execu on of work. Project
planning starts with the objec ve of project and following aspects are taken care:
• Breaking the project into smaller ac vi es,
• Establishing rela onships between these ac vi es,
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• Assigning budget to each ac vity, NOTES

• Assigning me to each ac vity,
• Establishing quality standards for each ac vity, etc.
In the project control, you will have to ensure that execu on of the work is happening as per
the planning done. If some devia ons are observed, then you need find the reasons for these
devia ons and take correc ve ac ons for avoiding devia ons.
CHECK YOUR PROGRESS-I
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Q.1 Henry Ford is noted for his contribu ons to _____________
a. standardiza on of parts
b. sta s cal quality control
c. assembly line opera ons
d. scien fic management
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Q.2 True/False
Flexibility is more in con nuous process.
1.5 DIFFERENCES BETWEEN PRODUCTS AND SERVICES

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The output of conversion process is either a product or a service, now let’s understand the
differences between products and services.
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Table 1.1: Differences between Products and Services
Products Services
Products are tangible as they canbe seen, Services are intangible as they can’t be
touched etc. touched rather felt.
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Products can be inventoried Services can’t be inventoried

Reselling is possible Reselling is not possible
Produc on is usually separate from Produced and consumed at the same me
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consump on
Products can be transported Service provider is usually transported
Automa on is easy Difficult to automate
Low customer interac on required High customer interac on required
Product defini ons are usually Services are o en knowledge based and
consistent hence o en dispersed.
1.6 PRODUCTIVITY OF TRANSFORMATION PROCESS

The choice of transforma on process depends on the product or service that you want to
provide at marketplace. But, the important ques on to be answered is are you managing the
transforma on process efficiently. The efficiency of conversion process is measured by
‘produc vity’, which is the ra o of output to input. Thus, 7
UNIT 1
NOTES Output
Produc vity =
Input
If you can manage the produc vity of the process you are handling, then probably you are
managing the process well. This could be done by maximizing the output to desired level
with available resources. Another way of enhancing the produc vity is by reducing the
waste. Here waste is defec ve products, unnecessary movements of employees,
unnecessary movement of material etc.
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1.6.1 PRODUCTIVITY MEASUREMENT
Although it is now known to you that produc vity is output to input ra o, but how to
measure output and input is again situa onal. And depending on this there are two types of
produc vity:
1. Single-factor produc vity,
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2. Mul factor produc vity.
Single-factor produc vity is when only one resource is used. For example, if products
produced are 500 and labor-hours used is 100, then:
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Produc vity =
Product Produced
Labour hour used
=
500
100
= 5 products per labor hour
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Whereas, mul factor produc vity provides broader picture of produc vity as it includes all
inputs (like labor, material, energy, capital etc.). It is also known as total factor produc vity.
Mul factor produc vity can be computed as follows:
Output
Produc vity =
Labor+Material+Capital+Energy+others
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Out of the above men oned two types of produc vity ra os, the mul factor produc vity is
be er, but quite complicated. This is because of measurement issues. In general labor,
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capital, and management are cri cal factors for improvement of produc vity (Stein H., Foss
M., 1995).
1.7 PRODUCTIVITY AND COMPETITIVENESS

According to US department of commerce “compe veness is the degree to which a na on
can produce goods and services that meet the test of interna onal markets while
simultaneously maintaining or expanding the real incomes of its ci zens.” Produc vity is
one of the common measures of compe veness as increase in produc vity leads to
increase in wages which raises the quality of living.
The governments of different countries keep publishing the changes in produc vity from
me to me (which may be monthly, quarterly, annual etc.). Although labor-hours is the
predominant factor in compu ng produc vity, but, effect of other factors viz. capacity
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u liza on, investment, skills, technology etc. are also compared based on produc vity. NOTES
Produc vity is one of the factors in judging na onal compe veness for ranking in global
compe veness. Other factors that can be considered for calcula ng na onal
compe veness are market capitaliza on, GDP growth, quality of educa on etc.
There is tough compe on among companies of specific industry and hence other
perspec ve to view compe veness could from comparison within and between industries.
Some factors that leads compe on within industry are frequency of introducing new
products, price war, extended warran es, aggressive adver sing, low profit margins etc.
Market share of industry leaders is generally considered to measure industry
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compe veness. The extent of compe on (compe veness) in an industry distresses
innova on in products, strategies, investments in technology etc. for companies in an
industry. Looking at the most compe ve business environment globally the companies
now need to prepare their own ways to sustainable compe ve edge. And you will now
agree that effec ve management of opera onal ac vi es within the organiza ons is
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important for company’s compe veness.
CHECK YOUR PROGRESS-II

Q.1 True/False C
Opera ons management is applicable mostly to the service sector.
Q.2 True/False
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Services are frequently dispersed and o en knowledge based.
Q.3 Compute produc vity, if products produced are 700 and labor-hours used is 115.
1.8 FUNCTIONS OF OPERATIONS MANAGER

Just like any manager, opera ons manager also must perform some basic func on as listed
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below:
• Planning
• Sequencing
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• Organizing
• Execu on
• Control
Although the basic func ons are common but now the context will be opera onal. In
planning opera ons managers must plan on type of product or service to be provided,
transforma on process for the same, capacity planning, material requirement planning, etc.
In the case of sequencing the arrangement of opera onal ac vi es in the op mum manner
must be ensured. As already briefed earlier that opera ons management is set of ac vi es
where output of one ac vity will be input for another, hence in opera ons managers needs
to ensure proper sequence as per order of input-output of various opera onal ac vi es.
Organizing func on include alloca ng opera onal ac vi es to most suitable employees for
that ac vity. Here right man on right job is to be ensured by the opera ons managers. You 9
UNIT 1
NOTES can very well imagine the importance of this step-in preven on of defects. Execu on is
about ensuring accomplishment of work as per plan. Managers should focus on enhancing
efficiency during this phase.
Controlling is one of the most important func on of opera ons managers. Once the
execu on starts then conforming of it with planning needs to be controlled by the managers.
In the control func on managers need to ensure following:
• Ac vi es are done in s pulated me,
• Ac vi es are completed in allocated budget,
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• Completed works are conforming to quality standards,
• Desired quan es are achieved with available resources,
• Unfavorable communica ons are avoided,
• Any form of waste is controlled, etc.
If you as manager observe that any of the aspect is going out of control, then you need to find
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the root cause of it and eliminate the cause so as bring processes in control. Some of the
causes for processes being out of control might be lack of training to employees, poor raw
material, improper planning, improper sequencing etc. Therefore, by providing proper
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training to employees, establishing good rela ons with vendors etc. managers can control
the processes.
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1.9 CHALLENGES IN OPERATIONS MANAGEMENT
Now you will understand about challenges in front of opera ons managers in the
contemporary environment. Following table will help us in understanding that.
Table 1.2: New challenges in Opera ons Management
New Challenges in Opera ons Management

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From To
Local or na onal focus Global focus
Batch shipments Just-in- me
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Low bid purchasing Supply chain partnering

Lengthy product development Rapid product development
Standard products Mass customiza on
Job specializa on Empowered employees, teams
The revolu on of Informa on technology, automa on, internet, and relaxa on in trade
barriers has made the global boundaries local. Interna onal compe on has become the
norm. If you will confine your business with-in local boundaries, then some interna onal
player in the similar business will enter your territory and reduce your market share.
Otherwise also by having global focus you can explore many resources available on different
parts of earth. For example, in some countries good quality raw material will be available at
lower price, some areas will have skilled labor available at lower price etc.
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Batch shipment might look cost effec ve but looking at holding cost associated with it and NOTES
fast changing customer requirements suggests that just-in- me concept would be be er
op on. But JIT require very good infrastructure, good level of understanding between
supplier, transporter & manufacturer etc. In India mostly companies work on semi-JIT
models.
Low bid purchasing might appear to be providing cost benefit, but guarantee will be least for
the quality of raw material. It is highly recommended that have good rela onship with your
vendors and make them partners in a way that they work as per your requirements. This
partnership will help both the manufacturer and the supplier to have good market share by
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responding to customer requirements promptly.
You will agree that in 1983-84 when Maru 800 was launched it was not having any
compe on in India and the company retained this product for quite a long period at the
marketplace. But now the scenarios are changed, and every segment of product has lot of
compe on and customers have become very demanding. Therefore, rapid product
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development is the need instead of not trying to improve your product at regular intervals of
me.
Now a days you should try to focus on mass customiza on instead of throwing a standard
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product at marketplace. For example, if you no ce Maru Suzuki India’s product (car) D’zire
then it is not one standard product rather they have targeted masses with variants of D’zire
viz. Lxi, Vxi, Zxi, Ldi, Vdi, etc.
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Once you become manager then try empowering your employees/teams so that they
propose good sugges on/ideas for improving the produc vity, removing errors etc. Don’t let
your employees to be mare follower of instruc ons (job specializa on) rather encourage
them to propose their solu ons whenever they can.
CHECK YOUR PROGRESS-III

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Q.1 The five elements in the management process are

a. plan, direct, update, lead, and supervise
b. plan, lead, organize, manage, and control
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c. organize, plan, control, staff, and manage

d. plan, organize, staff, lead, and control
Q.2 Current trends in opera ons management include all of the following except
a. Just-in- me performance
b. rapid product development
c. mass produc on
d. empowered employees
1.10 GLOBALIZATION
You will agree that advancements in new communica on technologies has enabled the
concept of globaliza on. Being on one part of globe you can communicate and gather 11
UNIT 1
NOTES informa on of other parts of the globe. Internet remained a gamechanger by providing
companies a pla orm to market and sell their products and at the same me provided
customers with informa on about large range of products.
The earlier concept of domes c produc on and expor ng to different markets may not be
viable model and no longer guarantee success. You can say that there are new standards of
global of global compe veness that impacts quality, variety, customiza on, meliness etc.
Although the strategy of globaliza on enhances efficiency of processes but, the job of
opera ons managers becomes challenging. Therefore, you should carefully work on
globaliza on aspects.
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Following are some the reasons because of which domes c businesses decides to go global:
• Understanding markets.
• Gaining knowledge to improve opera ons.
• Explore and retain global talent.
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• Reduc on in costs by having low cost skilled labor, tax benefits, etc.
• To provide be er goods and services.
• Improving supply chain.
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For example, VIP luggage company of India can sustain number 2 posi on in luggage industry
of world because they went global and created large variety of products for its customers.
You must have heard about Boeing as leader in aircra industry. It is the global strategy of
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Boeing that provides the compe ve advantage to the company. They have both sales and
produc on worldwide. Components from Boeing’s global supply chain are brought on
assembly line in Evere , Washington. Almost 35% of the parts (structures) of Boeing 787
comes from Japanese companies.
1.11 OPERATIONS STRATEGY

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Every company has some objec ves and goals to achieve. These goals are divided into sub-
goals for each department of the company and these departments prepares a roadmap for
achieving them. Based on the reason of existence every organiza on prepares a mission
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statement and strives for achieving it. Success of organiza ons depends on how well they
perform at the marketplace.
Therefore, every company tries to seek answer for one of the major ques ons that is “what
they should different than its compe tors so as to take lead at the marketplace?”. This means
that company needs to have some compe ve priority for its success. The compe ve
priority could be either to launch innova ve products first at the marketplace or it could be
providing best quality products. Your company could be the one to provide large range of
products. Therefore, having strong command on either cost, quality, variety, speed, or
innova on could be used as core competency to have posi oned your company at the
marketplace. Ul mately, you are working on crea ng some sort of impression about your
company or products/services in the minds of your customers.
Another important ques on that needs to be addressed is “What you should do to sustain on
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these compe ve priori es?”. Answer to these ques ons comes from proper planning and NOTES
execu on of work. For achieving the missions of organiza on, a proper roadmap is prepared
and that is what we call strategy. Every company will have its corporate strategy and various
departments will have their own departmental strategy which will be in alignment with the
corporate strategy.
In general, the main objec ve of the organiza on is to provide products in right quan ty,
right quality, on me and at reasonable price. But this can’t be achieved without a proper
opera ons strategy. Hence, let’s now understand different steps required in formula on of
strategy:
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• Defining primary tasks of the organiza on,
• Assessing core competencies,
• Determining order winners and order qualifiers
• Posi oning the firm
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1.11.1 DEFINING PRIMARY TASK
In this step you will define the main reason of company’s existence. It means you will
properly be defining about the business that company is into. The mission statement of the
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organiza on should reveal the primary task of it. This statement should further go together
with vision statement of the organiza on where you are trying to see about futuris c goal of
the organiza on. For example, the primary task of Amazon is to provide easiest, fastest, and
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happy shopping experience, whereas Toyota wants to provide highly valuable products and
services which will lead to most sa sfying ownership experience. Proper defining of primary
tasks always provides right direc on to all our ac ons.
1.11.2 ASSESSING CORE COMPETENCIES

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Here core competency means dis nc ve competence on which your company is be er than
compe tors. It can be having strong command on providing cost effec ve product, best
quality products, a large range of products, taking less me in providing the products, or
launching innova ve products faster than other companies. You should try to have
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excellence level a ained on one of the core competences and then ensure to be compe ve
on other competencies. This means that if your company wants to provide cost effec ve
products then it can’t completely ignore the quality in the products.
Core competencies provide sustainable compe ve advantage and hence products are not
core competencies. Because your compe tors can easily copy the products and provide
be er products than yours. It is the processes of the organiza on which helps companies to
develop some core competencies. Ul mately you or your organiza on can do be er than
other companies by improving the processes. For example, having good marks in one of the
subjects can’t be core competency rather how you plan your rou ne and follow it will be your
core competency. Similarly, instead of a par cular product the system of developing new
products will be the core competency of the company.
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NOTES 1.11.3 DETERMINING ORDER WINNERS AND ORDER QUALIFIERS

Suppose you created best quality product but, customers are apprecia ng it then your best
becomes worst for you. The point I am trying highlight here is that it is always be er
understand about the aspects of the products that customers will be looking for. The factors
that influences customers decision can be classified as either order qualifiers or order
winners. Let’s understand these two terms and their importance.
Order qualifiers: These are the characteris cs of a product or service which qualifies the
product or service for being considered by the customer for purchase.
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Order winner: These are the characteris cs of a product or service which forces or convince
the customer to purchase the considered product or service.
Let’s assume that you want to purchase a smart phone ranging between Rs 25000 to
Rs 30000. And instead of making an online comparison you want to compare the features at
a mobile retail outlet. A er reaching the mobile retail shop you asked the retailer to show
smartphones in your pre-decided price range and retailer displayed 10 different
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smartphones. A er looking on all the 10 smartphones you told the retailer to keep back 5 of
them and remaining 5 you want to explore. Now think, why you asked the retailer to keep
back 5 smartphones? The answer would be that those smartphones were not having the
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characteris cs which could enable them to be considered by you for purchase. Now you are
in a situa on where you will have to purchase only one smartphone out of 5 considered.
Here you will agree with me that it will be one or the other characteris c which will lt your
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decision towards one of the smartphone and that characteris c is order winner, whereas the
characteris cs which helped you in considering 5 smartphones for purchase are known as
order qualifiers.
Now you must be having a ques on in mind that which characteris cs comes under order
qualifiers and which one comes under order winners. The answer to this ques on is that
there is no fixed set of characteris cs under order qualifiers or order winners. These
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characteris cs keeps on changing their posi on depending on the situa ons. A characteris c
which is order qualifier today might be order winner tomorrow. For example, you will agree
that European and Americans do not accept Asian products easily. When Toyota of Japan
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wanted to enter American market, they were aware about this fact and compe on was
with Ford Motors and General Motors. Toyota made quality products and priced it lower
than the compe tors. Americans accepted them based on quality as qualifier and price
winner. As me passed Toyota was able to build trust in American customers. Now these
customers approached Toyota and told them that price is ok and now provide us best of
quality. And hence price became a qualifier and quality took the role of order winner.
Therefore, you can say that for accurately judging the order qualifiers and winner market
studies shall be conducted on regular basis.
1.11.4 POSITIONING THE FIRM

Finally, you need to posi on your firm at marketplace this means posi oning in the minds of
the customers. Posi oning here means that what should come in the mind of customer
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when your firm or products are seen/discussed by him. It is about having some compe ve NOTES
advantage created by posi oning the firm. Mostly companies posi on themselves based on
following compe ve priori es:
• Cost,
• Quality,
• Flexibility,
• Speed,
• Posi oning on Cost
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In this case company keeps prices of its products below the compe tors. The companies that
use cost as compe ve weapon works majorly on standard products and tries to eliminate
every sort of waste. Stable produc on process, stringent produc vity standards, automa on
are some of the requirements for improving such processes. When Dhiru Bhai Ambani
launched low cost mobiles with popular slogan “Kar lo duniya mu hi mai”, he ordered for
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mass produc on of similar mobile phones. This led to reduc on in price per product and he
won the market by playing on cost. Similarly, when you compare Maru Ciaz with Honda City,
Ciaz is posi oned on less cost, but s ll doing good at marketplace.
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Al though companies can play on cost, but then they have saved on cost by lot many ways
which includes standard products, similar raw material, similar produc on process, same
training to majority of employees etc. Posi oning on cost does not mean that you start
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compromising on quality. Quality should be reasonably comparable to compe tors’
products.
• Posi oning on Quality
Quality is conforming to specifica ons and hence reducing the defect rate. For
being able to compete on quality companies need to have more quality checks for
products and processes. Here companies try to ensure that no defec ve product
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should go in the hands of customers as they are charging more than the
compe tors. For example, you go to five star hotel to have a cup of coffee, what
you will be provided with is the great ambience, good coffee, good service, great
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experience etc., but you will be charged accordingly. Similarly, if you think of
luxury cars like Audi, BMW, Mercedes etc. its altogether a different feeling but
price is also high. Another example is of Bangur cement that adver ses with a
punch line “Sasta nahi sabse achha”.
So, you can say that companies posi oning themselves based on quality try to
give you best of experience or product but will charge you higher than others.
Quality is not only a compe ve priority for high end products but to other
products too. For example, again compare Honda city with Maru ciaz and which
one you think is quality product. Mostly people say Honda city and you can check
now that it is priced li le higher than the Maru ciaz.
Quality in products will not occur at its own rather it requires a proper planning
for a aining it. All successful firms have adopted quality programs like total
15
UNIT 1
NOTES quality management, six sigma, lean manufacturing etc. in the organiza ons at
every level. Quality programs are customer driven and starts with customers only.
Companies prepare proper quality statement and follow it. Everyone in the
organiza on is made responsible for quality. Employees are empowered to take
decisions that improves products or service quality.
• Posi oning on Flexibility
Flexibility is making of variety of products in each span of me. It is more about
how well an organiza on adjust to as per changes required at marketplace. The
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marke ng and sales teams requires more variety of products to be offered to the
customers for winning the orders but manufacturing teams have their own
reserva ons on the same as making of different products will disturb the stability
of produc on process which ul mately will increase the cost.
Consumers in the Indian market are becoming more and more demanding. Firms
have to be more responsive by improvising their products, by enhancing features
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and providing these at lower prices to take on rivals. Some of the companies
compe ng on flexibility are tex les, FMCG etc. These companies provide a large
range of products in the same category because customers are looking for it.
•
priority.
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Mass customiza on has forced many companies to use flexibility as compe ve
Posi oning on Speed

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Dominos started with risky step when they quoted that if their pizza is not
delivered in 30 minutes then it will be given free of cost. Many of you must have
tried but whether got a free pizza was sheer luck. Now think whether Dominos
was taking a risk or using speed as a compe ve weapon? Obvious answer would
be they used speed as compe ve priority and reduced the risk by aligning its
processes. Your courier services use speed to compete with postal services. For
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companies to be able to compete effec vely on speed proper linkages in the

supply chain are mandatory with fast adapta ons to moves. Having formed
proper alliances could be very effec ve way to use speed as compe ve weapon.
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1.12 OPERATIONS ROLE IN CORPORATE STRATEGY

There are two ways by which you can make your strategy effec ve:
1. Either perform different ac vi es than your compe tors, or
2. Perform the similar ac vi es be er than your compe tor.
The role of opera ons management is cri cal in achieving either of them. To be effec vely
posi oned on cost, quality, flexibility, or speed the companies need to align its opera onal
ac vi es to provide for these priori es. Walmart is known for its integrated opera ons
strategy, Toyota brought excellence in its opera onal ac vity to achieve Lean manufacturing
which many companies have yet not been able to apply.
In opera ons management the strategic decisions are designing of products or services,
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processes, planning short-term and long-term capacity, facility loca on and layout etc. NOTES
These strategic processes should be made to interact in such a way that un l your compe tor
copies it fully will not be able to get its advantage. Therefore, you can say that an integrated
opera ons system will provide more sustainable advantage than new products.
1.13 LET US SUM UP

Opera ons management is planning, execu on and control of many ac vi es which in turn
are responsible for making of products and rendering of services. Be it service or
manufacturing industry transforma on process will always be in the core of it. The efficiency
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of conversion process is measured by 'produc vity', which is the ra o of output to input. The
extent of compe on (compe veness) in an industry distresses innova on in products,
strategies, investments in technology etc. for companies in an industry. Just like any
manager, opera ons manager also must perform some basic func on like Planning,
Sequencing, Organizing, Execu on, Control. Based on the reason of existence every
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organiza on prepares a mission statement and strives for achieving it. Success of
organiza ons depends on how well they perform at the marketplace. For achieving the
missions of organiza on, a proper roadmap is prepared and that is what we call strategy. To
be effec vely posi oned on cost, quality, flexibility, or speed the companies need to align its
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opera onal ac vi es.
1.14 KEY WORDS

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Opera ons: A system which add values in the inputs and transforms them into output.
Opera ons Management: It is management of transforma on process which transforms
inputs into outputs.
Produc vity: It is a measure of knowing efficiency of transforma on process. It is ra o of
output value to value of input.
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Efficiency: It is making of similar types of products in an interval of me.

Flexibility: It is making of variety of products in an interval of me.
Order qualifiers: These are the characteris cs of a product or service which qualifies the
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product or service for being considered by the customer for purchase.

Order winner: These are the characteris cs of a product or service which forces or convince
the customer to purchase the considered product or service.
Strategy: It is a roadmap that keeps the organiza ons/departments in the right direc on.
Con nuous process: It is a process that leads to mass produc on of standard products.
Core competencies: These are the unique capabili es which provides compe ve
advantage to the companies.
Batch produc on: It is a process which produces variety of products in batches.
1.15 REFERENCES AND SUGGESTED ADDITIONAL READINGS

Russel, R.S., and Taylor-III, B.W., 2018 “Opera ons Management”, Wiley Publica on.
17
UNIT 1
NOTES Render, B., Rajashekhar, J., and Heizer, J., 2018, “Opera ons Management, Pearson
Publica on.
Chary, S.N., 2019, “Produc on and Opera ons Management”, McGraw Hills.
Mar nich, J.S., 2008, “Produc on and Opera ons Management: An Applied Modern
Approach”, Wiley India Pvt. Ltd.
1.16 SELF ASSESSMENT QUESTIONS

Mul ple Choice Ques ons
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Q.1 Which of the following would not be an opera ons func on in a fast-food restaurant?
a. making hamburgers and fries
b. adver sing and promo on
c. maintaining equipment
d. designing the layout of the facility
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Q.2 Typical differences between goods and services do not include
a. cost per unit
b. ability to inventory items
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c. ming of produc on and consump on
d. customer interac on
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Q.3 Which of the following services is not unique, i.e., customized to a par cular
individual's needs?
a. hairdressing
b. elementary educa on
c. legal services
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d. dental care
Q.4 Which of the following is not an element of the management process?
a. pricing
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b. staffing
c. planning
d. controlling
Subjec ve Ques on
Q.5 Explain the difference between an order qualifier and order winner.
1.17 CHECK YOUR PROGRESS- POSSIBLE ANSWERS

Q.1 C
Q.2 False
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CHECK YOUR PROGRESS-II NOTES

Q.1 False
Q.2 True
Q.3 Produc vity = 700/115 = 6.087
Q.1 C
Q.2 C
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1.18 ANSWERS TO SELF-ASSESSMENT QUESTIONS
Q.1 b
Q.2 a
Q.3 b
Q.4 a
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Q.5 Order qualifiers: These are the characteris cs of a product or service which qualifies
the product or service for being considered by the customer for purchase.
C
Order winner: These are the characteris cs of a product or service which forces or
convince the customer to purchase the considered product or service.
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19
NOTES UNIT 2
PRODUCT AND SERVICE DESIGN
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STRUCTURE
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2.0 Objec ves
2.1 Introduc on
2.2 The Design Process
2.3
2.4
2.5
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Concurrent Design
Design for Manufacture
Technology in Design
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2.6 Design Quality Reviews
2.7 Design for Environment
2.8 Quality Func on Deployment
2.9 Design for Robustness
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2.10 The service Economy

2.11 Characteris cs of Services
2.12 The Service Design Process
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2.13 Tools of Service Design

2.14 Let Us Sum Up
2.15 Key Words
2.16 References and Suggested Addi onal Reading
2.18 Check Your Progress- Possible Answers
2.0 OBJECTIVES
• Define various aspects of design process
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• Know the issues involved in screening a new product idea NOTES

• Understand use of technology in design
• Learn the concept of design for environment
• Understand and apply quality func on deployment
• Define characteris cs of services
• Define various steps of service design process
• Understand different tools of service design
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2.1 INTRODUCTION
We studied in previous chapter that opera ons management is set of ac vi es which
converts inputs into outputs by adding some value in it. Although value addi on takes place
within the organiza on, but its confirma on takes place at marketplace by the customers. If
customers are accep ng your products or services, then you can say the value addi on
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happened otherwise you need to iden fy the correct value to be added. This concept totally
changes the concept of value addi on from inward approach to outward approach.
Therefore, opera ons managers need to understand requirements of the customers and
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then create products and services that can sa sfy these needs of the customers.
Output of every transforma on process is either product or a service and hence in this unit
you are going to study output design. You have studied the differences between products
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and services in previous chapter, but at mes it becomes confusing to differen ate between
them. For example, if you sold a laptop to someone then of course you sold a product. But if
lease out a laptop then what exactly you are selling? Therefore, at mes you will be selling
only product, some mes a service accompanied by a facilita ng product, and some mes
only a service (like haircut, counselling etc.).
Product selec on is a strategic and long-term decision for companies and hence they
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perform thorough analysis before selec ng the product or service to be designed and sold.
The form and features of the product to be produced is important as many decisions viz.
technology requirement, loca on and layout of facility, capacity planning etc. depends on it.
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The design of product and service is very important because complex designs might increase
the cost of produc on whereas changes in complex designs might reduce the produc on
cost which ul mately will lead in profitability. Complex designs might require addi on of
technology in transforma on process leading to increase in cost whereas products can also
be designed in a way that exis ng transforma on process is able to make it. Therefore, you
can say that designing of products and services is one of the cri cal aspects that will affect
the produc on cost.
Being a strategic decision, the product selec on process should involve relevant func onal
areas. Marke ng area can provide with customer requirements, research and development
area can provide insights on changes that can be done in product characteris cs, opera ons
area can provide with feasibility of available technology, raw material etc.
21
UNIT 2
Product and Service Design
NOTES 2.2 THE DESIGN PROCESS

As you know that if customers are accep ng products and services only then the related
firms will stay in the business otherwise, they need to improve their products or services.
Design is a cri cal process because poor designs will not be able to sa sfy customer needs
and quality will remain low. In the case of product design, you need to specify type of
material required, length-breath-height along with specifica on, external looks of product,
performance standards etc. On the other hand, in service design you need to specify about
the psychological and sensual benefits that the customer is expec ng from the service, also
postulate the physical items/tools required during the service. Although design is an art, but
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you should learn to effec vely managing the design process. In the design process you
should ensure the following:
• Product (or service) characteris cs relates with requirements of the customers.
• Customer needs are met in least cost possible.
• The me required to design a product (or service) is op mized (minimized).
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• Workable design is achieved with minimum revisions.
• Simplifica on of design instead of complexity.
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Following figure 2.1 depicts the flow-chart of design process from idea ll product launch.
Fig. 2.1: The Design process
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Source: Book ‘Opera ons Management, (Heizer J., Render B., Jagadeesh R.)
The design process starts with some idea of product or service. The idea can come from
any source as follows:
• Understanding the customers,
• Economic changes,
• Demographic changes,
• Technological changes,
• Poli cal/legal changes.
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Customers are always with lot of expecta ons/requirements and proper understanding of NOTES
their requirements can lead to some idea of product or services. Otherwise also it is the
customer who need to appreciate your product or service and hence making/designing it as
per his requirements shall be performed. Economic changes are obvious to happen,
recession and pandemic like situa ons are short lived and are taken over in a year or so. But,
over a longer period of me it is observed that economic condi ons of the na ons, states
and individuals improves and hence leads to requirement of new and diverse products and
services. This might lead to some idea for product or service. Demographically family sizes
are reducing. Gone are the days when people use to prefer staying in joint families. Now
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people prefer staying as nuclear family and real estate created product based on this. All
builders came up with 1BHK, 2BHK, 3BHK, and 4BHK. No builder marketed 10BHK or so.
Therefore, demographic changes also can provide with idea of product or service.
Technological changes or advancements are the main source of idea for new products. It is
based on technological improvements that conduct of classes is possible during Covid-19
pandemic also. Poli cal/legal changes can also provide with idea of new product. For
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example, ban on plas c bags provided some with the idea of jute bag.
Once you or your team have some idea of a product or service then next step is to check the
feasibility of conver ng that idea into a product or service. In this step you are working on
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that if a product can be created based on the idea. If feasibility study indicates that product
can created based on idea, then next step is to understand customer requirements. This step
helps us in determining order qualifiers & order winners, and about what type of product or
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service to be created.
Now team will work on func onal specifica ons of the product that is how the product will
func on. For example, how you start a car is by inser ng the key in lock and rota ng it. But
have you ever given a thought on what happens when you rotate the key, how the car gets
started? The answer is it happens based on the func onal specifica ons in the design of the
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car. Similarly, you know how to start a laptop is by pressing the start bu on when the ba ery
is full otherwise plugin the charger and press the start bu on. But have tried to know what
happens when you press the start bu on? Again, the answer is it gets started due the
func onal specifica ons of the laptop. Therefore, func onal specifica ons are very
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important part of product design as it will help us in finalizing how the product will operate.
A er func onal specifica ons are finalized then you need to define product specifica ons in
the product design. Understand this with an example, let’s say you are designing a small car.
Tyre are one of the components of car and deciding on the specifica on of tyre is part of
product specifica on. For instance, while designing a small car you can’t finalize tyres of an
SUV and vice-versa. Similarly, while designing a SUV you can’t have engine with 800cc
capacity. Product specifica ons are decided by keeping in mind the product dimensions,
customer requirements, compe tor’s product etc.
In the design review phase, you are ensuring whether func onal and product specifica ons
finalized will be able to fulfill the customer requirements to meet order winner
characteris cs. If you feel yes, then proceed for test market otherwise go to func onal and
product specifica ons and make changes in a way that final design will meet with customer 23
UNIT 2
NOTES requirements. In the test market idea is to use the created product so as iden fy if any
shortcoming is prevailing to be taken care of. It is a pilot tes ng and if some shortcoming is
found then accordingly improvements are made before the final introduc on of the product
in market. If the test results are favorable, then the product is introduced in the market and
evalua on of its performance based on customer feedback is carried on. This feedback
mechanism will help us in con nuously improving the product as per customer
requirements and design process cycle will con nue.
2.3 CONCURRENT DESIGN
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It is concept in product design where people from relevant departments are involved for
discussions and sugges ons during the ini al stage of product design process. People from
marke ng department will tell about requirements of the customers. They will tell about
product package which can be effec vely sold at marketplace. People from opera ons
department will tell about capabili es of machines and man-power available with them.
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Vendors should also be made part during discussion to take their inputs as per their
capabili es. People of finance department can provide upper limit of expenses that can be
permi ed etc.
2.4
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DESIGN FOR MANUFACTURE
It is important for companies to manufacture products efficiently and hence product design
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teams should design the products in a way that they can be easily produced. Along with ease
of producing the products team should ensure that it is economic also. Design for
manufacture (DFM) is such a concept that guides the design team on these aspects. DFM
focuses on the product characteris cs that can be segregated for their making with utmost
quality and then aligned with manufacturing process for its assembly in the main products.
This concept if performed successfully will enhance the overall quality of the products.
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Design should be simplified by reducing the number of parts, because unnecessary increase
in the parts will increase the process of assembling them. Wherever possible standard parts
shall be used. Standardiza on helps in interchangeability of parts during a er sales and also
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save me and produc on hurdles. Following design concepts can be used for ensuring ease
of producing the minimiza on of cost of manufacturing:
• Modular design: In this design standardized parts (building blocks or modules)
are combined or assembled as per products requirements to make desired fished
product. This design is highly applicable in electronics industry, automobile
industry etc.
• Design for Assembly (DFA): The main goal of this design is working on procedures
for determining assembly sequence with reduced number of parts in it.
• Failure mode and effect analysis (FMEA): It is a systema c approach in which
design team focuses on the probable failure modes of the product and extent of
its effect on the customer, environment etc. Then design team works on
reduc on of this effect by suitably redesigning the product. For example, accident
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of cars can happen leading to serious injuries to driver. By providing safety NOTES
balloons in the cars the extent of injuries can be reduced.
• Fault tree analysis (FTA): It is a method of analyzing the rela onships between
the various failure modes to find the exact cause of failure and then suitably
correc ng it.
• Value analysis/engineering: It is one of the concepts in product design to discard
unnecessary features in the product during its design. It is achieved by defining
essen al of a product. A er elimina ng non-essen al func ons from the
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product, the design team performs value analysis to check the reduc on in
manufacturing cost.
• Reverse engineering: This is a concept in which compe tors’ product is studied
a er dismantling it. If your compe tors are quick to innovate and launch new
products, then you should purchase their new product and study it. You should
study the innova ons done their product and then map your product with those
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innova ons or ahead of those innova ons.
CHECK YOUR PROGRESS- I

Q. 1 True/False C
Product design be carried with inward approach without considering outside market
needs.
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Q. 2 Which of the following is not related with product design process.
a. Customer requirements
b. Inventory management
c. Func onal specifica ons
d. Product specifica ons
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2.5 TECHNOLOGY IN DESIGN

In the last two decades the customers have become more demanding and companies have
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to provide upgrada on in the products and services at a faster rate. This has led to shorted
life span of products and increase in variety of products in the same category. For example,
prior to 2000 very few car companies were in the Indian market with small cars, but a er that
the number of players and products has increased and s ll increasing. This scenario is not
confined to cars rather to every industry and product line. Technological advancements are
one of the reason for bringing in deluge of new products. These advancements in technology
started with CAD (computer aided design) and in its gamut has CAE (computer aided
engineering) and CAM (computer aided manufacturing).
2.5.1 COMPUTER-AIDED DESIGN (CAD)

It is a so ware which is used to create, modify, and op mize the designs by analyzing it. CAD
is very instrumental in enhancing the quality of design and improving the produc vity of
25
UNIT 2
NOTES designer. Documenta on based on CAD helps in be erment of communica on among the
design teams. You all must have seen circuit boards; they usually have many connected
layers. Its not easy to check these layers manually, but CAD helps the designer to study one
layer at a me to examine the accuracy of the design. The designs prepared by CAD can also
be used as input for programming automa on or CAM.
CAD is highly used for special effects in films by computer anima ons, adver sements,
automobile sector, electrical and electronics industries etc. The database created using
computer aided design also helps in the patent process of the design.
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2.5.2 COMPUTER AIDED ENGINEERING (CAE)
In computer aided engineering you will use the CAD or any other design so ware on a
computer terminal to test and analyze the created design performance without physically
making a prototype. This is usually done to iden fy the scope of improvement and to
improve the product design to op mum level. For example, by using computer aided
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engineering during the design of car the scope of maximizing the boot space can be worked
on, cooling performance of air condi oner can be op mized etc. Computer aided
engineering predicts the behavior of product design when exposed to different condi ons.
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2.5.3 COMPUTER AIDED MANUFACTURING (CAM)
It is the manufacturing process with is controlled by computers. CAD/CAM is integra on of
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design and manufacturing. With the use of this design to manufacture connec on
companies save lot of me, enhance quality of products, and customize produc on. The
three components required in a computer aided manufacturing (CAM) are:
1. So ware (to instruct machines on how to make product by genera ng toolpaths),
2. Post processing (to convert toolpaths in a language understandable by machines),
3. Machines (to transform inputs into desired products)
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CAD focuses on design of products or parts in a way that how it should look and func on.
Whereas CAM is used with a focus on how to manufacture it.
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2.6 DESIGN QUALITY REVIEWS

Let’s assume that you created one of the best designs, but, if you are not able to
communicate on why it is best then you will lose trust of your teammates. If your team leaves
you then it will be difficult to make product based on that design. And it might happen that
best design remains as a sketch only. Therefore, design works should be effec vely
presented with some strategic orienta on behind.
Ge ng quality feedback from other designers, stakeholders, clients is always helpful.
Although stakeholders usually have different exper se and agenda but their approval along
with feedback is crucial. For ge ng quality reviews and pu ng forward your design
following steps should be considered:
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• Write your logic of design: You should write the reason behind if some extra steps NOTES
you have include in the design or if you have made some changes in the
components to be used. This will help you during the discussion when some
members will ask ques ons and give their valuable feedback.
• Understand your audience/client: You need to know about who is going to listen
to you and what are going to be his expecta ons. Accordingly, you should try to
resonate your presenta on of prepared design. Growth in business, voice of
customer, performance etc. are some of the requirements audience will be
interested in.
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• Introduce the context: Design review should start with you telling the audience
why you are there? Usually this audience is involved in many other ac vi es and
hence have many things in their mind. Therefore, to be effec ve you should tell
about ‘why’ part of the design which includes why client hired you for this design.
Introduce the problem and objec ve to the audience. Also introduce if some
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decisions were made in previous design review mee ngs. This step is very
important you should effec vely tell your audience about the type of feedback
expected from them. The focus should be on technical aspects of the design
•
rather than cosme c aspects. C
Propose your design as solu on: A er you have introduced the context, now
present your design flowchart, and let audience give their sugges ons, feedback,
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or ques ons. You can respond to their queries and note the important
sugges ons. Overall, you should be able to present on why your design is best in
solving the current problem.
• Note sugges ons, respond, and proceed: Many types of sugges ons will be given
by audience, only few of them are going to be important and you can respond to
other sugges ons and convince them. You can discuss on the important
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sugges ons during the design review mee ng and consensus can be made. Move
forward by incorpora ng valuable agreed upon points. Lastly, summarize the
discussion points, decisions taken, further course of ac on.
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Quality design reviews provide us with important feedback and help in achieving
consensus. And this ul mately leads designer to deliver value to the client or to
the business depending on for whom the design ac vity is performed.
CHECK YOUR PROGRESS- II

Q. 1 True/False
Quality design reviews provide us with important feedback and help in achieving
consensus.
Q. 2 CAD is a so ware which is not used for _______.
a. Crea on of design
b. Modifica on of design
27
UNIT 2
NOTES c. Op miza on of design

d. Adver sement of product
2.7 DESIGN FOR ENVIRONMENT (DFE)

Environment is the surroundings which includes air, water, solids etc. in which we all live
along with many other living beings. For a healthy living the surrounding environment should
be healthy. But the developmental ac vi es of various countries have affected the
environment adversely and is s ll harming it. Many countries every year is facing a challenge
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to dispose millions of home and office appliances. If this scenario con nues most of the city
dumps will be filled with used home and office appliances (which includes refrigerators,
computers, washing machines etc.).
Design for environment is the concept for designing of product in a way that it has least
possible effect on the environment and hence includes following points:
• Designing product in a way that it can be made with recycled material,
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• The parts or material used in making the product is recyclable,
• Final product is easily repairable than being discarded,
•
•
•
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Packaging material is minimized,
Material and energy required during manufacturing of it is minimized.
The product designed should not have any harmful effect on consumer.
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• It should be easy to dispose the product a er it has completed the life cycle.
It is highly recommended that instead of making a product directly, it should be assembled
by combining different components and part. And now the designing team should focus on
these components and part for feasibility of making them recyclable. If recycling of these
parts is not possible then the team should work on devising ways to dispose that part a er
product completes its life.
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2.8 QUALITY FUNCTION DEPLOYMENT

It is a process through which the customer needs are mapped with product characteris cs to
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iden fy those characteris cs which when improved will sa sfy majority of customer needs.
Quality func on deployment not only map the customer needs with product characteris cs,
but also considers interrela onships of characteris cs, compe tors’ products etc. In general,
quality func on deployment has following steps:
• Iden fy customer expecta ons,
• Iden fy product characteris cs which relates with customer expecta ons,
• Prepare rela onship matrix between customer expecta ons and product
characteris cs,
• Develop interrela onships between product characteris cs,
• Analyze compe tor’s product on the noted customer expecta ons,
• Benchmarking and comparison of technical a ributes.
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• Customer Expecta on NOTES

In the first step you need to iden fy customers who have used or are using the product that
needs improvement. Now you can ask them about their requirements from the product.
Here you should try to interact with as many customers as possible. Customers will provide
with many requirements, but you will consider the commonly presented requirements. Now
you can ask customers to rate these requirements on a 5-point ordinal scale, where 5 is for
highly important and 1 is for least important.
• Iden fy Product Characteris cs
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A er iden fying customer expecta ons, the ques on arises how to sa sfy them?
This means product characteris cs are to be iden fied which are related with
customer expecta ons. For example, if for a laptop one of the customer
requirement is processing speed then of course the product characteris cs to be
considered are processor and RAM. If you modify motherboard or case material
of laptop then it might not sa sfy customer expecta on ‘processing speed’.
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Therefore, iden fying right product characteris cs is very important.
• Rela onship Matrix
Each iden fied product characteris cs might be related with some or all the
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customer requirements. In the rela onship matrix you will show the extent of
rela onship between product characteris cs and customer requirements. This
step helps in finding importance ra ngs for each product characteris cs and
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based on this you can iden fy the product characteris cs which are highly related
with customer expecta ons. These characteris cs are improved on priority.
• Interrela onships
Interrela onship matrix is prepared based on the rela onships between the
product characteris cs. If you are making changes in one product characteris cs,
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then it might happen that to support these changes some other characteris cs
also needs to be changed. Therefore, interrela onship matrix will help us in
knowing this and cost es mates of making changes can be made more accurately.
It is important in a way that cost of making changes should not be very high that
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you have to increase the product cost in the end.

• Compe tors Analysis
It is always good to understand how your compe tor products are performing at
marketplace. This will help you in judging which characteris cs to be improved in
your product to overcome your compe tors. When you are analyzing your
compe tors’ products during quality func on deployment exercise then analyze
them in context to the customer requirements. Compe ng products
performance could be measured as good, fair, poor, or some scale can also be
used.
• Technical Analysis
Technical analysis is presented at the bo om of house of quality and it is very
29
UNIT 2
NOTES important to perform it. This includes minimum or maximum value permi ed for
any of product characteris cs. It also includes the present level of your product
characteris cs and your compe tor’s product characteris c. The importance of
technical analysis is that it helps the design team with lower and upper limit while
making changes in them.
Overall quality func on deployment looks like a house and also known by the
name house of quality. Following diagram will help you understand it be er.
Fig. 2.2: House of Quality (QFD)
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C
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Lets now understand the quality func on deployment with an example. Footwear industry is
witnessing s ff compe on with major players spending enormously on –
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• design
• comfort
• durability
• weight
This product is relevant for all ages, genders etc., hence, companies need to make designs
suitable for all sec ons of society. With a projected market volume of US$11,664m in 2021,
India generates the 6th highest revenue from this industry in the world (Sta sta, 2021).
MSMEs account for nearly 75% of the produc on in India (Yourstory, 2020). Rapidly changing
fashion needs and constant demand for more and more designs and varia ons compel this
industry constantly evolve. (PR Newswire, 2020).
Let’s assume that one of the players wants to improve its one type of sports shoes. The
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design team decides to perform quality func on deployment as follows: NOTES

Step 1a: Iden fica on of customer requirements: Developing process of house of quality for
shoes is focused on consumers’ needs, because they are the target group. When many
customers were approached to know their requirements following customer requirements
remained commonly quoted:
Material / fabric
Comfort level
Stability on foot / weight
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Speed of dryness / water permeability - Rate of sweat absorp on
Air permeability – Rate of air flow
Colour
Affordability
Step 1b: When these customers were asked about which requirement is how much
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important (5 is for highly important and 1 is for rela vely least important) then following
importance ra ngs to each requirement is generated:
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Step 2: Technical characteris cs: Now the Design team must brainstorm and iden fy
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product characteris cs which are related with these customer requirements. Following are
the product characteris cs related with customer requirements stated in the step 1.
• Upper material
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• Lining material
• Color
• Water permeability
• Air permeability
• Sole material
• Sole so ness
• Lock system
Step 3: Establish the rela onship / develop the rela onship matrix :
In this step, we compare each customer requirement with every characteris c in order to
iden fy a connec on and to determine the intensity (strong, medium, weak, null) for each
interac on.
31
UNIT 2
NOTES Table 2.1: Rela onship Matrix
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Calcula ons of Weighted Ra ng (Importance Ra ng of each Technical A ribute) are as
follows:
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From the weighted ra ng it is very clear that upper material, and lining material are highly
related with customer requirements. Therefore, design team should improve them on
priority and if budget permits then accordingly based on weighted ra ng next product
characteris cs can be considered. But your decision is not merely dependent on weighted
ra ng rather compe ng products should also be analyzed to know which customer
requirements they are sa sfying be er.
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Step 4: Compe tor Evalua on : NOTES

Table 2.2: Compe tor Analysis
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From the above table it is clear that our product is doing good on all the customer
requirements except on ‘stability on feet’ and ‘speed of dryness’, whereas compe tor 2 is
good on both. Hence, looking on the rela onship matrix team might decide to consider
product characteris c ‘lock system’ for improvement. Water permeability may or may not be
considered depending on the budget because ‘upper material’ and ‘lining material’ are also
related with ‘speed of dryness’.
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Step 5: Interrela onships between product characteris cs:

Interrela onship matrix shows the rela onships between product characteris cs. To show
the rela onship ‘5’ is for ‘strong rela onship’, ‘3’ is for ‘moderate rela onship’, and ‘1’ is for
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‘low rela onship. A blank box shall be considered as no rela onship. From the
interrela onship matrix you can see that ‘upper material’ is highly related with color and
water permeability, but moderately related with air permeability characteris c. Therefore,
you and your team need to check if the level of changes you want to bring in upper material
will require some changes in the color, water permeability, or air permeability characteris c.
If ‘no’ then it is good, but if changes are required in related characteris cs then consider the
cost of these changes and plan accordingly. Similarly, other related product characteris cs
can be studied for effec ve decisions.
33
UNIT 2
NOTES Fig. 2.3: Interrela onships of Product Characteris cs
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Step 6: Benchmarking: In the benchmarking process, the idea is to know about the material
to be used, upper limit, lower limit as benchmarks. This is done to finalize technical values for
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our product while making improvement. Here, your team will also consider the compe ng
products while making decisions.
Table 2.3: Comparison of Technical A ributes
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Overall, the final house of quality will look like as shown in figure 2.4:
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Fig. 2.4: Completed House of Quality NOTES
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In general, it can be concluded That QFD helps us to highlight the consumer needs for sports
shoes; iden fy the most significant features of the product considered; highlight and
understand the rela onships between customer requirements and product characteris cs.
It also helps us to compare our product features with that of our compe tors and establish
objec ves for the technical characteris cs that should be in the future.
Quality func on deployment is a series of connected houses of quality as shown in the
following figure. The first house of quality translates customer requirements into product
characteris cs. In the second house of quality product characteris cs are mapped with
specific components to iden fy components that needs improvement. The third house of
quality translates specific components into produc on process and fourth house helps in
35
UNIT 2
NOTES rela ng produc on process with quality plan. The implementa on process starts from
fourth house and reaches to first through third and second respec vely.
Fig. 2.5: Connected Houses of quality
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2.9 C
DESIGN FOR ROBUSTNESS
According to Genichi Taguchi, a sta s cian and industrialist from Japan, the main reason
behind product failure is design quality and hence product failure is a func on of ‘quality of
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design’. Customers usually have a habit of using the products as they want, and this leads to
lot of varia on in the opera ng condi ons than the normal. And their expecta on of normal
func oning of the product remains as it is. We cannot change the way the customers are
using the products, but what you can do is to design and make a product in a way that it
func ons well during varia ons occurring due to range of opera ng condi ons. This is the
concept of robust design.
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Products based on robust designs can handle range of varia ons in opera ng by customers.
The failure of product could be either wrong manufacturing or incorrect design. The
situa ons that leads to poor performance of product are called noise. These noises can be
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classified as controllable and uncontrollable factors. As a designer you should know that
material to be used, product dimensions, processing style etc are controllable factors,
whereas uncontrollable factors include longevity of use by customer, maintenance etc.
Environmental factors like heat, cold, humidity etc are also included in uncontrollable
factors. In the robust design the designer should work (during designing the product) on
controllable factors in such a way that happening/occurrence of uncontrollable factors is
handled amicably by the product made based on that design.
As we know that perfec on on single value is seldom, therefore design team should specify
specifica ons to allow random varia on. Products produced within these specifica ons are
always considered to be quality products. Taguchi emphasizes on consistency over being
within tolerance limits as it will lead to be er quality. He advocated on consistency based on
following points:
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• It is easy to correct consistent errors than random errors. NOTES

• Assemblies based on parts (conforming specifica ons) might not be conforming
to specifica ons, and
• Ideal values in product characteris cs are always preferred by consumers.
CHECK YOUR PROGRESS- III

Q. 1 True/False
Products based on robust designs can handle range of varia ons in opera ng by
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customers.
Q. 2 Interrela onships in the quality func on deployment is rela onship among.
a. customer requirements
b. Product characteris cs
c. Compe tor products
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d. Technical benchmarks
2.10 THE SERVICE ECONOMY

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in India and most of the developed countries the service sector is contribu ng hugely in the
GDP of the na on. Service sector in India (h ps://www.ibef.org/industry/services.aspx) is
the backbone of economy and is currently contribu ng 55.39% during 2020 in the overall
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GDP followed by manufacturing sector and agriculture. Service sector includes services
offered by banks, real estate, professional services, defense, hotels, transport, a er sales,
communica on, e-commerce business etc. Hence services are very important and should be
designed carefully for achieving desired outcome.
When we leave service provider to go and iden fy what customer wants and provide service
without any policies and help from management then the service provided might not sa sfy
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customer requirements effec vely. Now ques on arises ‘is the designing of services like that
of designing products?’. The obvious answer is ‘no’ because characteris cs of services are
different from that of products. Lets now understand characteris cs of services.
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2.11 CHARACTERISTICS OF SERVICES

All the services are not same and hence will not have similar characteris cs but will possess
different characteris cs with varied degrees. Based on the following characteris cs services
can be differen ated from the products/manufacturing.
• Intangible: It means you can feel the services but cannot be touched or seen. It is
an experience which will be different for different customers receiving same
service. It is very important to understand the customer experience for effec vely
designing services.
• Variability: Services are provided by different providers to different customers as
per their demand and hence becomes different for individuals. The variety of
services provided leads to variability in services. 37
UNIT 2
NOTES • High customer interac on: Services are provided as per the requirements of
customers and hence are always based on interac ons with the customers. For
example, a doctor will prescribe medicine or treatment as per his interac on with
the pa ent.
• Perishable: Service cannot be stored or inventoried and hence are perishable in
nature. Therefore, me and loca on of service is important and needs high
a en on during service design.
• Inseparable: Services are produced and consumed at the same me; therefore,
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services cannot be separated from the service provider.
• Easy to emulate: It is easy for the compe tors to emulate the new services started
by you and hence to stay ahead in the compe on you and your team should
constantly work on bringing new ideas in the services.
• Decentralized and dispersed: One service provider cannot provide service to
every customer at different geographic areas. Therefore, having many
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(decentralized) service outlets at different places is always preferred. Different
service providers will have different (dispersed) procedure or procedure of
providing services. Every service provider should be given proper training as per
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service design. This will bring in some level of consistency in the services provided
by different providers.
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2.12 THE SERVICE DESIGN PROCESS
Just like product idea, the idea of service can come from any source like customers, suppliers,
government policy, R&D etc. A er having the idea its feasibility as per customers’ expected
experience is checked. Because a service is a bundle which includes parts, sensual and
psychological benefits. For example, in the case of distance learning program physical items
consists of learning material, availability of computer labs, library on off days etc., sensual
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benefits will include good teachers delivering lectures effec vely, staff providing mely
services etc. and psychological benefits will include ease of studying, doubt clearing etc.
Following figure will help you in understanding the design process.
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Fig. 2.6: Service Design Process

Service Idea
Service Bundle
Performance Standards
Design Specifica ons
Delivery Specifica ons
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A er the feasibility of idea your team will work on service pack which will include parts, NOTES
sensual benefits, and psychological benefits. Now design team will brainstorm and finalize
the performance standards of the physical parts and benefits included in the service bundle.
While working on its customer requirements and expecta ons should be considered.
Performance standards needs to be converted in to design specifica ons by defining
descrip ons of service bundle. Design specifica ons are described in sufficient detail as per
service experience to be provided to the customers. It will include training guidelines; cost
es mate and me es mate of the service. In the delivery specifica ons of the service you
need to organize the workflow of the service by preparing the job schedule, including the
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loca on of service delivery etc.
Service delivery is service itself and hence is more comprehensive in comparison to
designing of products. Therefore, role (behavior) of service provider and speed of response
are very important.
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2.13 TOOLS OF SERVICE DESIGN
Service design tools are important as they can used in every step of service design process.
These tools can be used for either improving the exis ng service or designing new service.
Following are the service design tools:
•
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User diary: It is a tool used in early stage of service design process. The objec ve is to
observe consumer requirements, experience, and responsiveness over a period. In
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this some consumers are studied, and diary is maintained which will include
document, recording, photograph etc.
• Personas: The informa on collected in user diary is analyzed and organized as a
persona. Here persona means an imaginary character providing the needs,
demographic informa on, problems faced, interest of the target consumer. It is a tool
used in middle stage of service design.
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• Business model canvas: It is a service design tool used for prototyping stage. In this
tool the personas created will be used for prototyping service to be provided. It will
include ac vi es, persons, value proposi on, customer rela onship, resources,
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review mechanism etc.

• Scenarios: It is the tool used in tes ng stage of service design. The compe ve
scenario and ever demanding customers will always put us in con nuous
improvement mode. For con nuous improvement you should evaluate the service
provided to understand how to improve it in future. Scenarios are an cipated
feedbacks through which we try to bring up future situa ons that can occur while
services are being used by the customers.
You should ensure that the consumer is considered during each stage of service design
process. The use of right tools and persons is important for successful implementa on
of the service development process. As per the objec ve of each stage of service
design the above men oned four tools can be used for effec veness in results.
39
UNIT 2
NOTES 2.14 LET US SUM UP

Opera ons managers need to understand requirements of the customers and then create
products and services that can sa sfy these needs of the customers. The design of product
and service is very important because complex designs might increase the cost of produc on
whereas changes in complex designs might reduce the produc on cost which ul mately will
lead in profitability. Design is a cri cal process because poor designs will not be able to sa sfy
customer needs and quality will remain low. Technological advancements are one of the
reason for bringing in deluge of new products. These advancements in technology started
with CAD (computer aided design) and in its gamut has CAE (computer aided engineering)
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and CAM (computer aided manufacturing). Ge ng quality feedback from other designers,
stakeholders, clients is always helpful. Design for environment is the concept for designing of
product in a way that it has least possible effect on the environment. Products based on
robust designs can handle range of varia ons in opera ng by customers. All the services are
not same and hence will not have similar characteris cs but will possess different
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characteris cs with varied degrees. The use of right tools and persons is important for
successful implementa on of the service development process.
2.15 KEY WORDS C

Computer-aided design (CAD): It is so ware used for making, modifying and analysing the
product design.
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Computer-aided engineering (CAE): It is tes ng and analyzing the created design
performance at computer terminal without physically making a prototype.
Concurrent design: It is a concept in product design which involves people from relevant
departments while designing product.
Design for assembly: The main goal of this design is working on procedures for determining
assembly sequence with reduced number of parts in it.
O
Design for Environment: It is the concept for designing of product in a way that it has least
possible effect on the environment.
Design for manufacture: It is a design which ensures ease of making the product and
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minimizes cost of manufacturing.

Failure modes and effect analysis: It is a systema c approach in which design team focuses
on the probable failure modes of the product and extent of its effect on the customer,
environment etc.
Fault tree analysis: It is a method of analyzing the rela onships between the various failure
modes.
Modular design: In this design standardized parts (building blocks or modules) are combined
or assembled as per products requirements to make desired fished product.
Quality func on deployment: It is a process through which the customer needs are mapped
with product characteris cs to iden fy those characteris cs which when improved will
sa sfy majority of customer needs.
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Reverse engineering: This is a concept in which compe tors’ product is studied a er NOTES
dismantling it.
Robust design: It is a product design made keeping in mind the different environmental
condi ons, and varied styles of usage by customers.
Service package: It is a service, ‘which includes items, sensual, and psychological benefits’,
provided to customer.
Value analysis: It is one of the concepts in product design to discard unnecessary features in
the product during its design.
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Chary, S. N., 2019, “Produc on and Opera ons Management”, McGraw Hills.
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Russel, R. S., and Taylor-III, B.W., 2018 “Opera ons Management”, Wiley Publica on.
Render, B., Rajashekhar, J., and Heizer, J., 2018, “Opera ons Management, Pearson
Publica on.
h ps://www.designorate.com/4-service-design-tools/.
C
R afi q E l m a n sy, “ 4 S e r v i c e d e s i g n to o l s to fo c u s o n C o n s u m e rs ’ n e e d s ”,
h ps://www.sta sta.com/outlook/cmo/food/oils-fats/bu er/india

TO
h ps://yourstory.com/2021/01/budget-2021-indian-startup-ecosystem-founder-
expecta ons/amp
h ps://www.prnewswire.com/in/news-releases/jd-ins tute-of-fashion-technology-south-
announced-its-new-domain-835236689.html
2.17 SELF-ASSESSMENT QUESTIONS

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Q.1 Which of the statement is correct.
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a. Screening comes a er idea genera on, but before preliminary designs.

b. Prototyping comes before evalua on.
c. Preliminary design comes before screening, but a er idea genera on.
d. Evalua on comes a er preliminary and final design.
Q.2 Which of the following is a ‘core part of service’ at a restaurant?
a. Food prepara on
b. Provision of meal
c. The environment in which food is served
d. The meal
41
UNIT 2
NOTES Q.3 Where should product or service design start?

a. With the marke ng department
b. With the customer
c. With the opera ons manager
d. With human resources
True/False
Q. 4 Products and services are usually the first thing customers see of a company.
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Q. 5 Ideas and concepts are same thing product or service design process.

Q.1 False
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Q.2 b
Q.1 True
Q.2 d C
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Q.1 True
Q.2 b

Q.1 a
O
Q.2 b
Q.3 b
Q.4 True
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Q.5 False
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UNIT 3 NOTES
CAPACITIES AND FACILITIES DESIGN
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STRUCTURE
3.0 Objec ves
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3.1 Introduc on
3.2 Understanding and Measuring Capacity
3.3
3.4
3.5
Determinants of Capacity
Efficiency and U liza on
Capacity Planning
C
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3.6 Applying Decisions Trees to Capacity Decisions
3.7 Facility Design
3.8 Let Us Sum Up
3.9 Key Words
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3.0 OBJECTIVES
• Understand the requirements of capacity and facility design
• Define and measure capacity
• Determine the parameters for effec ve capacity design and its u liza on for
various matrices measurements
• Understand the break-even point for capacity
• Apply decision tools to propose framework for capacity decisions
• Iden fy process focused, product focused and fixed posi on layouts Design a
process and product layout for the industrial scenario 43
UNIT 3
Capaci es and Facili es Design
NOTES 3.1 INTRODUCTION

Rajeshri started a start-up business of expor ng Rajasthani handmade bags. She hired some
women from Rajasthan to make these handbags. The handbags were available in different
designs and styles. Ini ally, there was less demand for every kind and all the opera ons were
running smoothly. Where she simply received the orders from the website, and her
employees were tasked to complete those orders. Happy with the profits, she started a
special adver sement campaign for Diwali.
All was going well ll the fes ve season of Diwali in which huge orders were placed. Rajeshri
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took all the orders without realizing that how much addi onal workforce, equipment,
resources, me and facility were required for this commitment. As a result, Rajeshri faced
delayed and backlog orders.
What do you think? What impediments caused her to not successfully complete all her
orders?
There may be several reasons for Rajeshri’s derelic on, but the most important one was the
O
lack of planning. So, the important ques on here is what sort of planning?
For Rajeshri to have a greater understanding of what may impact upon supply of her
products, and how much their demand is likely to be affected, there are requirements for
C
planning such campaigns.
The scenario demonstrates how complicated business campaigns can be to deal with the
unpredictability of demand and supply of goods and services, and s ll have an efficient
TO
running opera on. Provisioning of the right amount of goods at the correct me requires
careful planning and investment decision.
There are three main things an opera on must consider when looking at produc on of goods
and services:
Capacity: How much can you make?
O
Demand: How much does the market require?

Forecas ng: How are you going to match demand and supply without was ng resources?
If we relate these factors with our case, we can understand that all these factors have impact
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on each other. In order to fulfill the demands, Rajeshri must be fully aware of her opera on
capacity (required and available workforce, material and equipment required, etc.), and
then decide whether to increase or decrease the capacity. This scenario of capacity is not
only a problem of offering the amount of goods or services in accordance to the supply and
demand, but it is also an issue of me management; that how much me is required to fulfill
the demand?, and how much me Rajeshri’s workforce is spending to fulfill the demand?
An opera on can encounter a number of problems when a emp ng to plan its capacity. So,
during maximiza on of opportuni es and demand without having excess capacity, an
opera on may experience many changes and fluctua ons in the demand for its products or
services. For instance, the daily demand for a cinema may peak in the evening, but this rise
may not be the only pa ern in demand; the weekends may be busier than a weekday, and
there may be other events like Valen ne’s Day or holy fes vals where demand is expected to
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increase. NOTES
From the above discussion it is evident that planning is the key to achieve any business goal.
In this chapter our focus will be on the planning regarding capacity of the organiza on. We
will first understand what is meant by capacity then further elaborate how to plan capacity
and finally how to design the organiza on to achieve the planned capacity.
3.2 UNDERSTANDING AND MEASURING CAPACITY

3.2.1 MEANING OF CAPACITY
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All of us familiar with the word capacity which literally means the amount something can
hold or the amount something can produce. If we talk about capacity of an organiza on then
capacity can be defined as the “throughput” or number of units a facility can hold, receive,
store or produce in a period of me”.
Examples:
• The number of pa ent beds in a hospital
O
• The number of customers served by the cashier per hour in a supermarket
• The number of electric ovens that can be produced in a month by a factory
C
In other words, capacity is simply an amount a facility/person can contain, produce or
perform with unavoidable delays. In many situa ons, measuring capacity is a difficult task.
Examples:
TO
• How many ambulances should be present at the airport as standby?
• How many surgeries should be performed by a surgeon in a month?
As per the defini on capacity can be a quan ty, so to measure this quan ty let’s see how it
can be measured.
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3.2.2 MEASURING CAPACITY

Capacity has no fixed measurement unit. The measure of capacity is associated with the
object or situa on that is to be measured. For example, the bo le capacity is measured in
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liters or milliliters. In opera on management, the capacity can be measured using an input or
output of the process. Now the ques on may confuse you that whether to select input or
output capacity measure? You can select any measure that clearly reflects the ability of the
opera on to create its product or service. Some mes the input is more difficult to measure,
such as machine hours on a process layout; herein output is a suitable measure of capacity.
3.2.3 INPUT CAPACITY MEASURE

In input capacity measure, the key input of the process is used to measure the capacity of the
process. It is usually used where the provision of capacity is fixed e.g.: number of seats at a
conference. It can be used where processes are small, highly customized and having variable
outputs e.g.: call centers.
45
UNIT 3
NOTES 3.2.4 OUTPUT CAPACITY MEASURE

It is used where outputs are countable data from the process and it has low variety in the
process output e.g.: the number of tables produced in a furniture manufacturing company.
Some examples of input and output capacity measures are given below:
Table 3.1: Examples of Input and Output Capacity Measures
Business Input Capacity measures Output Capacity measures
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Automobile Labour hours Number of automobiles
Manufacturer Machine hours per shi
Farm Number of acres Grains produced per acre per

year
Theatre Number of seats Number of ckets sold per
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Number of shows performance
Pizza Shop Labor hours Pizzas sold per day
Restaurant
C Number of tables
Sea ng Capacity
Number of meals served per
day
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3.3 DETERMINANTS OF CAPACITY
Capacity usually determines the fixed cost. Like if a restaurant wants to expand its area to
increase the capacity to accommodate more customers, then costs related to construc on,
insurance of the restaurant, property taxes, u li es etc. will be incurred as fixed costs.
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Capacity also helps you to determine whether the facility will be able to sa sfy the demand
or it will be idle. Taking the previous restaurant example, if the restaurant facility is expanded
without considering the demand, then there is a possibility that it will be idle and add cost to
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the exis ng facility. But, if the demand is high and the restaurant won’t expand, then the
restaurant may lose its customers. So, determining facility size with an objec ve of achieving
high level of u liza on and a high return on investment is cri cal. Similarly, op mum number
of equipment, employees, and labor hours should be considered for achieving high
u liza on and high returns on investments.
Capacity is also defined under the categories of designed and effec ve capacity. We are
defining these categories because it would help the organiza ons to calculate the u liza on
of their resources and the efficiency of the processes. Every organiza on wants to fully u lize
its resources and wants all the processes running efficiently. To calculate the u liza on and
efficiency one should know the design parameters of the organiza on like an oven is
designed to bake six cakes and the capability of the process i.e. how much an organiza on
can produce. Let’s see the theore cal defini on of these categories and how they linked to
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u liza on and efficiency. NOTES
3.3.1 DESIGN CAPACITY

Design capacity is the maximum theore cal output of a system in a given period under ideal
condi ons. It is the rate a process can produce output con nuously without delays and
stoppages. It is also termed as maximum capacity.
Usually, companies operate their facili es less than the design capacity as it is not possible to
avoid produc on delays and stoppages.
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Example: The batch produc on line of a pharmaceu cal company is designed to produce
20,000 tablets in an hour on a fully staffed shi . You can easily figure out here that the line
has a design capacity of 20,000 tablets hourly.
3.3.2 EFFECTIVE CAPACITY

Effec ve capacity is the capacity that a company expects to meet considering all the planned
O
produc on delays and stoppages. It is usually lower than the design capacity.
You are well aware of the fact that no produc on process can run without delays and
breakdowns so the effec ve capacity is what organiza ons expect to meet with the cushion
of delays.
C
Example: The batch produc on line of a pharmaceu cal company which is designed to
produce 20,000 tablets in an hour on a fully staffed shi only produces 18,000 tablets per
TO
hour, as there are possibili es that shi s would not be fully staffed (reasons may be
absenteeism, staff breaks etc.).
3.3.3 ACTUAL OUTPUT

Actual output is output obtained from the process a er all the planned and unplanned
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delays and stoppages. It is o en less than the effec ve capacity due to breakdowns,
defec ve units, material shortage etc.
Fig. 3.1: Illustra on of Design Capacity, Effec ve and Losses
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47
UNIT 3
NOTES CHECK YOUR PROGRESS-I

Q.1 Which is not the input capacity measure?
a. labour hours
b. machine hours
c. number of products produced in a day
d. all of the above
Q.2 True/False
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Design capacity is lower than the effec ve capacity.
3.4 EFFICIENCY AND UTILIZATION:

For organiza ons it is very important to know how efficiently they are u lizing their
resources, and how effec vely their processes are in opera on. To determine efficiency and
u liza on, certain calcula ons are used. These calcula ons are also termed as measures of
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system performance. As discussed earlier, the design and effec ve capaci es are used to
evaluate these measures. Where, Efficiency is the actual output shown as a percentage of
effec ve capacity, and U liza on is the output shown as a percentage of design capacity.
C Efficiency = Actual Output/Effec ve Capacity
U liza on = Actual Output/Design Capacity
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3.4.1 SOLVED PROBLEM
Daneesh furniture has a plant for processing special type of fiber chairs. Last week the
plant produced 2,000 chairs. The effec ve capacity is 2,500 chairs. The produc on line
operates 7 days per week with two 8 hour shi s per day. The line was designed to
produce 30 chairs per hour. Determine the u liza on and efficiency of the plant.
O
Solu on
Design Capacity = (7 days x 2 shi s x 8 hours) x (30 chairs per hour) = 3,360 chairs
U liza on = Actual Output/Design capacity = 2,000/3,360 = 59.5%
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Efficiency = Actual Output/Effec ve Capacity = 2,000/2,500 = 80%

What do you think about the organiza on’s performance? If you only calculate the efficiency
then you might be happy that you are on right track unless you focus on the u liza on. So, it
is very important for the opera on managers to consider both u liza on and efficiency. In
the solved example the efficiency is quite high as the output is compared to effec ve
capacity. However, for compu ng, u liza on output is compared to design capacity. This
indicates that the facility is underu lized, as the design capacity is much higher than the
effec ve capacity. To improve the u liza on, the manager needs to improve the effec ve
capacity by reducing planned delays and stoppages.
3.4.2 CASE
An Industrial engineer was hired on a plant and told to effec vely u lize the resources and to
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minimize the cost. The manager has no idea from where to start. He obtained the data and NOTES
found out that the plant was designed to produce 8,000 die cast parts per day but is
producing 6,000 parts per day because of the machine setup me. On further inves ga ng
he found out that the current month although the effec ve capacity is 6,500 parts only 4,500
parts per day are produced because of the unavailability of labor and material shortages.
What do you think the manager should do?
This informa on seems to be so less for a manager to work on his objec ves, but if we recall
our defini ons of design and effec ve capacity we can use these to calculate the u liza on
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and efficiency of the plant and hence can get the idea either the plant is running effec vely
its processes and u lizing its resources or not.
So from the informa on above,
Design Capacity = 8,000 parts per day
Actual Capacity = 6,000 parts per day
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U liza on = Actual Output/Design Capacity = 6,000/8,000 = 0.75 = 75%
Current Month
Effec ve Capacity = 6,500 parts per day
Actual Output = 4,500 parts per day C
Efficiency = Actual Output/Effec ve Capacity = 4,500/6,500 = 0.692 = 69.2%
You can see now the industrial engineer has the numbers on which he can take decisions and
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see the actual picture of the plant processes. From the above values of u liza on and
efficiency, the engineer must put efforts to increase the efficiency by reducing the
absenteeism and material shortages. Moreover he can more effec vely u lize the resources
by studying the process and reducing the setup me of the machines.
Let’s say the engineer set the target efficiency as 85% and as per the previous data the
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effec ve capacity is 6,500 parts per day the actual output that is needed to be produced can
be calculated as,
Expected Output = (Effec ve Capacity) x (Efficiency) = 6,500 x 0.85 = 5,525 parts
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Now we can see that just by working on the delays and shortages the number of actual
outputs can be increased and hence can increase the u liza on and efficiency of the plant.
3.5 CAPACITY PLANNING

A er knowing what capacity is and you might be thinking how organiza ons can plan the
capacity. Capacity planning is usually three step process which starts with the iden fica on
of the requirement, develop the requirement and then evaluate the requirements.
Capacity planning is to plan capacity where workforce needs to meet rising demands over
me. Capacity planning lets organiza ons know that how and when to expand the business,
enhance design capacity, enhance facili es, iden fy bo lenecks, and mi gate risk within a
period of me. Capacity Planning is carried out in three steps.
49
UNIT 3
NOTES 3.5.1 STEP 1: IDENTIFY CAPACITY REQUIREMENT

Capacity expansion can be complicated, as it’s largely based on future demand. Demand
pa erns are usually forecasted by tradi onal forecas ng methods, and then decision
regarding capacity increment is taken. Forecas ng the demand is the first step in capacity
planning and is usually referred as iden fying capacity requirements. To plan when to
increase or decrease the capacity is a key decision, as huge investment is required to fulfill it.
Moreover, op mum opera ng level (volume) should also be iden fied, and then capacity
requirements regarding the op mum level should be considered.
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3.5.2 STEP 2: DEVELOP CAPACITY REQUIREMENT
A er iden fying the required capacity, in the next step it is determined how to achieve that
capacity. For this different organiza ons consider different strategies which are listed below.
3.5.2.1 CAPACITY PLANNING STRATEGIES
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The ming decisions of how and when to change ‘capacity need’ is to be determined in line
with demand. For this purpose, usually three main strategies are used by the organiza ons
to develop the capacity requirements.
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3.5.2.1.1 CAPACITY LEADS DEMAND
In this strategy, capacity is extended or planned ahead of the forecast of demand. In this case
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the capacity which has already been expanded would be ready for any increment in the
demand. Capacity can be increased a er certain amount of me or it can be increased at one
step. For example, a plant acquired new capacity at beginning of year 1 and then handles all
the incremental demands of that year. This new capacity can be of any type like increase the
facility area, hired more staff or procure new equipment etc. At year 2 again new capacity is
acquired to handle the demand of that year and so on. In this way the plant is increasing its
O
capacity incrementally. The second approach is to expand the facility at year 1 to meet all the
demands of year 1, 2 and so on.
Capacity lead strategy has an advantage if the opera on is ready to sa sfy customer demand
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and meet short term opportuni es. However, there is a risk of demand not rising and the
opera on le with the wasted costs of unused capacity. An example of this strategy would be
an extension of college laboratory without es ma ng how many students were enrolled.
3.5.2.1.2 CAPACITY MATCHES DEMAND

A capacity matches demand strategy is when capacity is added in line with demand. This is
done by adding capacity in measured amounts in response to changing demand. It can be
done by flexible addi on of capacity either from flexible labor or flexible facili es. This o en
happens in services where staff is the flexible resource and can be brought in at peak mes.
For instance, in a manufacturing firm a staff roster can be prepared where employees are
appointed for extra shi s during high demands or for asking them to take holidays when
demand is low.
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3.5.2.1.3 CAPACITY LAGS DEMAND NOTES

In this strategy, organiza ons react a er considering what the actual demand is. The
planning to increase the capacity is done if the demand has risen. The organiza ons wait to
increase the capacity un l their capacity is stretched to maximum limits. This maximiza on
of limits gives an opportunity of certainty and reduces the risk of incorrect investment into
capacity. This strategy provides products and services on short lead- me and assumes that
the customer is prepared to wait, which is less risky than inves ng on capacity ahead of
demand. However, there is a disadvantage in such a situa on, that customers may not be
prepared to wait for the product or service, and opportuni es can therefore be lost.
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For example, a branch of bank with 5 staff does not want to hire more employees un l
everyone is working over me. Now if everyone is working over me and s ll unable to meet
customer demand, then the manager would take the decision of hiring new staff.
3.5.2.2 CASE
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Saudi Arabia with its Vision 2030 plan is in the voyage of bringing changes in social and
economic reforms. With increase in pilgrims, visit, work and tourist visa the demand of
expand in country’s airports has also increased. According to flight intelligence company,
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Office of the Adjutant General (OAG), Saudi Arabia has recorded a 15.4 percent week-on-
week increase in airline capacity over the last week of March 2021. Although it was s ll lower
than pre-pandemic levels, OAG said “we are heading for the best week in over twelve
TO
months,” if airline capacity con nues its upward trend.
Before pandemic this rapid increase has made the airports runways for landing airplanes and
the immigra on counters crowded. People had to wait for hours in the queues for
immigra on purposes. In 2017, to solve the issue the avia on sector decided to increase the
capacity. In ini al stage the busiest airport King Abdul Aziz Airport (KAIA) Jeddah, was
decided to expand. KAIA is being developed in three phases. The first phase was designed to
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process an annual capacity of 30m passengers, while the second phase – planned for 2025 –
will boost capacity to 43m. Finally, total capacity will be increased to 80m by 2035 under the
third phase. However, as the first stage is nearing comple on – set to open in the first quarter
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of 2018 and be opera onal in me for the busy Hajj season – passenger numbers have
already overtaken the airport’s intended capacity: some 31m travelers passed through KAIA
in 2016 – a 7.3% increase on the 28.9m people using the facility in 2015. As the Kingdom’s
busiest airport, Jeddah handled 10.2% more flights in 2016 than in the previous year, rising
from 19,028 to 20,767. At the same me, three new airlines are planning to begin
opera ons, offering more choice in price and des na ons.
What do you think what strategy has been approached by the Saudi Arabian Avia on Sector
towards matching capacity to demand?
As we seen in the case before expansion of KAIA, the passengers were facing huge difficulty
in immigra on and crowded airports; at this stage the airports lagged demand. That is there
were more demand for airport space and immigra on counters and KAIA was unable to fulfill
it hence lagging the demand.
51
UNIT 3
NOTES Now as per the planning of three phase expansion the strategy is leading demand with
incremental expansion, as the whole plan is to increase the capacity from 2017 to 2035 in
stages and the expansion is planned to accommodate the passengers more than the
forecasted.
3.5.3 STEP 3: EVALUATE CAPACITY REQUIREMENTS

3.5.3.1 BREAK EVEN ANALYSIS
Break even analysis is very important for the organiza ons to find the moment when
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revenue of the product sales equals to the total cost associated with the product. This
moment or point is called break-even point. It is the point at which companies earn no
money from the sales volume, which is helpful in determining the amount of remaining
capacity a er the break-even point is reached. It helps organiza ons to increase or decrease
the capacity for ge ng high profits.
The aim of break-even analysis is to find the break-even point, in units or dollars, at which
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cost equals revenues. The firms must operate above this point to achieve profits. Break-even
point requires an es ma on of fixed, variable cost and profits. Fixed costs are costs that does
not change with an increase or decrease in the amount of goods or services sold. Examples
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include salaries, insurance, taxes etc. Variable costs are the cost that changes with the unit of
goods produced. Examples are the labor or material cost.
Fig. 3.2: Break-even Point-graphical Representa on
TO
O
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You can see in the figure, there are two func on lines that are the total cost line and the
revenue line. Total cost line is the summa on of fixed and variable cost. As we have discussed
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earlier fixed cost does not change over a period of me so the fixed cost is a horizontal line NOTES
over the me. It can also be seen even if no goods would be sold; the organiza on has to face
the cost associated to fixed cost. At low level of produc on, costs are greater than revenue.
Revenue begins with origin and increases as number of goods sold. Revenue func on
increases by the selling price of each unit. The intersec on of these func on lines is the
break-even point, the point at which cost is equal to revenue and hence neither profit nor
loss is made. If more quan es are produced beyond this point, then organiza ons can incur
more profits. If fewer quan es are produced than break-even point then organiza on has
to face a loss. For calcula ng the break-even point some assump ons are considered which
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are listed below:
Assump ons
Fixed costs do not vary with volume
Unit variable cost does not vary with volume
Unit revenues do not vary with volume
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Revenue and cost func ons are shown in straight lines. They are shown to increase linearly
as if these are directly propor onal to the volume of units produced. However, neither fixed
cost nor variable cost needs to be straight line. For example, fixed cost can be changed as the
C
organiza on adds more equipment or when taxes are increased. Similarly, variable cost can
also be changed by changes in the raw material cost, overhead charges etc. The change in the
fixed cost and volume discounts also changes the revenue func on.
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Graphic Approach
As break-even point occurs where total cost is equal to total revenue. Therefore,
TC = TR or Px = F + Vx
Where,
TC = Total cost = F + Vx
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TR = Total revenue = Px
P = Price per unit
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F = Fixed cost
V = Variable costs per unit
x = number of units produced
Now, solving for x, we can get the break-even point in units and further break-even point in
dollars. The two formulas for our interest are:
Break even in units = BEPx = Total fixed cost

(Price-Variable cost)
Break even in dollars = BEP$ = Total fixed cost

Variable cost
1-
Selling Price
53
UNIT 3
NOTES 3.5.3.2 SOLVED PROBLEM: SINGLE-PRODUCT CASE

A coffee café management would like to add a new line of coffee, which will require leasing
new equipment for a monthly payment of $2,000. Variable costs would be $3 per coffee, and
coffee would retail for $9 each.
a) How many coffee cups must be sold per month in order to break even?
Break even in units = BEPx = (Total Fixed Cost)
(Price-Variable Cost)
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BEPx = 2,000/ (9-3) = 334 coffee cups per month
b) What would the profit (loss) be if 1,400 coffee cups are made and sold in a month?
Profit=Total revenue-total cost
Profit=(Price-Variable cost)units produced-Fixed cost
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Profit = 1,200(9 – 3) – 2,000 = 5,200 (profit)
c) How many coffee cups must be sold to realize a profit of $8,000 per month?
C
Profit=(Price-Variable cost)units produced-Fixed cost
Let x be the units produced to get a profit of $8,000, then
Profit = 8,000 = (9 – 3) x – 2,000
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Solving for x will give x = 1,667 coffee cups
d) If demand is expected to be 600 coffee cups per month, will this be a profitable
investment?
Producing more than 334 (i.e., BEPx) coffee cups will bring profit. Since 600 > 334
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(BEPx), it is a profitable investment.
3.6 APPLYING DECISION TREES TO CAPACITY DECISIONS

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You might be thinking how to take decision about enhancement of capacity or vice versa.
This can be done by using decision tools. In this unit we are discussing decision trees.
Decision tree is a decision-making tool which is used to evaluate the alterna ves. It is
especially useful for evalua ng capacity expansion alterna ves given that future demand is
uncertain. It is a schema c model of available alterna ves and possible consequences and is
useful with probabilis c events and sequen al decisions. For each alterna ve, expected
monetary value (EMV) is evaluated, and the one that has highest expected monetary value is
considered.
3.6.1 STEPS IN CONSTRUCTING DECISION TREES

• Understand and specify the problem for which decision making is required. These
are decision points and denoted as squares, see fig 3.3, called as nodes. Several
54 alterna ves can be branched out from these nodes.
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• Interpret all possible alterna ves to the problem. These are the decision NOTES
alterna ves and are branched out from the nodes and are represented on the
branches.
• The decision alterna ves are then connected to chance nodes, denoted as circle.
The consequences of the alterna ves are then represented by the branches
coming out from the chance node.
• Present all the values on the decision tree with the respec ve probabili es.
• Find out the outcomes of all the variables and specifying it in the decision tree.
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• Calculate the EMV values for all the chance nodes or op ons, to figure out the
solu on which provides the highest expected value. For an event node, we
mul ply the payoff of each event branch by the event’s probability and add these
products to get the event node’s expected payoff. For a decision node, we pick the
alterna ve that has the best expected payoff.
Fig. 3.3: Decision Tree Model
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3.6.2 SOLVED PROBLEM

Spot on, a clothing brand is trying to expand the business due to high demand. For expansion
the management has several op ons, like do nothing, to build a small, medium and a large
plant. If a large plant is built and a favorable market exists, a profit of $ 200,000 could be
realized. An unfavorable market would yield a $ 190,000 loss. If a medium plant is built, it
yields a profit of $ 60,000 in a favorable market and unfavorable market a loss of $ 10,000. In
case of a small plant, $ 40,000 can be incurred in favorable market condi on, and $ 5,000 can
be lost in unfavorable market condi on. There will be no cost associated in status quo. A er
thorough market research, it is iden fied that there is 40% chance of a favorable market
condi on, therefore a 60% chance of an unfavorable market condi ons. Which alterna ve 55
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NOTES will be suitable for the management?

Here you can see that Spot on needs to take a decision which one alternate should be chosen
for enhancement of its facility. As the probabili es and the payoff value are know so decision
trees are best to use.
First we have to develop a schema c model of decision tree using the steps men oned in
sec on 3.6.1. The decision tree can be seen in the figure 3.4.
Fig. 3.4: Decision Tree for Spot on
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The EMV will be calculated from the right hand side by mul plying the payoff of each event
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branch by the event’s probability and add these products to get the event node’s expected
payoff. EMV of the alterna ves are calculated as:
EMV (for large plant) = (0.4) ($200,000) + (0.6) (-$190,000) = -$34,000
EMV (for medium plant) = (0.4) ($60,000) + (0.6) (-$10,000) = +$80,000
EMV (for small plant) = (0.4) ($40,000) + (0.6) (-$5,000) = +$13,000
Based on EMV criteria, Spot on, should build a medium plant which has the highest EMV.
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Fig. 3.5: Decision Tree of Spot on with The Event's Payoff NOTES
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3.6.3 CASE
A grocery store owner wants to build a small or a large facility at a new loca on. For both
facili es the demand can be either high or low, with probabili es es mated to be 0.6 and
0.4, respec vely. For a small facility and high demand, there are two possibili es either to
not expand the facility that will have a payoff of $223,000 or to expand the facility with a
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payoff of $270,000. For a small facility and low demand the payoff is $200,000. For a large
facility and low demand, there are two op ons one is doing nothing which has a payoff of
$40,000. The other op on is to adver se the facility. The response to adver sing may be
either modest or sizable, with their probabili es es mated to be 0.3 and 0.7, respec vely.
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For a modest response the payoff is $20,000 and $220,000 if the response is sizable. For a
large facility and high demand the payoff is $800,000.
The decision tree in Figure 3.6, shows the event probability and the payoff for alterna ve-
event combina ons. The first decision is whether to build a small or a large facility. Its node is
shown first, to the le , because it is the decision the grocery store owner must make now.
The second decision node is reached only if a small facility is built and demand turns out to be
high. Finally, the third decision point is reached only if the owner builds a large facility and
demand turns out to be low.
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NOTES Fig. 3.6: Decision Tree of The Grocery Store
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For solu on, we will first consider the right most event node that will happen if the owner
takes a decision of large facility and low demand and adver se that facility. The payoff at
that event comes out to be $160,000, calcula ons are shown in figure 3.7.
Fig. 3.7: Decision Tree of Grocery Store

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A er that the adjacent decision node 3 is considered and the payoff value of $160,000 is NOTES
considered as it is higher than of $ 40,000 payoff of doing nothing. This can be seen in the
figure 3.8.
Fig. 3.8: Decision Tree of a Grocery Store
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Next payoff of decision node 2 is calculated, and shown in figure 3.9.
Fig. 3.9: Decision tree of a Grocery Store
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NOTES In the next step the payoff of selec ng small facility is calculated as $242,000, the
calcula ons are in figure 3.10.
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Finally the payoff of selec ng large facility is calculated as $544,000, the calcula ons are in
figure 3.11.
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The payoff for small facility is calculated as $244,000 and for large facility it is calculated as NOTES
$544,000. The grocery owner will take the decision of enhancing the facility on large scale
due to high payoff value of large facility.
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Q.1 If, Design Capacity = 1,000 parts per day, Actual Capacity = 5,00 parts per day, then
u liza on is______
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a. 50%
b. 20%
c. 70%
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d. 100%
Q.2 True/False
Decision tree is a decision-making tool which is used to evaluate the alterna ves
3.7 FACILITY DESIGN

Organiza ons are usually designed to have an efficient and effec ve system where
opera ons run smoothly and material flows steadily at minimum cost. The arrangement of
aspect of manufacturing or service departments in an appropriate manner as to achieve
desired output comes under the domain of facility design. This arrangement is called facility
layout and it helps in maximizing the effec veness of the process and mee ng the employee
needs.
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NOTES 3.7.1 OBJECTIVES OF FACILITY LAYOUT

An ideal facility layout provides the best rela onship between equipment, manpower, raw
material, flow and output at a minimal cost under safe environment. The objec ves are:
• The layout should facilitate high u liza on of equipment, people under safe
condi on
• The layout should allow a smooth flow of man, material and informa on
• The layout should facilitate the future extension in capacity in terms of up-
grada on of equipment or to accommodate new product line
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• The layout should improve customer and client interac on
3.7.2 BASIC LAYOUTS

Layout decision helps in placing the machines (in manufacturing sector), offices and counters
(in hospital or departmental stores). To achieve the above-men oned objec ves variety of
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layout types has been developed from which we are discussing the three main types that are
fixed posi on, process focused and product focused layout. The other layouts are office
layout, warehouse layout and retail layout.
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3.7.2.1 FIXED POSITION LAYOUT
In this type of layout, the project remains at one place and all the resources like equipment,
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workers etc. are bought to the site. Examples of the projects may include airplane
assembling, highway, ship building and an opera on room in a hospital. In this type of layout,
the equipment must be portable.
In this type of layouts, the fixed costs are rela vely very low as compare to the high variable
costs. The work area is usually crowded and has very less storage space.
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3.7.2.2 PROCESS FOCUSED

In process layout, the floor plan is arranged where same type of equipment or services are
grouped together and placed together. The placement is done in such a way that promotes
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minimum cost related to material handling. Example in figure 3.13 may include the machine
shop where all the mills are located at one place; all the surface grinding equipment is
located together and all other similar type of machines are placed together. Any incoming
batch of material will follow the route according to its own needs to be processed on various
machines.
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Fig. 3.13: Process Layout of a Machine Shop NOTES
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Other examples may be hospital layout, shopping malls etc. You are well familiar with these
layouts. In these layout people move from department to department according to their
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need. These layouts deal with low volume and high variety of products. Therefore, it gives an
advantage of flexibility to the organiza ons to deal a variety of processing requirements.
However, the scheduling can be a tough call.
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In this type of layout special a en on is paid to minimize the cost of material handling
because here the material flows through the stream of worksta ons or departments. To
achieve this worksta ons or departments with large flow of material are placed next to each
other. Material handling cost depends on the number of loads/people that are moving
between the worksta ons or departments and the distance related cost of these loads. This
objec ve can be wri en mathema cally as:
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Where,
n = total number of worksta ons or departments
i, j = individual worksta ons or departments
Xij = number of loads moved from worksta on/department i to department j
Cij = cost to move a load between department i to department j
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NOTES 3.7.2.2.1 DESIGNING A PROCESS LAYOUT- A CASE

Process Layout can be designed using the steps that are men oned below. The objec ve
here is to minimize the cost of moving the material between the worksta ons or
departments.
Star Maintenance is a maintenance facility that usually provides maintenance to small
aircra engines. The new management wants to improve the material flow of the facility
using the process layout method.
Step 1: Construct a from-to-matrix. This matrix shows the flow of material or loads from one
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department to the others.
The manager studies the process and iden fies the various departments of the organiza on
and flow of the material among various departments in an average month. The number of
material moved between departments is shown in the figure 3.14.
Fig. 3.14: From-to-Chart of Star Co. Maintenance
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The manager now iden fies the present layout of the facility with the space allocated for
each department. The manager came to know that the only restric on in improving the
layout that the recep on office can’t be moved or shi ed to any other space. All other
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departments or rooms (each 10-feet square) can be moved if it is beneficial. The current
layout can be shown in figure 3.15.
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Step 2: Determine the space requirements for each department. NOTES

The manager now iden fies the present layout of the facility with the space allocated for
each department. The manager came to know that the only restric on in improving the
layout that the recep on office can’t be moved or shi ed to any other space. All other
departments or rooms (each 10-feet square) can be moved if it is beneficial. The current
layout can be shown in figure 3.15.
Fig. 3.15: Exis ng Layout of Star Co. Maintenance
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Step 3: Develop an ini al schema c diagram showing the sequence of departments through
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which parts must move. Departments are placed according to the current layout of the
facility. However, in the improvement stages the departments that have frequent material
movements can be placed next to each other.
The manager assumes that departments such as recep on office (room 1) and receiving
room (room 2) having a walking distance of 10 feet. Diagonal departments are also
considered as adjacent departments and assigned a distance of 10 feet. Nonadjacent
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departments such as recep on room (room 1) and parts (room 3) or the recep on (room 1)
and inspec on (room 7) are 20 feet apart and nonadjacent rooms such as recep on (room 1)
and metallurgy (room 4) are 30 feet apart.
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The current flow can be seen in figure 3.16, the load movements from the already developed
from-to-chart between adjacent departments are shown using straight lines and for
nonadjacent departments the flow is shown using curves. The ‘from-to’ chart the trips
between room 1 to room 2 are 100, which is displayed as a straight line. The 100 trips from
nonadjacent rooms, room 1 and 3 can be displayed as a curve.
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NOTES Fig. 3.16 Exis ng Material Flow
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Step 3: Determine the cost of the layout using material handling cost equa on.
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The manager assumes that a forkli carries all interdepartmental loads. The cost of carrying
load between departments is $1/foot. The cost for the current layout from Fig can be
calculated using the material handling cost equa on.
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Where,
n = total number of worksta ons or departments
i, j = individual worksta ons or departments
Xij = number of loads moved from worksta on/department i to department j
Cij = cost to move a load between department i to department j
Total cost = [100 x ($1 x 10’)] + [100 x ($1 x 20’)] + [50 x ($1 x 20’)] + [20 x ($1 x 10’)]
room 1 to 2 room 1 to 3 room 2 to 4 room 2 to 5
+ [30 x ($1 x 10’)] + [30 x ($1 x 20’)] + [20 x ($1 x 30’)] + [20 x ($1 x 10’)]
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+ [20 x ($1 x 10’)] + [10 x ($1 x 30’)] + [30 x ($1 x 10’)] NOTES
room 5 to 6 room 5 to 8 room 6 to 7
Total cost = 1,000 + 2,000 + 1,000 + 200 + 300 + 600 + 600 + 200 + 200 + 300 + 300
= $ 6,700
Step 5: By trial and error (or by any computer program) try to improve the layout by
minimizing cost and distance travelled by the material between the departments.
The manager proposes two changes that are to switch rooms 3 and 5 and to interchange
rooms 4 and 6. The change would result in the following figure 3.17.
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Fig. 3.17: Improved Layout
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Total cost = [100 x ($1 x 10’)] + [100 x ($1 x 10’)] + [50 x ($1 x 10’)] + [20 x ($1 x 10’)]
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+ [30 x ($1 x 10’)] + [30 x ($1 x 20’)] + [20 x ($1 x 10’)] + [20 x ($1 x 20’)]
+ [20 x ($1 x 10’)] + [10 x ($1 x 10’)] + [30 x ($1 x 10’)]
room 5 to 6 room 5 to 8 room 6 to 7
Total cost = 1,000 + 1,000 + 500 + 200 + 300 + 600 + 200 + 400 + 200 + 100 + 300
= $ 4,800
Step 6: Prepare a detailed plan arranging the departments.
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NOTES Figure 3.18 shows the detailed arrangement of departments of the Star Maintenance.
Fig. 3.18: Improved Layout of Star Co. Maintenance
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3.7.2.2.2 SOLVED PROBLEM
Four processes are to be laid out in six rooms at a publishing centre. The material must move
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among the four rooms to complete the process. The number of trips between the rooms and
layout are given below
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Exis ng Layout:
The distance between each room is 30 feet.
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a. What is the movement cost of the exis ng layout? NOTES

Trips between the rooms are
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Distance covered by the material
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Load x Distance
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NOTES b. Suggest an improved layout and compute its cost.

Improved Layout:
Now the distance between the rooms would be
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Load x Distance
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3.7.2.3 PRODUCT FOCUSED

In product layout, layout is designed around products or families of similar high volume, low
variety products. This type of layout is usually in the repe ve assembly or con nuous flow
industries. Similar process is required for all the products. So, the variety is very less.
However, high volumes can be easily a ained by a series of worksta ons arranged in a line.
Two types of lines are used in this layout: fabrica on and assembly line. In fabrica on line
usually, components are built like metal parts of an electric appliance, and in assembly line
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the built components are assembled to get the finished output. Example can be an NOTES
automobile assembly line. Due to high volume produc on the unit cost is usually low. There
is a high degree of labor and equipment u liza on in this type of layouts. These layouts are
usually inflexible and cannot easily respond to the changes in the design of the product.
3.7.2.3.1 ASSEMBLY LINE BALANCING

Assembly line is a series of worksta ons that are producing the output product at a specific
rate. To produce the output management must know the tools, equipment and work
methods that are used in the line. The me required to perform the assembly task at each
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worksta on must be determined. This me is referred as cycle me which is the maximum
amount of me a product is allowed to spend on a single worksta on. Moreover
management must be aware of the sequence in which various tasks must be performed to
make a final product. This sequence is known as precedence rela onship. It is actually a
physical restric on on the order in which opera ons are to be performed.
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To make product layouts effec ve, line balancing technique is used to minimize imbalance
between machine or personnel while mee ng a required output from a line. Line balancing
tries to equalize the amount of work at each worksta on so that delays and bo lenecks can
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be avoided. This helps in se ng a pace of the line.
3.7.2.3.2 ASSEMBLY LINE BALANCING PROCEDURE-A CASE

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An assembly line ac vi es are shown in table has 480 produc ve minutes of work available
per day. The produc on schedule requires 40 units be completed as output each day. The
ac vi es that are required to complete the product along their sequence and process me
are listed in table 3.2.
Table 3.2: Precedence Data
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NOTES Step 1: Draw a precedence diagram

For precedence diagram, Task A is independent task. No ce that task B and E cannot be
started unless task A has been completed. Similarly for star ng task C task B has to complete
first. For the above ac vi es the precedence diagram is shown in figure 3.19. Each node
(circle) denotes the task along the comple on me of that task. Dependencies are shown by
the arrows.
Fig. : 3.19 Precedence Diagram
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Step 2: Calculate the cycle me of the line:
Cycle me is the maximum me a product can be allowed at each worksta on. It can be
calculated by using the following formula:
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Step 3: Calculate theore cal minimum number of worksta ons.

This is the total dura on divided by the cycle me. Frac ons are rounded to the next higher
whole number.
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Where n is the number of assembly tasks. NOTES

For our case,
Step 4: Group elements into worksta ons, recognize cycle me and precedence constraints.
We have to make 6 worksta ons and each worksta on should have a cycle me of 12
minutes. For this one solu on is shown in the figure 3.20 that does not violate the sequence
requirements and also group tasks into six worksta ons. The first worksta on consumes 10
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minutes and has an idle me of 2 minutes. The second worksta on uses 11 minutes and the
third consumes the full 12 minutes. The fourth also consumes 12 minutes and the fi h has an
idle me of 1 minute. The sixth has an idle me of two minutes. The total idle me is 6
minutes per cycle.
Fig. 3.20: Minimum Number of Worksta ons
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Step 5 Calculate the efficiency of the line.

Efficiency of the line can be calculated as:
The efficiency of our case would be
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NOTES If an acceptable efficiency level and theore cal number of worksta ons have not been
achieved then the procedure can be repeated from step 4.
3.8 LET US SUM UP

Capacity is the amount a facility can produce, store or hold. Managers take capacity decision
as per the organiza on’s mission and strategies. One way to look at Capacity Planning and
Management is that an cipa ng demand and inves ng in capacity is a fundamental part of
opera ons management. Managing that capacity is what generates surplus or profit. How
well we do this is a measure of our efficiency. This chapter has introduced a number of
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approaches for dealing with everyday problems. The chapter has presented: How capacity is
measured and appreciates the dilemma faced by management in matching variable demand
with variable capacity. How decisions should be taken regarding capacity.
Facili es layout plays an important role in achieving the planned capacity. Three major
layout types are discussed in the unit. The fixed posi on layout a empts to minimize the
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material handling cost with a constraint of limited space at the site. Process layout minimizes
the travel distances mes the number of trips. Product layout focuses on reducing wastes
and imbalance in assembly line.
3.9 KEY WORDS

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Capacity: Capacity is defined as the ability to achieve, store or produce. For an organiza on,
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capacity would be the ability of a given system to produce output within the specific me
period. In opera ons, management capacity is referred as an amount of the input resources
available to produce rela ve output over period of me.
Capacity planning: is essen al to be determining op mum u liza on of resource and plays
an important role decision-making process, for example, extension of exis ng opera ons,
modifica on to product lines, star ng new products, etc.
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Capacity is calculated as (number of machines or workers) × (number of shi s) × (u liza on)

× (efficiency).
Facility Layout: A model facility layout should be able to provide an ideal rela onship
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between raw material, equipment, manpower and final product at minimal cost under safe
and comfortable environment. An efficient and effec ve facility layout can cover following
objec ves:
• To provide op mum space to organize equipment and facilitate movement of goods
and to create safe and comfortable work environment.
• To promote order in produc on towards a single objec ve
• To reduce movement of workers, raw material and equipment
• To promote safety of plant as well as its workers
• To facilitate extension or change in the layout to accommodate new product line or
technology upgrada on
• To increase produc on capacity of the organiza on
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Design of Facility Layout: Principles which drive design of the facility layout need to take into NOTES
the considera on objec ve of facility layout, factors influencing facility layout and
constraints of facility layout. These principles are as follows:
a. Flexibility: Facility layout should provide flexibility for expansion or modifica on.
b. Space U liza on: Op mum space u liza on reduces the me in material and people
movement and promotes safety.
c. Capital: Capital investment should be minimal when finalizing different models of
facility layout.
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3.10 REFERENCES AND SUGGESTED ADDITIONAL READING
Heizer. J and Render, B. (2011). Opera ons Management (10th Ed.). Pren ce Hall
Russell and Taylor. (2014). Opera ons and Supply Chain Management (8th Ed.). John Wiley &
Sons Inc.
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h ps://oxfordbusinessgroup.com/analysis/making-room-airports-and-airlines-are-
expanding-capacity-accommodate-growing-demand
h ps://www.arabnews.com/node/1835076/business-economy
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h ps://oxfordbusinessgroup.com/analysis/making-room-airports-and-airlines-are-
expanding-capacity-accommodate-growing-demand
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Q.1 Which of the following func ons is NOT affected directly by the facili es decision?
a. Opera ons
b. Finance
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c. Marke ng
d. None of these
Q.2 In general, a less capital-intensive industry such as a hotel chain would do well with a
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u liza on rate of:

a. 20%
b. 30-40%
c. 60-70%
d. 100%
Q.3 A facility with a design capacity of 1,000 units, an actual average of 800 units, and
effec ve capacity of 850 units has an efficiency of ______________.
a. 65%
b. 94%
c. 20%
d. 70% 75
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NOTES Q.4 The first steps of capacity planning and control do not include:
a. Iden fying alterna ve plans
b. Measuring aggregate demand and capacity
c. Studying queuing theory effects
d. Choosing most appropriate capacity plans
Q.5 The maximum output of a system in a given period is called the
a. Efficiency
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b. Effec ve capacity
Design Capacity
Break-even point
Subjec ve Ques ons
Q.6 A plumbing work company has a group of 50 plumbers. These individuals visit houses
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and hotels or pre-arranged visits or are called in for emergency repairs. A call out fee is
charged that covers the first hour of their visit. Beyond the first hour they charge in
minimum blocks of 30 minutes. The average call out is 2 hours long. The working day is
usually eight hours long but allows 2 breaks of 15 minutes each and a half hour lunch
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break, leaving a 7-hour day. If holidays and illness are accounted for at 25%, the 7 hours
per day is actually a 5 ¼ hour day. If actual work is only 500 hours billed in the week,
calculate the u liza on and efficiency of the team.
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Q.7 Décor Co. is decora ve items manufacturer, which manufactures a special type of vase
that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs
are $12,000. Current volume is 50,000 units. The manufacturer can substan ally
improve the product quality by adding a new piece of equipment at an addi onal fixed
cost of $5,000. Variable cost would increase to $1.00, but their volume should increase
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to 70,000 units due to the higher quality product. Should the manufacturer buy the
new equipment? What are the break-even points ($ and units) for the two processes?
Q.8 A firm has three capacity alterna ves: small, medium, and large job shop. Whatever
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capacity choice is made, the market for the firm's product can be "moderate" or
"strong." The probability of moderate acceptance is es mated to be 40 percent; strong
acceptance has a probability of 60 percent. The payoffs are as follows. Small job shop,
moderate market = $24,000; Small job shop, strong market = $54,000. Medium job
shop, moderate market = $20,000; medium job shop, strong market = $64,000. Large
job shop, moderate market = -$2,000; large job shop, strong market = $96,000. Which
capacity choice should the firm make?
Q.9 A toy manufacturer company has decided to manufacture a new toy car, the
produc on of which is broken into six steps. The demand for the tractor is 4,800 units
per 40-hour workweek:
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NOTES
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Draw the precedence diagram. Assign tasks to worksta ons and calculate the efficiency. How
much idle me is present at each cycle?
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Q.1 c
Q.2 False
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Q.1 a
Q.2 True
3.13 ANSWERS TO SELF ASSESSMENT QUESTIONS

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Q.1 d
Q.2 c
Q.3 b
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Q.4 c
Q.5 c
Q.6
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NOTES
Q.7
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Q.8
The expected values for the three decision alterna ves (capaci es) are: small job shop =
$42,000; medium job shop = $46,400; and large job shop = $56,800. The firm should choose
the large job shop.
Q.9
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NOTES
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The assembly line balance for a cycle me of 30 seconds requires five sta ons, as shown
below.
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Idle me =30 sec = 20+10

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NOTES Efficiency with 5 worksta ons:
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UNIT 4 NOTES
PROJECT MANAGEMENT
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STRUCTURE
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4.0 Objec ves
4.1 Introduc on
4.2 Understanding the Project
4.3
4.4
Project Management
Project Life Cycle
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4.5 Quality in Project Management
4.6 Total Quality Management (TQM) in Project
4.7 Project Performance Management
4.8 Project Monitoring
4.9 Earned Value Management
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4.10 Project Evalua on

4.11 Project Control
4.12 Project Audit
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4.13 Project Termina on

4.14 Let Us Sum Up
4.15 Key Words
4.18 Check Your Progress- Possible Answers
4.0 OBJECTIVES
• Create a work breakdown structure for the project
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NOTES • Understand various types of projects

• Define the concept of quality in projects
• Monitor and assess project performance
• Understand the steps of project termina on
4.1 INTRODUCTION
Managers have to handle various projects during their careers’, so ware consultant may
need to implement a database management project, a construc on engineering may have
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to handle the construc on project of a building, a scien st in the research and development
department of an organiza on may be given a research project and simply, for an
entrepreneur, star ng a new business or a manufacturing unit is a project, A project requires
manpower, money, material, machine etc. Commissioning a new industrial unit,
Construc on of a house, se ng up of an office, developing a technology, launching a new
product in the market, managing any event in college, etc. can be given as examples of
O
project. In this way we can say that we are surrounded by different types of projects, most of
the developments taking place around us are the part of some projects. Therefore, it
becomes necessary and interes ng to have insights of project management. In this unit we
C
will understand the meaning of project and various tools for managing a project with
effec veness and efficiency.
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4.2 UNDERSTANDING THE PROJECT
A project may be defined as a series of related jobs usually directed towards some major
output and requiring a significant period of me to perform.
it is a group of unique, interrelated ac vi es that are planned and executed in a certain
sequence to create a unique product or service within a specific me frame, budget and the
client specifica ons.
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A project can be visualized as a set of ac vi es which are networked in an order and aimed
towards achieving the goal of a project. Upon the comple on of all the ac vi es the goal of
the project would have been achieved. A project is undertaken to achieve a purpose. It is a
PH
temporary and one me exercise which vary in dura on. It is undertaken to address a specific
need in an organiza on, which may be to create a product or service or to change a business
process. This is in direct contrast to how an organiza on generally works on a permanent
basis to produce their goods or service.
Project is one shot, me limited, goal directed, temporary endeavor, requiring the
commitment of varied skills and resources. It has following features
• Not a recurring exercise
• Has defined star ng dates and ending dates
• There is always a purpose
• It is a temporary exercise that is dismantled once the project is completed
• It requires set of human and non- human resources.
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4.2.1 CHARACTERISTICS OF PROJECT NOTES

• OBJECTIVES
Well defined, established and unique objec ve
• LIFE SPAN
Every project has a definite beginning and definite ending point
• UNIQUENESS
Every project have different ac vi es
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• TEAM WORK
Team spirit is required to achieve objec ve of project as different individual from
varied discipline are involved in the project
• LIFE CYCLE
Each project has its own project life cycle reflected by growth, maturity and
decline.
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• CHANGE
Project is dynamic in nature and changes in original plan are a normal feature in a
•
project
RISK AND UNCERTAINTY
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Every project has its own risk and uncertainty associated with it.
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4.2.2 CLASSIFICATION OF PROJECT
• Based on profit (Industrial and non-industrial)
• Bases on technology involvement (conven onal, non-conven onal, new, high,
low technology)
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• Based on size and scale (large, medium, small)

• Bases on ownership and control (public sector, private sector, joint sector)
• Base on Infrastructure (road, railways, flyover, hospitals, ins tute, airport)
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• Base on scope and significance (na onal and interna onal)

• Based on degree of change (inven ve, discovery, innova ve, adap on)
• Based on speed (normal, crash, disaster)
• Base on beneficiary (industrial, ancillary, consumers)
• Base on purposes (new project, mergers, diversifica on, moderniza on,
replacement, up grada on)
4.3 PROJECT MANAGEMENT

Project Management is planning, organizing, monitoring and controlling of all aspects of a
project and mo va on of all involved to achieve project objec ve of safety and within a
defined me, cost and performance.
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NOTES It is the art of planning, direc ng controlling recourses like people, equipment, material to
meet the cost, me,, manpower, hardware and so ware resources involved in a project. It
involves the applica on of processes, methods, skills, knowledge and experience to achieve
specific project objec ves according to the project acceptance criteria within agreed
parameters. Project management has final deliverables that are constrained to a finite me
scale and budget. It includes the following
4.3.1 PROJECT PLANNING is a discipline for sta ng how to complete a project within a
certain me frame, usually with defined stages, and with designated resources. One view of
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project planning divides the ac vity into:
• Se ng objec ves (these should be measurable)
• Iden fying deliverables
• Planning the schedule
• Making suppor ng plans
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4.3.2 PROJECT ANALYSIS is the examina on of all the costs or problems of a project before
work on it is started. It is the iden fica on of risks to which a project is exposed, and the
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assessment of the poten al impact of those risks on the project.
Facets of Project Analysis-
• Market Analysis
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• Technical Analysis
• Financial Analysis
• Economic Analysis
• Ecological Analysis
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4.3.3 PROJECT FINANCE is the long-term financing of infrastructure and industrial projects
based upon the projected cash flows of the project rather than the balance sheets of the
project sponsors. Usually, a project financing structure involves a number of equity
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investors, known as sponsors, as well as a syndicate of banks or other lending ins tu ons
that provide loan to the opera on.
4.3.4 PROJECT IMPLEMENTATION is the carrying out, execu on, or prac ce of a plan, a
method, or any design for doing something. As such, implementa on is the ac on that must
follow any preliminary thinking in order for something to actually happen.
Stages of Project Implementa on-
• Project and engineering design
• Nego a ons and contrac ng
• Construc on
• Training
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• Plant commissioning NOTES
4.3.5 PROJECT REVIEW FORM helps you document the results of your Project Management
Review, by sta ng whether the:
• Project is currently delivering to schedule
• Budget allocated was sufficient at this point
• Deliverables have been produced and approved
• Risks have been controlled and mi gated
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• Issues were iden fied and resolved
• Changes were properly managed
• Project is on track
4.3.6 IMPORTANCE OF PROJECT MANAGEMENT
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Project management is necessary because
• A project requires huge investment which should not go waste.
• Project objec ve may not be achieved (customer sa sfac on, me and quality)
•
•
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A loss in any project would have direct or indirect impact on the society.
Prevent failure in projects
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• Scope of the project ac vity may undergo a change
• Technology used may change during the course of project execu on.
• It takes more me, more money, and more resources that may be waste if there is
no proper planning.
• Consequence of nega vity in project related problem could be very serious.
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• Shortening of project life cycle

• Global compe on
• Knowledge explosion
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• Corporate Downsizing
• Increased customer focus (customer sa sfac on will be increased)
4.3.7 ROLE AND RESPONSIBILITY OF PROJECT MANAGER

• The project manager must determine the purpose, goal and constraints of the
project.
• The project manager must establish basic project management controls.
• Project planning puts together are the details of how to meet the project goals,
given the constraints.
• Managing the me by planning and mee ng schedule.
• Manage quality so that the project result is sa sfactory
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NOTES • Manage cost to see that project is performed at the minimum possible cost within
the budge,
• Managing communica on to see that appropriate par es are informed and have
sufficient informa on to keep the project coordinated.
• Manage the human resource involved in a project effec vely.
• Manage the project scope of to define the goals and the work o be done in
sufficient detail to facility understanding and correct performance by
par cipants.
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• To take correc ve ac on.
4.3.8 MAIN CAUSES OF PROJECT FAILURE

There are various causes of failure of a project which are given below
• Inadequate project formula on
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• Poor planning for implementa on
• Lack of proper contract planning and management
• Lack of project management during execu on
•
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Lack of stakeholder management.

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Q.1 Which of the following is not the role of project manager?
a. Manage the human resource involved in a project effec vely.
b. Managing the me by planning and mee ng schedule.
c. Manage quality so that the project result is sa sfactory
d. Lack of proper contract planning and management
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Q.2 Which op on will not lead to project failure?

a. Poor planning for implementa on
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b. The project manager must determine the purpose, goal and constraints of the
project.
c. Lack of project management during execu on
d. Inadequate project formula on
Q.3 Project is a recurring exercise
a. True
b. False
4.4 PROJECT LIFE CYCLE

Project life cycle refers to a logical sequence of ac vi es that are performed to achieve
project goal of objec ve. It can also be termed as project cycle. The life cycle of every major
project includes following seven steps
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• Iden fica on – It refer to selec on of one most feasible project idea out of several NOTES
alterna ve.
• Prepara on – It refer to developing the iden fied and selected ideas.
• Appraisal – Perform systema c and comprehensive evalua on of every aspect of
the select ideas to prepare the final project plan. Project appraisal deals with
market appraisal, technical appraisal, financial appraisal, economic appraisal,
managerial appraisal, environmental appraisal.
• Planning and organizing – It refer to designing the course of ac ons required to
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achieve the objec ves of the project like organiza on structure, manpower,
schedule and budget, licensing and government clearance, infrastructure of
project, finance, site prepara on, selec ng vendors
• Presenta on – Involve crea ve a detail plan to send it to appropriate en es
• Implementa on – It refer to a stage in which the approved project plan is
executed. Major bulk of work (80 – 85%) project is done in this phase like
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prepara on of equipment and machinery, civil construc on, placing orders for
recourses, commissioning of plant.
• Monitoring – It involve assessing and monitoring the progress of the project at
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every stage to iden fying the loopholes and take correc ve ac on if required.
• Closing – It refer to the formal closure of project. It involves handling over of the
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facili es built to the customer (project accounts are closed, outstanding payment
is made, dues are collected, manual and catalogued are handed over, the
employee and other resources are released to be used for other ac vi es)
• Evalua on – Calls for the re assessment of the efficiency and performance of the
project a er the comple on of project
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4.5 QUALITY IN PROJECT MANAGEMENT

4.5.1 QUALITY
Generally, it can be said that a product is of sa sfactory quality, if it sa sfies the customer.
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The customer will buy a product or service, only if it meets his or her minimum needs. Thus,
customer sa sfac on is the main criteria for determining whether a product possesses the
required quality or not. Therefore, customer wants are first assessed by marke ng people
and then quality decision is taken on the basis of such informa on. In order to define quality,
therefore, we have to think of it in term of some use. The term quality can be defined as the
sum totals of feature of a product which influences its ability to sa sfy a given demand. It is
also known as “fitness for use”. It is decided by customer. It is also considered as the sum total
of the a ributes or proper es that describe a product. A product quality should control at
every stage of transforma on like input (material, machine), transforma on (process) and
output.
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NOTES 4.5.2 BENEFITS OF QUALITY (RESPONSIBILITY FOR QUALITY IN PROJECT)

• Customer sa sfac on will increase
• Profit will increase
• Sales will increase
• Goodwill and image of company will increase
• Resources will be fully u lized
• Company will be able to survive in the market
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• It will help company to grow in other market.
• It will be easy to face compe on in the market.
• Scrap and wastage will be reduced
• A mirror for a manufacturer.
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4.5.3 DESIGN QUALITY
The design of a product or service must incorporate that feature and a ributes that would
sa sfy the customer need. While designing product or service, there are various
characteris c should be considered. The characteris cs for product or service may be
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different.
Component of Product quality Component of Service quality
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• Performance (func on) reliability(trustworthy)
• Features (various nature) responsiveness(discipline)
• Reliability (life of product) competence(perfec on)
• Serviceability (ease in service) access(convenient)
• Appearance (looks) courtesy (behaviour)
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• Safety (less breakdown) communica on(understanding)

• Durability (opera on life) accuracy (correctness )
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4.5.4 COST OF QUALITY

A product or service that sa sfies the customer need must be produced in a cost-effec ve
manner. Every quality has some cost. Generally, preven ve cost, appraisal cost, internal
failure cost, and external failure cost are four types of cost of quality. If Appraisal cost and
preven on cost increase, then failure cost will decrease and vice versa.
• Preven ve cost – They are associated with preven ng defects before they
happen. They include the cost of redesigning the product to make it simpler to
produce, redesigning the process to remove cause of poor quality, and training of
employee in the method of con nuous improvement. For example, design cost,
maintenance, product requirement, planning, appraisal equipment, training etc.
• Appraisal cost – They are incurred in assessing the level of quality a ained by the
opera ng system. They include the cost of detec ng defects that means the cost
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of all ac vi es aimed at finding product and service that do not conform to NOTES
specifica on before they are shipped to customer. For example inspec on,
verifica on, quality audit, equipment inspec on, vendor ra ng etc.
• Internal failure cost – This result from defects that are discovered during the
produc on of a product or service. The cost includes the cost of repairing,
wastage, reworking and retes ng, rescheduling and other hassles caused by
defec ve products.
• External failure cost – They arise when a defect is discovered a er the customer
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has received the product or service. These costs include repairing, li ga on, loss
of goodwill, warranty cost, product liability, cost of product return or recall and
lost business and customer goodwill.
4.6 TOTAL QUALITY MANAGEMENT (TQM) IN PROJECTS

A Philosophy that involves everyone in an organiza on in a con nuous effort to improve
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quality and achieve customer sa sfac on. It demands coopera on from everyone in the
company from the top management down to the worker. TQM can be defined as an
organiza on wide effort to develop system, tools, techniques, skill and mindset to establish a
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quality assurance system that is responsive to the emerging market needs. Total connotes
every one, everywhere and every me. It involves everyone from CEO to the operator, the
responsibility for quality shi to the produc on workers.
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4.6.1 SIX BASIC CONCEPTS IN TQM
• Top management commitment and support
• Focus on both internal and external customer
• Employee involvement and empowerment
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• Con nuous improvement

• Partnership with the supplier
• Establishing performance measure for process.
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4.6.2 ESSENTIALS OF TQM FOCUS

• Customer sa sfac on
• Quality policy
• Employee involvement
• Supplier selec on and development
• Recogni on and reward
• Leadership
• Organiza on structure quality.
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NOTES 4.6.3 SEVEN UNDERLYING PRINCIPLE IN TQM

• Strive for quality in all things (total quality)
• The customer is the crea on of quality
• Improve the process or system by which product are produced
• Quality improvement is con nuous, never ending ac vity
• Worker involvement is essen al
• Ground decision and ac on on knowledge
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• Encourage team work and coopera on.
4.6.4 SCOPE OF TQM

• All integrated organiza on infrastructure
• A set of management prac ces
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• Wide variety of tools and techniques
4.6.5 QUALITY CIRCLE

A quality circle or quality control circle is a group of workers who do the same or similar work,
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who meet regularly to iden fy, analyze and solve work-related problems. Normally small in
size, the group is usually led by a supervisor or manager and presents its solu ons to
management; where possible, workers implement the solu ons themselves in order to
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improve the performance of the organiza on and mo vate employees. It is a group of
employees whose assignment is to iden fy problems, formulates solu on and present than
result to the management with sugges on for implementa on. The various issue of
discussion may be quality, produc vity, defec ve, wastage, scrape, u liza on of resources
etc. It is started in Japan. In India BHEL, L&T, Kirlosker are implemen ng quality circle
prac ces. The support structure usually consists of a steering commi ee of top
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management official, facilitator, circle leader and circle members.

Typical topics for the a en on of quality circles are
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• improving occupa onal safety and health improving product design, and
• Improvement in the workplace and manufacturing processes.
Quality circles are typically more formal groups. They meet regularly on company me and
are trained by competent persons (usually designated as facilitators) who may be personnel
and industrial rela ons specialists trained in human factors and the basic skills of problem
iden fica on, informa on gathering and analysis, basic sta s cs, and solu on genera on.
Quality circles are generally free to select any topic they wish (other than those related to
salary and terms and condi ons of work, as there are other channels through which these
issues are usually considered.
4.6.6 JUST-IN-TIME (JIT)

It is a philosophy of manufacturing based on planned elimina on of all waste and con nuous
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improvement of produc vity Or JIT is an approach that seeks to eliminate all sources of NOTES
waste in produc on ac vi es by providing the right part at the right place at the right me.
i.e. JIT means
• Producing the quan ty of unit that is needed, no more no less
• Producing them on the date and at the me required, not before and not a er.
• The supplier delivers the exact quan ty demand at the schedule me and date.
Benefit of JIT system
• Inventory level are dras cally reduced
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• The me taken for products to get through the factory is generally reduced.
• Product quan ty is improved and hence the cost of scrape is reduced.
• With less in process, less space is taken up by inventory and material handling
equipment.
• Be er labour u liza on
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• Elimina on of unpleasant supplier such as those with late deliveries and
acceptable quality.
• Reduc on in customer related problem.
C
• Significant improvement in quality, near to zero defects.
• Reduc on in floor space needs due to lesser worker in process and smaller lot
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size.
• Shorter lead mes of supplies, allowing them to respond more quickly to
changing customer needs.
Type of wastage according to Toyota Company
• Over produc on – the extra part or product may not be needed or may not be
available when needed or may not be available when needed, so it is waste.
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• Wai ng me – the operator, the machine or the part will not be either working or
worked upon.
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• Movement – any unnecessary movement is a waste of energy.

• Process – some steps in the process may not be necessary to arrive at the required
stage.
• Inventory – excess procurement or produc on build up stock of material which
are not immediately used.
• Efforts and movement – the people who work do not make a study as to how
these are u lized in realizing the purposes for which they are made.
• Defect product – these are produced using the same equipment, workman and
the me that would be used to make good product. This defec ve product result
to losses.
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NOTES 4.6.7 ISO 9000

The ISO 9000 family of quality management systems standards is designed to help
organiza ons ensure that they meet the needs of customers and other stakeholders while
mee ng statutory and regulatory requirements related to a product or program. ISO 9000
deals with the fundamentals of quality management systems, including the seven quality
management principles upon which the family of standards is based. ISO 9001 deals with the
requirements that organiza ons wishing to meet the standard must fulfill.
Third-party cer fica on bodies provide independent confirma on that organiza ons meet
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the requirements of ISO 9001. Over one million organiza ons worldwide are independently
cer fied, making ISO 9001 one of the most widely used management tools in the world
today. However, the ISO cer fica on process has been cri cized as being wasteful and not
being useful for all organiza ons.
4.6.8 CONTINUOUS IMPROVEMENT (KAIZEN)
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It is also known as Kaizen. It is the philosophy of con nuously seeking ways to improve
process. It involves iden fying benchmark of excellent prac ce. It requires total employee
involvement, training, team, Kaizen is actually a life philosophy assuming that every aspect
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to life deserve to be constantly improved. The Kaizen mean change –Kai and good – Zen. It is
originated in Toyota motors Co. various step for improvement
• Train employee
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• Make SPC method a normal aspect of daily life.
• Build team work
• U lize problem solving tool within the work teams
• Develop a sense of operator ownership in the process.
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4.6.9 TOOL AND TECHNIQUES IN QUALITY MANAGEMENT

• Cause-and-effect diagram (also called Ishikawa or fishbone chart): Iden fies
many possible causes for an effect or problem and sorts ideas into useful
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categories.
• Check sheet: A structured, prepared form for collec ng and analyzing data; a
generic tool that can be adapted for a wide variety of purposes.
• Control charts: Graphs used to study how a process changes over me.
• Histogram: The most commonly used graph for showing frequency distribu ons,
or how o en each different value in a set of data occurs.
• Pareto chart: Shows on a bar graph which factors are more significant.
• Sca er diagram: Graphs pairs of numerical data, one variable on each axis, to look
for a rela onship.
• Stra fica on: A technique that separates data gathered from a variety of sources
so that pa erns can be seen (some lists replace “stra fica on” with “flowchart”
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or “run chart”). NOTES
4.6.10 QUALITY MANAGEMENT AT DIFFERENT STAGES OF PROJECT

Try to achieve quality at every stage of project like
• Planning (resources planning like material, machine, technology, labour, etc.)
• Organizing (departmenta on, delega on of authority, span of control,
organiza on structure)
• Implementa on (resources of u liza on, minimize cost, wastage, accident,
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breakdown)
• Monitoring (checking the performance personally or through some camera)
• Controlling (checking progress of project, finding devia on, achieving desire
target)
• Closing (payment, feedback, learning, resources planning)
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Q.1 Which of the following is not a stage of project life cycle?
a.
b.
c.
iden fica on
presenta on
promo on
C
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d. monitoring
Q.2 Which of the following is not cost of quality?
a. preven ve
b. appraisal
c. internal failure
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d. transporta on
Q.3 True/False
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TQM is a philosophy that involves everyone in an organiza on in a con nuous effort to

improve quality and achieve customer sa sfac on.
4.7 PROJECT PERFORMANCE MANAGEMENT

Ideally, a project will be considered totally successful if it gets completed on me, within
budget and performs exactly to the designer specifica ons.
4.7.1 FACTORS INFLUENCING SUCCESSES OF THE PROJECT

• Clearly defined goals
• Support of top management
• Competent project manager
• Competent team member 93
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NOTES • Sufficient project resources

• Client involvement in defining need and requirement
• Adequate communica on channel
• Involvement of all par es in project review and correc on
• Consul ng with users and keeping them informed
• Technology being implemented, has been reviewed and work well
• Client understand the usefulness of the project
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• Control measure to keep project on track
• Daily trouble shoo ng and resolu on of problems
4.7.2 FACTORS RESPONSIBLE FOR THE FAILURE OF THE PROJECT

• Inadequate skills reflected in approach
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• Unsuppor ve top management
• Project manager unable to cope up with the demand of the project
• Inadequate communica on in the project
•
•
•
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Failure to involve the user
Inadequate project planning
Insufficient project defini on
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• Improper es ma on of me and resources
• Incorrect scheduling and handling of resources
• Enormous changes during the last implementa on phase
• Inadequate control
• Project termina on poorly planned
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4.8 PROJECT MONITORING

Project monitoring refers to the process of evalua ng the progress of project ac vi es. It is a
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con nuous process to determine the actual status of a project in rela on to the es mated
me and cost. The main objec ve of monitoring is to improve the performance of project by
assessing the poten al risk involved in the project and iden fy the main cause of error in the
project.
The project manager monitors project ac vi es to
• Assess the risks involved in a project
• Iden fy the main cause of delay in the comple on of the project
• Recognize the factors that affect the progress of the project
• Measure the actual performance of the project
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4.8.1 PROCESS OF MONITORING NOTES

• Iden fy the key factors
• Developing the measuring system
• Collec ng data and informa on
• Preparing reports based on data
• Determining the flow of informa on
4.8.2 PROJECT MONITORING CONTROLLING CYCLE (PMC)
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PMC is an interac ve process that establishes a rela onship among the ac vi es involved in
the planning, monitoring and controlling of a project. The PMC cycle enable the
project manager to iden fy the devia on in the performance of the project.
• Planning the project (future of ac on)
• Execu ng the project (ac on)
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• Monitoring cycle (checking progress)
• Controlling cycle (finding any devia on)
• Closing cycle (comple ng the project) C
4.8.3 OBJECTIVE OF PROJECT MONITORING
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• To assess the risk involved in a project
• Iden fy the main cause of delay in the comple on of the project
• Recognize the factors that affect the progress of the project
• Measure the actual performance of the project
4.8.4 PROCESS OF MONITORING SYSTEM

O
• Iden fy the key factors

• Developing the measuring system
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• Collec ng data and informa on

• Preparing reports based on data
• Determining the flow of informa on
4.9 EARNED VALUE MANAGEMENT (EVM)

Earned value analysis can be incorporated in a project with the help of Earned Value
Management (EVM) system. The EVM system iden fies discrepancies in the project by
comparing the actual performance and set standard. EVA is widely used methods of
determining the progress of the project. It is also known as performance management.
Management by objec ves. Budgeted cost of work performed and cost schedule control
system. It helps the project manager to check project performance at early stage of the
project life cycle and control them.
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NOTES Earned Value Analysis is a method for measuring project performance. It compares the
amount of work that was planned with what was actually accomplished to determine if cost
and schedule performance is as planned.
4.10 PROJECT EVALUATION

Project evalua on is a systema c process of recording and analyzing project performance
and output and controlling them with pre determine standards. It is the process of analyzing
and comparing the end results of the project with pre-determined results. Project evalua on
aims to iden fy the weakness of a project and improve them. Project evalua on is a
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systema c process of recording and analyzing project performance and output and
comparing them with pre-determined standard
4.10.1 OBJECTIVE OF PROJECT EVALUATION

• Iden fying the progress of the project
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• Comple ng the project within allocated me and recourses
• Responding to the demand of customer
• Jus fying the employment of team member to achieve goal of the project
•
•
C
Compare the actual performance with planned one
Loca ng the resource of the organiza on effec vely.
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4.10.2 PURPOSE OF PROJECT EVALUATION
• Efficiency of the project
• Profitability
• Customer sa sfac on
• Future poten al
O
• competency
4.10.3 BENEFIT OF PROJECT EVALUATION

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• Recognize and solve problem at the ini al stage of the project

• Establish rela onship between me, cost and performance
• Improve the key performance area of the project
• Iden fy the opportunity for future growth of the project
• Applies the performance of the project team
• Increased the rate of successes of the project
• Improve the quality of the project management process
• Create healthy working environment to ac ve be er result.
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4.11 PROJECT CONTROLLING NOTES

Controlling involves the measurement of actual performance; comparing it with the planned
performance and correc ng devia on to ensure a ainment of predetermine project
objec ves. Thus, controlling ensuring that actual performance conforms to planned
performance as closely as possible. There is a close inter rela onship between planning and
control func on. Planning serves as basis of control. The plan act as the standard for
evalua ng actual. Planning can achieve nothing without control of actual observa on. The
control can be related to like finance control, budgetary control, quality control, marke ng
control, human recourse control, informa on technology control etc. Project control serves
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following major func ons:
• It ensures regular monitoring of performance
• It mo vates project employee to strive for achieving project objec ves.
• Project controlling aims at reducing the gap between the actual performance of a
project and the expected performance ac vi es such as planning, organizing and
O
controlling
4.11.1 PURPOSES OF CONTROLLING

•
•
Crea ng be er quality
Coping with changes
C
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• Crea ng faster cycles
• Adding value
• Facilita ng delega on and teamwork
4.11.2 TYPE OF CONTROL

(i) Feed forward - It is preven ve control that a empt to iden fy and prevent devia on in
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the standered before their occurrence

(ii) Concurrent control – It is performed when a project ac vity is in progress. It regulates
ongoing ac vi es and ensures that they must follow the organiza onal standards
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(iii) Feedback control – It focus on the output a er project is completed. It is applied to

check whether the actual informa on is per the set standard.
4.11.3 PROCESS OF CONTROLLING

• Establishing of standard
• Determine the actual performance
• Find the devia on in the performance of the project
• Analyses the reason for devia on
• Taking correc ve ac on and achieve desire objec ve
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NOTES 4.11.4 OBJECTIVE OF CONTROLLING

• Crea ng be er quality
• Coping with changes
• Crea ng faster cycle
• Facilita ng delega on and team work
4.11.5 TOOLS FOR CONTROL

• Financial control (financial statement, financial audit, ra o analysis)
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• Budgetary control (revenue and control)
• Quality control (inspec on, quality assurance, TQM)
• Marke ng control (marke ng research, test marke ng, marke ng sta s cs)
• Human resource control
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• Informa on technology control
4.12 PROJECT AUDIT

Project audit refers to a process of evalua ng and verifying the transac on carried out in
C
project ac vi es. The project audit is conducted at different stage of a project cycle. The
project audit process is executed by qualified independent personal. The project audit is
conducted a er the comple on of the project. It provides sugges on for be erment of the
TO
current and future projects. It also provides informa on related to the financial status of the
organiza on. It is conducted once in a year. The audit report is used by govt, donors, and top
management of organiza on, promoters, shareholders and partners. An ideal audit team
should team should include
• Account person to handle financial ac vi es
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• Technical expert to test the technical aspects

• Human resources expert to study the behavior of employees
• Legal expert to take care or legal aspects
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Some element of audit report may like

• Introduc on
• Current status
• Future project status
• Cri cal management issue
• Risk analysis and risk management
• Final comments
Audit can be
• General audit
• Detailed audit
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• Technical audit NOTES
4.12.1 PROCESS OF PROJECT AUDIT / PROJECT AUDIT LIFE CYCLE

• Ini a ng project audit
• Defining project base line
• Establishing audit database
• Analyzing the project
• Preparing audit report
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• Termina ng project audit
4.13 PROJECT TERMINATION

All project come to end a er a certain period of me. Project termina on is the final phase of
the project life cycle. A project may be terminated for various reasons like
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• Successful comple on of the project
• Premature abandonment due to resource constraints
• Escala ng cost
4.13.1
• Commercial non viability
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FACTOR AFFECTING THE TERMINATION DECISION
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• Probability of fulfilling technical objec ves is very low
• Non availability of required R& D skill
• Presence of alterna ve project with higher priority requiring R & D skill and funds
• Low return on investment
• High cost
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• Low demand
• Different market need
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• Commercial results are not immediate

• Adverse effect on other projects
• Problem of protec ng intellectual proprie es.
4.13.2 PROCESS OF PROJECT TERMINATION

• Remaining project ac vi es
• Administra ve ac vi es
• Client related ac vi es
• Redistribu on of recourses
• Closure of financial ac vi es
• Analysis of project performance
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NOTES • Closer of documenta on
4.14 LET US SUM UP

As it can be understood that, A project is a series of tasks that need to be completed to reach
a specific outcome, also it can be defined as a set of inputs and outputs required to achieve a
par cular goal. Project is the blueprint that shall help in manifesta on of an idea. It works as
a guiding principle for the comple on of the project. The project management allows the
manager effec ve and efficient task planning. However, the quality is an essen al
component in project planning and control. A quality project design leads to flawless project
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comple on. There are different methods of project design and network diagrams is one of
such methods. The network diagrams not only provide the path for essen al ac vi es but
also provide a key insight on the dura on of the project. A perfectly designed project lets the
manager understand well in advance the plan of ac vity execu on. It also allows the
manager to op mize the overall cost of the project. Further, a perfect project planning leads
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to effec ve risk management.
4.15 KEY WORDS

C
Project: A project is a series of tasks that need to be completed to reach a specific outcome. A
project can also be defined as a set of inputs and outputs required to achieve a par cular
goal.
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Project Control: It is a process that encompasses the resources, procedures, and tools for the
planning, monitoring, and controlling of all phases of the capital project lifecycle.
Project Execu on: It is the stage of the project where everything your team has planned is
put into ac on.
Project Management: It is the use of specific knowledge, skills, tools and techniques to
deliver something of value to people.
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Project Planning: It is a discipline addressing how to complete a project in a certain

meframe, usually with defined stages and designated resources. One view of project
planning divides the ac vity into these steps: se ng measurable objec ves. iden fying
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deliverables.
Project Team: It is a group of people working together in collabora on or coopera on
towards a common goal.
Project Termina on: It is the last stage of managing the project, and occurs a er the
implementa on phase has ended.
Total Quality Management: It is a management approach to long-term success through
customer sa sfac on.

Opera ons Management book authored by Jay Heizer, Barry Render, and Jagdeesh
Rajashekhar, Pearson publica on.
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Opera ons Management book authored by Roberta Russel and Bernard Taylor III, Wiley NOTES
publica on.
Badiru, A. B. (2019). undefined (2nd ed.). CRC Press.
Ferraro, J. (2012). Project management for non-project managers. AMACOM.
Project Management Ins tute. (2019). A guide to the project management body of
knowledge (PMBOK(R) guide-sixth edi on / Agile prac ce guide bundle (HINDI).
h ps://www.manage.gov.in/studymaterial/PM.pdf
h ps://www.researchgate.net/publica on/320101542_PROJECT_MANAGEMENT_HANDB
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OOK
Project Management, Planning and Control, Seventh Edi on: Managing Engineering,
Construc on and Manufacturing Projects to PMI, APM and BSI Standards - PDF Drive
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Mul ple choice ques ons:
Q.1 What is the first step in project planning?
a. Establish the objec ves and scope.
b.
c.
Determine the budget.
Select the team organiza onal model.
C
TO
d. Determine project constraints.
e. Inspect the deliverables.
Q.2 While assessing your project processes, you have iden fied some uncontrolled
process varia ons. Which of the following would be the appropriate chart you may use
for this purpose?
a. Pareto diagram
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b. PERT chart
c. Control chart
PH
d. HR personnel chart
e. Cri cal path
Q.3 Once the project is approved and moves into the planning stage, what happens in the
next phase of the project life cycle?
a. Agreements for risk sharing need to be concluded.
b. The total risk on the project typically reduces as ac vi es are performed without
loss.
c. Risks must be weighed against the poten al benefit of the project’s success in
order to decide if the project should be chosen.
d. Risks are iden fied with each major group of ac vi es.
e. A risk response plan can be used to iden fy increasing levels of detailed risk
analysis 101
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Project Management
NOTES Q.4 Risk must be considered in the _____ phase and weighed against the poten al benefit
of the project’s success in order to decide if the project should be chosen.
a. comple on
b. closeout
c. execu on
d. planning
e. ini a on
Q.5 When a project manager starts to plan a new project budget, the cost of which project
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management process group is expected to be lowest?
a. Ini a ng
b. Execu ng
c. Monitoring and controlling
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d. Closing
e. Planning
Subjec ve Ques on
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Q.6 What are benefits of applica on of quality management?
Q.7 Explain the tools and techniques can be used for detec on of sources of errors.
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Q.1 d
Q.2 b
Q.3 b
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Q.1 c
Q.2 d
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Q.3 True

Q.1 a
Q.2 c
Q.3 d
Q.4 e
Q.5 d
Q.6 Applica on of quality management can lead to following benefits:
• Customer sa sfac on will increase
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• Profit will increase NOTES

• Sales will increase
• Goodwill and image of company will increase
• Resources will be fully u lized
• Company will be able to survive in the market
• It will help company to grow in other market.
• It will easy to face compe on in the market.
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• Scrap and wastage will be reduced
• There will be reduc on in complements.
• A mirror for a manufacturer.
Q.7 Following tools and techniques can be used for detec on of sources of errors:
• Cause-and-effect diagram (also called Ishikawa or fishbone chart): Iden fies
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many possible causes for an effect or problem and sorts ideas into useful
categories.
• Check sheet: A structured, prepared form for collec ng and analyzing data; a
•
•
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generic tool that can be adapted for a wide variety of purposes.
Control charts: Graphs used to study how a process changes over me.
Histogram: The most commonly used graph for showing frequency distribu ons,
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or how o en each different value in a set of data occurs.
• Pareto chart: Shows on a bar graph which factors are more significant.
• Sca er diagram: Graphs pairs of numerical data, one variable on each axis, to look
for a rela onship.
• Stra fica on: A technique that separates data gathered from a variety of sources
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so that pa erns can be seen (some lists replace “stra fica on” with “flowchart”
or “run chart”).
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103
NOTES UNIT 5
SUPPLY CHAIN MANAGEMENT:

STRATEGY AND DESIGN
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STRUCTURE
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5.0 Objec ves
5.1 Introduc on
5.2
5.3
5.4
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Supply Chain System
Aligning Products with Supply Chain and Strategy
Defining types of Supply chains
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5.5 Supply Chain Characteris cs across different produc on systems
5.6 Different Views on Supply Chain
5.7 Supply Chain Performance
5.8 Recent trends in SCM
5.9 Let Us Some Up
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5.10 Key Words

5.11 Reference and Suggested Addi onal Readings
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5.0 OBJECTIVES
• Define Supply chain management and its strategic importance
• Understand decision making across supply chain
• Explore the role and significance of supply chain players
• Design effec ve supply chain management for compe veness
5.1 INTRODUCTION
104 We o en hear about “Supply Chain and its effec ve Management towards strategic
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Chain Management
advantage”. Many professionals are nowadays interested in exploring various challenges NOTES
within and across different stages of supply chains. What do you think about supply chain,
par cularly considering Vola le, Uncertain, Complex and Ambiguous (VUCA) business
world? What is your defini on of supply chain? Why we need to plan our resources and
energies in managing supply chain. Let’s understand answers to these ques ons and delve
the basics of supply chain management and its design in this unit.
5.1.1 WHAT IS SUPPLY CHAIN

Academicians as well as industrial professional a empt to define the scope of supply chain
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(SC). There can be mul ple perspec ves to this ques on- “What is Supply Chain?” This
ques on is analogous to story of six blind men describing an elephant.
Fig. 5.1: Defining Supply Chain: Analogous to Story of Six Blind Men
Describing an Elephant
O
C
TO
O
Answer to defining supply chain and its scope can be explored through different
perspec ves. Some of the defini ons are as follows:
PH
• Supply chain encompasses all stages involved, directly or indirectly, in fulfilment

of the customer demand.
• Primarily include manufacturers, suppliers, transporters, warehouses, retailers
and customers. Remember: Customer is an integral part of supply chain
Fig. 5.2: Supply Chain Scope
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Strategy and Design
NOTES • Basic role of supply chain is to integrate customer’s demand and supply.
• SC includes co-ordina on among all the func ons fulfilling customer’s demand
such as marke ng, Research and Development (R&D), opera ons, distribu on,
logis cs, finance and accoun ng and customer service. Thus, the scope of supply
chain encompasses to en re business func ons, rather than just to
manufacturing or opera ons.
• The wider and enlarged view determine SC decisions at- a) Strategic, b) Tac cal
and c) Opera onal levels.
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• Flow-wise, SC includes
• Physical Material movement of products from suppliers to manufacturers,
and to distributors to end customers.
• Movement of funds, informa on in both (to and fro from customers)
direc ons across all the SC en es.
O
• These flows in SC are no more linear, but involves crisscross and closed loop
movements. Thus, supply chain term is o en replaced by supply network or
supply web.
C
Brain Teaser 1: The Biscuit: Everybody likes and affords it!
TO
O
PH
Parle G is one of the most popular and best-selling biscuit brands in the world. Think on
following ques ons:
i) What is the Maximum Retail Price (MRP) of Parle-G? How Parle-G is managing its
stable price, despite increasing raw material and processing costs?
ii) How affordable biscuits are available at the same price in the remote Himalayan north-
eastern village to the coastal interiors of Kerala?
iii) Whenever, I visit any shop to buy biscuit, I always get my Parle-G biscuit. I never have
experienced stock out? How can Parle-G biscuit be readily available almost every
grocery shop in India?
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iv) Over the years, I am the Parle-G eater, but I never found tasteless, or defec ve or NOTES
over/under baked biscuit? How does Parle-G maintain the consistencies in its taste,
quality and freshness?
Thinking on these ques ons, you may no ce that- Parle-G biscuit is available every me and
almost everywhere at the affordable price. Friends, this is the resultant of effec ve Supply
Chain. In next sec on, we will learn about the objec ves of supply chain.
5.1.2 WHAT ARE THE OBJECTIVES OF SUPPLY CHAIN MANAGEMENT?
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The art and science of obtaining, producing and distribu ng the Right Product (P) at
• Right Quality (Q)
• Right Quan ty (Q)
• Right Time (T)
• Right Source (S)
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• Right Place (P)
• Right Price (P)
Brain Teaser 2: How does Parle-G reaches to almost every village and to every Indian
household? C
Think on, the con nuous process of supply chain of biscuit: raw material-wheat to our tea-
tray. Biscuit reaches to us in the systema c, phase-wise flow of material, money and
TO
informa on. Parle-G biscuit is composed of raw materials like sugar, wheat, milk, milk
powder and other preserva ves. These raw materials are supplied by quality assured
vendors (suppliers) across the India. Wheat, and milk, being the major raw materials, are
managed through stringent vendor development process. Apart from the original factory in
Mumbai, Parle has manufacturing facili es at Neemrana (Rajasthan), Bangalore (Karnataka)
and Bahadurgarh (Haryana). It also has several manufacturing units on contract
O
manufacturing. The standard Opera ng Procedures (SOPs) with world-class equipment and
material handling systems enable the manufacturing of the popular biscuit. The finished
goods a er the strict quality inspec ons are dispatched through the abled logis cs networks
PH
through whole-sellers and stockists across the country. These whole sellers form the retailer
network to dispatch the ready-fresh biscuits to the end consumers.
Parle G reaches us in the physical good forms, but it involves- a) Raw material procurements
from different suppliers, b) Processing of raw material into finished goods, c) Transporta on
and logis cs of Finished biscuit packets to the last mile consumer, d) Sharing of informa on
for seamless interac on across all these stages, e) Transac onal money exchanges at every
stage.
Fig. 5.3: Parle-G reaches us through the series of exchanges of material,
money and informa on
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Strategy and Design
NOTES 5.2 SUPPLY CHAIN SYSTEM

With Parle-G exhibit, it is now clear that Supply chain (SC) includes various ac vi es, people,
organiza ons, informa on and resources required to move a product from its incep on to
the end consumer. Supply chain system includes: a) Supply Chain levels, b) Supply Chain
Flows and c) Supply Chain Process
5.2.1 SUPPLY CHAIN LEVELS

a) Upstream SC: The upstream SC includes firm’s suppliers, vendors, inbound storage and
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transporta ons of material flow into the manufacturing process.
b) Opera onal Process: Opera onal process includes internal supply chain processes for
transforming the materials and services furnished by suppliers into finished goods and
for managing materials and inventory.
c) Downstream SC: The downstream SC includes firm’s distribu on and delivering
network, to facilitate last mile delivery of the finished goods and services to the end
O
consumer.
5.2.3 SUPPLY CHAIN FLOWS
flows viz.-
a) Material flow,
C
The primary goal of any supply chain is to meet customer demands by balancing three
TO
b) Informa on Flow and
c) Money Flow
Fig. 5.4 Supply chain system including SC Process, Levels and Flows
O
PH
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a) Material Flow: NOTES

Material flow includes the smooth and physical material movement from raw material
suppliers to finished goods sa sfying the customer requirements via upstream, process and
downstream supply chain networks.
According to the theory of swi even flow, the swi er and even flow of materials through a
process, the more produc ve the process is. Thus, supply chain produc vity rises with the
speed by which materials flow through the process. Naturally, supply chain produc vity falls
with increasing obstacles and variability of the material flow.
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Primary Material flow includes movement of components, supplies, raw materials, finished
goods and services. The reverse material flow includes the flow of returns for repairs, scraps,
replacements, and recycling.
Material flow is majorly forward and unidirec onal from upstream to downstream last mile.
However, modern customer centric supply chain also manages the customer return and
reverse chain of physical goods from customer end to producer’s end.
O
b) Informa on Flow:
Informa on flow includes request for the requisi on of quota ons, purchase orders,
monthly requests, produc on schedules, engineering products developments and related
C
changes, quality complaints, monetary performance reports.
The flow of informa on in the supply chain can be bi-direc onal i.e. from upstream to
TO
downstream as well as downstream to upstream end. Informa on flow across supply chain,
is majorly handled by advanced informa on technologies to ensure seamless
connectedness and co-ordina on among supply chain partners.
c) Money Flow:
Money flow includes the direc onal movement of finances from the last mile consumer to
the upstream supply chain through SC network. Occasionally, money flow is observed from
O
the producer side to the clients in the form of debit notes.
5.2.4 SUPPLY CHAIN PROCESS

PH
Supply chain process aims to op mize supply chain flows across its levels- upstream, process
and downstream. Supply Chain process includes five basic func ons.
Fig. 5.5: Supply Chain Process: A Cyclic Loop
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Strategy and Design
NOTES i) Planning: The ini al stage of SC is dedicated to devising the plan as to how to address
the needs of our customers through our products and services. Planning includes
considera ons of resources, competencies, and market requirements to yield
maximum profits.
ii) Sourcing: Sourcing includes the iden fica on of dependent raw material and ancillary
suppliers. However, sourcing does not stop at just iden fica on stage but it also
includes determina on of different planning methods for shipping, delivery, and
payment of the product.
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iii) Making: The third stage is Making i.e., Manufacturing of the products (Physical goods/
service) to sa sfy the customer demand. Making includes product design, produc on,
tes ng, and packaging of the finished products. With a lean perspec ve, making is a
value-adding (VA) process of supply chain that contributes to the significant value
enhancements for which the customer pays. (To know more about Lean and value
addi on process- h ps://www.lean.org/whatslean/ ).
O
iv) Delivering: Products are delivered at the customer’s desired loca on through the
supplier network. Primarily, delivery stage is governed by finished goods
transporta ons and logis cs of end product. Present day e-commerce companies
v)
C
such as Amazon, Flipkart, food delivery apps Zomato, Swiggy value their competencies
in delivering the products at right place and at right me.
Returning and Enabling: The customer being the integral core of the supply chain
TO
process, some mes the supply chain needs to engage in the return management of
the defec ve or damaged goods. Firms need to deal with customer’s queries and
respond to customer complaints. Return management deals with the backward flow
from customers to the suppliers.

O
Q.1 Supply Chain System includes:

a. Supply Chain Flows
b. Supply Chain Levels
PH
c. Supply Chain Process

d. All the Above
Q.2 The physical movement of goods and products across supply chain is known as:
a. Physical movement
b. Goods carrier
c. Material flow
d. Swi flow
Q.3 Highlight which of the following is Not objec ves of supply chain.
a. Delivering Products at Right me
b. Cost-effec ve Sourcing of raw material
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c. Minimize transporta on costs NOTES

d. Transferring technology from global partner
Q.4 The sequence of typical supply chain:
a. Storage–Supplier–manufacturing–storage–distributor–retailer–customer
b. Supplier–Storage-manufacturing–storage–distributor–retailer–customer
c. Supplier–Storage-manufacturing– distributor–storage–retailer–customer
d. Supplier–Storage-manufacturing–storage– retailer–distributor–customer
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Q.5 Define Supply Chain Management:
a. The physical material moves in the direc on of the end of chain
b. Flow of cash backwards through the chain
c. Exchange of informa on moves in both the direc on
d. All the Above
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ILLUSTRATION I: REAL LIFE APPLICATIONS OF CONCEPTS
Example 1: Bakery Shop
C
Visit a bakery shop in your locality. Just watch out for the menu and price list displayed. Also,
observe various bakery products available at the counter. Now, wait for some me, observe
the daily counter opera ons of the bakery.
TO
Example 2: Juice outlet
Visit a juice outlet shop in your locality. Just watch out for the menu and price list displayed.
Also, observe various juices available at the counter. Now, wait for some me, observe the
daily counter opera ons.
Example 3: Electricity U lity Operator
O
We o en call an electrician to our house for our rou ne electric repairs and installa ons. In a
sense, electricians provide services to us at the house. But, these services also include
physical products such as bulbs, fuses, tubes, wires, etc. Imagine you have called your
electrician for the household electric maintenance works to your house:
PH
111
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Strategy and Design
NOTES With your observa on and the concepts, compare SC processes at the bakery, juice outlet
and electricity u lity services.
Customers type Example 1: Example 2: Example 3: Electricity

Bakery Shop Juice Outlet U lity services
Products: Which are

the major products
sold?
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Materials flowing
across SC
What is average
response me/
serving me per
O
customer?
What is the average

basket value per
customer per visit?
List the upstream

C
TO
supply chain partners
List the various

processes involved
List the downstream

supply chain partners
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Tabula on of your answers can highlight some interes ng take ways:

• The characteris cs of the supply chain vary with the products.
PH
• The challenges at various levels of the supply chain may vary with product flows.
• The modern Supply chain has evolved from the transac onal exchanges of SC
flows- material, money, and informa on
• Supply chain decisions are dynamic in nature and may subject to change with the
given product and business contexts.
• Supply chain management is a complex task and involves a structured approach
to effec vely execute.
• Supply chain management is becoming the cri cal factor for achieving and
sustaining compe ve advantage, thus requires strategic a en on.
• The fit between product characteris cs and supply chain decisions is a vital
prerequisite for business compe veness.
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5.3 ALIGNING PRODUCTS WITH SUPPLY CHAIN AND STRATEGY NOTES

Effec ve management of the supply chain is a complex task, as modern firms tend to
innovate and customize products, expanding product varie es. Addi onally, decision
making in the supply chain is becoming challenging due to:
i) Increasing customer demand and cut-throat compe ve forces
ii) Shorter product life cycle
iii) Increasing outsourcing
iv) Globaliza on and interna onal supply networks
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v) Advanced process and informa on technologies
The strategic requirements in the supply chain decisions can be studied via-
i) Product types
ii) Produc on processes
iii) Logis cs process managing movements of material
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Now, we will learn about the types of supply chains and understand varia ons in supply
chain strategies across various produc on systems.
5.4 DEFINING TYPES OF SUPPLY CHAINS

C
Customer Order Decoupling Point (CODP) is ge ng increasing a en on as an input a ribute
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for designing opera ons and supply chain. CODP is defined as the point in the supply chain
for a product, where the product is linked to specific customer order. CODP is also thus
some mes called Order Penetra on Point. The different situa ons and posi ons determine
different manufacturing situa ons to accommodate product customiza on or a wider
product range as illustrated in the following table 1.
Table 5.1: Different posi ons of Customer Order Decoupling Points and
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Associated Produc on Systems

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The varia ons in the CODP posi ons determine following types of produc on systems:
a) Engineer-to-Order (ETO): Firms work with the customers on product design, which is
then subsequently manufactured in Job-shop/ Project type produc on systems. CODP
is posi oned at the upstream part of the supply chain, and engineering product 113
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Strategy and Design
NOTES development is ini ated at the confirmed customer order. For example, ISRO Mission
projects such as space shu le manufacturing, R&D driven product developments in
defense sectors, Shipbuilding in dockyards, Dam construc on projects at riverfronts.
b) Make-to-Order (MTO): A product is built directly as a response to customer order and
specifica on. CODP is posi oned at the upstream side of the supply chain. Generally,
MTO is preferred for the higher variety, repeat but moderate to low volume products.
e.g., Furniture shops, fabrica on shops, restaurants, tailoring shops.
c) Assemble-to-Order (ATO): A produc on environment where pre-assembled
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components, subsystems are assembled together on the Assembly line in a response
to specific customer order. CODP is generally posi oned in the manufacturing process
of the supply chain, with significantly higher levels of work-in-process and/or ready-
to-assemble subcomponent inventories.
d) Make-to-Stock (MTS): Customers are served on-demand from finished goods
inventory with the Con nuous- flow or mass produc on system. The products are
O
generally manufactured in the bulk based on the demand forecast. CODP is posi oned
at the downstream logis cs part of the supply chain, with significantly higher finished
goods inventory. E.g. Paint, cement, petroleum products, Fast Moving consumer
5.5
(FMC) goods. C
SUPPLY CHAIN CHARACTERISTICS ACROSS DIFFERENT PRODUCTION SYSTEMS
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Till this point, it is now clear that supply chain decision is the func on of Volume (i.e. amount
of material/products) and Variety (varia ons in product types and characteris cs) of supply
chain en ty.
The supply decisions –at its three levels- (a) Product type, (b) Process Characteris cs, and (c)
Logis cal process varies with the type of produc on systems and posi on of CODP. Table 2
elaborates varia ons in the supply chain strategies aligning different produc on systems.
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Table 5.2: Comparison of Supply Chain Characteris cs NOTES
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The and opera ons at ETO and MTO supply chains are driven and triggered by customer
orders, while ATO and MTS supply chain are majorly forecast-driven. The supply chain
characteris cs with respect to product types, produc on, and logis cs processes vary
significantly between customer-driven and forecast-driven supply chains.
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NOTES 5.5.1 ETO SUPPLY CHAIN STRATEGY

Complete customiza on is the key characteris c of the Engineered to order (ETO) supply
chain. Thus, capturing customer’s input and incorporate design changes into finished
products is the point cri cal objec ve of the ETO supply chain. The customer involvement in
the design and engineering stage makes the variety and volume of these products very
unique and customized. For example, Fashion designed dress for exclusive occasions such as
weddings, special ceremonies, shipbuilding projects, bridge and dam construc on, ISRO
special space mission projects, etc.
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5.5.1.1 ETO PRODUCT CHARACTERISTICS
ETO products are by defini on lower (o en very few or unique) volumes, with highly variable
characteris cs. The highest customiza on for premium customers makes these products
high priced and unique. Forecas ng is hardly possible in managing raw materials supplies, as
the raw materials are commodi es products (such as grains, vegetables for exclusive food
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orders for a special occasion like a wedding), or raw materials are sourced based on the
specific needs of product design. (e.g. vendors and ancillary system manufacturers for ISRO).
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5.5.1.2 ETO PROCESS CHARACTERISTICS
ETO products are manufactured with job shop or project type to ensure the highest
customiza on and produc on flexibility. As the produc on process requires essen al
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flexibility, and operates with almost no volume, the skill-set of operators and resources is
required to be at the highest excellence levels.
5.5.1.3 ETO LOGISTICS PROCESS

ETO products are customized, thus essen ally involve customer engagement at every
stage including the logis cs process. There are few or limited intermediaries placed to
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maintain the seamless exchanges of finished goods as well as design requirement inputs.
Limited supply chain partners reduce the possibili es of the bullwhip effect, empowering
agility and responsiveness to the supply chain. The key objec ves of agile supply chains
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are:
• Focus on customer orienta on
• Focus on supply chain visibility to ensure seamless coordina on and product
development with customer engagement.
5.5.2 MTO SUPPLY CHAIN STRATEGY

MTO supply chain essen ally provides the opportunity for customiza on, but at limited
levels. So, the engineering design of the product is already made, but the process or feature
level customiza on can be incorporated into the specific requirements of the customer.
Custom-made furniture, pre-designed houses, aircra , customized cars can be examples of
MTO strategies, where customiza on can be offered in terms of choice of colors, variants,
base materials, but the engineering design remains standardized.
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5.5.2.1 MTO Product Characteris cs NOTES

MTO products are lower volume, higher variety products with higher margins. The
opera ons at MTO are triggered by the customer order. MTO products are developed and
engineered previously, but the product's features are incorporated later with the MTO
process.
5.5.2.2 MTO PROCESS CHARACTERISTICS

The customiza on of MTO products is the result of the combina on of standardized modular
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components and addi onal elements that are specifically produced to meet individual
customer requirements. In MTO supply chains, forecas ng is primarily done for raw
materials and standardized components. The raw material and components may be on hand
to ensure quick customiza on, but actual produc on does not begin un l the customer’s
order is received.
Similar to ETO, project or job shop produc on systems are generally preferred. For example,
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consider the manufacturing of a sofa in a furniture shop. The various components such as
arms, legs, backs, and frames are ini ated to manufacture once the customer order is
confirmed.
5.5.2.3 MTO LOGISTICS PROCESS

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As discussed, the CODP of MTO is the process or manufacturer, the control of the MTO
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supply chain rests with the manufacturer only. In MTO supply chains, there may be no or
hardly a few distributors or retailers in the MTO chain. The smaller or few supply partners
allows for a faster response to customer requests, as well as easier sharing of informa on
among the supply chain members. MTO firms majorly focus on:
• A rac ng and maintaining new customers
• Ensuring customer sa sfac on high quality, customized product (Efficient supply
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chain) as well as being flexible to address the demand uncertainty (Responsive

supply chain).
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5.5.3 ATO SUPPLY CHAIN STRATEGY

ATO products are typically characterized by a limited number of choices of configura on.
This produc on system offers customers to pick and choose among standard variants.
However, customers do not have any direct control or involvement at an individual level to
determine the design of standard variants. To avail configura ons, companies typically
delay the final assembly of the final product. A popular example of ATO is Dell. Dell provides
the customized desktops and laptops at rela vely low prices to both businesses and
individual consumers.
5.5.3.1 ATO PRODUCT CHARACTERISTICS

ATO products are manufactured with moderate-higher volumes and moderate-higher
varie es. ATO products are generally useful for higher-priced consumer goods that are
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NOTES assembled to individual ends as per customer specifica ons. ATO products o en get
updated with advanced technologies, thus, increasing the rate of obsolescence. With the
ATO supply chain, forecas ng takes place at the component level, while assembly of the final
finished product gets triggered with the confirmed customer order. ATO products may imply
a certain wai ng me once the confirmed order is placed, as final assembly processing may
require a certain me. In these case crashing of delivery me may prove a differen a ng
advantage, for instance, Domino’s Pizza, that operate with ATO supply chain, where the final
delivery is promised within 30 minutes of confirmed order.
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5.5.3.2 ATO PROCESS CHARACTERISTICS
ATO process is designed to balance the trade-off between efficiency and responsiveness. The
components before the assembly stage, are standardized and efficiently produced in bulk.
The final products are then assembled to meet individual customer orders.
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5.5.3.3 ATO LOGISTICS PROCESS
CODP is majorly posi oned at the assembly process, thus the assembling firm controls the
ATO supply chain and logis cs process. There are o en a small number of intermediaries in
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ATO supply chains with end products either going to retailers/dealers for delivery to the end
customer or directly to the end customer.
ATO supply chains usually operate with lower profit margins in a highly compe ve
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environment. ATO supply needs to maintain efficient upstream while responsive
downstream process. Maintaining and managing the balance between upstream efficiency
and downstream agility challenge ATO supply chain management. Such a hybrid supply chain
is also known as Leagile and relates to the postponement of the final assembly of the finished
product.
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5.5.4 MTS SUPPLY CHAIN STRATEGY

Products are manufactured in the bulk volumes for end consumers fulfilling their generic
requirements.
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5.5.4.1 MTS PRODUCT CHARACTERISTICS

MTS products are forecast-driven, higher volume, low margin commodity products. These
products rela vely have stable demand with minimum possibility of forecas ng error.
5.5.4.2 MTS PROCESS CHARACTERISTICS

The produc on processes for MTS product is matured, highly automated and standardized
and primarily focus on low-cost and economies of scale. Firms prefer to use special-purpose
dedicated assembly lines for high-volume produc on of finished products in bulk. Such a
type of automated produc on o en involves less or limited manpower with moderate
assembling skill sets.
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5.5.4.3 MTS LOGISTICS CHARACTERISTICS NOTES

MTS producers tend to push the ready-made finished products to the retailers and
downstream side of the supply chain. The material flows heavily rely on the distribu on
networks and retailers that can deliver the end product to the consumer (typically termed as
last-mile delivery) in the most cost-efficient manner. Many mes, bulk manufactures
a empt to maximize the order quan ty to offer bulk discounts with direct-to-store
distribu on agreements with large retailers such as Wal-mart, D-Mart, Big Bazaar, etc.
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Q.1 New product development before its standardiza on can be developed using
a. Engineered-to-order (ETO)
b. Make-to-order (MTO)
c. Assemble-to-order (ATO)
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d. Make-to-stock (MTS)
Q.2 The balance of trade-off between cost-efficiency and responsiveness is maintained at
the best possible levels in:
a.
b.
c.
Engineered-to-order (ETO)
Make-to-order (MTO)
Assemble-to-order (ATO)
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Q.3 The Commodity products can be manufactured in the most possible cost-efficient
manner in:
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Q.4 Product customiza on and personaliza on at the limited levels can be executable in:
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Q.5 Aligning products characteris cs with supply chain strategies is cri cal for:
a. Supply chain effec veness
b. Quick, dependable, and responsive delivery
c. Customer orienta on
d. All the above
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NOTES Q.6 Which of the following is not true?

a. Customer order decoupling point (CODP) is also called order penetra on point.
b. CODP connects the market and customers with the manufacturing chain.
c. CODP is the point where the maximum inventory is held.
d. CODP is an illusionary concept, prac cally cannot be determined.
ILLUSTRATION II: REAL LIFE APPLICATIONS OF CONCEPTS

Case 1: Beggy’s burger has recently opened its outlet in the suburban region, a er the
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successful outlets in Mumbai city. The firm has bagged its success with a strong focus on
quality for a customized burger. Beggy has developed its own online order supply
management system to receive-process-track and deliver the order at the doorstep of the
customer. Mumbai suburban region is also planning to work on free home delivery for the
customized burgers in the nearby locality. Help Beggy, to design their supply chain strategies,
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processes, and logis cs systems.
i) Which supply chain strategy you will prefer for Beggy’s Burger? ______________
ii) Posi on of Customer Order Decoupling Point (CODP)________________________
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5.6 DIFFERENT VIEWS ON SUPPLY CHAIN

5.6.1 PUSH AND PULL VIEWS OF SUPPLY CHAIN
Push and Pull views of the supply chain are becoming popular in understanding supply chain
systems. Push and Pull boundaries are majorly driven by the confirmed customer order as
shown in figure 6. The confirma on of customer order is dynamic and can be posi oned at-
a) Point of Sale at customer’s end (Pure Push Supply Chain), b) Point of assembly at
producer’s end (Hybrid Push-Pull Supply chain) and c) Point of incep on at the supplier’s end
(Pull Supply Chain Process). The point of customer order divides supply-chain opera ons
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into two important cycles- i) Procurement, manufacturing, and replenishment cycles, ii) NOTES
Customer order cycle.
Fig. 5.6: Push and Pull View of Supply Chain
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5.6.1.1 PUSH PULL SUPPLY CHAIN PROCESS
In the Push-based supply chain process, products are pushed through the produc on
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process up to the retailers. Manufacturing of the product is carried out the demand forecast
in the absence of confirmed customer order. Generally, Make-to-Stock (MTS) supply chain
strategies operate with “Push”, allowing bulk manufacturing of commodity products on
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demand forecast. The Push Supply Chain process imparts economies of scale with volume-
based produc on. For example, Fast Moving Consumer Goods (FMCG) products are mass-
manufactured, mostly following the Push type of supply chain process.
5.6.1.2 PULL SUPPLY CHAIN PROCESS

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In a pull-based supply chain, procurement, produc on, and distribu on are demand-driven
rather than based on predic ons. Goods are produced in the amount and me needed on
the confirmed customer order. The customer involvement in the development and the
volume of produc on determine the type of produc on and supply chain strategies out of
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ETO and MTO. Pull based supply chain process imparts economies of scope, benefi ng the
supply process with responsiveness and agility. For instance, ISRO’s specific mission space
shu le is developed on a project basis following Pull Supply Chain Process.
5.6.1.3 HYBRID PUSH-PULL SUPPLY CHAIN PROCESS

The Hybrid Push-Pull supply chain process is aimed to manage the trade-off between cost-
efficient volume-based produc on and responsive variety-based produc on. These supply
chain processes are generally preferred for products which uncertainty in demand is high,
while economies of scale are important in reducing produc on and delivery costs.
Assemble-to-Order (ATO) approach is generally gets aligned with the Hybrid Push-Pull
approach. For instance, Pizza is prepared and baked on the confirmed customer order
following pull view. On the other hand, raw material procurement, chopping of vegetables,
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NOTES sauces prepara on is done a priory before the confirmed customer order following Push
view.
5.6.2 HORIZONTAL AND VERTICAL INTEGRATION OF SUPPLY CHAINS
Firms a empt to expand their business and follow the expansion strategies across their
supply chain. The expansions in the supply chain can be understood in two types- i)
Horizontal integra on and ii) Ver cal integra on.
5.6.2.1 HORIZONTAL INTEGRATION
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Horizontal integra on refers to the business expansion of the firm that involves the
acquisi on of other companies that are in the same business and at the same supply levels.
Horizontal Integra on primarily reduces the compe on and enhances the probabili es of
monopoly or oligopoly in the industry. Companies involving in horizontal integra on allow
the expansions and opera onal growth due to increased produc on levels.
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For instance, consider two Bakeries- A and B. Baker A is selling cakes in Mumbai, while baker
B is located in Pune and selling cakes. Horizontal integra on refers to the integra on of the
supply chain process of bakery A to acquire bakery B in Pune (or vice-a-versa) to sell their
products and services in both the ci es.
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Fig. 5.7: Horizontal Integra on: Acquiring Firms represen ng the same Supply Levels
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5.6.2.2 VERTICAL INTEGRATION

Ver cal integra on involves the company acquiring various en es engaged in different
stages of the supply chain. Two firms opera ng at the different levels of the supply chain of
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the same product merge into a single en ty and concentrate their efforts. Ver cal
integra on can be of two types- Forward integra on and Backward integra on. When
companies acquire the downstream distributors of their supply chain, then such expansion
is known as forward integra on. If a company acquires its upstream supply partners, then
such expansion is known as backward integra on.
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Fig. 5.8: Ver cal Integra on and its two types- Forward and Backward Integra on NOTES
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For instance, a Plas c toy manufacturing company, gains control over its suppliers of plas c
components or dies and molding manufacturers, such expansion of the supply chain is
termed as Ver cal integra on (backward type in this case).
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ILLUSTRATION III: REAL LIFE APPLICATIONS OF CONCEPTS
1) Classify the following products on the basis of Push and Pull based Supply Chain
Process. Also state the pre and post confirmed customer order.
Paint, Edible oil, Dosa, Biscuit, Car, Household interior, Television, Laptop, Designed
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Suits for Special Occasions, Mobile phones, Ships, Aircra s, Refrigerators

2) Differen ate between Horizontal integra on and ver cal integra on based on
following points:
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Horizontal Integra on Ver cal Integra on

Objec ve
Major Supply Chain Impact
Primary Result/ benefit
Key Supply Chain Challenge
Real life Examples
5.7 SUPPLY CHAIN PERFORMANCE

Supply chain performance is defined as the framework to assess the performance of the
supply chain system. Broadly, supply chain performance measures can be classified into two
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NOTES categories- Qualita ve Measures and Quan ta ve Measures. Qualita ve measures include
subjec ve and persecu on-based measures such as customer sa sfac on and product
quality. Quan ta ve measures are measurable, comparable performance dimensions such
as lead me, customer response me, transporta on costs, etc.
5.8 RECENT TRENDS IN SCM

COVID-19 outbreak has transformed our work and the world order; this has heavily impacted
the supply chain. Post-pandemic supply chains are essen ally a emp ng to reconfigure the
various SC facets such as Planning, Sourcing, Opera ons, Delivery, and Returning. Looking
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forward, Supply Chain Digi za on through emerging technologies such as Cloud Compu ng,
the Internet of things, Blockchain technology is emerging as complementary and
compulsory updates.
The goal of digi za on is to leverage supply chain flows, transparency, and responsiveness. A
cloud-based supply chain offers flexibility, scalability, and a global reach through pla orms
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such as So ware as a Service (SaaS), Infrastructure as a Service (IaaS), and Pla orm as a
Service (PaaS).
Big data analy cs, Internet of Things (IoT) are emerging as with the digi za on of the supply
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chain. Firms have access to enormous customer and feedback data. Many firms are
genera ng business intelligence ranging from understanding past performances to
predic ng future trends. Using Big Data, it's possible to determine customer preferences and
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market trends, as well as redefine the supply chain.
IOT firms improvise their opera ons through inventory monitoring, real- me tracking of
stocks, produc on, shipment, and delivery. Thus, IoT increases supply chain transparency
across upstream, process as well as downstream decision levels.
With greater access to Big Data, firms are evolving to Ar ficial intelligence (AI) and machine
learning to simplify tasks and automate procedures. Some of the applica ons of AI and ML
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are used to improve planning and decision support systems, iden fy purchasing pa erns,
automate tedious warehousing processes and manage inventory. Firms are engaging their AI
and ML research to replace humans performing repe ve supply chain tasks aiming to
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enhance supply chain efficiency.

With the increasing trends of the digitaliza on of SC, firms are focusing on environmental
sustainability and circular economy. A circular economy is characterized by the reuse and
rework of discarded and worn-out products through refurbishment or by recycling
components into raw materials. These advanced prac ces have challenged the tradi onal
approach of SC to enhance sustainable value along with business compe veness.
Blockchain is a disrup ng technology which shall alter the nature of supply chains. This
technological solu on is considered disrup ve as it is characterized by anonymity,
immutability, and distributed control. Block chain can be an enduring solu on to the safety,
security, and transparency concerns of any supply chain. The generic relevance of Block
chain as supply chain risk mi ga on technology is beyond doubt. However, the applica on
of Block chain and cri cal risk mi ga ons tac cs may vary across diverse supply chains.
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5.9 LET US SOME UP NOTES

1. Supply chain (SC) includes various ac vi es, people, organiza ons, informa on, and
resources required to move a product from its incep on to the end consumer. The
supply chain system includes: a) Supply Chain levels, b) Supply Chain Flows and c)
Supply Chain Process.
2. Supply Chain levels include - i) Upstream, ii) Opera onal Process and iii) Downstream
levels. The upstream SC includes the firm’s suppliers, vendors, inbound storage, and
transporta ons of material flow into the manufacturing process. The opera onal
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process includes internal supply chain processes for transforming the materials and
services furnished by suppliers into finished goods and for managing materials and
inventory. The downstream SC includes the firm’s distribu on and delivery network,
to facilitate last-mile delivery of the finished goods and services to the end consumer.
3. The primary goal of any supply chain is to meet customer demands by balancing three
flows- i) Material Flow, ii) Informa on Flow, and iii) Money Flow.
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4. The Supply Chain process includes five basic func ons- i) Planning, ii) Sourcing, iii)
aking, iv) Delivery, and v) Returning and Enabling.
5. The fit between product characteris cs and supply chain decisions is a vital
6.
prerequisite for business compe veness.
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The different situa ons and posi ons of customer order decoupling points determine
different manufacturing situa ons to accommodate product customiza on or a wider
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product range.
7. The types of supply chain strategies are- i) Engineer-to-order (ETO), ii) Make-to-Order
(MTO), iii) Assemble-to-Order (ATO) and iv) Make-to-Stock (MTS).
8. The trade-off between cost-efficient processes (volume-based manufacturing) and
responsive process (Variety-based manufacturing) can be managed by adop ng
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different supply chain strategies.

9. The modern supply chain is aligned to the confirma on of customer orders. The
posi on point of order confirma on varies and can be either at- a) Point of Sale at
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customer’s end (Pure Push Supply Chain), b) Point of assembly at producer’s end
(Hybrid Push-Pull Supply chain), or c) Point of incep on at the supplier’s end (Pull
Supply Chain Process).
10. Firms a empt to expand their business and follow the expansion strategies across
their supply chain. The expansions in the supply chain can be understood in two types-
i) Horizontal integra on and ii) Ver cal integra on.
11. Supply chain performance is defined as the framework to assess the performance of
the supply chain system. Broadly, supply chain performance measures can be
classified into two categories- Qualita ve Measures and Quan ta ve Measures.
Supply Chain Digi za on through advanced technologies such as Cloud Compu ng, Internet
of things, Blockchain technology, Ar ficial Intelligence (AI), Machine learning (ML),
Predic ve Analy cs is emerging as complementary and compulsory updates.
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NOTES 5.10 KEY WORDS

Supply Chain: Supply chain encompasses all stages involved, directly or indirectly, in
fulfilment of the customer demand. SC primarily include manufacturers, suppliers,
transporters, warehouses, retailers and customers.
Supply Chain Scope: SC includes co-ordina on among all the func ons fulfilling customer’s
demand such as marke ng, Research and Development (R&D), opera ons, distribu on,
logis cs, finance and accoun ng and customer service.
Supply Chain Objec ves: The art and science of obtaining, producing and distribu ng the
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Right Product (P) at: i) Right Quality (Q), ii) Right Quan ty (Q), iii) Right Time (T), iv) Right
Source (S), v) Right Place (P)and vi) Right Price (P).
Supply Chain System: includes: a) Supply Chain levels, b) Supply Chain Flows and c) Supply
Chain Process.
Supply Chain Process: aims to op mize supply chain flows across its levels- upstream,
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process and downstream. Supply Chain process includes five basic func ons: i) Planning, ii)
Sourcing, iii) Making, iv) Delivering and v) Returning and Enabling.
Aligning Products with Supply chain and strategy: is key to achieve supply chain
compe veness. C
Supply Chain Strategies: The types of supply chain strategies are- i) Engineer-to-order (ETO),
ii) Make-to-Order (MTO), iii) Assemble-to-Order (ATO) and iv) Make-to-Stock (MTS).
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Supply Chain Performance: Supply chain performance is defined as the framework to assess
the performance of the supply chain system. Broadly, supply chain performance measures
can be classified into two categories- Qualita ve Measures and Quan ta ve Measures.

1) Fisher, M.L., 1997. What is the right supply chain for your product? Harvard business
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review, 75, pp.105-117.

2) Lee, H.L., 2002. Aligning supply chain strategies with product uncertain es. California
management review, 44(3), pp.105-119.
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3) Stavrulaki, E. and Davis, M., 2010. Aligning products with supply chain processes and
strategy. The Interna onal Journal of Logis cs Management, 21(1), pp. 127-151.
4) Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E. and Shankar, R., 2008. Designing and
managing the supply chain: concepts, strategies and case studies. Tata McGraw-Hill
Educa on.
FOR MORE INFORMATION AND ADDITIONAL READINGS

1) What is Supply Chain Management? Defini on and Introduc on :
h ps://www.youtube.com/watch?v=lZPO5RclZEo&ab_channel=AIMSEduca on%2C
UK
2) Supply Chain Management tutorial:
h ps://www.tutorialspoint.com/supply_chain_management/index.htm
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3) What is supply chain management NOTES

system?h ps://paginas.fe.up.pt/~als/mis10e/ch9/chpt9-2bulle ext.htm
4) Supply Chain Analy cs by Prof Rajat Agarwal, IIT
Roorkeeh ps://www.youtube.com/channel/UCvJtkKTqqqdmP1HgTWe3GQg
Following is a list of some interes ng TED/TEDx talks which will generate interest and also
create an urge to enhance our understanding about SCM.
Sr. No Title Speaker Link/Url

Sustainability of supply Tom Pathuis h ps://www.youtube.com/wat
1.
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chains in the age of ch?v=zKOkEEmtlIo&ab_channel
informa on =TEDxTalks
KavitaParmar h ps://www.youtube.com/wat
2. Turning Supply Chains into
ch?v=FlbGNe73L74&ab_chann
Prosperity Chains
el=TEDxTalks
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3. The future of delivery in Alan Amling h ps://www.ted.com/talks/ala
our new on-demand n_amling_the_future_of_delive
economy ry_in_our_new_on_demand_e

C conomy
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1) Search informa on about AMUL on internet. Explain various supply chain processes of
AMUL highligh ng – Planning, Sourcing, Making, Delivering and Returning Processes.
Refer for addi onal informa on- a) Amul: h ps://www.amul.com/m/organisa on b)
Amul Food factory: h ps://www.youtube.com/watch?v=h1Xp7p1taW0
Sr. No Informa on about What How to obtain How

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informa on this (source) frequently?
1. Supplier
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2. Manufacturing
3. Distribu on
4. Retailing
5. Customer demand
5.13 CHECK YOUR PROGRESS-POSSIBLE ANSWERS

Q.1 d
Q.2 c
Q.3 d
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NOTES Q.4 b
Q.5 d
Q.1 a
Q.2 c
Q.3 d
Q.4 b
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Q.5 d
STUDY TIPS
• Connect the theore cal underpinnings with real life supply chains such as
newspapers, milk, grocery, medicine, vegetables.
• Explore online videos and podcast links detailing the flows across supply chains.
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• Detect the shortages of daily products and explore the reasons for the shortages.
• Think about the Supply chain solu ons to the real life problems and an cipate the
feasibility of your solu on.
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UNIT 6 NOTES
GLOBAL SUPPLY CHAIN - PROCUREMENT
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STRUCTURE
6.0
6.1
Objec ves
Introduc on
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6.2 Global Procurement and Supply Chain Context
6.3 Interna onaliza on in Procurement Strategy
6.4 Process Model of Global Procurement
6.5 Global Procurement Procedure
6.6 INCOTERMS
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6.7 Risks in Global Procurement Supply Management

6.8 Recent Trends in Global Supply Chain Procurement
6.9 Let Us Sum up
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6.10 Key Words

6.11 References And Suggested Addi onal Reading
6.0 OBJECTIVES
• Understand the need for global procurement in the modern supply chain
• Define Global Procurement strategies and their theore cal basics
• Analyze the key decisions in the global procurement context
• Explain the challenges in managing the global procurement supply chain. 129
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Chain - Procurement
NOTES 6.1 INTRODUCTION

In the previous unit, we learn about supply chain management and its defini ons, various
strategies, and the need for alignment of Supply chains with respect to its products. Modern
supply chains do have their upstream supply partners across the globe, and firms are o en
dependent on global supplies. Thus, Global procurement is emerging as a strategic and
interna onal sourcing concern for mul -na onal giant firms.
Global procurement includes sourcing raw materials, ancillary components as well as
machine tools and process equipment from the company’s suppliers across the globe. Global
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procurement is peculiarly characterized by the number of overseas suppliers, non-
availability of certain commodi es in domes c markets, increasing compe veness of
overseas resources, global technology obsolescence, advances, and its implica ons to
businesses. Thus, it is impera ve to understand global procurement and its strategies,
tac cs, and relevance in the modern supply chain. This unit discusses global procurement
and its impera ves on opera ons and supply chain management.
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6.2 GLOBAL PROCUREMENT AND SUPPLY CHAIN CONTEXT

We are always fond of Toyota cars for their performance and sturdiness. As of 2021, Toyota
Motors is the world's second-largest automaker, with a global presence with annual sales of
more than 9.9 million cars. Toyota relies on its complex network of ancillary suppliers for its
cars. In Japan, Toyota buys directly from 200 component suppliers. Apart from Japan, Toyota
has its manufacturing plant across the globe including major manufacturing hubs such as
USA, Russia, India, China, and Europe. Let’s consider produc on bases and R&D bases rest of
Japan using world map figure 6.1.
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Fig. 6.1: Produc on bases and R & D Centers Across Rest of World NOTES
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(Source: Richard Valdez, 2016)
Think and Answer the following ques ons:

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1. How Toyota is spreading its wings in the rest of the world? Refer to the link for
informa on: h ps://en.wikipedia.org/wiki/List_of_Toyota_factories
2. Toyota has more than 50 manufacturing centers, is it just possible with 200 component
Japanese suppliers? If yes, how Toyota is feeding to its manufacturing centers and
managing supply chain across the globe?
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3. What are the challenges in handling procurements for these manufacturing centers
across the Toyota centers?
4. Toyota has developed suppliers across the globe, how Toyota has secured trustworthy
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rela onships with these poten al supply partners? How Toyota does ensure the
Toyota quality as their competence?
5. How does Toyota manage their new product developments across their upstream
suppliers?
The answers to these ques ons are decoded with effec ve procurement and supply chain
management. In this unit, we are going to learn about the global procurement prac ces and
their impera ves with modern supply chains.
6.2.1 MOVING TO GLOBAL PROCUREMENT

Procurement or sourcing process of finding a source for the inputs for produc on and
subsequently managing that source. In other words, Procurement is the process of finding,
agreeing on terms, and acquiring goods, services, or works from an external source, o en via
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NOTES a tendering or compe ve bidding process. Figure 6.2 illustrates the process of tradi onal
procurement includes- i) Buyer requirements, ii) Supplier Selec on, iii) Contract Design, iv)
Remi ance, v) Supplier assessment.
Fig. 6.2: Tradi onal Procurement Process
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Interna onal trade and services are always subject to inevitable change and challenge.
Produc on or supply chains have extended geographically and businesses have crossed
interna onal boundaries. Managing the flows of materials, money, and informa on across
borders is a highly complex, regulated, and dynamic process. Despite the size and affilia on
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of business, the firms involved in the global opera ons ought to take inevitable global supply
and logis cs decisions. The trade barrier reduc on along with a frequent search for lower-
cost sourcing op ons have transformed their local-for-local approach to the global pla orm.
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6.2.2 GLOBAL PROCUREMENT: UNDERSTANDING THE BASICS
We will now understand global procurement, answering few ques ons such as - i) What is
Global Procurement and what are the key benefits of global procurement? ii) Why domes c
firms opt for global procurement? and iii) What is the relevance of global procurement in
achieving compe ve advantage?
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What is Global Procurement and what are the key benefits of global procurement?
Global Procurement: Global procurement the integra on and coordina on of procurement
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requirements across worldwide business units, looking at common items, processes,

technologies, and suppliers. Thus, global procurement can be defined as the process in
which goods and services are sourced from the global market. The benefits of global
procurement are as follows:
i) Lower costs to purchase raw materials and services
ii) Greater access to new technologies and emerging markets
iii) Higher delivery speed and flexibility for the product variety
iv) Guaranteeing the availability of limited resources
v) Introduc on of compe on to the domes c supplier base
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Why domes c firms choose global procurement? NOTES

The key decisions concerning strategy and organiza on opera ng across the globe are the
source of suppliers (where and from whom to purchase the materials, goods, and services
needed for their ac vity). The primary reasons for domes c firms looking for global suppliers
are the failure or incompetence of domes c or regional suppliers due to:
i) Domes c unavailability of some raw materials
ii) Poor quality of available raw materials in domes c markets
iii) Higher local prices and taxes
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iv) Incompetent technology standards
v) Compensa on and counter-trading
What is the significance of global procurement in achieving compe ve edge?

The global procurement has a strong linkage with corporate strategy, thus procurement
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prac ces are expected to differen ate the firms across the global markets. The seamless
coordina on through an integrated supply management system is the competence towards
the procurement differen a on. This approach emerges the development of a global
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procurement strategy. The global Procurement strategy is the decision-making process
through which firms find and manage inputs for final produc on in an integrated,
interna onal context to contribute to the crea on of sustainable compe ve advantage by
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the firm.
The se ng up of the global procurement strategy involves the complex process including- a)
Decide to Outsource or not, b) Loca on of suppliers, c) Type of rela on-linger or short term
rela onship. The complexity of global procurement strategy includes several perspec ves
including global trade, interna onal business, supply chain management, business strategy,
and manufacturing strategy.
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How global procurement process can be differen ated from local sourcing/procurement?
Global Procurement and its supply chain management is a much challenging process than
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local sourcing. Procurement in the global scenarios typically involves:

i) Longer supply chains due to cross-border exchanges of materials, money, and
informa on
ii) Increased rules and regula on
iii) Currency exchange fluctua ons
iv) Custom requirements
v) Cultural, Language and me differences
What are the cri cal factors to be considered while global procurement?
With the access to advanced technologies and manufacturing systems, local suppliers are
also catching up with the global sources in terms of Product Cist, Quality, Delivery speed, and
dependability as well as new product variety. Thus, modern firms always get this dilemma of 133
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NOTES choosing local suppliers or to procure globally. Following are the cri cal factors many firms
do consider while global procurement:
I) Costs
a. Item costs (Actual Product cost)
b. Movement cost covering logis cs and transporta ons
c. Inventory carrying and holding costs
d. Labor Costs
e. Interna onal freight tariffs
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f. Currency exchange rates
ii) Customs Duty
a. Duty levels difference by commodity and level of assembly
b. Impact of GATT/WTO- Changes over me
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iii) Export/Import Regula ons
iv) Time
a. Lead me
b.
c.
d.
Cycle me
Transit me
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Customs clearance
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v) Taxes on corporate income
vi) Manufacturing capabili es of domes c firms
6.2.3 DIMENSIONS OF GLOBAL PROCUREMENT STRATEGY

As discussed, global procurement is a complex process, but the procurement managers need
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to focus on limited but cri cal tasks. Following are the cri cal tasks, essen ally known as the
five dimensions of procurement strategy:
i) Ownership: The degree to which suppliers are part of procuring company.
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ii) Rela on: The type of rela on between the source/suppliers and procuring company.
iii) Network: the nature and structure of the network of suppliers of the procuring
company
iv) Supplier internaliza on: the degree to which the loca on of the supplier differs from
that of the buyer.
v) Interna onal Supply Decisions: how decisions concerning the supplies of the firm are
organized between countries.
These five dimensions denotes three cri cal func ons or role of global procurement
managers:
i) Make-or-Buy Decisions- Covering the ownership
ii) Supplier Management- including rela on and network.
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iii) Interna onal Sourcing, covering Supplier internaliza on and interna onal supply NOTES
decisions.

Q.1 Which of the following is true in global procurement for companies that are considered
to be MNEs?
a. They can manufacture the product themselves but cannot outsource.
b. They can manufacture in local markets but cannot export.
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c. They can manufacture in either the local market or another country and then
import it into the market.
d. All of these
e. None of these.
Q.2 The strategy in which a firm needs to determine where parts and components will be
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manufactured and sourced and where final products will be assembled is known as
a. Procurement
b. Making
c.
d.
Manufacturing network
Ra onaliza on
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Q.3 Which of the following qualifies for global procurement?
a. ABC bikes assemble bikes in India with components sourced locally as well as
interna onally and ship them into east Africa.
b. ABC Bikes assembles bikes in India with indigenous components and sells only
locally.
c. ABC Bikes assembles bikes in China and exports them out in India.
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d. All of these
Q.4 The primary reasons for global procurement are:
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a. Lower costs
b. Currency exchange benefits
c. Language differences
d. Distance
Q.5 Why is global sourcing more expensive than domes c sourcing?
a. Transporta on expensive
b. Need to manage longer supply lines
c. Higher lead mes
d. All the Above.
Q.6 The role of global procurement manager is NOT to:
a. Select Supplier loca ons
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NOTES b. Manufacture the subcomponent

c. Nego ate for delivery terms and condi ons
d. Schedule the orders and receipts
6.3 INTERNATIONALIZATION IN PROCUREMENT STRATEGY

Global procurement as discussed is a very complicated process, and it is advisable to get
evolve as the organiza on evolves. Many strategic experts suggest the step-wise approach
to venture into global sourcing as shown in figure 6.3. The strategies for interna onaliza on
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of procurement gets evolved with a depth of global market involvement increases with
respect to me. Five strategies are:
i) Strategy 1: Local procurement from local buyers
ii) Strategy 2: Imports via agents
iii) Strategy 3: Imports through subsidiaries
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iv) Strategy 4: Interna onal Procurement Organiza on (IPOs)
v) Strategy 5: Integrated and coordinated global sourcing
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Fig. 6.3: Evolving Strategies of Interna onaliza on of Procurement
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Depth of Involvement
in Foreign Supply market
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Time
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Table 6.1: Global Procurement Supply Strategy: Moving from local to Global NOTES
Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5

Key insights Domestic International Imports International Integrated
purchasing procurement through Procurement global
only when subsidiaries offices (IPO) sourcing
needed
Collaborative Quick delivery Availability of Low cost Low cost and Low cost,
Priority of commodity critical bulk purchase advanced
commodity technological
products
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Buyer Domestic Domestic Domestic Domestic Domestic-
location Foreign
Supplier Domestic, Foreign- Foreign- Foreign- Domestic-
location within Mostly single involving few mainly Foreign
geographical country countries component multiple
proximity bulk purchase division
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from single
country
Level of Decentralized Decentralized, Centralized Centralized Centralized
Purchasing manage for
single/few C
instances
Level of Low-Market Low- Moderate- Higher Highest
international entry moderate, High
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involvement limited for
import
commodities
Table 6.1 details the differences in the approaches used by the procuring firms concerning
their purchases. It is quite clear that firms involving in interna onal transac ons require
robust and centralized procurement management with a clear global supply strategy (GSS).
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In the process of strategic evolu on from domes c purchasing to interna onal purchasing,
the organiza on must appraise with longer distances, increased rules and regula ons,
currency fluctua ons, customs and language requirements, cultural and me differences.
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Making the right global supply strategy and aligning to the procurement requirements is the
cri cal stage in the successful interna onaliza on of business.
Real life Illustra on: 1
Suppose, you have developed the start-up engaging in imports of dry fruits for Indian
markets. You are intended to sell Dates, cashews, Apricots, Raisins, Almond, and Pista.
i) Market search the poten als suppliers of dry fruits
ii) Comment on the Global Procurement Strategy of your startup
iii) How will you evolve your procurement strategies in the coming 5 years?
iv) What would be major challenges you would face in dry fruits procurement?
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NOTES 6.4 PROCESS MODEL OF GLOBAL PROCUREMENT

The process of Global procurement as we discussed is a very complex procedure. We
understand the process model of global procurement with the following key elements- i)
Drivers of global procurement, ii) Inhibitors of global procurement, iii) Global procurement
program, iv) Cri cal success factors of global procurement, and v) Measures of Effec veness
as shown in figure 6.4.
Fig. 6.4: Process Model of Global Procurement
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6.4.1 DRIVERS OF GLOBAL PROCUREMENT

The drivers of global procurement form the ini al trigger and boost to the
138 interna onaliza on of the procurement process. As discussed, the purchasing func ons of
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the organiza ons get evolved from the local, short-term approach to the longer-term global NOTES
sourcing approach. The me-based evolu on expects the level of interna onaliza on,
higher investments in processes, logis cs, transporta ons, supplier networks, and
Integrated coordina on technologies and systems. The cri cal drivers for the global sourcing
and its alignment with the supply chain are:
i) Existence of global strategy
ii) Cost Compe ve Pressure
iii) Increased technological pressure
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iv) Strong shared value and excellence differen a on
6.4.2 INHIBITORS OR BARRIERS OF GLOBAL PROCUREMENT

Despite the trigger to the interna onaliza on of the procurement process, there are some
cri cal challenges or inhibitors in the procurement growth at the global level such as-i) Lack
of procurement procedural knowledge, ii) Language and cultural differences, iii) Longer lead
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mes, some mes the excess inventory carriage. Following table 2 details these barriers and
tabulates certain world-class prac ces adopted by the global procuring firms.
Table 6.2: Inhibitors or barriers of Global Procurements
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Sr. Inhibitors or Barriers of Global Procurement Standard Global Practices
No. addressing barriers
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1. Lack of knowledge and skills concerning global Education and training
procurement
Ø How to identify the potential sources across the
globe?
Ø Documentation issues
2. Resistance to change in addressing Brainstorming and Publicizing

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Ø How to al ter established routine sourcing chains? success stories

Ø How to manage and ensure supplier credibility?
3. Longer Lead times due to: Global integrated supply and

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Ø Extended material pipelines information systems

Ø Forecasting over longer time horizon
Ø Possibility of customs/ re gulatory delays
4. Currency fluctuations Obligating stable currency

Ø Involves higher and complicated financial
procedures
5. Business, language and cultural differences Use of third party (3PL)

Ø More engineering and product rela ted changes intermediaries
across the supply network
Ø Variations in negotiation and business ethics.
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NOTES 6.4.3 GLOBAL PROCUREMENT MANAGEMENT PROGRAM

Global procurement and its supply chain is not one type task, but it is a con nual process.
Thus, the sustenance of procurement standards and seamless informa on sharing the
cri cal part of team success of global procurement. Following are the global procurement
management program prac ced across the world for effec ve procurement and its supply
management.
I) Market and Supplier research
ii) Knowledge availability and exchange experience
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iii) Development of supplier networks
iv) Determining the right transac onal channels and logis cs networks
v) Posi oning as a valued supply Partners.
Posi oning a supplier as a valued partner involves strategic supplier development, including-
a) Supplier selec on, ii) Supplier collabora on and iii) Supplier development as shown in
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figure 5.
Fig. 6.5: Supplier Development Process- Stepwise Approach
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Global procurement involves the procurement of goods and services from cross-border
suppliers. Thus, the selec on of suppliers is dependent on several technical as well as trust
factors. The supplier selec on criteria for global procurement mainly includes-
i) Product and Process Technologies
ii) Willingness to share informa on and allied technologies
iii) Supply Quality
iv) Supply Cost and Reliability
v) Order system and cycle me
vi) Communica on capability
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vii) Loca on of supplier/source NOTES

viii) Services and transfer of risks
Suppliers collabora on includes- i) Leveraging exper se and cri cal capabili es and ii)
Op mizing supplier interac on from design to produc on, to develop the supplier network.
Supplier development is a con nuous process, thus requires frequent performance
monitoring, quality audits, and knowledge sharing.
6.4.4 MEASURES OF EFFECTIVENESS OF GLOBAL SUPPLY CHAIN PROCUREMENT
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Global Procurement supply management deals with the effec veness of global sourcing to
ensure supply chain goals such as Right- Product Quality, Price, Time, Source, Volume,
Loca on. Typically, procurement management involves mul ple stakeholders such as
importers, freight transporters, buyers, customs officers, logis cs providers, sellers. Thus,
con nual performance monitoring to maintain the desired effect of the procurement supply
chain is utmost essen al. Broadly, the globally accepted measures of effec veness are as
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follows:
i) Total Cost-effec veness
ii) Supplier delivery effec veness
iii) Product Quality and Standardiza on
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iv) Product Innova on and new product development
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Apart from these generic measures, the supply chain stage-wise performance monitoring
may include both qualita ve (Customer sa sfac on, reliability of delivery, delivery
experience, shipping risks) as well as quan ta ve measures such as lead me, cycle me,
inventory holding costs, transporta on losses, etc.

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Q.1 The process view of global procurement management includes

a. Drivers and cri cal success factors of global procurement
b. Barriers of global procurement
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c. Measures of effec veness of global procurement

d. All the Above
Q.2 The supplier selec on is cri cal because:
a. Ensures trustworthy suppliers
b. Ensure the right product and the right me
c. Ensure supply chain effec veness
d. All the Above
e. None of the above
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NOTES Q.3 Find Odd Man Out:

a. Sourcing
b. Purchasing
c. Procurement
d. Selling
Q.4 Which of the following are Not measures of supply chain performance?
a. Total Cost-effec veness
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b. Delivery lead me
c. Exchange rate
d. Order procurement me
Q.5 Global Supplier development does not include-
a. Supplier selec on
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b. Supplier collabora on and networking
c. In house making
d. Supplier monitoring
6.5
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GLOBAL PROCUREMENT PROCEDURE
The global procurement as we discussed earlier involves the complicated interac ons
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among several regional as well as cross-border stakeholders. Thus, the material and money
flow of the global supply chain needs to be supported by informa on documenta on via
trade documents. Each trade document differs from the other and presents the various
aspects of the trade like descrip on, quality, number, transporta on medium, insurance,
inspec on, and so on. So, it is essen al for both buyers (importers) and sellers (exporters) to
make sure that transac ons follow the as per Interna onal trade rules and regula ons. Some
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of the illustra ve trade documents are tabulated in the table:

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Table 6.3: Trade documents for Global Supply Chain Procurements NOTES
Sr. No. Documents Description/Purpose
1. Letter of credit Letter of Credit L/c also known as Documentary
Credit is a widely used term to make payment secure
in domestic and international trade. The document is
issued by a financial organization at the buyer
request. Buyer also provide the necessary instructions
in preparing the document.
2. Bill of Lading (BoL) Bill of Lading is a document given by the shipping
agency for the goods shipped for transportation form
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one destination to another and is signed by the
representatives of the carrying vessel. The parties
involved in BoL are- a) Shipper, b) Consignee, c)
Notify Party and d) Carrier
3. Certificate of Origin Essentially required by the regulating customs
authority. It normally include- i) Importers and
Exporters information, ii) Package numbers, batch,
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weight, with signed and stamped by the chambers of
commerce.
4. Certificate of Insurance Also known as Insurance Policy, it certifies that goods
transported have been insured under an open policy
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and is not actionable with little details about the risk
covered. It is necessary that the date on which the
insurance becomes effective is same or earlier than
the date of issuance of the transport documents.
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5. Packing list/ Proforma Also known as packing specification, it contains
invoice details about the packing materials used in the
shipping of goods. It also include details like
measurement and weight of goods.
6. Commercial Invoices Commercial Invoice document is provided by the
seller to the buyer. Also known as export invoice or
import invoice, commercial invoice is finally used by
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the custom authorities of the importer's country to

evaluate the good for the purpose of taxation
6.6 INCOTERMS
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Understanding and Dealing with Incoterms is one of the cri cal func ons of global trade.
INCOTERMS are the acceptable agreement between both buyers and sellers before the
shipments of the physical goods. Addi onally, INCOTERMS are accepted by all the
governments and legal authori es around the world. The different types of INCOTERMS are
categorical responsibili es of buyer and seller in terms of:
I. Tasks
ii. Costs
iii. Risks
INCOTERMS can be classified into four categories: a) E category, ii) F Category, iii) C Category
and iv) D-category as shown in figure 6. Different terms and condi ons further sub classify
the incoterms depending upon tasks, cost, and transfer of risks.
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NOTES Fig. 6.6: INCOTERMS and their Classifica on
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INCOTERMS get updated a er every 10 years’ intervals. The detailed informa on,
applica ons of INCOTERMS are summarized in figure 6.7.
Based on mode of transporta ons, INCOTERMS can be classified into two classes-i) Any
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Mode, ii) Water ways only
a. Apply to Any Mode of Transports
• EXW (Ex Works): Delivery of goods at which the seller takes on the least risk
•
•
C
FCA (Free Carrier): Buyers organize shipping of goods and export documenta on
CPT (Carriage Paid To): Like FCA, but where goods are delivered to a defined
des na on.
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• CIP (Carriage and Insurance Paid To): Seller required to purchase minimum
insurance required, and transport.
• DAT (Delivered at Terminal): Seller needs to deliver goods (and insure them) to a
defined terminal
• DAP (Delivered at Place): Mul modal incoterm for the seller to deliver goods to a
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defined des na on.

• DDP (Delivered Duty Paid): Mul modal incoterm extending on DAT, to deliver
goods at named des na on with paid du es by the seller.
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b. Apply to Water Ways only

• FAS (Free Alongside Ship): Non-containerized incoterm where it’s acceptable to
ship with other goods
• FOB (Free on Board): Common incoterm where the seller delivers to port but
buyer responsible for insurance
• CFR (Cost and Freight): Seller delivers goods to the des na on and is responsible
for all transport insurance.
• CIF (Cost, Insurance, and Freight): Seller pays for transport insurance and
delivery of goods up un l end port.
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Fig. 6.7: INCOTERMS-Managing Trade Rela onships Among Buyers and Sellers NOTES
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6.7 RISKS IN GLOBAL PROCUREMENT SUPPLY MANAGEMENT
Global procurement and its supply chain management is a complicated task. It should be
noted that different companies obtain different types of benefits from global sourcing. The
varia ons in the benefits of global sourcing may vary as the process of global procurement is
subject to:
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i) The size of company

ii) The type of products
iii) The import volume
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iv) The percentage of imports

v) Exper se in global sourcing
vi) Geographical territories of business
In addi on to above factors, the modern supply chain has become longer and more
fragmented. The longer and fragmented supply chain, o en increase the supply chain risks
and costs. There can be three direc ons in considering global logis cs risks:
i) What are the poten al losses? (i.e. if the risk is realized, what will losses result
into?)
ii) How likely are those losses? (i.e. Probability (likelihood) of occurrences of an
event that leads to the realiza on of the risks.
iii) What is the significance of the consequences of the losses? 145
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Global Supply
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NOTES Sr. Global Procurement Descriptions

NO. Risks
1. Supply Risk Disruption of supply, inventory, schedules, and technology access;
price e scalations, Quality issues, technology uncertainty, frequency
material design changes.
2. Operational Risks Breakdown of operations, Inadequate manufacturing capability,
higher process variations, changes in technology
3. Environmental and Fluctuations on interest rates, quota restrictions, unanticipated
sustainability resource requirements, high levels of CO2 carbon footprint emissions
Risk during the global sourcing activity
4. Demand Risk Variations in demand, uncertainties in demand market ,New Produc t
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introductions, variations in demands (Fashion, seasonal), market
dynamics (Introduction of new products by competitors).
5. Security Risks Political turmoil or uncertainty in low cost supplying countries. Freight
breaches, crime sabotage, Information sy stems security,
infrastructure security
6. Intellectual The proprietary knowledge regarding design,engineering, materials
Property risk and other elements
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7. Macro Risks Economic shifts in wage rate, interest rates, exchange rates and
prices.
Real life Illustra on 2
and complete the table.

a)
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Compare following cases with reference to the Global supply chain procurement concepts
You can refer to INCOTERMS chart (Figure 6.7).

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b) Case I: Assume you are an IMPORTER of Pharmaceu cal products from India to United
States
c) Case II: Assume you are an IMPORTER of the cellular phones and personal electronic
devices to India from Japan.
d) State your assump ons clearly.
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Case I: Importer of Case II: IMPORTER of

Pharmaceuticals Cellular Phones and
Personal Electronic Dev ices
Define Mode of Transports

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Justify the mode of

Transports
Define INCOTERM
Justify, your Choice of
INCOTERM
Warehouse charges
Export Packaging
Loading at origin point
According to your Origin Port Charges
INCOTERM, Who will bear Origin Forwarder
the cost of: charges
Destination port
charges
Customs clearance
Supply Risks
Forecast various supply
Demand Risks
chain risks associated with
your business Intellectual Property
Risks
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Real life Illustra on 3 NOTES

Refer to your Dry-fruits Imports start-up explained in illustra on 1. Comment on:
i) What would be the procurement related risks for your start-up?
ii) What would mi gate or reduce these risks? Define and Jus fy your INCOTERM, to
minimize your risks.
iii) What if, your supplier call backs from your cri cal supplies? What would you
ensure your supplies for your end consumers?
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6.8 RECENT TRENDS IN GLOBAL SUPPLY CHAIN PROCUREMENT
Many firms are reshoring their manufacturing into their own countries, par cularly a er the
coronavirus outbreak. COVID 19 pandemic significantly disrupted the tradi onal
frameworks, transporta on, and logis cs channels across the globe. The economic impact of
the pandemic is also severe. To curtail the pandemic losses and shorter the logis cs supply
networks, many countries are adop ng self-reliance strategies and shu ng down their
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facili es from tradi onal low manufacturing hubs like China, Hong Kong, Taiwan, etc.
India is also boos ng its manufacturing and service sector with policy ini a ves such as Atm-
Nirbhar Bharat and Make-in-India. This scheme is expected to a ract foreign mul -na onal
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companies to source and procure from India. On the backdrop of policy level developments,
the cri cal challenges in the compe veness of Indian manufacturers are:
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i) Lack of Design and R&D capabili es
ii) Lack of technology in terms of process, equipment, and material handling
iii) Lack of experimen ng, tes ng, and commissioning facili es
iv) Unavailability of raw materials at op mum costs
India though it has loca on, resource, and cost advantage, should invest in:
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i) Research and Development, design, tes ng capabili es of Small and Medium

Enterprises (SMEs)
ii) Exploi ng innova ons and technologies for new product and process
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developments and commercializa on

iii) Shared services for experimen ng, tes ng, and commissioning facili es.
6.9 LET US SUM UP

1) Global procurement relates to the commercial transac on between buyer (local) and
suppliers across different countries.
2) Global procurement aims to procure material at- a) Op mal cost, ii) World class
Quality, iii) Advanced technologies
3) Reasons for choosing global procurements over domes c sources are:
a. Material not available domes cally.
b. Unsa sfactory quality of domes c products
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NOTES c. Price compe veness

d. Technology access
4) Buying firms o en engage in world-wide search for procuring from global vendors
sa sfying- right quality, price, quality, quan ty, delivery targets and variety criteria.
5) Global procurement necessarily involves the cross-boundary purchase. Global
procurement supply management iden fying, developing and accessing op mal
supplier source regardless of the Purchasing loca on.
6) Global procurement has become popular with the emergence of Network
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manufacturing, which has triggered worldwide component procurements for
assembling them into final products in low-cost manufacturing des na ons such as
India, China, Vietnam, Bangladesh, Mexico, etc.
7) The progression from domes c purchasing to interna onal purchasing and then finally
to global sourcing can be visualized as movement through five different strategies:
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a. Domes c purchasing only;
b. interna onal purchasing only as needed;
c. interna onal purchasing as part of a sourcing strategy
d.
e.
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global sourcing strategies integrated across worldwide loca ons;
global sourcing strategies integrated across worldwide loca ons and func onal
groups
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8) Global Supply Chain Procurement involves mul ple stakeholders such as buyers,
sellers, custom regulators, transporters, vessel carriers so and so forth. Thus, the
efficient set up process of global supply chain procurement essen al including- i)
Drivers of global procurement, ii) Inhibitors of global procurement, iii) Global
procurement program, iv) Cri cal success factors of global procurement, and v)
Measures of Effec veness.
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9) The selec on of suppliers is the most cri cal step of supplier development. Supplier
development includes- i) Supplier Selec on, ii) Supplier Collabora on and iii)
Supplier Monitoring and performance evalua on.
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10) The global procurement as we discussed earlier involves the complicated interac ons
among several regional as well as cross-border stakeholders. Thus, material and
money flow of the global supply chain needs to be supported by informa on
documenta on via trade-documents
11) Understanding and Dealing with Incoterms is one of the cri cal func ons of global
trade. INCOTERMS are the acceptable agreement between both buyers and sellers
before the shipments of the physical goods. Addi onally, INCOTERMS are accepted by
all the governments and legal authori es around the world. The different types of
INCOTERMS are categorical responsibili es of buyer and seller in terms of- i) Tasks, ii)
Costs, and iii) Transfer of risks.
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12) The longer and fragmented supply chain, o en increase the supply chain risks and NOTES
costs. Thus Global procurement risk and its mi ga on essen ally forms the new role
of procurement managers across the world.
6.10 KEY WORDS

Procurement: Procurement or sourcing process of finding a source for the inputs for
produc on and subsequently managing that source. In other words, Procurement is the
process of finding, agreeing on terms, and acquiring goods, services, or works from an
external source, o en via a tendering or compe ve bidding process.
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Tradi onal Procurement Process: The process of tradi onal procurement includes- i) Buyer
requirements, ii) Supplier Selec on, iii) Contract Design, iv) Remi ance, v) Supplier
assessment.
Global Procurement: Global procurement the integra on and coordina on of procurement
requirements across worldwide business units, looking at common items, processes,
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technologies, and suppliers.
Global Procurement and its Supply Chain Management: is a much challenging process than
local sourcing. Procurement in the global scenarios typically involves: i) Longer supply chains
C
due to cross-border exchanges of materials, money, and informa on, ii) Increased rules and
regula on, iii) Currency exchange fluctua ons, iv) Custom requirements and v) Cultural,
Language and me differences.
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Dimensions of Global Procurement Strategy: Global procurement is a complex process, but
the procurement managers need to focus on limited but cri cal tasks. Following are the
cri cal tasks, essen ally known as the five dimensions of procurement strategy: i)
Ownership, ii) Rela on, iii) Network, iv) Supplier interna onaliza on, and v) Interna onal
Supply decisions.
Process Model of Global Procurement: Understanding to process model of global
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procurement aligning- i) Drivers of global procurement, ii) Inhibitors of global procurement,

iii) Global procurement program, iv) Cri cal success factors of global procurement, and v)
Measures of Effec veness.
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Global Procurement Supply Management: deals with the effec veness of global sourcing to
ensure supply chain goals such as Right- Product Quality, Price, Time, Source, Volume,
Loca on.
INCOTERMS: INCOTERMS are the acceptable agreement between both buyers and sellers
before the shipments of the physical goods. Addi onally, INCOTERMS are accepted by all the
governments and legal authori es around the world. The different types of INCOTERMS are
categorical responsibili es of buyer and seller in terms of- i) Tasks, ii) Costs, and iii) Transfer of
risks.

1) Global Logis cs and Supply Chain Management John Mangan, Chandra Lalwani, Tim
Butcher, Roya Javadpour, John Wiley & Sons, 2nd Edi on, 2011, ISBN 13: 978-1-119- 149
UNIT 6
Global Supply
Chain - Procurement
NOTES 99884-6
2) Interna onal Logis cs. Wood, D. F., Barone, A., Murphy, P., & Wardlow, D., Pinnacle
Learning, 2nd edi on, ISBN-13: 978-0814406663 (Indian Edi on Available)
3) Interna onal Business Law and Its Environment, Richard Schaffer, FilibertoAgus , LJ
Dhooje, Cengage Learning; 9thedi on, ISBN-13: 978-1285427041
4) Supply Chain and Logis cs Management, DJ Bowersox, David Closs, MB Cooper, 4th
edi on McGraw Hill, ISBN-13: 918-93-5316-258-0.
5) Branch, A.E., 2008. Global supply chain management and interna onal logis cs.
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Routledge.
6) Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E. and Shankar, R., 2008. Designing and
managing the supply chain: concepts, strategies and case studies. Tata McGraw-Hill
Educa on.
7) INCOTERMS:
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h ps://www.youtube.com/watch?v=7g7IC4IzjDM&ab_channel=IncoDocsh ps://w
ww.investopedia.com/terms/i/incoterms.asp
8) Procurement Supply Chain Risk and Mi ga on
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Strategiesh ps://www.youtube.com/watch?v=h7cQjQJHbUs&ab_channel=Cranfiel
dSchoolofManagement
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1) Differen ate between local procurement and Global procurement with suitable
examples.
2) Explain the need for Global Supply Chain Procurement with suitable examples?
3) What the key supplier selec on criteria? Highlight their relevance with respect to
Global procurement risks with examples.
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4) Comment on: The evolu on of procurement func on of the organiza on from local-
to- Global.
5) Jus fy the post-pandemic need for realigning global procurement strategies with
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suitable examples.

Q.1 d
Q.2 a
Q.3 d
Q.4 a
Q.5 d
Q.6 b
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CHECK YOUR PROGRESS-II NOTES

Q.1 d
Q.2 d
Q.3 d
Q.4 c
Q.5 c
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O
C
TO
O
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151
NOTES UNIT 7
GLOBAL SUPPLY CHAIN-DISTRIBUTION
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O
STRUCTURE
7.0
7.1
7.2
Objec ves
Introduc on
The Context
C
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7.3 Global Supply Chain Distribu on
7.4 Logis cs and Transporta on in Global Distribu on Systems
7.5 Let us Sum up
7.6 Key Words
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7.7 References And Suggested Addi onal Readings

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7.0 OBJECTIVES
• Understand the need for global distribu on in modern supply chain
• Define Global distribu on strategies and its theore cal basics
• Analyze the key decisions in global distribu on context
• Explain the challenges in managing global distribu on supply chain.
7.1 INTRODUCTION
Global procurement and distribu on has been a policy a en on with the
Interna onaliza on of trade. Global procurement and its implica ons to the supply chain are
152 discussed in unit 6. In this unit we will be discussing distribu on channels and supply chain
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management. NOTES
Consider following table 1 lis ng top 10 leading commodi es exported by India in the
financial year 2018-19.
Table 1 India: Leading commodi es exports in FY 2018-19 (Data Retrieved from
h ps://www.sta sta.com/topics/5782/exports-from-india/#dossierKeyfigures, on
November, 3, 2021)
Table 7.1
Sr. No. Sector Share in Export (%) 2018-19 Value of Goods (US$)
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1. Petroleum products 14.10 46.54
2. Pearls, precious and semi-Precious stones 7.78 25.98
3. Drug formula ons, biologicals 4.36 14.39

4. Gold and other precious metal jewellery 3.92 12.94
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5. Iron and steel 2.95 9.74
6. Organic Chemicals 2.83 9.33
7.
8.
9.
Co on and Accessories
Motor vehicle/Cars
Electric Machinery and Equipment
C 2.63
2.58
2.55
8.69
8.50
8.42
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10. Products of Iron and steel 2.55 8.42
Further to the exports data, the largest export des na ons of India are USA (16.94%), UAE
(9.20%), China (5.47%), Hong Kong (3.53%) in FY 2019-20. WTO ranks India 5th for
commercial services exports and 6th for commercial services imports. Trade balance
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through increasing exports and lowering imports dependencies is an extremely important

perquisite for healthy economy. Increase in exports levels and balancing trade balance has
three central challenges- a) How to enhance manufacturing capabili es of our country
PH
matching with world class standards and, b) How to market, distribute and develop our
products to the overseas customers. C) How to manage inbound and outbound logis cs of
outsourced and inland commodi es.
In this unit, we will focus on the second challenge, and aim to discuss the global supply chain
enabling effec ve logis cs and distribu ons of goods and service across the world.
7.2 THE CONTEXT

Consider recent drama or farce, when the giant ship carrier- Ever-Given impeded the Suez
Canal in March 2021 for six days. More than 350 ships prevented from passing Suez Canal,
giving rise to financial, delivery knock outs. Wikipedia quotes, the popular Mari me Journal-
Lloyd’s List es mated during the blockage the value of the goods delayed each hour at
US$400 million. Every day it takes to clear the obstruc on would disrupt an addi onal US$9
153
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Chain - Distribu on
NOTES billion worth of goods.

Apart from economic losses through the six days with this incidence, the ripple and under-
wave effects would s ll con nue supply distribu on channels. Thus, the need for supply
chain risk management program is highly signified.
Let’s understand the post-incidence supply chain and distribu on losses:
i) Congested ports, railyards, and distribu ng centers
ii) Containerships and vessels shortages
iii) Delaying shipments of raw materials impac ng produc on and downstream
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processes.
Fig. 7.1: Bracing the Impact: Supply Chain Management Post-Suez Blockage,
by Jaclyn Jaeger, Compliance week,
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C
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Source: h ps://www.complianceweek.com/supply-chain/bracing-for-impact-supply-chain-risk-
management-post-suez-canal-blockage/30298.ar cle
Some key highlights of lessons learnt are:

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i) Short-term and longer term measures of risk mi ga on strategies to manage

unan cipated and unexpected events.
ii) Reassessment and suppliers, logis cs and transpor ng channel monitoring and
fact audits
iii) Mul -sourcing and Alterna ve supply route systems and agility in onboarding the
alterna ves
iv) Technology enabled informa on tracking system for real me data
The list of lessons learnt can be expanded, but the cri cal take-away of the incidence is the
need for distribu on supply chain risk management at the global levels. Building
rela onship along both upstream and downstream supply chain and distribu on
management is again emerging as important global strategy.
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The upstream suppliers typically provide raw materials and components, downstream NOTES
partners create the links with final customers through supply and distribu on networks.
Distribu on strategy typically focuses on the material movement across the upstream as
well as downstream side of supply chain. We will know discuss the concept of logis cs and
then explore the need of global logis cs for effec ve distribu on.
7.3 GLOBAL SUPPLY CHAIN DISTRIBUTION

7.3.1 LOGISTICS DECISIONS
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Supply Chain is defined as the transforma on of raw materials to finished goods and ge ng
it to the customers. Logis cs details the movement of material in the whole supply chain.
The role of logis cs func on in supply chain are:
a. Transporta on: Forward material movements in all upstream, process and
downstream via various modes- Air, Water (Sea, Rivers and Canals), Land (Pipelines,
Rail and Road).
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i. Selec on of op mum integra on of available transport modes is the key to
effec ve transporta on.
b. Warehousing: Intermediate storage of finished products within produc on unit and
C
end customers.
i. Involves three primary func ons- Receipts, Storage and Shipment
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c. Logis cs experts
i. 3rd Party Logis cs (3PL): Manage one or more logis cs services in upstream,
process and/or downstream chains.
ii. 4th Party Logis cs (4PL): Logis cs specialists playing the role of contractor to
manage all the logis cs related ac vi es across upstream, process and
downstream value chain.
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d. Reverse Logis cs: Handling of Return or reverse flow of the products from customers
to the manufacturers/raw material suppliers.
The logis cs decisions are realized as the executable ac on plans for the strategic direc ves.
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Logis cs decisions can be classified as: (a) Outbound Logis cs Decisions, (b) Inbound
Logis cs Decisions and (c) Returned Products (Reverse Supply Chain).
a. Outbound logis c Decisions: Decisions related transport, storage and delivery of
goods going out of process centers (i.e. manufacturing units) to the downstream of
supply chain. Following func ons are included in outbound logis c decisions:
i) Demand Forecas ng: It is the process in which historical sales data is used to
develop an es mate of an expected forecast of customer demand in conjunc on
with marke ng department. To businesses, Demand Forecas ng provides an
es mate of the amount of goods and services that its customers will purchase in
the foreseeable period.
ii) Order Management: It is a series of events from order receipt to the packaging of
export commodity. It mainly includes- Order receipt, Verifica on of order, 155
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Chain - Distribu on
NOTES Customer’s reliability and poten al verifica on, Terms of trade, Verifica on of
Stock in transit, transporta on documenta ons, Insurance advisories, Customs
updates.
iii) Packaging: Packaging serves three purposes-
1. Product Iden fica ons
2. Product Protec on
3. Aid in Handling
iv) Labelling: Describing the content, in the language of the expor ng na on along
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with RFID bar codes encrypted with product details, manufacturers and handlers’
informa on.
v) Documenta ons: Prepara on and handling of all the documents accompanying
the shipments. Recent documenta on regarding insurance, freight, product
details, customs taxes and tariffs are encrypted as the RFID bar code.
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vi) Customer Service and Parts support
b. Inbound logis c Decisions: Decisions related transport, storage and delivery of goods
coming into the process centers (i.e. manufacturing units) from the upstream supply
i)
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chain. Following func ons are included in inbound logis c decisions:
Produc on scheduling: Produc on Scheduling is the process of arranging,
controlling and op mizing work and workloads in a produc on process or
TO
manufacturing process to balance product demands with the plant capacity and
available inputs.
ii) Procurement: Procurement is the process of finding and agreeing to terms, and
acquiring goods, services, or works from an external source, o en via a tendering
or compe ve bidding process. Key steps in procurement cycles are as follows:
1) In ma on to supplier a er Order confirma on from the produc on
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planning and control (PPC)

2) Produc on scheduling at suppliers’ end
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3) Manufacturing and shipment of components (raw materials) at suppliers’

end
4) Physical receipt of components at processing division (Manufacturing
loca on).
iii) Returned Products (From the downstream to the supply chain): It is also known
as reverse logis cs. It is "the process of moving goods from their typical final
des na on for the purpose of capturing value, or proper disposal.
C. Func onal Decisions: Certain logis c func ons are generic and cannot be specific to
incoming or outgoing material and informa on movements. These generic logis cs
func onal decisions can be listed as follows:
1) Inventory Management
2) Transporta on Management
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3) Material Handling NOTES

4) Warehouse and distribu on center management
5) Salvage and scrape disposal
6) People’s movement
7) Plant, warehouse site loca ons

Q.1 Which of the following is Not part of Logis cs Systems?
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a. Compe tors
b. Customers
c. Transporters
d. Manufacturer
Q.2 Which of the following is not the responsibility of Logis cs Manager?
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a. Inventory control
b. Dispatch
c.
d.
Warehousing
Marke ng
C
Q.3 …………...includes design and administra on of systems to control the flow of
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materials, WIP and finished inventory to support business unit strategy.
a. Bill of materials
b. Manufacturing management
c. Logis cs management
d. Distribu on management
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Q.4 Which of the following is True for Outbound logis cs?

a. Deals with material movement from supplier to producers.
b. Deals with material movement from producer to end customer.
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c. Deals with outsourcing

d. Deals with imports
Q.5 Properly designed …………………………... network help to reduce total logis cs and
distribu on cost
a. Warehouse
b. Logis cal network
c. Manufacturing facility
d. Sourcing channel
Illustra on 1
We o en hear the leading companies in logis cs domain such as FedEx logis cs, DHL
157
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Global Supply
Chain - Distribu on
NOTES solu ons, Nippon Express. List down the various ac vi es/ logis cs func on these
companies do? Typically, these companies are 3PL- third party logis cs service provider.
According to you, jus fy the applica ons of 3PL in global distribu on business.
7.3.2 NEED AND RELEVANCE OF GLOBAL LOGISTICS

We note changes in Global business Dynamics in following cri cal dimensions:
a. Increasing Market Concentra ons: Major Market share concentrated with the very
few giants- For example, Wal-Mart (in retail), P&G, HUL (in FMCG), Amazon, FlipKart (E-
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commerce) Google (IT services)
b. Increasing Dispersion of Produc on
i. Loca ng manufacturing facility by Off-shoring to low cost countries/emerging
economies such as India, China, Taiwan etc.
ii. Loca ng manufacturing facility closer to the customers. (Many automobile/cell
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phone manufacturers are located in China and India, as demands for automobiles
and cellphones is higher in South and South East Asia.
c. Increasing Product line diversity: Rapid innova ons and developments of new
products to disrupt the daily market trends. E.g. Computer Assembly industry- the
C
configura ons of different so ware and hardware technologies obsoletes the recently
bought advanced items sooner. This develops the need for flexible and agile suppliers
and quicker, faster and efficient movements of material (i.e. logis cs).
TO
d. Open Innova ons and Quick Access to Technology:
i. Many technology-innova ons based start-ups across the globe are engaged in
rapid technology development, technology commercializa on and technology
transfers. This has substan ally minimized the delays and lags in the value chain.
ii. Simultaneously open innova on pla orms, rapid tech transfers and licensing
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have improved the technology and manufacturing capabili es of small

entrepreneurs across the globe.
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7.3.3 DIFFERENTIATING GLOBAL LOGISTICS MANAGEMENT

a. Domes c logis cs: Trade/movement of material within the geographical territory of
the country.
b. Global Logis cs: Trade/Material movement across the interna onal fron ers of the
country may be in the form of:
i. Impor ng- raw material, ancillary subassemblies, or finished products.
ii. Expor ng- raw material, ancillary subassemblies, or finished products.
c. The understanding of global logis cs is paramount to scale up the interna onal
compe veness of the firms those are:
i. Opera ng within geographical territory (i.e. domes c markets), but s ll aim to
enhance global standards of opera ons.
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ii. Loosing foreign exchange with Higher imports, NOTES

iii. Dealing with fiercening global compe on, but managing to scale up their
exports compe veness.
7.3.4 SPECIFIC CHALLENGES OF GLOBAL LOGISTICS AND DISTRIBUTION

a. Logis cs Costs:
i. Movement of en es (either raw material, work-in-process, or finished products)
across geographical territory requires higher logis cs costs.
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ii. The mul -modal transporta ons (Air, Water and Land), mul -modal tariffs,
mul ple intermediates (logis cs partners, 3PL, 4PL experts, freight forwarders)
and extensive record keeping increases the logis cs cost significantly.
iii. Inventory management and material flow in global supply chains within
interna onal distribu on channels.
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b. Complexity due to Global Opera ons
i. Daun ng global business dynamics and standards of opera ons.
ii. Varia on in the Procedures and protocols of transporta on,
c.
iii. Legal and commercial issues C
Complexity in Interna onal trade rela onships due to varia ons in:
i. Poli cal environment,
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ii. foreign exchange rate and market fluctua ons,
iii. Customs, tariffs, banking and insurance systems
With the basic understanding of logis cs and its cri cali es in global context, we understood
that, the logis cs func on primarily comprises the network that connects to customers. The
logis cs and distribu on network includes all ac vi es related to sales, service and the
O
development of customer rela onships

The ul mate aim of the distribu on supply chain is to provide Place U lity and Time U lity.
Place u lity and me u lity denote right product or service needs to be in the right place at
PH
the right me. So, the purpose of distribu on system is to provide customer value and
sa sfac on only if it is available to the customer when and where it is needed, and in the
appropriate quan ty.
It should be noted that, very few companies are able to deliver Place and Time u lity
independently and usually they need to rely on the intermediaries such as:
i) finished goods warehouses,
ii) transporta on-logis cs channels,
iii) stockiest, whole-sellers and retailers network.
The intermediaries as well as manufacturing organiza ons aim to ensure an orderly flow of
material, personnel, and informa on throughout the distribu on channel. Matching supply
with demand through the interac ons among the suppliers, manufacturers and end
customer is one of the cri cal challenges of distribu on network. We will learn about various 159
UNIT 7
Global Supply
Chain - Distribu on
NOTES intermediaries later in this unit.
7.3.5 SCOPE OF GLOBAL SUPPLY CHAIN DISTRIBUTION

The scope of global distribu on is wider and encompassing both offshore carriers,
transporta on-logis cs networks, as well as inland handling of finished goods to the end
customer. Distribu on network mainly deals with the outbound logis cs in the downstream
supply chain. It generally involves the flow of finished goods/services from manufacturing to
the end customer across the globe.
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Schlegelmilch (2016) describe the scope of distribu on network including- i) Handling of
Finished Goods, ii) Transporta on-logis cs through sea/air carrier, iii) Por ng-handling-
Delivery to store, iv) Delivery to end customer as shown in figure7.2.
Fig. 7.2: Global Supply Chain Distribu on Network (Schlegelmilch, 2016)
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C
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7.3.6 FUNCTIONS OF GLOBAL SUPPLY CHAIN OF DISTRIBUTION

The distribu on channel partners as discussed are also known as intermediators. The role
these intermediaries can be classified based on three basic tasks:
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i) Transac onal Func ons

ii) Logis cal Func ons
iii) Facilita ng Func ons
The channel wise func ons performed by the distribu on intermediaries are summarized
in the table 2 below:
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Table 7.2: Distribu on Func ons of the intermediaries NOTES

(Adopted from, Schlegelmilch (2016))
Sr. No. Functional Type Description
1. i) Contacting and Promoting: contacting potential
customers, promoting products, soliciting orders
ii) Negotiating: determining how many products to buy
Transactional
Functions and sell, type of transportation used, methods of
payment, delivery and timing
iii) Risk taking: assuming ownership utility
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2. i) Physically Distribution: transporting and sorting
goods
ii) Storing: maintaining inventories and protecting goods
iii) Sorting: Breaking down a heterogeneous supply into
homogeneous stocks
Logistical
iv) Accumulating: combining similar products from
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Functions
different sources
v) Allocating: Breaking bulk into consumable quantities
vi) Assorting: Combing products and creating offerings
3. i)
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for customers
Researching: gathering and sharing information about

customers
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Facilitating
Function ii) Financing: extending credit lines and other financial
services
7.3.7 MANAGEMENT OF INVENTORY THROUGH DISTRIBUTION CHAIN

With Lean systems, many firms opt to adopt Just-in-Time and Zero Inventory and a empt to
O
reduce the inventory levels. The recent studies on inventory management show that,
zeroing the inventory levels may not be advisable, if the cycle me and order transit me are
higher. Typically, global distribu on involves the higher cycle mes and shipment-
PH
transporta on delays.
The larger amount of inventory levels is used to balance the uncertainty due longer to longer
cycle mes in global networks. The advantages of keeping and holding inventory levels in
global distribu on chains are as follows:
i) Availability of Stocks for ready sales: With increasing technologies and
efficiencies of supply chains, various global players o en get emerge to offer the
same products. The availability of ready stocks is becoming key differen ators the
firm prefer.
ii) Price Strategy: Global companies prefer high volume or bulk purchases to benefit
the quan ty discounts.
iii) Assurance of supplies from the dedicated suppliers.
Inventory or supplies assurances in global logis cs are achieved through following concerns: 161
UNIT 7
Global Supply
Chain - Distribu on
NOTES a) Concept: Companies are primarily concerned with reducing delivery mes and
improving responsiveness to customers, reflec ng the shorter product lifecycles they
face.
b) Value: The simultaneous emphasis is placed upon cost savings (from reduced
inventory levels, economies of scale and a reduc on in fixed assets) and improved
service quality (through reliable delivery, improved stock availability and response
mes).
7.4 LOGISTICS AND TRANSPORTATION IN GLOBAL DISTRIBUTION SYSTEMS
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Transport is at the core of the logis c global opera on. The efficiency of global supply chain is
dependent on the transporta on networks. More emphasis is being placed on overland
distribu on of road, rail and canal, embracing combined transport from a supplier to
consumer supply chain.
Fig. 7.3: Modes of Transport in Global Supply and Distribu on Chain
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7.4.1 MODES OF TRANSPORTS IN GLOBAL SUPPLY CHAIN

Transporta on modes enable the movement or mobility of physical goods or passengers.
Following are modes of transport: i) Land (Road, Rail), ii) Water iii) Air iv) Pipeline.
The Freight (Physical goods) transporta on mode selec on is dependent on:
i) Characteris cs (Weight, Size, Perishability etc.) of Physical goods
ii) Distance to be transported
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iii) Modal availability NOTES

Following table 3 summarizes various characteris c features of freight transport types.
Table 7.3: Comparison Across the Various Transporta on Modes
Characteristics of Road Water Railway Air Pipeline

Freight Transport
Infrastructure Common Natural Special Public Natural air Special Piping
Public road Waterways, rails way, Airports and
Artificial infrastructure , essential controlling
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water- infrastructure
connecting
canals (e.g.
Suez,
Panama
canal etc),
Ports
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Transportation Door-to- Port-to- Between Between Between
Door Port cargo railways Airports output and
stations input points
ensuring
Transportation
modes
Varying load
and capacity
Higher
volume,
C
Standardized
rolling stock
Standardized
transport
continuous
flow
Continuous
flow, no
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vehicles and bulky load means of transportation
container limited mode
volumes nomenclature required
Type/Nomenclature Wide, but No Wide, but Wide, but Liquid, gases,
of Freight mostly limitations mostly limited mostly Granular
limited by by handling limited by cargo
handling capacities handling
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capacities capacities
Schedule Free As per As per train Timetable Continuous
navigation schedule
condition
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Stability Dependent Dependent Dependent on Dependent High

on road and on weather weather on weather
weather conditions conditions conditions
condition
Safety Higher Relatively Relatively- Relatively- Higher
accident high high high
risks
Sustainability Large Lower Medium Medium Low emissions
emission emission emission emission
volumes volumes volumes volumes
( Source: Smirnov, 2019)
163
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Chain - Distribu on
NOTES ILLUSTRATION 2
India has recently started COVID 19 vaccina on program targe ng to vaccine the largest
popula on. The available vaccines are- I) Covishield, ii) Covaxin, iii) Sputnik V, iv) Moderna
Vaccine, v) Pfizer vaccine. Iden fy the sources (manufacturing loca on) of these vaccines,
and suggest various modes of transports, global distribu on strategies to vaccinate the
common Indian ci zen.
7.4.2 INTERMEDIATORS IN GLOBAL SUPPLY CHAIN DISTRIBUTION
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a. Freight Forwarders:
i. The most common intermediaries, freight forwarder can handle almost all the
logis cal aspect of the transac ons a er comple on of sale.
ii. Act as the middleman between transporta on service and the shipper.
iii. Firm specializing in arranging storage and shipping of merchandise on behalf of its
O
shippers.
iv. It usually provides a full range of services including: tracking inland
transporta on, prepara on of shipping and export documents, warehousing,
booking cargo space, nego a ng freight charges, freight consolida on, cargo
C
insurance, and filing of insurance claims.
v. Takes logis c responsibility from Pick-up point to Shipping lines.
TO
vi. For more info: h ps://www.universalcargo.com/what-does-a-freight-forwarder-
do-do-you-need-one/
b. Non-Vessel Opera ng Common Carriers (NVOCCs)
i. Does not own “Ships”- thus known as non-vessels, but works on the behalf of
shipping company.
ii. Have the agreement with shipping company- with freight rates.
O
iii. Have the legal authority to issue House Bill of lading (HB/L), acknowledging the
receipt of cargo for shipment.
PH
iv. Freight forwarders are the agents/partners of shipping companies/NVOCCs, but

do not have legal authority to issue HB/L.
v. For more info: h ps://w w w. globalnego ator.com/interna onal-
trade/dic onary/nvocc/
c. Export Management Companies (EMCs)
i. Independent private company that acts as an export department for several non-
compe ng manufacturers and suppliers.
ii. EMCs act as Interna onal sales representa ves, and may take up the possession
of the goods for the direct exports.
iii. For more info: h ps://w w w. globalnego ator.com/interna onal-
trade/dic onary/export-management-company-emc/
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d. Export Packers: NOTES

i. Assis ng exporters with the special packaging requirements needed to reach out
the intended export markets.
ii. The degree of export packing required greatly depends on the kind of product,
the mode of transporta on, and the facili es at the shipment and des na on
port or airport.
iii. For more info: h ps://www.globalnego ator.com/interna onal-
trade/dic onary/export-packing/
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e. Customs Brokers:
i. Customs brokers are o en work with co-ordina on with freight forwarders in
expor ng na ons.
ii. Customs broker verifies the shipment to be exported and guides it through the
customs checks and assures the required customs tariff/duty payments.
O
iii. A er transit, custom brokers are also responsible to clear out customs regula ons
of impor ng country.
f. Goods surveyors
i.
ii.
C
Quality inspectors a er the receipt of goods in impor ng na on.
Responsible for Quality checks, weight, Quan ty, and determina on of in-transit
damages.
TO
g. Parts Banks
i. Parts bank are exclusively to store spare parts/ ancillary parts (subassemblies) to
be readily available as cri cal equipments are under breakdown.
ii. Parts bank services are given generally by airlines to quickly fly cri cal spare
parts/ subassemblies at desired place.
O
h. Container Leasing Companies

i. Containers are large shipping devices that can be u lized on land and on sea with
equal ease.
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ii. The uniform shape and dimensions of containers makes it very easy to secure the
devices to a flatbed trailer or rail car and move goods across highway or rail
systems. Containers can also be stacked and secured in place on barges, making
them ideal for water transport.
iii. While some companies choose to purchase containers, others find that container
leasing is more prac cal and cost-effec ve.
iv. Container leasing involves entering into a working agreement with a container
supplier. The supplier agrees to deliver a minimum number of containers to the
client, with the understanding that the containers will be used for a specified me
and at a rate documented within the terms of the lease agreement.
i. Export Trading Companies (ETCs)
I. ETCs are similar to Export management companies (EMCs). 165
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NOTES ii. ETCs buy the manufacturers’ goods, take the tle, then sale these goods in export
market.
iii. ETCs are not just the sales representa ves, but the owners of exported goods.
iv. By selling to ETCs, manufacturer o en removes himself from financial risks, but
the trustworthiness of ETCs becomes the cri cal issue.
7.4.3 TYPES OF DISTRIBUTION CHANNEL

The number of intermediators in between producers and the customers define the type of
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types of distribu on channel:
i) Direct Channel: Without (Absence of) any intermediaries, producers directly sell their
goods/services directly to the customers. D2C (Direct to Customer) scheme is
operated with Direct channel. Generally Direct channels are preferred for exclusive or
customized products with rela vely limited number of customers.
O
ii) Indirect Channel: With one or more intermediates between producers and customers,
forming the wholesalers’ and retailers’ chain. Preferred for higher volumes and
moderate-higher variety products, with rela vely wider customer base.
iii) Mul -Channel/ Hybrid Channel distribu on: The tac cs adop ng both direct and
C
hybrid distribu on channels, specifically used where aggressive marke ng and
distribu on as well as simultaneous trust building is essen al.
TO
While direct channel, is emerging phenomenon, Indirect and mul -channel distribu on are
the popular types of distribu on of overseas commodi es. Indirect channel partners
include- a) Agents or brokers, ii) Distributors, iii) Franchises, iv) Wholesalers, and v) Retailers.
7.4.4 SHIPPING METHODS
Shipping process is defined as the process of shipping goods to overseas. The choice of
shipping method is func on of:
O
i) Overall Packing size

ii) Total Cubic measurements
iii) Total weight to be shipped
PH
There are three main methods to ship goods to overseas:

a. Full Container Load (FCL):
i. Used when expor ng the full container products.
ii. Predominantly shipped in 20 feet and 40 feet containers.
iii. Containers can be dry cargo, refrigerated, open top container, flatrack
container depending upon the specific applica ons.
iv. Refrigerated cargos are temperature sensi ve cargos for the perishable
products such as meat, fish, vegetables, fruits, flowers, dairy products and
medicines.
v. Open top containers are used for bulky material, which normally requires
overhead cranes for material handling.
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vi. Flat rack containers are special type containers for transporta on of NOTES
irregular (odd shaped), oversized cargos.
b. Less than container Load (LCL)
i. Smaller amount of cargo i.e. not big enough to fill 20 feet container.
ii. May involve the shared shipping along with cargos by other par es. This is known
as consolidated shipping container.
iii. Freight cost in terms of consolidated shipping depends upon the per cubic meter
of cargo or per metric ton in weight. (Whichever is greater)
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c. Breakbulk shipping
i. It is used to ship oversized cargos that will not ship inside the shipping containers.
ii. Any cargo that exceeds the height, weight or length restric ons can be shipped by
breakbulk cargos.
iii. Mainly used INCOTERM is FAS (Free Alongside Ship), large machinery, steel are
O
delivered alongside the ship and placed at the top of the deck by crane.
b.
C
Q.1 Global distribu on is differen ated from local opera ons in terms of:
a. Involves cross border transac on-imports and exports
Includes customs and regulators
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c. May involve mul -modal transporta on
d. All the above
Q.2 The major func ons of logis cs intermediaries do not include:
a. Transac onal func ons
b. Logis cal func on
O
c. Cost monitoring
d. Market research
PH
Q.3 The middleman between transporta on service and shipper is:

a. Not at all required
b. Goods surveyor
c. Export checker
d. Freight forwarder
Q.4 Shipping method is NOT func on of:
a. Weight
b. Measurements
c. Loca on
d. Packaging size
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Chain - Distribu on
NOTES Q.5 Which of the statement is true for Direct Channel?

a. Preferred for high volume products
b. It can operate in franchise model
c. Without any (or absence) of intermediaries
d. None of these
ILLUSTRATION 3
Company A is opera ng with Direct channels, and working for Direct to customer model in
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Mumbai. Company wants to diversify with respect to its product offerings and loca on.
Thus, they decide to cover Thane, Navi Mumbai, Nasik and Pune District along with
exis ng customer base in Mumbai. Suggest the suitable Logis cs Strategies for Company
A. Also comment distribu on challenges with respect to new logis cs strategy of the
company.
O
7.5 LET US SUM UP
The process of distribu on network is ini ated with the customer order or the forecast.
Basically, distribu on involves – a) Physical movement of finished goods, transporta on and
C
warehousing b) Informa on flow management customer order, dispatch, material
movement and inventory control.
TO
Thus the supply chain requirements such as i) Delivery speed and reliability, ii) Product
Quality, iii) Low cost transporta on and logis cs, iv) Convenience of order tracking are
similar or iden cal for domes c and interna onal customers. However, the complexi es of
distribu on network increases considerably when goods cross-na onal boundaries. The
cross-border transac ons involve higher distribu on costs, primarily due to:
i) Increased distance co-ordina on and communica ons
O
ii) Inclusion of mul -mode transports such as Airways, Waterways

iii) Cross-border customs regulatory
iv) Shipping and taxa on documenta ons
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v) Language and cultural differences

vi) Mul ple logis cs operators and outsourcing operators such as UPS, FedEx or DHL
vii) Managing warehousing ac vi es and informa on flows
Global Distribu on supply chain works on seven key principle:
i) Customer: central and responsive to the market demand
ii) Focus on Core competence, and outsource new/non-exper se fields.
iii) Develop a low-risk and profit-sharing rela onship with business partners
iv) Design, implement, evaluate and adjust the workflow, physical goods flow and
cash flow in the supply chain.
v) Adopt informa on technology to op mize the opera on of the supply chain
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vi) Shorten product lead me and delivery cycles NOTES

vii) Lower cost on sourcing, warehousing and transporta on.
The global scale distribu on system can be successful, if the system adheres to two
importance cri cal success factors:
i) Integrated framework managing upstream-process-downstream related
ac vi es
ii) Specialists and knowledge sharing pla orm rela ng to the mul tude of laws,
conven ons and regula ons dealing in the complex web of Interna onal trade
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Global supply chain management delivers four important benefits: a) Cost Reduc on, b)
Quality improvements, c) increased customer sa sfac on and d) Compe ve leverage.
ILLUSTRATION 4
Complete the following comparison for distribu on systems of- a) DELL (assembled in
O
India, but subsystems are imported), b) AMUL (Expor ng milk and milk products from
India)
C
TO
O
PH
169
UNIT 7
Global Supply
Chain - Distribu on
NOTES
PY
O
C
TO
Mode of
Transports
O
PH
Logistics Costs and its major

components
Highlight
Logistics
challenges in
global context
Inventory flows
(Networked/Decentralized/hub -
spoke/Centralized)
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7.6 KEY WORDS NOTES

Supply Chain: is defined as the transforma on of raw materials to finished goods and ge ng
it to the customers. Logis cs details the movement of material in the whole supply chain.
Logis cs decisions: can be classified as: (a) Outbound Logis cs Decisions, (b) Inbound
Logis cs Decisions and (c) Returned Products (Reverse Supply Chain).
Outbound logis c Decisions: Decisions related transport, storage and delivery of goods
going out of process centers (i.e. manufacturing units) to the downstream of supply chain.
Inbound logis c Decisions: Decisions related transport, storage and delivery of goods
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coming into the process centers (i.e. manufacturing units) from the upstream supply chain.
Returned Products (From the downstream to the supply chain): It is also known as reverse
logis cs. It is "the process of moving goods from their typical final des na on for the
purpose of capturing value, or proper disposal.
The ul mate aim of the distribu on supply chain is to provide Place U lity and Time U lity.
O
Place u lity and me u lity denote right product or service needs to be in the right place at
the right me.
Logis cs Intermediaries: The distribu on channel partners as discussed are also known as
C
intermediators. The role these intermediaries can be classified based on three basic tasks- i)
Transac onal func ons, ii) Logis cs Func ons and iii) Facilita ng func ons.
Intermediaries of global distribu ons are: i) Freight forwarders, ii) Non-vessel Opera ng
TO
common carriers (NVOOCs), iii) Export Management companies, iv) Export packers, v)
customs brokers, vi) Goods surveyors, vii) Parts banks, viii) Export trading companies
Modes of Transporta on: Transporta on modes enable the movement or mobility of
physical goods or passengers. Following are modes of transport: i) Land (Road, Rail), ii) Water
iii) Air iv) Pipeline.
The Freight (Physical goods) transporta on mode selec on is dependent on: i)
O
Characteris cs (Weight, Size, Perishability etc.) of Physical goods, ii) Distance to be

transported and iii) Modal availability.
Shipping methods: Shipping process is defined as the process of shipping goods to overseas.
PH
The choice of shipping method is func on of: i) Overall Packing size, ii) Total Cubic
measurements and iii) Total weight to be shipped.
Three methods of shipping: a) Full Container Load (FCL), b) Less than container load (LCL)
and c) Breakbulk shipping .

1) Schlegelmilch, B.B., 2016. Global supply chains and distribu on networks. In Global
Marke ng Strategy (pp. 129-151). Springer, Cham.
2) Global Logis cs and Supply Chain Management John Mangan, Chandra Lalwani, Tim
Butcher, Roya Javadpour, John Wiley & Sons, 2nd Edi on, 2011, ISBN 13: 978-1-119-
99884-6
3) Interna onal Logis cs. Wood, D. F., Barone, A., Murphy, P., & Wardlow, D., Pinnacle 171
UNIT 7
Global Supply
Chain - Distribu on
NOTES Learning, 2nd edi on, ISBN-13: 978-0814406663 (Indian Edi on Available)
4) Interna onal Business Law and Its Environment, Richard Schaffer, Filiberto Agus , LJ
Dhooje, Cengage Learning; 9th edi on, ISBN-13: 978-1285427041
5) Supply Chain and Logis cs Management, DJ Bowersox, David Closs, MB Cooper, 4th
edi on McGraw Hill, ISBN-13: 918-93-5316-258-0.
6) Smirnov, S.A. and Smirnova, O.Y., 2019. Magne c Levita on Cargo Ransport Role in
World Economy. Transporta on Systems and Technology, 5(2), pp.106-117.
For More Informa on and Addi onal Readings
PY
1) Supply Chain Management, Global Produc on and Distribu on, Manufacturing
Strategy By Prof JK Nayak
h ps://www.youtube.com/watch?v=9BsRSqzrXCA&ab_channel=IITRoorkeeJuly2018
2) Global Supply Chain Management - Par cipants and Opera ons | AIMS Lecture
h ps://www.youtube.com/watch?v=DexxVVeqikk&ab_channel=AIMSEduca on%2C
O
UK
3) Naviga ng changes in global distribu on h ps://www.cips.org/supply-
management/analysis/2021/may/naviga ng-changes-in-global-distribu on-/
4) C
Transporta on modes, modal compe on
h ps://transportgeography.org/contents/chapter5/transporta on-modes-modal-
compe on-modal-shi /
TO
1) Inventory holding is essen al in the global distribu on context. Jus fy the statement
with suitable example
2) Differen ate between Global distribu on with local distribu on systems with suitable
O
illustra ons.
3) Just-in- me (JIT) firms, o en need to airli their supplies. Jus fy the various
transporta on models for expor ng perishable items like Milk, Dairy products, Meat,
PH
Flowers and vegetables.

4) Comment with suitable jus fica ons: The intermediaries increase supply chain
complexi es and total distribu on costs
5) Explain Breakbulk shipping with its applica ons.
6) What are Freight forwarders and NVOCCs? Why they are significant in modern
distribu on networks?

Q.1 a
Q.2 d
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Q.3 c NOTES
Q.4 b
Q.5 b
Q.1 d
Q.2 c
Q.3 d
PY
Q.4 c
Q.5 c
O
C
TO
O
PH
173
NOTES UNIT 8
FORECASTING TECHNIQUES
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STRUCTURE
O
8.0 Objec ves
8.1 Introduc on
8.2 Defining Forecas ng
8.3
8.4
C
Forecas ng Methods
Let Us Sum up
TO
8.5 Key Words
8.0 OBJECTIVES
O

• Understand the meaning of forecas ng and its significance in opera ons and
PH
supply chain management.

• Explain the factors of product demand of forecas ng
• Discuss workable forecas ng systems
8.1 INTRODUCTION
Every June-before monsoon you find the stocks on raincoats and Umbrellas in the markets of
your locali es, so as the crackers, lamps (Diyas), Sky-decorators, kites in the fes val mes.
Think, how does your shopkeeper know about the rou ne quan es of the daily needs may
be milk, grains, egg etc. How does the manufacturer decide the quan ty, me of their
produc ons? The market needs every product to be changing, ever changing with respect to
features, part worth and u lity? How to predict such dynamically changing customer’s
psyche, likings and quest for sa sfac on? Forecas ng is the scien fic func on to the
174 opera ons management, to understand the customer demand in terms of quan ty and
OPMC002
Chain Management
me. Through forecas ng, the firm knows how much to produce, it can plan and organize NOTES
opera ons accordingly. And if opera ons have been properly planned and organized, control
is easier and smoother. Keeping these contextual considera ons in mind, in this unit we will
learn about forecas ng techniques and various approaches and elements.
8.1.2 THE CONTEXT

Tata Motors developed the new segment in the Indian 4wheeler market and launched
Micro-SUV- Tata Punch for Indian buyers. Tata Punch will be made available in 4 dis nct
personas with both Manual (MT) and Automa c (AMT) transmission op ons along with
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customiza on packs.
Fig. 8.1: Tata Punch- Upcoming Micro-SUV in Indian Motor Cars Segment
O
C
TO
O
Tata motors plans to build the segment-micro SUV, with mild-off roading features.
Historically, company plans the produc on of cars based on the expected sales, price
brackets and market penetra on of the model in the given segment. Typically, the concept
PH
behind this is Forecas ng.

Tata-Punch launch is something different. The car is expected to launch in 3rd week of
October 2021 (this unit is wri en in the first week of October 2021) But there are some
interes ng facts with respect to the launch of Tata punch and new Micro-SUV segment: i)
Price of the car ( ll the first week of October 2021 is not being disclosed., ii) Planning to set
new benchmark and conduc ng “Punchathon”, to give hands on experience to the people
across the country, iii) Rest other than price technical features such as engine capacity,
pla orm, interiors, body are open to market scru ny almost 15 days before official launch of
product.
In this case, Forecas ng related open issues will be- a) Who will be probable customers and
poten al segment of Tata punch, b) How to es mate monthly, annual sales and thereby
predic ng the supply chain processes? C) Tata needs to plan the complex supplier networks,
175
UNIT 8
Forecas ng Techniques
NOTES as it requires the clear predic on of future trends for every devise model at SKU levels.
It should be noted that, there is no specific and best technique of forecas ng for specific
situa ons. A blending of two or more techniques in integra ons can be used for effec ve
forecas ng. In this unit, we will learn about forecas ng, its defini ons, various techniques,
approaches and applica ons.
8.2 DEFINING FORECASTING

Forecas ng is a process of es ma ng a future event by cas ng forward past data. The past
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data are systema cally combined in a predetermined way to obtain the es mate of the
future. Predic on is a process of es ma ng a future event based on subjec ve
considera ons other than just past data; these subjec ve considera ons need not be
combined in a predetermined way.
8.2.1 REASONS FOR FORECASTING
Reasons for keeping forecast in any field are as follows:
O
1. Purpose: Any ac on devised in the PRESENT to take care of some con ngency accruing
out of a situa on or set of condi ons set in future. These future condi ons offer a
purpose / target to be achieved so as to take advantage of or to minimize the impact of
2.
C
(if the foreseen condi ons are adverse in nature) these future condi ons.
Time: To prepare plan, to organize resources for its implementa on, to implement;
and complete the plan; all these need me as a resource. Some situa ons need very
TO
li le me, some other situa ons need several years of me. Therefore, if future
forecast is available in advance, appropriate ac ons can be planned and implemented
‘in me’.
8.2.2 STEPS IN FORECASTING SYSTEMS

O
Steps in forecas ng systems, assist in the systema c way of ini a ng, designing, and
implemen ng a forecas ng task, through regular upda ng of data. Following figure
illustrates the various steps included in the systema c forecas ng procedures-
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Fig. 8.2: Steps in the Forecas ng System
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8.2.3 FORECASTING TIME HORIZON NOTES

The significance of me-horizon is paramount for the effec ve forecas ng. With respec ve
to me horizon, forecas ng can be classified as- a) Short Range Forecast, b) Intermediate
Range forecast and c) Long Run Forecast, as shown in figure 8.3.
Fig. 8.3: Time horizon based forecast and types
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O
C
TO
a) Short Range Forecast:
• Horizon: Generally, less than 1 season or 1 year
• Applica on: Short Control decisions such as adjustments of produc on,
O
employment levels, purchasing, job scheduling, project assignment and over me

decisions
• Characteris cs: Item level planning
PH
• Method: Trend extrapola on; Graphical Judgment and Exponen al smoothing

b) Intermediate Range Forecast
• Horizon: Generally, 1 season or 2 years
• Applica on: Aggregate Planning such as Capital and Cash budge ng; Sales
Produc on planning and control; Produc on and inventory budge ng
• Characteris cs: Numerical and reliability driven
• Method: Collec ve Opinion; Time series; Regression; Economic index
correla on; Judgement
c) Long Run Forecast
• Horizon: Generally, 5 years or more
• Applica on: Business Planning such as Product planning; Research 177
UNIT 8
NOTES Programming; Capital Planning; Plant loca on and expansion.

• Characteris cs: Broad General and intui on driven
• Method: Economic, marke ng and demographic studies; Judgement
8.2.4 APPLICATIONS OF FORECASTING

In this sec on, we shall list some of the applica ons of forecas ng such as-
1) Sales Forecas ng: Any company in selling goods needs to forecast the demand for
those goods. Manufactures need to know how much to produce. Wholesalers and
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retailers need to know now much to stock. Substan ally understanding demand is
likely to lead to many lost sales, unhappy customers, and perhaps allowing the
compe on to gain the upper hand in the marketplace.
2) Raw material and Spare forecast
3) Forecas ng of Economic trends
O
4) Forecas ng of staffing needs
b.
C
Q.1 Opera ons generated forecasts o en not to do with
a. Inventory requirements
Resource needs
TO
c. Time requirements
d. Sales
Q.2 Which of the following is not true for forecas ng?
a. Forecasts are rarely perfect
b. The underlying casual system will remain same in the future
O
c. Forecast for group of items is accurate than individual item

d. Short range forecasts are less accurate than long range forecasts.
PH
Q.3 Which of the following is not true for long run forecasts?
a. Done at Strategic levels
b. Time horizon is at least 5 years
c. Involves and depends on the judgements
d. Time series and regression methods are used generally.
Q.4 Applica ons of the forecas ng is for-
a. Demand Forecas ng
b. Raw material and resource planning
c. Strategic planning
d. All the Above
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Q.5 Short term forecas ng is used for: NOTES

a. Capital intensive decisions
b. New Product introduc on
c. Daily opera onal planning
d. None of the above
8.3 FORECASTING METHODS

There is no specific way or technique to predict/ define the best specific situa ons. Broadly,
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there are two general approaches to forecas ng: i) Qualita ve approaches, and ii)
Quan ta ve Approaches. The qualita ve approach incorporates factors such as the
decision-makers guesses, hunches, intui on, emo on and personal experiences, and value
system in reaching a forecast. Quan ta ve forecast u lizes the variety of mathema cal
models that use historical data or casual variables to forecast demand.
O
In the prac cal situa ons, the combina on or blending of the two styles is usually most
effec ve. Within quan ta ve approach, different methods can be sub classified under two
broad classes- a) demand based- me series models relying mainly on the historical data, b)
causal models, rela ng the demand to other influencing variables. Different forecas ng
C
methods are classified and demonstrated in following figure 8.4.
Fig. 8.4: Different Forecast Methods
TO
O
PH
8.3.1 QUALITATIVE METHODS OF FORECASTING

1) Jury of Execu ve opinion: Opinions of Higher levels of managers in combina on with
sta s cal models are u lized to group the es mate of demand. 179
UNIT 8
NOTES 2) Sales Force Composite: Each sales person es mates what sales will be in his/her
region. This forecast is then reviewed to ensure they are realis c and then combined at
the district and na onal levels to reach an overall forecast.
3) Consumer Market Survey: U lizing inputs from poten al customers and consumers
regarding future purchase plans. This method is also handy in improving product
design, and planning for new products.
4) Delphi Method: Group process intended to achieve consensus forecasts, specifically
avoiding direct inter-personal rela ons. Primarily, three different par cipants in Delphi
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methods are- i) Decision makers/ expert ii) Staff personal/ coordinator, iii)
Respondents. Procedure followed stepwise is as follows:
a. Posing ques ons to par cipants
b. Wri ng brief predic on
c. Co-coordinator colla ng, and edi ng the predic on inputs together
O
d. Requisi oning on the basis of input responses received.
e. Feedbacks in wri ng
f. Re-upda ng of the feedback and synthesizing the consensus
5) C
Nominal Group Discussions: Process is similar to Delphi technique, only difference is –
experts are allowed to sit in a group, discuss, debate and synthesize the consensus.
TO
8.3.2 QUANTITATIVE METHODS OF FORECASTING
8.3.2.1 TIME SERIES MODELS:
Primary, me series model predicts simple assump ons, future is the func on of past. The
past trends and historical data is u lized to for the forecas ng. Some of the basic tools of
me series models are: i) Simple Average, ii) Moving Average and iii) Exponen al Smoothing.
O
i) Simple Average
• Simplest way of forecas ng
• Depends on the detec ng the central tendency of demand
PH
• One of the disadvantage of this method, extreme outliers and values affect the
central tendency, and affect the results.
For Example,
Consider the wifi connec on company and monthly wifi connec ons are as follows:
January February March April May June
200 268 284 280 216 300

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Forecast, the demand for July month? NOTES
Wifi Company may expect 258 wifi connec ons in July month.
ii) Moving Average
A moving average forecast uses a number of recent actual data values from several of the
most recent periods to generate a forecast.
Simple moving average (SMA) can be calculated as follows:
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Where,
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Di – The demand in the ith period.
n- Chosen number of periods
i- ways from 1 (first period) to n (most recent period)
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For example, Consider Wifi connec on company actual sales values as shown in following
table,
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Month Actual Sales Forecast
January 200
February 268
March 285
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April 280 (200+268+285)/3= 251
May - (268+285+280)/3= 277.66 ≈ 278

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iii) Exponen al Smoothing

Exponen al smoothing is the rigorous weighted moving average involving past data
reference. The pa ern of weights of demand follows the exponen al demand. Demand for
the most recent period is weighted most heavily; the weights placed on successively older
periods decrease exponen ally. The basic exponen al smoothing formula for crea ng a new
or updated forecast (Ft) uses two pieces of informa on: i) actual demand for the most recent
period (Dt-1), ii) Most recent demand forecast (Ft-1).
Exponen al smoothing based demand is forecasted using:
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NOTES Where,
F= Forecast
α = Smoothing coefficient (0≤ α ≤ 1)
D = Demand
t = is the period
t-1 = immediate previous period.
Expanding the exponen al form, the equivalent form of equa on (1) becomes,
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The selec on of smoothing coefficient (α) is vital, following table can assist in choice of
smoothing coefficient.
Type of Demand Smoothing Coefficient (α)
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New Product/ Dynamic or Unstable demand 0.7 to 0.9
Slightly unstable demand 0.4 to 0.6
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Stable demand with longer period of me 0.1 to 0.3
The simplest formula for exponen al smoothing is, New forecast = Old forecast + α (Latest
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Observa on – Old Forecast), where α (alpha) is the smoothing constant.
For Example,
Company develops and launches new product in August 2021. The actual sales of product in
September and October 2021 were 200 and 350 units respec vely. Forecast for month
September was 200 units. Considering the given forecasts and sales values, predict the
demand for November month.
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Step 1: Calcula on of Forecast for immediate previous month

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Step 2: Calcula on of Forecast for the required period
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Time series Decomposi on NOTES

Decomposi on as the name suggest, directs the separa on of series into the basic
components that are likely to have predictable or more recognizable pa ern. Par cularly,
me series decomposi on model is u lized for the seasonal demands with the inclusion of
seasonality. Four basic types of me series are- a) Trend, b) Cyclical, c) Seasonal, and d)
Random.
General forms of the me series decomposi on model are: i) Mul plica ve Model (Forecast
is done by mul plying me series components) and ii) Addi ve Model (Forecast is done by
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adding the me series components). Figure 8.5 shows different models of me series
decomposi ons with respect to seasonality and linearity –non linearity trends.
For Mul plica ve model,
TF= T x S x C x R
And For Addi ve Model,
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TF = TF= T + S + C + R.
Here,
TF = me series forecast
T= trend component C
S= measure of seasonality, either a ra o or an amount to add
C= measure of cyclical adjustment, either a ra o or an amount to add
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R= random component
A seasonal factor is the amount of correc on needed in a me series to adjust for the season
of the year. Basically, the seasonal factor (or index) is the ra o of the amount sold during each
season divided by the average for all seasons.
Fig. 8.5: Different Models of Addi on and Mul plica ve Seasonality
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NOTES 8.3.2.2 CAUSAL QUANTITATIVE MODEL

Regression model is a causal forecas ng technique output that establishes a rela onship
between variables. There is one dependent variable and one or more explanatory variables.
Historical data establishes a func onal rela onship between the two variables. If there is
one explanatory variable it is called simple regression, otherwise, it becomes mul ple
regression. If the model takes the shape of a linear equa on, we call it simple linear
regression or mul ple linear regression models. Normally least square curve fi ng
technique is used to develop the models for fi ng a line to a set of points.
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The linear regression line is of the form Y = a + bX, where Y is the value of the dependent
variable that we are solving for, a is the Y intercept, b is the slope, and X is the independent
variable. (In me series analysis, X is units of me).
The major restric on in using linear regression forecas ng is, as the name implies, that past
data and future projec ons are assumed to fall about a straight line. Although this does limit
its applica on, some mes, if we use a shorter period of me, linear regression analysis can
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s ll be used. For example, there may be short segments of the longer period that are
approximately linear.
The objec ve in linear regression is to obtain an equa on of a straight line that minimizes the
the equa on:

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sum of squared ver cal devia ons of data points from the line. This least square curve has
Y = a + bX
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Y- Dependent variable (Predicted)- Normally drawn on Y axis
X- Explanatory variable - Normally drawn on X axis
a- value of predicted variable (Y) when x = 0 (Y-intercept value of the line)
b- slope of line (Change in Y corresponding to a unit change in X).
The coefficients a and b of the regression line are computed using the following two
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equa ons:
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For Example, A firms sales for a product line during the 12 quarters of the past three years
were as follows.
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Quarter Sales Quarter Sales NOTES

1 600 7 2600
2 1550 8 2900
3 1500 9 3800
4 1500 10 4500
5 2400 11 4000
6 3100 12 4900
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Forecast the sales for the 13, 14, 15 and 16th quarters using a regression equa on.
Solu on: The procedure is quite simple: Lay a straightedge across the data points un l the
line seems to fit well, and draw the line. This is the regression line. The next step is to
determine the intercept a and slope b. The following fig shows a plot of the data and the
straight line we drew through the points.
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C
TO
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The intercept a, where the line cuts the ver cal axis, appears to be about 400. The slope b is
the "rise" divided by the "run" (the change in the height of some por on of the line divided
by the number of units in the horizontal axis). Any two points can be used, but two points
some distance apart give the best accuracy because of the errors in reading values from the
graph. We use values for the 1st and 12th quarters. By reading from the points on the line,
the Y values for quarter 1 and quarter 12 are about 750 and 4,950. Therefore.
b = (4950 - 750) / (12- 1) = 382
The hand-fit regression equa on is therefore
Y = 400 + 382X
The forecasts for quarters 13 to 16 are
185
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NOTES
Quarter Forecast
13 400 + 382(13) = 5366
14 400 + 382(14) = 5748
15 400 + 382(15) = 6130
16 400 + 382(16) = 6512
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These forecasts are based on the line only and do not iden fy or adjust for elements such as
seasonal or cyclical elements.
8.4 LET US SUM UP

In virtually every decision they make, execu ves today consider some kind of forecast. Sound
predic ons of demands and trends are no longer luxury items, but a necessity, if managers
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are to cope with seasonality, sudden changes in demand levels, price-cu ng maneuvers of
the compe on, strikes, and large swings of the economy. Forecas ng can help them deal
with these troubles; but it can help them more, the more they know about the general
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principles of forecas ng, what it can and cannot do for them currently, and which techniques
are suited to their needs of the moment.
To handle the increasing variety and complexity of managerial forecas ng problems, many
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forecas ng techniques have been developed in recent years. Each has its special use, and
care must be taken to select the correct technique for a par cular applica on. Summarizing,
following table may help in choosing the accurate forecas ng method.
Table 8.1 Forecas ng Method Selec on Guide
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CHECK YOUR PROGRESS-I NOTES

Q.1. Which of the following is not a forecas ng technique?
a. Judgemental
b. Time series
c. Time horizon
d. Qualita ve
Q.2 Delphi Method is used for-
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a. Judgemental forecast
b. Time series forecast
c. Time horizon forecast
d. Associa ve forecast
Q.3 Short term regular varia ons related to the calendar or me of day is known as
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a. Trend
b. Seasonality
c. Cycles
d. Random varia ons
Q.4 A linear trend equa on has the form
C
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a. F=a-bt
b. F=a+bt
c. F=2a-bt
d. F=2a+bt
Q.5 If the actual demand for a period is 100 units but forecast demand was 90 units.
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The forecast error is

a. -10
b. +10
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c. -5
d. +5
Q.6 Which of the following is not a causal forecas ng method?
a. Exponen al smoothing
b. Econometric models
c. Delphi
d. Mul ple regression
Q.7 Which of the following is not quan ta ve approach of forecas ng method?
a. Moving average
b. Simple Average
c. Delphi Technique 187
UNIT 8
NOTES d. Exponen al smoothing

Q.8 In exponen al smoothing method, which of the following is true?
a. Dynamic or new product demand cannot be predicted.
b. Exponen al smoothing coefficient (α) is not needed.
c. Exponen al smoothing coefficient (α) is higher for unstable demands.
d. Should not be used for short run forecasts.
8.5 KEY WORDS
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Forecas ng: Forecas ng is a process of es ma ng a future event by cas ng forward
past data. The past data are systema cally combined in a predetermined way to
obtain the es mate of the future.
Predic on: is a process of es ma ng a future event based on subjec ve
considera ons other than just past data; these subjec ve considera ons need not
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be combined in a predetermined way.
With respec ve to me horizon, forecas ng can be classified as- a) Short Range
Forecast, b) Intermediate Range forecast and c) Long Run Forecast
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Applica on of Forecas ng: i) Sales Forecas ng, ii) Raw material and spare forecasts,
iii) Forecas ng of economic trends, iv) Forecas ng staffing needs
Forecas ng methods: There is no specific way or technique to predict/ define the
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best specific situa ons. Broadly, there are two general approaches to forecas ng: i)
Qualita ve approaches, and ii) Quan ta ve Approaches.
Time series Models: me series model predicts simple assump ons; future is the
func on of past. The past trends and historical data is u lized to for the forecas ng.
Some of the basic tools of me series models are: i) Simple Average, ii) Moving
Average and iii) Exponen al Smoothing.
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Time series decomposi on: model is u lized for the seasonal demands with the
inclusion of seasonality. Four basic types of me series are- a) Trend, b) Cyclical, c)
Seasonal, and d) Random.
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Time series decomposi on model: are: i) Mul plica ve Model (Forecast is done by
mul plying me series components) and ii) Addi ve Model (Forecast is done by
adding the me series components).

1) Diebold, F. X. (1998). Elements of forecas ng. South-Western College Pub.
2) Wilson, J. H. (1998). Business forecas ng. Tata McGraw-Hill Educa on.
3) Kea ng, B., & Wilson, J. H. (1987). Forecas ng-prac ces and teachings. The Journal
of Business Forecas ng, 6(4), 10.
4) Gilliland, M., Tashman, L., & Sglavo, U. (2015). Business forecas ng: Prac cal problems
and solu ons. John Wiley & Sons.
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5) Ord, K., Fildes, R. A., & Kourentzes, N. (2017). Principles of business forecas ng. NOTES
For More Informa on and Addi onal Readings
1) Opera ons and Supply Chain Management by Prof. G. Srinivasan , Department of
Management Studies, IIT Madras.
h ps://www.youtube.com/watch?v=k9dhcfIyOFc&ab_channel=nptelhrd
2) Produc on and Opera ons Management by Prof Rajat Agarwal
h ps://www.youtube.com/watch?v=kH6UALawYt8&ab_channel=IITRoorkeeJuly201
8
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Q.1 Explain the u lity of Forecas ng in VUCA (Vola le, Uncertain, Umabigious and
Complex) world.
Q.2 Differen ate between Qualita ve and Quan ta ve methods of forecas ng.
Q.3 India is planning vaccinate its popula on against COVID-19 vaccine. Discuss the factors
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as forecas ng manager you will consider for the es ma on of vaccine demand.

Q. 1 d
Q.2 d
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Q.3 d
Q.4 d
Q.5 c
Q.1 d
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Q.2 a
Q.3 b
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Q.4 b
Q.5 b
Q.6 c
Q.7 d
Q.8 c
189
NOTES
UNIT 9
INVENTORY MANAGEMENT
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STRUCTURE
9.0
9.1
Objec ves
Introduc on
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9.2 Inventory Management
9.3 Special Terms Used in Inventory Management
9.4 Typology
9.5 Distressed Inventory
9.6 Economic Order Quan ty (EOQ)
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9.7 ABC Analysis

9.8 Just In Time (JIT) Technique
9.9 Let Us Sum Up
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9.10 Key Words

9.0 OBJECTIVES
• Learn concepts of inventory management
• Define inventory and explore the possible reasons of inventory management
• Explain challenges of inventory management
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9.1 INTRODUCTION NOTES

Sorry we’re out of stock, your items have been just purchased by someone else, and not
available for you. How o en you hear these comments during your shopping visits? So o en
you also hear, Sir/Madam, here is your required item. Many retailers keep piles of stock and
o en their stock gets obsolete or waste. Why this happens? Is keeping stock is not the good
prac ce? Though, it can’t be denied that on me availability of material is required for
uninterrupted opera ons, but it will result in cost increment if excess stock is maintained in
an cipa on. Therefore, it requires lucid understanding of inventory and its management for
ensuring smooth opera ons with op mum cost. In this chapter, we will learn about the
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inventory management with its conceptual understanding, reasons for keeping stocks, and
some of the analy cal models to manage the inventory levels.
9.2 INVENTORY MANAGEMENT

Inventory or stock can be defined as the goods and materials that a firm or business house
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holds for the purpose of selling, produc on of finished goods or u lizing them to convert
work in progress to finished products to achieve the ul mate goal of earning profit.
Inventory management refers to the management of stocked goods at different loca ons or
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may be at one loca on in such a manner that it can be u lized for further process such as
conversion of stock into finished goods and stocking of finished goods for the purpose of
selling. The concepts of inventory management is now extended from the manufacturing
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industry to the service industry by generalizing the defini on “all work that is or has occurred
prior to the comple ng of the produc on” (Shiny and Zabelle, 2016). In the context of
manufacturing system, Inventory refers to the produc on prior to the sales i.e., raw material,
unfinished products, finished products, and transfer of goods from the manufacturing
system to point of sale. Whereas, In the context of services, inventory refers to the processes
done before the actual services are delivered such as pre-processing of informa on.
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9.2.1 REASONS FOR MAINTAINING INVENTORY

Five basic reasons for keeping or maintaining the inventory.
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1. Time – The me gap in the supply chain can hamper the produc on of finished goods.
Therefore, it is impera ve to maintain a minimum amount of inventory to facilitate the
produc on processes in this lead me. However, inventory has to be maintained in
such a way so as to counter the effect of varia ons in lead me. This problem of lead
me can be solved by ordering that many days in advance.
2. Seasonal Demand – refers to the varia on in the demand of goods depending on the
season. The demand of the goods varies at regular intervals but during the peak
season the unusual rise in demand is termed as the seasonal demand. Therefore, to
meet the unusual rise in demand, it is important to maintain a stock of inventory.
3. Uncertainty – Uncertainty may arise due to sudden shocks .
4. Economies of scale – Ideal condi on of "one unit at a me at a place where a user
needs it, when he needs it" principle tends to incur lots of costs in terms of logis cs. So
191
UNIT 9
Inventory Management
NOTES bulk buying, movement and storing brings in economies of scale, thus inventory.
5. Apprecia on in Value – In some situa ons, some stock gains the required value when
it is kept for some me to allow it reach the desired standard for consump on, or for
produc on. For example; beer in the brewing industry.
9.2.2 IMPORTANCE OF INVENTORY MANAGEMENT

Inventory management is the key element for the success of any business specifically for the
manufacturing sector. When your inventory is properly managed and channelized, the
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chances of failure of your supply chain is very less or minimum. Therefore, it is impera ve for
any organiza on to manage their inventory levels in such a way that the possibili es of being
stock out, overstocks and other problems are minimized.
Inventory in usually kept in warehouses and these warehouses play a bridging role between
the actual sales and stocking of goods. Therefore, Proper warehousing management is as
important as inventory management. Moreover, warehouses facilitate the manufacturers to
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save their inventories from various malprac ces such as the , pilferage and many more.
9.3 SPECIAL TERMS USED IN INVENTORY MANAGEMENT

• C
Stock Keeping Unit (SKU): SKUs are clear, internal iden fica on numbers
assigned to each of the products and their variants. SKUs can be any combina on
of le ers and numbers chosen, just as long as the system is consistent and used
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for all the products in the inventory. An SKU code may also be referred to as
product code, barcode, part number or MPN (Manufacturer's Part Number).
• Stockout means running out of the inventory of an SKU.
• "New old stock" (some mes abbreviated NOS) is a term used in business to refer
to merchandise being offered for sale that was manufactured long ago but that
has never been used. Such merchandise may not be produced anymore, and the
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new old stock may represent the only market source of a par cular item at the
present me.
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9.4 TYPOLOGY
1. Buffer/safety stock refers to level of stock which is maintained to counter the problem
of stock out and cover the lag period.
2. Reorder level is the level at which the order for new inventory or stock has to be placed.
3. Cycle stock (Used in batch processes, it is the available inventory, excluding buffer
stock)
4. De-coupling (Buffer stock held between the machines in a single process which serves
as a buffer for the next one allowing smooth flow of work instead of wai ng the
previous or next machine in the same process)
5. An cipa on stock (Building up extra stock for periods of increased demand – e.g. ice
cream for summer)
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6. Pipeline stock (Goods s ll in transit or in the process of distribu on – have le the NOTES
factory but not arrived at the customer yet).
9.5 DISTRESSED INVENTORY

Distressed stock refers to the expired stock or the stock whose poten al to be a sold at a
specific price has passed or will pass soon. In certain sectors it also means that the stock will
soon be impossible to sell for example medicines cannot be sold a er the expiry date in the
pharmaceu cal industry. Another example can be in the fashion industry, the clothes which
are out of fashion cannot be sold even at bare minimum prices. More examples of distressed
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stock can be the music which is no longer in fashion or the consumer electronics which is
obsolete or has been discon nued by the manufacturer.
In 2001, Cisco wrote off inventory worth US$2.25 billion due to duplicate orders. This is
considered one of the biggest inventory write-offs in business history.
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Q.1 Re-order level is the level of inventory at which_____________
a. Inventory level should always be maintained
b.
c.
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order of new Inventory should be placed
opera ons should be discon nued
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d. All of the above
Q.2 True/False
New Old Stock refers to merchandise being offered for sale that was manufactured long ago
but that has never been used.
9.6 ECONOMIC ORDER QUANTITY (EOQ)

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Economic Order Quan ty is the quan ty that the company should buy to minimize the
inventory costs, holding costs and order costs. EOQ model was developed by Ford W. Harris
in 1913. EOQ model helps in determining the op mal level of inventory in an organiza on.
PH
This EOQ model is best suited for condi ons where the ordering cost, demand and several
other factors don’t change over me. However, EOQ model suffer from certain limita ons
such as EOQ model assumes that the demand for the company’s product remain same over
me. The formula of EOQ model is given below
Where,
Q = Economic Order Quan ty Units
D = Demand in Units (Annual)
S = Ordering Cost (Per Purchase Order)
193
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NOTES H = Holding Costs (Per unit per year)
Further things can also be calculated:

Number of orders per year = D/Q
Annual Ordering cost = number of orders per year * ordering cost = (D/Q)*S
Annual Holding cost = average inventory * holding cost per unit per year = QH/2
Annual Purchasing cost = C*D (C is cost per unit)
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Total annual Inventory cost = purchasing cost+ ordering cost + holding cost
Fig. 9.1: EOQ Model Cost Curves
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C
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Example 1
Demand for the Child Cycle at Best Buy is 500 units per month. Best Buy incurs a fixed order
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placement, transporta on, and receiving cost of Rs. 4,000 each me an order is placed. Each
cycle costs Rs. 500 and the retailer has a holding cost of 20 percent. Evaluate the number of
child cycle that the store manager should order in each replenishment lot?
Solu on:
D = 500*12 = 6000 units

S = Rs. 4000
H = 500*20/100 = 100
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Q = 693 Units NOTES

Example 2: ABC Ltd. uses EOQ logic to determine the order quan ty for its various
components and is planning its orders. The Annual consump on is 80,000 units, Cost to
place one order is Rs. 1,200, Cost per unit is Rs. 50 and carrying cost is 6% of Unit cost. Find
EOQ, No. of order per year, Ordering Cost and Carrying Cost and Total Cost of Inventory.
Solu on:
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D = 80,000 Units
S = Rs. 1200
H = Rs 50 * 6/100 = Rs 3
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Q = 8000 Units
Number of orders per year = D/Q = 80,000/8000=10
Ordering cost= (D/Q) * S = 10* 1200=12000
Carrying cost = QH/2=8000* 3=24000
Total cost of inventory = purchasing cost + ordering cost + holding cost
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= 50*80,000 + 12000 + 24000= 4036000
9.7 ABC ANALYSIS

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ABC analysis is an inventory management technique which determines the value of stock
based on the importance to the business. ABC technique ranks the inventory on demand,
cost and profitability and inventory managers group the inventory into classes. Therefore, it
helps the business to understand which products are most important and which products
are least important. The most important SKU are termed as Class A items. The next important
SKUs are termed as Class B and the least important items are termed as Class C items.
The formula of ABC analysis is given below
Annual Usage Value per Product = Annual Number of items sold * Cost per Item
9.7.1 ADVANTAGES OF ABC ANALYSIS

1. Expanded Inventory Op miza on: The inves ga on recognizes the items that are
sought a er. An organiza on would then be able to u lize its valuable distribu on 195
UNIT 9
NOTES center space to sufficiently stock those products and keep up with lower stock levels
for Class B or C things.
2. Further developed Inventory Forecas ng: Monitoring and gathering informa on
about items that have high client request can build the precision of deals es ma ng.
Chiefs can u lize this data to set stock levels and costs to expand generally income for
the organiza on.
3. Be er Pricing: A flood in deals for a par cular thing suggests request is expanding and
a cost increment might be sensible, which further develops benefit.
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4. Educated Supplier Nego a ons: Since organiza ons acquire 70% to 80% of their
income on Class A things, it's a good idea to haggle be er terms with providers for
those things. On the off chance that the provider won't consent to bring down costs,
have a go at arranging post-buy administra ons, ini al installment decreases, free
delivery or other expense investment funds.
5. Key Resource Alloca on: ABC examina on is an approach to ceaselessly assess asset
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assignment to guarantee that Class A things line up with client interest. At the point
when request brings down, rename the thing to u lize staff, existence for the new
Class A items.
6.
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Be er Customer Service: Service levels rely upon many variables, similar to amount
sold, thing cost and overall revenues. When you decide the most produc ve things,
offer higher assistance levels for those things.
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7. Be er Product Life Cycle Management: Insights into where an item is a major part of
its life cycle (dispatch, development, development or decrease) are basic for
an cipa ng request and loading stock levels properly.
8. Power Over High-Cost Items: Class A stock is intently a ached to an organiza on's
prosperity. Focus on observing interest and keeping up with sound stock levels, so
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there's in every case enough of the vital items available.

9. Reasonable Stock Turnover Rate: Maintain the stock turnover rate at fi ng levels
through deliberate stock control and informa on catch.
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10. Diminished Storage Expenses: By conveying the right extent of stock dependent on A,
B or C classes, you can decrease the stock conveying costs that accompany holding
abundance stock.
11. Worked on Supply Chain Management: Use an ABC inves ga on of stock informa on
to decide whether it's an ideal opportunity to unite providers or shi to a solitary
source to decrease conveying costs and improve on ac vi es.
9.7.2 DISADVANTAGES OF ABC ANALYSIS

1. Boundary Instability: ABC inves ga on frequently brings about administrators
relega ng up to half of things to another class each quarter or year. Regularly,
organiza ons don't know about the progressions un l there is an issue with request,
and the need to re-evaluate may occupy significant me and risk consumer loyalty.
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2. Restricted Pa ern Considera on: The standard ABC strategy won't represent factors NOTES
like new item presenta ons or item irregularity. For instance, another item might have
low deals volume since it has no purchasing history. ABC inves ga on has a fairly sta c
point of view on request and will create stock shortcomings at whatever point request
is moving or indis nct.
3. Uninformed Extrac on: ABC class data may not give every one of the factual
informa on or detail expected to make educated, vital administra on choices.
4. High Resource Consump on: Giving lopsided load to insignificant issues is known as
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bikeshedding, which can be a disastrous outcome of ABC examina on. Since ABC
examina on is not difficult to get a handle on, staff might infuse their sen ments or
solicita on their own varia ons making ABC inves ga on an asset devouring
interac on instead of an efficient instrument.
5. Worth Blindness: ABC examina on credits item significance dependent on income or
recurrence of u liza on, however a few things may not hold to this worldview. For
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instance, a retail show thing may seldom sell however may draw in a great deal of
clients (who will purchase different items) in light of its oddity. In avia on, a par cular
part for a plane may not be u lized regularly and have li le market esteem, however it
6.
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very well might be a basic wellbeing capacity.
Framework Incompa bility: ABC stock examina on clashes with customary cos ng
frameworks and is out of consistence with sound accoun ng guidelines (GAAP)
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necessi es. In the event that you should run numerous cos ng frameworks, work
costs will ascend close by failure.
7. Undersupply or Oversupply Issues: One ABC inves ga on inconvenience is it sees
dollar-based quali es, instead of the volume that cycles through stock, so there is a
danger of running out of Class B or C things. The inverse can happen, as well. You might
have overabundance low-class things that amass in stock in the event that you reorder
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them without ordinary audits.

8. Misfortune Risk: Just on the grounds that B and C things don't have as high a worth as
Class A items doesn't mean they no worth. One of the constraints of ABC examina on
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is that overabundance stocks are consistently in risk of outdated nature or harm.

Consequently, the stock that rou nely goes uncounted or unmonitored might be
dependent upon burglary.
9. Compulsory Standardiza on: The ABC technique is just effec ve if each thing is
dependent upon the normaliza on of materials, which incorporates how they are
named, put away, and reliably appraised and observed.

Q.1 The formula of EOQ model is given below
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UNIT 9
NOTES If D is Demand, then S must be

a. ordering cost per order
b. carrying cost per unit per year
c. purchasing cost per unit per year
d. total cost of inventory
Q.2 True/False
EOQ is Economic Opportunity Quan ty
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9.8 JUST IN TIME (JIT) TECHNIQUE
JIT stock administra on guarantees that stock shows up as it is required for crea on or to
sa sfy shopper need, however no sooner. The objec ve is to wipe out waste and increment
the proficiency of your tasks. Since the principal objec ve is regularly quality and not the
most reduced value, JIT requires long haul contracts with dependable providers.
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JIT is the thing that's known as a lean administra on measure. In JIT, all pieces of any crea on
or administra on framework, especially individuals, are interconnected. They advise one
another and are commonly subject to producing frui ul results. This current prac ce's
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star ng point comes from Kaizen, a Japanese expression signifying "improve." Origina ng in
Japan, the business theory looks to ceaselessly further develop ac vi es and include all
representa ves, from mechanical produc on system laborers to the CEO. Like JIT, the
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objec ve is to lessen squander and work on quality.
Fig. 9.2: Just In Time Process
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9.8.1 JUST IN TIME PROCESS STEPS NOTES

1. Design: The JIT process begins with a review of the essen al manufacturing building
blocks: product design, process design, personnel and manufacturing planning. Then
plans are put into place to eliminate disrup on, minimize waste and build a flexible
system.
2. Manage: A Total Quality Management (TQM) review ensures there is con nuous
improvement throughout the process. A management review defines workers’ roles
and responsibili es, defines and measures sta s cal quality control, stabilizes
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schedules, and checks out load and capacity schedules and levels.
3. Pull: Educate the team on produc on and withdrawal methods using signaling
methods like Kanban. Review lot size policies and reduce lot sizes.
4. Establish: Vendor rela onships are vital to the success of JIT. Review vendor lists. Se le
on preferred suppliers, nego ate contracts, discuss lead mes, delivery expecta ons
and usage metrics and measures. Learn how to make the most of them in the supply
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chain.
5. Fine-tune: Determine inventory needs, policies, controls and reduce inventory
movements.
6.
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Build: Inform your team about the skills and capabili es it needs to complete its work
and conduct team educa on and empowerment sessions to educate them.
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7. Refine: Reduce the number of parts and steps in produc on by refining, standardizing
and reviewing the en re process.
8. Review: Define and implement quality measures and metrics and conduct a root cause
analysis of any problems. Emphasize improvements and track trends to improve every
aspect of JIT.
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9.8.2 ADVANTAGES OF JUST IN TIME (JIT)

JIT stock administra on helps an organiza on's ROI by bringing down stock conveying costs,
expanding produc vity and diminishing waste.
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1. Squander Reduc on: The JIT stock administra on model takes out overordering and
overabundance, everything being equal.
2. Decrease Obsolete Inventory and Dead Stock: Low stock levels altogether diminish
the danger of stock going unsold and si ng in the distribu on center old.
3. Diminish Defec ve Product Loss: Defec ve stock things are simpler to dis nguish and
fix when crea on levels are low, which decreases scrap costs.
4. Further developed Efficiency: JIT wipes out the costs that accompany addi onal crude
materials, superfluous stock and item stockpiling.
5. Raise Inventory Turnover Ra os: Greater proficiency brings higher stock turnover.
6. Negligible Inventory Obsolescence: The high stock turnover rate holds things back
from si ng in your office for a really long me and becoming outdated.
199
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NOTES 7. Limit Raw Materials on Hand: Receiving conveyances in the li lest poten al
amounts—once in a while on various occasions each day—basically kills crude
material inventories.
8. Neighborhood Sourcing: When providers are situated close to an organiza on's
crea on office, the abbreviated distances add to opportune conveyances. On
schedule, solid conveyance of products lessens the requirement for wellbeing stock.
9. More Prominent Produc vity: JIT upgrades usefulness by diminishing the me and
assets associated with assembling measures.
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10. Quicker Product Turnaround: Manufacturers can all the more rapidly produce items.
11. More Limited Produc on Runs: With JIT, makers can convey new items all the more
rapidly and without any problem.
12. Work on Change Orders: Having less crude material stock to draw down before item
changes makes it simpler to carry out designing change requests to exis ng items.
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13. Smoother Produc on Flow: JIT can wipe out bo lenecks and deferrals across the
whole crea on measure.
14. More Limited Produc on Cycles: JIT abbreviates fabrica ng me, which diminishes
15.
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lead mes for clients.
Lessen Product Defects: Produc on slip-ups can be spo ed quicker and adjusted,
which brings about less faulty items.
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16. More Func onal Produc on Cells: Employees walk singular parts through the
preparing steps in a work cell, which decreases scrap levels. Cell models likewise wipe
out work-in-measure lines that development at more specific worksta ons.
17. Compacted Opera ons: Arranging crea on work cells close to one another limits the
measure of work-in-measure stock moving between cells.
18. Lower Costs: Receiving merchandise dependent upon the situa on decreases stock
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expenses.
19. Lessen Working Capital: The low stock levels that accompany JIT limit the measure of
working capital required.
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20. Lower Holding Costs: Inventory holding costs (like those for warehousing) are
insignificant on the grounds that less space is u lized.
21. Lower Cash Investment: Companies put less money in stock on the grounds that JIT
doesn't need having a great deal of stock available.
22. Decrease Large Raw Material Spends: In JIT, organiza ons request crude material
when required, so cash is accessible for different u liza ons that could be more
important to the organiza on.
23. Diminish Labor Costs: Labor costs are lower since the quan ty of individual hours
needed to sa sfy orders is normally less than full- me crea on.
24. Further Develop Quality: An adaptable labor force can zero in on making quality items
with lower deformity rates. Be er results increment consumer loyalty and diminish
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the money expense for crea on. NOTES

25. Diminish Work-in-Progress Goods: Fewer things con nuing in the shop floor permits
groups to zero in on building excellent items.
26. Less Damage: Since insignificant stock is close by, capacity related mishaps decrease.
27. Affirmed Quality: Suppliers ensure quality ahead of me. Along these lines,
conveyances go directly to crea on regions as opposed to being held in ge ng to
an cipate inves ga on.
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9.8.3 DISADVANTAGES OF JIT TECHNIQUE
1. JIT crea on can be excep onally delicate to any sort of mistake. Since absolute
minimum stock levels are kept up with, there is no space for any sort of mistake.
2. JIT crea on can not adjust well to unexpected expansion in volume of interest from the
market, since the stock levels are kept up with at much lower level.
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3. In the nick of me producing is a way of thinking which is accomplished just when every
one of the gatherings associated with the en re inventory network will work in
extraordinary couple and coordina on. JIT might bomb at some point if any of the
providers will neglect to sa sfy their commitments and react to the necessi es in a
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convenient way.
4. JIT centers around lean stock; consequently there isn't a lot support in stock levels.
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Under any condi on, in case there is any sort of disappointment that occurs in the
store network, that can prompt unexpected personal me underway promp ng
tremendous misfortunes for the associa on.
9.9 LET US SUM UP

For any business it is very important that the demand doesn’t go unturned as it results in loss
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of customers, revenue, and good will of the organiza on. One of the most effec ve methods
to meet the uncertain demand is adop ng right inventory model. A right inventory
mechanism ensures unerupted flow of products from produc on to customers. The
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inventory can be maintained at different levels in different forms depending on the need of
the business i.e., at raw material procurement level, during the produc on, a er the
produc on etc in par ally finished or finished form. The inventory management also comes
at a cost. The inventory management shall be such, that it minimizes the total lead me and
cost. A perfect inventory management result in excellent business management with
sa sfied customers. There are customised inventory solu ons available independently or
integrated with various ERP systems
9.10 KEY WORDS

Inventory: Blocked money/investments in material, processing goods and equipment.
a. Goldra defined Inventory is defined as the all the money that system has
invested in purchasing and genera ng the things that it intends to sell. (Refer- The
Goal, E Goldra , Theory of Constraints) 201
UNIT 9
NOTES b. In simpler terms, inventory can be defined as the stock of any item or resource
used in an organiza on.
c. Opera ng inventory generally includes raw material, work-in-process (WIP),
finished goods (stock), in transit inventory etc.
Order Cycle : The me period between two successive orders is called as order cycle.
Lead me: The length of me between placing an order and receipt of items is called lead
me.
Safety stock: It is also called buffer stock or minimum stock. It is the stock or inventory
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needed to account for delays in materials supply and to account for sudden increase in
demand due to rush orders.
Re-order level (ROL): It is the point at which the replenishment ac on is ini ated. When the
stock level reached R.O.L., the order is placed for the item.
Re-Order Quan ty (ROQ): This is the quan ty of material (items) to be ordered at the re-
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order level. Normally this quan ty equals the economic order quan ty.
EOQ (Economic Order Quan ty): quan ty to be ordered to ensure uninterrupted supply
with minimiza on of total inventory cost.
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Silver, E., D. Pyke, and R. Peterson: Inventory Management and Produc on Planning and
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Scheduling, 3d ed., Wiley, New York, 1998.
Sherbrooke, C. C.: Op mal Inventory Modeling of Systems: Mul -Echelon Techniques, Wiley,
New York, 1992.
Hillier, F. S., M. S. Hillier, and G. J. Lieberman: Introduc on to Management Science, A
Modeling and Case Studies Approach with Spreadsheets, Irwin/McGraw-Hill, Burr Ridge, IL,
2000, chaps. 11–12
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Book Download Link: Best Prac ce Inventory Management PDF ( Free | 218 Pages )
(pdfdrive.com)
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Q.1 Which of the following is not an inventory?
a. Machines
b. Raw materials
c. Finished goods
d. Consumable tools
Q.2 The following classes of costs are usually involved in inventory decisions except
a. Cost of ordering
b. Carrying costs
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c. Cost of shortages NOTES

d. Machining costs
Q.3 The cost of insurances and taxes are included in:
a. Cost of ordering
b. Set up costs
c. Inventory carrying costs
d. Costs of shortages
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Q.4 Buffer stock is the level of stock:
a. Half of the stock
b. Minimum stock below which stock should not fall
c. At which the ordering process should start
d. Maximum stock in inventory
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Q.5 The minimum stock level is calculated as
a. Reorder level – (Normal consump on x Normal delivery me)
b. Reorder level + (Normal consump on x Normal delivery me)
c.
d.
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(Reorder level + Normal consump on) x Normal delivery me
(Reorder level + Normal consump on) / Normal delivery me
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Q.6 Which of the following is true for Inventory control?
a. Economic order quan ty has minimum total cost per order
b. Inventory carrying costs increases with quan ty per order
c. Ordering cost decreases with lot size
d. All of the above
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Q.7 The me period between placing an order its receipt in stock is known as
a. Lead me
b. Carrying me
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c. Shortage me
d. Over me
Q.8 Reordering level is calculated as :
a. Maximum consump on rate x Maximum re-order period
b. Minimum consump on rate x Minimum re-order period
c. Maximum consump on rate x Minimum re-order period
d. Minimum consump on rate x Maximum re-order period
Q.9 Average stock level can be calculated as
a. Minimum stock level + ½ of Re-order level
b. Maximum stock level + ½ of Re-order level
c. Minimum stock level + 1/3 of Re-order level 203
UNIT 9
NOTES d. Maximum stock level + 1/3 of Re-order level

Q.10 The Economic Order Quan ty (EOQ) is calculated as
a. (2D*S/h)^1/2
b. (DS*/h)^1/2
c. (D*S/2h)^1/2
d. (D*S/3h)^1/2
Where, D=Annual demand (units), S=Cost per order, h=Annual carrying cost per unit
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Subjec ve Ques on
Q.11 Demand for a product is 1000 units per month. It incurs a cost of Rs. 8,000 each me an
order is placed. Each product costs Rs. 1000 with the holding cost of 20 percent.
Evaluate the number of products that should be ordered in each replenishment lot?
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Q.1 b
Q.2 True C
Q.1 a
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Q.2 False
9.14 ANSWERS TO SELF ASSESSMENT QUESTIONS

Q.1 a
Q.2 d
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Q.3 c
Q.4 b
Q.5 a
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Q.6 d
Q.7 a
Q.8 a
Q.9 a
Q.10 a
Q.11
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D = 1000*12 = 12000 units NOTES

S = Rs. 8000
H = 1000*20/100 = 200
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205
NOTES
UNIT 10
THE SALES AND OPERATIONS PLANNING
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STRUCTURE
10.0 Objec ves
10.1 Introduc on
10.2 Planning Process
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10.3 Strategies for Adjus ng Capaci es
10.4 Strategies for Managing Demand
10.5 Quan ta ve Techniques for Aggregate Planning
10.6 Aggregate Planning for Services
10.7 Revenue Management
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10.8 Let Us Sum up

10.9 Key Words
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10.12 Self-Assessment Ques ons And Answers
10.0 OBJECTIVES
• Describe the sales and opera ons planning process.
• Appreciate the interface of marke ng, finance, and opera ons in S&OP planning
• Describe the monthly S&OP process and the importance of reconciling
differences
• U lize various tools and techniques to adjust capacity and manage demand
• Evaluate a demand scenario and select an appropriate S&OP strategy
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• Describe hierarchical planning and the process of determining available-to- NOTES

promise
• Determine overbooking, single orders, and fare class strategies for revenue
management in services
10.1 INTRODUCTION
Sales and opera ons planning (S&OP) is an aggregate planning process that determines the
resource capacity a firm will need to meet its demand over an intermediate me horizon 6 to
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12 months in the future. Within this me frame, it is usually not feasible to increase capacity
by building new facili es or purchasing new equipment; however, it is feasible to hire or lay
off workers, increase or reduce the workweek, add an extra shi , subcontract out work, use
over me, or build up and deplete inventory levels.
You may also understand it as a process for coordina ng supply and demand. We use the
term aggregate because the plans are developed for product lines or product families, rather
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than individual products. An aggregate opera ons plan might specify how many bicycles are
to be produced but would not iden fy them by color, size, res, or type of brakes. Resource
capacity is also expressed in aggregate terms, typically as labor or machine hours. Labor
they may be given only for cri cal processes.

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hours would not be specified by type of labor, nor machine hours by type of machine. And
There are two objec ves to sales and opera ons planning;
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1. To develop an economic strategy for mee ng demand and
2. To establish a company comprehensive game plan for alloca ng resources.
The first objec ve refers to the long-standing ba le between the sales and opera ons
func ons within a firm. Personnel who are evaluated solely on sales volume have the
tendency to make unrealis c sales commitments (either in terms of quan ty or ming) that
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opera ons is expected to meet, some mes at an exorbitant price. Opera ons personnel
who are evaluated on keeping manufacturing costs down may refuse to accept orders that
require addi onal financial resources (such as over me wage rates) or hard-to-meet
comple on dates. The job of opera ons planning is to match forecasted demand with
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available capacity. If capacity is inadequate, it can usually be expanded, but at a cost. The
company needs to determine if the extra cost is worth the increased revenue from the sale,
and if the sale is consistent with the strategy of the firm. Thus, the aggregate plan should not
be determined by manufacturing personnel alone; rather, it should be agreed on by top
management from all the func onal areas of the firm—opera ons, marke ng, and finance.
Because this is such an important decision, companies engage in a structured, collabora ve
decision-making process called sales and opera ons planning (S&OP).figure below outlines
the S&OP process.
As shown in figure 10.1, the sales and opera ons plan should reflect company policy (such as
avoiding layoffs, limi ng inventory levels, and maintaining a specified customer service level)
and strategic objec ves (such as capturing a certain share of the market or achieving
targeted levels of quality or profit). Other inputs include financial constraints, demand
207
UNIT 10
The Sales
and Opera ons Planning
NOTES forecasts (from sales), and capacity constraints (from opera ons).
Given these inputs, the sales func on develops a monthly sales plan. A forecas ng model is
run to create preliminary demand figures, then adjusted based on input from key customers
and sales personnel in the field. The forecast is further adjusted for planned promo ons,
product introduc ons, and special offers. Finally, a customer service level is set that specifies
the percent of customer demand that should be sa sfied.
Fig. 10.1: Inputs and Outputs of Sales and Opera ons Planning
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The sales plan is then shared with the opera ons func on that must convert sales to
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produc on requirements as economically as possible. Opera ons develops a schedule of

produc on per month by product family that includes the number of workers and other
resources needed, and whether the produc on plan requires over me or subcontrac ng.
The produc on plan also shows an cipated inventory levels, backlog (work not yet
completed), backorders (work performed later for customers willing to wait for their order),
and lost sales (customers whose orders could not be completed or were not accepted).
The sales and opera ons planning process does not stop here. The two plans must be
reconciled. Typically this involves crea ng an annual plan and upda ng it with monthly
mee ngs that culminate in execu ve approval of the final plan. The process is diagrammed
in Figure 10.2 below.
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Fig. 10.2 : Steps involved in Sales and Opera ons Planning NOTES
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Because of the various factors and viewpoints considered, the sales and opera ons plan is
o en referred to as the company's game plan for the coming year, and devia ons from
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the plan are carefully monitored. Monthly S&OP mee ng reconcile differences in supply,
demand, and new product plans.
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10.2 PLANNING PROCESS
This is a five step process
• Step 1: Gather and Manage Data
• Step 2: Develop Demand Plan
• Step 3: Supply Planning
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• Step 4: Reconcilia on of Plans | Pre-S&OP Mee ng

• Step 5: Approve and Release | Execu ve S&OP Mee ng
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209
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The Sales
NOTES Fig. 10.3: Planning Process
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Q.1 The objec ves of sales and opera ons planning include_________
a. developing economic strategy for mee ng demand
b. establishing company comprehensive game plan for alloca ng of resources
c. both a and b
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d. none of these
Q.2 which of the following is not related with opera ons plan
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a. backlogs
b. backorders
c. lost sales
d. promo ons
Q.3 True/False
The sales and opera ons plan should reflect company policy and strategic objec ves.
10.3 STRATEGIES FOR ADJUSTING CAPACITIES

If demand for a company's products or services is stable over me, then the resources
necessary to meet demand are acquired and maintained over the me horizon of the plan,
and minor varia ons in demand are handled with over me or under me. Aggregate
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planning becomes more of a challenge when demand fluctuates over the planning horizon.
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For example, seasonal demand pa erns can be met by: NOTES

1. Producing at a constant rate and using inventory to absorb fluctua ons in demand
(level produc on)
2. Hiring and firing workers to match demand (chase demand)
3. Maintaining resources for high-demand levels
4. Increasing or decreasing working hours (over me and under me)
5. Subcontrac ng work to other firms
6. Using part- me workers
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7. Providing the service or product at a later me period (backordering)
So when one of these alterna ves is selected, a company is said to have a pure strategy for
mee ng demand. When two or more are selected, a company has a mixed strategy.
Following strategies are used for adjus ng Capacity
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10.3.1 LEVEL PRODUCTION
The level produc on strategy, shown in Figure 10.4 (a) below, sets produc on at a fixed rate
(usually to meet average demand) and uses inventory to absorb varia ons in demand.
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During periods of low demand, overproduc on is stored as inventory, to be depleted in
periods of high demand. The cost of this strategy is the cost of holding inventory, including
the cost of obsolete or perishable items that may have to be discarded. So Level produc on
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means producing at a constant rate and using inventory as needed to meet demand.
Fig. 10. 4: Level Produc on and Chase Demand
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10.3.2 CHASE DEMAND

The chase demand strategy, shown in Figure 10.4 (b), matches the produc on plan to the
demand pa ern and absorbs varia ons in demand by hiring and firing workers. During
periods of low demand, produc on is cut back and workers are laid off. During periods of
high demand, produc on is increased and addi onal workers are hired. The cost of this
strategy is the cost of hiring and firing workers. This approach would not work for industries
in which worker skills are scarce or compe on for labor is intense, but it can be quite cost-
effec ve during periods of high unemployment or for industries with low-skilled workers. 211
UNIT 10
The Sales
NOTES Hence in Chase demand strategy we change workforce levels so that produc on matches
demand.
10.3.3 PEAK DEMAND

Maintaining resources for peak demand levels ensures high levels of customer service but
can be very costly in terms of the investment in extra workers and machines that remain idle
during low-demand periods. This strategy is used when superior customer service is
important (as for Nordstrom's department store) or when customers are willing to pay extra
for the availability of cri cal staff or equipment. Professional services trying to generate
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more demand may keep staff levels high, defense contractors may be paid to keep extra
capacity “available,” child-care facili es may elect to maintain staff levels for con nuity when
a endance is low, and full-service hospitals may invest in specialized equipment that is rarely
used but is cri cal for the care of a small number of pa ents. Thus in Peak demand, staffing
are used for high levels of customer service.
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10.3.4 OVERTIME AND UNDERTIME
Over me and under me are common strategies when demand fluctua ons are not
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extreme. A competent staff is maintained, hiring and firing costs are avoided, and demand is
met temporarily without inves ng in permanent resources. Disadvantages include the
premium paid for over me work, a red and poten ally less efficient workforce, and the
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possibility that over me alone may be insufficient to meet peak demand periods.
10.3.5 SUBCONTRACTING
Subcontrac ng or outsourcing is a feasible alterna ve if a supplier can reliably meet quality
and me requirements. This is a common solu on for component parts when demand
exceeds expecta ons for the final product. The outsourcing decision requires maintaining
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strong es with possible subcontractors and first-hand knowledge of their work.

Disadvantages include reduced profits, loss of control over produc on, long lead mes, and
the poten al that the subcontractor may become a future compe tor.
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10.3.6 PART-TIME WORKERS

Using part- me workers is feasible for unskilled jobs or in areas with large temporary labor
pools (such as students, homemakers, or re rees). Part- me workers are less costly than full-
me workers. Part- me workers have been the mainstay of retail, fast-food, and other
services for some me and are becoming more accepted in manufacturing and government
jobs.
10.4 STRATEGIES FOR MANAGING DEMAND

Aggregate planning must also involve proac ve demand management. Strategies for
managing demand include:
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10.4.1 RESERVATION OF CAPACITY NOTES

One method used to manage demand is to moderate and shi the excess demand out of a
busy period to any future period without completely losing it. Consider, for instance, a mul -
speciality healthcare unit in which pa ents arrive for consulta on. If there is no reserva on
of capacity (in this case, the doctor’s me for consulta on), some pa ents may go
una ended and the hospital might lose the opportunity of servicing the demand. Therefore,
an appointment system helps to capture the demand by scheduling the service on another
day when there is sufficient capacity. Capacity reserva on is a very popular method in
service systems.
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10.4.2 INFLUENCING DEMAND
Another method to manage demand is to influence the demand during a par cular period
through some mechanisms and induce customers to voluntarily shi the demand count
structures, and limited period product promo ons.
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There are several examples similar to this, which induce customers to shi the demand from
peak to non-peak periods. This includes special off-season discounts for several seasonal
products such as summer resorts, raincoats, winter wear, and weekend tariff structures for
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airline ckets. Similarly, several years ago, white goods manufacturers such as Videocon and
BPL used to offer a “wait–buy–save” scheme. In this scheme, customers willing to wait for a
period of about five weeks would get a refrigerator with a substan al discount on the
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product price and it would also be home delivered according to the promised schedule. It is
clear that strategies for influencing demand stem largely from a variety of ini a ves in the
marke ng func on in an organiza on. Therefore, close coordina on and planning by
opera ons planning and marke ng func ons is important to implement this set of
strategies.
Although both these alterna ves appear to be very similar there are some differences. In the
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case of reserva on of capacity, there is an explicit approach to book capacity in the future.
On the other hand, promo onal schemes merely encourage the customers to use the
capacity. There is s ll an element of uncertainty in the extent to which capacity is likely to be
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used during the promo onal (non-peak) period. Therefore, an accurate capacity planning
exercise could be done only in the case of the former. This explains why the appointment
system is a useful tool for managing capacity in service systems efficiently.
10.5 QUANTITATIVE TECHNIQUES FOR AGGREGATE PLANNING

One aggregate planning strategy is not always preferable to another. The most effec ve
strategy depends on the demand distribu on, compe ve posi on, and cost structure of a
firm or product line. Several quan ta ve techniques are available to help with the aggregate
planning decision. In the sec ons that follow, we discuss pure and mixed strategies, linear
programming, the transporta on method, and other quan ta ve techniques.
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UNIT 10
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NOTES 10.5.1 PURE STRATEGIES

Solving aggregate planning problems involves formula ng strategies for mee ng demand,
construc ng produc on plans from those strategies, determining the cost and feasibility of
each plan, and selec ng the lowest cost plan from among the feasible alterna ves. The
effec veness of the aggregate planning process is directly related to management's
understanding of the cost variables involved and the reasonableness of the scenarios tested.
Following example compares the cost of two pure strategies: level produc on and chase
demand.
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Example 1
The Good and Rich Candy Company makes a variety of candies in three factories worldwide.
Its line of chocolate candies exhibits a highly seasonal demand pa ern, with peaks during the
winter months (for the holiday season and Valen ne's Day) and valleys during the summer
months (when chocolate tends to melt and customers are watching their weight). Given the
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following costs and quarterly sales forecasts, determine whether (a) level produc on or (b)
chase demand would more economically meet the demand for chocolate candies:
Quarter
Spring
Summer
C Sales Forecast (lbs)
80,000
50,000
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Fall 120,000
Winter 150,000
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SOLUTION
a. For the level produc on strategy, we first need to calculate average quarterly demand.
This becomes our planned produc on for each quarter. Since each worker can produce 1000
pounds a quarter, 100 workers will be needed each quarter to meet the produc on
requirements of 100,000 pounds. Produc on in excess of demand is stored in inventory,
where it remains un l it is used to meet demand in a later period. Demand in excess of
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produc on is met by using inventory from the previous quarter. The produc on plan and NOTES
resul ng inventory costs are as follows:
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b. For the chase demand strategy, produc on each quarter matches demand. To
accomplish this, workers are hired at a cost of $100 each and fired at a cost of $500
each. Since each worker can produce 1000 pounds per quarter, we divide the quarterly
sales forecast by 1000 to determine the required workforce size each quarter. We
C
begin with 100 workers and hire and fire as needed. The produc on plan and resul ng
hiring and firing costs are given here
TO
O
PH
Comparing the cost of level produc on with chase demand, we find that chase demand is the
best strategy for the Good and Rich line of candies. The problem can also be solved using
Excel.
10.5.2 MIXED STRATEGIES

Under mixed strategy, both inventory and workforce levels are allowed to change during the
planning horizon. Thus, it is a combina on of the "chase" and "level" strategies. This will be a
good strategy if the costs of maintaining inventory and changing workforce level are
rela vely high.
For aggregate plans that are prepared on a product family basis, where the plan is essen ally
215
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NOTES the summa on of the plans for individual product lines, mixed-integer programming may
prove to be useful. Mixed-integer programming can provide a method for determining the
number of units to be produced in each product family.
10.5.3 LINEAR PROGRAMMING

Linear programming (LP) can be used in aggregate planning if the costs of various resources
are assumed to be linear func ons of the amount of those resources used by the aggregate
plan. LP can be used to plan produc on over some horizon for an actual product or for some
pseudo product.
PY
Linear programming is an op miza on technique that allows the user to find a maximum
profit or revenue or a minimum cost based on the availability of limited resources and certain
limita ons known as constraints. A special type of linear programming known as the
Transporta on Model can be used to obtain aggregate plans that would allow balanced
capacity and demand and the minimiza on of costs. However, few real-world aggregate
O
planning decisions are compa ble with the linear assump ons of linear programming.
C
SOLUTION USING LINEAR PROGRAMMING
We can also formulate a linear programming model for Example 1 that will sa sfy demand
for Good and Rich chocolate candies at minimum cost. Solve the model with Excel Solver.
TO
Model Formula on:
O
PH
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NOTES
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• Objec ve func on: The objec ve func on seeks to minimize the cost of hiring
workers, firing workers, holding inventory, and produc on. Cost values are provided in
the problem statement for Example 1. The number of workers hired and fired each
quarter and the amount of inventory held are variables whose values are determined
by solving the linear programming (LP) problem.
O
• Demand constraints: The first set of constraints ensures that demand is met each
quarter. Demand can be met from produc on in the current period and inventory from
the previous period. Units produced in excess of demand remain in inventory at the
It−1 + Pt = Dt + It
C
end of the period. In general form, the demand equa ons are constructed as
There are four demand constraints, one for each quarter. Since there is no beginning
TO
inventory, I0 = 0, and it can be dropped from the first demand constraint.
• Produc on constraints: The four produc on constraints convert the workforce size to
the number of units that can be produced. Each worker can produce 1000 units a
quarter, so the produc on each quarter is 1000 mes the number of workers
employed, or
O
1000Wt = Pt
• Workforce constraints: The workforce constraints limit the workforce size in each
period to the previous period's workforce plus the number of workers hired in the
PH
current period minus the number of workers fired.

Wt−1 + Ht − Ft = Wt
No ce the first workforce constraint shows a beginning workforce size of 100
• Addi onal variables and constraints: Addi onal variables, such as over me and
subcontrac ng, can be added to the LP formula on as needed. The cost of those
variables is then added to the objec ve func on. Addi onal constraints such as
limi ng the amount of over me or subcontrac ng can also be added in the Solver
model.
10.5.4 TRANSPORTATION METHOD

Transporta on Models is a special case of linear programming that deals with the issue of
shipping commodi es from mul ple sources to mul ple des na ons. The objec ve is to
217
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NOTES determine the shipping schedule that minimizes the total shipping cost while sa sfying
supply and demand constraints.
Transporta on models are a special form of the linear program. They address a common
business problem of where to get supplies when there is a choice of suppliers all with a
limited capacity. The basic idea is very simple.
To solve transporta on problems, you need to know the capacity requirements of the
sources and the des na ons and an es ma on of the costs of transport between the
sources and des na ons. Once this data is available, a number of techniques can be applied
PY
to find a low-cost solu on.

Q.1 under_________ both inventory and workforce levels are allowed to change during
the planning horizon.
a. mixed strategy
O
b. level produc on strategy
c. peak demand strategy
d. C
none of these
Q.2 ____________sets produc on at a fixed rate and uses inventory to absorb varia on in
demand.
TO
a. level produc on strategy
b. chase demand strategy
c. peak demand strategy
d. none of these
Q.3 True/False
O
Chase demand strategy sets produc on at a fixed rate.
10.6 AGGREGATE PLANNING FOR SERVICES

PH
The aggregate planning process is different for services in the following ways:
• Most services cannot be inventoried. It is impossible to store an airline seat, hotel
room, or hair appointment for use later when demand may be higher. When the goods
that accompany a service can be inventoried, they typically have a very short life.
Newspapers are good for only a day; flowers, at most a week; and cooked hamburgers,
only 10 minutes.
• Demand for services is difficult to predict. Demand varia ons occur frequently and
are o en severe. The exponen al distribu on is commonly used to simulate the
erra c demand for services—high-demand peaks over short periods of me with long
periods of low demand in between. Customer service levels established by
management express the percentage of demand that must be met and, some mes,
how quickly demand must be met. This is an important input to aggregate planning for
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services. NOTES
So what are the characteris cs of aggregate planning for services, we need to look.
• Capacity is also difficult to predict. The variety of services offered and the
individualized nature of services make capacity difficult to predict. The “capacity” of a
bank teller depends on the number and type of transac ons requested by the
customer. Units of capacity can also vary. Should a hospital define capacity in terms of
number of beds, number of pa ents, size of the nursing or medical staff, or number of
pa ent hours?
PY
• Service capacity must be provided at the appropriate place and me. Many services
have branches or outlets widely dispersed over a geographic region. Determining the
range of services and staff levels at each loca on is part of aggregate planning.
• Labor is usually the most constraining resource for services. This is an advantage in
aggregate planning because labor is very flexible. Varia ons in demand can be handled
by hiring temporary workers, using part- me workers, or using over me. Summer
O
recrea on programs and theme parks hire teenagers out of school for the summer.
FedEx staffs its peak hours of midnight to 2 A.M. with area college students.
McDonald's, Walmart, and other retail establishments woo senior ci zens as reliable
C
part- me workers. Workers can also be cross-trained to perform a variety of jobs and
can be called upon as needed. A common example is the sales clerk who also stocks
inventory.
TO
There are several services that have unique aggregate planning problems. Doctors, lawyers,
and other professionals have emergency or priority calls for their service that must be
meshed with regular appointments. Hotels and airlines rou nely overbook their capacity in
an cipa on of customers who do not show up. Airlines design complex pricing structures for
different routes and classes of customers. Planners incorporate these decisions in a process
called revenue management.
O
10.7 REVENUE MANAGEMENT

It is also called yield management. It seeks to maximize profit or yield from me-sensi ve
PH
products and services. It is used in industries with inflexible and expensive capacity,
perishable products or services, segmented markets, advanced sales, and uncertain
demand. The types of problems addressed by revenue management include overbooking,
par oning demand into fare classes, and single order quan es. Revenue management
maximizes the yield of me-sensi ve products and services.
10.7.1 OVERBOOKING
This is a commonly use technique in revenue management for maximizing yield.Services
with reserva on systems can lose money when customers fail to show up, or cancel
reserva ons at the last minute. It is not unusual for no-shows to account for 10% to 30% of an
aircra 's available seats. Thus, hotels, airlines, and restaurants rou nely overbook their
capacity. Managers who underes mate the number of no-shows must then compensate a
219
UNIT 10
The Sales
NOTES customer who has been “bumped” by providing the service free of charge at another me or
place.
10.7.2 FARE CLASSES

Hotels, airlines, stadiums, and theaters typically offer different cket prices for certain
classes of seats or customers. Planners must determine the number of seats or rooms to
allocate to these different fare classes. Too many high-priced seats can lose customers, while
too few high-priced seats can lower profits. Sabre es mates that airlines make more profits
from the 3% of customers who are “business travelers” than the rest of customers who have
PY
discounted fares.The useful life for products such as newspapers, flowers, baked goods, and
seasonal items is so short that in many instances only one order for produc on can take
place. Determining the size of that single order can be difficult.
The op mum probability is where the cost of underes ma ng demand is equal to or just
greater than the cost of overes ma ng demand. The deriva on of the formula is shown
O
below, followed by an example.
C
TO
O
Given cost informa on and a distribu on of demand or no-shows from past data, we can
PH
now match our planning policy with the op mum probability of overes ma ng demand
Solved Example
Lauren Lacy, manager of the Lucky Traveler Inn in Las Vegas, is red of customers who make
reserva ons and then don't show up. Rooms rent for $100 a night and cost $25 to maintain
per day. Overflow customers can be sent to the Motel 7 for $70 a night. Lauren's records of
no-shows over the past six months are given below. Should the Lucky Traveler start
overbooking? If so, how many rooms should be overbooked?
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No-Shows Probability NOTES

0 0.15
1 0.25
2 0.30
3 0.30
SOLUTION
PY
Adding a cumula ve probability column of no-shows being less than expected gives us:
The op mal probability of no-shows falls between 0.40 and 0.70. Since we are concerned
with no-shows less
10.8 LET US SUM UP

Many companies adopt sales and opera ons planning (S&OP) to strike a balance between
O
the demand and supply so that the costs of the resources is minimised. This solves the
problems related to customer sa sfac on, inventories stock, mely shipments, finger
poin ng at others, cash-flow glitches, demand and supply etc. through execu on of business
C
plan. The sales and opera ons planning give a be er grip of the business to the top
management. Aggregate planning is cri cal for companies with seasonal demand pa erns
and for services. Varia ons in demand can be met by adjus ng capacity or managing
TO
demand. There are several mathema cal techniques for aggregate planning, including linear
programming, linear decision rule, search decision rule, and management coefficient model.
Produc on and capacity plans are developed at several levels of detail. The process of
deriving more detailed produc on and capacity plans from the aggregate plan is called dis-
aggrega on. Collabora ve planning sets produc on plans in concert with suppliers and
trading partners. Available-to-promise o en involves collabora on along a supply chain.
O
Aggregate planning for services is somewhat different from that for manufacturing because
the varia on in demand is usually more severe and occurs over shorter me frames.
Fortunately, the constraining resource in most services is labor, which is quite flexible.
PH
Services use part- me workers, over me, and under me. Revenue management is a special
aggregate planning tool for industries with me-sensi ve products and segmented
customer classes.
Aggregate planning is an opera onal ac vity cri cal to the organiza on as it looks to balance
long-term strategic planning with short term produc on success. Aggregate planning will
ensure that organiza on can plan for workforce level, inventory level and produc on rate in
line with its strategic goal and objec ve.
The sales and opera ons planning processes comprises of a number of mee ngs, ul mately
ending with high level mee ngs where intermediate-term decisions are finalized. An
agreement between various departments on the future ac ons is done so that the balance
between demand and supply can be met. The aim is to put the business plans to actual
opera onal plans. It is difficult to es mate how much of the individual product would sell but
221
UNIT 10
The Sales
NOTES the larger groups of products sale can be evaluated. The term aggregate refers to the group
of products. With the help of this aggregate plan, the weekly and daily individual products
demand is handled.
10.9 KEY WORDS

Aggregate planning: the process of determining the quan ty and ming of produc on over
an intermediate me frame.
Backlog: accumulated customer orders to be completed at a later date.
PY
Backordering: ordering an item that is temporarily out-of-stock.
Chase demand: an aggregate planning strategy that schedules produc on to match demand
and absorbs varia ons in demand by adjus ng the size of the workforce.
collabora ve planning: sharing informa on and synchronizing produc on plans across the
supply chain.
O
Disaggrega on: the process of breaking down the aggregate plan into more detailed plans.
Level produc on: an aggregate planning strategy that produces units at a constant rate and
uses inventory to absorb varia onsin demand.
C
Linear decision: rule (LDR) a mathema cal technique for aggregate planning.
Lost sales forfeited sales for out-of-stock items
Management coefficients model: A regression technique for aggregate planning.
TO
Mixed strategy: varying two or more capacity factors to determine a feasible produc on
plan.
Peak demand staffing: for high levels of customer service
Pure strategy: varying only one capacity factor in aggregate planning.
Sales & opera ons planning (S&OP): a process for coordina ng supply and demand
O
Revenue management: the process of determining the percentage of seats or rooms to be

allocated to different fare classes.
PH

1. Associa on for Opera ons Management (APICS), ‘Introduc on to Sales and
Opera ons Planning”,2007. www.apics.org. Accessed on 24.12.15
2. APICS and Pro vi “Sales and Opera ons Planning : Aligning Business Goals with
Supply Chain Tac cs”, research paper,2008. h p://www.adexa.com/PDF/4905-RA-
sales-opera ons-planning.pdf. Accessed on 26.12.2015.
3. Buffa , Elwood S and Sarin, Rakesh K “ Modern Produc on /Opera on Management”,
John Wiley and Sons(Asia) Pte Ltd,1989, Singapore.
4. Calderon, Filipe, “Implemen ng S&OP Process in a Mul na onal Automo ve
Supplier”, Industrial Engineering research paper, 2011.
5. Ferreira John, “The Integrated Planning Process, Tale of a CPG Turnaround, Successful
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Sales & Opera ons Planning: Lessons Learned”, (2006), Forum, Second Quarter. NOTES
6. Grimson J Andrew and Pyke F David ,"Sales and opera ons planning: an exploratory
study and framework", The Interna onal Journal of Logis cs Management, (2007)Vol.
18 Issue: 3.
7. Krajewski, Lee; Ritzman, Larry and Malhotra, Manoj, “Opera ons Management –
Process and Value Chains”, Eighth Edi on, PHI Learning Private Ltd, 2008, New Delhi-
110001.
8. Lapide, Larry, “Sales & opera ons planning part I: the process”, Journal of Business
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Forecas ng. (2004)
9. Ling R.C. and Palma er G, “Demand Management: Integra ng Marke ng,
Manufacturing and Management”, APICS Conference Proceedings, 1987, Falls Church,
VA.
10. Ling, Dick and Coldrick Andy “Breakthrough Sales & Opera ons Panning: How we
developed the process” 2009,
O
h ps://www.researchgate.net/publica on/228919533_Breakthrough_Sales__Oper
a ons_Planning_How_we_d eveloped_the_process. Accessed on 25.04.15.
11. Majumdar Maha and Fontanella John “The Secrets to S&OP Success”,Supply Chain
C
Management Review ,(2006). h p://www.scmr.com/ar cle .Accessed on 2.01.2016.
12. Millikken, Alan N, “Sales &Opera ons Planning -Two Decades of Learning at BASF”,
TO
Regional IV Mee ng , 2007 New Orleans, LA
13. Moon Mark A, Mentzer John “Improving Sales force Forecas ng”, The Journal of
Business Forecas ng Methods and Systems (1999).
14. Reekie, Stuart “ How to Extend SAP to Create a Global, Integrated S&OP Process,
Integrated Supply Chain, Air Products, 2005, Steelwedge Inc.
15. Schorr, John, “The Proven Path”, Strategic Management,Business Excellence,2008.1
O
h ps://www.oliverwight-americas.com/system/files/public/resources/proven-path-
john-schorr.pdf. Accessed on 29.12.15 Page571
16. Thomé, A.M.T., Scavarda, L.F., Fernandez, N.S., Scavarda, A.J “ Sales and opera ons
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planning : A research synthesis” , Interna onal Journal of Produc on

Economics,138,1-13,Published by Elsevier B.V.,(2011). Journal homepage:
www.elsevier.com/locate/ijpe. Accessed on 11.08.2015
17. Thomé, A.M.T., Scavarda, L.F., Fernandez, N.S., Scavarda, A.J. “Sales and opera ons
planning and the firm performance”, Interna onal Journal of Produc vity and
Performance Management, (2012), Vol 61 No 4.
18. Vollmann T.E., Berry ,W.L., Whyback , D.C.Jacobs, F.R., “ Manufacturing Planning &
Control Systems for Supply Chain”, McGraw Hill, 2005,Irwin, New York ,USA.
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NOTES 10.11 CHECK YOUR PROGRESS-POSSIBLE ANSWERS

Q.1 c
Q.2 d
Q.3 True
Q.1 a
PY
Q.2 a
Q.3 False
10.12 SELF ASSESSMENT QUESTIONS AND ANSWERS

Q.1 What is aggregate planning and what alterna ves are generally feasible when
developing the aggregate produc on plans?
O
Ans: Aggregate planning determines the resource capacity a firm will need to meet its
demand over an intermediate me horizon—6 to 12 months in the future. The term
aggregate is used because the plans are developed for product lines or product
C
families, rather than individual products. Within this me frame it is usually not
feasible to increase capacity by building new facili es or purchasing new equipment;
however, it is feasible to hire or lay off workers, increase or deduce the workweek, add
TO
an extra shi , subcontract out work, use over me, or build up and deplete inventory
levels.
Q.2 Briefly discuss the two primary objec ves of aggregate planning.
Ans: There are two objec ves to aggregate planning: (1) to establish a companywide game
plan for alloca ng resources, and (2) to develop an economic strategy for mee ng
O
demand. The first objec ve refers to the long-standing ba le between the firm’s
marke ng and produc on func ons. Marke ng will some mes make unrealis c sales
projec ons that produc on is expected to meet. Produc on employees who are
evaluated on keeping manufacturing costs down may be reluctant to accept orders
PH
that incur higher processing costs. The job of aggregate planning is to match
forecasted demand with available capacity. If capacity is inadequate it can some mes
be expanded, but at a cost. An analysis of whether the extra revenue is worth the extra
cost must be performed.
Q.3 What are the outputs of aggregate planning?
Ans: The outputs of aggregate planning include produc on per month or quarter by
product or service family, the size of the workforce, and the amount of regular,
over me, and subcontracted produc on required. Inventory and backlog levels are
projected, along with the number of units or dollars to be backordered or lost. For
companies that outsource most of their produc on, the aggregate plan also includes
where the produc on will take place. For services, the aggregate plan outlines how
much work can be completed (or new work accepted) in a specified me period.
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CASE LET NOTES

Disney's Magic Numbers
Sales and opera ons planning at Disney World is all about people—how many people visit
the parks and what they do while there. The Disney property in Florida includes 4 parks, 20
hotels, 27,500 rooms, 160 miles of roads, and 56,000 employees. Forecas ng a endance
and guest behavior helps plan for more than 1 billion customer interac ons per year, and the
purchase of 9 million hamburgers, 50 million Cokes, and tons of “tangible memories.”
Planning begins with a five-year forecast of a endance based on a combina on of
PY
econometric models, experience-based models, extensive research, and a magic mirror. The
econometric model examines the interna onal economies of seven key countries, their GDP
growth, foreign exchange rate, and consumer confidence. The experience-based model
looks at demographics, planned product introduc ons, capacity expansions, and marke ng
strategies. Extensive research is conducted by 35 analysts and 70 field personnel year round.
Over 1 million surveys are administered to key household segments, current guests, cast
O
members, and travel industry personnel. The magic mirror is the patented part of the
forecas ng procedure that, in part, accounts for the mere 5% error in the five-year
a endance forecast and the 0% error in annual forecasts.
C
Disney's five-year plan is converted to an annual opera ng plan (AOP) for each park. Demand
is highly seasonal and varies by month and day of the week. Economic condi ons affect
annual plans, as do history and holidays, school calendars, societal behavior, and sales
TO
promo ons. The AOP is updated monthly with informa on from airline specials, hotel
bookings, recent forecast accuracies, website monitoring, and compe ve influences. A
daily forecast of a endance is made by tweaking the AOP and adjus ng for monthly
varia ons, weather forecasts, and the previous day's crowds. A endance drives all other
decisions
Disney is a master at forecas ng aggregate demand for its theme parks, as well as adjus ng
O
capacity in me increments as small as 15 minutes.

Disney is a master at adjus ng its capacity and managing its demand. Capacity can be
increased by lengthening park hours, opening more rides or shows, adding roving food and
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beverage carts, and deploying more “cast members.” To maintain flexibility, cast members
are scheduled in 15-minute intervals at various jobs throughout the park. Demand is
managed by limi ng access to the park, shi ing crowds to street ac vi es, taking
reserva ons for a rac ons, and no fying patrons when room becomes available. Opera ng
standards strictly regulate when these ac ons are taken. Obsessive collec on of data
ensures the response is mely.
The collec on of data will be easier and more mely with a new vaca on management
system to be implemented by Disney, called My Magic+. The system will transform how
visitors navigate the park, and hopefully provide them with a be er customer experience. It
will also provide Disney with more consumer behavior informa on on which to make
decisions. Each guest will be issued a rubber bracelet (the Magic Band) equipped with RFID
tags. The Magic Bands will contain cket informa on, credit card informa on, contact
225
UNIT 10
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NOTES informa on, and other personal informa on, as allowed, as well as fast passes and updated
informa on on the guest's interac ons during their day at the park. Turns les throughout
the park will be replaced by bracelet readers, stores will no longer take cash, and, if ac vated,
a child's name, birthday, and other informa on can be relayed to park staff so that
interac on with costumed characters can really be magical. Lines would be eliminated with
visitors “pinged” when it's their me for a par cular ride or a rac on, or when they pass by
an a rac on on their preferred list that has empty seats.
Solved Example 1: A manufacturer of electrical switch gears is in the process of preparing the
aggregate produc on plan for the next year. Let us assume that a good measure of capacity is
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the number of working hours available per month. Table 15.4 presents details pertaining to
the forecast demand for the “equivalent” model of switch gears and the number of working
days available during the planning horizon.
The following relevant details are also available:
1. The manufacturer currently works on a single-shi basis and employs 125 workers.
O
2 One unit of switchgear requires 100 hours of produc on me.
3. It is expected that at the beginning of the planning horizon, there will be a finished
goods inventory of 200 switchgears.
4.
C
Inventory carrying costs are `1,000 per switchgear per month and unit
shortage/backlogging costs are 200 per cent of unit carrying cost. Devise a level
produc on strategy with constant workforce and constant working hours and
TO
compute the costof the plan.
Table Fore cast Demand for Models of Switchgears and the Number of Working Days
Month Demands (in Units) Number of Working Days
O
April 250 23
May 220 22
June 300 21
PH
July 290 24
August 260 22
September 180 22
October 200 19
November 220 23
December 250 21
January 200 23
February 240 20
March 270 24
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Solu on NOTES
Compu ng the Period-by-period Demand–supply Mismatch
The first step in AOP is to compute the demand– supply mismatch during the planning
horizon. Using the informa on available this is computed and presented in Figure 15.3. Since
the firm works for eight hours a day employing 125 people, the capacity available is 1,000
hours per day. Similarly, since each switchgear requires 100 hours, we can compute the
number of hours required during a period. Figure 15.3 shows the relevant calcula ons.
Level Produc on Strategy
PY
In this strategy, we use inventory-related alterna ves only. During periods of low demand we
accumulate inventory and during periods of high demand we consume the inventory built
during lean periods. During each period we have an opening inventory. A er compu ng the
excess/shor all of inventory, we compute the closing inventory, which becomes the opening
inventory for the next period. We compute the cost of the plan by compu ng the costs of
holding inventory and backlogging/shortages. Figure 15.4 shows the relevant calcula ons
O
and results.
We see from the computa ons that the opening inventory of 200 units has enabled the
switchgear manufacturer to avoid shortages/backlogging un l January. However, during
C
February and March shortage/backlogging costs are incurred. The total cost of the plan is
`830,000. The costs related to backlogging/shortage are hard to quan fy in prac ce.
Therefore, enough care should be exercised in interpre ng the usefulness of this strategy
TO
O
PH
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UNIT 10
The Sales
NOTES
PY
O
Solved Example 2: Consider Example 1. Assume the switchgear manufacturer has no
opening stock of inventory and chooses to devise a chase produc on strategy. The following
2.
C
addi onal informa on is available:
1. Over me costs are ` 40 per hour and under me costs are `20 per hour.
Temporary workers can be hired on a monthly basis. The relevant cost of this op on
TO
including firing them at the end of the month amounts to `7,500 per worker.
Evaluate the following op ons for chase strategy and offer your sugges ons to the
switchgear manufacturer.
(a) U lizing over me and under me alterna ves
(b) Using hiring and laying-off alterna ves for capacity adjustment
O
Solu on
(a) Chase strategy using OT/UT
In this strategy, the demand–supply mismatch is addressed through use of OT during periods
PH
of high demand and UT during periods of low demand. For example, consider the
computa ons in Example 15.1. During April, the demand for capacity is 25,000 hours and the
available capacity is only 23,000 hours. Therefore, 2,000 hours of OT will be used at the rate
of `40 per hour. Similarly, during the month of September, the demand is only 18,000 hours
whereas the supply is 22,000 hours. Therefore, 4,000 hours of UT will be allowed during
September at the rate of `20 per hour.
Since chase strategy does not result in carrying over inventory, there will be no inventory
carrying costs. By compu ng the extent of OT/UT required and the costs associated with this
in every period one can arrive at the cost of the plan. Figure 15.5 shows all the relevant
calcula ons. The total cost of the plan is Rs. 1,440,000.
(b) Chase strategy using hire–lay-off
In the hire–lay-off alterna ve we compute the number of workers to be hired/laid off by
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examining the demand–supply mismatch. When the demand greater than the supply, we NOTES
resort to hiring. For the given example, consider the month of April. The demand is in excess
of supply by 2,000 hours. If we hire one worker, he/she will contribute 184 hours as there are
23 working days and each day we have eight working hours. Therefore, the number of
workers to be hired during April is 2000/184 = 10.86 = 11 workers.
In the case of a lean period, we merely incur UT costs as we do not fire the enis ng
permanent workers. For example, in the month of january we incur UT cost of Rs. 60,000
(3,000 × 20).
PY
Since the number of workers to be hired/laid off can only be integers, we round off the
number to be hired to the next higher integer. In this process we also incur some idle me by
retaining a li le more capacity than needed. The cost of the plan takes all these into
considera on. Figure 15.6 shows all the relevant details for the computa on. The total cost
of this plan is Rs. 1,572,420.
Clearly, the cost of the hire–lay-off plan is higher than the cost of the OT/UT plan. Moreover,
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there are other costs that are hard to quan fy in the former case. For instance, frequent
hiring/lay-off of workers may not be feasible in several sectors of industry involving skilled
sets of workers. The training costs and lost produc vity during the learning phase would
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have been grossly under-es mated. Moreover, such prac ces could result in low
morale/mo va on among the workers, leading to produc vity and quality problems. These
costs are difficult to quan fy. Therefore, it is a good prac ce to deploy the hire–lay-off plan
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only as a last resort.
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The Sales
NOTES
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UNIT 11 NOTES
MATERIAL REQUIREMENT PLANNING
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STRUCTURE
11.0 Objec ves
11.1 Introduc on
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11.2 How Material Requirement Planning (MRP) work?
11.3 Resource Planning Process
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11.4 Components of MRP
11.5 Short comings of MRP
11.6 Capacity Requirements Planning (CRP)
11.7 Distribu on Requirement Planning (DRP)
11.8 Manufacturing Resource Planning (MPR II)
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11.9 Enterprise Resource Planning (ERP)

11.10 Let Us Sum up
11.11 Key Words
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11.0 OBJECTIVES
• Explain how enterprise resource planning (ERP) systems can foster be er
resource planning.
• Explain how the concept of dependent demand is fundamental to resource
planning.
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Material Requirement Planning
NOTES • Apply MRP principles to the provision of services and distribu on inventories
• Discuss the differences between independent and dependent demand systems
• Describe the inputs and outputs to an MRP system, and execute the MRP process
• Describe a master produc on schedule (MPS) and compute available-to-promise
quan es
• Apply the logic of a material requirements planning (MRP) system to iden fy
produc on and purchase orders needed for dependent demand items.
• Determine resource capacity and load percent, and perform load leveling on
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capacitated resources
• Discuss the issues, advantages and drawbacks of the MRP
• Describe basic CRP, DRP, MRP II, ERP systems and the scope of their
implementa ons
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11.1 INTRODUCTION
Resources are very precious for any organiza on. Cau ous usage of available resources is
very important because resources are always scarce. Resources could be of many types but
importance.
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in Opera ons, we would focus on manufacturing resources where material is of prime
Material requirements planning (MRP) is a computer-based inventory management system

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designed to improve produc vity for businesses. Companies use material requirements-
planning systems to es mate quan es of raw materials and schedule their deliveries.
11.2 HOW MATERIAL REQUIREMENTS PLANNING (MRP) WORKS?

MRP is designed to answer following three ques ons:
1. What is needed?
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2. How much is needed?

3. When is it needed?
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MRP works backward from a produc on plan for finished goods, which is converted into a list
of requirements for the subassemblies, component parts, and raw materials needed to
produce the final product within the established schedule.
In other words, it's basically a system for trying to figure out the materials and items needed
to manufacture a given product. MRP helps manufacturers get a grasp of inventory
requirements while balancing both supply and demand.
By parsing raw data—like bills of lading and shelf life of stored materials—this technology
provides meaningful informa on to managers about their need for labor and supplies, which
can help companies improve their produc on efficiency.
Before we start discussing the concepts of MRP, you should understand the en re process
flow diagram in Produc on Planning and Control. The flowchart shown below will help you
to understand various stages of Produc on Planning and Control. It starts with Aggregate
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Produc on Plan where planning horizon is for medium term. If it is found feasible, we move NOTES
to Master produc on Schedule to find out exactly how many end products if each variety is
required and then we move to third stage of MRP. The fourth and the last stage is Capacity
Requirement Planning (CRP) before we actually start the manufacturing process. CRP
iden fies and fixes machines and man power requirement that will be used during the
manufacturing process to carry out various kinds of transforma ons.
Material requirement planning (MRP) is a key element in managing resources in a
manufacturing environment. It is a computerized inventory control and produc on planning
system. MRP gets input from (Master Produc on Schedule) MPS. MRP translates a master
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schedule of final products into me-phased net requirements for subassemblies,
assemblies, and parts. MRP systems were developed to help companies manage dependent
demand inventory and schedule replenishment orders. MRP systems have proven to be
beneficial to many companies.
Now the ques on arises when to use MRP?
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MRP works efficiently under following condi ons:
• While dealing with Dependent demand items
• Discrete demand items
•
•
Complex products
Job shop produc on
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• Assemble-to-order environments
The MRP process can be broken down into four basic steps:
11.2.1 Es ma ng demand and the materials required to meet it. The ini al step of the MRP
process is determining customer demand and the requirements to meet it. U lizing
the bill of materials—which is simply a list of raw materials, assemblies, and
components needed to manufacture an end product—MRP breaks down demand
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into specific raw materials and components.

11.2.2 Check demand against inventory and allocate resources. This step involves checking
demand against what you already have in inventory. The MRP then distributes
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resources accordingly. In other words, the MRP allocates inventory into the exact
areas it is needed.
11.2.3 Produc on scheduling. The next step in the process is simply to calculate the amount
of me and labor required to complete manufacturing. A deadline is also provided.
11.2.4 Monitor the process. The final step of the process is simply to monitor it for any issues.
The MRP can automa cally alert managers for any delays and even suggest
con ngency plans in order to meet build deadlines.
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NOTES Fig. 11.1: Resource Planning for Manufacturing
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Here we would introduce the concept of MRP II which is considered as an advanced version
of MRP. It can handle a larger chunk of data and has be er integra on capability with other
manufacturing applica ons. In the 1980s, organiza ons began to incorporate several
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modules in the MRP systems. This extended version is known as manufacturing resources
planning (MRP II).
MRP II is not a proprietary so ware system and can thus take many forms. It is almost
PH
impossible to visualize an MRP II system that does not use a computer, but an MRP II system
can be based on either purchased–licensed or in-house so ware.
The MRP II system integrates various modules together so that they use common data and
freely exchange informa on, in a model of how a manufacturing enterprise should and can
operate.
Material requirements planning (MRP) and manufacturing resource planning (MRPII) are
predecessors of enterprise resource planning (ERP), a business informa on integra on
system. The development of these manufacturing coordina on and integra on methods
and tools made today's ERP systems possible. Both MRP and MRPII are s ll widely used,
independently and as modules of more comprehensive ERP systems, but the original vision
of integrated informa on systems as we know them today began with the development of
MRP and MRPII in manufacturing.
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Material requirements planning (MRP) and manufacturing resource planning (MRPII) are NOTES
both incremental informa on integra on business process strategies that are implemented
using hardware and modular so ware applica ons linked to a central database that stores
and delivers business data and informa on.
MRP is concerned primarily with manufacturing materials while MRPII is concerned with the
coordina on of the en re manufacturing produc on, including materials, finance, and
human resources. The goal of MRPII is to provide consistent data to all members in the
manufacturing process as the product moves through the produc on line.
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Paper-based informa on systems and non-integrated computer systems that provide paper
or disk outputs result in many informa on errors, including missing data, redundant data,
numerical errors that result from being incorrectly keyed into the system, incorrect
calcula ons based on numerical errors, and bad decisions based on incorrect or old data. In
addi on, some data is unreliable in non-integrated systems because the same data is
categorized differently in the individual databases used by different func onal areas.
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MRPII systems begin with MRP. MRP allows for the input of sales forecasts from sales and
marke ng, or of actual sales demand in the form of customers’ orders. These demands
determine the raw materials demand. MRP and MRP II systems draw on a master produc on
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schedule, the breakdown of specific plans for each product on a line.
11.3 RESOURCE PLANNING PROCESS

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Now we begin with the resource planning process. As part of the produc on-planning
process, firms must ensure that the resources needed for produc on—such as raw
materials, parts, equipment, and labor—will be available at strategic moments in the
produc on process. This can be a huge challenge. The components used to build just one
Boeing airplane, for instance, number in the millions. Cost is also an important factor. In
many industries, the cost of materials and supplies used in the produc on process amounts
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to as much as half of sales revenues. Resource planning is therefore a big part of any firm’s
produc on strategy.
Resource planning begins by specifying which raw materials, parts, and components will be
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required, and when, to produce finished goods. To determine the amount of each item
needed, the expected quan ty of finished goods must be forecast. A bill of material is then
drawn up that lists the items and the number of each required to make the product.
Purchasing, or procurement, is the process of buying produc on inputs from various
sources.
11.3.1 MAKE OR BUY DECISIONS

The firm must decide whether to make its own produc on materials or buy them from
outside sources. This is the make-or-buy decision. The quan ty of items needed is one
considera on. If a part is used in only one of many products, buying the part may be more
cost-effec ve than making it. Buying standard items, such as screws, bolts, rivets, and nails, is
usually cheaper and easier than producing them internally. Purchasing larger components
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NOTES from another manufacturer can be cost-effec ve as well. When items are purchased from an
outside source instead of being made internally, it is called outsourcing. Harley-Davidson, for
example, purchases its res, brake systems, and other motorcycle components from
manufacturers that make them to Harley’s specifica ons. However, if a product has special
design features that need to be kept secret to protect a compe ve advantage, a firm may
decide to produce all parts internally.
In deciding whether to make or buy, a firm must also consider whether outside sources can
provide the high-quality supplies it needs in a reliable manner. Having to shut down
produc on because vital parts aren’t delivered on me can be a costly disaster. Just as bad
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are inferior parts or materials, which can damage a firm’s reputa on for producing high-
quality goods. Therefore, firms that buy some or all of their produc on materials from
outside sources should make building strong rela onships with quality suppliers a priority.
11.3.2 INVENTORY MANAGEMENT: NOT JUST PARTS
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A firm’s inventory is the supply of goods it holds for use in produc on or for sale to
customers. Deciding how much inventory to keep on hand is one of the biggest challenges
facing opera ons managers. On the one hand, with large inventories, the firm can meet most
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produc on and customer demands. Buying in large quan es can also allow a company to
take advantage of quan ty discounts. On the other hand, large inventories can e up the
firm’s money, are expensive to store, and can become obsolete.
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Inventory management involves deciding how much of each type of inventory to keep on
hand and the ordering, receiving, storing, and tracking of it. The goal of inventory
management is to keep down the costs of ordering and holding inventories while
maintaining enough on hand for produc on and sales. Good inventory management
enhances product quality, makes opera ons more efficient, and increases profits. Poor
inventory management can result in dissa sfied customers, financial difficul es, and even
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bankruptcy.
One way to determine the best inventory levels is to look at two costs:
Holding inventory,
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Ordering cost
Managers must measure all three costs and try to minimize them.
11.3.3 COMPUTERIZED RESOURCE PLANNING

Many manufacturing companies have adopted computerized systems to control the flow of
resources and inventory. Materials requirement planning (MRP) is one such system. MRP
uses a master schedule to ensure that the materials, labor, and equipment needed for
produc on are at the right places in the right amounts at the right mes. The schedule is
based on forecasts of demand for the company’s products. It says exactly what will be
manufactured during the next few weeks or months and when the work will take place.
Sophis cated computer programs coordinate all the elements of MRP. The computer comes
up with materials requirements by comparing produc on needs to the materials the
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company already has on hand. Orders are placed so items will be on hand when they are NOTES
needed for produc on. MRP helps ensure a smooth flow of finished products.
Manufacturing resource planning II (MRP II) was developed in the late 1980s to expand on
MRP. It uses a complex computerized system to integrate data from many departments,
including finance, marke ng, accoun ng, engineering, and manufacturing. MRPII can
generate a produc on plan for the firm, as well as management reports, forecasts, and
financial statements. The system lets managers make more accurate forecasts and assess the
impact of produc on plans on profitability. If one department’s plans change, the effects of
these changes on other departments are transmi ed throughout the company.
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Whereas MRP and MRP II systems are focused internally, enterprise resource planning (ERP)
systems go a step further and incorporate informa on about the firm’s suppliers and
customers into the flow of data. ERP unites all of a firm’s major departments into a single
so ware program. For instance, produc on can call up sales informa on and know
immediately how many units must be produced to meet customer orders. By providing
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informa on about the availability of resources, including both the human resources and
materials needed for produc on, the system allows for be er cost control and eliminates
produc on delays. The system automa cally notes any changes, such as the closure of a
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plant for maintenance and repairs on a certain date or a supplier’s inability to meet a delivery
date, so that all func ons adjust accordingly. Both large and small organiza ons use ERP to
improve opera ons.
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11.3.4 DEMAND CHARACTERISTICS
In a factory, there are a lot of items such as raw materials, parts, and products. But the
produc on planning for all of them is not performed. It is performed for the items handled by
sales division such as products and service parts. Customers' demand occurs for such an
individual item, and from the standpoint of demand, they have no rela onship with each
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other. On the other hand, the demand of some items depends on that of other items. Such
items are e.g., assemblies or parts.
Thus, demand Characteris cs include independent demand and dependent demand, and
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the items for which independent demand occurs are called "independent demand item",
while the items for which dependent demand occurs are called "dependent demand item"
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NOTES Fig. 11.2: MRP Ecosystem
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11.4 COMPONENTS OF MRP
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MRP has a few similar aims for all businesses. These include ensuring that inventory levels
are kept to a minimal yet sufficient to meet consumer demand, as well as planning all
ac vi es, such as delivery, purchasing, and produc on.
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The diagram depicts a basic MRP system. An MRP system includes inputs and outputs
components, as shown in the below diagram:
Fig. 11.3: Inputs and Outputs of MRP
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11.4.1 INPUTS OF MRP

a. Supplier lead me: supplier lead me need to be an essen al part of how you plan
produc on.
b. On hand inventory: If resource material is available in inventory, then there is no
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necessity to purchase new. This saves money. This helps to op mize on the materials NOTES
already in the inventory. Keeping promises of customers is also easy.
c. Current forecas ng: if there is knowledge about what you have already forecasted,
then this can alert the organiza on to make changes that need to be made. This helps
to line up demand and inventory, including sales forecasts and customer orders. When
working with predicted demand, a system that is integrated with an enterprise-wide
ERP system allows forecas ng using historical sales vs. just sales forecasts
d. Work and machine center capacity: Knowledge person capacity is a must to do MRP.
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Whenever a customer wants material, we should make it available to the customer. If
capacity at work is known, then the planning of material available for dispatch can be
calculated. As per such calcula on, we can give promises to the customers.
e. Order history and season: There should be an idea about seasonal trends. This
knowledge helps to op mize produc on rate as per the demands. Also, in addi on to
the above, the following are a few more inputs for effec ve MRP.
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11.4.2 INPUT FILES OF MRP
a. MPS (Master Produc on Schedule): MPS is a produc on schedule that is meant to
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fulfill future market demand (both firm orders and predicted demand) within the given
planning horizon. The MPS primarily represents the finished product's comprehensive
delivery meline. It can, however, contain requests for replacement parts to make it
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more thorough. In below table is the example of MPS the total capacity requirement By
machine A, B, C and D in 6 weeks’ me.
MACHINES WEEK
1 2 3 4 5 6
A 113 20 134 30 110 14
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B 146 38 210 59 158 46

C 280 47 330 100 349 120
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D 380 99 460 150 480 200
b. Product structures Files: The product structure is represented by the BOM. It contains
informa on on all required sub-components, their quan es, and the order in which
they should be assembled in the final product. It also contains informa on on the work
centres that are doing the build-up procedures.
It can be also represented in form of Product Structure Tree - This is a graphic
representa on of the bill of materials, indica ng how many of each item and how
many sub-parts are required to manufacture the product.
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NOTES
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c. Inventory Status File: The inventory status file maintains track of all of the items in the
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inventory. This file contains informa on such as the item iden fica on number,
amount on hand, safety stock level, amount previously assigned, and procurement
lead me for each item. In below table states the inventory status file.
Item Lead me
A 2
C Safety stock In hand
- 20
Order type
B2B
Schedule Receipts
0
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B 1 - 20 B2B 0
C 1 - 20 B2B 0
11.4.3 OUTPUTS OF MRP

a. Scheduled Order Receipts: Planned receipts are a component of Materials
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Requirements Planning, or MRP, and each component's scheduled arrival date is listed
in a column. This is the order quan ty of an item that is planned to be ordered such that
it is received at the start of the period in ques on to fulfill the period's net needs. This
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order hasn't been placed yet, but it will be in the near future. It also specifies the
quan ty of each component that must be delivered. This informa on is u lized to
compute the MRP, and the net raw material needs are determined as a result.
Week 1 2 3 4
Scheduled Receipts 20 50
b. Expected Order Release: This is the order quan ty of an item that is projected to be
ordered in the planned me period for this order, ensuring that the item is delivered on
me. The planned order release is calculated by mul plying the scheduled order
recep on by the item's procurement lead me. Inventory forecasts, purchase
commitment reports, stock-out incidents, and other items are included in the planned
order release.
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c. Order Rescheduling: MRP Reschedule adds further features to allow the automated NOTES
adjustment of works orders and purchase orders based on the indicated adjustments.
This emphasizes the need of expedi ng, de-expedi ng, and cancelling open orders,
among other things, in the event of unforeseen circumstances.
d. MRP Outputs Reports: The material requirements planning so ware creates a
number of outputs that may be u lized in plant opera ons planning and management.
The following are some of the outputs:
1. Order release no fica on, which is used to place orders that the MRP system has
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scheduled.
2. Orders to be released in future periods are shown in reports.
3. No ces of rescheduling, informing open orders of changes in due dates
4. No ces of cancella on, sta ng that open orders have been cancelled due to changes in
the master schedule.
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5. Inventories-status reports
Furthermore, at the user's request, the MRP system may create supplementary output
reports.
11.5 SHORTCOMINGS OF MRP

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Capacity Limita ons: MRP expects the lead me to be constant regardless of how much
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work has been released into the produc on system, so it is implicitly assuming infinite
capacity. This can create problems when produc on levels are at or near capacity. One way
to address this problem is to make sure that the MPS is capacity feasible.
Long Lead Times: There are many pressures to increase planned lead mes in an MRP
system. MRP uses constant lead mes when, in fact, actual lead mes vary considerably. To
compensate, planners typically choose pessimis c es mates. Long lead mes lead to large
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work-in-process (WIP) inventories.

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Q.1 ____________is not an input of MRP

a. supplier lead me
b. current forecas ng
c. on hand inventory
d. promo on
Q.2 Material Requirement Planning (MRP) and Manufacturing Resource Planning (MRPII)
are predecessors of Enterprise Resource Planning (ERP).
a. true
b. false
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NOTES 11.6 CAPACITY REQUIREMENT PLANNING (CRP)

Capacity requirement planning forms part of the opera onal stage of the planning process
and works in conjunc on with a manufacturing requirement planning (MRP) system. A
detailed capacity requirement plan provides an opera onal level overview for the
produc on cell and assists the opera ons manager with iden fying all the elements that will
be required to deliver the output.
For the opera ons manager to accept the capacity plan they may need to consider -
materials, machine produc on me, machine change over me and tooling, maintenance,
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and down me, along with manpower availability and skill, so that shi work can be assigned,
and resources can be used efficiently.
The opera onal team will take feedback of their ability to meet the planning requirements to
the planning team, who will then look to ensure materials or components required for the
produc on process are made available in me and in full via the procurement team. The
planning team will then confirm the capacity plan and the materials requirement plan and
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generate a works order which will then be passed to the produc on team.
11.6.1 UNDERSTANDING CAPACITY REQUIREMENTS PLANNING

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Capacity requirements planning is the process through which a company—primarily in
manufacturing—figures out how much product it needs to make, and determines if it has the
ability to meet its produc on goals.
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You can also understand CRP as a management tool that's based on using a company's
resources efficiently by projec ng its produc on expecta ons accurately. If a company finds
that its produc on capacity is inadequate, it may alter its produc on goals, or take other
steps to bring expecta ons in line with capacity—which could include contrac ng with
another firm that has excess capacity to handle its produc on.
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11.6.2 HOW IS CAPACITY PLANNING USED IN MANUFACTURING?

If a capacity requirement plan is not followed in a produc on process there is the risk that a
company may commit to make goods that it does not have the resource available to deliver
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the finished product to the required specifica on, on me or in full.

It is important that the planning team liaise with the opera ons team to ensure that the
opera ons team have the right skilled produc on team available and that the produc on
machines are available and running at the right capacity to make a produc on pass.
The capacity plan is an essen al step in the planning process to ensure that the appropriate
resources are made available and how the product will be routed through the plant to its
finished state and financial implica ons of doing so.
11.7 DISTRIBUTION REQUIREMENTS PLANNING (DRP)

The Distribu on Requirements Planning process ensures that goods are delivered in the
most efficient manner. This includes considering the quan ty of the various materials
required in produc on and the direct loca on that it is needed to arrive at in a given me.
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Distribu on requirements planning will benefit opera ons as a whole by increasing NOTES
efficiency in the following areas:
• Faster Decision Making
• U liza on of Demand Forecas ng
• Planning Ini a on Accuracy
• Cost Awareness
• Customer Service Enhancement
• Push or Pull Method
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The outputs of DRP can help managers to answer ques ons such as:
• Which products will we need?
• What quan ty of each product will we need?
• Where are those finished goods needed?
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• What quan ty do we have on-hand and how much do we need to produce?
The goal of DRP is to ensure that the right quan ty of goods is produced in the manufacturing
facili es and sent to various warehouses to fulfill customer orders.
11.8 MANUFACTURING RESOURCES PLANNING (MRP II)

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The previous sec ons show the applicability of MRP logic to other domains of the business.
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Furthermore, the availability of compu ng power and so ware for storage and the
manipula on of large chunks of data has increased ever since organiza ons began to use
MRP systems. Therefore, it was logical that newer systems were developed to expand the
applica on of MRP into other domains of business where dependency rela onships exist. In
the 1980s, organiza ons began to incorporate several modules in the MRP systems. This
extended version is known as manufacturing resources planning (MRP II).
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A typical MRP II system will consist of the following modules:

Business planning
Purchasing
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Forecas ng/demand management

Inventory control
Order entry and management
Shop-floor control
Master produc on scheduling (MPS)
Distribu on requirements planning (DRP)
Material requirements planning (MRP)
Service requirements planning (SRP)
Capacity requirements planning (CRP)
Accoun ng
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NOTES The advantage of MRP II lies in its ability to provide numerous feedback loops between
different modules and minimize re-planning on a piece-meal basis.
11.9 ENTERPRISE RESOURCE PLANNING (ERP)

Enterprise resource planning is an organiza on-wide planning system that u lizes some
common so ware and an integrated database for planning and control purposes. An ERP
embeds all the organiza on processes into the so ware and creates a workflow mechanism
such that different organiza onal players engaged in planning and control of a variety of
ac vi es can make use of the system. Viewed alterna vely, an ERP system is a mammoth
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transac on engine that runs on some common so ware.
Since ac vi es in an organiza on typically have hundreds of processes comprising of
thousands of ac vi es, the so ware is split into modules represen ng different func onal
domains.
Each module has a set of inputs, processes, and outputs. Moreover, each module is closely
O
interconnected with several other modules (see Figure 16.19 for an illustra on of this).
Experts say that the power of ERP so ware lies in its ability to manage these interfaces well,
thereby providing ghter integra on. The following are the typical modules in ERP so ware:
Sales and distribu on
Produc on planning
Logis cs
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Accounts payable/receivable, treasury
Opera onal (shop floor) control
Purchasing
Finance and cost control
Human resources
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In addi on, other tools are also available for genera ng Web interfaces, coding and
programme genera on for specialized requirements, report genera on rou nes, data
import/export, and a library of best prac ces from which an organiza on could choose
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processes for implementa on. A wide number of so ware op ons are available for ERP
today. The most popular among them include SAP, Oracle, Ramco Systems, PeopleSo , and
JD Edwards. Ramco Systems provide ERP so ware using a cloud based architecture focusing
on small and medium enterprises. Ini ally, ERP so ware were proprietary standards that
were expensive and inflexible. However, all of them are now available as cloud based and
customizable.

Q.1 ____________is an output of MRP
a. scheduled order receipts
b. current forecas ng
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c. on hand inventory NOTES

d. promo on
Q.2 Master Produc on Schedule (MPS) focuses on fulfilling future market demand within
the given planning horizon
a. true
b. false
11.10 LET US SUM UP
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Material Requirements Planning is important to the prac ce of inventory planning and
control. Because MRP would not be possible in any significant applica on without a
computer, this chapter strongly stresses computer files and methodology. At the same me,
a empts were made to keep the chapter rela vely simple so as to not become
overpowering. Among advanced MRP topics discussed are MRPII, MRP and CRP, DRP and
Enterprise Resource Planning (ERP).
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MRP began as a system for ensuring that sufficient material was available when needed.
However, in applica on, it became clear that material was not the only resource in short
C
supply. Planning capabili es for machine and labor resources were added to the system in
the form of capacity requirements planning (CRP).
MRP requires input from other func onal areas of a firm, such as marke ng and finance. As
TO
these areas began to see the power of a common database system, they encouraged the
expansion of MRP into areas such as demand forecas ng, demand management, customer
order entry, accounts payable, accounts receivable, budgets, and cash flow analysis. Clearly
this enhanced version was more powerful than the original MRP system that ordered
material and scheduled produc on. It provided a common database that the en re company
could use. Its what if? capability proved invaluable in evalua ng tradeoffs, and the easy
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access to informa on encouraged more sophis cated planning. Thus, MRP evolved into a
more comprehensive enterprise resource planning system, or ERP.
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11.11 KEY WORDS

Bill of material (BOM): a list of all the materials, parts, and assemblies that make up a
product, including quan es, parent– component rela onships, and order of assembly.
Capacity: the maximum capability to produce.
Capacity Requirements Planning (CRP): a computerized system that projects the load from
a given material plan onto the capacity of a system and iden fies under-loads and overloads.
Cloud Compu ng: on-demand IT services usually delivered over the Internet.
Cumula ve lead me: the total length of me required to manufacture a product; also, the
longest path through a product structure.
Customer Rela onship Management (CRM): so ware that plans and executes business
processes that involve customer interac on, such as sales, marke ng, fulfillment, and
customer service. 245
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NOTES Cycle Coun ng: a method for audi ng inventory accuracy that counts inventory and
reconciles errors on a cyclical schedule rather than once a year.
Efficiency: how well a machine or worker performs compared to a standard output level.
Enterprise Resource Planning (ERP): so ware that organizes and manages a company’s
business processes by sharing informa on across func onal areas.
Forward Scheduling: scheduling forward from today’s date to determine the earliest me a
job can be completed.
Item master file: a file that contains inventory status and descrip ve informa on on every
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item in inventory.
Lot sizing: determining the quan es in which items are usually made or purchased.
Master Produc on Schedule (MPS): a schedule for the produc on of end items (usually final
products). It drives the MRP process that schedules the produc on of component parts.
Material Requirements Planning (MRP): a computerized inventory control and produc on
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planning system for genera ng purchase orders and work orders of materials, components,
and assemblies.
Modular Bill: of material a special bill of material used to plan the produc on of products
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with many op onal features.
Product Structure File: a file that contains computerized bills of material for all products.
Time Phasing: the process of subtrac ng an item’s lead me from its due date to determine
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when an order should be released.
U liza on: the percentage of available working me that a worker spends working or a
machine opera ng.

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Bond, B., Y. Genovese, et al. “ERP Is Dead—Long live ERP II.” Gartner Advisory Research Note
(October 4, 2000) h p://www. gartner.com.
Brady, J., E. Monk, and B. Wagner. Concepts in Enterprise Resource Planning. Boston: Course
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Technology, 2001.
Davenport, T. “Pu ng the Enterprise into the Enterprise System.” Harvard Business Review
(July/August 1998), pp. 121–131
Davenport, T. Mission Cri cal: Realizing the Promise of Enterprise Systems. Boston: Harvard
Business School Press, 2000.
Kerste er, J. “When Machines Chat.” BusinessWeek (July 23, 2001), pp. 76–77.
Miller, D. “Tying It All Together.” The Industry Standard Magazine (July 2, 2001).
h p://www.thestandard.net.
Orlicky, J. Material Requirements Planning. New York: McGraw-Hill, 1975
Vollman, T. E., W. L. Berry, and D. C. Whybark. Manufacutring Planning and Control Systems,
3rd ed. Homewood, IL: Irwing, 1992.
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Wight, O. Produc on Planning and Inverntory Control in the Computer Age. Boston: Cahners NOTES
Books Interna onal, 1974

Q.1 How does MRP differ from tradi onal inventory control systems?
Q.2 What is the difference between independent and dependent demand?
Q.3 When is it appropriate to use material requirements planning (MRP)?
Q.4 What is the master produc on schedule (MPS) and what role does in play in the
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material requirements planning (MRP) process?
Q.5 What is a bill-of-material?
Q.6 What is Enterprise Resource Planning (ERP)?
Q.7 What steps are necessary to effec vely implement Enterprise Resource Planning
(ERP)?
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Q.8 What effect does lot sizing have on MRP?
Q.9 Suppose you need to produce 100 units of product A eight week from now, where
product A requires one unit of product B and two units of product C, while product C
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requires one unit of product D and two units of product E. How many units of each type
do you need?
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Q.1 d
Q.2 a
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Q.1 a
Q.2 a
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Ans1 Material requirements planning (MRP) is a computerized inventory control and
produc on planning system. The main objec ve of any inventory system is to ensure
that material is available when needed. One objec ve of MRP is to maintain the
lowest possible level of inventory. MRP does this by determining when component
items are needed and scheduling them to be ready at that me, no earlier and no later.
MRP was the first inventory system to recognize that inventories of raw materials,
components, and finished goods may need to be handled differently. In the process of
planning inventory levels for these various types of goods, the system also planned
purchasing ac vi es (for raw materials and purchased components), manufacturing
ac vi es (for component parts and assemblies), and delivery schedules (for finished
products). Thus, the system was more than an inventory system; it became a
247
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NOTES produc on scheduling system as well. With its computerized data base, MRP is able to
keep track of the rela onship of job orders so that if a delay in one aspect of produc on
is unavoidable, other related ac vi es can be rescheduled, too. MRP systems have the
ability to keep schedules valid and up to date.
Ans2 The demand for the final product, or end items, is referred to as independent demand.
Independent demand occurs outside of the firm and must be forecasted. Dependent
demand is the demand for component parts, subassemblies, and modules that
comprise the end item. The requirements for dependent demand items are
calculated, not forecasted. Because dependent demand is calculated and independent
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demand is forecasted different inventory control systems are used for each type. MRP
is appropriate for dependent demand.
Ans3 MRP is a useful inventory and produc on control system for dependent and discrete
demand items, complex products, job shop produc on, and assemble-to-order
environments.
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Ans4 The master produc on schedule (MPS) specifies which end items or finished products a
firm is to produce, how many are needed, and when they are needed. The MPS works
within the constraints of the produc on plan but produces a more specific schedule by
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individual products. The me frame is more specific as well. An MPS is usually
expressed in days or weeks and may extend over several months to cover the complete
manufacture of the items contained in the MPS. The MPS drives the MRP process. The
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schedule of finished products provided by the master schedule is needed before the
MRP system can do its job of genera ng produc on schedules for component items.
Ans 5 The bill of material for a product lists the items that go into the product, includes a brief
descrip on of each item, and specifies when and in what quan ty each item is needed
in the assembly process.
Ans6 Enterprise Resource Planning (ERP) is so ware that organizes and manages a
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company’s business processes by sharing informa on across func onal areas. It

transforms transac onal data like sales into useful informa on that supports business
decisions in other parts of the company, such as manufacturing, inventory,
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procurement, invoicing, distribu on, and accoun ng. In addi on to managing all sorts
of back-office func ons, ERP connects with supply chain and customer management
applica ons, helping businesses share informa on both inside and outside the
company. Thus, ERP serves as the backbone for an organiza on’s informa on needs,
as well as its e-business ini a ves.
Ans7 Effec ve ERP implementa on typically requires that a firm analyze its business
processes, choose the ERP modules to implement, understand the level of
sophis ca on needed for the business, finalize delivery and access, and link the
system with its external partners.
Ans 8 Results show that by selec ng the proper lot sizes and then using the planned lead
mes to control delivery performance; the required inventory levels can be minimized.
The use of material requirements planning (MRP) logic is prevalent in planning and
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control systems for batch manufacturing. NOTES

Ans 9 The effects of lot size and planned lead me se ngs are evaluated in a shop producing
assembled products with common components. Material requirements planning
(MRP) logic is used for produc on planning. A framework for the analysis of delays
within the produc on system is presented. These delays are evaluated using
spreadsheet based MRP so ware linked to a simula on package that emulates shop-
floor ac vity. Results show that by selec ng the proper lot sizes and then using the
planned lead mes to control delivery performance; the required inventory levels can
be minimized.
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Solu on: In this example it is easy to compute the requirements of each item to
produce 100 units of product A: Req.(B) = 100, Req.(C) = 200, Req.(D) = 200, Req.(E) =
400.
10. The manufacturing of a car assembly requires one unit of flywheel, two unit of wheel
assembly, one unit of engine lock assembly, one unit of water pump assembly. Each
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unit of wheel assembly requires one unit of wheel and four units of bearings. Each
engine block assembly requires two unit of sha and 4 units of bearings. Each unit of
water pump assembly requires a bearing of same type & price as that of engine block
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assembly and is designated as (E). The wheel assembly is designated here as (C),
flywheel unit is designated as(B), engine block assembly is designated as (D), and water
pump assembly is designated as (I). Wheel is designated as (F) and bearing is
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designated as (G), sha is designated as (H), and engine bearing is also designated as
(E) like water pump bearing because of same type & price.
The other informa on available are shown in Table A as follows:
Table A: Informa on about ordering quan ty, lead me, safety stock to be kept and available
quan ty at the beginning of different components and subcomponents of car assembly (the
end item)
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Component Ordering quan ty Lead Time Safety Stock Available Quan ty

at the Beginning
A Variable 1 week 0 0
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B 450 2 weeks 120 120

C 1000 2 weeks 200 600
D 500 1 week 40 120
E 2500 1 week 120 120
F 1000 2 weeks 120 500
G 4000 2 weeks 200 2000
H 1000 2 weeks 120 240
I 500 2 weeks 120 120
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NOTES End Product requirement for the 10-month period are as follows:
Time 1 2 3 4 5 6 7 8 9 10
End Product 200 300 500 600
(A)
Requirement
Solu on:
The product structure tree is designed as follows: -
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O
C
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Designa on: A = car assembly, B: Flywheel unit, C: wheel assembly, D: Engine block assembly,
I: Water pump assembly, F: wheel, H: sha , G: Wheel assembly bearing, E: Engine block
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assembly bearing.
Now it is the task of management to design a M.R.P. system for the whole unit. The Master
schedule drives the MRP system by establishing the Demand. The projected demand for 10
periods is stated below and it is derived from external orders already received. The end
product requirement for the 10-month period is shown in Table 2.
Table 2: End Product requirement for the 10-month period:
Time 1 2 3 4 5 6 7 8 9 10
End Product 200 300 500 400 600
(A)
Requirement
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MRP: NOTES
The demands for various sub-components are stated below. Assuming that Product A has a
one-week lead me and can be produced in lot sizes equal to demand. Then components B,
C, D, have a dependent demand equal to the demand A but occurring one week earlier.
The Projected requirement of B is shown in Table no 3. Because one unit of component B
required for each unit of end items as prescribed in product structure tree. The requirements
are shown as an offset of one week earlier.
Table 3: The demand for component B
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Component B, Order quan ty 1 2 3 4 5 6 7 8 9 10
=450 Lead Time=2 weeks,
Safety stock= 120
Projected requirements 200 200 500 600 900
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Similarly, the projected requirement of D is shown in Table no 4. Because one unit of
component D required for each unit of end items as prescribed in product structure tree. The
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requirements are shown as an offset of one week earlier.
Table 4: The demand for component D
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Component D, Order quan ty 1 2 3 4 5 6 7 8 9 10
=500 Lead Time=1 week,
Safety stock= 40

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Similarly, the projected requirement of C is shown in Table no 5. As because two units of

component C is required for each unit of end items as prescribed in product structure tree,
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the requirement is shown as an offset of one week earlier.

Table 5: The demand for component C
Component C, 1 2 3 4 5 6 7 8 9 10
Lead Time=2 weeks,
Similarly, the projected requirements of I are shown in Table no 6. As because one unit of
component I is required for each unit of end items as prescribed in product structure tree,
the requirement is shown as an offset of one week earlier.
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NOTES Table 6: The demand for component I
Similarly, the projected requirement of F is shown in Table no.7. Because one unit of
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component F is required for each unit of item C as prescribed in the product structure tree
and in total two units of item F are required because two units of component C is required for
each unit of end item A. To find out when to produce subcomponent G and F, it is first
necessary to determine the order release dates for component C. A combina on of material
requirement plan for end item A, item C, item F, and item G is presented in the result sec on.
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Table 7: The Demand for Component F
C
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Similarly, the projected requirement of G is shown in Table no 8. Because four units of item G
is required for each unit of end item C as prescribed in product structure tree and the total
item G required are eight units because two unit of component C are required for each unit of
end items A.
Table 8: The Demand for Component G
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It seems that each unit of D requires 2 units of H. The material requirement planning of
item H is presented in Table no 9.
Table 9: The Demand for Component H
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The product structure tree and bill of material figure indicate that one unit of E is required for NOTES
the assembly of each unit of component A. 4 units of component E are used for
manufacturing component D. It is assumed that the previously used order releases are
applicable for A and D. So, order release quan ty of product D is mul plied by 4 and the
requirement for order release of A are offset to account the lead me. So, requirement of E is
the total projected requirement of A and D. Here the order release of each component of D is
mul plied by 4 to get the number of units of E. The requirement of E is shown in Table no 10.
Table 10: Demand for Component E
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C
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Now, we compute the es mated demand, scheduled receipt and planned order releases
follows:
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Table: 11: Es ma on of projected demand, scheduled receipt and

planned order release of item B:
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253
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NOTES Table 12: Es ma on of projected demand, scheduled receipt and

planned order release of item E:
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Table 13: Es ma on of projected demand, scheduled receipt and
C planned order release of item C, F & G:
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(2C/A) NOTES
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(F/C)
C
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255
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NOTES (4G/C)
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C
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planned order release of item D & H
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PH
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(2H/D) NOTES
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C
planned order release of item I
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NOTES UNIT 12
QUALITY MANAGEMENT AND LEAN SYSTEMS
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STRUCTURE
12.0 Objec ves
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12.1 Introduc on
12.2 Evolu on of Quality Management
12.3 Understanding Quality
12.5 Quality of Design

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12.4 Dimensions of Quality
12.6 Quality of Conformance

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12.7 Quality Costs
12.8 Contribu on by Various Quality Gurus
12.9 Seven Quality Control Tools
12.10 Sta s cal Process Control
12.11 Lean Manufacturing
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12.12 Kaizen
12.13 Concept of 5S
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12.14 Let Us Sum Up

12.15 Key Words
12.0 OBJECTIVES
• Define the term quality
• Differen ate between quality control and quality assurance
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• Understand concept of quality in design and conformance NOTES

• Explain u lity of seven quality control tools
• Understand importance of quality costs
• Define lean manufacturing concepts
• Understand the importance of 5S, JIT, and Kaizen principles towards lean systems
12.1 INTRODUCTION
Let me tell you that quality management is a buzzword since long across the companies on
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the globe. In the intense compe ve environment, managers come back to the basics of
quality management for seeking answer to the ques ons which are troubling them. Many
years back when Toyota wanted to enter the US market, they were aware about that US
customers don’t accept Asian products easily. Therefore, Toyota made quality as their
weapon to compete and provided quality products at reasonable price to gain the market
share. And they were accepted by the US market based on quality.
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Further, can you think of any company which has ever said that they are providing products
at lower cost because they have compromised on quality, the obvious answer is ‘no’. Rather,
many companies make their tagline just to hint that they are providing quality products. For
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example, Honda says “power of dreams” where they show a man standing in front of mirror
and seeing himself as robot, General Motors say “pu ng quality on the road”, Bangur
cement says “sasta nahin sabse achha”, “quality is job 1” by Ford etc.
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From here you can make about the importance of quality management in providing
compe ve edge to companies at marketplace. The work of quality gurus viz. Deming, Juran,
Crosby, Ishikawa, and many others has led to the development of quality management in
phases. These developments have woken up the companies worldwide to realize the
poten al benefits of adop ng quality management principles.
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12.2 EVOLUTION OF QUALITY MANAGEMENT

Let’s go back to history and you will agree that prior to industrial revolu on quality was not a
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threat to the manufacturers of goods because individual cra smanship was exis ng. But,
with the inven on of steam engine by James Wa in 1764, machine system came in
existence and it led to emergence of factory system (industrial revolu on). An ar cle
“Economic benefits of division of labor” by Charles Babbage led to the concept of specialized
labor. Eli Whitney provided with the concept of standardiza on, from where specifica ons
came in discussion and conforming to specifica on started defining quality in products and
services.
Although it’s difficult to define who suffered how much during world war II, but you will
agree that it was European countries and Japan who suffered the huge loss. But, can you
imagine what it led to? Let me tell you that one of a ereffects of world war II was that
American companies took the lead and started enjoying environment of ‘no compe on’
and quality movement was sent on back seat.
What is more interes ng is that when quality experts viz. W. Edward Deming, Joseph Juran 259
UNIT 12
Quality Management
and Lean Systems
NOTES etc. tried to convince management of these companies about threats that could come if
quality is not given right importance, the management ignored the ideas of these quality
experts. These experts then moved to Japan which was recovering from the devasta on of
the world war II. Companies in Japan welcomed these quality experts, heard their ideas, and
implemented them in their organiza ons. From here started the quality movement and
Japan with the help of quality experts like W. Edward Deming, Joseph Juran etc. became
ini ator of it. This movement of quality has travelled through many phases like, quality
control, total quality control, quality assurance, quality management, total quality
management, etc.
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Fig. 12.1: Evolu on of TQM
Quality
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Quality Control
CSta s cal Quality Control

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Total Quality Control

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Quality Assurance
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Total Quality Management
Quality has travelled a long journey and is con nuously evolving. Ini ally its quality that was
important for the organiza ons, so they started defining and understanding it. Therea er
companies started looking for ways to control the quality and a new concept emerged as
‘quality control’. Walter Shewhart introduced use of sta s cal concepts for quality control
and this phase was popularized as ‘sta s cal quality control’. From here quality further
graduated to total quality control by training and involving majority of employees to ensure
quality control at each process. Further advancements shi ed focus from quality control to
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quality assurance by replacing the inspec on with preven on. Finally, quality further NOTES
advanced to the next level know as ‘total quality management’ in which management of
quality is responsibility of everyone instead of one department.
12.3 UNDERSTANDING QUALITY

Quite o en in our day today life we use the word ‘quality’ like, look at the quality of picture in
my mobile, quality of this cloth is superb, quality of roads in Chandigarh is be er etc.
Although you use this word ‘quality’, but do you know how to define it?
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Many organiza ons and quality gurus have given their understanding about the quality, have
a look on these for enhancing your knowledge on quality:
• Quality is a predictable degree of uniformity and dependability, at low cost and
suited to the market (Deming): This defini on focuses on the conformance to
specifica ons (as per market needs) and making the products in least possible
costs.
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• Quality is fitness for use (Juran): Here, Joseph Juran has described quality purely
from customers perspec ve. According to it every customer has some
expecta ons from the product/service he/she purchases, if these expecta ons
•
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are met then it’s a quality product otherwise no.
Quality is conformance to specifica ons (Crosby): In this defini on the expert
has considered only manufacturers’ perspec ve. According to this every process
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will have predefined specifica on for the product it will make and if working of
the process conform to those specifica ons then quality is ge ng ensured in the
products.
• Quality is minimum loss imparted by a product to society from the me the
product is shipped (Taguchi): According to this defini on, quality is said to be
exis ng in the products only if the loss imparted by the product to the society
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from the me of design of product phase ll it reaches customer is least.

• Quality is, in its essence, a way of managing the organiza on (Faigenbaum): In
this defini on of quality has been explained as dependent aspect on the working
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environment of the organiza on. According to this if organiza on and its working
environment is managed well then quality will automa cally emerge as output in
the products/services.
• Quality is correc ng and preven ng loss, not living with loss (Hoshin): Here the
quality is defined as correc ng the processes and taking preven ve ac ons to
avoid the occurring of defects.
According to ISO, “quality is the totality of characteris cs of an en ty that bear on its ability
to sa sfy stated and implied needs”. According to this defini on the characteris cs of the
product/service should be able to sa sfy the needs stated by customers and be able to take
care of unstated needs. Second aspect of the defini on concerning with implied needs is
more cri cal and requires strong an cipa on by the team working on it. Stated needs are
easy to be taken care in comparison to implied needs and successful companies ensure those 261
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Quality Management
and Lean Systems
NOTES characteris cs in the en ty which can sa sfy implied needs.

I am sure, you have understood the meaning of quality and before I explain you about various
dimensions of quality let me give you some idea on the concept of quality control, quality
assurance, and total quality management.
• Quality Control: It means “all those opera onal techniques and ac vi es that are
used to fulfill requirements for quality”. It is a reac ve approach, where ac ons
are taken to control the process a er some defects are observed and process has
gone out of control. Quality control requires study of the process on frequent
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basis to check if conformance to specifica ons is occurring or no. Incase sample
observa ons are going beyond the specifica ons then maintenance team rec fy
the causes of errors.
• Quality Assurance: It means “all the planned and systema c ac vi es,
implemented within the organiza on for quality management, to provide
adequate confidence that a product or service will sa sfy given requirements for
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quality.” It is a preven ve approach where based on experience or an cipa on
sources of errors/defects are taken care well in advance to ensure avoidance of
happening of these errors.
• C
Total Quality Management: It is a companywide approach which involves all the
internal employees for management of quality. It emphasizes on the role of top
management in ensuring total quality approach by involving employees at all
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levels. In this approach the pivotal point of all organiza onal func ons is quality
and all employees are responsible for con nuous improvement. In TQM
approach quality is a strategic concern and companies must decide on needs of
customers in terms of quality. And then work on strategic planning by including all
the func onal areas to achieve goals of quality.
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Q.1 True/False
a. According to Philip Crosby, ‘quality is conformance to specifica ons.
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b. Quality control is the more advanced stage of quality in comparison to ‘total

quality management’.
Q.2 Define quality as given by ISO.
Q.3 Total Quality Management (TQM) focuses on
a. Employee
b. Customer
c. Both (a) and (b)
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12.4 DIMENSIONS OF QUALITY NOTES

It is not easy to understand quality based on its defini ons and hence for be er clarity you
should understand various dimensions of quality. Following are the dimensions of quality
(Garvin, D., 1987):
• Performance: Every product has a reason for its existence and if it delivers on that
purpose very well then performance dimension is exis ng. For example, the basic
func on of a television is to provide good quality picture and movements in the
picture should match with the sound ge ng delivered from it. If a television is
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performing these func ons well then, its performance is good ensuring quality in
it.
• Features: It includes advancements in the parts of basic product and extra things
provided other than the basic product. For example, if you purchase a television
then it could have normal speakers or digital speakers a ached in it. If it has digital
speakers then you can say television is having advanced feature.
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• Conformance: In this dimension it is ensured that while producing the product
consistency as per the specifica ons defined during product design shall be
confirmed. Conformance with specifica on will reduce variability.
•
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Reliability: It is measured in terms of probability and is the probability of products
life as per claims of the company. For example, if you want to purchase mobile
phone company X and before purchasing it you asked 50 people (who were using
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company X’s mobile phone) about it. If 48 people out of 50 says that company said
no problem will be faced by you up to minimum 3 years and it our 3rd year and no
problem faced yet. This means reliability of company X’s product is almost 96%.
• Durability: It is also measured as probability only, but it is the probability of
products life exceeding the claim of the company. Let’s consider the example
discussed while studying reliability. If out of 50 people, 46 says that company said
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no problem will be faced by you up to minimum 3 years and we have not faced any
issue up to 5 years. This is durability of the products of the company X.
• Perceived Quality: It is more about subjec ve percep ons a ributed towards
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brand name, adver sing and other indirect measures.

• Serviceability: It include two main aspects viz. speed of service and behavior
while providing service. How fast a company can respond to customer complaints
adds to quality provided by that company. And how well behaved the service
provider remains while delivering the service further adds to quality. Therefore,
quality conscious companies should take care of both aspects while responding
to customer complaints.
• Aesthe cs: This dimension includes external looks, dimensions, styling etc. of
the product. Status conscious society has started comparing the aesthe cs with
their status quo and hence companies should be careful while designing
products.
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NOTES • Safety: It is one of the most powerful dimensions of the quality because it has the
capability to take you from nowhere to somewhere and from somewhere to
nowhere. For example, during 1997, LG launched flat-screen television saying
that they are good for eyes. This led to exponen al increase in the sales of LG flat-
screen televisions and all compe tors also came up with flat screen televisions.
Few years back, one of the quality-inspector in India said that ‘Maggi’ contains
more lead than permi ed limits and it is very harmful for humans. As a result, the
sales of ‘Maggi’ dropped dras cally. Therefore, companies should handle safety
dimension very carefully.
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Above men oned quality dimensions are for products and they are not exactly same for the
services. Dimensions of service quality are different from that of product because they
depend on me and interac on between receiver and provider of service. According to
Evans and Lindsay (1996), following are the dimensions of the service quality:
• Time and Responsiveness: Service provider should es mate the wai ng me to
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given to the customer and then ensure providing service within this me. Always
strive for finding ways to minimize the wai ng me for the customer.
• Completeness: As a service provider you need to ensure that complete service
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package as per the requirement of the customer is provided. Incomplete package
will lead to dissa sfac on of customer and that is not in accordance to the
defini on of quality.
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• Courtesy: How the service provider should behave with the customer while
providing the service is very cri cal for service quality. A polite behavior is always
recommended so that customer feels comfortable.
• Consistency: Service provider should try to provide the service to different
customers with same standards. This will avoid comparisons by the consumers
that could lead to some sort of dissa sfac on in some.
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• Accessibility: This dimension is about ease of ge ng service. For example, we all

know that mobile service providers are always accessible through their customer
care number.
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• Accuracy: It is about providing the right service rightly in first a empt itself. For
this service provider should discuss thoroughly about the requirements with the
customer.
12.5 QUALITY OF DESIGN

Quality is viewed from consumers’ as well as producers’ perspec ve. Quality of design is
related with consumers’ perspec ve and one should always consider customer
requirements while working on product or service design. In chapter 2 you studied about
quality func on deployment and that is one of the design techniques which relates product
characteris cs with the customer requirements. You should not forget that whatever best
you design is not best un l it is appreciated by the customers. Therefore, it is highly
recommended that one should first understand customers’ expecta ons and then design
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the product in accordance to them. Dimensions of product and service quality discussed in NOTES
previous sec on will be helpful in quality of design.
12.6 QUALITY OF CONFORMANCE

Quality of conformance is a concept given by Philip Crosby. It is purely producers’ perspec ve
for quality and is worked on as per specifica ons defined in the design. You will agree that
perfec on is seldom. Even if you do the same work 2 mes, it might not be exactly same, and
hence working as per specifica ons is preferred. Specifica ons allow the random varia ons
to occur. If producer is producing the products with consistency within the specifica ons,
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then we can say that producer has conformed to the design specifica on. This leads to
minimiza on of errors to the least possible limit.
12.7 QUALITY COSTS

During 1978-79, Philip Crosby got a book published tled “Quality is Free: The Art of Making
O
Quality Certain”. To explain on ‘how quality can be free?’ this, he has wri en a book of more
than 800 pages. This means there are many condi ons for having quality free of cost. In
general, there is always some costs for quality, and they are classified as follows:
•
• Cost to enhance good quality
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Cost occurring due to poor quality, and
Poor quality costs: These costs occur when products or services fail to conform with design
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standards. The poor-quality costs include two categories viz. internal failure costs and
external failure costs. Internal failure costs occur when a product fails quality checks within
the organiza on. This means product is not conforming to the specifica ons. In such
scenarios either products are sent for rework or declared as scrap if rework is not possible. If
rework is possible then cost of extra effort, material, me etc. is an add on cost for the
company and is part of internal failure cost. If rework is not possible then the complete
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product is declared as scrap and cost of making the product which includes raw material,
man-hours, machine-hours etc. goes as waste. Therefore, you can say that nonconformance
of product or service during quality checks within the organiza on leads to some extra cost
PH
to the company which is known as internal failure cost.

On the other hand, external failure costs occur when the product fails in the hands of the
customers before the guarantee or warrantee period. In such cases either the company must
repair the product (provide service) free of cost or must replace the product with new
product. In both the cases there is some extra cost to be bear by the company. This extra cost
is described as external failure cost.
Cost to enhance good quality: Instead of having reac ve approach, it is be er to be with
proac ve approach towards quality. Proac ve approach helps you to detect and rec fy the
sources of errors. Cost to enhance good quality is related with proac ve approach towards
quality. It includes two categories of costs viz. appraisal costs and preven on costs.
Appraisal costs are the costs required or used by the process owners to appraise themselves
with the exis ng levels of quality in their processes. For this you might be requiring some
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NOTES employees, measurement tools, tes ng equipment, chemicals if required during tes ng etc.
If you hire employees for taking sample from the process and test it then you have to pay
salary to these employees, you need to stop the process to take samples (during this me lot
produc on could have happened) etc. Therefore, you can say that salary of these extra
employees, cost of produc on loss during sample collec on, equipment cost, tes ng
material costs etc. are part of appraisal cost.
Preven on cost is the one that occur to avoid the happening of defects or errors. It will
include cost of training to employees, cost of hiring the consultant for design process, cost of
purchasing new machinery, cost of maintaining records or data etc. It could be said that
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preven on costs help the organiza ons in preven ng the delivery of poor-quality products
to the customers.
Mere understanding of these costs is not sufficient, and one must look for ways to minimize
these costs. The organiza ons who can reduce quality costs are the one bringing excellence
in their processes. One should ensure that costs related to quality are relevant and handle
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the irrelevant costs. Quality costs can be measured with the help of index numbers.
Index numbers are the ra os of quality costs to either sales revenue or number of units
produced etc. Following are some of the commonly used index numbers for measuring
quality costs:
•
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Labor index: It is the ra o of quality costs to labor hour during a fixed interval of
me. Although it is easy to compute but, not effec ve in long term as
TO
advancements in technology can reduce man hours.
• Cost index: It is the ra o of quality costs to overall produc on cost. This ra o is
be er than labor index as it is independent of technological advancements.
• Sales index: In the sales index the base value considered is sales. It is easy to
understand and compute.
O
• Produc on index: Here the base value used in the ra o is total number of units of
manufactured products. This index is good when organiza on is making only one
type of products. One of the major disadvantages of this index is when an
organiza on is making variety of products then it becomes difficult to measure
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and depend on this index.

Q.1 True/False
a. Training is part of appraisal cost.
b. QFD is used to ensure quality of design.
Q.2 Sales index is used for measuring __________.
a. Durability
b. Reliability
c. Quality Costs
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d. Responsiveness NOTES
12.8 CONTRIBUTION BY VARIOUS QUALITY GURUS

The concept of quality has evolved over the years and many quality gurus have contributed
towards its evolu on. The world has not moved from inspec on to preven on overnight, it is
based on the concepts, principles, and philosophies given by many researchers. Some of the
prominent contributors towards quality management are Walter Shewhart, William Edward
Deming, J. Juran, and Philip Crosby.
PY
12.8.1 CONTRIBUTION OF WALTER SHEWHART
W. Shewhart is father of Sta s cal quality control which he developed during 1930’s while
working in Bell telephone laboratories. During his job only he developed some technical
tools for quality control which later became base of quality management revolu on in Japan
and other countries. He later worked with AT&T and used his quality concepts there. Walter
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Shewhart introduced the concept of quality assurance based on technical aspects of quality
control using sta s cal quality control methods. For almost four to five decades the quality
assurance concept was understood and prac ced as per the techniques of Shewhart. It was
C
Edward Deming who introduced different philosophy for quality assurance by shi ing the
focus towards management philosophy. Coincidently, Deming has learned many quality
concepts from Walter Shewhart and is o en quoted as his disciple.
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12.8.2 CONTRIBUTION OF WILLIAM EDWARD DEMING
William E. Deming learned concepts of sta s cs from Walter Shewhart. He worked in
department of Agriculture, Washington, and later in census bureau. He taught concepts of
sta s cal process control to the suppliers of material to military during 2nd world war. When
world war ended, he was known to many companies and countries as quality prac oner. He
O
started consul ng companies in Japan on quality management a er the 2nd world war. He is
known as father of quality control in Japan.
Deming’s philosophy of quality management focuses on improving processes con nuously
PH
to reduce variability. According to him, if a company wants to improve its processes

con nuously the they should eliminate common causes and special causes of quality
problems. For this, Deming has given his 14 points philosophy (popularly known as Deming’s
14 principles for con nuous improvement) as follows:
1. Constancy of purpose towards improvement: This states the company should always
plan for the long run and be prepared for all sorts of situa ons that might have to be
faced. This can be done by keeping oneself abreast with the happenings in the macro
and microenvironment of the industry so that prepara on to deal with possible
complica ons can be done well in advance.
2. Adapt to the new philosophy: Customers are full of changing expecta ons and
markets are challenging. Therefore, companies should con nue adap ng the new
philosophies to meet the customers’ expecta ons and responding to challenging
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NOTES markets.
3. Cease dependency on inspec on: Although inspec ons cannot be eliminated, but it is
be er to have proac ve approach to minimize dependency on inspec on. This will
help companies to eliminate sources of defects.
4. End the prac ce of awarding business based on price tags: Instead of selec ng and
changing vendors based on price companies should develop vendors as their partners.
This will help companies and suppliers in business surety and focus of supplier will now
be on quality of material at reasonable rice to be supplied to the company.
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5. Improve constantly and forever: Companies must constantly strive to make sure that
the varia on in the manufacturing process is minimal to maintain uniformity in the
quality of products and services. Therefore, requirement is of nurturing the mindset
towards con nuous improvement.
6. Ins tute training on job: Giving training about the processes in the closed room with
power point presenta on might not be effec ve in reducing the defects. According to
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Deming, training the employees on the job (where they must work) will boost their
efficiency and it will result in minimiza on of mistakes.
7. Ins tute Leadership: Management should play the role of leaders and not remain
8.
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mere felicitators. Problem with most of the projects is not lack of supervision but lack
of leadership. A leader should walk the talk and guide his subordinates.
Drive out fear: Management by fear or punishment is very undesirable as it limits the
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ideas, crea vity, and innova on from the workforce. The fear of sounding silly, failing,
making a mistake, and stepping into others’ toes limits the crea vity of the employees.
So, the working environment should be created where in there is mutual trust and
coopera on among employees so that people can fearlessly share their crea ve ideas.
9. Breakdown barriers between staff areas: Deming stated ‘Each person is a customer to
O
someone, and everyone is a supplier to somebody’ so it is important to consider views

coming in from all the employees. Rigid hierarchy leads to communica on gaps
between workers and management, which can lead to bigger problems in
manufacturing due to lack of coordina on like over produc on, under produc on, etc.
PH
These barriers can be broken down by exposing people to diverse situa on out of their
comfort zone which will help in building healthy rela ons among the employees.
10. Eliminate slogans, exhorta ons and targets for workforce: Slogans imply that the
problem is with the employees but Deming believes that the problem is with the
process, prac ces like slogans, etc. must be avoided because they can severely
demoralize the employees instead the process should be reviewed and improvised.
11. Eliminate management by objec ves: Deadlines are short sighted in nature as they
focus only on the quan ta ve aspects of the outcome, so the employees focus on
merely mee ng the deadlines rather than on the quality of the deliverables. So,
elimina on of deadlines will facilitate be er quality of outcome.
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12. Remove barriers to pride of workmanship: According to Deming, companies should NOTES
avoid comparison of work done by different workers. These ra ngs might sidetrack
workers from working as a team. Companies should treat each worker of the process
equal.
13. Implement educa on and self-improvement: Management should create
environment where employees are mo vated to learn new skills for comba ng with
changing markets.
14. Make transforma on everyone’s job: Top management should be commi ed and
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involved for quality drive movement in the organiza ons. Their involvement will
mo vate and guide all the employees towards quality movement.
12.8.3 CONTRIBUTION OF JOSEPH M. JURAN

Juran has broader concept towards quality. His philosophy was much beyond the sta s cal
process control. He remained instrumental in promo ng the concept known as ‘Managing
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Business Process Quality’ (a cross-func onal quality improvement technique for execu ve).
According to Juran, for a aining quality one should begin by establishing the vision for the
organiza on along with the goals and policies. Some of his major contribu ons are pareto
planning, control, and improvement).

C
analysis, principles for quality management, and the Juran trilogy (which includes quality
According to Juran, one should have proper plan for quality to ensure that deliverables are of
TO
desired quality. For this establishment of quality goals, iden fica ons of customers and their
needs, determina on of product features for responding to customers’ needs etc. are
important. A er having quality plan in place, one should ensure control over quality as per
plan. In the quality control process, it is important to develop/use right methods for tes ng
product quality. As we know that quality is a journey, therefore improving con nuously for
quality is the need. Problems related to quality should be con nuously iden fied through
O
root cause analysis and corrected for desired results.
12.8.4 CONTRIBUTION OF PHILIP CROSBY

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Philip Crosby emphasizes to implement quality management for its benefits which are
indeed good for bo om line workers. According to him adop on of quality management is
free and results in benefi ng the organiza ons. He has defined quality as ‘conformance to
specifica ons’, instead of shininess or luxury. A preven on approach is be er for achieving
quality. Preven on approach here means that iden fy the probable sources of errors in the
future and fixing them so that happening of errors is avoided or minimized. His idea of quality
is more process driven and it is management who is responsible for achieving or not
achieving the standards.
12.9 SEVEN QUALITY CONTROL TOOLS

When you think about conformance, it means process is working well, but when you think of
nonconformance it is due to some error or problem or fault in the process. Therefore, it is
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NOTES important to keep collec ng data and analyze it for detec ng errors. Japanese Union of
Scien sts and Engineers have developed seven such tools which are popularly known as
seven quality control tools. Following are the seven quality control tools:
• Pareto Analysis
• Flow charts
• Check sheets
• Histograms
• Sca er diagrams
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• Cause-and-effect diagrams
• Sta s cal process control charts
12.9.1 PARETO ANALYSIS

This method is used for finding causes of poor quality. Joseph Juran devised this technique
O
and named it a er Italian economist Vilfredo Pareto, who gave in his research study that 20%
of the people on this earth are having 80% of the total wealth. Accordingly, pareto analysis
also indicates that 80% of the defects are due to 20% of the common causes like, poor design,
C
dimensions, parts, etc. Following figure depicts the pareto analysis diagram:
Fig. 12.2: Pareto Analysis
TO
O
PH
From the above figure it is very clear that almost 80% of the defec ves are due to poor
design, dimensions, and parts. Only 20% of the defec ves are due to operator error,
calibra on, material etc. Therefore, ac on plan to remove happening of defec ves has to be
priori zed as per major factors responsible.
12.9.2 FLOW CHARTS

Flow charts define the flow of process through which product will move for its comple on.
Be er understanding of flow chart will help you in following a proper rout to find the exact
cause of the problem. Flow of process is followed step by step to check each ac vity for
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iden fica on of poor quality. NOTES
12.9.3 CHECK SHEETS

It is another tool used for collec ng data related to problems of quality. Check sheet is
prepared based on previously iden fied causes of poor quality and if poor quality occurs
again then iden fied causes are checked for their probable responsibility of bringing lack in
quality. This approach is used as proac ve approach also where me to me previously
responsible causes are inspected to avoid happening of defects due it.
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12.9.4 HISTOGRAMS
It is a diagramma c technique to show the frequency of various causes of poor quality.
Histograms are worked based on the check sheets or data collected on various causes of
poor quality. These are connected bar diagrams, where each bar represents one the cause of
poor quality and height of bar indicates number of defects happened due to that cause.
O
12.9.5 SCATTER DIAGRAM
Sca er diagram is a graphical technique based on two variables. This technique is used to
C
observe the rela onship between two variables. The pa ern of plo ed observa ons in the
sca er diagram is studied and rela onship of variables considered is understood for decision
making. Two variables might have posi ve or nega ve rela onship of some magnitude. If
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sca er diagrams also indicates the same rela onship then process is working well, but if
diagram indicates some other rela on than expected then process is not working well and
needs rec fica on.
12.9.6 CAUSE AND EFFECT DIAGRAM

It is a technique used to find root cause of some effect (poor quality, customer dissa sfac on
O
etc.). This technique was given by Kaoru Ishikawa and hence also known as Ishikawa
diagram. It is a problem-solving technique by rela ng the problem/effect with probable
causes of the same. The cause of different types of problems can be man, material,
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machines, measurements, environment etc. Following diagram will help us in understanding

the Ishikawa diagram.
Fig. 12.3: Cause and Effect Diagram in General
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NOTES The cause and effect diagram looks like fishbone and hence also known as fishbone diagram.
Various causes can be categorized as primary and secondary. For example, one of the cause
of poor quality (effect) might be material, when you further do the root cause analysis you
might come to know that out of three suppliers of the material one has supplied low quality
material. This root cause analysis can be further extended to the processes of that supplier
for finding the exact cause and then suitable ac on plan can be taken to improve the
shortcomings.
12.9.7 STATISTICAL PROCESS CONTROL
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It is one the major quality control tools and is used to check process control as per
specifica ons. You all will agree that perfec on is seldom, and we all strive towards
perfec on. This means that anything close to perfec on is always acceptable to the
manufacturer and consumer. Now as you know that varia ons are obvious to happen then
you should also understand that there are two major causes of the varia ons viz. assignable
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and random causes.
Random causes are unavoidable and hence are permi ed in the form of specifica ons (i.e.
upper limit and lower limit). Assignable causes occur when product a ributes go beyond the
C
specifica ons. Assignable causes are to be located and rec fied to bring the process in
control as per specifica ons. Sta s cal process control helps us in knowing if the process is
out of control or in-control.
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12.10 STATISTICAL PROCESS CONTROL
Sta s cal process control is based on normal distribu on concept and following are the two
categories of control charts used:
• Control charts for variable
• Control charts for a ributes
O
Control charts for variables are used when we have quan ta ve data and the two charts for
this are ‘mean charts’ and ‘range chart’. Similarly control charts for variables are used when
we have qualita ve data and the two charts for this are ‘p-chart’ and ‘c-chart’.
PH
12.10.1 MEAN CHART

Mean chart is used to check the distribu on of central tendency of the collected data. Idea
here is to find the central line and control limits (both lower and upper). These can be
computed using following formulas:
Central Line = Grand mean (mean of all the sample means)
Lower control limit = Grand mean – A2*mean of ranges
Upper control limit = Grand mean +A2*mean of ranges
Here A2 is the constant of mean chart and its value depends on the sample size and can be
seen from the table of control charts. A er finding the values of above men oned three lines
that sample means are plo ed in the chart and based on the pa ern of the distribu on of
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these sample means you need to take decision if the process is in-control or out of control. NOTES
Try to solve following ques on
The Goliath Tool Company produces slip-ring bearings, which look like flat doughnuts or
washers. They fit around sha s or rods, such as drive sha s in machinery or motors. At an
early stage in the produc on process for a par cular slip ring bearing, the outside diameter is
measured. The employees have taken 10 samples of 5 slip ring bearings (i.e., n=5). The
individual observa ons from each sample are shown as follows:
Sample Observa ons
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1. 5.02 5.01 4.94 4.99 4.96
2. 5.01 5.03 5.07 4.95 4.96
3. 4.99 5.00 4.93 4.92 4.99
4. 5.03 4.91 5.01 4.98 4.89
5. 4.95 4.92 5.03 5.05 5.01
O
6. 4.97 5.06 5.06 4.96 5.03
7. 5.05 5.01 5.10 4.96 4.99
8. 5.09 5.10 5.00 4.99
C 5.08
9. 5.14 5.10 4.99 5.08 5.09
10. 5.01 4.98 5.08 5.07 4.99
TO
Apply Mean chart to monitor the process variability. (For n=5, the value of A2 = 0.58)
(Hint: Grand mean= 5.011, Mean Range = 0.115)
12.10.2 R-CHART
R-chart is used to check the distribu on of dispersion of the collected data. These charts
should be simultaneously used along with the mean charts. Here also the values of upper
O
control limit, central line, and lower control limit shall be found using following formulas:
Central Line = mean of ranges obtained from various samples
PH
Lower control limit = D3* mean of ranges

Upper control limit = D4* mean of ranges
Here D3 and D4 are constant of range chart and their value depends on the sample size and
can be seen from the table of control charts. Procedure of working on all the control charts is
same, its only the method of compu ng the value of three lines and the what values to be
plo ed makes the charts different. In range chat based on the values of three lines you need
to plot the range values of different samples and based on the pa ern of the distribu on of
these sample ranges you need to take decision if the process is in-control or out of control. If
both the charts indicate that the process is in-control, then only you should declare it in
control otherwise declare it out of control for finding assignable cause/s of varia ons.
Try to solve following ques on using R-chart:
The Goliath Tool Company produces slip-ring bearings, which look like flat doughnuts or
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and Lean Systems
NOTES washers. They fit around sha s or rods, such as drive sha s in machinery or motors. At an
early stage in the produc on process for a par cular slip ring bearing, the outside diameter is
measured. The employees have taken 10 samples of 5 slip ring bearings (i.e., n=5). The
individual observa ons from each sample are shown as follows:
Sample Observa ons
1. 5.02 5.01 4.94 4.99 4.96
2. 5.01 5.03 5.07 4.95 4.96
3. 4.99 5.00 4.93 4.92 4.99
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4. 5.03 4.91 5.01 4.98 4.89
5. 4.95 4.92 5.03 5.05 5.01
6. 4.97 5.06 5.06 4.96 5.03
7. 5.05 5.01 5.10 4.96 4.99
8. 5.09 5.10 5.00 4.99 5.08
O
9. 5.14 5.10 4.99 5.08 5.09
10. 5.01 4.98 5.08 5.07 4.99
2.11)
C
Apply Range chart to monitor the process variability. (For n=5, the value of D3 = 0, and D4 =
(Hint: Mean Range = 0.115)

TO
12.10.3 P-CHART
Mean and range values are possible when you are having quan ta ve data collected, but
let’s assume that you are quality inspector in a light bulb manufacturing company. Now,
when you are inspec ng the bulbs then only two decision op ons are possible viz. defec ve
and non-defec ve. In such cases you can’t compute mean and range and hence both the
O
charts cannot be applied. Here you need to apply p-chart and the value of three lines can be
found as follows:
Central Line = mean of sample propor ons
PH
Lower control limit = mean of sample propor ons – 3* standard devia on of propor ons
Upper control limit = mean of sample propor ons + 3* standard devia on of propor ons
A er making control chart based on above men oned three values sample propor ons are
plo ed in the chart and based on the pa ern of the distribu on of these sample propor ons
of defec ves you need to take decision if the process is in-control or out of control.
Try to solve following ques on:
The Western Jeans Company produces denim jeans. The company wants to establish a p-
chart to monitor the produc on process and maintain high quality. Western believes that
approximately 99.74 percent of the variability in the produc on process (corresponding to 3-
sigma limits, or z = 3) is random and thus should be within the control limits, whereas 0.26
percent of the process variability is not random and suggest that the process is out of control.
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The company has 15 samples (one per day for 15 days), each containing 100 pairs of jeans (n NOTES
= 100), and inspected them for defects, the results are as follows.
SAMPLE NUMBER OF DEFECTIVES
1 6
2 0
3 4
4 10
5 6
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6 4
7 12
8 10
9 8
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10 10
11 12
12 10
13
14
15
14
8
6
C
TO
(Hint: Mean of propor ons = 0.08, standard devia on of propor ons = .027)
12.10.4 C-CHART
At mes instead of number of defec ves in a sample you might be interested in number of
defects on a product. In such cases c-chart is applied instead of p-chart. The value of three
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lines in the case of c-chart can be found as follows:

Central Line = mean of number of defects of various samples
Lower control limit = mean of number of defects – 3* standard devia on of number of
PH
defects
Upper control limit = mean of number of defects + 3* standard devia on of number of
defects
Make control chart based on above three values and plot the number of defects in each
sample. Based on the pa ern of the distribu on of these number of defects in samples you
need to take decision if the process is in-control or out of control.
Try to solve following ques on:
The Ritz Hotel has 240 rooms. The hotel’s housekeeping department is responsible for
maintaining the quality of the rooms’ appearance and cleanliness. Each individual
housekeeper is responsible for an area encompassing 20 rooms. Every room in use is
thoroughly cleaned and its supplies, toiletries, and so on are restocked each day. Any defects
that the housekeeping staff no ces that are not part of the normal housekeeping service are 275
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Quality Management
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NOTES supposed to be reported to the hotel maintenance. Every room is briefly inspected each day
by a housekeeping supervisor. However, hotel management also conducts inspec on tours
at random for a detailed, thorough inspec on for quality-control purposes. The
management inspectors not only check for normal housekeeping service defects like an
inopera ve or missing TV remote, poor TV picture quality or recep on, defec ve lamps, a
malfunc oning clock, tears or stains in the bedcovers or curtains, or a malfunc oning curtain
pull. An inspec on sample includes 12 rooms, i.e., one room selected at random from each
of the twelve 20-room room blocks serviced by a housekeeper. Following are the results
from 15 inspec on samples conducted at random during a 1 month period:
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Sample Number of Defects
1 12
2 8
3 16
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4 14
5 10
6 11
7
8
9
C 9
14
13
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10 15
11 12
12 10
13 14
14 17
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15 15
The hotel believes that approximately 99 percent of the defects are caused by natural,
random varia ons in the housekeeping and room maintenance service, with 1 percent
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caused by nonrandom variability. They want to construct c-chart to monitor the house
keeping service.
(Hint: Mean of number of defects= 12.67, standard devia on of number of defects= 3.55)

Q.1 True/False
Top level management is responsible for quality objec ve.
Q.2 The chart used to monitor a ributes is
a. Range chart
b. Mean chart
c. p-chart
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d. All of the above NOTES
12.11 LEAN MANUFACTURING

Lean manufacturing evolved over me because of inputs from many people and
organiza ons. The major contribu on came from Toyota based on its Toyota produc on
System. It is a concept where focus shi s from ‘low variety, high volumes’ to high variety, low
volume’. Lean is about providing value to the customer and Taiichi Ohno who remained
instrumental in crea ng Toyota Produc on System explained lean as:
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“All we are doing is looking at a meline from the moment the customer gives us an order to
the point when we collect the cash. And we are reducing that meline by removing the non-
value-added wastes.”
It is the value that customers are wan ng in the form of right product, at right price, at right
me and in right quality. Therefore, in lean manufacturing you should first iden fy what the
customers want and what is their thinking about value. You need to also look for ways to
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smoothing the workflows in the process. Instead of push lean manufacturing is more like a
pull process. Overall lean manufacturing is more about iden fying non-value-adding steps
and removing them from the process.
12.12 KAIZEN
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It is a method used for making processes more efficient, controllable, effec ve, and
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adequate by making con nuous small incremental improvements. It is Japanese philosophy
in which top management con nuously involve everyone for small improvements. In kaizen
complex processes are simplified by breaking them into sub-processes and then
improvements are accomplished at li le expenditure.
The kaizen has following three major objec ves:
• Management must broaden its perspec ve by involving more.
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• Crea ng culture focused on quality.

• Organiza onal effec veness- by providing proper leadership, mo va on, and
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goalse ng.
Kaizen focusses on reduc on of all types of wastes viz. over produc on, delay, unnecessary
transporta on, unnecessary processing etc. It also helps in achieving just-in- me to produce
right quan es of products at right me with right resources. In general, kaizen depends on
the culture in which operators are encouraged for giving sugges ons to con nuously
improving the processes.
Kaizen is process driven and not result driven. It is believed that by focuses on processes
ul mate outcomes are achieved, because kaizen helps in bringing process in control.
Fascina on for results, ‘get it done’ and ‘I don’t care how you do it’, is against the philosophy
of kaizen. Outcome of result-oriented approach is shortsighted focus on profit, increase in
employee dissa sfac on, lack of mo va on in employees etc. On the contrary process
driven approach leads to con nuous improvement by restoring the pride of employees in
work, by ensuring working standards, by enhancing discipline, involvement etc. 277
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Quality Management
and Lean Systems
NOTES 12.13 CONCEPT OF 5 ‘S’

The concept of 5S originated from Japan and focuses on employees’ behavioral aspects
towards elimina on of unnecessary items from workplace. The concept of 5S qualita vely
changes the behavior and thought process of people which leads to improvement in the
quality of work environment and equipment maintenance. One of the basic requirements
before implementa on of 5S is to codify in wri ng the aim of 5S’s for the organiza on and
same should be understood by the employees involved in it. Following are the 5S ac vi es:
• SEIRI: In this ac vity you need to sort the items into two categories viz. necessary and
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unnecessary. Here items include raw material, sub-assemblies, machines, equipment,
files, papers, rejected products etc. lying in the workplace (‘gemba’ in Japanese). Some
operators have a habit of to place items at workplace which might be a er few days.
Instead of keeping many items at the workplace one should iden fy and keep only
those items which required during the day.
• SEITON: Once necessary items are segregated from the unnecessary items then come
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the role of seiton. It is the ac vity of arranging the necessary items in a well-organized
way with the aim of minimizing the me in searching them. One of the ways to do this is
by pu ng proper labels on these items for easy iden fica on. Keep the passage
•
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obstruc on free and do not place any material near fire ex nguishers.
SEISO: A clean workplace always enhances the feel-good factor in employees. This
ac vity is related with cleaning the workplace by removing unwanted broken
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materials, oil, dust etc. One should not feel offended in doing the cleaning of
workplace and it is recommended that even top managers should also perform this
ac vity on rota on basis. This should be done once every day. This ac vity should be
treated as inspec on and while cleaning the machines one should try to check the
causes that lead to accidents or poor quality.
• SEIKETSU: This is related with repea ng the seiri, seiton and seiso for maintaining high
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standard of workplace regularly. In this ac vity you need to prepare a schedule with
names of persons who will perform seiri, seiton, and seiso. Managers should make
regular visits to workplace for observing the progress on the scheduled ac vi es. They
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also need to provide safety to their workers from dangerous condi ons.
• SHITSUKE: This ac vity earmarks the self-discipline a ained by employees by
prac cing the 4S’s on regular basis. This self-discipline should help the employees to
make prac ce of 4S’s a part of daily life. This ac vity depends on educa ng and training
the employees for adop ng good work habits.
Proper implementa on of 5S ac vi es at workplace results in increased efficiency and
effec veness in the working of employees.
12.14 LET SUM UP

Quality has travelled a long journey and is con nuously evolving. Many organiza ons and
quality gurus have given their understanding about the quality. For be er clarity on quality,
you should understand various dimensions of quality. Quality of design is related with
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consumers’ perspec ve and one should always consider customer requirements while NOTES
working on product or service design. Specifica ons allow the random varia ons to occur.
There are always some costs for quality, and they are classified as cost occurring due to poor
quality, and cost to enhance good quality. Quality costs can be measured with the help of
index numbers. The world has not moved from inspec on to preven on overnight, it is
based on the concepts, principles, and philosophies given by many researchers. Some of the
prominent contributors towards quality management are Walter Shewhart, William Edward
Deming, J. Juran, and Philip Crosby. Japanese Union of Scien sts and Engineers have
developed seven tools which are popularly known as seven quality control tools. Lean is
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about providing value to the customer. Therefore, in lean manufacturing we first iden fy
what the customers want and what is their thinking about value. Kaizen focusses on
reduc on of all types of wastes viz. over produc on, delay, unnecessary transporta on,
unnecessary processing etc. The concept of 5S qualita vely changes the behavior and
thought process of people which leads to improvement in the quality of work environment
and equipment maintenance.
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12.15 KEY WORDS
Appraisal costs: These are the costs required or used by the process owners to appraise
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themselves with the exis ng levels of quality in their processes.
Cause-and-effect diagram: It is a technique used to find root cause of some effect (poor
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quality, customer dissa sfac on etc.).
Cost index: It is the ra o of quality costs to overall produc on cost.
External failure costs: These costs occur when the product fails in the hands of the
customers before the guarantee or warrantee period.
Index ra os: These are the ra os of quality costs to either sales revenue or number of units
produced etc.
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Internal failure costs: These costs occur when a product fails quality checks within the
organiza on.
Labor index: It is the ra o of quality costs to labor hour during a fixed interval of me.
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Pareto analysis: This method is used for finding causes of poor quality.
Preven on costs: Costs occurring to avoid the happening of defects or errors.
Quality assurance: It is company-wide management of quality.
Quality of conformance: It is the level to which a product or service conform to specified
standards.
Quality of design: It is the extent to which quality characteris cs are ensured in the product
and service during design phase.
Sales index: It is the ra o of quality costs to overall sales.
Total quality management: It is an approach which involves all the internal employees for
management of quality.
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and Lean Systems
NOTES

Chary, S.N., 2019, “Produc on and Opera ons Management”, McGraw Hills.
Evans, J.R., and Lindsay, W.M., “The Management and Control of Quality” 7th Edi on,
Cengage Publica on.
Garvin, D., 1987, Compe ng on the eight dimensions of quality. Harvard Business Review,
65(6), 101.
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Russel, R.S., and Taylor-III, B.W., 2018 “Opera ons Management”, Wiley Publica on.
Render, B., Rajashekhar, J., and Heizer, J., 2018, “Opera ons Management, Pearson
Publica on.
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Mul ple Choice ques ons
Q.1 Control chart is a
a.
b.
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Process monitoring tool
Process control tool
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c. Both (a) and (b)
Q.2 Central tendency of a process is monitored in
a. Range chart
b. Mean chart
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c. p-chart
d. c-chart
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Q.3. Which of the following are examples of internal failure costs?

a. Defects and rework
b. Inspec on and audits
c. Warranty and returns
d. Purchasing and accoun ng
True/False
Q.4 Kaizen is process driven concept.
Q.5 Lean manufacturing focuses on improving efficiency by elimina ng non-value-adding
ac vi es.
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12.18 CHECK YOUR PROGRESS- POSSIBLE ANSWERS NOTES

Q.1 a. True
b False
Q.2 According to ISO, “quality is the totality of characteris cs of an en ty that bear on its
ability to sa sfy stated and implied needs”.
Q.3 c.
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Q.1 a False
b True
Q.2 c
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Q.1 True
Q.2 c
12.19 ANSWERS TO SELF-ASSESSMENT QUESTION

Q.1 c
Q.2 b
C
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Q.3 a
Q.4 True
Q.5 True
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281
NOTES UNIT 13
SCHEDULING
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STRUCTURE
13.0 Objec ves
13.1 Introduc on C
13.2 Principles of Scheduling
13.3 Inputs to Scheduling
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13.4 Scheduling Strategies
13.5 Types of Scheduling
13.6 Scheduling Methodologies
13.7 Theory of Constraints
13.8 Let Us Sum Up
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13.9 Key Words

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13.0 OBJECTIVES
• Explain the mul ple dimensions of a good schedule, and determine which type of
schedule is appropriate for different types of produc ve systems
• Use several different quan ta ve techniques for loading, sequencing, and
monitoring work
• Discuss advanced planning and scheduling systems, and the contrast between
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• Use the theory of constraints to iden fy the bo leneck and pace a system to the NOTES
bo leneck opera on
13.1 INTRODUCTION
Now let us begin with the last stage of Produc on Planning before actual manufacturing
starts. This stage is known as Scheduling. It can be defined as “prescribing of when and where
each opera on necessary to manufacture the product is to be performed”. It is also defined
as “establishing of mes at which to begin and complete each event or opera on comprising
a procedure”. The principle aim of scheduling is to plan the sequence of work so that
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produc on can be systema cally arranged towards the end of comple on of all products by
due date.
Scheduling is the prepara on of metable of ac vi es or ac on plan for a specific period.
Since it has to be drawn up before the commencement of that period - a day, a week, a
fortnight or a month, it incorporates projected future ac vi es and events of a firm. It is not
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unusual for companies to prepare a metable of labor requirements to meet target
produc on levels within a specific period; it would be of li le value if materials required for
performing those opera ons are not available. Similarly, a good schedule of ac vi es cannot
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be prepared un l we have frozen the method of manufacturing (sequence of manufacturing
process), we ensure that machines are available and in running condi on, all produc on
accessories like jigs, fixtures, tools, dies, punches, gauges have not only been designed, but
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also fabricated and are ready for use, we have drawn up all produc ons schedules and
sequences including route cards, progress sheets etc. and we have reliable source of
electricity supply or alterna vely, standby arrangement for power genera on and supply.
Scheduling of industrial ac vi es or tasks is therefore, a very complex opera on as it involves
simultaneous considera on of all the above factors besides the demands of customers and
commitments made to them by the sales personnel.
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Scheduling is defined as the process of rank-ordering the jobs in front of each resource with a
view to op mize some chosen performance measure. If there are n jobs wai ng in front of a
machine, using scheduling, the planner could rank-order them for the purpose of
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processing. Rank-ordering could be done to minimize the wai ng me of all the jobs in the
queue. In the dental hospital example, if it is decided to allow 10 pa ents for consul ng
during a three-hour schedule, some rules are u lized to schedule the ten pa ents one a er
the other. In service systems, the rule is o en first-cum-first served. But in manufacturing
systems, several other possibili es exist
There are two important terms used in this field: rou ng and sequencing. These terms
pertain to the technological constraints of the jobs to be scheduled in the opera ng system.
Rou ng is defined as the order in which the resources available in a shop are used by the job
for processing. The order is a func on of the technological constraint associated with the job.
The informa on is normally available in a rou ng file or a route card. In a manufacturing
system, the rou ng denotes the order in which opera ons are performed on a component.
For example, a spindle produc on may involve cu ng the required length using a shearing
opera on, rough machining using a turning opera on, heat treatment for stress relief, 283
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Scheduling
NOTES grinding for finishing the opera on, and, finally, chromium pla ng—in that order. Similarly,
rou ng informa on is u lized in a service system also. A person aspiring to obtain a U.S. visa
from the U.S. Consulate needs to go through three or four stages of the process—submission
of papers and dra s, ini al verifica on of documents and basic clearance, interview by the
visa officer, and final clearance for the visa. There could be rejec ons as a candidate proceeds
through the system. This informa on is crucial for resource deployment and opera ons
scheduling at the U.S. Consulate.
Sequencing is the ordering of the opera ons of the jobs in the opera ng system, to decide
which job should be taken first and then next. It combines the rou ng and scheduling
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informa on to provide a basis for the planners to ensure that jobs are processed in the shop
without viola ng technological constraints.
13.2 PRINCIPLES OF SCHEDULING

1) The principle of op mum task size: Scheduling tends to achieve maximum efficiency
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when the task sizes are small, and all tasks of same order of magnitude.
2) Principle of op mum produc on plan: The planning should be such that it imposes an
equal load on all plants.
3) C
Principle of op mum sequence: Scheduling tends to achieve the maximum efficiency
when the work is planned so that work hours are normally used in the same sequence.
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13.3 INPUTS TO SCHEDULING
1. Performance standards: The informa on regarding the performance standards
(standard mes for opera ons) helps to know the capacity in order to assign required
machine hours to the facility.
2. Units in which loading and scheduling is to be expressed.
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3. Effec ve capacity of the work centre.

4. Demand pa ern and extent of flexibility to be provided for rush orders.
5. Overlapping of opera ons.
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6. Individual job schedules.
13.4 SCHEDULING STRATEGIES

Scheduling strategies vary widely among firms and range from ‘no scheduling’ to very
sophis cated approaches. These strategies are grouped into four classes:
1. Detailed scheduling: Detailed scheduling for specific jobs that are arrived from
customers is imprac cable in actual manufacturing situa on. Changes in orders,
equipment breakdown, and unforeseen events deviate the plans.
2. Cumula ve scheduling: Cumula ve scheduling of total work load is useful especially
for long range planning of capacity needs. This may load the current period excessively
and under load future periods. It has some means to control the jobs.
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3. Cumula ve detailed: Cumula ve detailed combina on is both feasible and prac cal NOTES
approach.
4. Priority decision rules: Priority decision rules are scheduling guides that are used
independently and in conjunc on with one of the above strategies, i.e., first come first
serve.
These are useful in reducing Work-In-Process (WIP) inventory.
13.5 TYPES OF SCHEDULING
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Types of scheduling can be categorized as forward scheduling and backward scheduling.
13.5.1. Forward scheduling is commonly used in job shops where customers place their
orders on “needed as soon as possible” basis. Forward scheduling determines start
and finish mes of next priority job by assigning it the earliest available me slot and
from that me, determines when the job will be finished in that work centre. Since the
job and its components start as early as possible, they will typically be completed
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before they are due at the subsequent work centres in the rou ng. The forward
method generates in the process inventory that are needed at subsequent work
centres and higher inventory cost. Forward scheduling is simple to use and it gets jobs
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done in shorter lead mes, compared to backward scheduling.
13.5.2. Backward scheduling is o en used in assembly type industries and commit in

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advance to specific delivery dates. Backward scheduling determines the start and
finish mes for wai ng jobs by assigning them to the latest available me slot that will
enable each job to be completed just when it is due, but done before. By assigning jobs
as late as possible, backward scheduling minimizes inventories since a job is not
completed un l it must go directly to the next work centre on its rou ng. Forward and
backward scheduling methods are shown in Figure below.
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Fig. 13.1: Forward and Backward Scheduling

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Scheduling
NOTES CHECK YOUR PROGRESS-I

Q.1 Input to scheduling is _____________
a. units of loading
b. Demand pa ern and extent of flexibility
c. effec ve capacity of work centers
d. all of the above
Q.2 True/False
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Sequencing is prerequisite for scheduling
13.6 SCHEDULING METHODOLOGY

In job-shop produc on system, variety of products is larger than the batch produc on and
quan es to be produced at a me are significantly lower. It is very difficult to predict the
type of work and its requirement in terms of demand. Besides, each order or job may be
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quite different in terms of opera ons, their sequence and me taken at a worksta on. A job
shop would also use general-purpose machines, grouped together into departments only
when the total volume of business is large. Job shops are usually small and suffer from lack of
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support services and func ons. Uneven loads at different machines or departments are
quite common in prac ce. The variety of jobs and opera ons generate a mul plicity of semi-
finished items which may have to wait for further opera ons to be done on them. When
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hundreds or thousands of such varia ons in opera ons are to be handled, systema c
detailed daily plan is called for. Scheduling involves two major issues Loading, Sequencing
and Monitoring. Let us discuss each one by one.
13.6.1 LOADING- Loading involves assigning jobs to work centers and to various machines in
the work centers. If a job can be processed on only one machine, no difficulty is presented.
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However, if a job can be loaded on mul ple work centers or machines, and there are mul ple
jobs to process, the assignment process becomes more complicated. The scheduler needs
some way to assign jobs to the centers in such a way that processing and setups are
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minimized along with idle me and throughput me.

Assignment Method of Loading: It is a method of alloca ng organiza onal resources. The
Assignment Method involves assigning task or jobs to the resources. The objec ve of this
method is to minimize total cost and minimize the me requirement.
The assignment method is useful when one job is assigned to one machine and there are as
many machines available for assignment as there are jobs. If there are fewer jobs than
machines, one can s ll use the assignment method by adding some fic ous jobs and solving
the standard assignment problem. On the other hand, if there are fewer machines than jobs,
other methods are available for loading jobs on machines. In this case, several jobs are
assigned to each machine as long as sufficient capacity is available for processing and other
constraints are taken care of.
A step by step approach is given to understand and make use of Hungarian Method.
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Hungarian method: A common method for Assignment of Load NOTES

First of all, acquire the relevant cost informa on and arrange it in tabular form
1. We need to perform row reduc ons by subtrac ng minimum value in each row from
all other row values
2. Now we perform column reduc ons by subtrac ng minimum value in each column
from all other column values.
3. Next we cross out all zeros in matrix by using minimum number of horizontal and
ver cal lines
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4. If number of lines equals number of rows in matrix, then op mum solu on has been
found. And we make assignments where zeros appear in the matrix
• Else we need to modify matrix by following steps:
• You are required to subtract minimum uncrossed value from all uncrossed values
and add it (minimum value) to all cells where two lines intersect while other
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values in matrix should remain unchanged.
5. Steps 3 and 4 has to be repeated un l op mum solu on is reached
Example1: Assign Jobs to resources C

We apply Hungarian method to the above assignment matrix.
Select the row minimum
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Subtract the smallest number in each row

To form a new table and select column minimum
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Subtract the smallest no. in each row and enter results to form a new table
287
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Scheduling
NOTES Determine the minimum no. of lines needed to cross out all zeros. Here we have 3 lines only
and rows are 4. So the solu on is not op mal.
Subtract the smallest value that has not been crossed out from every no. that has not been
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crossed out here and add this to numbers that are at intersec ons of covering lines.
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Determining the minimum no. of lines needed to cross out all o since this equals all the no. of
C
rows we obtain the op mum assignment.
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Make the assignments start with rows and column with only one 0 . match jobs with
machines that have 0 costs.
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Answer: The assignment according to Hungarian method is therefore A→4, 2→B, I→C, and,
3→D
13.6.2 SEQUENCING
As already discussed Sequencing is concerned with determining/priori zing the order in
which jobs are processed. Not only must the order be determined for processing jobs at work
centers but also for work processed at individual work sta ons. When work centers are
heavily loaded and lengthy jobs are involved, the situa on can become complicated. The
order of processing can be crucial when it comes to the cost of wai ng to be processed and
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the cost of idle me at work centers. Several sequencing rules are available to tackle such NOTES
situa ons.
Sequencing Rules: Although loading decisions determine the work centers / machines that
will be used, they don’t indicate the order in which jobs wai ng at a machine are to be
processed. Sequencing is concerned with determining the job process order. Simple priority
rules are used
FCFS (First Cum First Served): This rule schedules the jobs simply in the order of job a r r i v a l .
There will be no considera on of the processing me or any other informa on such as the
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due date of the jobs.
Shortest Processing Time (SPT) : This is to keep the work in progress for a lesser amount of
me. This rule simply chooses the job with the least processing me from the
compe ng list and schedules it ahead of the others. For example, let us consider four jobs
wai ng in front of a machine for processing. If the processing mes (in minutes) are 12,
9, 22, and 11, then the order in which the jobs will be scheduled using the SPT rule is Job
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2–Job 4–Job 1–Job 3
Longest processing me (LPT): This rule is the reverse of the SPT rule. The job with the
longest processing me is scheduled ahead of other compe ng jobs. For our example, the
2).
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order in which the four jobs are scheduled is exactly in reverse (Job 3–Job 1 –Job 4–Job
Earliest due date (EDD): It is possible to establish priori es on the basis of the due date
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for the jobs. The logic here is that a job that is due tomorrow needs to be scheduled ahead
of another that is due the day a er even though the second job may require lesser
processing me compared to the first. Therefore, jobs can be rank-ordered on the basis of
due dates. If the chronological order of the due dates of the four jobs is Job 4–Job 3–Job
2–Job 1, then EDD rule will rank the jobs in that order.
Cri cal ra o (CR): The SPT and LPT rules take only the processing me informa on into
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considera on. On the other hand, EDD considers only the due dates of the jobs. In reality, it
will be desirable to consider both while scheduling. A job with a long processing me due in
the near future requires greater a en on than a job with very li le processing me but due
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at the same me. The cri cal ra o es mates the cri cality of the job by compu ng this
informa on using a simple ra o:
Cri cal ra o (CR) = (Remaining me) / (Remaining work)
= (Due date- Current date) /( Remaining Processing Time)
A smaller CR value indicates that the job is more cri cal. Par cularly, if CR <1, it denotes that
the available me is not sufficient and the job is already running late. On the contrary, a
larger CR value (CR >1) indicates that some slack is available for the job.
Random order (RAN): It is also possible to assign priori es on a random basis. Suppose
we get four random numbers from a random number generator, as follows: 563, 125, 490,
and 923. Then one can use this set of numbers for rank ordering the four jobs (on the
basis of ascending order of the three digit numbers). The resul ng order will be Job 2–
Job 3–Job 1–Job 4. 289
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NOTES 13.6.2.1 SEQUENCING JOBS THROUGH ONE PROCESS

For one Process, there are certain performance criterions used to measure the
characteris cs of scheduling. These are discussed below:
Flow me is the elapsed me between releasing a job into the shop and the me of
comple on of the job. Flow me equals the sum of processing me of all opera ons of
the job and other non-produc ve me, including wai ng and moving in the shop at
various work centres.
Make span is the me taken to complete all the jobs released into the shop for
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processing. Even when all the jobs are released at the same me, jobs come out of the
shop at different mes due to me differences in processing. Therefore, make span is the
comple on me of the last job in the shop.
Tardiness Difference between a late job’s due date and its comple on me. If a job is
completed ahead of me, instead of compu ng a nega ve value for Li, if we take zero,
then the resul ng measure is known as tardiness. In other words, tardiness captures
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informa on of only those jobs that are late for the purpose of evalua on of the scheduling
rule.
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13.6.2.2 SEQUENCING JOBS THROUGH TWO SERIAL PROCESSES
Some factories consist of single process but we might find factories with two or more
processes. We will consider only two serial processes here. Johnson rule is widely used for
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this purpose.
Johnson’s Rule:
The rule of Johnson is u lized in determining the sequence of order that is required to
process a series of jobs on pre-defined machines. This sequencing is based on the aggregate
me that is required to finish all the jobs and it should be kept at a minimum. This rule is a
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procedure to minimize the total cycle me required to schedule a group of jobs on two work
centers. There are two main benefits to sequence such a group of jobs for minimizing the
me i.e.
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• The minimum me is involved in the comple on of a group of jobs

• It maximizes the use of two sta on flow shop
Johnson’s rule can be adopted by following the below steps:
• Lis ng of the me of processing or opera on from “n” jobs on the two different
machines or work centers.
• Scanning of all the mes related to processing or opera on for the “n” jobs on
both work centers or machines and selec ng the processing or opera on having
the shortest me in any of the work centers.
• In case, the shortest processing me is related to a job on the first machine or
work center, that job will be placed first in the sequence. The job will be placed
last in the sequence if the shortest processing me is for a job at the second work
center or machine.
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• In the next step, the job assigned will be removed from further considera on. In NOTES
other words, both mes will be crossed off for the assigned job.
• Repe on of 2, 3, and 4 steps un l the process of assigning all jobs into the
sequence is completed.
For example, two machines are occupied to work for six jobs that are required to be
produced and the me for two opera ons on these two machines are given in the below
table for all the six jobs. These jobs will put in a sequence for scheduling through Johnson’s
rule and the best sequence to schedule these jobs will be determined.
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Now, we will apply Johnson’s rule on the above machines by following the below steps:
1. At first, the shortest processing me will be taken among all the above processing me
irrespec ve of the machine. In the above table, the shortest me is 6 hours on
machine B and job 6. So, this job will be placed in last (as late as possible).
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6
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2. The next shortest me is 7 hours on machine A and for job 4. So, this job will be placed
as early as possible.
4 6
3. Now, both the 1st and 5th jobs contain the same next shortest me i.e. 8 hours. So, we
will select anyone first. Among the remaining jobs, job 1 will be placed as early as
possible.
4 1 6
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Scheduling
NOTES 4. In the above step 3, the 5th job also has the same shortest me of 8 hours, so, it will be
placed as late as possible among the pending slots.
4 1 5 6
5. The next shortest me is 9 hours on machine B and for job 4. It will be placed as early as
possible among the remaining jobs.
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4 1 3 5 6
6. The remaining job of 2 will be placed in the vacant slot as shown below:
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4 1 3 2 5 6
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So, through the above analysis; sequence 4, 1, 3, 2, 5, 6 is considered the best sequence for
scheduling jobs.
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13.6.3 MONITORING: The process of maintaining progress reports on each job un l it is
completed. Two approaches are used for monitoring. There are Gan Charts sand Input /
Output Control Charts.
13.6.3.1 GANTT CHARTS

Gan charts are used as visual aid for loading and scheduling purposes. The name was
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derived from Henry Gan in the early 1900s. The purpose of Gan charts is to organize and
clarify the actual or intended use of resources in a me-framework. In most cases, a me
scale is represented horizontally, and resources to be scheduled are listed ver cally. The use
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of resources is reflected in the body of the chart.
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Fig. 13.2: Example of Gan Charts NOTES
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the load chart and the schedule chart.
a.
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There are a number of different types of Gan charts. Two of the most commonly used are
Load Chart: A load chart depicts the loading and idle mes for a group of machines or a
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list of departments. The chart shows when certain jobs are scheduled to start and finish, and
where to expect idle me. If all centers perform the same kind of work, the manager might
want to free one center for a long job or a rush order.
Fig. 13.3: Load Chart
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Two different approaches are used to load work centers, infinite loading and finite loading.
Infinite loading assign jobs to work centers without regard to the capacity of the work center.
One possible result of infinite loading is the forma on of queues in some work centers. Finite 293
UNIT 13
Scheduling
NOTES loading projects actual job star ng and stopping mes at each work center, taking into
account the capaci es of each work center and the processing mes of jobs, so that capacity
is not exceeded. Schedules based on finite loading may have to be updated o en, perhaps
daily, due to processing delays at work centers and the addi on of new jobs or cancella on of
current jobs. The following diagram illustrates these two approaches.
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Loading can be done in various ways. Ver cal loading refers to loading jobs at a work center
job by job, usually according to some priority criterion. Ver cal loading does not consider the
work center’s capacity (i.e., infinite loading). With ver cal loading, a manager may need to
make some response to overloaded work centers. Among the possible responses are shi ing
work to other periods or other centers, working over me, or contrac ng out a por on of the
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work. In contrast, horizontal loading involves loading the job that has the highest priority on
all work centers it will require, then the job with the next highest priority, and so on.
Horizontal loading is based on finite loading.
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One possible result of horizontal loading is keeping jobs wai ng at a work center even though
the center is idle, so the center will be ready to process a higher priority job that is expected
to arrive shortly. That would not happen with ver cal loading; the work center would be fully
loaded, although a higher priority job would have to wait if it arrived while the work center
was busy. So, the horizontal loading takes a more global approach to scheduling, while
ver cal loading uses a local approach.
Which approach is be er? That depends on various factors: the rela ve costs of keeping
higher priority jobs wai ng, the cost of having work centers idle, the number of jobs, the
number of work centers, the poten al for processing disrup ons, the poten al for new jobs
and job cancella ons, and so on.
b. Schedule Chart: There are two general approaches to scheduling: forward scheduling
and backward scheduling. Forward scheduling means scheduling ahead from a point in me;
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backward scheduling means scheduling backward from a due date. Forward scheduling is NOTES
used if the issue is “How long will it take to complete this job?” Backward scheduling would
be used if the issue is ” When is the latest job can be started and s ll be completed by the due
date?” A manager o en uses a schedule chart to monitor the progress of jobs. A typical
schedule chart is illustrated below for a landscaping job.
Fig. 13.4: Schedule Chart
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The chart shows planned and actual star ng and finishing mes for the five stages of the job.
The chart indicates that approval and ordering of trees and shrubs was on schedule. The site
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prepara on was a li le behind schedule The trees were received earlier than expected, and
plan ng is ahead of schedule. However, the shrubs have not yet been received. The chart
indicates some slack between scheduled receipt of shrubs and shrub plan ng, so if the
shrubs arrive by the end of the week, it appears the schedule can s ll be met.
The Gan charts possess certain limita ons. The chief one is the need to repeatedly update a
chart to keep it current. In addi on, a chart does not directly reveal costs associated with
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alterna ve loading. Finally, a job’s processing me may vary depending on the work center;
certain work sta ons or work centers may be capable of processing some jobs faster than
other sta ons.
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13.6.3.2 INPUT/ OUTPUT CONTROL

Input / output (I/O) control refers to monitoring the work flow and queue length at work
centers. The purpose is to manage work flow so that queues and wai ng mes are kept
under control. A simple example of I/O control is the use of stoplights on some expressway
on ramps. These regulate the flow of entering traffic according to the current volume of
expressway traffic. The following figure illustrates an input / output report for a work center.
The devia on in each period are determined by subtrac ng “planned” from “actual”. The
backlog for each period is determined by subtrac ng the “actual output” from the “actual
input” and adjus ng the backlog from the previous period by that amount.
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Scheduling
NOTES
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Thus Opera onal control in manufacturing systems is largely a func on of the rela onship
between input and output rates. Let us look at a situa on in which jobs are launched into
system at the rate of one every four hours and the jobs leave the system one every three
hours. Over a period of me one could expect build-up of inventory in the system leading to
conges on at worksta ons and chaos in material flow. Build-up of WIP inventory in the
system leads to several complica ons, which include the following:
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(a) Es ma ng the available capacity in the shop becomes difficult.

(b) The lead me for manufacturing increases with increase in inventory.
(c) Planning and control of opera ons becomes more complex as more jobs compete for
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limited resources.
(d) Performing loading and scheduling func ons also becomes difficult.
Therefore, input–output control is an important element of opera onal control in
manufacturing systems, especially in batch manufacturing and job-shop systems.

Q.1 Objec ves of assignment method can be ____________
a. to minimize me
b. to minimize cost
c. both a and b
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Q.2 True/False NOTES

if CR(cri cal ra o) <1, it denotes that the available me is more than sufficient to
complete the job.
13.7 THEORY OF CONSTRAINTS

The Theory of Constraints, made famous by Eliyahu M. Goldra in his book The Goal, is a
body of knowledge that deals with anything that limits an organiza on’s ability to achieve its
goals. The theory says there is always at least one constraint, and TOC uses a focusing process
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to iden fy the constraint and restructure the rest of the organiza on around it.
The constraint ac vity is the “weakest link in the value chain”. It means that processes,
organiza ons, etc., are vulnerable because the weakest person or part can always damage or
break them or at least adversely affect the outcome, understand as throughput (the rate at
which the system generates money through sales). In manufacturing, the constraint is o en
referred to as a bo leneck.
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There are many ways that constraints can show up, but a core principle within TOC is that
there are not tens or hundreds of constraints. There is at least one but at most only a few in
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any given system. The different types of constraint could be:

• Equipment: The way equipment is currently used limits the ability of the system
to produce more salable goods/services.
• People: Lack of skilled people limits the system. Mental models held by people
can cause behavior that becomes a constraint.
• Policy: A wri en or unwri en policy prevents the system from producing more.
So, the core concept of the Theory of Constraints is that every process has a
constraint and that total process throughput can only be improved when the
constraint is improved. TOC provides a specific methodology to eliminate or
improve the constraint divided in 5 steps:
• Iden fy: Iden fy the current constraint (the single part of the process that limits
the rate at which the goal is achieved). 297
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Scheduling
NOTES • Exploit: Make quick improvements to the throughput of the constraint using
exis ng resources (i.e. make the most of what you have).
• Subordinate: Review all other ac vi es in the process to ensure that they are
aligned with and truly support the needs of the constraint.
• Elevate: If the constraint s ll exists, consider what further ac ons can be taken to
eliminate it from being the constraint. Normally, ac ons are con nued at this step
un l the constraint has been “broken” (un l it has moved somewhere else).
• Repeat: Once a constraint is resolved the next constraint should immediately be
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addressed. This step is a reminder to never become complacent.
Once we have iden fied our constraint or bo leneck, there are several techniques for
dealing with it:
• Increasing capacity of the constraint. This may require a capital investment or
more resources such us people or machines.
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• Ensuring skilled workers are available to ensure full opera ons and maintenance
of the works center or weakest links causing the constraint.
• Developing different rou nes or subcontrac ng.
•
•
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Moving inspec ons to a posi on just before the bo leneck in order to avoid
bigger or poten al constraints.
Scheduling throughput to match the capacity of the bo leneck.
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13.7.1 DRUM, BUFFER AND ROPE (DBR)
DBR is the Theory of Constraints produc on applica on. Similar to TOC the fundamental
assump on of DBR is that within any plant there are a limited number of scarce resources
which control the overall output of that plant. This is the “Drum” (constraint/bo leneck),
which sets the pace for all other resources.
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The “Buffer” is the level of inventory needed to maintain consistent produc on. It ensures
that brief interrup ons and fluctua ons in non-constraints do not affect the constraint.
Buffers represent the amount of me (usually measured in hours) that work-in-process
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should arrive in advance of being used to ensure steady opera on of the protected resource.
Instead of placing Buffers inventory at each opera on, which unnecessarily increases
manufacturing mes, companies placed Buffers in strategic loca ons related to specific
restric ons within the system.
Finally, the prepara on and execu on me required for all opera ons prior to Drum plus the
Buffer me, is called “Rope-length”.
So, the programming method DBR can lead to substan al benefits in the supply chain
ensuring that the plant is running at maximum speed with minimum inventory and reaching
to meet unexpectedly high demand.
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13.8 LET US SUM UP NOTES

All scheduling decisions deal with the collec on of scarce resources to jobs, ac vi es, tasks,
or customers. Within the available resources, scheduling seeks to sa sfy the conflic ng
objec ves of low inventories, high efficiency and good customer services. Scheduling,
however, differ between mass produc on, batch produc on & job shop produc on. The
produc on line is u lized to the extent needed for the single product, however for mul ple
products; a line capacity scheduling is needed for different products. In batch produc on too
li le impact will result in low inventories low u liza on of labor and machines, and fast
customer service. Too much impact will result in high u liza on and long customers delivery
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mes. For scheduling individual jobs, either sequencing on dispatching rules may be used. If
sequencing is used a Gan chart is developed which shows exactly when each opera on is
planned for each job. When dispatching rules are used, jobs are selected for the next
opera on on the basis of prescribed priority rule.
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13.9 KEY WORDS
Drum-buffer-rope a concept in theory of constraints where the drum sets the pace of
produc on, buffer is placed in front of the bo leneck, and rope communicates changes.
me.
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Flow me the me that it takes for a job to “flow” through the system; that is, its comple on
Gan chart a bar chart that shows a job’s progress graphically or compares actual against
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planned performance.
Input/output (I/O) control a procedure for monitoring the input to and output from a work
center to regulate the flow of work through a system.
Johnson’s rule an algorithm for sequencing any number of jobs through two serial
opera ons to minimize make span.
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Load leveling the process of smoothing out the work assigned across me and the available
resources.
Loading the process of assigning work to individual workers or machines.
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Make span the me that it takes for a group of jobs to be completed— that is, the comple on
me of the last job in a group.
Scheduling the determina on of when labor, equipment, and facili es are needed to
produce a product or provide a service.
Sequencing the process of assigning priori es to jobs so that they are processed in a
par cular order.
Shop floor control (SFC) scheduling and monitoring day-to-day produc on in a job shop; also
known as produc on control or produc on ac vity control.
Tardiness the difference between a job’s due date and its comple on me for jobs
completed a er their due date.
Theory of constraints a finite scheduling approach that differen ates between bo leneck
and non-bo leneck resources and between transfer batches and process batches. 299
UNIT 13
Scheduling
NOTES Work package shop paperwork that travels with a job to specify what work needs to be done
at a par cular machine center and where the item should be routed next.

Baker, K., and M. Magazine. “Workforce Scheduling with Cyclic Demands and Days-Off
Constraints.” Management Science 24(2; October 1977), pp. 161–167.
Conway, R., W. Maxwell, and L. Miller. Theory of Scheduling. Reading, MA: Addison-Wesley,
1967.
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Goldra , E. What Is This Thing Called Theory of Constraints and How Should It Be
Implemented? Croton-on-Hudson, NY: North River Press, 1990.
Goldra , E., and J. Cox. The Goal: Excellence in Manufacturing. Croton-on-Hudson, NY: North
River Press, 1984.
Gupta, J. N. D. “An Excursion in Scheduling Theory.” Produc on Planning and Control 13(2;
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2002), pp. 105–116.
Huang, P., L. Moore, and R. Russell. “Workload versus Scheduling Policies in a Dual-Resource
Constrained Job Shop.” Computers and Opera ons Research 11(1; 1984), pp. 37–47.
C
Langevin, A., D. Riopel, and K. Stecke, “Transfer Batch Sizes in Flexible Manufacturing
Systems,” Journal of Manufacturing Systems, (March–April 1999), pp. 140–151.
Pinedo, M., and X. Chao. Opera ons Scheduling with Applica ons in Manufacturing and
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Services. New York: Irwin/McGraw-Hill, 1999.
Russell, R., and B. W. Taylor. “An Evalua on of Sequencing Rules for an Assembly Shop.”
Decision Sciences 16(2; 1985), pp. 196–212.
Vollman, T., W. Berry, and D. C. Whybark. Manufacturing Planning and Control Systems.
Homewood, IL: Irwin, 1997
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Q.1 The rule of _______is u lized in determining the sequence of order that is required to
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process a series of jobs on pre-defined machines.

a. assignment method
b. north-west corner
c. Johnson
d. Hungarian
Q.2 The name Gan chart was derived from __________
a. Henry Gan
b. Robert Gan
c. William Gan
d. Jus ce Gan
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Q.3 The two general approaches to scheduling are _________ NOTES

a. integral and differen al
b. forward and backward
c. forward and integral
d. backward and integral
Q.4 A common method used for assignment of load______
a. Hungarian
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b. vogel’s approxima on
c. stepping stone
d. Johnson
Subjec ve Ques on
Q.5 What makes scheduling so difficult in a job shop?
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Q.6 List some of the objec ves in scheduling.
Q.7 Why is monitoring an important component of job shop scheduling?
Q.8 Who developed the theory of constraints (TOC) and what is its approach to
scheduling? C
Q.9 There are 5 jobs A, B, C, D, E and their processing me and due dates are given. Using
all sequencing rules discussed above to solve this problem
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Q.1 d
Q.2 True
Q.1 c
Q.2 False
301
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Scheduling
NOTES 13.13 ANSWERS TO SELF ASSESSMENT QUESTIONS

Q.1 c
Q.2 a
Q.3 b
Q.4 a
Q.5 Job shop scheduling is difficult because of the variety of jobs (or customers) that are
processed, each with dis nc ve rou ng and processing requirements. In addi on,
although the volume of each customer order may be small, there are probably a great
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number of different orders in the shop at any one me. This necessitates planning for
the produc on of each job as it arrives, scheduling its use of limited resources, and
monitoring its progress through the system.
Q.6 There are many different possible objec ves in construc ng a schedule, including:
mee ng customer due dates, minimizing job delays, minimizing response me,
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minimizing comple on me, minimizing me in the system, minimizing over me,
maximizing machine or labor u liza on, minimizing idle me, and minimizing work-in-
process inventory.
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Q.7 In a job shop environment, where jobs follow different paths through the shop, visit
many different machine centers, and compete for similar resources, it is not always
easy to keep track of the status of a job. When jobs are first released to the shop, it is
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rela vely easy to observe the queue that they join and predict when their ini al
opera ons might be completed. As the job progresses, however, or the shop becomes
more congested, it becomes increasingly difficult to follow the job through the system.
Compe on for resources (resul ng in long queues), machine breakdowns, quality
programs, and setup requirements are just a few of the things that can delay a job’s
progress. Monitoring develops progress reports on each job un l it is completed and
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helps maintain reliable schedules in the system.

Q.8 The theory of constraints (TOC) was developed by an Israeli physicist named Eliyahu
Goldra . Because he did not have a business or manufacturing background, Dr.
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Goldra took a commonsense, intui ve approach to scheduling. He developed a

so ware system that used mathema cal programming and simula on to create a
schedule that realis cally considered the constraints of the manufacturing system. Dr.
Goldra ’s first insight into the scheduling problem led him to simplify the number of
variables considered. Instead of trying to balance the capacity of the manufacturing
system, he thought it best to balance the flow of work through the system. He
iden fied resources as bo leneck or non-bo leneck and noted that the system’s flow
is controlled by the bo leneck resources. These resources should always have
material to work on, should spend li le me on nonproduc ve ac vi es, should be
fully staffed, and should be the focus of con nuous improvement ac vi es. Goldra
pointed out that an hour’s worth of produc on lost at a bo leneck reduces the output
of the system by the same amount of me, whereas an hour lost at a non-bo leneck
resource may have no effect at all. Consequently, Goldra simplified the scheduling
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problem by ini ally scheduling the bo leneck resources and then the non-bo leneck NOTES
ones. In this way produc on could be synchronized with the needs of the bo leneck
and the system as a whole.
Q.9 Sequencing rule: FCFS
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Sequencing rules: SPT
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Sequencing rules: Due date
303
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Scheduling
NOTES Sequencing Rules: Slack
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Summarizing the en re above discussed sequencing rule in a matrix given below:
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Rule Average Completion Average No. of Tardiness Max.
Time Tardiness Tardiness
FCFS 18.60 9.6 3 23
DDATE 15.00 5.6 3 16
SLACK
SPT
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16.40
14.80
6.8
6.0
4
3
16
16
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SPT performs best in terms of Average comple on me. Now you can analyze with respect
to other parameters also.
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OPERATIONS AND
SUPPLY CHAIN MANAGEMENT OPMC002
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OPERATIONS AND
ISBN is 978-81-951960-1-2
Published by: Ins e of Management Technology,
Centre for Distance Learning, Ghaziabad
Printed by: M/s. Vikas Computer & Printers VIK072023

SUPPLY CHAIN MANAGEMENT

Operations and Supply Chain Management (OPMC002)

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OPERATIONS AND

SUPPLY CHAIN MANAGEMENT OPMC002

orms Pvt. Ltd., New Delhi

Prof. (Dr.) Ravindra Kumar Prof. (Dr.) Kunal Ganguly

Prof. (Dr.) Subhajit Bha acharya Mr. C. K. Mani

Prof. (Dr.) A. H. Kalro (Retd.) Prof. (Dr.) Asif Zameer

Prof. (Dr.) P.K. Jain

Prof. (Dr.) B. B. Chakrabor (Retd.)

Dr. Abhay Kumar Srivastava

Dr. Sadia Samar Ali

Dr. Sumeet Singh Jasial

COURSE COORDINATOR EXPERT REVIEW

PUBLISHER & PRINTER

focused and ﬁxed posi on layouts of Design.

1.9 Challenges in Opera ons Management

1.12 Opera ons Role in Corporate Strategy

NOTES • Understand diﬀerences between products and services

1.2 THE EVOLUTION OF OPERATIONS AND SUPPLY CHAIN MANAGEMENT

1.3 OPERATIONS FUNCTION

NOTES • Physiological (this will include health care)

1.4 TYPES OF TRANSFORMATION PROCESS NOTES

• Ini al me taken for se ng the machines is high.

1.4.2 SEMI-CONTINUOUS PROCESS

NOTES 1.4.3 INTERMITTENT PROCESSES

ﬂyover, highway, ship etc.

• Assigning budget to each ac vity, NOTES

CHECK YOUR PROGRESS-I

1.5 DIFFERENCES BETWEEN PRODUCTS AND SERVICES

Products can be inventoried Services can’t be inventoried

1.6 PRODUCTIVITY OF TRANSFORMATION PROCESS

1.7 PRODUCTIVITY AND COMPETITIVENESS

CHECK YOUR PROGRESS-II

1.8 FUNCTIONS OF OPERATIONS MANAGER

New Challenges in Opera ons Management

Low bid purchasing Supply chain partnering

CHECK YOUR PROGRESS-III

Q.1 The ﬁve elements in the management process are

c. organize, plan, control, staﬀ, and manage

1.11 OPERATIONS STRATEGY

1.11.2 ASSESSING CORE COMPETENCIES

NOTES 1.11.3 DETERMINING ORDER WINNERS AND ORDER QUALIFIERS

1.11.4 POSITIONING THE FIRM

Posi oning on Speed

companies to be able to compete eﬀec vely on speed proper linkages in the

1.12 OPERATIONS ROLE IN CORPORATE STRATEGY

1.13 LET US SUM UP

1.14 KEY WORDS

Eﬃciency: It is making of similar types of products in an interval of me.

product or service for being considered by the customer for purchase.

1.15 REFERENCES AND SUGGESTED ADDITIONAL READINGS

1.16 SELF ASSESSMENT QUESTIONS

1.17 CHECK YOUR PROGRESS- POSSIBLE ANSWERS

CHECK YOUR PROGRESS-II NOTES

PRODUCT AND SERVICE DESIGN

2.10 The service Economy

2.13 Tools of Service Design

• Know the issues involved in screening a new product idea NOTES

NOTES 2.2 THE DESIGN PROCESS

2.3 CONCURRENT DESIGN

CHECK YOUR PROGRESS- I

2.5 TECHNOLOGY IN DESIGN

2.5.1 COMPUTER-AIDED DESIGN (CAD)

2.6 DESIGN QUALITY REVIEWS